January 8, 2015

Five trends that will shape the Arab World’s online industry in 2015

“We're gearing up for an exciting year marked by wealth creation, new success stories, and more power given to online consumers and businesses. But this will only be true for those who follow the right business models and execute aggressively. ”

2014 was a milestone year for online businesses in the Arab world. It was the year in which Arab online users spent more time behind their smartphone and computer screens than their televisions, online classified’s popularity soared over that of print classifieds, and several industries such as transportation, automotive, and food & beverage were disrupted and/or evolved –thanks to online marketplaces for services such as restaurant reservations, online food ordering and mobile taxi ordering.

2014 also marked the year where Internet penetration and smartphone penetration passed the 75% threshold in all GCC countries and the 50% threshold across the region.  This happened amidst unrest and transitions, at a time when investment in online businesses was –and still is– very low compared to other regions of the world with similar population size and Internet penetration rates.

As 2015 rings in, online business growth in the Arab world continues unabated, while traditional industries such as banking, telecommunication, and traditional media witness dwindling margins and growth. While this will continue for years as the online industry matures, clear trends are emerging for 2015 that will define the industry.

Here are the top five trends we expect to see in 2015:

1) The rise of online media brands and advertising expenditure growth

The landscape of online media –be it news sites, video sites, or specialty content sites for women, luxury, or travel– is fairly fragmented in the Arab world. As advertising budgets move to the online space in pursuit of affluent and young users, and in adopting international trends of allocating more to online advertising, we expect to see consolidation of online media brands into strong networks that leverage economies of scale. This is more likely to be led by agile medium-sized media groups that have less to lose compared to the larger traditional media brands when it comes to moving online.

2) Evolution of online financial industry regulations

As the size of the online transaction industry grows and we see governments, airlines, and large retailers shifting towards accepting online payments, large banks will pay heed. Subsequently, regulators will follow, as they’ve become more aware of the need for proper licensing and regulation of online financial services providers (such as payments, financing, and remittances).

The resulting commitment to ensuring that such services are properly regulated will certainly pressure small online financial services providers, as well as cross-border ones who have been hesitant to invest in navigating the complex and costly regulatory environments of the Arab world. Regional players who have built the right structures, teams, and technologies required to adapt will win big, while smaller ones will be pushed out of the market.

3) Return of Egypt as a strong online market and hub for online business

Egypt has been lagging behind other key markets and hubs of online business in the Arab world. The return to “business as usual” in Egypt, given its large market size and pool of talent, will boost investors’ confidence to pour money into existing online businesses to support growth in the local market as well as regional expansions. This will include content, e-commerce, and financial service companies.

By the end of 2015, expect to see several success stories from Egypt, with waves to be felt across the region.

4) Online marketplaces to disrupt more industries

The disruption of traditional industries by online marketplaces is destined to continue in 2015. Large industries such as insurance, healthcare, and education will be top targets. Furthermore, new industries will be consolidated and created in the online industry such as local services (e.g. cleaning, laundry and home maintenance). This will make space for new players with local/regional networks to rise as market leaders, driven by the growth of local economies and the move by consumers online to manage their daily needs.

5) Strong comebacks by traditional retailers as omni-channel e-retailers, and market entry by international retailers

As e-retail technological and operational components become more commoditized, the only differentiator in e-retail will be how cheap an e-retailer can procure products sold online, and how fast these products can be delivered to the consumer. This will return the power to traditional retailers, who have been standing on the sidelines as pure-play e-retailers were growing in the market.

Traditional e-retailers’ regional procurement power, established agency relationships and logistics value chains, along with the consumer trust in their brands, will enable them to occupy a significant market share and exert more pressure on the already squeezed margins of pure play e-retailers. This might be accompanied by the market entry of international e-retailers –who still own the largest market share in the Arab world– by establishing regional logistics centers, offsetting shipping costs and delivery time; the only advantage local and regional e-retailers have. Combined, those two trends will result in a seismic shift in the landscape of e-commerce e-retailers in the Arab world.

All in all, we are gearing up for an exciting year, marked by wealth creation, new success stories, and more power given to online consumers and businesses. But this will only be true for those who follow the right business models and execute aggressively in their markets. No doubt, great rewards will be awaiting those who are already ahead of the curve and the brave investors backing them.