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... any information hereto contained Israel Information Technology Report Q3 2011 © Business Monitor International Ltd Page Israel Information Technology Report Q3 2011 CONTENTS Executive Summary... 22 Israel Information Technology Report Q3 2011 Internet Penetration 2011e 2015f e/f = estimate/forecast Source: BMI © Business Monitor International Ltd Page 23 Israel Information Technology Report. .. them part of Israel' s information industry © Business Monitor International Ltd Page 34 Israel Information Technology Report Q3 2011 Industry Forecast Scenario BMI projects that the Israeli IT
Q3 2011 www.businessmonitor.com ISraeL information technology Report INCLUDES BMI'S FORECASTS ISSN 1752-4245 Published by Business Monitor International Ltd. ISRAEL INFORMATION TECHNOLOGY REPORT Q3 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: July 2011 Business Monitor International 85 Queen Victoria Street London, EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2011 Business Monitor International. All rights reserved. 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Israel Information Technology Report Q3 2011 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q3 2011 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 8 Israeli IT Sector SWOT .......................................................................................................................................................................................... 8 Israel Telecommunications Sector SWOT .............................................................................................................................................................. 9 Egypt Political SWOT .......................................................................................................................................................................................... 10 Egypt Economic SWOT ........................................................................................................................................................................................ 11 Egypt Business Environment SWOT .................................................................................................................................................................... 12 IT Business Environment Ratings ................................................................................................................ 13 Middle East & Africa ........................................................................................................................................................................................... 13 Regional IT Business Environment Ratings ......................................................................................................................................................... 16 Middle East And Africa IT Markets Overview .............................................................................................. 17 MEA IT Regional Overview 2011 ........................................................................................................................................................................ 17 Market Growth and Drivers................................................................................................................................................................................. 19 Sectors and Verticals ........................................................................................................................................................................................... 21 Israel Market Overview .................................................................................................................................. 24 Government Authority.......................................................................................................................................................................................... 24 Hardware............................................................................................................................................................................................................. 26 Software ............................................................................................................................................................................................................... 28 Services................................................................................................................................................................................................................ 30 Outsourcing ......................................................................................................................................................................................................... 31 Industry Developments ........................................................................................................................................................................................ 32 Industry Forecast Scenario ........................................................................................................................... 35 Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) ............................................................................ 37 Country Context ................................................................................................................................................................................................... 38 Consumer Expenditure, 2000-2012 (US$) ........................................................................................................................................................... 38 Rural/Urban Breakdown, 2005-2030 ................................................................................................................................................................... 38 Internet ................................................................................................................................................................................................................ 39 Table: Internet Data And Forecasts, 2007-2015.................................................................................................................................................. 39 Macroeconomic Forecast .................................................................................................................................................................................... 41 Israel – Economic Activity ................................................................................................................................................................................... 43 Competitive Landscape ................................................................................................................................. 