Business

Change is in the airwaves

by Karim Sabbagh
written by Karim Sabbagh

Over the past decade, the telecom industry has helped to fuel the digital transformation of entire industries, economies and societies. But now the sector is entering a more challenging time following years of significant growth.

In order to stay ahead of the game, operators must build the next generation of high-speed fixed and mobile networks to keep up with customer demand; doing so will require massive investments. At the same time, they must invest in innovation and the development of new strategic capabilities. But operators are hindered in these efforts. Their traditional sources of revenues are becoming commoditized and many are struggling to find new unique services to catch the attention of their customers.

To meet all these demands, operators must strive to build leaner, more adaptive, modular and increasingly complex business models. And they must acquire the capabilities needed to ensure that these new business models can succeed, even as they continue to invest in next-generation fixed and mobile infrastructures.

Forward-looking business models must be based on a deep understanding of three overarching trends that are driving the industry into the future.

The first trend is customer ubiquity. Consumers and businesses demand constant and universal access to digital applications and content: The more bandwidth and services that operators provide, the more their customers will consume. This demand will put huge burdens on operators’ current fixed and mobile networks. Data already makes up the vast majority of network activity; much of it driven by video streaming on the web and it just keeps growing: video streaming in the United States has increased by a hefty 78 percent per year since 2005. The continuing rise of mobile ‘apps’ — the hundreds of thousands of services available on smartphones and other devices everywhere — will only intensify the phenomenon of customer ubiquity. Operators will lose ground to technology companies like Apple and Google unless they find a way to cash in on the mobile app business, which is expected to generate $40 billion in revenue by 2014.

The second trend is technology modularity, in which networks, services and applications are rapidly evolving and shifting away from vertical integration toward modular, open systems. Different networks (such as fixed, wireless and broadband) will serve end-users directly, delivering the required ubiquitous connectivity. Both applications and service offerings such as on-demand movies and gaming will likely be based on systems that will essentially be independent from the infrastructure through which they are accessed. This means that parts of the entire system can be built not just by operators but by a variety of non-industry rivals, as they try to gain a share of future revenues.

The third trend is industry innovation. Operators used to focus on protecting their core business — the development of large-scale networks — rather than experimenting with smaller initiatives. As a result, they have left themselves vulnerable to a vast array of competitors developing apps and services.

New models for a new industry

Once operators understand the implications of these three trends, they must select, design and build new business models — and the accompanying capabilities — to respond to and benefit from them. There are four distinct business models that will shape the future of telecom operators:

Network guarantors use their network assets to provide widely available and open infrastructure and timely, reliable, cost-efficient services. Their primary customers are companies operating under the business enabler model, which can take advantage of their infrastructure to offer more advanced services to their own customers. This model will require operators to be efficient in their planning, provisioning and operations, and to offer high levels of quality in terms of network reliability and service levels.

The business enabler is a “double-sided” business model. On one side, it provides end users with the broadband services they need. On the other, it helps application and service providers manage their own businesses, providing them with wholesale broadband, managed services, transaction and billing support, and platforms such as hosting and cloud computing. To make this model work, operators must cultivate their capabilities in partnership, offer flexible service customization, and aggregate their customer bases and service providers.

Experience creators capitalize on consumers’ thirst for new apps and services, as well as the needs of companies in any number of industries to digitize their businesses. They will provide consumers and business customers alike with the ubiquitous connectivity they demand — with targeted applications, fresh content and a distinctive experience — as well as the ability to create and distribute their own content. To do so, they must be extremely innovative in their products and services, as well as dedicated to serving different customer segments effectively.

Each of these three business models offers operators a way to compete in increasingly fragmented telecom markets. To extend the gains made in one market by replicating the model in other markets, there is a fourth business model that operators should consider — especially if they already have significant scale and scope, as well as operations beyond single markets or regions.

This model, the global multimarketer, offers a path for operators to make the leap to becoming truly global entities. Thanks to their inherent strengths in branding, efficiencies and reach, global operators are proving stronger than their local rivals. Successful global multimarketers are able to benefit from the cost savings available through sheer scale, as evidenced by the efficiency in capital expenditures that a select group of global operators have gained in some markets.

The only way operators can counter the numerous threats they face is by creating new business models that can effectively respond to the rapid changes overtaking the telecom industry. Operators that understand the need to move away from their traditional vertical organizations and to develop one or more of these business models must ultimately transform themselves into one or another of the modular organizations described above, with the ability to replicate their capabilities and business models across different markets and customer segments.

 But building those capabilities and business models will take time. The winners will be those operators that are first to understand the need to make this transformation, and then move fast.

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Real Estate

A lack of Grade A

by Rayya Salem
written by Rayya Salem

Though many of Beirut’s 130 downtown office buildings are in need of tenants, its Grade A office sector is suffering the opposite problem. Most of the Beirut Central District’s (BCD) premium offices are fully occupied and the supply is badly in need of restocking, as few developers have delved into that risky terrain in the last few years.‘Grade A’ typically refers to those offices in prized locations that feature top of the range interiors, facilities and services, and the shortage of quality supply was a factor helping Beirut earn the dubious honor of being fourth most expensive city in the Middle East and North Africa for office rent in Cushman & Wakefield’s February report.

