Israel information technology report q1 2010
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Q1 2010
www.businessmonitor.com
ISraeL
information technology Report
INCLUDES 5-YEAR FORECASTS TO 2014
ISSN 1752-4245
Published by Business Monitor International Ltd.
Israel Information
Technology Report Q1 2010
Including 5-year industry forecasts by BMI
Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Publication date: January 2010
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Israel Information Technology Report Q1 2010
© Business Monitor International Ltd
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Israel Information Technology Report Q1 2010
CONTENTS
Executive Summary .........................................................................................................................................5
SWOT Analysis.................................................................................................................................................8
Israel IT Sector SWOT .......................................................................................................................................................................................... 8
Israel Telecommunications Industry SWOT........................................................................................................................................................... 9
Israel Political SWOT.......................................................................................................................................................................................... 10
Israel Economic SWOT........................................................................................................................................................................................ 10
Israel Business Environment SWOT .................................................................................................................................................................... 11
IT Business Environment Ratings................................................................................................................12
Regional IT Business Environment Ratings ......................................................................................................................................................... 14
Middle East Regional IT Markets Overview .................................................................................................15
IT Penetration...................................................................................................................................................................................................... 15
Market Growth & Drivers ................................................................................................................................................................................... 16
Sectors & Verticals .............................................................................................................................................................................................. 17
Market Overview .............................................................................................................................................19
Government Authority.......................................................................................................................................................................................... 19
Government Initiatives......................................................................................................................................................................................... 20
Hardware............................................................................................................................................................................................................. 20
Software............................................................................................................................................................................................................... 22
Services................................................................................................................................................................................................................ 23
Industry Developments ........................................................................................................................................................................................ 24
Industry Forecast Scenario ...........................................................................................................................27
Israeli IT Industry - Historical Data & Forecasts (US$mn, unless otherwise stated) .......................................................................................... 29
Internet ................................................................................................................................................................................................................ 30
Table: Internet Data & Forecasts........................................................................................................................................................................ 30
Country Context................................................................................................................................................................................................... 31
Consumer Expenditure, 2000-2012 (US$) ........................................................................................................................................................... 31
Rural/Urban Breakdown, 2005-2030................................................................................................................................................................... 31
Competitive Landscape .................................................................................................................................32
Macroeconomic Forecast .................................................................................................................................................................................... 35
Table: Israel – Economic Activity, 2006-2014..................................................................................................................................................... 37
Company Profiles...........................................................................................................................................38
Ness ..................................................................................................................................................................................................................... 38
IBM...................................................................................................................................................................................................................... 40
HP........................................................................................................................................................................................................................ 41
Matrix .................................................................................................................................................................................................................. 43
Microsoft.............................................................................................................................................................................................................. 45
Country Snapshot: Israel Demographic Data..............................................................................................46
Section 1: Population........................................................................................................................................................................................... 46
Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 46
Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 47
Section 2: Education And Healthcare.................................................................................................................................................................. 47
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Israel Information Technology Report Q1 2010
Table: Education, 2002-2005 .............................................................................................................................................................................. 47
Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 47
Section 3: Labour Market And Spending Power .................................................................................................................................................. 48
Table: Employment Indicators, 2001-2006.......................................................................................................................................................... 48
Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 48
Table: Average Annual Wages, 2000-2012.......................................................................................................................................................... 49
BMI Methodology ...........................................................................................................................................50
IT Ratings – Methodology......................................................................................................................................................................................... 50
Ratings Overview................................................................................................................................................................................................. 50
Table: IT Business Environment Indicators ......................................................................................................................................................... 51
Weighting............................................................................................................................................................................................................. 52
Table: Weighting Of Components ........................................................................................................................................................................ 52
How We Generate Our Industry Forecasts .......................................................................................................................................................... 52
IT Industry ........................................................................................................................................................................................................... 53
Sources ................................................................................................................................................................................................................ 53
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Israel Information Technology Report Q1 2010
Executive Summary
Market Overview
BMI projects that the Israeli IT market will have a value of US$4.9bn in 2010 and will grow at a fiveyear CAGR of 6% to a projected US$6.2bn in 2014. The Israeli IT market should have enough
momentum from key sectors to expand over BMI's 2010-2014 forecast period, thanks to relatively stable
demand from defence and government sectors, and opportunities in verticals like financial services and
small and medium-sized enterprises (SMEs).
Spending is forecast to resume single-digit growth in 2010, with a boost, particularly in the second half of
2010, from computer hardware tenders delayed from 2009. BMI tentatively expected conditions to
improve in the final quarter of 2009 with a seasonal upturn reinforced by procurements deferred from the
first half of the year.
The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory
during BMI's five-year forecast period. Low computer penetration of around 30% offers potential for
continued growth. High internet penetration and growing broadband penetration are drivers for the retail
segment, while the financial services sector accounts for about 15% of Israeli IT spending.
Industry Developments
In 2009, Israel's high-tech sector suffered as demand for high-tech exports dropped by at least 10-15%,
with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israeli
government given that high-tech accounted for around 10% of Israel's economy, with annual sales
estimated at around US$25bn. Major IT firms were retrenching in Israel, including SAP, Cisco and HP.
