A marriage of convenience

Yahoo's takover of Maktoob could give Arab web enterprises a much needed shot in the arm.
By Soren Billing
Sat 05 Sep 2009 04:00 AM


After years of talks and speculation, Yahoo and regional internet portal Maktoob have finally decided to tie the knot. Soren Billing looks at the deal that could give Arab web enterprises a much needed shot in the arm.

The reasons for US internet giant Yahoo acquiring regional player Maktoob could have been lifted from most any prospectus telling investors to buy into the region: a rapidly growing market, a young population, and plenty of cash around to invest in infrastructure.

Yet it took more than nine years for an international company to snap up the only Arab internet firm with any market share to speak of.

There are many reasons for that. Local investors were busy investing in real estate and the ever-rising stock markets. On the ground, entrepreneurs were hampered by low internet penetration rates and state-backed internet service providers that were often as slow as they were expensive. And global investors had plenty to do in emerging markets like China.

“Maktoob badly needed this acquisition because over the last two to three years, with new venture capitalists, they went down a route of acquiring small websites and increasing their audience,” says Jawad Abbassi, founder and general manager of research consultancy Arab Advisors Group.

“But that was the right strategy for them to be acquired by Yahoo.”

The Sunnyvale, California-based company did not reveal how much it paid for its Jordanian competitor, but TechCrunch, a blog that covers technology start-ups, puts the figure at $85m.

The sale did not include auctioning site
Souq.com

, payment service provider
cashU.com

, search engine
Araby.com

, and gaming site
Tahadi.com

. When the deal closes in the fourth quarter of this year, those sites will operate under a new entity called the Jabbar Internet Group.

Maktoob was founded in Jordan nine years ago by Samih Toukan and Hussam Khoury as the world’s first Arabic language webmail service.

In 2005 private equity group Abraaj Capital bought a 40 percent stake in the company for $5.2m, which it sold to US hedge fund Tiger Global Management in 2007. Abraaj did not disclose the value of the deal, but said the sale generated an internal rate of return of 75 percent.

Toukan will head up the newly formed Jabbar Internet, which will maintain close commercial ties with the Maktoob units that are now part of Yahoo.

Yahoo’s sprawling internet empire already includes 44 million users in the Middle East. The acquisition should easily boost that number by 15 to 20 percent after accounting for some overlap between the two companies, according to Arab Advisors Group.

The fact that Yahoo has no Arabic language content means the number of people using both sites should be slightly lower than it would have been otherwise.

“We’ve been looking at the region but we didn’t have a footprint and so we looked at various ways of entering the market,” says Keith Nilsson, senior vice president of international emerging markets at Yahoo.

Arab internet users do not differ in any significant way in their needs and preferences compared with other nationalities, but as in many emerging economies, the market has been hampered by insufficient infrastructure and a lack of developed media outlets, he says.

At the moment, only one percent of all internet content is estimated to be in Arabic, despite 320 million people speaking the language.

There were 34.3 million internet users in the Arab world by the end of 2008, out of whom 20 to 22 million were broadband users, according to research by Arab Advisors Group. Internet penetration ranged from around 6.3 percent in Egypt, the most populous Arab country, to a whopping 45.4 percent in the UAE.

“The one thing that’s standard across the board is that, especially in countries like Egypt, Morocco, Algeria and the Levant, there is a huge level of growth taking place from year to year in terms of internet penetration,” says Ahmed Nassef, general manager of
Maktoob.com

.

The region’s online advertising industry will grow around 25 to 30 percent this year, he believes.

“We are probably growing at twice the size of the market’s growth but the whole industry kind of came to a full stop towards last year. Things are picking up again. But even within that context there was growth.”

The Maktoob takeover sends an important signal to investors: exiting a technology investment in the Middle East is possible, even if initial public offerings (IPOs) are not an option.

“This is nothing short of a sea change for the region,” says Faisal Ghori, a principal at strategy consultancy Middle East Ventures.

That should spell more funding for Jordan’s growing number of internet entrepreneurs, and strengthen the country’s role as a regional tech hub.

Still, the typical investment in a technology start-up lasts around five years. For Maktoob, it took nearly twice as long.

Whilst emphasising that this is a positive story, Jawad of Arab Advisors also notes that the new company will face some challenges going forward.

“The main weakness of Maktoob is that in all the major online services — e-mail, messaging, e-commerce, social networking and search — it’s a very distant player in the region,” he says.

Others point out that the deal leaves out the region’s fledging e-commerce sector, which still has a long way to go.

“Yahoo doesn’t have any particular strength in e-commerce, so it’s not surprising that it has left these and gone for instant access to users. But this is the area where the region lags behind the most,” says Mark Sutton, group editor of Dubai-based publisher ITP’s technology group. (ITP Publishing Group is the publisher of Arabian Business and ArabianBusiness.com.)

“It is an interesting move to get users, but not revolutionary.”

In a region where many governments use highly sophisticated technologies to block any content that could offend local sensitivities, Yahoo will have to tread carefully, especially in Saudi Arabia, the largest Arab advertising market.

“The vast majority of its audience will come from Saudi,” says Austyn Allison, managing editor of Communicate, an advertising and marketing magazine.

“If Maktoob were to get itself banned in Saudi Arabia through some misguided story that it put on there, or a perception that it was offering too much online dating, it would obviously lose a lot of its value to Yahoo.”

The US company is unlikely to rock the boat. Four years ago, it was criticised by Amnesty International, Human Rights Watch and Reporters Without Borders for its complicity in the arrest of a Chinese journalist. Rival Google has been criticised for censoring, or omitting, search results from its Chinese search engine.

“Yahoo are going to have to listen a lot to the people behind Maktoob who have the regional expertise,” says Allison.

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