Internet Sector Investments in the Republic of Kazakhstan

Transcription

1 JSC Rating Agency Regional Financial Centre of Almaty 136 Dostyk ave., 9 th floor, office 904, Almaty, The Republic of Kazakhstan Internet Sector Investments in the Republic of Kazakhstan Analysts: Aigerim Kulbayeva Gaukhar Shinkeyeva Tel: (727) Fax: (727) aigerim.k@rfcaratings.kz shinkeyeva@rfcaratings.kz Any form of copying, reproduction, distribution and forwarding of texts, graphs and other types of materials posted on the website of the "Rating Agency of the RFCA" must be accompanied by a hyperlink to the website and indication of the author of the material. Copyright JSC Rating Agency of the RFCA Almaty March 2016

2 Internet Sector Investments in the Republic of Kazakhstan. Over the recent years the economic role of Internet has significantly increased. Today it is not only a web-based search tool, communication tool and a mailing system, but it has recently become a huge platform for realization of any bold business ideas. Due to a wide Internet market coverage, which is almost 2 times bigger a media market coverage, among all high-tech sector s business markets the Internet market seems like one of the most prospective for Kazakhstan. The history of the Internet, as it is, takes its beginning in 1960s. Kazakhstan s Internet history started in early 90s, when the first «.kz» national domain was registered. Later, at the end of the 90-s investments in Internet encouraged growth of the country s Information Technology (IT) sector. IT and Internet are two interconnected terms and fields: development of the first inevitably leads to development of the second and vice versa. One of the first Internet providers in Kazakhstan was the National Bank with its network called BankNet, which had the internet connection speed of bps. Those days it was a great breakthrough in communications field. To compare, today Kazakhstan is the second in the CIS by the average Internet connection speed, which amounts to Mbps, according to NetIndex. As of November 2000, there were only registered kz domains, but now 8-12 new web-sites are created within 1 week only. By 2013, the number of Kazakhstani sites has reached As of August 2014, among 50 most visited websites in Kazakhstan, local Web resources accounted for the largest share of 38%, Russian Web resources accounted for 32%, and international for 30%, according to the KazContent national company. In order to understand the level of Internet development in Kazakhstan, it is necessary to analyze the level of Internet penetration in the country, the attractiveness of the market for business circles, market transparency and readiness for investments. This co-relation is supported by the rule: the higher the Internet penetration level in the country, the more attractive for investors become sectors related to Internet, especially e-commerce and e-pay (electronic payments) sectors. However, Internet penetration in the country depends on the growth of telecommunications market, which includes Internet service, and on the access of the population to computers, mobile devices and network connection devices. Due to that, we shall start with the comparative analysis of telecommunication services and Internet services provided in Kazakhstan. The Figure 1, below represents the co-relation of telecommunication and Internet services in the country. Although Internet has appeared later than all other types of communication, in 1999, it has the most stable growth tendency among all. Thus, in the long-term that growth tendency is viewed as apparent, because Kazakhstan Internet sector is now at the beginning of the growth phase, if not almost at the initial phase. While the mobile services have already passed all 3 phases of development, including a phase of maturity, and, therefore, as of 2013, we see a predictable decline on that market. 2

3 Due to technology lagging, the oldest services of communication in Kazakhstan, such as long-distance/ international calls and local communication services weren t able to compete with Internet and mobile services. Nevertheless, the Chart (Fig. 1) shows that there is still some demand for those types of services their volume dynamics demonstrate a weak but steady growth, excluding period. However, apparently, the demand for these services has been still declining, that s why since 2008 we observe the decreasing tendency. Figure 1. Dynamics of communication services, including Internet service, KZT mln long-distance/international calls Inernet service local communication services mobile services Source: Committee on Statistics of the Republic of Kazakhstan, RA of RFCA The quantitative analysis for the 15-year period ( ) shows that Internet service has significantly increased by 166.8%: total amount of money/cash gained from Internet services amounted to KZT 1 bln. in 1999, and sharply increased to KZT 168,5 bln. in 2014, a 22.2% increase versus In all other telecommunication services we observe the decrease: 1.3% in total volume of the telephone services and 5.2% in mobile services. Despite the mentioned decline in mobile services volume, the weight of mobile services in total volume of communication services exceeds the weight of the Internet services by 16% and accounts for 25%. 3