IT is viewed as an important policy tool for the Israeli government's 2008-2010 socio-economic policy
framework. In 2009 the National Economic Council recently submitted a policy agenda to the
government, which specified two main policy tracks of reducing poverty and achieving balanced growth.
The first track was expected to emerge as the main priority.
As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has also been spending on computers in healthcare and
the nationwide paperless court initiative. The e-government programme is leading to increased demand
for computers, with the Israeli government reaching a supply agreements with vendors like Dell and HP.
Competitive Landscape
The Israeli IT services market is competitive, with leading multinational competitors IBM and HP both
estimated to have Israeli IT services market shares of below 10%. Following its merger with EDS, US
giant HP was projected to take around 10% of the Israel IT services market last year. HP Israel's
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Israel Information Technology Report Q1 2010
software division hosts HP's biggest research and development (R&D) centre worldwide, and the
company also has significant production facilities in Israel.
Leading Israeli IT services vendors experienced mixed fortunes in H109. Market leader Matrix reported
wins in a number of key sectors including healthcare, financial services, defence and government. In
Q309 Matrix reported 100% annualised growth in net profits, and 7% growth in operating profits on flat
revenue growth. Ness Israel, by contrast, reported a 19% decline in revenues for Q209, although 30% of
this was due to currency translation.
In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal)
concerning the future of a major computerisation project being implemented by Oracle. Oracle initiated
the project, to replace and upgrade ICC-Cal's computer systems, some 18 months ago. However,
differences had apparently arisen between Oracle and ICC-Cal concerning the project. Meanwhile, in
2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP sales and
distribution division in Israel.
Computer Sales
The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is
projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of
5% over the forecast period to reach US$2.7bn in 2014. The Israeli government has launched various
initiatives to increase computer and internet penetration.
Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the
economic slowdown and unemployment hitting consumer demand for electronics goods. Household
consumption moved into negative territory in 2009, with spending on household equipment down
by 6.7% in Q109, and although BMI forecast a slight recovery in H209, trading conditions remained
tough.
Software
Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged
software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses were
expected to remain cautious in H209, deferring investments, or looking for good enough solutions to
immediate problems. However, there should still be several growth areas going forward.
Spending on software is shifting towards the SME segment, which forms the mainstay of the Israeli
business sector. Spend on enterprise solutions has grown since 2007, with reviving or emerging areas of
opportunity including security, customer relationship management (CRM) solutions and business
intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key
opportunities including defence and healthcare.
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Israel Information Technology Report Q1 2010
IT Services
The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7%
over the forecast period to reach US$2.2bn in 2014. In 2009, there were reports of IT managers scaling
back projects, and vendors will have to adapt to an environment where some projects are commissioned
more in response to immediate needs.
Government and defence are two key sectors likely to be a continued source of opportunities, because the
factors driving spending in each case are not particularly sensitive to economic vicissitudes. Another key
area of opportunity is healthcare IT. Despite failing to capitalise in the past, Israel is starting to emerge as
a desirable location for packaged applications and localisation services.
E-Readiness
Israel's high PC penetration and the growing availability of broadband access mean that internet
penetration is likely to continue its upward trajectory. The government has announced that it intends to
make a big effort to narrow the digital gaps that manifest themselves across various demographic lines.
Israel's strong broadband growth has long relied on a handful of developments across the market. These
include the competition between Bezeq and the cable companies, with five major internet service
providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy
high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another
development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will
give alternative operators access to Bezeq's network and will stimulate much greater competition. LLU is
due to be implemented by end-2009.
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Israel Information Technology Report Q1 2010
SWOT Analysis
Israel IT Sector SWOT
Strengths
Weaknesses
Opportunities
Threats
One of the most modern economies in the region, with a highly educated, linguistically
skilled workforce and relatively low labour costs compared with most developed
countries.
Strong defence and government spending provides base of IT demand.
Relatively mature IT market, with services accounting for an estimated 32% of
spending in 2008. Despite this, the market for basic IT hardware and software is far
from saturated.
Strong political support, with government having implemented a number of policies to
aid in the development, success and expansion of the IT sector.
The recession at the beginning of the decade created a client mentality of focusing on
the bottom line, with enhanced services customer market power adding to pressure on
pricing and margins.
Digital divide, with 3% of bottom income group having home internet access.
Despite financial crisis, the financial services sector, which accounts for around 15%
of spending, will have to spend on compliance with Basel II and other international
standards, driving growth.
Defence and government projects should be relatively less sensitive to the economic
downturn.
Outsourcing, software as a service (SaaS) and applications management likely to
grow fastest out of IT services, with particular opportunities in financial sector.
Opportunities for partnership/investment in Israel's lively local IT company sector.
Healthcare IT will be a growing source of opportunity.
Economic downturn and unemployment will lead to weaker consumer and business
sentiment.
Other factors may affect business confidence, notably the security situation.
The weaker local currency, and aggressive pricing, may continue to constrain growth
and put pressure on margins.
