ICT in­fra­struc­ture: Big fish, small pond

ICT hard­ware com­pa­nies are stom­ach­ing short term prob­lems as they look to long term gains

Executive Magazine - - Contents -

Sit­ting in a room where two ro­tat­ing cylin­der lenses track you and project a blown-up high def­i­ni­tion im­age of you to your col­league sit­ting in Jor­dan, and vice versa, may be dis­con­cert­ing for any num­ber of rea­sons, but for Hani Raad, gen­eral manager for the Le­vant re­gion at net­work­ing gi­ant Cisco, it is a time sav­ing rou­tine and just an­other day of busi­ness meet­ings con­ducted over In­ter­net Pro­to­col (IP) tele­phony.

Ac­cord­ing to Raad, while prod­ucts as state of the art and fu­tur­is­tic as the IP telecom­mu­ni­ca­tions have some­what of a fan base among cer­tain busi­ness seg­ments in Le­banon, the coun­try is miss­ing a size­able mar­ket for, and in­vest­ment in, the more mun­dane mar­ket of net­work­ing in­fra­struc­ture.

Routers, modems, switches and fiber op­tic ca­bles are cer­tainly one of the less hyped lines of busi­ness, but they do make up the back­bone of the in­ter­net, which is not of neg­li­gi­ble rel­e­vance to a coun­try that wants to call it­self mod­ern.

And while sexy top­ics such as the in­ter­net of things come to the fore­front of piquing one’s in­ter­est in In­for­ma­tion and Com­mu­ni­ca­tions Tech­nol­ogy (ICT), even with the mu­nic­i­pal­ity of Beirut par­tic­i­pat­ing in the Arab Fu­ture Cities Sum­mit in Dubai last Novem­ber, judg­ing by cur­rent in­vest­ment lev­els in ICT in­fra­struc­ture Le­banon seems far off from hav­ing smart high­ways where cars and speed lim­its talk to each other.

It is not that there are no so­phis­ti­cated tech­nolo­gies in Le­banon. Just by en­ter­ing a mall your very own mo­bile de­vices can sell you out to the mar­ket­ing cam­paigns of a store near you. As Raad tells Ex­ec­u­tive from one of Cisco’s tele­con­fer­ence rooms, “Don’t think we don’t know what you’re do­ing. Don’t think we don’t know where you’re walk­ing.” In­deed, ev­ery per­son th­ese days is rather eas­ily trace­able through their mo­bile de­vices. This, Raad ex­plains, is a symp­tom of the in­ter­net of things in Beirut.

But while not all things in our world feel the need to be con­nected, the ma­jor­ity of the peo­ple do, and hav­ing the net­work­ing in­fra­struc­ture to achieve this is cru­cial for our mod­ern day and of­ten long dis­tance com­mu­ni­ca­tion needs. This pro­vides the op­por­tu­nity for for­eign com­pa­nies the likes of Cisco, Huawei, Eric­s­son and Al­ca­tel–Lu­cent to come and carve out a share in what is, ad­mit­tedly a rather mea­ger mar­ket, but one whose peo­ple share a strong de­sire to be con­nected.

PUBLIC SEC­TOR STINGI­NESS

Whether it is spiffy new tech­nolo­gies or ba­sic back­bone in­fra­struc­ture, the per­va­sive­ness of th­ese tech­nolo­gies de­pends on the will­ing­ness of client or­ga­ni­za­tions to in­vest. And un­like our Gulf neigh­bors, many of whose gov­ern­ments have made lav­ish in­vest­ments in ICT, the Le­banese gov­ern­ment is not an ideal client to pro­vide a Le­banese com­pany’s bread and but­ter through deals in the net­work­ing hard­ware mar­ket.

Le­banon has al­ready wit­nessed com­pa­nies be­ing put in a shaky sit­u­a­tion if they can only rely on the gov­ern­ment as a cus­tomer. With a gov­ern­ment bud­get up­wards of $50 mil­lion sup­pos­edly al­lo­cated to the in­ter­net back­bone, two com­pa­nies, lo­cal civil works com­pany Con­sol­i­dated En­gi­neer­ing and Trad­ing (CET) and multi­na­tional net­work­ing equip­ment gi­ant Cisco, ad­mit­ted to Ex­ec­u­tive that they had not been paid in full for projects they had de­liv­ered.

