Israel information technology report q3 2014

Q3 2014
www.businessmonitor.com

ISRAEL
INFORMATION TECHNOLOGY REPORT
INCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1752-4245
Published by:Business Monitor International


Israel Information Technology
Report Q3 2014
INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: May 2014

Business Monitor International
Senator House
85 Queen Victoria Street
London
EC4V 4AB
United Kingdom
Tel: +44 (0) 20 7248 0468
Fax: +44 (0) 20 7248 0467
Email:
Web:

© 2014 Business Monitor International

All rights reserved.
All information contained in this publication is
copyrighted in the name of Business Monitor
International, and as such no part of this
publication may be reproduced, repackaged,
redistributed, resold in whole or in any part, or used
in any form or by any means graphic, electronic or
mechanical, including photocopying, recording,
taping, or by information storage or retrieval, or by
any other means, without the express written consent
of the publisher.

DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of
publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor
International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the
publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as
to the accuracy or completeness of any information hereto contained.



Israel Information Technology Report Q3 2014

CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 9
IT SWOT .................................................................................................................................................. 9
Wireline SWOT ....................................................................................................................................... 11
Political ................................................................................................................................................. 12
Economic ............................................................................................................................................... 13

Business Environment .............................................................................................................................. 14

Industry Forecast .............................................................................................................. 15
IT Market ............................................................................................................................................... 15
Table: IT Industry - Historical Data And Forecasts (loccur mn) (Israel 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Broadband ............................................................................................................................................. 20
Internet ................................................................................................................................................ 20
Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Macroeconomic Forecasts ............................................................................................... 22
Table: Israel - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Industry Risk Reward Ratings .......................................................................................... 28
Table: Middle East And Africa RRRs - Q3 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Market Overview ............................................................................................................... 32
Hardware ............................................................................................................................................. 32
Software ............................................................................................................................................... 38
Services ................................................................................................................................................ 42

Industry Trends And Developments ................................................................................ 46
Regulatory Development .................................................................................................. 50
Table: IT Regulatory Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Table: Government Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Competitive Landscape .................................................................................................... 54
International Companies ......................................................................................................................... 54
Table: Intel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Local Companies ................................................................................................................................... 55
Table: Amdocs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Table: Check Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Table: Imperva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Table: Retalix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Company Profile ................................................................................................................ 59
Ness ...................................................................................................................................................... 59

© Business Monitor International

Page 4


Israel Information Technology Report Q3 2014
Matrix ................................................................................................................................................... 64

Regional Overview ............................................................................................................ 68
Table: OSN Recent Content Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Demographic Forecast ..................................................................................................... 73
Demographic Outlook .............................................................................................................................. 73
Table: Israel's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Table: Israel's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Table: Israel's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Table: Israel's Rural/Urban Population Split, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Methodology ...................................................................................................................... 77
Industry Forecast Methodology ................................................................................................................ 77
Sources ................................................................................................................................................ 78

Risk/Reward Ratings Methodology ............................................................................................................ 79
Table: It Risk/Reward Ratings Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

© Business Monitor International

Page 5



Israel Information Technology Report Q3 2014

BMI Industry View
BMI View: Israel's IT market is the most developed in the Middle East with a rich ecosystem of major
global investors, start-ups and universities engaged in cutting edge research. These features compensate for
the relatively small and mature market that drags growth rates below those of many other MEA markets.
We forecast IT spending to reach ILS23.4bn in 2014, with the software and services segments
outperforming hardware sales. We forecast IT spending to continue growing throughout our five-year
forecast period to 2018, accelerating in the later years as GDP and private consumption growth recover
from government austerity measures imposed in 2013. The market will increasingly be driven by software
and services in key sectors such as government, defence and financial services, resulting in IT services
accounting for 36.8% of overall market spending by 2018.

Headline Expenditure Projections

Computer Hardware Sales: ILS9.55bn in 2013, rising 2% in local currency terms to ILS9.75bn in
2014. We expect a return to growth in 2014 to be driven by the launch of 4G mobile networks and ongoing
migration to the Windows 8 OS.

