Uptake of new technology is underlining the potential for rapid growth in the Saudi IT sector. Total IT spending in 2013 stood at SR37.3bn ($9.9bn) according to the latest available data from the Communications and Information Technology Commission (CITC), up from SR33bn ($8.8bn) in 2012. This represented a year-on-year increase of 14.2%. Over the longer term, the average annual growth rate of IT spending between 2005 and 2013 stood at approximately 14%.
In its 2013 ICT Indicators Report, the CITC said it expected IT spending to grow by around 12% in 2014; however, the upward trend could well continue beyond that. Amjad A Hafez, CEO of NourNet, a local telecommunications provider, told OBG, “The Kingdom has the potential to take a leading role in the region when it comes to the IT sector thanks to its large economy and impressively tech-savvy population.”
GOVERNMENT & CORPORATE MARKET: Spending in the segment is dominated by the government and major enterprises, many of which are state-backed. “The high levels of spending on IT shows how important the government views this sector as the country continues to modernise,” Mohammed bin Rashed bin Khamees, chairman and managing director of Bin Khamees Holding Group, told OBG. According to Al Walid Khairi, deputy CEO of local ICT firm Ajna United, “business from government companies accounts for 95% of the market.”
However, industry figures say usage can be inefficient. “Government IT systems tend to be fragmented rather than integrated across different ministries. There is a realisation that this needs to be addressed, but at the moment there is a lack of overarching strategic planning to bring this about,” said Khairi. Some players are confident that this will change as officials gain a greater understanding of IT systems. “The government is proactively hiring specialised IT people into senior roles in an effort to enhance and make the government activities more efficient,” Samir Noman, president of Microsoft Arabia, told OBG.
Another characteristic of the local market is a tendency among major companies and organisations to maintain large in-house IT departments, rather than outsourcing operations to IT service companies. “Many large Saudi businesses have IT departments so big that they essentially amount to IT companies in themselves, and are often larger than actual local IT firms,” said Noman, arguing that this can become counterproductive for the companies.
SME SEGMENT: In contrast to the state and corporate sector, industry figures say IT is not a priority for smaller firms. “Large mass-market companies tend to have good IT systems but subcontractors and small and medium-sized enterprises (SMEs) on the whole do not,” said Khairi. “However the situation is improving as various government initiatives are pushing companies to modernise, in particular if they want to work on government contracts,” he added.
Indeed, expansion in this segment is anticipated in the coming years as SMEs pursue greater efficiency. Sami Saadi, CEO of IT services provider Saudisoft, told OBG that while the “traditional sectors of the Saudi economy offer stable prospects, significant growth can be expected in the high-tech segment as the rising number of SMEs look toward automated solutions for their businesses.”
Noman further argued that while the sophistication of IT usage by SMEs is low, this sector nonetheless represents an important opportunity for IT firms. “Professionalism and penetration in the SME market is of course low; however, this makes moving to the cloud a lot easier and would generate great benefits for such companies,” he told OBG.
GROWTH MARKETS: One sector driving development in the national IT industry is financial services. “Some banks are increasingly moving towards electronic and branchless banking, which is helping to encourage growth in the IT sector,” said Khairi. “Mobile commerce is also a promising area. It hasn’t really taken off yet but there are increasing signs of interest.” Abdullah bin Jebren, president of IT service provider ABANA, told OBG, “Banks in Saudi Arabia have shown themselves to be early adopters of technology and services. For example, the ATM systems here in the Kingdom are some of the best in the world.”
Growth in these markets is further encouraging demand in the security sector. “The demand for advanced high-quality electronic security solutions and project management offers strong potential for international companies entering the market,” Khalid Fawaz Baghdadi, managing director of almajal G4S, a Saudi-based integrated services solutions joint venture, told OBG. In addition to physical security, cybersecurity serves as another area of growth. Tarik Algain, CEO of Technology Control Company, a Saudi-based IT firm, told OBG, “Digital securities and biometrics are good greenfield segments for Saudi Arabia and the region as a whole. The GCC has the money to support these lines of business and the stability that such significant investments require.”
CLOUD & DATA SERVICES: Saudi Arabia is a major potential market for cloud computing services, given the size of its economy and the large government IT budgets, albeit one characterised by a number of challenges. “The state is a huge spender on IT here, and there are enormous opportunities in cloud computing in Saudi Arabia, in particular in the government sector,” said Noman. “However regulations on data protection and data sovereignty present challenges,” he told OBG, pointing to a ban on the storage of government data on servers based in foreign countries, and similar restrictions in industries such as banking.