4 Figure 2. Weight of Internet service in general structure of the communications market of Kazakhstan in 2014, % longdistance/international calls 6% local communication services 8% Inernet service 25% other communication services 20% mobile services 41% Source: Committee on Statistics of the Republic of Kazakhstan, RA of RFCA This data acknowledge that innovations made in the sphere of telecommunications, more exactly, introduction of various types of cellular communication like Internet, substantially influence telecommunication market of Kazakhstan, e.g. negatively affect local telephone services. The gradual extinction of the telephone service is a result of the normal economic competition on the communications market, in which we observe an absolute advantage of the Internet as a communication tool. Nowadays, there exist different types of devices to access Internet, such as: personal computer (PC), Notebooks, tablets, mobile phones, etc. In Kazakhstan PC and mobile phone are the most popular devices for connecting to the network (both shares are 63%). Therefore, a question arises: what is the level of population s access to PCs in Kazakhstan? According to the Committee on Statistics of the Republic of Kazakhstan, in 2014, 6 mln. people or 34% of the population had PCs. The weight of PC users aged 6-74 years account for 64.1%. The major users of information and communication technology (ICT) among them are people aged years their share accounts for 30%; the most passive users of ICT are people aged years. Analyzing computer literacy of the population by sex over 5-year period ( ), we observe the following: if in 2009 male computer literacy accounted for 55% of the whole Kazakhstan population and exceeded female computer literacy, the situation cardinally changed to 2014 female computer literacy exceeded the male one by 6%; males share decreased by 8% versus 2009 (Fig. 3). 4

5 Figure 3. ICT usage level dynamics for period by gender, % 60 54,9 53, ,7 51, , ,4 45,1 46, men women Source: Committee on Statistics of the Republic of Kazakhstan, RA of RFCA Thus, one can say that the level of computer literacy and the PC usage level increases every year, this is facilitated by globalization and progress in science and technology. It has recently become obvious that the majority of the population realizes the importance of the constant IT skills improvement to keep up with the times and be competitive in the modern capitalist reality. The Internet penetration into the population s life accelerates those processes, which in turn create a favorable business climate for maturing of the relatively new e-commerce sector of Kazakhstan. So, what is the Internet penetration rate in Kazakhstan? There is an opinion that for the dynamic development of the Internet business in the country, the Internet penetration rate should be not less than 20-25%. According to data of the Profit Online Internet-company, the size of the monthly internet audience in Kazakhstan is estimated at the number of 10 mln. people that is 60% penetration rate. If 10 years ago the share of Internet users was less than 4% per year (approximately people), now there are about 12 mln. people. According to the Committee on Statistics of the Republic of Kazakhstan, in 2014, there were 11.2 mln. Internet users in the country that is 63.9% of the population of the Republic aged between 6 and 74. At the same time the number of subscribers of the fixed Internet in the country was 2,1 mln. people that is 12 % of total population of Kazakhstan, while 43% of the population aged 12-54, 99.6% of which use a high-speed Internet. The frequency of network use for the last 3 months of 2014 was 95%, while for the year (without last three months) 5 %. As on any growing market of the world, the main users of the Internet in Kazakhstan are citizens of the large cities, accounting for 67.5% of the market. Whereas, the Internet penetration rate to the rural areas is around 40% per year. The statistical data of internet usage by type of activity and occupation, shows that 50% of users are public servants and employees, 25% are managers and specialists. There has also been recently explored that the average internet user in Kazakhstan is a woman in the age of 25 and older. Internet is also convenient for companies to 5

