Mobility is key: On-the-go access drives internet uptake

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With a large and fast-growing domestic market and a strong export-oriented sector, Egypt’s IT industry is going places. Internet penetration and computer ownership are rising rapidly, as content proliferates and hardware becomes more accessible. With its talent pool, key location, infrastructure and cost advantages, the country is also one of the world’s leading outsourcing destinations and is building on its strong base to develop added-value services and promote homegrown innovation. Take-up of IT, particularly the internet, is helping drive broader economic and social development, including governmental reform.

ACTIVE SECTOR: Egypt had more than 4700 registered ICT companies employing 215,000 people as of June 2012, according to the Ministry of Communications and Information Technology (MCIT). The sector’s issued capital (that is, the total nominal value of the shares held in the sector) was LE45.51bn ($7.61bn).

IT development was a priority for the government in the past decade, and such is the sector’s importance that few expect this to change under new leadership. Opportunities for growth should arise from private sector demand and the government’s digitisation efforts, some of which have been delayed by the revolution but are expected to restart before long.

“The sector has been on hold for a while, but attracting investment to the IT sector will be a goal for any incoming government,” Dina Galal, the governmental programmes executive for the technology firm IBM in Egypt, told OBG. “Existing investors aren’t going to run away, and we expect opportunities for public-private partnerships to increase.”

A 2011 report by the UN Conference on Trade and Development (UNCTAD) stated that Egypt “is poised to emerge as a major player in the information economy”. The report examined a range of ICT development indicators, including infrastructure, skills procurement, technology use in education, export-oriented business in the industry and the use of e-content in Arabic. It highlighted the country’s strong ICT backbone, and one of the world’s most competitive outsourcing industries (see analysis).

GETTING ONLINE: Egypt had 31.21m internet users at the end of June 2012, up 20.64% from a year before, according to the MCIT, which therefore put penetration at 38.87%. The ministry also estimated that 40.29% of households used internet from home in June 2012. Of all internet users, 90.13% had broadband connections. Some 46% of users went online through mobile internet and USB modems, 35% through ADSL, and 10% each through ISDN and dial-up, and leased line. It is worth noting that many Egyptians have two or more devices and may be double-counted as several “users”, while it is also common for a single connections to be used by several people.

The rapid development of connectivity is striking. Wael Fakharany, the regional manager for North Africa at Google, told OBG, that around 30m devices connected to the internet each day in Egypt as of mid-2012, up from just 7m in 2008, with users connecting with two or more devices (for example, a smartphone and a laptop). Access to the internet is still unevenly spread across the country and different demographic groups. As one would expect, urban areas tend to have higher penetration than the countryside, while the young and those with disposable income use the internet more often than the old and poor. While acknowledging this disparity, Fakharany says that Egypt is “moving in the right direction”. Most towns have at least one internet club where anyone with basic skills can access the web cheaply; many households share connections; and the generation of Egyptians under 30 – the majority of the population – have grown up in the internet age and are very familiar with technology.

MOBILE MOVES: Mobile operators have played a leading role in the supply side of internet growth, taking over ISPs and implementing the business strategies that have given Egypt 100%-plus mobile penetration: upgrading networks, launching affordable pricing plans and promoting heavily. The synergies between GSM firms and the IT sector are becoming ever stronger with the rise of mobile internet, and personal computer original equipment manufacturers (OEMs) and other IT companies are looking to build links with the telecoms and their remarkable reach and marketing power.

Internet access of some kind is now a “must have” for most Egyptians and Egyptian businesses, Fakharany said. “A lot of businesses are becoming more aware of the importance and opportunities of having an online presence. At the same time, consumers are more aware of what’s going on and sharing information. The internet is at the forefront of consumer engagement.”

CONTENT: An increasing supply of content also stimulates demand: Egyptians are more likely to go online because there is more material that is relevant and accessible to them. The growth of online news and opinion, and particularly the meteoric rise of social networking, in the wake of the revolution has been an important factor behind recent increases in internet usage. As December 2011 report by US research and consultancy firm Frost & Sullivan noted that services like online banking and commerce, currently under - developed in Egypt, have the potential to further “transform” the sector by drawing more Egyptians online and engaging them with value-added services.