44 Internet Competitive Landscape .......................................................................................................................................................................... 47 Company Profiles ........................................................................................................................................... 49 Ness ..................................................................................................................................................................................................................... 49 IBM ...................................................................................................................................................................................................................... 52 Oracle .................................................................................................................................................................................................................. 53 Matrix .................................................................................................................................................................................................................. 55 Microsoft.............................................................................................................................................................................................................. 57 BMI Methodology ........................................................................................................................................... 59 How We Generate Our Industry Forecasts .......................................................................................................................................................... 59 IT Industry ........................................................................................................................................................................................................... 59 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q3 2011 IT Ratings – Methodology .................................................................................................................................................................................... 60 Table: IT Business Environment Indicators ......................................................................................................................................................... 61 Weighting............................................................................................................................................................................................................. 62 Table: Weighting Of Components ........................................................................................................................................................................ 62 Sources ................................................................................................................................................................................................................ 62 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q3 2011 Executive Summary Market Overview BMI projects that the Israeli IT market will grow to a value of US$5.6bn in 2011, consolidating a recovery in 2010 from the impact of the global economic situation. The market is forecast to reach US$7.3bn in 2015. The market should gain enough momentum from key sectors to expand at a compound annual growth rate (CAGR) of 7% over BMI's 2011-2015 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and small and mediumsized enterprises (SMEs). In 2010, vendors reported a pick-up in the flow of IT projects, which continued into H111 with new large projects initiated by the Israeli Ministry of Defence (MOD) and the Israel Electric Company. The Israeli IT market has strong fundamentals that should keep it in positive territory during BMI's five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High internet penetration, including 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 May 2010, the Israeli Ministry of Finance launched a programme called 'Relative Advantage' to boost Israel's high-tech sector. During the economic downturn, 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. As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has 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 supply agreements with vendors such as Dell and HP. Competitive Landscape The Israeli IT services market is competitive, with leading multinational competitors IBM and HP (following its merger with EDS) both estimated to have Israeli IT services market shares of around 10%. HP Israel's software division hosts HP's biggest research and development (R&D) centre worldwide, and the company also has significant production facilities in Israel. Among major developments in H111 was a US$75mn five-year agreement that domestic IT services leader Ness signed with global finance leader Barclays Capital to develop a high-tech research and © Business Monitor International Ltd Page 5 Israel Information Technology Report Q3 2011 development centre in Israel. The outsourced software engineering model was hailed by Ness as pioneering. Ness reported revenues of US$137.3bn in Q111, with revenues from the Israeli market at 42% of the total. Cloud computing is a major focus of IT company investment in the Israeli market. In Q111, US PC hardware leader Dell inaugurated a new Israeli R&D centre, which will focus on developing storage technologies and cloud computing solutions. Meanwhile, cloud computing now accounts for around 70% of the work at Microsoft's Israel-based R&D centre. Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.4bn in 2011, up from US$2.2bn in 2010. The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.0bn in 2015. BMI has upwardly revised its Israeli PC market growth for 2011, consolidating a recovery from the impact of the economic slowdown, which hit consumer demand for electronics goods. In 2010, Israeli computer shipments recorded a modest recovery compared to the same period of 2009. Household consumption moved into negative territory in 2009, and, although there was a slight recovery in H209, trading conditions remained tough. Software Israeli software spending is projected at US$1.2bn in 2011, up from US$1.1bn in 2010. The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period. In Q111, the pick-up in demand for systems and upgrades continued in both public and private sectors, with investment by government organisations such the MOD and Israeli Police, and from utilities and financial sector companies. Software spending is shifting towards the SME segment, which forms the mainstay of the Israeli business sector. Spending 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. IT Services The IT services segment is forecast to reach a value of US$1.9bn in 2011 and this is expected to grow at a CAGR of 8% over the forecast period to reach US$2.6bn in 2015. In 2011, vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. © Business Monitor International Ltd Page 6 Israel Information Technology Report Q3 2011 Government and defence are two key sectors likely to be a continued source of opportunities, while other growth areas include healthcare IT and Utilities. 