“We are trying to help the government establish what kind of cloud options would best suit them; for example, in addition to a public or private cloud, there is the hybrid option whereby less sensitive information is stored on the public cloud – which is still highly secure – while private data is kept in-house. However, at the moment the main focus is on building a national private cloud,” he said. “In some ways it is a ‘good’ problem for IT companies to have, as the authorities can afford to build a private cloud; however, it is not efficient.” Revelations in 2013 regarding Western security agencies’ apparent ability to access digital data in international transit, as well as the servers of major IT companies based on their soil, are unlikely to have reassured the Saudi authorities regarding their data privacy and sovereignty concerns.
Development of the cloud segment has been hindered by a lack of awareness. “There are some mis-perceptions of what cloud computing actually is,” said Noman. “Often anything internet-related is seen as cloud. As a result, companies will sometimes say that they do not want to use the public cloud, when in fact they are without realising it,” he told OBG.
Telecoms operators are helping to drive growth and innovation in the cloud and related segments as they seek to expand their range of value-added data services, partly in order to compensate for saturation in the voice segment. Mobily, for instance, has recently launched a number of IT and data-based services in cooperation with major international IT firms, including a partnership with IBM to offer IT security services and a private cloud service, as well as an initiative with SAP to provide cloud-based applications, and a joint venture with Virtustream to provide enterprise cloud services. As of the end of 2013 Mobily operated 38 data centres and planned to open a further 18 over the next five years.
HUMAN RESOURCES & ENTREPRENEURS: Staffing can be a challenge in the segment, local industry figures told OBG. “One of the biggest issues we have in the sector is a lack of skills and work experience in high-end IT,” Noman said. “The use of IT has been growing very rapidly and the Kingdom hasn’t had the same amount of time as other countries to adapt to the situation. There were around 3000 IT positions open in Saudi Arabia two years ago, but there could be as many as 30,000 jobs in the sector by 2015.”
Finding local and expatriate staff can be difficult. “Saudi nationals tend to be more interested in administrative posts, and it is expensive to hire foreign nationals with IT expertise,” said Khairi. “Furthermore IT experts from some countries appear unwilling or unable to come here,” he added, arguing that there is a need for changes to sponsorship regulations to facilitate the employment of more expatriates in the sector. However, Noman said that with the restructuring of the labour market, interest in the sector from young Saudis was increasing, thanks to rising wages, following a period of decline.
EDUCATION & INNOVATION: Attempts by local institutions to support education, innovation and entrepreneurship in the sector should also help address the problem. “There has been a great deal of investment in educating the younger generation, which are now well educated and very technologically savvy,” Abdulaziz Aldusari, CEO of Riyadh Techno Valley, told OBG. “Now it is about utilising this resource by creating the support structure necessary for innovation.” Other industry players have echoed this sentiment. “A knowledge-based industry depends on the brains of the population, which is why we are seeing such significant spending in education. By harnessing all of our resources, both natural and human, Saudi Arabia can build a sophisticated and stable economy for the future,” said Ghassan Al Shibl, CEO of manufacturer Advanced Electronics Company.
However, Noman said that support for Saudi entrepreneurs is not always well structured. “There remains some way to go as regards establishing proper incubation of IT start-ups,” he said. “At the moment there is a tendency to just hand out money without enough business and technology incubation.” To address this, in February 2014 Microsoft and the Centurion Fund launched an initiative to provide entrepreneurs with what they call a “business in a box,” including IT services. The initiative also features a “cloud academy”, offering training for both cloud users and for IT professionals to deploy cloud services.
GOVERNMENT STRATEGY: The Ministry of Communications and Information Technology is responsible for policy and government strategy in the sector, and has a number of initiatives aimed at improving domestic IT capabilities. The ministry is working to develop the sector through a series of five-year plans, known as the National Communications and IT Plans, under the rubric of a long-term vision of transforming the Kingdom into an “information society and digital economy”. The first of these ran from 2008-12 and included 26 objectives and 98 separate projects, with a particular focus on education. A second such plan, running from 2014 to 2018, is now being implemented, with four key areas of focus, namely supporting SMEs and entrepreneurship; creating a qualified ICT workforce; ensuring the provision of efficient and fairly priced ICT services; and the creation of an integrated national information security system.
The plan includes 17 objectives and 73 projects. Examples of the latter include the provision of free e-learning programmes in basic ICT activities and teaching young children how to programme. The ministry has also established a fleet of “e-caravans” to provide training and raise awareness throughout the country as well as having launched a “digital excellence award” for web content development and design.
