Beyond bricks & mortar: Can Qatar really become the ‘Silicon Valley’ of the Middle East?
Qatar was recently ranked by the World Economic Forum as the most networked Arab country and the 23rd most networked nation in the world. Thanks to the ubiquitous nature of the Internet in Qatar, the opportunities for business online is growing. In 2012, Qatar’s e-commerce market was worth USD600 million (QAR2.2 billion), a figure that by 2015 is expected to reach USD1.1 billion (QAR4 billion). As the country’s behavioural trends follow those of more networked nations, it is important to question if Qatar’s e-commerce industry is actually on track for this sort of growth.
When noted British entrepreneur James Caan visited Qatar a few years ago, the country was in the midst of launching numerous programmes to encourage entrepreneurship within the country. Caan rather emphatically stated during a speech that he believed “Qatar should become the Silicon Valley of the region.“
It is a statement that has since been thrown about by numerous people in the entrepreneurship scene here in Qatar. But how realistic is that statement? Is the country really ready, or even a conducive environment for Internet businesses?
Starting up an online business in Qatar is as complicated as one might expect. The issue stems from the fact that in Qatar, online businesses are not treated any differently to traditional bricks and mortar businesses.
Khalifa Saleh Al Haroon set up ILoveQatar (ILQ) as a portal for information about Qatar while at University, after he became weary of people not knowing anything about the country he came from. Soon, he explains, people started asking him to create a forum and then an events section. From there, the purpose for the website was born.
“People started to feel like they owned the site. It was at that time I decided to create a site that is a Qatari friend, especially for an expatriate. So if it happens in Qatar you will find it on ILQ.”
Typically most online businesses start with little to no staff, a computer and an idea, adds Haroon. However, he still needed to come up with the QAR200,000 capital the state requires businesses to invest before getting a licence in addition to renting office space. “You can see that the barrier to entry is almost immediately set quite high, it’s not e-commerce-friendly,” points out Haroon.
“Until the company registration process catches up, there is a lot of innovation that is going to be stifled.” – Aziz Sharif, managing partner Mannzili.
Dr. Thomas Emerson, a professor of entrepreneurship at Carnegie Mellon University in Qatar explains to The Edge that one of the appealing factors of an online business is usually the small start-up capital required. The government-imposed requirement seems particularly unhelpful in the case of online start-ups, he says, “The requirement should be significantly lowered or removed for businesses that operate solely online.”
However, Haroon’s struggle to set up his company did not end there. When he first approached the Ministry of Business and Trade for a licence, they could not understand his business model, ostensibly because it did not fit into one of the few categories under which a company can be licensed in Qatar. Being a portal for information meant that he was not selling a product to customers per se, but would be looking to generate revenue through advertising by leveraging the engagement of people on that portal.
“I eventually ended up registering a normal business with a marketing and advertising licence which is typically what a publishing company will apply for,”
Aziz Sharif is an online entrepreneur, who soon after moving back to Doha following an MBA, decided to join his friend to work on Mannzili, an online real estate portal. He is also of the view that getting the correct company registration can be difficult for some online business models, which he says could have legal ramifications in the future, if for example someone decides to sue your organisation.
Haroon offers a different view, and points out that a license will define how you are going to be generating revenue, “If I have a marketing and advertising licence, it’s clear I generate revenue from advertising. Tomorrow if I wanted to sell something online then I would apply for a licence specifically to that item that I am trying to sell. So there is nothing to fear as long as you go through the correct steps.”
Nevertheless, Sharif raises the point that he is currently working on a disruptive product, and questions how that will be classified within the current system. Although he is not ready to reveal his idea yet, often online based ideas create new products and can sometimes give rise to entire industries – think about social media marketing. “This product requires interaction with a number of other institutions,” continues Sharif, “how do we tick all the right boxes so that it doesn’t fall through or have any issues on the legal requirements. Until that sort of thing catches up, there is a lot of innovation that is going to be stifled.”
Setting up a website in Qatar is no different to anywhere else in the world; you buy a domain name and launch your site. That is what Omar Chatriwala, co-founder of Doha News first did when he and his wife and co-founder Shabina Khatri first started their now highly popular online news outlet. From Chatriwala’s perspective, it was only once they felt they were an established website that was steadily growing in traffic that they looked to register as a formal business. “When we started taking money in the country [from advertisers], that is when we felt like we needed to have some sort of business registration in order to make sure that we were not crossing any red lines,” says Chatriwala. “We did need some support and investment to stabilise our operations,” he explains, and so ILQ became their sponsor, which is part of the holding company Haroon United Group managed by Khalifa Al Haroon.
The business model
Generally, economies work best when the rules are transparent, clear and consistently and fairly applied, says Dr. Emerson. And while Qatar has made some positive strides in this area in recent years, the process still requires some improvement, he says. In particular, the requirement for 51 percent Qatari ownership in a new business is especially burdensome for online businesses, as these are often started by expatriates and not by Qataris. “The government should reconsider the goals of this policy,” he continues, “Apart from retarding economic growth and diversification, what is being accomplished by this policy with respect to online businesses?”