Moving out

Office occupancy is at 75 percent in the BCD, the highest in a decade, according to Karim Makarem, director at Ramco real estate advisory. But most of the 100 to 250 square meter offices are unsuitable for multinationals and large firms, who typically look for 600 square meters of open floor space.

A source from Beirut’s Michael Dunn & Co. said that more than five multinationals have moved out of their Beirut offices in the last year. This was mainly because they were unable to find sufficient floor space serviced by the amenities they required with enough parking spaces for employees, forcing them to retreat to less costly suburbs such as Hazmieh, Sin El Fil and Mkalles.

Specific needs may also drive organizations to look outside the BCD: Abdullah Saleh, general manager of BrokersXP says a recent client, an Arab television station, needed an office with high ceilings and a good view for filming purposes. After viewing up to 15 premises in downtown, they opted for an office in Hazmieh on the outskirts of the city, where they found six-meter-high ceilings.

Bernard Mouchbahani, managing partner of corporate consultancy ProFinance expects areas such as Hazmieh and Sin El Fil to attract more commercial interest in the future and that Dbayeh will become a “middle class Solidere.”

But for firms like ServCorp, the world’s second largest provider of serviced offices, boasting a prestigious corporate address in downtown Beirut is a must. Barry Barakat, the firm’s general manager in the Middle East, says the country’s recent increase in construction activity and real estate prices convinced the management that demand for international services would pick up, and thus the company’s 95th branch was born in the BCD.

After settling into a 450 square meter office in downtown’s Louis Vuitton building last month, he told Executive: “In other cities, we would typically have a choice of three to five well known Grade A buildings to choose from. This was not the case in Beirut. [Compared to] the growth of Gulf Cooperation Council cities…the office sector in Lebanon has been somewhat stagnant.”

New supply

However, there is some hope on the horizon. The rate of construction for Grade A office buildings has picked up this year, after rents rose to a high of $400 per square meter annually from a market rate of $250 per square meter in 2009, according to Cushman & Wakefield’s 2010 second quarter report.

Brokers say the highest priced new constructions will be near the Starco and Bab Idriss areas of downtown. There, large firms are willing to shell out cash for what they consider to be Beirut’s prime office location: in downtown but comfortably distant from Parliament’s security upheavals and subsequent road closures.

Premium Projects is behind the upcoming eight-story Stratum office building near the Starco Center, designed by Australian architect Kevin Dash, who also designed the Bank Audi headquarters across the street. Ziad Karkaji, the group’s director of real estate, says that prices have doubled from around $3,500 to $6,750 per square meter in the sales-only project since they bought the 1,656 square meter plot in March of 2008. Some 90 percent of the grade A office building, to be completed by mid-2012, has been sold, he says, mostly to Lebanese companies who were operating in the Gulf and returned their headquarters to Lebanon after the financial crisis.

Stratum’s soon-to-be-neighbor, Developer Mouawad’s Palladium, is fully sold out. Marketer Foncia real estate consultants said the four office floors, ranging from 600 to 1,300 square meters in size, have all been leased to a single tenant. A representative from the Mikati-owned M1 group also confirmed their plan to complete a Grade A office building in three to four years on 25,000 square meters of built up area near the Starco building.

Ramco’s Makarem adds that there is a substitute to renting a downtown location: “Large, local companies come to us to look at alternatives such as buying land to develop their own office space or find other corporations [also] looking for large office space, so they can approach a developer together to get him to build what they want.”

Lebanese-Canadian Bank is building itself a nine-story $15 million high-tech headquarters on a 1,000 square meter plot in Martyr’s Square, while the Bank of Kuwait and the Arab World is erecting an 8-story, 10,000 square meter office on Foch Street, of which some 6,000 square meters will be rented out to tenants.

Parking

Although new construction will make Grade A office space more available, parking remains a major problem. “Even new office supply coming up is majorly lacking parking space. I know of some multinationals who want to move out because of this parking issue… it’s not enough for only the manager to have a parking spot,” says ProFinance’s Mouchbahani. 

Saleh of BrokersXP concedes that scant parking in downtown affects all categories of offices. “It costs $120 per car per month to park at Beirut souks and 55,000LL [$36] per month to park at [the Beirut International Exhibition and Leisure Center (BIEL)],” he said, adding: “Now they made free transport every 15 minutes from BIEL to downtown for all downtown employees, but of course top managers won’t take the bus.”

Even existing supply is not being fully used, as the 40 parking spaces under each of several downtown office buildings must remain car-free due to security rules enacted in 2006. 

The BCD municipality’s rules require only one parking space for every 60 square meters of retail space or 100 square meters of office space. International standards usually stipulate one spot per 15 square meters of gross leasable area, says Mouchbahani. Adding further pressure, he explains, is that the tenants of Grade A office buildings often try to economize on their investment by cramming their offices with workers, leaving a higher proportion without parking spaces.

The developer’s dilemma

According to Mouchbahani, part of the broader problem is that developers have shied away from building new offices because of their low yields, coupled with rising construction costs. “You need to rent it at $300 to $350 to make a 5 percent yield,” he says, suggesting they may be better off keeping their money in the bank earning interest. But these yields could be a smart investment, depending on the developer’s ability to finance the project and the expected capital appreciation.