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 relatively high PC penetration and the growing availability of broadband access mean internet penetration is likely to continue its upward trajectory. The government has announced 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 stimulate much greater competition. © Business Monitor International Ltd Page 7 Israel Information Technology Report Q3 2011 SWOT Analysis Israeli 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 for IT demand. Relatively mature IT market, with services accounting for an estimated 33% of spending in 2009. Despite this, the market for basic IT hardware and software is far from saturated. Strong political support, with government having implemented many policies to aid in the development, success and expansion of the IT sector. The recession at the beginning of the 2000s created a client mentality of focusing on the bottom line, with enhanced services and customer market power adding to pressure on pricing and margins. Digital divide, with 3% of bottom-income group having home internet access. Despite the 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 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. © Business Monitor International Ltd Page 8 Israel Information Technology Report Q3 2011 Israel Telecommunications Sector 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 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 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 the 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. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q3 2011 Egypt 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 are 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. The fallout between Turkey and Israel, caused by the Gaza flotilla incident of May 2010, has meant that Israel has lost a key Mideast ally. Opportunities 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 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 refusal to give up his country's nuclear programme raises concerns that nuclear weapons could be used against Israel in the future. Strengths Weaknesses © Business Monitor International Ltd Page 10 Israel Information Technology Report Q3 2011 Egypt Economic SWOT Strengths Weaknesses Opportunities Threats The policy framework has stabilised in recent years with fiscal deficits brought well under control. 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. The discovery of large offshore gas deposit will bring foreign investment and is expected to serve the country's energy needs for decades. Fundamental appreciatory pressures on the shekel could result in a drop in exports if policymakers are unable to develop effective countermeasures to fight currency strength. 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. © Business Monitor International Ltd Page 11 Israel Information Technology Report Q3 2011 Egypt Business Environment SWOT Strengths Weaknesses Opportunities Threats 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. 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. Corporate tax rates fell to 25% in 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. 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 Ltd Page 12 Israel Information Technology Report Q3 2011 IT Business Environment Ratings Middle East & Africa 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 2015. 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 Q311 ratings, country rankings are unchanged, reflecting stabilisation in most markets after the impact of the global economic downturn in 2008-2009. 2011 is expected to see IT market verticals continue spending momentum, following a strong rebound in PC sales in 2010. Vendors also reported a pick-up in IT services project flow, with new IT projects in verticals such as banking, government, real estate and education. Despite this, continued credit restrictions and political instability mean that cautious spending patterns are likely to persist in 2011 across many Gulf Cooperation Council (GCC) markets. The wealthy, high-tech GCC markets continue to occupy the higher rankings. Factors such as comparatively resilient consumer demand and ongoing infrastructure projects make this region relatively well positioned for growth in 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 five-year forecast period. Despite continued financial concerns concerning Dubai, the UAE retains the top spot in our Q311 table. In second place is Israel, where household computer penetration of around 75% offers potential for continued growth and about 50% of IT spending is accounted for by government and military projects. Qatar takes third place, with its projected high rate of GDP growth keeping it ahead of the larger market of Saudi Arabia in fourth. Kuwait, Bahrain and Oman occupy the next three places, and, as in Qatar, spending is expected to grow in 2011, consolidating a recovery in 2010 from the impact of the economic slowdown. Economic reform and trade liberalisation will fuel spending on IT by both public sector organisations and enterprises. Turkey, in eighth place in our table, is expected to be a regional IT market outperformer as the focus of demand shifts towards the Anatolian region and the rate of PC penetration rises. Meanwhile, South Africa's ninth spot reflects business environment risks rather than the considerable potential of the country's IT market. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q3 2011 Bringing up the field, Egypt's high growth potential is constrained by income and business environment considerations, while uncertainties continue to surround the Lebanese IT market, with a mixed picture with regards to economic policy. One factor that will keep IT spending growing in this region is the wave of e-government initiatives being implemented. Government accounts for up to 40% of the IT market in some states, and governments in the region have allocated significant budgets for e-services development. First-placed UAE's Strategic Plan calls for a strengthening of e-government programmes. In Saudi Arabia, too, government bodies have pressed ahead with ambitious e-government and IT projects. A number of factors contributed to a recovery in the UAE and other GCC markets such as Oman in 2010, including economic recovery and a reversal of population decline seen during 2009. Saudi Arabian population growth, for example, is expected to reach 10% by the end of our five-year forecast period, driving IT spending. However, in markets such as the UAE, a property price slump and tighter credit are likely to continue to influence business and consumer caution. In many