Egypt Information Technology Report Q3 2008

Market Overview BMI remains optimistic in its view of the Egyptian IT market, with a projected IT spending CAGR of 13% for 2007-2013. Computers remain a luxury item for many Egyptians but a large, young population and increasing affordability are among the fundamentals that should underpin growth. The economic context is also broadly favourable, with ongoing domestic momentum, and investor confidence, despite a worsening international climate. Low disposable incomes and economic disparities remain a constraint, but household computer penetration will rise.

Overall IT market size is expected by BMI to increase from US$889mn in 2007 to around US$1.3bn in 2012. Following the government's recently announced plan to make Egypt an outsourcing and call-centre hub, IT services should be the fastest growing segment over the forecast period. The Egyptian IT market's position within the MEA region is on the rise, with the Nazif administration committed to promoting IT as part of its overall development strategy.

In recent speeches, administration officials have outlined initiatives in areas such as e-government, IT training and new IT parks. The government has also launched several plans designed to further computer penetration, and the large expansion of the 'Computer for Every Home' programme in 2006, with more than 1.4mn sales, was followed in 2007 by the launch of the latest 'Nation Online' phase.

Industry Developments The IT and Communications Minister Tarek Kamel said recently that the government will work hard to attract more investments in IT and Communications. In the past year or so, an increasing number of tech firms have been taking advantage of lower costs to set up in Egypt, where previously they might have chosen the UAE. The government is emphasising regional development of ICT.

Last year the government set an ambitious target for the country to capture US$1.1bn of the global outsourcing market by 2010. A number of contact centres, call centres and software development centres have located in Egypt and the industry already accounts for tens of thousand of jobs. However, Egypt faces a number of challenges, including skills bottlenecks.

Meanwhile, Egypt's e-government initiatives are continuing. The Egyptian Minister of State for Administrative Development said recently that some two hundred government services will soon be available online through a new e-government portal. According to the Ministry for Administrative Development, more than 24 government agencies currently offer services and licences online.

Competitive Landscape Aside from Banking and Telecoms, the future of the market will belong to those vendors which can successfully develop the SME sector. This is the focus of SAP's most recent promotions, which have focused on development of a hosted suite of business applications for the mid-market. With more than 50% of the regional business community comprising of SMEs, this sector is likely to emerge as the main driver of enterprise application spending.

Meanwhile, Oracle recently inaugurated the latest phase of its new Egypt-based Global Support Centre.

The first phase of the centre, which serves clients in North America and Europe, the Middle East and Africa (EMEA), was launched in 2005. In the second phase, Oracle has expanded coverage to include ERP applications and client support services. With demand for packaged software still growing fairly sedately, vendors are concentrating on mining opportunities in the most profitable verticals.

Turning to IT services, the increasing prominence of this segment is drawing more activity from vendors.

The big three players, IBM, Raya Integration and Giza Systems, have over 50% of the market.

Generally, local companies such as Raya have an advantage, but IBM recently won a major tender from Telecom Egypt.

Computer Sales In 2007 Egypt spent US$607mn of its IT budget on hardware, driven by initiatives like the 'Computer for Every Student' projects. Spending is expected to surpass US$1bn by 2012, growing at a CAGR of 13%.

Hardware (including communications hardware) still dominates the Egyptian IT sector, accounting for approximately 62% of the total market. There is room for considerable growth in the next few years, given the current low level of computerisation, which is much higher in the business sector than in the population at large. Desktops still represent over 95% of the PC market and, despite a government laptop initiative aimed at business executives, desktops are likely to remain the mainstay of the market. Fastest growth should come from the fast developing SME and education sectors. Some 20%-25% of unit sales are accounted for by households, with almost 1mn-1.5mn households said to possess a computer at present.

Software Overall spending on software remains rather low, amounting to an estimated US$137mn in 2007. The estimated 14% share of the total Egyptian IT spending accounted for by software reflects the relative immaturity of Egypt's IT market. Another explanation for low spending on software is piracy, with up to 80% of some IT goods being counterfeit. Another important factor is, of course, low income. The high costs associated with operating systems such as Windows have led some players to champion the cause of Linux. However, the domestic software sector is expected to grow at a double-digit CAGR over the forecast period until 2012. With more than 50% of the regional business community comprising of SMEs, this sector is likely to emerge as the main driver of enterprise application spending over the next few years. The entry of new telecoms service providers should spur spending on OSS and BSS systems as well as applications and service platforms.

Services IT services were worth around US$234mn in 2007, accounting for about 24% of Egypt's total spending on IT. Egypt's fast growing IT sector is starting to create demand for larger projects, with larger customers becoming more demanding in terms of their IT expectations, particularly in sectors such as banking, which is increasingly looking to use IDC hosting solutions. However, basic support and maintenance services represent around one-third of IT services spending. IT services CAGR is forecast at 14% for the 2007-2012 period.

E-Readiness In 2008 Egypt is to continue liberalisation of the Telecoms market, with the award of a second national fixed licence. Raya has indicated that it is considering a bid for the prospective licence. This development, which follows the award of 3G licences to three mobile telecoms service providers in 2007, is likely to provide new opportunities for IT vendors. Egyptian mobile operator Mobinil was the latest company to be granted a 3G licence in July 2007, following awards for Vodafone Egypt and new entrant Etisalat earlier in the year. As well as generating additional spending on IT products and services from the telecoms sector, the growing popularity of mobile data applications should provide a boost to the PC market over the next few years.

A similar story could be told about broadband, where the number of users is expected to increase to more than 6mn by 2012. However, while the rate of internet penetration will reach 30% by that year, broadband penetration will lag far behind at just 7%.