Makarem says: “If you’re looking to develop property in downtown and not sell it, office space and their rentals would give higher yields than they would for residential. Yields for new offices vary between 5 and 6 percent, which is higher than residential property, which yields around 3 percent.”

Commenting on a recent trend whereby some developers chose to retain ownership of more than half of their office space, fearing inflation would chip away at their early profits, Mouchbahani believes prices in Solidere will remain stable for the next five years, following the continuous price rise since late 2008.

Demand and supply in this sector, or any other business sector, is heavily dependent on things we can’t depend on; though Beirut offers cheaper operating costs and higher-quality human capital compared to other Arab cities, both the political fluctuations and the lack of premium infrastructure hinders developers’ efforts.

Still, as ServCorp’s Barakat will tell you, Beirut is always a draw: “We have many Lebanese entrepreneurs expanding [their] business locations… as well as clients in our Jeddah, Kuwait, Doha and Dubai offices regularly asking us when we will open in Beirut.”

 

 

 

 

 

 

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Finance

Banking Special – The hard truth

by Emma Cosgrove
written by Emma Cosgrove

Hopefully your wealth management contracts and agreements are not the places where you skip the fine print, because if so, you could be getting hosed. Between initial charges, annual charges, transaction charges and performance charges, if you don’t pay close attention, your wealth management firm could be making close to the same amount of money from your portfolio as you are.

Even if you do read the fine print, banks are still making more than they disclose when selling third party funds, as the charges are not passed onto the client at cost. When a financial institution sells a product to a wealth management firm, the product comes with a certain charge, usually somewhere around 2 percent, which is split between the two. However, the wealth management firm will then agree with the seller to charge, for example, 3 percent and pocket the extra percentage. Essentially funds and products from third party providers are sometimes marked up twice from wholesale price.

Make sure they’re working for you

This creates an added incentive for wealth managers to sell specific products that bring in more revenue to the bank. Banks sell products and bankers essentially work on commission; they therefore inherently have split allegiances.

“Many wealth mangers focus on sales and marketing. They have a range of products and they spend their time convincing prospects and clients to buy them,” said Dory Hage, head of advisory and asset allocation at Banque Libano Francaise. “One of the most common mistakes that wealth mangers make is to sell a product that they don’t understand, driven by financial incentives.”

Also worth noting is that the volatility of today’s markets makes trades more frequent, meaning more transaction fees. Competition with online trading platforms has been pushing down bank fees, but transaction charges should still be monitored.  Keeping an eye on this figure is a necessary chore for any client with a discretionarily traded part of their portfolio. That said, trading should not be avoided for the sake of cutting costs.

And if you thought fees were bad, there is another threat to your earnings that is not contained in the fine print. This threat is institutional self-interest, and if you don’t watch closely, you can end up with a portfolio that suits your manager better than it suits you.

“In this universe there are thousands upon thousands of investments and the reality is that most bankers are more willing to push in-house funds, which are definitely not the best. The reason being that providing in-house funds, which the banking officer feels might do the trick, generates more fees for the bank rather than sending [funds] to a third party money manager,” said Nadim Haidar, senior private banker at FFA Private Bank. He continued: “All banks preach open architecture, but they rarely practice it because the bottom line is what counts. As a banker, you have to generate fees for the banks as a multiple to your salary.”

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Economics & Policy

Q&A with Sir Andrew Cahn

by Caroline Anning
written by Caroline Anning

 

Lebanon is Britain’s eighth largest trading partner in the Middle East, and exports from the United Kingdom to Lebanon in the first half of this year amounted to $348 million, while UK imports from Lebanon added up to $40 million. This is fairly small fish compared to Lebanon’s trade with other European countries, but Sir Andrew Cahn, chief executive of UK Trade & Investment — roughly equivalent to a minister of trade — is looking to change that. Executive sat down with him on his recent visit to Beirut to find out what the UK has to offer besides tea and Manchester United.

E  Britain is a relatively minor trade partner for Lebanon at the moment – do you have targets for how much you’d like to increase trade by?

I don’t think it’s helpful to have targets because I can’t pull levers to make targets work, the business communities are independent. But what I would say is that I think there’s scope for significant increase and we should work to that.

E  What are the sectors that you think that can be targeted?

Well, I met the minister for telecommunications, the minister for health and the president of the Council for Development and Reconstruction, and I was going to meet the minister for energy but it wasn’t possible. But I think that gives you a hint. Our largest volume export is pharmaceuticals, and they’re pretty significant for us, and the whole healthcare sector is one where Britain is world-leading — not just pharmaceuticals but medical devices and provision of healthcare.

In telecommunications, clearly we have leading companies, and I think the whole IT sector is one where Lebanon really does need to raise its game.

[As for] construction, I went with Solidere and saw their development and there was a lot of British involvement in that, but I would have thought that there’s much more scope for British involvement — not so much a construction company coming in and doing the building, but as architects, designers, quantity surveyors.

I also spent some of the afternoon at the port. British port people actually run the port of Beirut and rescued it from when it was nothing — it had almost stopped entirely — and now it’s about to double in size. That’s been a very successful joint project between British operators and the Lebanese government.

E  Do you do any work with the government to prepare the ground for British companies and services?

I certainly find myself saying to ministers you need to change your regulations or you need to change your laws. For example, Britain is world-leading in public-private partnerships; we invented it, we perfected it over the 1980s and 1990s. But…if you want public-private partnerships to be successful, you have to have the proper legislative background…in order to make it work.