markets, liberalisation in sectors such as telecommunications and financial services is a factor 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, during BMI's forecast period, there will continue to be significant spending on new technology-driven solutions in the hydrocarbons sector. The UAE is forecast to remain the largest market in the region. In the wake of the Dubai financial crisis, new growth potential exists in the northern emirates where the government has launched a major infrastructure investment programme. Government investment should also help support the market, with cloud services central to the Emirates' e-Government strategy for the next three years. There will be further UAE market opportunities in sectors such as education, healthcare, utilities, banking and telecoms. A pick-up in the number of tourist visitors should provide a boost to the carry trade, although there are concerns about the impact of sanctions against Iran. Qatar is expected to be one of the fastest-growing IT markets in the region over the next decade. In its attempts to diversify the economy, the Qatari government is undertaking modernisation projects, which will offer opportunities to IT vendors. The recent success of Qatar's bid to host the 2022 FIFA World Cup will boost the ongoing development of transport infrastructure as well as the construction of stadiums. The Qatari government has outlined plans to invest QTR6bn (US$1.6bn) in information technology and IT services as part of its ICT-2015 strategy. © Business Monitor International Ltd Page 14 Israel Information Technology Report Q3 2011 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 PC and notebook penetration. The kingdom's relative political stability compared with some other markets in the region will also attract vendors. BMI also takes a positive view of market performance in Bahrain over the 2011-2015 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 should have enough momentum from key sectors to expand over BMI's 2011-2015 forecast period. Our ratings take account of opportunities in verticals such as financial services and small and medium-sized enterprises (SMEs), and growing demand for major IT outsourcing solutions. Healthcare, the public sector and utilities are also generating new projects or significant contract extensions. Falling unemployment and low inflation and interest rates should support domestic spending going forward. South Africa is one of the Middle East and Africa's most significant IT markets in terms of size and growth potential. However, it loses points for Country Structure and Market Risk. The market will be supported by factors such as government projects and investment by sectors such as telecoms. The South African Department of Education has announced a target of rolling out laptops to all school children in the country by 2014. Real wage increases, along with low interest rates and relatively low inflation, will drive spending on bigticket items such as computers. 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. Prolonged political instability following the events of February 2011 could also impact on the market's development. The country's IT budget 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. © Business Monitor International Ltd Page 15 Israel Information Technology Report Q3 2011 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 51 95 66 60 73 68 66.7 1 Israel 47 95 64 55 68 63 63.3 2 Qatar 36 100 58 50 76 66 60.5 3 Saudi Arabia 48 85 61 45 67 58 59.9 4 Kuwait 46 100 65 40 48 45 58.9 5 Bahrain 31 85 50 58 72 66 54.7 6 Oman 33 75 48 50 70 62 52.1 7 Turkey 50 55 52 45 49 47 50.5 8 South Africa 53 45 50 35 59 49 50.0 9 Egypt 52 25 42 40 51 46 43.5 10 Lebanon 30 65 42 20 35 29 38.3 11 Scores out of 100, with 100 highest. The IT BE Rating is the principal rating. It comprises two sub-ratings, '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 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. Source: BMI © Business Monitor International Ltd Page 16 Israel Information Technology Report Q3 2011 Middle East And Africa IT Markets Overview MEA IT Regional Overview 2011 The Middle East region divides into two groups in terms of information society Internet Penetration (per 100 population) 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 more emerging markets such as Egypt, on the other hand, computers remain a luxury for many. Across the MEA region, the number of internet users is expected to grow significantly. Qatar is projected to advance the most in percentage terms, with e/f = estimate/forecast. Source: BMI penetration rising from about 57.2% in 2011 Broadband Penetration to 82.8% by 2015 (note: figures may vary (per 100 population) elsewhere in report due to updated forecasts after time of writing). Saudi Arabia, where the second biggest increase is forecast, will have 66% penetration by 2015, up from 52.5% in 2011. The UAE is one of the most e-ready states in the region, with internet penetration seen as reaching 89% within the forecast period. Growth in the number of internet subscribers is also forecast to pick up in Saudi Arabia, with a 55% increase between 2011 and 2015. e/f = estimate/forecast. Source: BMI Similar contrasts are apparent in relation to © Business Monitor International Ltd Page 17 Israel Information Technology Report Q3 2011 broadband penetration, where mobile broadband is now a major driver of overall penetration, due to 3G mobile service rollouts across the region. Broadband penetration currently ranges from 5.1% in Kuwait to 27.7% 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. BMI's broadband penetration forecasts have been downgraded in many markets as a result of the economic downturn, with Israel's 28.6% penetration seen as the highest in 2015. Saudi Arabia is projected to reach 25.7%, the second highest among the countries covered by BMI. Internet and broadband penetration growth will receive boosts from continued efforts to liberalise regional telecoms markets. Moves towards telecoms market liberalisation have continued in Qatar, Egypt, Saudi Arabia and other countries. 