The Middle East's Internet Inflection

Executive magazine, Middle East edition

Expansion on the web opens alternative avenues for business and society

Information technology (IT) players refer to the major changes the industry’s had on the way people think and act as inflection points. One inflection point was in the late 1980s and early 1990s when the internet started to become more widely adopted by organizations. It took time to gain momentum, to move from the office into the home and reach the two billion internet users on the planet today. We are now in the middle of a second IT inflection point: mobility, with the internet wirelessly accessible through laptops, smart phones and tablet devices in what some are calling the “post-PC” world.

In the Middle East and North Africa (MENA), the past two years have arguably been an inflection point of a related yet somewhat different nature. According to statistics released by search engine Google, internet usage in the Middle East grew by a staggering 39 percent in 2010 to 86 million users, up from 64 million in 2009, with overall penetration reaching 29 percent. Such growth is just over double the increase in internet usage on a global basis, estimated at 14 percent by Internet World Stats in 2010.

The momentous rise in Internet penetration and adoption of mobile devices in MENA has had ramifications that no one would have imagined, including the role IT played in the uprisings this year via the use of social media and mobile technologies in coordinating protests demanding political freedoms.

Dollars online

When the wave of mobile communications spread across the region a little over 10 years ago the first big commercial surprise was the fact that mobile phone operations proved highly attractive and viable in less affluent nations and could serve as business enablers in unexpected ways. For private sector enterprise, the new big question after the eruption of the region’s social and political restructuring is if Internet and mobile networks will be the next big thing for regional business.

The trend for online media usage is increased spending on digital marketing, currently accounting for 22 percent of MENA companies annual marketing budgets, while 58 percent have increased digital budget spending this year, according to a 2011 EConsultancy study, whether on social media, mobile marketing or video advertising.

Ecommerce is equally booming, with 32 percent of MENA Internet users buying online in 2010, according to Spot On, a Dubai-based communications company, and retailers selling some $90 billion in goods and services last year, up 37 percent on 2009, according to Startup Arabia, an Arab technology startups and services website. The top purchased items are airline tickets, books, computer services, clothing and hotel reservations.

Ecommerce and online advertising, the drivers of the dotcom era, are still the top potentials for business on the web but it remains to be seen if they can fulfill the expectations for what had been called New Economy in the Internet’s early days. Barriers against the rise of these economic activities cannot be discounted.

“There are definitely social aspects to Internet adoption, with access to the super information highway meaning more freedom of information,” said Samer Taha, chief executive officer and Founder of Jordan’s Waseela, a telecom system integrator and managed services provider. “Countries are trying to balance developing IT with censorship, while others are delaying roll out due to the amount of information available (on the web). So even if the private sector is willing to invest, governments are often more reluctant.”

Although growth in IT and adoption of social media in the region is indicative of economic potentials, Internet penetration rates vary wildly from country to country, with the United Arab Emirates the highest at 65 percent, Bahrain at 50 percent, Jordan at around 30 percent, Lebanon 25 percent and Syria 18 percent in 2010, according to Internet World Stats.

“Overall the Middle East and the Gulf are not so different from the third world, there is a digital divide comparable to the first and second worlds,” said Taha. “Yet with the Gulf countries reaching first world levels by introducing 4G [fourth generation mobile telecoms], the non-Gulf countries are three to five years behind.”

As the adoption rates of social networking site Facebook and video site Youtube in Arab countries show, the MENA region is catching up with international rates of web usage but the numbers differ widely between countries. Facebook, for example, had attracted 19 million new users in the MENA this year up to June 30. The site claims a total of 56 million users in the MENA at midyear, a 51 percent increase from a year earlier.

Yet while Facebook reported 100 percent increases in users in Algeria, Egypt, Palestine and Yemen over the past year, and 317.5 percent growth in Iraq, user numbers dropped by 61.8 percent in Libya and by 200,000 in Qatar due to government censorship.

Youtube, in another way, also serves as an example for the factors that make online business an interesting but complex proposition in the region. In October, repercussions of using the service were highlighted a case where three young Saudis were arrested after uploading a clip on poverty in the kingdom on Youtube. But this appears not to have reduced the popularity of the social media tool. Saudi Arabia is considered number one worldwide for Youtube uploads per capita, according to Khaled el-Amrawi, regional director of Enterprise Solutions Middle East of Intel Corporation Egypt.

Going mobile

Internet penetration has been boosted by the rapid uptake of smart phones, which allows people to bypass the relatively high cost of purchasing a personal laptop to get wired, at the same time providing the latest “must-have” gadget that doubles as a conventional mobile phone. According to a survey released this year by Effective Measure, 45 percent of MENA Internet users surveyed use mobile phones to access the internet.

In countries with already high penetration like the UAE, the adoption of second and third devices — smart phones and tablets — is pushing penetration even further, said El Amrawi. Recent data backs this up, with an Arab Advisors Group survey revealing that smart phones constitute 43.7 percent of total cellular handsets in the UAE, 54.6 percent of total handsets in Saudi Arabia and 41.6 percent in Jordan.