Software Sales: ILS5.1bn in 2013, increasing 4.5% y-o-y to ILS5.3bn in 2014. Enterprise software

spending will be the main growth driver as device and data proliferation will result in increased spending on
customer relationship management (CRM), databases and business intelligence.

IT Services Sales: We expect IT services sales will continue to outperform the rest of the IT market,
increasing from ILS7.9bn in 2013 to ILS8.3bn in 2014. Cyber security services will outperform in terms of
growth, but it will be stable sectors such as government and defence that continue to account for the
majority of spending.

Key Trends And Developments
■

The growing emphasis of many multinational IT vendors on software and services revenues has led
several of them to direct more investment in R&D at the Israeli market. Israel's strong reputation as a
hotbed for innovative software development has made Israeli companies popular takeover targets for
multinationals. In April 2014, IBM announced the launch of its Alpha Zone technology accelerator in Tel
Aviv, which will recruit start-ups to grow technologies across several areas, including big data, cloud,
mobile, security and the Internet of Things. Meanwhile, in the month before US-based Palo Alto
Networks confirmed the acquisition of privately held, Tel Aviv-based cyber security firm Cyvera. The
financial terms of the acquisition were not confirmed, but industry experts expect the total value of the
transaction was around USD200mn.

© Business Monitor International

Page 7


Israel Information Technology Report Q3 2014

■

In April 2014 Israeli economic minister Naftali Bennett stated that Intel plans to invest around USD6bn
to upgrade its Kiryat Gat chip plant. At the time of writing the company had not yet officially confirmed
the investment, but the development is in line with talks between the government and Intel in January
2014 on its investment plan for the country over the coming decade. According to media reports, the
Ministry of Economy's Investment Center is poised to offer Intel a grant of 5% of the company's
investment, approximately ILS750mn.

© Business Monitor International

Page 8


Israel Information Technology Report Q3 2014

SWOT
IT SWOT
SWOT

Strengths

■

Home to the most well developed economy and IT market in the region with major
local IT companies based in the country, a highly educated, linguistically skilled
workforce, and relatively low labour costs compared with developed markets.

■

Strong defence and government spending provides base for IT demand.

■

Strong political support, with the government having implemented many policies to
aid in the development, success and expansion of the IT sector.

■

Investment in FTTH and wireless data networks provide basis for cloud computing
growth and internet of things expansion.

Weaknesses

■

The recession at the beginning of the 2000s focussed customers on the bottom line,
with enhanced services and customer market power adding to pressure on pricing
and margins.

Opportunities

■

Digital divide, with just 30% of bottom-income group having home internet access.

■

Cyber security threats should attract increased spending on safeguards as the
concerns of government and enterprises escalate.

■

Growing demand for tablets and other mobile computing devices such as hybrids and
ultrabooks.

■

Despite the financial crisis, the financial services sector, which accounts for around
15% of spending, will have to spend on compliance with new Israeli Securities
Authority regulations, introduced in the wake of the economic crisis.

■

Defence and government projects should be less sensitive to fiscal retrenchment,
with a major datacentre project under way for the Israel Defense Force.

■

Outsourcing, Software-as-a-Service (SaaS) and applications management likely to
grow fastest out of IT services, with particular opportunities in financial sector.

© Business Monitor International

Page 9


Israel Information Technology Report Q3 2014

SWOT - Continued

Threats

■

Opportunities for partnership/investment in Israel's lively local IT company sector.

■

Government austerity measures will dampen consumer and business spending.

■

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.

© Business Monitor International

Page 10


Israel Information Technology Report Q3 2014

Wireline SWOT
SWOT

Strengths

■

Well developed internet/broadband sector compared with regional peers.

■

Fixed-line liberalisation has led to increased competition and the erosion of
incumbent market share.

■

Incumbent operator Bezeq faces strong completion from HOT Telecom, which has
recently entered the mobile market.

Weaknesses

Opportunities

■

Internet infrastructure is currently controlled by Bezeq and HOT Telecom.