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 also considerable PC market growth potential as the current level of computerisation is estimated at less than 50% in every country in the region. PC penetration in Egypt is estimated at around 10% and is forecast to rise above 20% by 2015. In Saudi Arabia, PC penetration is currently about 24% and should increase to more than 30% by 2015. Even in Israel, where household penetration was estimated at around 75% in 2008, there is potential for further growth. Government initiatives will drive more use of computers in education. In the UAE, the Ministry of Education is leading an initiative to supply computers to state schools. Around 25% of Egypt's schools are not equipped with computers and significant spending is expected as part of an EGP150bn project to build new schools. Meanwhile, the South African Department of Education has announced a target of rolling out laptops to all school children in the country by 2014. Governments in the region have also allocated significant budgets for e-government development. Egypt aims to make 200 government services available soon online through a new e-government portal. Qatar's e-government programme and Hukoomi e-services portal will continue to drive investment in computer hardware across government agencies and client organisations. South Africa's IFMS (Integrated Financial Management Systems) project manages the evolution of government IT systems to support interoperability and e-government service development. Another key policy priority throughout the region is to increase utilisation of IT by businesses and in particular small and medium-sized enterprises (SMEs). One of the Saudi government policies that vendors are capitalising on is the United Instalment Scheme (USI) finance option, which makes highquality notebooks available to small and medium businesses. Qatar's ICT governing body, ictQatar, has made increasing SME utilisation of IT a key policy objective. Access to credit remains a barrier for © Business Monitor International Ltd Page 18 Israel Information Technology Report Q3 2011 smaller companies in Egypt, as elsewhere, but initiatives such as that launched by the Bank of Alexandria in 2010 will help SMEs to invest in IT. Market Growth and Drivers IT spending bounced back strongly IT Market Sizes (US$mn) throughout the region in 2010. There is a 2011e strong correlation between economic growth and IT spending, and many countries in the region, such as Qatar, are forecast to report robust economic expansion in 2011. However, in markets such as the UAE, access to credit remains a constraint on domestic consumer demand. Drivers going forward are increasing economic diversification and strong spending from non-oil sectors such as e = estimate. Source: BMI government, financial and enterprise sectors. By 2015, this should be more evident, with IT's share of GDP rising in many countries. In Saudi Arabia, for example, government-driven investments in transportation, property constructions and water and power plants will create opportunities for IT vendors. In South Africa, despite a drop-off in IT investment associated with the 2010 FIFA World Cup, other major infrastructure and transport projects will provide growth opportunities. IT Market Sizes As % Of National GDPs 2011e-2015f In the wake of the political unrest that swept the Arab world in the first half of 2011, government spending is expected to help address economic concerns that may have underpinned dissatisfaction in some cases. In 2011 the Saudi government has announced US$93bn in handouts, including wage increases, which should boost consumer spending on electronic items such as PCs. Prolonged political instability in countries such as Egypt could e/f = estimate/forecast. Source: BMI potentially cause disruptions to distribution networks and have an impact on outsourcing operations. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q3 2011 An expected recovery in population growth underpins our IT market growth projections for markets such as the UAE and Kuwait, which saw an exodus of expat workers in 2009. In particular, strong positive population growth gives Saudi Arabia an advantage, with growth expected to reach 10% by the end of our five-year forecast period. Across much of the MEA region, youthful population demographics, and rising PC penetration will drive growth. An evolving retail landscape will also help to stimulate sales, with the traditional domination of smaller stores having been diluted by the appearance of multi-brand electronics sections in hypermarkets and mono-brand stores in malls. Several sectors will offer particular opportunities for IT vendors. IT Markets Compound Growth Telecoms liberalisation and a big push 2011e towards broadband penetration are expected to drive demand for hardware and systems. 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, proved relatively immune to the economic situation. Another key area for IT spending in many countries is healthcare, with several major projects launched. e = estimate. Source: BMI The highest growing IT market in the MEA IT market over the forecast period is expected to be Egypt, with compound growth of 86% for 2011-2015. 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. The fastest growth among the GCC countries is forecast to occur in Qatar (57%), where the decision to award Qatar the 2022 FIFA World Cup is expected to fuel a wave of investment in IT products and services. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q3 2011 Sectors and 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. There could be a boost from computer hardware tenders preciously delayed as a result of the economic situation. Sales of Microsoft's Windows 7 operating system and new Intel core technology have the potential to help trigger a new cycle of hardware upgrades, although much will depend on business and consumer confidence. Sales of notebooks are growing roughly twice as fast as desktops in many markets, and netbooks were one of the fastest-growing PC market segments during the global economic downturn. However, the growing popularity of tablets is expected to provide a growth area in 2011, after the product category enjoyed a surge of popularity in 2010, fuelled by Apple's iPad. Around 190,000 tablets were reported sold in Saudi Arabia in 2010. With growing 3G penetration in the region, telecoms operators will be an increasingly important channel for portable connectivity devices such as tablets and netbooks. Prices are continuing to fall, and this, along with more credit availability, is bringing computers within the reach of many more people. The advance of 'big box' retailing, with larger outlets offering lower prices and more choice, will also stimulate sales. Government programmes in Egypt and Saudi Arabia have made low-price computers available in easy instalment payment schemes. Government investment in education and e-services will mean desktop purchases for schools, colleges and government offices. 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. As the regional economy improves, more investment is likely to be driven by plans for expansion, rather than merely to realise cost efficiencies. Similarly the growing regional ambitions of South African companies will be a factor driving corporate spending on software in that market. Across the region, however, many businesses remain focused on costs, and software vendors will pitch efficiency gains from virtualisation and cloud computing, as companies focus on return on investment. Sales of the Windows 7 operating system have the potential to impact positively on the market, and 2010 should, in any event, see a boost from systems upgrades deferred from 2009. BMI predicts plenty of room for software market growth over the forecast period as numerous untapped sectors still exist. Key verticals will include telecoms, finance, retail, healthcare and the public sector. There has been growing demand in the market for applications tailored towards particular verticals. © Business Monitor International Ltd Page 21 Israel Information Technology Report Q3 2011 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, and other high-growth categories are set to include business intelligence, storage and security products. The security software market is very important throughout the region as increased investments in IT hardware over recent years are now driving spending on secure content management technologies. 