E  Does the security situation give you have any concerns about promoting Lebanon as a business destination to British companies?

Nobody is pretending that Lebanon is quite the same as, say, Belgium, but on the other hand lots of people are doing business here, and the British should be doing more. I don’t have any hesitations in saying to British companies there is good business to be done in Lebanon…but they have to go in with their eyes open.

E  What can Britain offer Lebanon that other Western countries can’t?

London is often seen as the financial services center of the world and it is… but London is also the creative industries capital of the world. If you want to be in architecture or fashion, design or advertising, music or film, you want to go to London. And I think…the people of Beirut, are very fashion conscious, very design conscious, very chic and very international. I think Britain therefore has a lot to offer here, and I would hope we can offer more.

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Finance

Banking Special – Gold: To buy or not to buy

by Emma Cosgrove
written by Emma Cosgrove

Call it the gold rush or the gold bug, but one of the world’s oldest investments is making a name for itself as a safe haven in the financial storm. Part of investor portfolios since the dawn of our modern financial time, the precious metal was never the most exciting weapon in a hotshot investor’s arsenal, but current macroeconomic conditions have created a buzz around this previously pedestrian commodity. While gold is touted as a necessary base in any portfolio, current market conditions have shone a much more speculative light on the portfolio staple.

 

In September, famed market shaman and investor George Soros called gold “the only actual bull market.” Soros’ hedge fund, Soros Fund Management LLC, at the end of the second quarter was the third largest shareholder in SPDR Gold Trust, holding 5.24 million shares. On October 26 Soros’ share was worth $685.7 million and constituted 1.2 percent of the fund.

Also as of October 26, United States gold futures stood at $1,340 and spot gold just a few cents less than that. This represents a gain of 22 percent this year and a record-breaking streak of annual gains since 1920. 

A customizable commodity

The many ways to invest in gold can be customized to fit individual investor preferences and risk appetites. Buying physical gold is the most conservative option and is recommended as a hedge against any future financial or currency road bumps. Risk takers and market manipulators may also choose to invest in gold futures through exchange traded funds (ETFs) — such as Soros’ favorite APDR Gold Trust — which offer higher leverage and higher return but also present higher risk.

Many mangers are also advising clients to invest in mining or distribution outlets through equity investments as a middle ground. Soros’ fund also has $250 million in equity investments in gold and minerals mining.

The gains in gold have been caused by both massive quantitative easing in the United States and an erosion of trust in Western currencies. “As long as the US keeps on debasing its currency and the dollar is weakening, gold will keep going up,” said Mahmoud Ezzedine, head of private banking at Fidus.

 But some say that the gold rush may be coming to an end shortly. “When taxi drivers tell you that you can make a lot of money in gold, it only means the beginning of the end of this trend,” said Nael Raad, deputy general manager of Ahli Investment Group Lebanon.

Soros has stated that he will ride the gold wave for a bit longer before cashing in, but many local wealth managers say that the time for speculation is over, as the quick appreciation suggests that a correction is coming soon.

At this point it comes down to a hunch as to when what has gone up will inevitably come back down. Toufic Aouad, general manger of Audi Saradar Private Bank, predicts that gold will rise to $1,500 before it starts to drop, but is not necessarily recommending to buy.

 

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Last Word

Empire in austerity

by Executive Contributor
written by Executive Contributor

In an article earlier this year for Foreign Affairs magazine, the British historian Niall Ferguson discussed how quickly empires collapse. He noted that while many observers have tended to assume long cycles of imperial decline, a breakdown could come suddenly, “like a thief in the night.”

Ferguson has argued that the American empire is more likely to disintegrate for reasons related to the domestic economy than foreign policy. In his book ‘Colossus: The Price of America’s Empire,’ he argued that imperial America faced a ballooning fiscal crisis brought on by a propensity to consume much and save little, as well as an impending social security crisis caused by Americans living longer and overburdening the fiscal system.

In the Foreign Affairs article, Ferguson focused on the vital matter of perceptions of decline. Even if fiscal shortcomings were not enough to erode American strength, he pointed out, “they can work to weaken a long-assumed faith in the United States’ ability to weather any crisis.” Just look at the relatively minor sub-prime defaults that spread through the global financial system by “blowing huge holes in the business models of thousands of highly leveraged financial institutions.”

 Another scholar, Michael Mandelbaum, recently examined the implications of the financial crisis on American foreign policy in his ‘The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era.’ He argued that America’s debt obligations following the 2008 financial crisis, as well as its fiscal structure and entitlement programs such as social security and Medicare, prevented the country from continuing to play the leading international role it has for decades. 

 “[T]he public will no longer feel able to afford, and so will not support, operations to rescue people oppressed by their own governments and to build the structures of governance where none exist,” Mandelbaum wrote. “Interventions of this kind, which the United States has undertaken in the last two decades in Somalia, Haiti, Bosnia, Afghanistan, and Iraq, will not be repeated. The American defense budget will come under pressure, and so, too, therefore, will the missions that the defense budget supports.”

 All this raises an interesting question. If, as Mandelbaum affirms, the United States becomes more frugal abroad, will that not undermine America’s long-assumed faith in its ability to weather any crisis, as Ferguson pointed out? In other words: too much realism about American limitations may actually accelerate America’s waning.

