Saudi Arabia's online opportunity

10 October 2011

As a young and tech-savvy population demands more from its technology, Saudi Arabia is drawing the attention of digital developers and investors

Key fact

There were 11.4 million internet users in Saudi Arabia with 2 million broadband subscribers as of June 2011

Source: MEED

Saudi Arabia’s online market is the most attractive to investors in the Middle East. With a population of 27 million, 29.4 per cent of which are under the age of 14 and with per capita income of $24,200, it has become the target market for most digital entrepreneurs and developers. 

“Saudi Arabia is very attractive because of its socio-demographic structure and large youth market that is very tech-aware,” says Gabriel Chahine, vice-president at US-based consultancy firm Booz & Co. “The youth, women and business professionals are the biggest users of the internet.”

If we do not invest in local content, then the Amazons and Facebooks will localise it … money will [leave] the country

Rashid al-Ballaa, National Net Ventures

In recent years, the government and telecoms operators have invested in fixed-line infrastructure and mobile networks to provide high-speed connectivity. In a bid to move towards a knowledge economy, Riyadh has allocated $3bn of its 2011 budget to IT and telecoms spending to improve infrastructure and increase internet penetration.

Internet penetration in Saudi Arabia

According to US-based internet market research firm Internet World Stats, there were 11.4 million internet users in Saudi Arabia as of June, with about 2 million broadband subscribers. Internet penetration is about 44 per cent, notably lower than the UAE (69 per cent) and Qatar (66 per cent), but better than Egypt (25 per cent) and Jordan (27 per cent).

Internet usage in Saudi
Social networking36
Reading blogs18
Writing blogs10
Source: Asda’a Burston-Marsteller

The fixed-line internet market is dominated by state incumbent Saudi Telecoms Company (STC) with more than 80 per cent of market share. There are four other main internet service providers (ISPs).

Demand is highest for mobile broadband, which is forecast to grow more than 25 per cent in 2011 alone. The mobile market is served by telecoms operators STC, Etihad-Etisalat (Mobily) and Zain. The mobile penetration rate is now above 200 per cent, which has pushed the three operators to look for new revenue streams.

Most content developers are not from Saudi Arabia and it can be very difficult to understand this market

Abdullah Hamed, local developer

All three have realised the importance of data and content, so have invested in their networks to provide higher connectivity speeds. The three operators have each launched high-speed mobile broadband, or long-term evolution (LTE) technologies and this is expected to boost the kingdom’s mobile broadband market.

PC penetration is relatively high at 73 per cent in the fourth quarter of 2010, according to London-based research firm Informa Telecoms and Media. This figure is expected to rise with the consumer electronics market projected at $4bn in 2011, rising to $5bn in 2015. Per capita consumer electronics spend in 2011 is forecast to be $152, increasing to $175 in 2015.

Smartphone penetration is increasing rapidly in the country. Mobile handset sales accounted for 22 per cent of consumer electronics spending in 2010 and this is expected to grow at a compound annualised growth rate of 6 per cent by 2015. These trends are increasing internet literacy in Saudi Arabia and driving demand for richer online content.

GCC internet penetration
Saudi Arabia38.1
Kuwait 40
Source: Internet World Stats

“Smartphone growth requires more content and better data plans. The telecoms sector should leverage this growth and build an ecosystem to enable innovation,” says William Kanaan, Google’s business development manager for the Middle East and North Africa (Mena) region.

Saudi Arabia is already the biggest market for data consumption with mobile users downloading more than 86 terabytes of data a day.

The strict censorship of traditional media and the lack of entertainment for young people have pushed them to seek entertainment online. Through virtual private networks and proxies, the internet becomes an open and unrestricted destination.

The main opportunities are in social media, online gaming, e-commerce and mobile applications. More than 97 per cent of Saudi internet users conduct online searches through US-based Google. Of the 100 million daily search queries across the Mena region, 54 per cent are in Arabic, of which 80 per cent come from the kingdom.

About 13 per cent of Mena search queries are performed on mobile devices, representing a 200 per cent growth in the past year alone, led mostly by Saudi Arabia. Arts and entertainment dominate search queries. “Youtube” was the most searched-for query, with “pictures”, “games” and “Facebook” making up the top four.

Social media in Saudi Arabia

Video streaming, particularly on the mobile platform, has become an important part of the market. Mena users watch 100 million hours of videos a day on Google-owned video streaming website Youtube. Saudi nationals watch more Youtube videos on mobile devices than any other nation in the world.