■

Regulator has been slow to license new services eg WiMAX wireless broadband.

■

VoIP licensing and triple-play for Bezeq placed on hold could hinder prospects.

■

Introduction of LLU will give alternative operators access to Bezeq's network and
should stimulate much greater competition.

■

Regulator is proposing a 76% reduction in fixed line interconnection fees; this could
stimulate increased service usage.

■

The ViaEurpoa-led consortium building a fibre network over the Israel Electric
Corporation (IEC) infrastructure would provide competition for Bezeq and HOT, and
ultimately boost growth in the market.

Threats

■

Continued reduction of internet tariffs could have devastating effect on revenues.

■

Fixed broadband growth is slowing as mobile broadband services become
increasingly popular.

■

Operators, Bezeq in particular, have resisted the introduction of number portability,

which could lead to a price war and thus drive down mobile revenues.

© Business Monitor International

Page 11


Israel Information Technology Report Q3 2014

Political
SWOT Analysis

Strengths

■

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.

Weaknesses

■

The protracted conflict with the Palestinians means there are persistent security risks.
Strategies to minimise or end the conflict are domestically divisive, with tensions

between Israel and Hamas set to remain elevated.

■

Frequent change to the composition of the coalition government often leads to
policies becoming fragmented or significantly diluted.

Opportunities

■

With the civil war in Syria continuing, risks of a spill over into Israel are ever-present.

■

A warming of relations with Greece has given Israel the ability to engage in military
exercises over a larger geographic area.

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 have added to uncertainty. Despite ongoing peace talks, finding a lasting
solution continues to pose a dilemma for Israel.

■

Continued home-building in some West Bank settlements antagonises the

Palestinians and stands in the way of the peace process.

© Business Monitor International

Page 12


Israel Information Technology Report Q3 2014

Economic
SWOT Analysis

Strengths

■

The policy framework has stabilised in recent years, and recent austerity measures
will help to keep the fiscal deficit under control over the coming years.

■

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.

Weaknesses

■

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 and Europe in terms of exports and
investment.

Opportunities

■

In the long term, relatively elevated levels of employment will underpin private
consumption growth.

■

Israel produces more technology start-up companies than any other country in the
world except the US.

■

The discovery of large offshore gas deposit will bring an influx in foreign investment
and is expected to serve the country's energy needs for decades.

Threats

■

Appreciatory pressures on the Israeli shekel risk damaging the country's exports. That
said, risks will remain contained by the Bank of Israel's commitment to intervene in
the forex market to stem excessive appreciation of the unit.

■

Competition from emerging Chinese and Indian producers of high-tech goods and
polished diamonds could undermine demand for Israeli exports.

© Business Monitor International

Page 13


Israel Information Technology Report Q3 2014

Business Environment
SWOT Analysis

Strengths

■

The business environment is supported by 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.

Weaknesses

■

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.

Opportunities

■

The beginning of offshore exploration will increase foreign direct investment in the
country.

Threats

■

Strike action has proved extremely disruptive to the business environment in 2011,
and could regain strength in 2014.

■

The parliament approved a plan to increase the country's oil and gas royalties, which
could reduce energy profits in the future.

© Business Monitor International

Page 14


Israel Information Technology Report Q3 2014

Industry Forecast
IT Market
Table: IT Industry - Historical Data And Forecasts (loccur mn) (Israel 2011-2018)