CET won the bid in 2011 for the mile­stone project to lay down Le­banon’s fiber op­tic back­bone in­fra­struc­ture, con­nect­ing ex­changes to­gether as well as heavy users such as the army. With a $55 mil­lion bud­get mostly al­lo­cated to the civil works part of the project, CET dug one mil­lion me­ters of trenches to lay down

the 4,000 kilo­me­ters of fiber op­tic ca­bles, ac­cord­ing to Dany El-Horr, CET’s vice pres­i­dent. The work of pur­chas­ing and pulling the ca­bles was sub­con­tracted out to Al­ca­tel–Lu­cent as part of a strate­gic part­ner­ship, which, the VP ex­plained, ac­quired the ca­bles from Sam­sung.

But whereas this project was car­ried out, CET has not yet been paid all of the money owed to them. Though the project did in­crease in size from the one orig­i­nally con­tracted, El-Horr claims that as much as 25 per­cent — about $15–20 mil­lion dol­lars — has not been paid.

This does not bode well for CET, whose ten­der was the cheap­est “by far” com­pared to those of the dozen oth­ers that were pre­sented to the gov­ern­ment whose in­abil­ity to pay has ended up “in a to­tal loss” for the com­pany. In­deed, El-Horr es­ti­mates that the price came to about $12 per me­ter of ca­ble. “It was very danger­ous for us to get into that project with very low prices,” he says. They were ex­pect­ing to break even, to make or lose 1–2 per­cent. Though El-Horr ad­mit­ted that their pri­mary goal wasn’t mak­ing prof­its, but rather for the pres­tige and know-how, he laments that with th­ese amounts “who can sus­tain that?”

The Le­banese gov­ern­ment also has out­stand­ing ac­counts with Cisco, ac­cord­ing to Raad. But for the multi­na­tional, the money owed to it by the gov­ern­ment does not seem to be an amount it can’t swallow. Cisco is one of the mul­ti­ple ven­dors tak­ing part in Le­banon’s in­ter­net in­fra­struc­ture as far as any­thing re­lated to rout­ing, switch­ing, in­ter­na­tional gate­way, etc. Though the size of the com­pany en­sures that it can bet­ter sus­tain losses, Cisco’s loss would likely have been smaller in value and, as Raad ex­presses, “our projects are not those megapro­jects.”

Not only is the Le­banese gov­ern­ment bad at pay­ing the out­stand­ing ac­counts to its telecom­mu­ni­ca­tion in­fra­struc­ture providers, but it is also quite dys­func­tional when it comes to in­stalling new equip­ment in gen­eral. Even a Cisco do­na­tion of two of their trea­sured IP video­con­fer­enc­ing screens to the gov­ern­ment through their in­volve­ment in the Part­ner­ship for Le­banon, an ini­tia­tive to mod­ern­ize Le­banon’s com­mu­ni­ca­tions in­fra­struc­ture, were never in­stalled ac­cord­ing to the GM. “They couldn’t agree where and how and the process to in­stall them,” he says.

ED­U­CATED GUESS­WORK

While the im­age of gleam­ing state of the art Cisco equip­ment sit­ting in boxes unin­stalled makes for a nice anec­dote, it is the symp­tom of a much larger prob­lem which is the in­abil­ity of the Le­banese gov­ern­ment to make and im­ple­ment pol­icy for the sec­tor, which has hin­dered it par­tic­u­larly in terms of man­ag­ing cap­i­tal ex­pen­di­tures. In a world where gov­ern­ment in­vest­ment can shape the tele­coms mar­ket, Le­banon is at some­what of a dis­ad­van­tage.

In fact, Raad states that the Le­banese mar­ket could not even grow to be­come a tenth of any given Gulf econ­omy. “We don’t have the money for that,” he says, cit­ing the sim­i­lar projects in many GCC economies, whereas in Le­banon there are no trans­for­ma­tional projects un­der­way, just the good old timid up­grad­ing and ex­pand­ing plans for or­ga­ni­za­tions.