ITIDA & EDUEGYPT: The highly regarded Information Technology Industry Development Agency (ITIDA) was founded in 2004 to “develop the IT industry, attract foreign direct investment and equip the talent pool with skills”, Ahmed Reda, the organisation’s media and international relations manager, told OBG. ITIDA is under the aegis of the MCIT, and works with both multinational and local IT firms to support the sector’s development. One of ITIDA’s flagship programmes is Education Development in Universities of Egypt ( EDU-Egypt), which was launched in 2008 to develop the ICT skill sets of third- and fourth-year students in higher education. The programme addresses the graduating talent pool in which the training is delivered and certified by global ICT industry players in the market, thus ensuring the readiness of the graduates to join the ICT sector. By mid-2012, the programme had worked with more than 28,000 business process outsourcing (BPO) and IT outsourcing training graduates. The courses are designed with the support of international and local firms to ensure they deliver the skills demanded by the market. Private sector partners are involved in training EDUE gypt instructors, syllabus development and field visits for students. Following the completion of a course, students attend career fairs featuring many top ICT companies, as EDUE gypt has a reputation of producing skilled and ambitious students. As well as technical competencies, EDUE gypt teaches some language and soft skills. ITIDA also runs parallel programmes for multinationals in a number of foreign languages, tailored for outsourcing and offshoring.

The programme is running in 12 of Egypt’s 27 governorates, and has expanded every year. EDUE gypt is running in 13 universities around the country, covering all tier 1 and tier 2 cities. It is playing an important role in bridging the gap between higher education institutions and the ICT industry, which Karim El Fateh, the country director for Egypt at the US technology company Intel, told OBG is one of the sector’s biggest challenges; academic courses do not always equip students with all the skills that employers need. Reda fully expects ITIDA to roll out several new initiatives once the government is in place.

SMES: Egypt has successfully attracted some of the world’s biggest ICT companies to its shores, but much of the activity in the sector is generated by domestic small and medium-sized enterprises (SMEs), which account for 75% of overall GDP. ITIDA supports SMEs through a range of programmes and funding tools, including export rebates, subsidies for attending local fairs and linking firms with academic and research institutions. The agency sees smaller firms as playing a central role in developing innovation and value-added in the sector through programmes like Information Technology Academic Collaboration (ITAC, see below). In May 2012, the agency signed an agreement with the Egyptian Stock Exchange (EGX) to cooperate on supporting SMEs and encouraging them to go public on the Nilex, Egypt’s SME market. The organisations said in a statement that listing on the exchange would enable SMEs in the sector to access a new source of financing and to increase their capital, while simultaneously broadening the opportunities for investors to participate in the sector.

ITIDA is in favour of greater consolidation in the sector through the merging of SMEs to optimise economies of scale, and suggests that merged companies, with greater capital, would be better placed to tap growth in other markets in the region – as well as being more strongly positioned to secure financing, be it from the stock market or banks. Another way that SMEs are growing is through partnerships with, and acquisitions by, multinationals. All big-name firms work with Egyptian partners, in fields ranging from supply to distribution and technical services, and continue to look for local companies with which they have a strategic fit.

For example, in 2011, Intel purchased SySDSoft as part of its global acquisition strategy, specifically to bring on board the Egyptian start-up’s wireless networking software capability. “International firms and local partners, from retailers to developers can both expand their reach through partnerships, which also help grow the local economy,” IBM’s Galal said.