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Israel Information Technology Report Q1 2010
Israel Telecommunications Industry SWOT
Strengths
Weaknesses
Opportunities
Threats
Well-developed internet/broadband sector compared with regional peers.
Liberal mobile market consisting of four operators.
Mature market with strong take-up of value-added and 3G services.
Mobile penetration rate of over 120% means that growth in the mobile market has
slowed considerably and operators must look for alternative revenue sources.
Lack of competition in all telecoms sectors.
Regulator has been slow to license new services, such as Worldwide Interoperability
for Microwave Access (WiMAX) wireless broadband.
Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold,
which could hinder prospects.
Emergence of rival operator HOT Telecom, made up of main three cable operators
(Golden Channels, Matav and Tevel) to compete against Bezeq could provide
cheaper services.
Introduction of number portability and the entry of mobile virtual network operators
(MVNOs) to the mobile sector could shake up competition and drive down retail prices
for consumers.
Continued interconnection tariff reduction could have a devastating effect on
operators' revenues.
Operators, Bezeq in particular, have resisted the introduction of number portability,
which could lead to a price war and drive down mobile revenues.
Operators are also hostile to the introduction of MVNOs.
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Israel Information Technology Report Q1 2010
Israel Political SWOT
Despite corruption allegations against some officials and members of parliament,
government members are still some of the most accountable in the region.
Elections are for the most part free and transparent, ensuring that a broad spectrum
of political views is represented within government.
The protracted conflict with the Palestinians means there are persistent security
risks, although violence in the West bank has been reduced significantly. Strategies
to minimise or end the conflict are domestically divisive.
Frequent change to the composition of the coalition government often leads to
policies becoming fragmented or significantly diluted.
Opportunities
The Annapolis conference in November 2007 laid the foundations for an eventual
peace agreement with the Palestinians, and improved relations with traditionally
hostile Arab states, particularly Saudi Arabia.
Threats
The victory of Hamas in the 2006 Palestinian elections, its subsequent takeover of
the Gaza Strip, and Israel's military incursion into the territory in December
2008/January 2009 has added to uncertainty. Finding a lasting solution poses a
dilemma for Israel, which has previously said it will not talk to the militant
organisation.
The construction of the West Bank barrier and the continued home-building in some
West Bank settlements antagonises the Palestinians and stands in the way of the
peace process.
Iranian president Mahmoud Ahmadinejad's re-election will add to Israeli concerns
about a possible Iranian nuclear weapons programme.
Strengths
Weaknesses
Israel Economic SWOT
Strengths
Weaknesses
Opportunities
Threats
The policy framework has stabilised in recent years with fiscal deficits brought well
under control (although the deficit is set to expand again in 2009).
The workforce is highly educated and skilled.
The country's close ties with the US provide it with substantial financial assistance for
economic and military ends.
The main downside risk to the economy is the security situation. A sharp
deterioration can have an immediate impact on domestic confidence, tourism
receipts, the exchange rate and foreign investment.
The economy is highly exposed to that of the US, in terms of exports, investment and
remittances.
In the long term, rising levels of employment will underpin private consumption
growth.
FDI stocks amounted to 37% of GDP in 2007, according to UNCTAD, and remained
robust in 2008; this should continue to propel growth for some years to come.
As a net fuel importer, Israel is vulnerable to large price fluctuations; the surge in oil
prices in 2008 contributed to rising inflation.
Competition from emerging Chinese and Indian producers of high-tech goods and
polished diamonds, as well as sluggish growth in the eurozone, could undermine
demand for Israeli exports.
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Israel Information Technology Report Q1 2010
Israel Business Environment SWOT
Strengths
Weaknesses
Opportunities
Threats
The business environment is supported by the sound infrastructure and
communication networks, as well as transparent legislation.
The banking system is one of the most sophisticated in the region, and offers a wide
range of both consumer and commercial credit products.
Historic political instability increases the risk premium of investment in Israel.
Some limits on repatriation of capital exist and there are constraints on foreign
investment in the high-tech sector.
Ongoing cuts will bring the top level of corporate tax down from 29% in 2007 to 25%
by 2010.
The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential
for trade.
Strike action has proved extremely disruptive to the business environment over the
past two years.
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Israel Information Technology Report Q1 2010
IT Business Environment Ratings
MEA IT Business Environment Ratings
BMI’s Middle East and Africa (MEA) IT Business Environment Ratings compare the potential of the key
regional markets over our forecast period, through to 2014. The ratings reflect our consideration of
political and economic risks, as well as risks associated specifically with IT intellectual property (IP)
rights protection and government projects.
In our updated Q110 ratings, the wealthy, high-tech Gulf Co-operation Council (GCC) markets continue
to occupy the higher rankings, with factors such as comparatively resilient consumer demand and ongoing
infrastructure projects making this region relatively well positioned for the post-credit-crunch era.
However, in most cases we do not see IT spending returning to its pre-crisis rate of growth over our fiveyear forecast period.