With public sec­tor projects “few and far be­tween,” Raad is some­what op­ti­mistic, cit­ing the dona­tions this year — such as Saudi Ara­bia’s pledge — as hope that the public sec­tor will move a lit­tle bit in the com­ing year. But all in all not even 10–15 per­cent of what Cisco does goes to public sec­tor clients “be­cause they don’t spend,” ac­cord­ing to Raad. Their public sec­tor clients in­clude the Min­istry of Fi­nance, Min­istry of In­te­rior, and the In­ter­nal Se­cu­rity Forces, though he qual­i­fies that most of th­ese in­fra­struc­ture projects come from grants from in­ter­na­tional or­ga­ni­za­tions such as the Euro­pean Union and the World Bank.

Though the gov­ern­ment is not a big spender, state run fixed line net­work op­er­a­tor Ogero con­trols much of the in­fra­struc­ture and the in­ter­net ser­vice providers (ISPs) and data ser­vice providers (DSPs) have a mi­nor­ity share of the mar­ket. “The ser­vice providers sec­tor is not as dy­namic and, lets say, lu­cra­tive as it should be,” says Raad, who likens the ac­cel­er­a­tion of the ISP seg­ment to “blood flow­ing in the veins” of the com­pany.

Un­sur­pris­ingly, Cisco’s main line of busi­ness in Le­banon is the fi­nan­cial and en­ter­prise sec­tor, a nat­u­ral choice given the promi­nence of the bank­ing sec­tor. Raad claims that top banks, as well as top uni­ver­si­ties, hos­pi­tals, and ser­vice providers are Cisco clients for ev­ery­thing re­lated to switches, routers, wire­less, se­cu­rity, IP tele­phony and video.

While no sin­gle com­pany Ex­ec­u­tive spoke with could give a pre­cise num­ber for the mar­ket size for net­work­ing hard­ware, it can be as­sumed with some cer­tainty that it is a small num­ber. “In re­al­ity, the fact [is] that we don’t have data and we don’t have things to track this data, I only can as­sume,” says Raad. “When we look glob­ally, I know where I am. When I zoom to Le­banon, I don’t know where I am.”

Though it is dif­fi­cult to mea­sure the to­tal worth of the units that are be­ing used, one num­ber that has been thrown around for over a decade now for the ICT mar­ket is the fig­ure of $250–300 mil­lion. More

“DON’T THINK WE DON’T KNOW WHAT YOU’RE DO­ING. DON’T THINK WE DON’T KNOW WHERE YOU’RE WALK­ING”

re­cent num­bers from In­vest­ment Devel­op­ment Author­ity of Le­banon (IDAL) pegged the IT mar­ket size at $337 mil­lion in 2012. Raad as­sumes that if about 45 per­cent be­longs to per­sonal com­put­ers and hard­ware, a com­pany in the net­work­ing hard­ware in­dus­try is left with a mar­ket size some­where north of $150 mil­lion and south of $200 mil­lion.

But such low fig­ures, al­ready barely an ed­u­cated guess, could quickly be­come ir­rel­e­vant with one deal. “We stopped a long time ago at Cisco to look at mar­ket share,” says Raad, who claims they track their per­for­mance in­stead based on growth, em­ployee pro­duc­tiv­ity, num­ber of ac­counts and ser­vice provider en­vi­ron­ment. Cisco works with more than 300 cus­tomers a year in Le­banon, ac­cord­ing to the GM, and he claims they have had growth or at least flat year on year per­for­mance in ev­ery year since 2000.

The next big gov­ern­ment project would be the fiber-to-the-home, or the last mile, which would re­quire a bud­get of roughly $300 mil­lion ac­cord­ing to El-Horr — the same num­ber given by a for­mer of­fi­cial from the Telecom­mu­ni­ca­tions Min­istry who spoke on con­di­tion of anonymity. Most of that ex­pense, like the lay­ing of the fiber op­tic back­bone, would go to the civil works part of the project, about 70 per­cent, ac­cord­ing to Roger Gho­rayeb, who over­sees sev­eral coun­tries for Al­ca­tel–Lu­cent in­clud­ing Le­banon, Syria, Kuwait and Bahrain.

STIFF COM­PE­TI­TION

But de­spite the slight mar­ket size, do­ing busi­ness in net­work­ing hard­ware in Le­banon has at­tracted sev­eral in­ter­na­tional com­pa­nies. Just as they com­pete glob­ally, the usual sus­pects Al­ca­tel–Lu­cent, Huawei, Eric­s­son, HP, Cisco and smaller com­pa­nies like Ju­niper are con­tin­u­ing the on­slaught in Le­banon.