Country

2011

2012

2013e

2017f

2018f

20435.7 22299.5 22576.0 23354.8 24607.9 26490.5 27698.4

28895.0

Israel

IT market value, ILSmn

Israel

IT market value, % of GDP

2.3

2.4

2.3

Israel

Computer hardware sales,
ILSmn

8877.3

9560.8

Israel

Personal computer sales,
ILSmn

7208.4

Israel

Software sales, ILSmn

Israel

Services sales, ILSmn

2014f

2.3

2015f

2.3

2016f

2.3

2.3

2.2

9550.3

9745.0 10124.7 10743.3 11233.0

11718.2

7839.9

7907.6

8068.9

8383.2

8895.4

9301.0

9702.7

4540.8

5004.4

5117.3

5346.7

5689.8

6186.3

6369.6

6541.6

7017.6

7734.2

7908.4

8263.1

8793.5

9560.9 10095.8

10635.2

e/f - BMI estimate/forecast. Source: BMI

We continue to hold the view that the Israeli IT market will experience only limited growth over the
medium term and will decline as a percentage of GDP. This is a product of saturation of the hardware and
software/services market and price competition between vendors, which will hold down the overall value of
the market. Nevertheless, Israel remains at the forefront of development of security services and continues
to attract investment in research and development centres from global IT firms.

We believe the IT market reached a value of ILS22.6bn in 2013, equal to around US$6.3bn. Despite our
expectations of relatively weak growth in 2013 and 2014, we maintain an optimistic outlook for Israel's IT
market over the long term. Israel remains a robust IT market with plenty of development across industrial,
government, defence and financial services spending.

Our five-year CAGR sees growth around 5.1% in Israeli new shekel terms for the period from 2014-2018.
We expect IT services will be the fastest growing segment of the IT market, narrowly ahead of software,
with both growing fast relative to hardware. In terms of key verticals, the financial services sector is

important, boosted by compliance requirements with the new regulations introduced in the wake of the
economic crisis in 2008-2009. Defence and government will also continue to maintain the market's
sustained importance to the overall economy, with security an important source of growth. The nature of
sales will change, however, as business becomes increasingly important and the hardware segment

© Business Monitor International

Page 15


Israel Information Technology Report Q3 2014

contributes comparatively less to the market's overall growth. Given Israel's relatively rich tech skills
resource base, many organisations prefer to conduct software development in-house.

2014 Outlook

Industry Trends - IT Market
We project real GDP growth of 3.2% in Israel in

2011-2018

2014, then forecast slow but steady acceleration in
GDP growth throughout our forecast period,
reaching 5.1% in 2018. BMI's Country Risk team

40,000

2.5

2.4

30,000

does not expect consumer confidence to drop sharply
in 2014, but forecast relatively weak expansion of

2.3
20,000
2.2

private consumption growth at 3.2% in 2014, mainly

10,000

2.1

as a result of the implementation of austerity
measures by the government. Although there is now

2

0
2011

2012 2013e 2014f 2015f 2016f 2017f 2018f

a reduced likelihood of an attack on Syria and Iran,
political risk in Israel is still high, as the chances of

IT market value, ILSmn (LHS)
IT market value, % of GDP (RHS)

renewed conflict with Hamas and Hizbullah remain
significant.
e/f = BMI estimate/forecast. Source: BMI

While government austerity and political instability
has weighed on Israel's economic outlook, we believe there will nonetheless be opportunities for vendors in
the IT market. One such opportunity is in the provision of cyber and information security products and
services. This is a growth area in IT markets globally, but there is a particularly large opportunity in Israel
where regional political tensions and the uptick in cyber attacks in 2012 and 2013, affecting Israel, UAE
and Saudi Arabia, have concentrated the minds of government and enterprise decision makers on
investments to protect their IT systems.

Other areas where we expect to see growth include business intelligence and cloud computing, with the
latter likely to gain traction among SMEs as a lower cost alternative to bespoke systems. Meanwhile sales
of hardware and software will receive a boost from Windows-8 driven upgrades and computer purchases
previously delayed as a result of the economic situation. The move to mobility and new form factors such as
tablets, hybrids and ultrabooks will help to drive demand in the consumer segment, while to some extent
undermining demand for traditional notebooks.

Meanwhile, despite the challenging trading conditions, vendors have reported a continued flow of IT
projects, with large tenders from the Israeli ministries of finance and defence and the Israel Electric

© Business Monitor International

Page 16

Israel Information Technology Report Q3 2014

Company. Following the global financial crisis, vendors reported demand had revived in the key financial
services vertical, with new projects including an US$11mn IT outsourcing tender by the First International
Bank of Israel. Healthcare, the public sector and utilities were also generating new projects or significant
contract extensions.