Certainly that is true in the Middle East, where, under President Barack Obama, the US has visibly downgraded its commitments. Obama has withdrawn American combat forces from Iraq. He has overseen a significant tightening of sanctions on Iran, in part to better avoid being sucked into an expensive, hazardous war with the country over its nuclear program. Obama’s support for Palestinian-Israeli peace, while it fulfills a campaign promise, may be viewed as an effort to stabilize a region that might cost the US dearly in the event of new conflicts.  Even in Afghanistan, where Obama has deployed 30,000 additional soldiers, information recently published by the journalist Bob Woodward indicates that at the heart of Obama’s thinking were a clear-cut exit strategy and financial worries. “I’m not doing 10 years. I’m not doing long-term nation-building. I am not spending a trillion dollars,” the president told Secretary of State Hillary Clinton in October 2009.

That is sensible. However, America’s view of itself has always pushed in a contrary direction. It was John F. Kennedy who stated in his inaugural address that America would “pay any price, bear any burden, [and] meet any hardship… to assure the survival and the success of liberty.” For Obama to challenge that premise on financial grounds effectively denies Americans the self-assurance — some would say the egotism — a higher sense of purpose invariably brings with it. This in turn could hasten the demise of the American empire that Ferguson discusses.  Balancing national values with national accounts will remain a major difficulty for American leaders. But the process of change may be quicker than some imagine, as Ferguson believes. America may not be able to afford high ambition, nor might it long outlast excessive modesty. 

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Companies & Strategies

Buying back the Love

by Executive Editors
written by Executive Editors

A journalist from Executive magazine and 200 others from around the globe were flown to San Francisco last month on a junket that included airfare, two nights at the Hilton Hotel, gourmet cuisine and a perpetually open bar.

Clearly, hosts Microsoft had something they wanted to say, or more accurately, wanted the assembled hacks to say. While some events make news, others are made news, and the later was certainly the case with the launch of Internet Explorer 9 (IE9) beta.

But why such expense for the trial version of a ninth edition web browser? As Sebastian Anthony, an editor at the AOL-owned technology blog Download Squad said, it’s been a good few years since Microsoft has been able to generate decent media coverage, while at the same time “Apple sneezes and people write a story about it.” Thus, perhaps, the reason for the public relations bonanza.   

Internet Explorer (IE), at one point the default browser of nearly 95 percent of web surfers, has seen its market share slip through the noughties to just over 60 percent today, as competitors such as Mozilla’s Firefox, Google’s Chrome and Apple’s Safari have gnawed away at IE’s slice of the pie. Still, that’s 60 percent of the almost 2 billion Internet users worldwide.

“It’s a fun story to tell sometimes how IE has declined, but it is still very strong,” said Brian Hall, general manager of Windows Live and Internet Explorer. Microsoft officials promised, and in many ways demonstrated, at the September 15 launch in San Francisco that IE9 heralds the next generation of web browsing.

While developers and enthusiasts might ogle over its “hardware acceleration” and the evolution of HTML5 coding, the layman attraction is that web browsing with IE9’s minimalist interface feels cleaner, and is a whole lot faster than competitors when it comes to loading large websites. (IE9 requires Windows Vista or Windows 7, however, so those using Windows XP or older operating systems will have to fork out for something newer).

Weeks before the beta launch, Microsoft gave many of the world’s most popular websites advance access to the new code and offered support to help optimize the sites for EI9, thus securing customer usage and adoption even before the release.

Then it was time for the charm offensive in San Francisco for the beta launch, which Microsoft will use to gather feedback from users and developers before launching IE9’s final version, at an as yet undisclosed date.

Regional strategy

Asked whether Microsoft had a specific strategy to promote IE9 in the Arab world, Hall noted that the company operates in most countries around the globe and while there are some unique local Internet intricacies regarding bandwidth and latency in developing markets, generally, “the market dynamics are quite consistent, which is: enthusiasts set the tone, sites drive the real adoption, distribution helps with adoption.”

He said Microsoft will now work at “encouraging” PC manufacturers to ship IE9 with their products, and Microsoft has more than 1,000 staff who will seek out local partners to work with. “Even in Lebanon, we will have people who are meeting with companies that build the top sites in Lebanon, and we’ll want them to do work for Internet Explorer 9.”

What profit?

This all sounds very expensive, leaving one glaring omission: how will Microsoft make money off IE9?

“We don’t,” said Dominic Carr, director of Windows Communication. “Our business model is ‘happy Windows customers.’”

As Hall explained: “We have a little tiny business called Windows,” an operating system with more than one billion customers. “Especially for home users, the number one thing people do on their PC is browse the Internet… our job is to give the best web experience to Windows customers that we can, and that is the purpose of the browser.”

So will this strategy work? Will IE9 help Microsoft regain browser market share and put smiles on the faces of Windows users?

“No one thought they would succeed with the X-Box, but they threw enough money at it until it succeeded, and now it’s huge,” said Download Squad’s Anthony. “I think [IE9] will succeed — they will throw money at it until it is a very big success.”

“It comes down to how much they value their free browser app, and whether they just want to beat Google — that might be the pure intention: they want to smash Google to pieces.”