Raad claims that Cisco has ben­e­fit­ted from be­ing the first en­trant to leap into the world of routers and switches in the Le­banese mar­ket since the in­au­gu­ra­tion of their Beirut head­quar­ters in 2000. He adds that their ma­jor­ity stake in the mar­ket for in­ter­net hard­ware in­fra­struc­ture has only dropped slightly, from a quasi mo­nop­oly to a cur­rent es­ti­mate of over 80 per­cent — though he qual­i­fies that this is a guess at best. He claims that since most projects in Le­banon cen­ter on up­grades and ex­pan­sion, and that Cisco al­ready has the in­stal­la­tions, it is harder for a com­peti­tor to come in and sweep up a con­sid­er­able mar­ket share.

Com­peti­tors like Huawei may have some ad­van­tages when it comes to their abil­ity to set their prices at a slightly more ap­peal­ing rate. Raad claims that while Cisco cur­rently dom­i­nates the en­ter­prise space, Huawei could get there “at some point,” though it is not out of char­ac­ter for GMs of ICT com­pa­nies to down­play the cur­rent ac­tiv­i­ties of their com­pe­ti­tion.

Even smaller fish like Ju­niper have his­tor­i­cally posed a threat to gi­ants like Cisco on the global scale, such as when in 1999 they re­leased their first prod­uct and took a size­able piece out of Cisco’s mar­ket share in net­work rout­ing. Cisco’s GM of the Le­vant says that the present com­pe­ti­tion from Ju­niper is rather neg­li­gi­ble, though the lat­ter does sell its prod­ucts through Le­banese com­pany Crys­tal Net­works.

As tech­nol­ogy changes, of course, there will be new com­peti­tors in the mar­ket. But the big ICT com­pa­nies of our day con­tinue strug­gling not only against each other, but also to stay rel­e­vant. Many gi­ants of the net­work­ing hard­ware world are fo­cus­ing their op­er­a­tions to be more spe­cific. Al­ca­tel–Lu­cent launched its ‘shift plan’ in 2013 to re­fo­cus their main lines of busi­ness on IP net­work­ing, cloud tech­nolo­gies and ul­tra-broad­band ac­cess af­ter the com­pany ran losses for sev­eral years. While their op­er­a­tions are now back in the black, the process demon­strates that th­ese gi­ants have enough re­sources to with­stand years of neg­a­tive cash flows.

So as far as long term strat­egy goes, at least in Le­banon, not all in­cen­tives may be based on im­me­di­ate prof­its. Gho­rayeb ex­plains that Al­ca­tel–Lu­cent may en­gage in projects with limited prof­itabil­ity but that may bring value in the long run, value which he de­scribes as that which “can be a ref­er­ence, bet­ter per­spec­tive on long run or prof­itabil­ity, sev­eral things.” Their clients in Le­banon in­clude the Min­istry of Telecom­mu­ni­ca­tions, Ogero, Al­pha, Touch, DSPs and ISPs, as well as EDL, Solid­ere and the Beirut Cen­tral Dis­trict’s broad­band net­work. “When we win a project, we are con­vinced it is vi­tal for [the] coun­try and com­pany. Even if the con­tract is los­ing from a prof­itabil­ity point of view, we take it if [it] can bring value in [the] medium or long term to [the] coun­try or com­pany,” he says.

It is hard to be hope­ful for the mar­ket for net­work­ing hard­ware in Le­banon. As long as noth­ing changes in the abil­ity of the Telecom­mu­ni­ca­tions Min­istry to come up with a spend­ing plan and stick to it, the mar­ket will con­tinue to op­er­ate un­der the same con­straints. The most se­vere be­ing, ac­cord­ing to Raad, the lack of an ICT vi­sion with tan­gi­ble plans, out­comes and ex­e­cu­tion. “To­day if I want to point you to Le­banon’s na­tional ICT plan for the next five years, I can show you the Jor­da­nian one,” he says. “I haven’t seen one for Le­banon.”

“WHEN WE LOOK GLOB­ALLY, I KNOW WHERE I AM. WHEN I ZOOM TO LE­BANON, I DON’T KNOW WHERE I AM”

All those bytes and gigs need to be routed the right way

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