Egypt Information Technology Report Q1 2008

Market Overview The Egypt IT market's position within the MEA region is on the rise, with average growth of 13% expected through 2012 and opportunities in most sectors. Overall IT market size is expected by BMI to increase from US$889mn in 2007 to around US$1.3bn in 2012. While computers remain a luxury item for many, a series of factors should drive growth over the forecast period including a large young population and a constructive economic outlook. Despite constraints of low disposable incomes and economic disparities therefore, computer penetration will rise in both household and enterprise sectors.

The Nazif administration seems likely to remain committed to promoting IT as part of its overall development strategy. In recent speeches administration officials have outlined initiatives in areas such as IT training and new IT parks such as the one at Maadi. The government has announced 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. The economic context is also broadly favourable, with consumer and government spending seen as boosting the rate of growth. On the output side, BMI sees strong performance in construction, real estate and tourism. All of these sectors will offer strong opportunities for IT vendor, as will telecoms and banking. Infrastructure spending in the oil and gas sector should be boosted by the discovery in 2007 of new reserves of both at several sites.

Industry Developments In a speech on November 2007, IT Minister Tarek Kamel outlined a new emphasis on IT skills and training as part of the government's plan to develop the offshoring industry in Egypt. The government is keen for Egypt to win a growing share of the global offshoring business with a focus on providing Arabic content, addressing European markets, and partnering with India and the Philippines. A number of contact centres, call centres and software development centres have located in Egypt but a skills shortage could provide a barrier to further expansion.

Meanwhile Egypt's e-government initiatives are continuing. Sahem Bedar, Director at the Ministry of State for Administrative Development, recently reported that more than two dozen government agencies offer services and licences online. A study conducted prior to the launch of the e-government programme found that the average Egyptian spent three weeks in queues outside government agencies. In 2007 the government announced that it was implementing a new strategy of expanding IT services to Education, Health and Transport areas.

Competitive Landscape International vendors are strengthening their position in the fast growing Egypt PC market and challenging the earlier dominance of local companies. The development in part reflects the growing demand for notebooks, where foreign vendors generally have an advantage. The growing dominance of foreign vendors was reflected by the fact that Dell was to open a representative office in Cairo before the end of 2007, whereas previously the company covered the market through four business partners including Raya and Quest. Overall, HP, Dell and Acer are the market leaders and combined the top three vendors accounted for more than 40% of revenues.

Meanwhile at the end of 2007 SAP AG announced that it would acquire all of partner SAP Arabia's software licences and customer maintenance products. SAP has many large enterprises in the region, but the new direct presence should bring SAP closer to its customers and partners.

Computer Sales In 2007 Egypt spent US$607mn of its IT budget on hardware, driven by initiatives like the 'Computer for Every Student' project. 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. Following the government's recently announced plan to make Egypt an outsourcing and call-centre hub, this sector should be one of the faster growing over the forecast period. 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 increasing 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 The award of 3G licences to three mobile telecoms service providers in 2007 is likely to provide 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 from around 2.3mn in 2007 to 5.7mn by 2012. However, while the rate of internet penetration will reach 22% by that year, broadband penetration will lag far behind at just 7%.