REGULATION: The CITC is responsible for internet regulation, which industry figures say can sometimes act as a constraint on innovation and sector growth. “There are quite a lot of restrictions placed on the market by the regulator as well as other public institutions such as the Saudi Arabian Monetary Authority,” said Khairi. “They take security very seriously, which is positive but can make them slow to act. As a result, segments such as online banking have not been developed as quickly as in regional markets such as the UAE,” he told OBG. “There is something of a constant struggle between companies on the one hand seeking more flexibility and freedom on issues such as privacy, and the regulator, which often wants increased control and imposes limitations. However, from the point of view of consumers, the situation is in many ways positive, as they have a regulator that cares about their privacy and also seeks to keep costs down.”
INTELLECTUAL PROPERTY: Intellectual property violations can be a challenge in the Kingdom, with industry players arguing for tougher application of relevant laws. A 2011 study by the Software Alliance found that the piracy rate in the Kingdom stood at around 51%, above the global rate of 42%, though below the rate in the Middle East and North African rate (58%). “It is common to see people dealing in pirated software in markets or from the boots of their cars, or to find a 5000-person operation using software licensed for only 1000 persons, as the original project was scoped for 1000,” Noman said.
Addressing this issue is crucial since the country’s strategic direction is to build a knowledge economy, Noman told OBG, adding that there have been significant efforts by the different government entities to address the issue. “The Ministry of Culture and Information, for example, launched an awareness campaign followed by some raids, but there is still a lot to do, and this requires support for the Department of Copyright, specifically in terms of hiring specialised personnel.” Enforcing intellectual property rights is key to national development, Bin Jebren of ABANA told OBG. “All great societies depend on innovation to grow,” he said. “There must therefore be provisions in place to enforce intellectual property rights and thereby foster innovation.”
INTERNET INFRASTRUCTURE: The country’s international internet bandwidth capacity stood at 814.2 Gbps in 2013, according to the CITC, up from 556 Gbps the previous year and 318 Gbps in 2010. Nine international cables land in the country at stations in Al Khobar on the Gulf coast and Jeddah on the Red Sea coast. There are two data service providers in the Kingdom connecting Saudi Arabia to the international internet. The first is Bayanat Al Oula (acquired by Mobily in 2008), which operates a 13,800-km domestic fibre network, and the second is Integrated Telecom Company, which is part of local conglomerate Al Mawarid and which operates a 16,000-km national fibre network along with nine urban fibre networks.
“Internet bandwidth is fair for now and is always expanding as a result of continued investment,” said Khairi. Capacity levels are set to continue to grow; for example, in January 2014 Mobily and 17 other telecoms operators in the Middle East and Asia announced plans to lay a new 25,000-km cable – the Asia-Africa-Europe 1 cable (AAE-1) – from Hong Kong to France, landing in the Kingdom and other Middle East and North African countries along the way. The project, which will have a capacity of 100 Gbps, is due to be completed by 2016. Additionally, in March 2014 Saudi Telecom Company was reported to be taking part in the construction of another 100-Gbps cable by the Se Me-We 5 consortium linking Asia and Europe via the Middle East, the consortium’s fifth link. The project is also due to enter into operations in 2016.
Investors continue to work to expand onshore fibre infrastructure as well. For example, in October 2013 a consortium composed of Vodafone, Dubai-based operator du and Kuwaiti provider Zain announced plans to build a new 1400-km fibre network, known as the Middle East-Europe Terrestrial System, with the aim of improving data connectivity throughout the region. Zain will act as the landing party in Saudi Arabia for the network, which was due to be launched in the latter half of 2014 and which will have an initial capacity of 200 Gbps. (For information on download speeds, see Telecoms analysis).
INTERNET & SOCIAL MEDIA: As in most countries, international search engine and social media sites such as Google, Facebook and Twitter are the sites most visited by Saudi users, according to the Alexa website, which measures usage. The most popular local website is Saudi news portal sabq.org, which was the 10th-most-visited site in the Kingdom overall.
Online video content is especially popular; Saudis spend more time watching YouTube on a per capita basis than any other country in the world, with the average citizen watching around three times the number of videos on the site as watched by the average American, for example. One of the most popular YouTube channels in the region is U-Turn, which is run predominately by Saudi nationals and which posts satirical and other content.
OUTLOOK: Spending and investment in the sector appear set to continue growing rapidly, though it remains to be seen whether major government entities and companies – which account for the great bulk of spending in the sector and tend to maintain large in-house operations – will be willing to outsource more of their IT operations to specialist service providers. Segments likely to see particular growth include cloud storage and cloud-based services, though as noted there is significant reluctance on the part of the government and some commercial sectors to use public cloud storage. This may give rise to further opportunities in cybersecurity provision, already a growth area. Internet infrastructure appears set to continue to improve in quality and speed, while government training initiatives and rising salaries may attract more local talent to work in the sector.
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