Market Drivers

The Israeli IT market has several supportive fundamentals that should keep it in positive territory during
BMI's five-year forecast period to 2018. Although household computer penetration of around 75% offers
only limited potential for growth derived from first time buyers, there are several factors pushing multiple
device ownership. Innovation in form factors, including tablets and hybrids will push sales of personal
devices. Meanwhile, investments by telecoms operators to expand the reach of high capacity wireless and
wireline broadband services will catalyse demand for personal devices. Spending will continue to move
away from desktops as more consumers acquire personal devices such as tablets - which may also cut into
spending on notebooks.

Per capita IT spending is expected to rise from ILS2,986 in 2014 to ILS3,496 by 2018. However, spending
will fail to keep pace with GDP growth in Israel as the economy becomes less heavily weighted towards the
high-tech sector following gas exploration and growth in other sectors. Some key IT spending verticals will
however keep pace, for instance defence and financial services, which are somewhat insulated from
economic vicissitudes. Vendors will target projects across a range of sectors from government to financial
services, telecoms and utilities. Regulatory compliance will continue to necessitate IT spending by banks
and the financial services sector, which accounts for about 15% of Israeli IT spending.

Another 50% of IT spending is accounted for by government and military projects, which will have a
relatively low sensitivity to economic downturn compared with the commercial sector. Government IT and
digital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging from
government e-services portals to healthcare. The government remains determined to preserve the country's

status as a high-tech powerhouse and drive development of the knowledge economy.

While the defence sector is, and is expected to remain the single most important vertical, investments by
financial sector organisations should mean more large outsourcing deals. Other sectors of opportunity will
include healthcare and telecoms, as well as infrastructure, transport and the small office and home office
sector.

© Business Monitor International

Page 17


Israel Information Technology Report Q3 2014

Income Per Capita Breakdown
(2011-2018)
75,000

50,000

25,000

0
2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Poorest 20%, net income per capita, ILS
Richest 20%, net income per capita, ILS
Middle 60% of population, net income per capita, ILS

National Sources/BMI

Opportunities

BMI expects IT services will display the highest growth over the forecast period to 2018, due to growth in
key verticals and the opportunities presented by cloud computing, big data analytics and real-time enterprise
services based on the internet of things. In addition, growing enthusiasm for outsourcing is putting Israel on
the map, with some recent large tenders such as HP's contract for outsourced management of the Israeli
navy's IT infrastructure. The economic slowdown may reinforce this trend.

As noted, cloud computing is expected to be a source of revenue growth over the medium term as
organisations looking for efficiencies turn to Software-as-a-Service and Infrastructure-as-a-Service.
Particular areas of opportunity for cloud computing include banking and retail, as organisations in those
fields look to save money on hardware.

While large organisations still dominate, SMEs have been investing more and represent a growth
opportunity. Many SMEs are waking up to the need to compete through more direct investment in support

© Business Monitor International

Page 18


Israel Information Technology Report Q3 2014

and service infrastructures. Cloud computing is a field which could gain traction with SMEs as the ondemand model fits well with their smaller budgets and lack of demand for bespoke in-house solutions and
software.

Summary

The Israeli economy remains vulnerable to global economic headwinds, with an escalation of risk
particularly around events in the eurozone. Despite these storm clouds BMI believes IT spending has
sufficient strength in key demand verticals to maintain a positive trajectory over the medium term.
However, we do not expect growth to keep pace with GDP as market saturation and price competition
between vendors limit increases in the total value of the market. The hardware market is forecast to grow
from ILS9.6bn in 2013 to ILS11.2bn in 2017, with PC sales projected to rise from an estimated ILS7.9bn to
ILS9.3bn. While growth will remain strong, the market will be increasingly dominated by IT service sales
and software sales, indicating the maturity of the market.