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 low income, including the high costs of operating systems such as Windows, which has led to the promotion of open source in countries such as Egypt, championed by IBM and other vendors. Over BMI's five-year forecast period, software-as-a-service (SaaS) business models are expected to provide a growing opportunity for vendors, with increasing demand for industry-specific applications. Government adoption will also be a key driver in many countries such as the UAE, where cloud services are central to the Emirates government's e-Government strategy for the next three years. BMI predicts that demand for IT services will grow strongly during the 2011-2015 period. The regional IT services market is dominated by demand from oil and gas, government, finance and telecoms sectors, which many markets account for more than half of total spending. In markets such as Saudi Arabia, most enterprise application spending still comes from segments such as oil and gas and banks. However, more projects are expected in segments such as education and health. Currently, IT services' share of IT spending ranges from around 24% to 37% 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. Vendors have reported an evolution in demand for services, with a shift away from the dominance of product implementation and installation to greater interest in managed services, value-added services, facilities management, hosting and business continuity and disaster recovery. Even in less mature markets such as Egypt, larger customers are becoming more demanding in terms of their IT expectations. In both the private and public sectors, MEA organisations are looking for help to utilise efficiencies from cloud computing services such as SaaS and infrastucture-as-a-service (IaaS.) Cloud computing is becoming viable in markets such as South Africa due to improved and lower-cost bandwidth availability. Particular areas of opportunity for cloud computing include government, banking and retailing as organisations in those fields look to save money on hardware investments. © Business Monitor International Ltd Page 22 Israel Information Technology Report Q3 2011 Internet Penetration 2011e 2015f e/f = estimate/forecast. Source: BMI © Business Monitor International Ltd Page 23 Israel Information Technology Report Q3 2011 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology) Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone numerous name changes and received its current name following the election of Binyamin Netanyahu's government in March 2009. The ministry's responsibilities include forming a national science and technology policy, coordinating research areas and technological analysis and organisation. The main priorities for the ministry are as follows: Establishing a national policy and priorities for R&D; Developing scientific and technological infrastructure; Establishing and strengthening foreign scientific relations; Participating in the establishment of research centres, including regional R&D centres; Participating 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); Consulting the government and its offices in the area of science and technology. Background All major vendors have a direct presence in Israel, employing substantial numbers of staff. For example, IBM has its only IBM Global Services 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 offers services and support through its subsidiary HP-OMS. Other vendors such as Oracle and EDS also have a sizeable presence. © Business Monitor International Ltd Page 24 Israel Information Technology Report Q3 2011 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. As well as the opening up of the financial and telecoms sectors, the high-tech sector succeeded in attracting large FDI inflows. The government's policy made foreign high-tech companies eligible for government grants covering 38% of the cost of new research and development 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 40-50% of their revenues. Government Initiatives Gov@Net – Government intranet A cross-government intranet planned to connect more than 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, ministry-specific operational systems and intra-government shared resources. Tehila – Government ISP The Government ISP 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, including 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 more than ILS250mn in its first year. Lehava project Group of initiatives to help close digital divide. © Business Monitor International Ltd Page 25 Israel Information Technology Report Q3 2011 Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.4bn in 2011, up from US$2.2bn in 2010. The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.0bn in 2015. BMI has upwardly revised its Israeli PC market growth for 2011, consolidating a recovery from the impact of the economic slowdown, which hit consumer demand for electronics goods. Businesses are now investing more to facilitate expansion and development, rather than purely to realise cost efficiencies, but there should be growth areas. As the Israeli economy recovers, enterprise sales could receive a boost from computer hardware tenders previously delayed because of the economic situation. Migrations to Microsoft's Windows 7 operating system and new Intel core technology should stimulate new cycles of hardware upgrades, although much will depend on business and consumer confidence. In 2010, Israeli computer shipments recorded a solid recovery. However, lower average prices meant revenue growth in most segments was flat or slightly negative. Notebooks remained the main growth driver in 2010, while desktops sales were down y-o-y in H110. The share of netbooks in total notebook sales may have peaked as the price differential compared with full-featured notebooks becomes less significant. Going forward, the popularity of alternative devices such as smartphones and tablets are forecast to constrain notebook sales. The current rate of PC penetration, while high for the region, represents potential for organic growth. Household penetration is estimated at around 75%. Digital divide issues mean 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 took around two-thirds of unit sales. Despite strong growth in demand for notebooks in 2009, the desktop