The adoption of these devices among the region’s burgeoning youth is already having an impact on how people use email. “This new generation, the mobile generation, often has no specific email address as they use Facebook instead,” said Michael Bayer, president of Europe, Middle East and Africa at Avaya, a computer networking and telecommunications company.

Furthermore, portable devices are surpassing PCs and laptops as the primary business tool. “I don’t use my laptop unless I’m opening a big attachment. Around 90 percent of my work is via my smart phone; contacts, email, everything,” said Bashar Bashaireh, regional director of Fortinet, a network security company.

The regional race

The region is experiencing an inflection point in how governments and businesses are using online technology. This year, IT spending by Middle Eastern and African governments is forecast to increase by 10.7 percent from 2010, reaching $6 billion, according to research firm IDC, while total MENA IT spending is estimated to reach $45 billion, up 50 percent from 2010. The numbers are estimates, and Dubai IT exhibitor GITEX estimates total Middle East IT spending substantially lower, at $14 billion. Nonetheless, it is big business. “The Middle East is an area where an IT company can grow by 30 percent year on year,” said Bayer.

With e-commerce sales forecast to reach $1.4 trillion worldwide by 2015, the MENA is expected to enjoy a significant slice of the e-pie as e-commerce becomes more widespread. “E-commerce in the MENA is following in the footsteps of Europe and the United States, so I think there is a future and huge potential,” said Hassan Hamadani, marketing and business development manager at Brocade, a networking solutions company.

In public and private sector IT investment the UAE, Bahrain, Qatar and Saudi Arabia are leading the pack. But other countries are trying to catch up and be viable IT hubs, most notably Egypt and Jordan.

“There was a plan for Egypt and Jordan to be software and IT hubs,” said Taha. “Egypt has succeeded to a degree but the momentum did not continue, while in Jordan it didn’t take off as hoped. Dubai has high operational costs but is seen as the right hub due to infrastructure, logistics and other advantages not there in Jordan or Egypt.”

But while the UAE is what one IT manager called a “high-tech sales office”, as it lacks research and development in software, Egypt is making headway as an “attractive offshore destination for R&D,” said Yasser el-Kady, CEO of the Information Technology Industry Development Agency (ITIDA), formed by the Egyptian government in 2005. While the political unrest earlier in the year negatively affected the sector, ITIDA has worked to retain the multinationals like Intel and Microsoft in the country while investing $500,000 to promote the IT sector. El Kady said a multinational outsourcer would be creating some 20,000 jobs when it starts operations later this year.

The $1.3 billion sector currently employees 60,000 people at some 11,000 IT and telecoms companies. With a strategic focus on the MENA, Kady said revenues will reach $7 billion by 2016. “Our goal is to treble software exports every five years,” he added.

As inflection points go, IT is the next big thing for the MENA in terms of job creation, foreign companies seeking to expand global market share, governments expanding electronic services and, potentially, greater political freedoms through hyperconnectivity.

Rein in the ratings agencies

Commentary - Executive magazine

Why should we take credit ratings agencies seriously anymore? It is a question that has growing currency globally, and one that would not have been asked several years ago, certainly not by those in the financial sector. Yet in these turbulent economic times I have heard corporate bankers, private traders, insurance brokers and compliance officers rant about how the credit ratings agencies (CRAs) have gotten out of control.

People are starting to question why the CRAs’ “opinions” — for that is what their ratings are — should wield such power in the global markets given their prominent role in instigating the financial collapse. Subsequent moves over the past year have further escalated the crisis, such as downgrading Greece, Portugal and Italy in the midst of the European sovereign debt debacle.

The CRAs raising ire are the three majors in the United States, Moody’s, Standard & Poor’s (S&P) and Fitch, not the 70-plus other CRAs that operate on a much smaller scale worldwide. Indeed when China’s Dagong, the only non-Western sovereign CRA, downgraded the US in 2010 to “AA” status it hardly registered, especially compared to when S&P did the same (to “AA+”) a year later.

In particular, the problem is the way the three CRAs work to assess the risk of debt-based securities and other structured financial products: CRAs are paid by clients to “objectively” rate these same clients. But there is a clear conflict of interest here. As US Senator Charles Schumer remarked to the Senate Committee on Banking, Housing and Urban Affairs in 2008, this is comparable to “allowing students to pay for their grades,” for naturally, everyone wants to receive a higher rating. CRAs bestowed “AAA” ratings — the highest possible — on the bulk of the $3.2 trillion in mortgage-backed securities issued by banks during the build up of the housing bubble, despite the risky nature of bundling together what is known as ‘collateralized debt obligations’, while watching their profits double to $6 billion between 2002 and 2007. When the bubble burst the following year and the big three CRAs were asked during US government investigations why they kept these securities rated so highly, all three stated: “it’s an opinion.”