6 get to know better the structure of consumers, thus to detect a concrete segment of clients/consumers. Due to the recent development of IT and Internet, they have become almost the major drivers of the modern economy, that s why these and other sectors, related to them, have lately become very attractive for investors. According to the Committee on Statistics of the Republic of Kazakhstan, communications sector investments reached KZT mln. by Taking into account the fact that the Internet services are the second by volume on the telecommunications market of Kazakhstan (after the mobile services), one can say that a considerable amount of those investments went to development of the Internet. ICT sector investments amounted to KZT 119,194 mln. in 2014, 89% of which were companies proprietary funds, 5.5% - bank loans and 6.5% - loan funds (81% of them non-residents loan funds), 1% - budget funds. Today we may find several examples of successful investment projects in the Internet sector in Kazakhstan: e.g., internet companies like BeSmart.kz, Chocolife.me which deal with the promotion of discount-coupons; on-line shops like lamoda.kz, sulpak.kz; Internet-company like OLX.kz that is known for posting various online advertisements and online services like kiwi.kz, which allows making electronic payments. According to the statistics of the Ministry of transport and communications of the Republic of Kazakhstan the total amount of e-commerce market of the country was USD 1.4 bln. in 2013, of which USD 220 mln. were provided by local e-commerce, which is forecasted to grow till USD 2.4 bln. to Presumably, Kaznet has not reached its full potential yet and the opportunities for internet startups are still present. According to speeches of authorized parties of some internet companies, Kazakhstan internet-business sector is still immature and therefore does not require huge investments. As a practice shows, huge investments are required in a huge projects, e.g., like the public program - Onai electronic tickets integrated system. Launched in early 2016 this project has become an illustrative example of application of the Internet and IT in an automated fare collection system.. Total amount of investments in this project amounted to over USD 12 mln. Another vivid example of Internet and IT investments are online payment services and mobile applications offered by local banks. Kazkommertsbank was one of the first Kazakhstan banks to launch an Internet banking service. It launched Homebank.kz in 2000, and collected the database of clients over the period of its operation. Before the recent times the Bank reported net profit of $ 3.4 mln. per year. In 2011 Kazkommertsbank launched Homebank application on the basis of ios and Android systems for smartphones and tablets, which was used by clients. This application could be used for all basic banking transactions and payments for over 700 various services. For comparison, there were about 500,000 transactions made in 131 retail centers of Kazkommertsbank per month, against over 1.2 mln. transactions conducted using bank s online services per month. Nowadays, social networks such as Facebook and VKontakte, as well as mobile applications such as Instagram and Snapchat are quickly gaining popularity. In this framework, Kazakhstan businessmen are trying to keep pace with the times and invest into a promising Internet projects. For example, in 2013 local investor has invested around $20 mln. into the Mobli mobile application (Instagram analogue). E-payments market is another growing Internet sector. However, it depends on availability of payment cards among the population and how actively 6

7 online services are being used. E-payment activity rate is conditioned by the public interest in the online shopping that is related to the e-commerce market. Electronic commerce is one of the most dynamic and promising spheres of trade. Electronic commerce includes: - Electronic Data Interchange (EDI); - Electronic Funds Transfer (EFS); - Electronic trade (e-trade); - Electronic cash (e-cash); - Electronic marketing (e-marketing); - Electronic banking (e-banking); - Electronic insurance (e-insurance). Internet network has made e-commerce available for any enterprises. If electronic data interchange process had been available before for large enterprises with significant investments in communication infrastructure, Internet network now expanded the possibilities to trade for small businesses. Web site can attract any clients throughout the world. Such on-line business creates a new virtual distribution channel without significant financial costs. If any information, services or products (e.g. software) can be provided via Web, then the trade (including payments) can be online. As per expert assessments, presently e-commerce market in Kazakhstan amounted to about USD 200 mln., that is approximately 0.45% of the total retail market in Kazakhstan. E- commerce in Russia amounted to USD 10 bln. or about 8% of the total commodity turnover, which is much higher in Western countries. The specific weight of the turnover includes different electronic payment systems, online flight booking, whilst Internet sales of goods are sufficiently low. Figure 1. Dynamics in consumer goods sales, % foodstuffs drugs movies, music books, magazines clothes, shoes cosmetics, perfumery sport equipment video games computer programs Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA 7

