It’s all about size

Saudi Arabia’s Internet service providers aren’t waiting for Saudi Telecom to provide relief by cutting bandwidth prices. They’re bulking up in a wave of mergers unprecedented in the Kingdom’s history

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By  David Ingham Published  May 8, 2002

|~||~||~|Khalid Al Molhim doesn’t accept the blame for what most Saudi Arabians consider high Internet access costs. Rather, the CEO of Saudi Telecom Co. insists that prices in Saudi Arabia are competitive with other regional countries and says that cuts are coming.

“There’s lots of talk about us having higher prices than others,” says Al Molhim. “We have lowered our prices to reach those of other Gulf countries and our policy is to keep on lowering them.”

Al Molhim was addressing April’s E-Commerce 2002, an annual event that is rapidly becoming ground zero for all things Internet and e-business related in Saudi Arabia. In his keynote speech, Al Molhim claimed that rather than price being the problem, factors such as the cost of PCs and parents’ fears about unsavoury content are holding back the Internet in Saudi Arabia.

Al Molhim does, however, have a plan. He told the audience that he has a “programme to lower prices” that will increase the number of Internet subscribers from 300,000 now to 500,000 in the coming year. Al Molhim expects 6 million of Saudi Arabia’s 24 million people to be regular Internet users by the end of 2004.

In a Q&A session after his keynote, Al Molhim faced tough questioning, however. He was asked several times why Internet access still costs SR4 per hour; he responded by repeating that price cuts are in the pipeline.

One questioner also criticised the quality of digital subscriber line (DSL) services, which are supposed to provide high speed Internet access and thus get round the quality of service problems that frustrate Saudi’s Internet users. “I agree with you that DSL is ineffective now,” admitted Al Molhim.

The arguments about the cost of Internet access being too high and who’s to blame for it could probably go on forever. What isn’t being debated is that the Internet needs to be accessible to more people if Saudi Arabia is to become a more vibrant part of the digital economy.
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Dr Said Al Shaikh, chief economist, National Commercial Bank, is amongst the voices urging more action to boost telecommunications usage. To illustrate his argument, Dr Al Shaikh uses some sums.

He estimates that a typical dialup subscriber will spend $60 per month using the Internet. He says that this is something like 8% of the average monthly income in Saudi Arabia. In comparison, US citizens spend an average of 0.8% of their monthly income using the Internet, he adds. “We have a long way to go in terms of developing the telecommunications sector,” says Dr Al Shaikh.

For Saudi Arabia’s ISPs, the companies that provide the Internet access, there are different concerns. They struggle simply to stay alive, and it is often joked that the only ones that don’t have minuses on their annual balance sheets are the ones that don’t pay their bills to STC. “I would challenge any ISP if it said it made a profit last year,” says Rashid Al Snan, chief executive officer at Atheer.

Alamiah.net, AwalNet and Naseej have decided to do something about it. Last month, they finally confirmed what everybody already knew when they went public with plans to merge their ISP operations. We don’t yet know what the new company will be called or who’ll be running it, but one thing that is clear is that the new company will be all about size.

According to the three companies, the merged ISP will have 100,000 subscribers (rivals claim the true figure is 75,000), 25% subscriber market share and 155mbits/s of bandwidth connecting it to Saudi Telecomms Company. In the words of Dr Badr Al Badr, president & CEO of Al Alamiah Internet & Communications Company, “The difference between us and the others is that we have achieved the critical mass that will allow us to invest in new services.”
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In the short term, the most immediate benefit of combining operations is to reduce the cost of the bandwidth that all ISPs need to buy from Saudi Telecomms Company to run their services. As reported in Arabian Business last month, the cost of bandwidth has been one of the main problems for ISPs since Internet service began in Saudi Arabia.

However, the more bandwidth an ISP buys, the cheaper each unit of that bandwidth becomes. “One of the reasons behind the merger is to achieve economies of scale,” confirms Dr Abduljabbar Al Abduljabbar, chief executive officer of Naseej. Longer term, the new ISP intends to invest in a significant expansion and improvement of its services across the board. Simply by having more bandwidth, the new company should be able to provide much speedier and more stable services.

Another plus is that the new ISP inherits three IT centres. Should it choose to maintain them all, it will be able to switch service from one centre to another to deal with possible power outages or technology failures.

The new player will also have the clout to become the first truly Kingdom-wide ISP. Currently, most ISPs operate very much on a geographical basis within the huge Kingdom. However, Alamiah.net, AwalNet and Naseej, which were all very much focused on the Riyadh and Najd region, can now begin to look further afield, maybe even abroad. “That is one of the main goals of the business plan — to expand regionally,” says Dr Badr.

If it can succeed in making the basic dialup business profitable, the new ISP will be better placed to invest in the so-called ‘value added’ services that provide the bigger profit margins. In the long term, all parties expect to see significant progress in the areas of application development & hosting, high speed Internet access and customer service & support.
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Corporate history is, of course, littered with mergers that failed and the problems usually start with the people. A large part of the merger’s success, and even the future of the Internet in Saudi Arabia, will depend on how well senior management at the company hits it off.

Naseej’s Dr Al Abduljabbar says that all the possible risks and pitfalls have been taken into consideration. “This merger didn’t just take place overnight,” he says. “We have developed a list of possible risks and the ways to mitigate those risks.”

Dr Al Abduljabbar says he’s not worried about any loss of personnel, something that usually happens after a merger, since he believes this ISP is going to be an exciting place to work. “This ISP won’t do what previous ISPs did,” he enthuses. “It will do much more…so we don’t expect a large turnover of manpower.”

However, for the Middle East, mergers and acquisitions are very much uncharted territory and one of the things that really makes this merger stand out is the fact that it is happening at all. Since this is one of the first major mergers in the region’s IT industry, there are few precedents to look at.

One of the few industries in the region to make any attempt at consolidation is the banking industry and results there have been mixed. The merger of TII and Dallah Al Baraka has just fallen apart, as did the proposed merger of National Bank of Dubai and Emirates Bank International. One of the few merger success stories is Bahrain’s Ahli Bank and United Bank of Kuwait.

One of the key points to be decided on is who gets the top positions at the new company. Alamiah.net’s chief, Dr Badr Al Badr, is currently the interim CEO of the new company and Mansour Al Obeid, AwalNet’s general manager, is acting COO.

Naseej’s Abduljabbar Al Abduljabbar will remain in charge of his own company, Advanced Business Systems. Senior management will be taken from across the three parties to the merger, as will the members of the new company’s board.

Notwithstanding the potential pitfalls, all the indications are that this merger is only the start for the entire ISP industry. Other, smaller ISPs are being invited to join this merger and more consolidation may follow. “We don’t see the market sustaining more than six ISPs, maybe five or even four,” says Dr Al Abduljabbar.

At least one merger has already taken place between two smaller ISPs in the Western region. Atheer, the Jeraisy/Batelco joint venture, has also talked openly of wanting to take over other ISPs.

So far it has resisted, saying there were few attractive takeover targets. “Once you look in detail at these companies, you find they have very little value,” says Rashid Al Snan. He pledges to continue this cautious approach.

Regardless of who is to blame for the high relative cost of Internet access in Saudi Arabia, this mega merger is all about achieving economies of scale that will allow ISPs to reduce overheads and start making profits. The one thing all ISPs, regardless of their size, could do with though, is an immediate drop in bandwidth prices.||**||

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