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Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 1,200.49    Current year low: 953.88

>  Review period: Closed Sept 23 at 969.34 points               Period change: 1.4%

Despite a minor improvement in the MSCI Lebanon index, Lebanese stocks are in the mode of attractive pricing; the Beirut market is the biggest loser so far in 2010. Political concerns were unabated in September as market participants marveled at fractious interactions between local, regional and international power brokers. Citigroup analysts confirmed that they continue to regard real estate scrip Solidere as having price potential far above the sub-$20 range it has been traded at lately. Bank of Beirut saw some selling after disclosing plans for a $159 million preferred shares issue.

Amman SE  

Current year high: 2,693.91                Current year low: 2,223.30

> Review period: Closed Sept 23 at 2,309.21 points             Period change: 2.68%

Although gainers outnumbered losers on the Amman Stock Exchange in the review period, the ASE index has a ways to climb to alleviate concerns over the Jordanian bourse’s poor performance and lack of stamina in 2010. One has to wonder if the mid- September announcement of a prime ministerial committee tasked with examining the reasons for the ASE downtrend qualifies as reassurance for investors. On the bright side, the industrial sub-index was the best gainer on the ASE in the review period. Arab Potash gained 11.8% while market cap leader Arab Bank advanced 4%.  

Abu Dhabi SM  

Current year high: 3,239.74                Current year low: 2,467.04

> Review period: Closed Sept 23 at 2,639.33 points             Period change: 5.64%

With a price return that was less than half of what was seen in Dubai, the Abu Dhabi Stock Exchange on Sept 23 nonetheless closed still ahead of the DFM in terms of to year-to-date performance:  3.8% in the red versus Dubai’s 6.3%. But the more important matter is that all GCC bourses recorded a period of gains as the region celebrated the end of Ramadan. Real estate, which was weak in August, was the outperformer among sector indices on the ADX, followed by banking. The consumer index underperformed. Abu Dhabi Commercial Bank gained 26.5%. 

Dubai FM  

Current year high: 2,373.37                Current year low: 1,461.80

> Review period: Closed Sept 23 at 1689.45 points                                 Period change: 13.87%

It seems that perhaps Ramadan prayers and spiritual discipline are as good for the books as they are for the soul, as the Dubai Financial Market had its most bullish moments for some time in September. As the DFM index reduced its loss for the year to date to 6.3% by Sept 23 market close, the telecoms sub-index led all active sectors in double-digit gains. Whether that growth is sustainable remains to be seen. Logistics firm Aramex leapt almost 28% higher; market cap leader Emaar gained 15.6%.

Kuwait SE  

Current year high: 7,882.60                Current year low: 6,319.70

> Review period: Closed Sept 23 at 6840.10 points              Period change: 2.27%

The upward trend across GCC markets allowed KSE investors to breathe easily as the bourse’s benchmark index loss for the year to date narrowed to 2.4%. Industry and insurance were the best performing sectors on the KSE, making September a real “in” month on the Gulf’s northernmost exchange. Share prices of market cap leaders Zain and NBK advanced 8.3% and 7.3%, respectively. Losers in the review period included First Takaful Insurance, down 15.6%, Kuwait National Airways, down 7.7%.

Saudi Arabia SE  

Current year high: 6,929.40                Current year low: 5,760.33

> Review period: Closed Sept 21 at 6,434.90 points             Period change: 5.38%

While the Saudi Stock Market still didn’t return to its former glory after regressing a month earlier, the solid gain in the TASI benchmark index indicated a return to greener pastures for the year-to-date performance, in step with the monthly growth. Petrochemical and agro sectors outperformed the market while retail underperformed. Gains were broad based across sectors and with few exceptions, stocks advanced. Holy and national holidays meant fewer trading sessions than peer markets. 

Muscat SM  

Current year high: 6,933.75                Current year low: 5,968.36

> Review period: Closed Sept 23 at 6,339.29 points             Period change: 3.15%

With a middling performance as compared to its GCC peers, the Muscat Securities Market benchmark index returned to a positive reading for the year to date but remained a bit too close to the drop zone to break out in full cheers. Led by the services sector, the MSM sub-indices for services, banking, and industry all performed modestly above the general index in the review period. The most exciting thing for the Omani market after the holidays was the opening of subscriptions for the Nawras IPO.

Bahrain SE  

Current year high: 1,605.98                Current year low: 1,361.19

> Review period: Closed Sept 23 at 1,445.75 points             Period change: 1.91%

Continued recovery brought the Bahrain Stock Exchange benchmark index back within one percentage point of its value at the start of 2010. With its price to earnings ratio of 11.49x, the BSE ended the review period less pricey than the average 13.69 P/E ratio for GCC bourses. Banking and investments led the market’s gains, while movements in the insurance as well as the hotels and tourism sub-indices pointed in the opposite direction. Gulf Finance House emerged on the losing side with a drop of 13.8%. Market cap leader Ahli United Bank gained 4.3%.

Doha SM  

Current year high: 7,801.33                Current year low: 6,502.93

> Review period: Closed Sept 23 at 7,661.67 points             Period change: 6.03%

The first market trend in the GCC this year that conveys real rally flair is the rise of the Qatar Stock Exchange along a 12-week upward path since early July. By its close on Sept 23, the benchmark index in Doha had worked its way into the gains range of 10% versus the start of 2010. Financial values outperformed the general index on the QSE in September while the sub-index for services lagged behind. Among market heavies, Qatar National Bank and Industries Qatar benefited from the upwind, while market cap leader Ezdan Real Estate was flat.    