According to research conducted by Jordan-based Arab Advisors Group, 55 per cent of internet users use social media as the primary means for social interaction. There are 3.5 million Saudi nationals on US-based social networking website Facebook – more than 15 per cent of the country’s population. Across the Middle East, 44 per cent of Facebook users log in at least once a day to check their profiles.

Such online activity presents huge advertising opportunities for all sectors.

E-commerce spending including bill payment in 2010
Saudi Arabia$6.68bn
Source: Arab Advisors

The demand for entertainment continues with online gaming. Out of the region’s users that play games online, more than 63 per cent of them are located in Saudi Arabia and 13 per cent of them pay to play these games.

Dubai-based media producer MBC responded to this opportunity in January by launching a social gaming network for mobile users called Me2 in Saudi Arabia. It is an avatar-driven social network, which enables users to interact with one another in real time. The application is free to download from the STC applications store but requires a $3 monthly subscription fee. Revenue also comes from the sale of virtual goods that users buy with real money. The virtual goods market was worth $7.3bn worldwide in 2010, up 245 per cent in just three years.

Virtual commerce opportunities

Rashid al-Ballaa, chief executive officer of the local National Net Ventures, says social gaming, where users have to buy virtual goods, will become one of the biggest markets in the country, based on the e-commerce potential.

Online transactions totalled $6.86bn in Saudi Arabia in 2010, the highest in the Middle East. “The e-commerce sector has great potential, but no one has figured out how to do it properly for the local markets,” says Al-Ballaa.

One entrepreneur making an attempt is Alexandra Tohme, who is setting up an e-commerce website dedicated to selling lingerie to Saudi women. “The internet is one of the best ways of gaining access to local women. The social effects of women not being allowed to do many things have created a place for them online and we are looking to target them through social media,” she says.

While social media and entertainment makes up a large proportion of online and mobile activity, there are as yet few local alternatives. Users in the kingdom rely mainly on US-based websites.

“If we do not invest in local content, then the Amazons and Facebooks will localise content and money will go out of the country,” says Al-Ballaa. “Facebook does not have a single employee in the Middle East and has not invested a single dollar back in the region.”

If the demand is not met by local developers, consumers will simply turn to international players. Less than 20 per cent of the Mena population communicates in English, yet it is the language most dominant on the internet. Arabic content only accounts for about 3 per cent of total online content.

“Content development has been very slow. Most operators have been left behind with content as they do not have the internal capabilities to fulfil customer needs. So, many bundle services with the mobile device and use services from Google, Apple and Blackberry,” says Ali Ameri, senior adviser to STC.

Content creation is an area ripe for development, but there are obstacles preventing this area from thriving. There are not enough developers catering specifically to the Saudi market. There are significant cultural differences among the countries in the Middle East, so success in one country may not be easy to replicate in another.

“Most content developers are not from Saudi Arabia and it can be very difficult to understand this market. This is why we have a lot of content that is not suitable or directly targeted at the country,” says local developer Abdullah Hamed.

The main problem is most Saudi graduates become employees of the state. Public relations company Asda’a Burston-Marsteller’s annual Arab Youth Survey, found 79 per cent of Saudi respondents said they would favour a job with the government. The key is attracting these graduates to venture out and become entrepreneurs. This may not be too much of a barrier, as 90 per cent of Saudi youth said they intend to start their own business within the next five years, according to the survey.

But it is still difficult for entrepreneurs to succeed in the region. While the US’ Silicon Valley has the experience, the tools and the personnel to help new ideas flourish and develop, the Middle East lacks these essential components. There is also a fear of failure that damages conditions for innovation, according to many developers.

Financial reward

Content and application development is also not financially rewarding. For mobile applications, developers complain of slow payment and a need for better pricing structures. Using telecoms operators’ applications stores gives wider exposure, but the disadvantage is the operator takes 40-60 per cent of the transaction, leaving little incentive for developers to go through them. “It forces developers to hike up prices and so it is bad for the consumer. Any chance to cut out the telecoms operators is for the best,” says Hamed.

The issue of payment is another significant hurdle in the growth of internet business. Micro-payment and online financial transactions are not developed enough to encourage entrepreneurs to venture into the online marketplace. The e-commerce sector is also being held back by a slow postal system. 

“The lack of regulation and different financial regulations in the region is one of the biggest barriers. It is being talked about at different levels and requires banking and telecoms industries to work together,” says Ghassan Hasbani, chief executive officer of international operations at STC. 

Once these requirements are met and improvements made, Saudi Arabia’s online market is likely to grow more rapidly, but even with these barriers, it is still the most attractive in the Middle East.

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