Apart from the odd malfunction reported on some e-mail software, the global IT industry came through the millennium unscathed. Whether offices shut down their systems for the duration of the holiday or fired them up afresh on the return to work in January, there were no significant failures reported from anywhere. No planes fell out of the sky; no public utilities collapsed. Sceptics warn that more difficult dates lie ahead and insist the risks are still with us, but their warnings carry less credibility by the day.
Having passed the millennium milestone, the innovations in technology are expected to flow thick and fast in the next few years. Much is expected from the convergence of technologies, promising within a very short period to turn the equipment in use today into antiques. Wireless telephone makers are hooking up with computer software developers to deliver a range of far more intelligent, multi-functional products.
The decision by Bill Gates to step down as Microsoft chief executive to focus once again on technology development highlights how challenging and potentially threatening the next stage of the IT revolution is likely to be. If it is to retain its dominant position, Microsoft needs to be sure that its Windows operating system, which has established itself as the standard for PCs, migrates successfully into the new technologies. As a new generation of internet devices becomes available, from hand-held computers to smarter mobile phones and appliances for use in the home and the car, Microsoft wants to be sure that its software sets the new standards.
Wireless telephones are a key battleground. Devices are now coming to market that will put within reach the fantasy functions once only seen in science fiction movies. A mobile phone can already be used to roam the internet, and send and receive e-mails. Video imagery is not far away. To make sure it is well positioned in wireless, Microsoft has teamed up with Sweden’s Ericsson to develop software that it hopes will outshine rival software being developed by Psion and its partners.
On the internet itself, the internet service providers (ISPs) are aligning themselves with music, media and entertainment businesses in some of the biggest corporate mergers ever seen. Within two weeks of the $172 billion merger of America Online and Time-Warner, a marriage of internet muscle and media content, the new partners added EMI music to their already vast portfolio of interests.
To explain the sudden upsurge in deals to consolidate internet services with content owners, look no further than the predictions of future growth. The latest study, released by Canada’s Nortel Networks at the end of January, predicts that the value of the global internet economy will rise to $2,800 billion in 2003. This will be about 7 per cent of global domestic product. More than half this sum represents the investment that will be necessary to build up the internet infrastructure to cope with the growth in demand. The study says that upgrading the internet will cost $1,500 billion a year in 2003, while e-business will have grown to reach $1,300 billion a year. Most of the growth is expected to be in business-to-business commerce, which will be six times as big as business-to-consumer revenues.
With such a boom in business in prospect, the ISPs are slugging it out to become the portal of choice. It is still uncertain how much the portals will be able to earn in future revenues but they are proving to be a magnet for new money that believes they hold one of the keys to the future. When China.dot.com launched an initial public offering (IPO) for just under $100 million on the Nasdaq last year, it received more than $4 billion in offers. In January it went back for more, raising $422 million in a second offer that was 10 times oversubscribed.
The day when a Middle East dot.com company can go to the market to raise such sums is still some way off. Internet use is spreading rapidly in the region but the scale of activity is still minuscule by the standards in other parts of the world. ‘Critical mass is not there yet,’ says Ramzi Zeine, chief operating officer at Arabia Online. He expects the number of active internet users in the Middle East and North Africa, currently estimated at 1 million-2 million, to rise very quickly to 3 million-4 million, mirroring the rate of acceleration seen in other parts of the world.
Arabia Online’s rise has been meteoric in the manner that is so typical of this industry. The company was spun off into a separate entity in November 1998 with the aim of becoming the leading destination portal for the Arab world, offering premium services that could be scaled up rapidly as demand expanded. Prince Alwaleed of Saudi Arabia took a 50 per cent stake through Silki La Silki, which added a range of distinct advantages to the business. ‘It brought us closer to a very important market in Saudi Arabia through PrimeNet and it brought the huge value of Prince Alwaleed as an international investor with it,’ says Zeine.
He says that the company is developing plans for further expansion and is intending to approach potential strategic investors soon to offer them a private placement. An IPO is a longer term ambition. Zeine’s confidence is based on the belief that Arabia Online, which attracts some 40 per cent of its users from outside the region, delivers a quality mix of internet access, news, e-mail and chat rooms. ‘The service we have built has put us ahead of everyone else,’ he says.
Building and keeping a leading market position is a prime objective in this young, fast-changing and fiercely competitive industry. As the competitive pressures have mounted on Lebanon’s internet pioneer Cyberia, it has slashed its unlimited online service rates from $29 a month to $12.99 in order to maintain its market share, which it estimates at 45 per cent of the local dial-up market. With operating costs of about $10 a month, the margins to be made on each user have been squeezed dramatically. To focus on revenues at this stage, however, is to miss the point. What matters is the number of users you can claim as your own. ‘We know that the real opportunities are built on the ISP business,’ says chief operating officer Samer Bohsali. ‘In terms of access, we can claim to be number one.’
Cyberia has used its local reputation to expand its business regionally, undertaking everything from website design to turnkey installations in any area of data communications and internet services. The company has done work in Saudi Arabia and the Gulf and is about to open an office in Amman. ‘We’ve expanded beyond Lebanon into consultancy and other projects,’ says Bohsali.
To a great degree, however, the internet explosion in the Middle East is still a revolution waiting to happen. Casual, consumer users are no substitute for the corporate customers who are going to put serious money through the system. Despite a definite popular appetite and a fascination with technology, the Middle East has a long way to go in this respect. Says Bohsali: ‘It’s a different world altogether, in scale and development. It’s still a luxury. It’s nice, but it’s not obligatory.’
Arabia Online does not anticipate a boom in business just yet either but it will be well-positioned to capture a share of it when it does materialise. ‘We are more focused on market share than revenue,’ says Zeine. ‘Advertising and sponsorship are related to use. We are concentrating on the user community first.’
The link-up with Alwaleed could provide a readymade stream of content if the Saudi investor decides to leverage some of his international media interests in a link-up with Arabia OnLine. Alwaleed has holdings in News Corporation and Arab Radio & Television which could constitute the bones of a regional combine akin to the mega-mergers now taking place in the US and Europe. It is still early days, however. ‘I think this will take place when the business grows,’ says Zeine. ‘There’s not much going on on that front at the moment.’
Large-scale e-commerce, which is running into its first problems in the more advanced economies because of the slow uptake, is also a distant prospect for the time being. Credit card use is spreading rapidly in the region but per capita penetration, let alone usage, is far below international averages. The cost and complexity of setting up an efficient e-commerce enterprise is still a deterrent and the legal protection available to such businesses is non-existent. ‘The system does not help,’ says Bohsali. ‘The word electronic is not mentioned in our laws.’
Legal frameworks to monitor e-commerce are still under development in the leading OECD economies so this shortcoming is hardly a critical factor delaying progress in the Middle East, where internet banking, for example, is already available. And, as usage increases and the volume of traffic rises, the region will almost certainly reflect more closely the trends already evident in more mature markets. When it catches up, the critical mass it achieves should be the trigger for a flood of new investment that will swamp the spending seen in the sector so far.