Tunis SE  

Current year high: 5,599.28                Current year low: 4,021.14

> Review period: Closed Sept 23 at 5,531.97 points             Period change: 4.07%

From the uninvolved observer’s perspective, the 2010 Tunisian Stock Exchange performance borders on boring, but it must be different from the local investor’s point of view. The Tunindex extended its gains further and by Sept 23 was up 28.9% for the year-to-date. Directly after the Fitr holidays, the index shot up 200 points to yet another record but at least there was some profit-taking in the last two sessions of the review period. Newcomers Carthage Cement and Ennakl Automobiles were among the best gainers, up by 8.6% and 4.7% respectively.

Casablanca SE  

Current year high: 12,457.59              Current year low: 9,997.56\

> Review period: Closed Sept 23 at 11,722.95 points                              Period change: -0.11%

The Casablanca Stock Exchange’s MASI was the only non-gainer in the September review period, and though its performance was a bit choppy the market does not deserve to be labeled as “weakening”. Market cap leaders Maroc Telekom and Attijariwafa Bank were in a good mood, gaining 2.4% and 3.6%, respectively. For Morocco’s top listed banking scrip, the share price at the end of the review period was almost back at its 12-month peak from June 10 of this year.

Egypt CASE  

Current year high: 7,603.04                Current year low: 5,850.00

> Review period: Closed Sept 23 at 6720.00 points              Period change: 4.87%

While volatility on the Egyptian Stock Exchange was more pronounced than North Africa’s other bourses, the EGX 30 continued to move nicely in a northerly direction. The vast majority of stocks showed gains in the review period, led by Arab Cotton Ginning which announced its highest dividend ever on Sept 13. The Orascom corporate values advanced modestly at 2.1% for OTH and 1.7% for OCI. Developer TMG fluctuated heavily after another set of headlines from a business-related court ruling.

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Economics & Policy

Executive Insight – Booz & Co

by Ahmed Youssef, Chady Zein & Raymond Soueid
written by Ahmed Youssef, Chady Zein & Raymond Soueid

Over the last decade, the state of private equity (PE) in the Middle East has gone from virtually nonexistent, to a booming prospect, to an industry facing a shakeup. In 2004, the region was home to just 26 funds, with a total of $3 billion under management; in 2010, 142 funds manage $34.5 billion.

The sector’s breakneck evolution has made it difficult for investors to get a clear picture of the industry’s underlying fundamentals, and they therefore have been understandably cautious about directing their funds to regional PE firms.

In fact, it is now becoming clear that the region’s heady growth over the last decade worked to cover up some critical weaknesses in the PE industry. Some issues are structural: Significant gaps remain in the region’s legal and regulatory frameworks and corporate governance requires development, as the influence of family-owned businesses may hinder corporate disclosure and limit transparency. Another challenge is the fact that PE firms in the region are still sitting on about $11 billion of unspent capital — much of which is contingent on the performance of previous funds.

Even if the appetite for PE investing were to return to the insatiable pace of 2006–2008 (around 70 transactions per year, with an average size of $30 million), it would take more than five years to deploy all of this capital. Considering that most firms average three to five years until they invest their funds, the mismatch could create significant pressure to invest quickly. The PE market in the Middle East would need to develop much faster in order to absorb the available capital.

In order to fulfill its potential and continue attracting global investment dollars, the industry will need to undergo some reform as it consolidates. PE firms that hope to operate in the Middle East should consider five key imperatives.

  • Develop an investment approach based on themes with staying power. Focusing on individual nations or sectors, as many firms outside the region do, might limit Middle East-focused PE firms’ pool of opportunities, thus restricting their ability to scale their assets with superior returns and in a reasonable time frame. Theme-based investments, by contrast, are built around economic trends and span numerous countries and sectors. For example, PE firms that focus on the theme of serving a growing and increasingly wealthy population will invest in sectors such as consumer and mortgage finance, real estate management, retail, and restaurants and leisure.
  • Tighten up risk management practices. PE firms will need to ensure that their portfolios are not over-concentrated. Naturally, this means that they should not be heavily skewed toward any single geography or sector. However, firms must also ensure that the companies in their portfolios are balanced between different stages of their development — i.e., between companies still in the growth stage that demand cash, and those that have achieved maturity and generate cash. Meeting this target is particularly problematic in the region, where many opportunities are at an early or greenfield stage. A better balance in the portfolio will create a hedge against the cyclicality of the business. In terms of individual deals, PE firms will need to practice more rigorous risk management before, during, and after each transaction.
  • Be an active owner. The robust economic growth that preceded the downturn allowed many companies in the region to chase top-line growth at the expense of working capital and profitability. Liquidity issues bubbled beneath the surface while the economy was booming, but rose to the top when the recession hit. These same companies are now struggling to get their house in order. Adopting the appropriate financing approach, anticipating a buildup of operational capabilities and strengthening relationships with key stakeholders and suppliers will require active oversight by existing PE backers, as leading firms KKR and Blackstone have demonstrated.
  • Deepen relationships with limited partners (LPs), especially institutional investors. Historically, the majority of LPs in the region were high-net-worth individuals. However, institutional investors now represent a more significant percentage of LPs — an important development for PE firms as they broaden their investor base. Firms should seek to strengthen relationships with institutional investors, whether regional or international, which are looking to make a play in the region. These may include banks, insurance companies, pension funds and others that have been adding private equity assets in hopes of achieving risk-adjusted returns beyond those possible in public equity markets. Deepening the relationship entails more rigorous relationship management, including continual reporting, and better understanding of the risk-return relationship that institutional investors seek. 
  • Build confidence through new fee structures and fund-raising approaches. Lowering entry fees will encourage investors to come on board and give fund managers the opportunity to prove their worth. Among limited partners globally, the standard “2 and 20” fee structure — in which firms take a management fee of 2 percent of the fund’s net asset value each year and a performance fee of 20 percent of the fund’s profit — has become a source of increasing dissatisfaction. Sensitive to investors’ concerns regarding these arrangements, some big PE firms around the world have lowered their management fees on committed but uninvested capital to 1.5 percent (and sometimes lower for LPs with large commitments); regional firms should consider doing the same. Another peculiarity is fundraising for specific opportunities — while cumbersome, this bespoke option appeals to investors and should be taken into account.