© Business Monitor International

Page 19


Israel Information Technology Report Q3 2014

Broadband

Internet
Table: Telecoms Sector - Wireline - Historical Data & Forecasts (Israel 2011-2018)

2011
Main telephone lines in service, '000

46.4

2014f

2015f

2016f

2017f

2018f

47.0

47.4

47.3

46.5

45.4

44.7

44.4

4721.5 4894.7 5326.5 5631.8 5857.1 6043.9 6186.0 6294.5

Internet users/100 inhabitants
Broadband internet subscribers, '000

2013e

3500.0 3594.0 3665.2 3702.2 3681.8 3646.8 3642.5 3668.3

Main Telephone Lines/100 Inhabitants
Internet users, '000

2012

62.6

64.0

68.9

72.0

74.0

75.3

76.0

76.1

1800.0 1950.0 2131.4 2240.0 2318.5 2385.7 2440.6 2482.0

Broadband internet subscribers/100 Inhabitants

23.9

25.5

27.6

28.6

29.3

29.7

30.0

30.0

e/f = BMI estimate/forecast. Source: BMI, operators

We have revised our forecast for the development of
Israel's internet user and broadband subscriber

Industry Trends - Wireline Sector

markets based on new data from the country's

2011-2018

service providers. We revised down our YE13
estimate for the number of internet users to 5.33mn,
giving Israel a penetration rate of 68.9%. We expect

4,000

3,000

steady, but slowing, growth in the number of internet
users to continue for the duration of our forecast,
resulting in 6.295mn internet users in 2018,

2,000

1,000

equivalent to a penetration rate of 76.1%.
0
2011

2012

2013e 2014f

2015f

2016f

2017f

2018f

Meanwhile, owing to a lack of reliable data on the
number of mobile broadband subscribers

Main telephone lines in service, '000
Broadband internet subscribers, '000

(specifically those subscribers who use USB dongles
and data cards to access the internet via laptops, PCs
and smartphones), our forecast for the Israeli

e/f = BMI estimate/forecast. Source: BMI, operators

broadband sector is currently based on fixed
broadband connections only. Data published by incumbent telecoms operator Bezeq and alternative
operators HOT and Partner Communications suggests that the number of fixed broadband subscribers
had increased to around 2.131mn at the end of 2013, up by 9.3% year-on-year (y-o-y). BMI believes that,

© Business Monitor International

Page 20


Israel Information Technology Report Q3 2014

by the end of 2014, Israel's broadband subscriber base will have risen to 2.24mn; this is equivalent to a

penetration rate of 28.6% and reflects full year growth of 5.1%.

Over the next five years ending 2018 we envisage average annual growth of around 3.1% for the Israeli
broadband sector. This will see the subscriber base reach 2.48mn subscribers, equivalent to a penetration
rate of 30.0%. We expect the growing popularity of mobile broadband services to result in slowing demand
growth in the fixed broadband sector. Nevertheless, we identify several developments which will sustain
fixed broadband growth for the duration of our forecast and beyond. These include the launch of wholesale
broadband services by the ViaEuropa-led consortium building a fibre network over the Israel Electric
Company (IEC) infrastructure and Bezeq's ongoing deployment of its fibre-to-the-cabinet (FTTC), a
development which is helping to drive capacity for its residential and corporate customers' broadband
access. Meanwhile, recent months have seen considerable reductions in the price of broadband tariffs being
offered by the major operators. Another development likely to stimulate growth is the introduction of LLU,
which will give alternative operators access to Bezeq's network and will stimulate much greater
competition.

© Business Monitor International

Page 21


Israel Information Technology Report Q3 2014

Macroeconomic Forecasts
BMI View: We forecast real GDP growth in Israel of 3.2% and 3.5% in 2014 and 2015, respectively. The
domestic economy will remain in a soft patch, while accelerating growth in the eurozone and the US will
lead to an improvement in net exports. Increasing exports underpin our relatively bullish medium-term
outlook for the economy.

Recently released data reaffirms our view that growth in Israel will remain sluggish in 2014. Real GDP
growth in seasonally adjusted terms came in at 3.3% y-o-y in Q313, compared to growth of 3.6% in H213.