The top four countries in our IT rankings table remain the same. Despite recent financial concerns, the
UAE has the top spot. Qatar moves into second place, ahead of Kuwait, which drops to third. Still in
fourth place is Israel, where low computer penetration of around 30% offers potential for continued
growth and about 50% of IT spending is accounted for by government and military projects
Bahrain, Saudi Arabia and Oman occupy the next three places, and – like Qatar – spending is expected to
pick up in 2010 following a slowdown in 2009 when businesses and consumers spent cautiously due to
the economic slowdown. Economic reform and trade liberalisation will fuel spending on IT by both
public sector organisations and enterprises.
South Africa’s ’s relatively lowly eighth spot reflects business environment risks rather than the potential
of the country’s IT market, which will receive stimulus from infrastructure initiatives. Turkey is expected
to be a regional outperformer as the focus of demand shifts towards the Anatolian region and the rate of
PC penetration rises. Bringing up the field, Egypt’s high growth potential is constrained by income and
business environment considerations, while uncertainties continue to surround the Lebanon IT market,
with a mixed picture with regards to economic policy
A key variable for IT spending in this region is economic diversification. In many markets, liberalisation
in sectors like telecommunications and financial services are factors driving demand for IT products and
services. The share of the non-oil sector in IT spending is expected to fall slightly in the UAE but to rise
in Saudi Arabia, which accounts for 40% of regional IT spending. However, there will continue to be
significant spending on new technology-driven solutions in the hydrocarbons sector.
Another factor that will keep IT spending growing in this region is the waves of e-government initiatives
being implemented. Government accounts for up to 40% of the IT market in some states. First-placed
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Israel Information Technology Report Q1 2010
UAE continued to roll out e-services in 2009, in line with the UAE Strategic Plan, which called for a
strengthening of e-government programmes. In Saudi Arabia, too, substantial budgets have been allocated
for e-government infrastructure development.
A number of factors contributed to the slowdown in the UAE and other GCC markets like Oman in 2009,
including the impact of a falling population on consumer spending, as numbers of expats returned home.
BMI expects this to be a short-term trend, however, and Saudi Arabian population growth for example is
expected to reach 10% by the end of our five-year forecast period, driving IT spending.
Saudi Arabia, Bahrain and Oman rank slightly behind their equally fast-growing GCC peers on grounds
of general business environment, but the IT market metrics remain attractive. Saudi Arabia will continue
to be a lucrative market for technology products and services, with the country’s youthful population
supporting a continued rapid rise in internet, PC and notebooks penetration. BMI also takes a positive
view of market performance in Bahrain over the 2010-2014 forecast period. A particularly important
factor is Bahrain’s growing status as a financial hub. Oman, although, like Bahrain, one of the smaller
markets in the region, should benefit from infrastructure projects in sectors ranging from tourism to ports.
Of the non-GCC countries, Israel – in fourth place – should have enough momentum from key sectors to
expand over BMI’s 2010-2014 forecast period. Our ratings take account of opportunities in verticals like
financial services and SMEs, and growing demand for major IT outsourcing solutions. However, in 2010
rising job insecurity for those in work will have a negative impact on consumer sentiment.
South Africa is one of the Middle East and Africa’s most significant IT markets in terms of size and
growth potential. However, the country loses points for country structure and market risk. The market
will be supported by factors such as the 2010 Football World Cup, government projects and investment
by sectors such as telecoms. Projected improvement in South Africa's broadband infrastructure, and
international bandwidth, will also be a growth driver.
Egypt is expected to be one of the fastest-growing IT markets in the region over the next few years, but
has a number of constraints, including low disposable incomes and economic disparities. The market will
benefit from youthful demographics, rising PC penetration and improving ICT infrastructure, despite a
sub-optimal distribution network outside of Cairo. Lebanon also has some intrinsic advantages, including
a cosmopolitan and multi-lingual labour force, and a strategic position for the Levant markets. There is
potential for IT vendors in sectors such as telecoms, banking, utilities, real estate and government, but
much will depend on the political stabilisation necessary to implement reforms.
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Israel Information Technology Report Q1 2010
Regional IT Business Environment Ratings
Limits Of Potential Returns
Risks To Realisation Of Returns
IT Market
Country
Structure
Limits
Market
Risks
Country
Risk
Risks
IT BE
Rating
Regional
Ranking
UAE
48
95
64
60
74
68
65
1
Qatar
41
100
62
50
80
68
64
2
Kuwait
44
100
64
40
76
62
63
3
Israel
45
90
61
55
69
63
62
4
Bahrain
42
80
55
58
69
64
58
5
Saudi Arabia
49
70
56
45
65
57
57
6
Oman
42
60
48
50
60
56
50
7
South Africa
53
45
50
35
54
46
49
8
Turkey
48
50
49
45
40
42
47
9
Egypt
50
25
41
40
55
49
44
10
Lebanon
42
60
48
20
37
30
43
11
Source: BMI. Scores out of 100, with 100 highest. The IT BE Rating is the principal rating. It comprises two subratings 'Limits Of Potential Returns' and 'Risks To Realisation Of Returns', which have a 70% and 30% weighting,
respectively. In turn, the 'Limits' Rating comprises IT Market and Country Structure, which have a 70% and 30%
weighting, respectively, and are based upon growth/size/maturity/govt. policy of the IT industry (Market) and the
broader economic/socio-demographic environment (Country). The 'Risks' rating comprises Market Risks and Country
Risk, which have a 40% and 60% weighting, respectively, and are based on a subjective evaluation of industry
regulatory and IP regulations (Market) and the industry's broader Country Risk exposure (Country), which is based on
BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI
provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating
individually or as a composite, which the choice depending on their exposure to the industry in each particular state.