HARDWARE: While accurate data on the size of Egypt’s hardware market is hard to come by, few doubt that it will grow healthily, thanks to the fundamentals of a country of 85m people with computer penetration estimated at just over 10% by Business Monitor International. While El Fateh estimates that the overall market, including consumer, business, government and educational sales, fell by 30% in 2011 due to the closure of outlets, lower private sector investment and frozen government procurement, he says that it was already accelerating to 10-20% growth by the first quarter of 2012. Consumer demand is the major driver of growth, accounting for 60% of sales by value in 2011, a proportion expected to rise to 70% by 2015. Notebooks and netbooks sell particularly well, due to their greater affordability and portability – “that shows where the market’s going,” said El Fateh.

The inauguration of a new administration in second-half 2012 should see sales to the public sector pick up again. The education segment is seen as particularly strong, due to Egypt’s commitment to ICT in its schools and universities. As in the mobile internet market, the single biggest barrier to increasing computer penetration is cost, in a country in which many are still on very low incomes. OEMs and other ICT firms are adopting strategies to address this issue – reducing costs and using schemes like hire-purchase and microfinance, with purchasers paying a monthly instalment.

“Currently, the OEMs are focusing on the same 5m or so people,” Al Fateh told OBG. “However, it is a reasonable assumption that everyone who can afford a car can afford to spend LE100 ($16) a month on a computer. There are 25m cars in Egypt, but only 5m to 6m personal computers – you are looking at a huge opportunity.” OEMs are frustrated with the large and poorly regulated market in used hardware, which offers lower prices but often outdated and improperly functioning equipment. While the import of computers older than five years is illegal, used laptops can be bought for as little as $100, well below the price of a new computer. Intel Egypt’s consumer channels sales manager, Nour El Din Zaki, said that this is the “equivalent of piracy”, and undermines the local computer assembly industry, which uses largely imported parts. While others might argue that the availability of low-cost old imported equipment broadens access to computers and the internet, OEMs see it as break on the expansion of the market for modern hardware.

E-GOVERNMENT: Egypt is in the process of digitalising its public administration and broadening the range of e-government services. With lower internet penetration and more limited resources, it is unsurprising that e-government is not as advanced as in the Gulf, for example, but progress is being made, with the Ministry for State Administrative Development (MSAD) encouraging other state entities to adopt online technology. Information about government ministries, departments and local offices is readily available online, and one of the unsung successes of the momentous 2011/12 elections was the use of IT, including in managing the voter rolls and an official website providing information (for example on polling stations) developed with Google, which received 40m hits.

Requests can be made to government departments online, students can apply for university accommodation and applications for ID card renewals submitted. Railway tickets can also be reserved and purchased.

Several e-government systems have been developed by state-owned E-Finance, which was established in 2005, including the electronic collection system for customs and the pensions payment system. The latter programme has seen 8m senior Egyptians receive special debit cards onto which the pension is automatically loaded every month.

Thanks to the system, within two years 27% of pensioners were collecting their pensions at ATMs – a sign that even the elderly will take up technology as well as the young, if it is made accessible and useful, Haithem Trabeek, E-Finance’s senior manager for strategic and business planning, said.

PAY ONLINE: E-Finance is now pushing for e-payment of taxes to be implemented, having developed the infrastructure. Trabeek says that if e-payment were compulsory for those paying over LE1m ($167,000) as taxes, 80-90% of taxes could be collected electronically, substantially lowering administration costs, improving monitoring, increasing payment velocity and reducing the level of transactions that “bounce”.

E-government and e-payment systems have come up against resistance in some quarters, including some officials reluctant to adopt new technology, and taxpayers benefitting from the current system. But Trabeek is confident that take-up will increase once the programmes are seen to “create value for society” as the pensions debit cards have, particularly if the government supports the drive for digitisation.

CLOUD COMPUTING: Cloud computing is starting to take off in Egypt, and projections suggest that its growth will be a boon to the ICT sector and the broader economy over the next coming years.

A March 2012 report commissioned by Microsoft forecast that cloud computing would generate 13,000 new jobs in Egypt in 2012, with 113,000 created by 2015. Many of the jobs will be created indirectly in a wide range of sectors using clouds, as firms and organisations begin shifting their data storage and other processes onto clouds – remote servers which are accessed via the internet.