8 To book tickets, to buy goods, to pay for services, including communal services, is possible online via computer or mobile out of turn. The higher the level of e-commerce development in Kazakhstan with many users, the faster, easier and more reliable these processes become. Online sales can save businessmen's time and exclude the extraneous links between them and buyers. Traditional channels as warehouse retailers and retail outlets become useless. But they consume most of costs. Besides manufacturers can present their product line globally and even private businessmen can sell their goods with transnational corporations. But there is an important downside increasing competition. The product assortment for Kazakhstan consumers is rather scarce, but online shops allow widening the range of goods. Now it is possible to purchase affordable clothes or electronics in country of its origin with a quality assurance. That's why Kazakhstan suppliers should revise distribution schemes to reverse their business model with high retail mark-ups. Figure 2. Dynamics in consumer goods sales by costs, % up to 2000 tenge tenge tenge over tenge Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA Presently credit cards are the dominating currency in online purchase. However there are new payment instruments smart-cards, electronic money (e-cash), micropayments and electronic checks. E-commerce includes not only online transactions, but such types of activities as marketing research, identification of a company's opportunities and their partners, communication with suppliers and customers, documentary management, etc. Thus, e-commerce is a generic term to describe electronic data interchange as one of the important component. 8

9 Figure 3. Payment types of online consumer goods purchases, % bank payment cards e-money bank transfer cash payment after shipping mobile payments Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA It is obvious that e-commerce market is very promising and it is important to regulate legal relations in online sales and online purchases. Unfortunately, we cannot identify the seller in online sales, that's why this sector paves the way for different fraudulent activities. One more important factor is a data hacking. When we buy online, we register in online shops' database, therefore fraudsters can gain unauthorized access to them. Also fraudsters use false payment cards. Presently e-money system in Kazakhstan has an insufficient development and therefore payment cards and cash payment are the main purchase payment instruments. High spending in online services up to USD per capita (considering average wage correlation in Kazakhstan) looks very promissory in the nearest future. And the capacity of this market is about USD 1 bln. But the business risks cannot be understated, that come primarily from the Russian Federation. The expansion of Russian companies, having sufficient experience in this segment, cannot be also understated. The only factor that restrains their expansion is unrealized perspectives in Russian e-commerce market. But the potential will be exhausted soon and the competition in Kazakhstan e-commerce market will increase and displacement, merger and acquisition will begin. In general, all current online market indicators demonstrate growth potential even in crisis since the market has an advantage of Internet network multifunctionality per se. Broadband Internet penetration is quite adequate Kazakhstan is the second by this indicator within CIS. And Kazakhstan even outstrips such European countries as Italy and Greece in broadband Internet speed. Internet services profitability in Kazakhstan accounted to about 30% of the total communication market proceeds that is lower than the profitability of mobile communication services. Thus it is possible for Kazakhstan online market with competent investments to become the link to the fifth wave of innovation, which core are IT-technologies, genetic engineering and telecommunications in frame of Kazakhstan's innovative development. 9

10 Published by JSC Rating Agency of the Regional Financial Center of Almaty (Rating Agency of the RFCA) Any form of copying, reproduction, distribution and forwarding of texts, graphs and other types of materials posted on the website of the "Rating Agency of the RFCA" must be accompanied by a hyperlink to the website and indication of the author of the material. Copyright JSC Rating Agency of the RFCA 2016 JSC Rating Agency of the RFCA 136 Dostyk avenue, floor 9 Business Center Pioneer Almaty. Telephone: (727) Fax: (727) info@rfcaratings.kz Website: 10