For a list of the data/indicators used, please consult the appendix at the back of the report.
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Israel Information Technology Report Q1 2010
Middle East Regional IT Markets Overview
IT Penetration
Internet Penetration
BMI projects continued improvement in
(per 100 population)
regional ICT indicators over the next few
years, driven by investment in broadband
and government ICT initiatives. The
Middle East divides into two groups in
terms of information society
development. In the first group are richer
and more technologically advanced
countries, such as Israel and the UAE,
where internet penetration is relatively
high and many households have access to
broadband services. In the more
emerging markets such as Egypt, on the
Note: figures may differ from other sections of this report due to
updated forecasts after time of writing. e/f = estimate/forecast.
Source: BMI
other hand, computers remain a luxury for many.
The number of internet users is expected to grow significantly across the region. Qatar is projected to
advance the most in percentage terms, with penetration rising from about 50% in 2008 to 78% by 2013
(note: figures may vary elsewhere in report due to updated forecasts after time of writing). Egypt will
have over 23mn subscribers in that same year, up from 11mn in early 2009. The UAE is one of the most
advanced states in the region in this respect, with internet penetration seen as reaching 72% within the
forecast period. By contrast, Saudi Arabia is forecast to achieve a 7% rise in subscribers.
Similar contrasts are apparent in relation to broadband penetration, which currently ranges from 1.2% in
Egypt to 24.5% in Israel. Government initiatives are afoot in most places, ranging from wireless
broadband in Dubai to plans to deploy optical fibre extensively in countries such as Kuwait. Broadband
penetration is seen as being at about 25% or above in the UAE, Saudi Arabia and Israel by the end of the
forecast period, but at only around 3% in Egypt and Kuwait.
Internet and broadband penetration growth will receive boosts from continued efforts to liberalise
regional telecoms markets. In 2008 the Qatari government announced that eight operators had submitted
bids for new fixed-line licences. Egypt also continued liberalisation of its telecoms market last year, and
similar moves have been seen in the Kingdom of Saudi Arabia. Broadband penetration has become a
driver of PC ownership in some segments, due to the growing variety of multimedia and communication
services available. There is plenty of room for PC growth, given the current low levels of
computerisation, which are estimated at less than 50% in every country in the region.
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Israel Information Technology Report Q1 2010
Governments in the region are allocating significant budgets for e-government development. The UAE
launched several new projects in 2008, including an ID card initiative that will be a key element
underpinning future information society development. Meanwhile, in June 2008 Saudi Arabia's governing
Shoura Council approved a draft national strategy for the IT industry that aimed to raise the contribution
of the industry to GDP to 20% by 2020. Israel has announced that it intends to make a big effort to
narrow the digital divide, and there has also been spending on computers in healthcare and a nationwide
paperless court initiative.
Market Growth & Drivers
Despite the global economic slowdown, the Middle East appears better placed than most other regions to
withstand the current global economic headwinds. In GCC states, the precipitous fall in oil prices in H208
had a negative effect on spending in previously fast-growing IT spending verticals such as oil and gas,
construction and real estate. Companies, hit by slowdowns in key export markets and credit tightening,
were looking to cut costs.
However, the region has a number of positive factors to help it avoid stagnation. There is increasing
economic diversification and strong spending from non-oil sectors such as government, financial and
enterprise sectors. By 2012 this should be more evident, with IT's share of GDP rising in these countries.
Other drivers include fairly resilient consumer demand and ongoing infrastructure projects in major
verticals such as oil and gas, telecoms and power.
As a result, IT market growth is expected
to remain in positive territory in most
places in 2009. Youthful population
IT Markets Compound Growth, (%)
2008e-2013f
demographics, retail sector development
and rising PC penetration will drive
growth. Growing regional competition
and opportunities, with the development
of the Arab Free Trade Zone, will
encourage spending.
Several sectors will offer opportunities
despite the economic headwinds.
Telecoms liberalisation and a big push
towards broadband penetration are
e/f = estimate/forecast. Source: BMI
expected to drive demand. Banks are implementing solutions to increase business flexibility and
introduce new services, including Islamic banking. In Israel, spending in two of the largest IT verticals,
defence and government, should be relatively immune to the economic situation. Another key area for IT
spending in many countries will be healthcare, with several major projects launched.
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Israel Information Technology Report Q1 2010
The highest growth Middle East & Africa (MEA) IT market over the forecast period is expected to be
Egypt, with compound growth of 65% for 2008-2013. There is room for considerable growth in the
country in the next few years, given the current low level of computerisation, which is much higher in the
business sector than in the population at large. Other high growth markets are expected to include Kuwait
(64%) and Qatar (64%).