The shift will take pressure off local servers, and is expected to boost productivity and reduce costs by lowering capital expenditure on maintenance and upgrading of systems. Microsoft also expects cloud technology to bring particular benefits to education by increasing access to learning materials and fellow students from around the world. “Not a great deal has been done on cloud computing in Egypt so far,” Google’s Fakharany told OBG. “But it has huge potential.”

GETTING SMARTER: A substantial proportion of Egypt’s top IT businesses, and particularly multinationals, are concentrated in purpose-built high-tech clusters that provide the infrastructure and service support required by ICT firms. The most prominent of is Cairo’s Smart Village, on a 32m-sq-metre site to the west of the capital, where firms including Microsoft, Telecom Egypt and Oracle are based, as well as a number of Egyptian SMEs. The site is expected to house 500 companies with 100,000 employees by 2016. Smart Villages Corporation (SVC), which manages the project, is developing another smart village at Damietta on the Mediterranean coast; the MCIT has a 20% stake in SVC, with the rest in private sector hands. Another MCIT-backed project, the Cairo Contact Centres Park, in the suburb of Maadi, was inaugurated in 2010, hosting firms including the US’s Sykes and local firm Xceed. The second phase is due to open in 2012, and will have a capacity of 35,000 seats for agents in 40 buildings by 2015, complementing Smart Village.

ADDING VALUE: A common criticism of the Egyptian IT sector, including outsourcing, is that added value is currently rather low, with limited innovation taking place – for example that call centres offering simple services predominate, rather than research and development institutes. But Reda says that Egypt is already capitalising on its strong base in outsourcing to develop a value-added segment, particularly in BPO.

Critics often overlook the progress that has already been made. Several big multinationals have already established research arms in Egypt, including IBM and Microsoft. “These centres have established the principle that there is the skill pool to develop high-end IT service businesses in Egypt,” IBM’s Galal told OBG.

In 2010 the MCIT established the Technology Innovation and Entrepreneurship Centre (TIEC) at the Cairo Smart Village, with the aim of becoming a regional leader for ICT-based innovation. Formed in partnership with global firms including Orange Labs, Microsoft and EMC, the TIEC has a multi-faceted strategy, including encouraging multinationals to establish research and development units in Egypt, supporting knowledge and technology transfer to local firms, increasing funding, and building technology incubators at universities.

One of the most high-profile initiatives supporting innovation is ITIDA’s project in academia, ITAC, founded in 2006. The initiative provides funding and lab space for value-added projects that “create new business models which aim at encouraging the largest number of companies to maximise revenues”, according to ITIDA’s executive director, Yasser El Kady. As its name suggests, ITAC links technologies companies, particularly SMEs, and research and academic bodies in the sector in an effort to encourage the pooling of expertise and collaboration on innovation.

The collaboration between educational institutions, the private sector and government organisations is widely regarded as vital in “joining the dots” and promoting greater innovation in the country. According to El Fateh, “We need to increase the number of institutions focusing on innovation, and enable more experimental work to be done in universities.”

OUTLOOK: The sector as a whole experienced a slowdown in 2011 due to the effects of the revolution, with some investments and government programmes put on hold. However, domestic demand for ICT products and services, and particularly the internet, has remained strong. Indeed, the popularity of social networking, news and blogs grew rapidly during and after the revolution, and shows no sign of abating. Egypt’s size and growth prospects make it a market in which multinationals consider they must have a presence.

The fact that almost all the presidential candidates in 2012 emphasised the importance of IT in their electoral platforms makes it clear that the sector’s importance transcends political and social divides. The new government is likely to continue past pro-ICT policies, supporting the private sector, encouraging education and implementing digitisation in the public sector.

Growing demand for added-value services is stimulating an increase in innovation throughout the industry that will require both private investment as well as public support. However, that can help bring Egypt up to the next level, both serving the domestic market and exporting ICT-related services and products.

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The Report: Egypt 2012

Telecoms chapter from The Report: Egypt 2012

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