Among the core issues here is that these opinions — the downgrade on the debt of sovereign debt or unrealistically high appraisals of toxic assets — are a type of self-fulfilling mantra: a poor asset wrapped in the gloss of a high rating will attract people to invest in it, making it worth more. This warps a market and can cause havoc, as we continue to see. Credit ratings are also used to anticipate future credit worthiness, but CRAs cannot predict the future no matter how good the data at their fingertips, and especially not if they are inherently in a conflict of interest.

So what is the solution to curb the powers of the CRAs? The US Dodd-Frank Act, the financial overhaul law enacted in 2010, and the Securities and Exchange Commission (SEC) have proposed policies to crack down on the CRAs, but they do not go far enough, with pressure from the well-lined pockets of the CRAs and Wall Street lobbying for significant concessions.

A more radical — and simple — solution was proposed by economist David Raboy at a Congressional Oversight Panel in 2009. Raboy suggested creating an independent clearinghouse that would receive rating applications from securities issuers and allocate each assignment to a ratings agency in a random fashion, with payment dependent on the complexity of the securities involved. Accurate ratings would ensure assignment of further cases. This model could be applied nationally or even at an international level, such as for sovereign ratings. Another solution is to scrap the CRAs all together. After all, the stock markets are devoid of ratings, with investors getting by on research from firms and banks to make decisions. If neither of these solutions is adopted — which seems likely unless the ongoing protests of the Occupy Wall Street movement pick up momentum for greater change in economic policy — then one must hope that the SEC can effectively rein in the CRAs through tougher regulation.

In a world with properly functioning markets, however, it is likely CRAs would have already rated themselves out of business, with their lost credibility leaving the services they offer akin to stirring gossip and spreading rumor.

Book review: In the Lion’s Den

In the Lion’s Den, a book by Andrew Tabler - Executive magazine

Andrew Tabler’s account of his time in Syria between 2001 and 2008 is refreshing — relative to the reams of Orientalist trite other Western authors have published about the Middle East and North Africa — in that he actually spent years in the region getting to know the place, first studying Arabic and working as a journalist in Cairo and later traversing the MENA for the Oxford Business Group writing country investment reports, before eventually basing himself in Damascus. Thus his offering, “In the Lion’s Den”, is neither ‘parachute journalism’ nor the story of a doe-eyed apple-pie eater struggling to make sense of an alien Arab fantasyland — the two most common categories of expat writing on the region. Rather, Tabler — a former contributor to Executive — is candid and observant in relating the challenges of trying to comprehend the vast complexities of a country like Syria.

The author has been accused of being naïve, in asserting that after Bashar al-Assad’s succession to the presidency in 2000 the country would move from autocracy to democracy, but what Tabler says interested him more was getting an “unexpected front-row seat to a fight”, pitting the young reformist Assad against the entrenched status quo of the old guard. He later admits some of his shortcomings in framing the situation as such; while there were superficial changes, it was clear after the first few years of the new Assad’s leadership that regime survival would always be the paramount concern.

Tabler was in a unique position to assess the touted reforms in Syria after a private meeting with Assad’s wife, Asma, and then working for one of her government-organized non-governmental organizations (GONGOs), the Fund for Integrated Rural Development of Syria. This led him to start up, under the auspices of Asma Assad, the country’s first English-language magazine, Syria Today. Tabler’s account of his meeting with the “first lady” is intriguing, as are the relations between Asma and her go-betweens at the GONGOs. Equally fascinating is Tabler’s account of being the only non-Arab and the first American to accompany a Syrian president on a state trip, to Beijing in 2004.

A criticism of “Lion’s Den” is it goes into no great depth about such encounters, or the running of Syria Today. Tabler also reveals little about his life in Damascus and travels around the country. A possible explanation for this may be that the book was intended both as a memoir and a dovetail into future career aspirations — Tabler’s current employer is the neoconservative Washington Institute for Near Eastern Policy think tank.

Much of the book consequently concerns Syria’s relations with Lebanon, Iraq and Israel, and America’s resultant foreign policy with Damascus. This ranges from Western hopes of engaging Assad to bring Syria ‘in from the cold’ — primarily through solving the Arab-Israeli conflict — to problematic relations after the Bush administration labeled Syria part of the ‘Axis of Evil’ and Damascus’ apparent reluctance to prevent fighters crossing its border into Iraq following the 2003 United States invasion. Relations soured further following the assassination of former Lebanese Prime Minister Rafiq Hariri in 2005, leading the US to withdraw its ambassador to Syria and Damascus entering into a strategic alliance with Tehran. The account of the ongoing tussle between Damascus and Washington is succinct and bipartisan, providing a useful primer on bilateral relations.

Tabler chose to write the book after he was not allowed back into Syria in 2008, due to his increasingly vocal criticism of the regime. Published in September, Tabler could not have asked for a more opportune moment for the release, given the international media attention on the Syrian uprising, and he has capitalized on this in the epilogue in arguing how Assad and the regime should be handled by Washington. While Tabler may have been taken in by Assad’s veneer of reform a decade ago, “In the Lion’s Den” resounds as an impeachment of the Syrian leadership and a call for even tighter international sanctions to bring the regime to account.