Sectors & Verticals
Hardware will continue to dominate regional IT spending as the number of personal computer users rises
steadily over the forecast period. This will be driven by growing affordability, government initiatives and
the popularity of notebooks and netbooks. Notebook shipments grew about 50% in the Gulf last year,
with notebooks the main product category driving retail segment growth, as consumer sales feel the
benefits of aggressive channel promotions.
The economic slowdown and credit tightening may have an impact on hardware spending in the
enterprise sector, as companies look to cut costs. However, PC prices are continuing to fall, and this along with more credit availability - is bringing computers within the reach of many more people.
Meanwhile, the advance of 'big box' retailing, with larger outlets offering lower prices and more choice,
will also stimulate sales.
Market Structure (% Of Total IT Market)
2008e (LHS) and 2013f (RHS)
e/f = estimate/forecast. Source: BMI
Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy
instalment payment schemes. Strong demand for notebooks is another key factor driving growth, although
desktops remain important for SMEs and other groups. Government investment in education and eservices will mean desktop purchases for schools, colleges and government offices.
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Spending on software as a share of total IT spending is as low as 14% in Egypt and below 20% in a
majority of MEA markets. Despite the difficult economic environment, which will encourage companies
to focus on the bottom line, demand from the oil and gas segment was hit in H208, but BMI predicts
plenty of room for growth over the forecast period as numerous untapped sectors still exist. Key verticals
will include telecoms, finance, retail, healthcare and the public sector.
SMEs are likely to lead spending growth, with manufacturing and trading firms seeking efficiencies by
making the transition from manual environments to full automation of back-office systems. Customer
relationship management (CRM) will be a growth area, as fewer than 2% of SMEs in the Middle East
region have a specialised CRM application in place. Other high-growth categories are set to include
business intelligence, storage and security products. Security software is a growing opportunity, with the
UAE currently the largest market.
There are some challenges for the regional software market. One key issue is that of illegal software:
across the region up to 80% of software is counterfeit. Another important factor is of course low income,
and the high costs of operating systems such as Windows, which has led to activity to promote open
source in countries such as Egypt, championed by IBM and other vendors.
BMI predicts that IT services will remain in positive territory during the 2008-2013 period. However, the
economic situation is likely to have an effect in some key verticals, particularly real estate and oil and
gas. In H208 there were reports of IT managers in various sectors looking to cut costs, although in some
cases the emphasis was more on scaling back projects rather than cancellation. In the government sector,
budgets have often already been commissioned, and so the effects are more likely to be felt in the second
half of 2009 and in 2010.
Currently, IT services' share of IT spending ranges from around 24% to 32% in the MEA countries
covered by BMI. Support and maintenance account for around one-third of spending on IT services, but
demand for more complex services has increased, with large outsourcing deals in the UAE, Israel and
elsewhere. There is also demand for services such as hosting, facilities management and disaster
recovery. Even in less mature markets such as Egypt, larger customers are becoming more demanding in
terms of their IT expectations.
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Market Overview
Government Authority
Government Authority
Ministry of Science, Culture and Sport
Minister
Ghaleb Majadele
The Ministry of Science, Culture and Sport was established in 1982 as the Ministry of Science and
Development; it has undergone numerous name changes, receiving its current name in 2006. The
responsibilities of the ministry are the formation of a national policy towards science and technology,
technological analysis and organisation, and the co-ordination of research areas.
The main priorities for the Ministry of Science, Culture and Sport are as follows:
Setting up a national policy and priorities for research and development (R&D);
Development of scientific and technological infrastructure;
Establishment and strengthening of foreign scientific relations;
Participation in the establishment of research centres, including regional R&D centres;
Participation in the development of scientific and technological human resources;
Increasing awareness of science within the public, especially the youth of Israel;
Developing digital infrastructure (facilitating access to information); and
Consulting the government and its offices in the area of science and technology.
Background
All the major vendors have a direct presence in Israel, employing substantial numbers of staff. For
example, IBM has its only IBM Global Services (IGS) regional subsidiary in Petach Tikva and employs
around 2,000 staff at its Haifa Labs and various IBM facilities in Rehovot and Jerusalem. HP has as many
as 4,000 employees and has long offered services and support through its subsidiary HP-OMS. Other
vendors such as Oracle and EDS also have a sizeable presence.
Foreign direct investment (FDI) first started to play a key role in Israel's economy in the mid-1990s, as
the country's high-tech sector underwent a rapid expansion. Together with the opening up of the financial
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and telecoms sectors, the high-tech sector succeeded in attracting large FDI flows. The government's
policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new
R&D facilities. Today, Israel has more offshore R&D centres of US high-tech companies than any other
country.
Local companies also have a significant presence in the Israeli IT market, with seven of the top 10 IT
services firms being Israeli. Major players include Matrix, Ness Technologies and Malam Group, with
Israel typically accounting for between 40% and 50% of their revenues.
Government Initiatives
Gov@Net - Government intranet
A cross-government intranet planned to connect over 80 governmental networks and hundreds of institutes.