Many online businesses today generate revenue through sponsorship and advertising. Online marketing is a discipline in its own right, and both business owners and marketers are constantly looking for new and inventive ways to integrate advertising into online platforms. Qatari businesses are no different in this regard. A majority of Doha News’ revenue comes from advertising, says Chatriwala. While there is a great deal of advertising in this country, much of it is spent on traditional media such as newspapers. Online advertising in Qatar has not seen the growth many other countries have. It has been slow, but it is evolving, notes Chatriwala. All the online business owners The Edge spoke to seem to have encountered the same issue of apprehension and lack of confidence in advertising through online mediums. However, a recent MENA Media Survey conducted by the Northwestern University Qatar showed that 70 percent of people surveyed in Qatar identified the Internet as the most popular source for news and current events. “We definitely have to explain to certain companies the benefits of advertising online,” says Haroon.
“On the other end of this spectrum,” says Haroon, “are people who try to apply the American advanced model of online advertising to Qatar, where our market is simply not ready.” Paying a minimal fixed fee per visit to a page on a website for example, is not going to work, explains Haroon, “you are going to hit a threshold because Qatar is such a small market.”
Infrastructure and logistics
The Internet advertising model is not the only issue online business owners have to contend with. Infrastructural challenges inherent to most of the Middle East are also present in Qatar. Elias Ghanem, managing director for PayPal MENA, explains that while the rate of e-commerce growth in the MENA region has been phenomenal, for it to continue, more payment options need to materialise for one.
Most recently PayPal partnered with Qatar National Bank to provide its retail customers with the opportunity to make online purchases. Today credit cards are the only way Qatari consumers can shop online, and even then international stores often reject credit cards from Qatar. Ghanem believes that with the introduction of services such as PayPal, more customers can start to shop online.
For online ‘merchants’ as they are referred to by PayPal, it will become much easier explains Ghanem, going to banks for payment solutions can become quite expensive and complicated. Over the coming months, he says, they will be enabling the service for merchants. However, Sharif explains that while PayPal has a high degree of trust with customers, the charges per transaction can be very expensive for merchants. Options are limited adds Haroon, pointing out that even local banks have high charges for collecting payments online.
QAR4 billion - The estimated value of e-commerce transactions in Qatar expected by 2015.
The lack of payment options and trust from customers has led to the emergence of cash-on-delivery as a trend, which now accounts for 80 percent of regional e-commerce, according to Ghanem. This creates an enormous problem for online businesses, he says, as the rate of product returns increases so do the costs to logistics. Qatar, which has only recently introduced numbered housing adds to the woes, especially if you want to use a private company, then delivery can become very expensive, adds Haroon.
Dr. Emerson, however, thinks Qatar has made some wise investments in logistics infrastructure. “The country has excellent air and sea transportation facilities. It has a strategic location in the heart of the Arab world, and convenient to Europe, Asia and Africa.”
Most of the expensive and difficult infrastructure problems have already been addressed and solved, says Dr. Emerson, and the remaining problem is the infrastructure for distribution of goods within the country, which will be solved by the investments being made in conjunction with the 2022 World Cup. “No current online start-up should be deterred because of logistical barriers. By the time that start-up has substantial need for infrastructure, the problem is likely to have been solved,” he concludes.
So, what is stopping the growth of e-commerce?
Haroon says that it was only in January of this year that he started focussing on turning ILQ in to a real business. Much like the model the online retail giant Amazon has followed under CEO Jeff Bezos, Haroon says during the first three years his goal was to achieve ‘critical mass’. Amazon has consistently cut prices and increased services for its customers in an attempt to gain market share. Its investors have been unfazed with the consistently poor performance for more than a decade (last year it reported QAR997 million in losses for the third quarter) trusting CEO Jeff Bezos in creating long-term shareholder value.
“Now imagine if you go ahead and try to sell that idea to an investor,” says Haroon, “and tell him for the first couple of years we are just going to work on building an audience and a trusted brand, and only then think about alternative opportunities for revenue. How can you find someone who is willing to take that risk?” There is so much opportunity in Qatar, explains Haroon, either because something just has not been done before or it has not been done well. The issue is with banks not taking enough risks with innovative start-ups and the lack of angel investors and venture capitalists within the country, he says. “There is so much money around here, and everybody talks about the money, the money isn’t everywhere, it is controlled by a select few and sadly those select few don’t necessarily want to take risks.”
“The money isn’t everywhere, it is controlled by a select few and they don’t necessarily want to take risks.” – Khalifa Saleh Al Haroon, CEO ILQ.
This gets to the very heart of the issue. The way the markets in Qatar are established means sole distributors control and limit the entry of both products and competitors into the market.
“It makes no sense, that if you could access another market and buy a product cheaper, why you wouldn’t do that,” says Sharif. What is really holding down the growth of e-commerce in Qatar is not the fear or the risk of failing, but as Haroon best puts it, “There are more opportunities for assured success. A risky project here [in Qatar] doesn’t necessarily mean high reward. So the question becomes, why should I do that when I can just open up a franchise that will guarantee me revenue?”
Other countries in the region such as Jordan are already being talked of as hubs for technology with venture capitalists and tech giants investing millions, and are well on their way to becoming centres for tech entrepreneurs. There is a lot of potential in Qatar with many talented entrepreneurs, but the country perhaps still has some way to go in fulfilling James Caan’s vision of becoming the ‘Silicon Valley of the Middle East‘.