Moreover, estimates by the Bank of Israel (BoI) put annual growth in Q413 at only 2.3% y-o-y. Although
we see exports and fixed investment growth picking up over the coming quarters, domestic economic
growth will remain sluggish. We project real GDP to increase by 3.2% and 3.5% in 2014 and 2015,
respectively, compared to our estimate of 3.3% growth in 2013.

A moderation of austerity policies over the coming years, coupled with increasing exports and a subsequent
acceleration in fixed investment growth, will ensure that the headline growth print accelerates over the
coming years. We forecast real GDP growth averaging 4.0% over the 2014-18 period.

© Business Monitor International

Page 22


Israel Information Technology Report Q3 2014

Fixed Investment Picking Up
Israel - Components Of Real GDP, % chg y-o-y

Source: BMI, Central Bureau of Statistics Israel

Private Consumption Outlook

Private consumption expanded by 4.7% y-o-y in seasonally adjusted terms in Q313, compared to growth of
3.3% in H113. We expect the acceleration in growth of the component, which was largely a result of low
base effects, to moderate over the coming quarters, and we forecast private consumption averaging 3.2% in
2014 and 3.5% in 2015. We have slightly increased our 2014 forecast from 3.0% previously, mainly as the
government decided at the end of 2013 to slash plans to hike income taxes, a measure which was due to
come into effect on January 1 2014.

That said, government spending will remain modest in 2014, which will continue to hit consumer demand.
In particular, while the private sector will likely benefit from increasing exports over the coming quarters,
the government's austere policy stance will weigh on the expansion of private sector employment, and the
public sector will also provide little additional employment opportunities. As a result, we forecast the
unemployment rate in Israel to average 6.7% and 6.5% in 2014 and 2015, respectively, compared to 6.4% in
2013. A further indication of sluggish private consumption growth is provided by Bank Hapoalim consumer

© Business Monitor International

Page 23


Israel Information Technology Report Q3 2014

confidence index (CCI). The indicator averaged 122.4 points in 2013, a 4.2% decline compared to 127.8 in
2012, and we expect confidence to remain low over the coming quarters.

Still Dovish In 2014
Israel - CPI Vs Policy Rate

Source: BMI, Bank of Israel

On the upside, the inflationary environment and the BoI's loose monetary policy will go some way towards
supporting household spending. We forecast headline consumer price inflation averaging 1.6% in 2014,
from 1.5% in 2013. The BoI cut benchmark interest rates by 25 basis points to 0.75% on February 24, and
we expect another 25 basis points cut to take place in 2015 (see 'Another Cut Likely In 2015', February 25).

Government Spending Outlook

Government consumption averaged 3.2% y-o-y in seasonally adjusted terms over the first three quarters of

2013, compared to 3.4% in 2012. We expect modest growth in the component over the coming quarters, as
the government seeks to reduce the burden of public services on the fiscal coffers. We project government
consumption expanding by 2.8% and 3.0% in 2014 and 2015, respectively.

© Business Monitor International

Page 24


Israel Information Technology Report Q3 2014

Fixed Investment Outlook

Fixed capital formation increased by 3.4% y-o-y in seasonally adjusted terms in Q313, compared to a yearon-year contraction of 4.1% in H113. We expect the ongoing rebound in growth within the component to
continue in 2014, and we forecast gross fixed capital formation expanding by 3.0% in both 2014 and 2015,
compared to our estimate of a 1.0% contraction in 2013. In particular, developments in the energy sector
will prompt the construction of new gas transmission and power generation infrastructure over the coming
quarters. A ruling from the Israeli Supreme Court in October 2013 confirmed a previous decision to allow
the export of 40% of the country's natural gas reserves, while 60% is to be maintained for domestic
consumption. Following the decision, companies involved in Israel's offshore oil dealings, particularly with
the Tamar and Leviathan fields, are now in the position to move forward with their export development
plans.

Firmly In The Black
Israel - Net Exports

Source: BMI. f= BMI Forecasts

© Business Monitor International

Page 25