The implementation will create the largest Israeli IP-VPN. The project will allow efficient internal
communication and resource sharing
Mercava - Government ERP
Mercava is the largest ever IT project implemented in Israel. It will gradually replace the assortment of unique
legacy systems currently operating in governmental bodies with a central, unified enterprise resource planning
(ERP) system running on SAP system software
This project will create a unified language for cross-government activities
Government EIP
This project is intended to promote enterprise portals within the government. Since a cross-government portal
will be based on information received from the different bodies, the first step involves the construction of a
ministry-level portal. This portal will draw information from Merkava (see Industry Developments), from
ministry-specific operational systems and from intra-government shared resources
Tehila - Government ISP
The Government ISP (GISP) project has been operational since 1998, providing essential infrastructure for
public-government communication
To date, 60% of the governmental bodies have voluntarily joined the project
Shoham - E-commerce infrastructure and service
A central e-commerce service allowing citizens and companies to access a uniform interface to carry out a
variety of payments and purchases, which includes the payment of taxes, fees, fines (VAT, vehicle and driving
licence fees, traffic fines) and the purchase of tangible goods (government publications). The service
processed over ILS250mn in its first year
Lehava project
Group of initiatives to help close digital divide
Hardware
The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is
projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of
5% over the forecast period to reach US$2.7bn in 2014. Spending is expected to resume single-digit
growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting
consumer demand for electronics goods.
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Household consumption moved into negative territory last year, with spending on household
equipment down by 6.7% in Q109, and although BMI forecast a slight recovery in H209, trading
conditions were expected to remain tough. Businesses are expected to maintain a cautious attitude to IT
investments in 2010 due to uncertainty about a sustainable global economic recovery, but there should
still be growth areas.
Retail computer spending had been buoyant in the two years preceding the economic downturn, with
drivers including the strong shekel, higher broadband penetration and demand for multimedia
applications. In H109, the PC market slowed, through a combination of reduced consumer and business
confidence. Government IT project investments are a major component of Israeli computer hardware
demand, but tighter fiscal conditions for the new administration in 2009 placed some budgets under
pressure.
There could be a boost, particularly in the second half of 2010, from computer hardware tenders delayed
from 2009. The launch of the Windows 7 operating system, in October 2009, has the potential to help
trigger a new cycle of hardware upgrades, although much will depend on business and consumer
confidence. Notebooks will remain the main growth area, although the share of netbooks in total
notebook sales may have peaked as the price differential compared with full-featured notebooks becomes
less significant.
These factors were apparent in H208, but because of the upwards trend in the first half of the year, total
2008 PC sales were still up overall, at around 439,000. One area of growth will be lower priced minicomputers, netbooks, which are establishing a position in the market. The current low rate of PC
penetration represents potential for organic growth. PC penetration was only 26.4% in 2005, while digital
divide issues mean that Israel currently has 600,000 children living below the poverty line, only 3% of
whom have internet or home PC access, compared with 90% in the top income group.
The Israeli government has launched various initiatives to increase computer and internet penetration,
including Computer for Every Child, Window to Tomorrow's World, Tapuah (The Israeli Society for the
Advancement of the Information Age) and others. The level of support, however, has been criticised by
some industry insiders as too low.
The Israeli IT market is relatively mature, but hardware still accounts for around half of the total market,
excluding communications hardware. Notebooks are the fastest growing segment of the market, but in
2008 desktops still dominated with around two-thirds of unit sales. Despite strong growth in demand for
notebooks, the desktop sector is still significant, largely to business and government end-users.
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Software
Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged
software segment is expected to grow at a CAGR of around 7% over the forecast period. In recent years,
the SME segment, the mainstay of the Israeli business sector, has emerged as an important growth area.
Spending on enterprise solutions should continue to grow steadily, with reviving or emerging areas of
opportunity including security, CRM solutions and business intelligence. However, in the current
economic climate, vendors will continue to pitch the efficiency gains potentially offered by these
applications.
A 2009 survey of IT managers suggested that current areas of high demand include management of
Microsoft systems and servers, as well as systems management, basic data management, firewalls, ERP
implementation and CRM. CRM is a particularly buoyant area, with local IT company Matrix reporting a
number of public- and private-sector successes in 2008, while customers for Microsoft's Dynamics CRM
platform include Israeli health maintenance organisation (HMO) Maccabi Healthcare Services.
The release of the Windows 7 operating system, in October 2009, has the potential to impact positively on
sales in 2010, despite business caution. 2010 should in any event see a boost from systems upgrades
deferred from last year when the economic crisis had an impact in public and private
sectors. The slowdown was expected to continue into H209, with companies deferring investments, or
looking for 'good enough' solutions to immediate problems. Vendors will need to convince enterprises of
benefits to the bottom line from software investments; however, there should still be several growth areas.
The security software segment is an important opportunity, projected to be worth tens of millions of
dollars. Israel has become more aware about the growing threat and sophistication of cyber attacks and
has been encouraging government and private-sector organisations to take action. Spending is likely
across all sectors, with security content and threat management the current priorities.
