Starting Points: Jabbar

Jun 9, 2010

Online Advertising Spending Surges in the Middle East

Large Internet companies are taking note of the region's recent vigor, and a potential surfing population of 300 million in 22 countries

In 2006, with the Egyptian economy on course for its biggest growth in at least two decades, Con O'Donnell's business was in trouble. Sarmady Communications, his Cairo-based digital media company, was struggling to attract advertisers to its websites. "Our business is creating content and selling advertising, and we ended up saying, 'do you want us to do a website for you?' We would do those things to have some cash flow."

Four years later, Sarmady has three offices, and its sports and entertainment websites are awash with advertisements from companies such as Toyota Motor (TM), BMW, adidas, and Telecom Egypt. Revenue more than tripled, to $2 million in 2009, and may reach $4.3 million this year, O'Donnell said.

The turnaround reflects new marketing strategies across the Middle East region of 22 countries and more than 300 million people. Over the past two years companies have begun to increase spending online, taking advantage of the growing number of Internet users and inexpensive multimedia technologies to advertise their products.

Spending on online advertising in the Arab world may surge to about $400 million within four years from about $90 million in 2009, said Samih Toukan, chief executive of Jabbar Internet Group, which owns online businesses such as e-commerce website Souq.com. That's in contrast to the recent performance of online advertising worldwide, which fell 2.4 percent in 2009, to $26.4 billion, research group IDC said in March.

A growing number of Arab businesses are "looking at the return on their [ad] investment and the best way to track that is online," said Husni Khuffash, Google's (GOOG) regional manager for the United Arab Emirates, Lower Gulf, and Levant.

Large Internet companies are taking note of the region's recent vigor. Last year, Yahoo!, owner of the second-most-popular U.S. search engine, paid $164 million for Arabic-language Internet venture Maktoob.com, which owns e-mail, search, auction, and entertainment websites. In 2008, Vodafone Egypt took a majority stake in Sarmady.

"There is a lot of room for advertising to grow, unlike other mature markets," says Ahmed Nassef, managing director for Yahoo! in the Middle East. "The numbers are there, and we have a vibrant advertising market" of as much as $9 billion in the Gulf Arab countries and elsewhere in the region, he says. Ad sales at Yahoo! Maktoob expanded more than 50 percent in 2009, says Nassef.

Microsoft's (MSFT) MSN gained first-mover advantage five years ago, with an Arabic version of its portal operated by LinkdotNet, an Egyptian company that owns nine sports, financial service, and entertainment ventures. The company now also operates MSN North Africa and another site dedicated to Pakistan.

Online ads are "doing super well; it surprises most people," says Karim Bichara, the 35-year-old CEO of LinkdotNet. The company expects revenue this year to surge 110 percent.

In February, LinkdotNet's advertising arm, Connect Ads, signed an agreement to sell ads in the region for social media site Facebook. Last month, Sarmady launched the Arabic-language version of the official website of the National Basketball Assn., which has a strong following in Arab nations, including Lebanon, Jordan, and the Arab Emirates.

Still, challenges abound for online operators in the Middle East. Broadband penetration has picked up only in the past few years and remains low—12 percent in 2009, according to a study by the Dubai Press Club, compared with 64 percent in North America.

That's pushing many online ad and content companies to tap the mobile phone market, which has more than 230 million users in the region, according to Jawad Abbassi, general manager of Amman-based research company Arab Advisors Group.

Of Sarmady's projected revenue this year, 40 percent will come from ads on the cellular applications of websites. Its flagship, sports website FilGoal.com, has already attracted campaigns from such advertisers as Egyptian vehicle assembler and distributor GB Auto.

The lack of content is also a potential stumbling block. While 5 percent of Internet users worldwide are Arabs, only 1 percent of content is in Arabic, Nassef of Yahoo says. "If we grow content, that's going to increase user engagement online, and it will help grow the industry too."

The bottom line: Internet advertising is growing fast in the Arab world. Low broadband penetration and lack of content in Arabic are challenges.

Alaa Shahine is a reporter for Bloomberg News. Massoud A. Derhally is a reporter for Bloomberg News.