The region’s PE industry sprang up when equity prices were rising, and many local players enjoyed early success in the form of quick and profitable exits from investment positions. However, that dynamic soon reversed. Today, winning will not depend on timing or on external market factors; it will depend on more fundamental sources of value. As firms in the Middle East rebuild, they will need to do the basic things right: Identify sustainable investment ideas, create value within their portfolio companies, reduce their risks, and gain the trust of the best possible investment partners. These are things that will work, and remain important, in good times and in bad.

AHMED YOUSSEF is a principal, and CHADY ZEIN and RAYMOND SOUEID are senior associates at Booz & Company

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Economics & Policy

Turkish delight

by Executive Editors
written by Executive Editors

After a summer in which equity preachers in the Middle East and North Africa found their faith tested by an absence of offerings, Oman’s first initial public offering (IPO) in two years is welcome news indeed. Nawras, the sultanate’s second mobile phone player, has opened for subscriptions to 40 percent of its capital in a month-long offering from September 15 to October 14, with the intent of raising between $471 million and $609 million. The wide range in projected IPO revenue is because the company is using book building to determine the issue price for the $260 million shares on offer, a first in Oman’s stock market history. This method of setting the issue price also gives Nawras greater ability to stir interest among international institutional investors, whereas the region’s other IPOs in the year to date were either inaccessible or short on attractiveness for international money.

But, for all the good signals the Nawras IPO sends regarding the vitality of the Muscat Stock Exchange, it is only a light drizzle after a drought and regional primary markets show only the vaguest promise for the fourth quarter. 

This dusty picture was reinforced by corporate talk around the Gulf from late September when executives of Bahrain’s aluminum smelter, Alba, and United Arab Emirate information technology retailer Axiom, independently from each other touted the possibility of going public in the not-too-distant future. So far in 2010, similar announcements of possible impending flotation have far outnumbered the subscription offers actually put in front of investors. This is not to say that IPOs were a bad idea this year. According to Zawya, the thin crop of 2010 market entrants in the MENA — 21 companies entering bourses in Riyadh, Damascus, Amman, Tunis and Cairo — has seen eight stocks achieve massive growth. By September 20, each of these stocks was quoted at least at twice their issue price.

The list of gainers was led by Egypt’s solitary debutant, juicer Juhayna, which in a little more than three months rose from its EGP 1 par value to EGP 5.49 per share, however the real gain margin was much lower than 450 percent. The actual issue price, which included a hefty EGP 3.66 premium, indicates a three-month return rate of 18 percent since flotation.

On September 20, Three of the new market entrants were quoted lower than at the close of their respective first trading days. One of these underperformers was the largest IPO offered in the first 36 weeks of 2010: Saudi urban developer Knowledge Economic City. Its share price range in September was 12 to 14 percent below the stock’s SAR 10 issue price.

But there is one stock market in the wider Middle East which this year has been outperforming the region and most other finance centers on earth. The Istanbul Stock Exchange’s ISE 100 index, which closed 2009 below 53,000 points, has recently raced from one peak to the next, closing September 22 at 64,479.14 points. After a hiatus in new listings throughout much of the past decade, 2010 has seen IPO announcements bloom on the ISE.

According to the exchange, 14 IPOs in the first half of 2010 raised $842 million, and the official ISE list of current IPO applicants just added its 10th hopeful issuer on September 20: retail group Kiler, which applied to offer 13.05 percent of post-IPO capital of $93.8 million.

Of the IPOs in the Turkish pipeline, almost half are related to real estate — a traditional favorite of the Middle Eastern investor. According to the Istanbul Stock Exchange, four GYOs (the acronym in Turkish for real estate investment trusts) are in the 2010 IPO pipeline, the largest of which is the Emlak Konut GYO with a capital of TRY 2.5 billion, (Emlak Konut is an affiliate of Turkey’s Housing Development Authority).

Another fund is being floated by Akfen Group, which is known internationally for, among other things, construction and operation of airports. The Akfen GYO, which received approval for its IPO on August 25, is a partner with France’s Accor Group in hotel developments in Turkey, Russia and the Commonwealth of Independent States. 

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