In terms of verticals, the financial sector has been a mainstay of demand, with other key areas including
defence and healthcare. These three sectors are likely to be somewhat immunised against the
consequences of the global slowdown. Despite the current financial crisis, regulatory compliance and
demand for new services will continue to drive IT spending by banks. Similarly, defence spending on
new systems is likely to be maintained given the current security situation.
Software comprises an important part of Israel's industrial production and exports, with software exports
of around US$3bn being comparable to about two-thirds of the entire value of the domestic IT sector.
Almost all global vendors are active in the domestic market, selling licences, along with integration and
applications services. Global vendors control more than three-quarters of the market, with SAP in first
place. In the past, the Israeli SME segment was dominated by local software companies. Now,
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international players, including market leaders like SAP and Oracle, are entering with appropriate
software packages. Microsoft is also designing a software package for this market segment.
Services
The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7%
over the forecast period to reach US$2.2bn in 2014. The relatively robust economy and increased
investment by a number of key sectors have driven recent growth, but the number of new projects
decelerated in 2009 owing to the economic slowdown.
In H109, there were reports of IT managers scaling back projects, but, in the near term, budgets had often
already been commissioned, and so the effects were more likely to be felt in H209 and 2010. Defence and
government spending represent a significant component of Israeli IT demand and have some immunity to
economic vicissitudes. This year much will depend on the speed of global economic recovery,
particularly in key Israeli export markets. However, vendors will have to adapt to an environment where
some projects are commissioned more in response to immediate needs, and with a focus on cost
reduction.
Growth is expected to reach a higher trajectory in the second half of our five-year forecast period. Key
Israeli IT services spending verticals include the financial sector, where international regulatory
compliance and structural and market reforms have driven substantial IT investment. The sector accounts
for around 25% of total IT services spending, while the government accounts for another quarter. Along
with defence, these two key sectors are likely to be a continued source of opportunities because the
factors driving spending in each case are not particularly sensitive to economic downturn. Indeed, the new
administration will likely feel pressure to ramp up government spending to combat lower private
consumption and rising unemployment. Another key area of opportunity is healthcare IT.
While large organisations still dominate, SMEs have also been investing more, and represent a growth
opportunity. Many SMEs are waking up to the need to compete through more direct investment in support
and service infrastructures. Similar factors are driving an increase in demand for managed services, with
businesses reluctant to invest in internal IT capabilities, or deterred from doing so by a lack of available
skills.
Outsourcing
Outsourcing has become a bigger factor and was estimated to account for about 20% of IT services
spending, or at least US$300mn, in 2009. Key sectors for IT outsourcing include:
The military, with outsourcing deals such as that awarded to HP by the Israeli Navy for
management of its IT infrastructure highlighting the opportunities there. While the value of the
HP deal was not made public, it is estimated to be worth several million shekels.
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The financial sector is another lead vertical for outsourcing. In 2006, an outsourcing deal between
First International Bank of Israel and EDS Israel was the largest outsourcing contract in the
Israeli banking industry and a milestone at the time. Tata Consultancy Services' decision to
open a local branch also underlines the potential attraction of the financial sector, now benefiting
from economic recovery and greater security.
The retail sector offers further opportunities, with IBM Israel having a 10-year outsourcing
contract with Clubmarket Marketing Chains, with the contract including computer systems for
the supermarket chain's branches and point-of-sale terminals.
Although Israel seemingly possesses many advantages as an outsourcing destination, in particular a
technologically literate, linguistically skilled workforce and low labour costs relative to most developed
countries, the country has failed to capitalise on these strengths in the past. Aside from Israel's small size,
another issue is security. However, the government is now actively promoting Israel to multinationals,
and there has been a spate of call-centre construction. The work seems to be paying off, with Israel
starting to emerge as a desirable location for packaged applications and localisation services.
Industry Developments
IT is an important element of the Israeli government's socio-economic policy framework for 2008-2010.
The National Economic Council recently submitted a policy agenda to the government, which specified
two main policy tracks of reducing poverty and achieving balanced growth. The first track is expected to
emerge as the main priority for the government. The digital divide is both a symptom and an aggravator
of relative poverty.
Economic Impact On Israel Tech Sector
In H109, Israel's high-tech sector continued to suffer the effects of the global economic slowdown and
credit crunch. Demand for high-tech exports was estimated to have dropped by at least 10-15% with as
many as 10,000 sector jobs feared to be at risk this year. This represents a major concern for the Israeli
government given that high-tech accounts for around 10% of Israel's economy, with annual sales
estimated at around US$25bn.
The high-tech industry directly employs around 7% of the country's work force, and 6-8% have been
estimated to have been laid off since last October. In 2009, some major IT firms were laying off staff in
Israel, including SAP, or cutting salaries, like HP.
Israel's high-tech merger activity also fell in 2008 as a result of the downturn in the global economy.
According to figures from Israel's Venture Capital Research Centre (JVC), the value of Israel high-tech
mergers were down by 19% year-on-year (y-o-y) to US$2.64bn. The average deal size was also down, to
around US$31mn. An even more striking development was that the whole year passed without a single
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