sector is still significant, largely due to business and government end-users. Netbooks were a main driver of PC market growth in 2010 but face competition from other form factors. In particular, smartphones from Palm, RIM, Apple and other vendors are being offered as alternative connectivity solutions and often include a Wi-Fi option. © Business Monitor International Ltd Page 26 Israel Information Technology Report Q3 2011 Tablet notebooks emerged in 2010, spearheaded by Apple's iPad. In October 2010, Apple released the Hebrew-compatible version of its operating system for the tablet, which was expected to boost imports of the device to Israel. Previously Israeli users of the iPad were obliged to pay for a less than optimal Hebrew keyboard application. In August 2010, iDigital, the Israeli importer of the iPad, had announced the availability of the device for sale in Israel, but as of October 2010 the cellular companies were still not offering the device. The Israel Ministry of Communications had cleared import of the Apple iPad for Israel in April, after previous concerns that iPads were in non-compliance with Israeli wireless standards. One Israeli chain was selling the iPad at a retail price of ILS3,800, or around US$1,000, about twice the price of the device in the United States. Other vendors are expected to follow Apple in releasing net tablet devices, which have a form factor between the size of a smartphone and a netbook. NetTabs are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy. NetTabs are expected to be significantly more expensive than smartphones, but despite a previous mixed record with this form factor, are seen as a growth area in 2010-2011. Another area vendors will watch is the e-reader market. Like iPads, Kindles are not yet readily available in Israel, but that situation is expected to change. Currently Amazon, Barnes and Noble and Apple do not permit the use of an Israeli credit card at their online bookstores. However, Amazon now offers Israeli consumers the ability to download content directly to their PC or Kindle using an Israeli credit card. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q3 2011 Software Israeli software spending is projected at US$1.2bn in 2011, up from US$1.1bn in 2010. The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period. In 2010 local IT leader Ness was among those vendors reporting a rebound in Israeli market revenues growth, with the company's annualised revenues growth increasing in each of the first three quarters. In Q111, the pick-up in demand for systems and upgrades continued in both public and private sectors, with investments by government organisations such as the Israeli MOD and Israeli Police, and from utilities leader Israel Electric Company. 2010 saw vendors winning projects across a range of sectors from government to energy, financial services, telecoms and utilities. Large organisations investing in SAP-based systems included the Meitav Regional Water and Sewage Corporation and Israel Direct Insurance (IDI). Meanwhile, the SME segment, the mainstay of the Israeli business sector, has emerged in recent years as an important growth area for enterprise systems. 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. Migrations to the Windows 7 operating system should have a positive impact on 2011 sales despite business caution. More than 50% of Israeli computer users are estimated to still be using the Windows XP operating system, and this represents a significant potential market, as support for XP will be withdrawn by 2014. 2011 should, in any event, see a boost from systems upgrades previously deferred as a result of the impact of the economic crisis in public and private sectors. Going into 2010, there were signs of a pick-up in project flow. The slowdown had continued 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. Current areas of enterprise 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, while in H111 vendors continued to sign up new business intelligence customers. The security software segment is an important opportunity, potentially worth tens of millions of dollars. Israel has become more aware of the growing threat and sophistication of cyber attacks and has been encouraging government and private sector organisations to take action. Spending is likely to continue across all segments, with security content and threat management the current priorities. © Business Monitor International Ltd Page 28 Israel Information Technology Report Q3 2011 Given the current focus on many businesses of controlling costs, the pay-on-demand SaaS model has grown in popularity and spread beyond the initial core application area of CRM. The economic crisis may have provided a lasting boost to the SaaS model, particularly as broadband penetration grows. More vendors are looking for channel partners to help them offer cloud computing and rented software services to local organisations. New cloud computing offerings and increased competition in this segment should fuel further demand from users. As well as cost savings, businesses will look to boost efficiency and increase flexibility of response to customer needs. Large businesses are most likely to put IT applications such as mail, phone systems and document management into the cloud. However, enterprise applications that require a high level of customisation, or which are subject to regulatory or data-sensitivity constraints, are more likely to stay on premise. 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 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. Vendors reported in Q110 that the key financial services segment had started to see demand recovery. 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 US$3bn representing around two-thirds of the value of the entire domestic IT sector. Almost all global vendors are active in the domestic market, selling licences alongside 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 international players, including market leaders such as SAP and Oracle, are entering with appropriate software packages. Microsoft is also designing a software package for this market segment. © Business Monitor International Ltd Page 29 Israel Information Technology Report Q3 2011 Services The IT services segment is forecast to reach a value of US$1.9bn in 2011, and this is expected to grow at a CAGR of 8% over the forecast period to reach US$2.6bn in 2015. In 2011, vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. Key sectors such as government and financial services had driven growth in 2010 after demand had slowed in 2009 due to economic uncertainty. In 2011 much will depend on confidence in the 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. Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes. In Q410, the Ministry of Defence awarded a US$6mn IT contract, and in Q111 the same department awarded a US$10mn contract for a new command and control system. Among other smaller government projects in 2011, the Israeli Police awarded a US$6mn contract. Vendors reported that in 2010 demand had revived in the key financial services vertical, where new projects included an US$11mn IT outsourcing tender by the First International Bank of Israel. Government agencies were also commissioning or extending IT contracts, including a US$2.6mn outsourcing contract extension awarded by Israel's Ministry of Environmental Protection. Meanwhile, Healthcare and Utilities were also generating outsourcing projects. This continued into H111 with the award of a US$17mn deal by Israel Electric Company. The development of a Natural Gas sector should be one driver of opportunities in the Utilities vertical. The relatively robust economy and increased investment by several key sectors have driven recent growth, but the number of new projects decelerated in 2009 owing to the economic slowdown. Public sector spending helped to prop up demand, however. Among public sector organisations tendering IT outsourcing contracts in Q409 were the Israeli Ministry of Immigration Absorption and the Israeli Ministry of the Interior. 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 opportunity because the factors driving spending in each case are not particularly sensitive to the 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. © Business Monitor International Ltd Page 30 Israel Information Technology Report Q3 2011 One potential demand driver will be organisations looking for help to utilise efficiencies from cloud computing such as SaaS and Infrastucture-as-a-Service (IaaS). Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments. In 2011, vendors such as Alcatel-Lucent have continued to invest in new cloud computing facilities in Israel, leveraging the country's expertise. 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 is forecast to account for about 20% of IT services spending, or at least US$320mn, in 2011. 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. The financial sector is another leading vertical for outsourcing. In 2006, a 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. The contract includes 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. © Business Monitor International Ltd Page 31 Israel Information Technology Report Q3 2011 Industry Developments IT was an important element of the Israeli government's socio-economic policy framework for 20082010. The National Economic Council 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. In May 2010, the Israeli Ministry of Finance launched a programme called 'Relative Advantage' to provide a boost to Israel's high-tech sector. Apple iPad Import Cleared for Israel In April 2010, the Israel Ministry of Communications announced import of the Apple iPad had been cleared for Israel. The tablet PC had previously been banned due to its Wi-Fi capability, which according to the ministry was in non-compliance with the European wireless standards that Israel follows. Previously, Israeli officials claimed the iPad's stronger signal would hinder other device's wireless capabilities. According to news reports, 20 iPads were confiscated by Israeli customs, leading to confusion among consumers. Leveraging IT For Growth IT will also be harnessed to the second goal of achieving balanced, long-term economic growth. Israel's software sector has long been one of the country's economic pillars and a magnet for inward investment. Recently released figures underlined that IT represents a crucial part of Israel's economy. The Israeli Association of Electronics and Software Industries projected that the software sector will generate US$3.2bn annually by the end of the decade. The government hoped the high-tech sector would generate US$3.0bn for the nation's economy by 2010. Offshoring Israel is working hard to ensure it benefits from the global offshoring trend, which it sees as an area of potential. Despite an often unstable political and security situation, Israel has marketed its IT skills with some success and attracted outsourcing operations from major IT corporations such as Intel, IBM and Microsoft, as well as Motorola. One factor in this, of course, has been incentives that the Israeli government started to offer back in 2006, with subsidies of up to ILS1,000 per employee per month. Several major public and private sector outsourcing deals have also highlighted the growing importance of outsourcing. However, there are fears of a skills bottleneck. In 2007, the government said Israel hoped to produce 10,000 engineers a year by 2010, up from the present graduation rate of 4,900, small numbers by the standards of China, India and the US, but a big challenge for Israel. The number of jobs in the sector rose to around 61,000 in 2006, according to the government's Central Bureau of Statistics. Engineering salaries in Israel are about half those in the US but double those in India. © Business Monitor International Ltd Page 32 Israel Information Technology Report Q3 2011 E-Services As part of its modernisation agenda, the government is also pressing ahead with various other strands of its e-government 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 agreement with Dell and HP. The government chose Microsoft search technology to power its government services portal, gov.il. Meanwhile, the Israeli government was progressing with its plans to roll out smart ID card systems intended to cover the entire population. With an urgent need for the government to update technology and strengthen authentication systems, the original target was to introduce 2.5mn smart ID cards. In December 2008, HP was awarded a contract to produce 5mn ID cards; however, it is yet to receive the go-ahead from the Knesset, which is deliberating over the passing of the biometric database bill. The ID cards, set to cost Israel US$67.49mn, would use 'smart' identification methods involving fingerprints and digital photography. The 2005-2007 masterplan of the government's ERP project called for implementation in around 90 government units by the end of 2007. The project leveraged mySAP ERP (content delivery software) and had a focus on financial, logistics and human resource components. Dubbed Merkava, the project cost an estimated ILS800mn since its launch in 1999. Israel's Digital Divide It has been estimated that Israel currently has around 600,000 children living below the poverty line, and the Gini coefficient has been estimated as among the highest of any Organisation for Economic Cooperation and Development (OECD) country. A 2007 survey found only 30% of children living in poverty have internet or home PC access, compared with 90% in the top-income group. Alarm at such statistics has helped to make tackling the digital divide central to the government's key policy goal of reducing poverty. There is also an ethnic dimension to digital inequalities. Recent research by the University of Haifa showed a consistent gap in internet access between the Jewish and Arab populations, with 72.5% of the former using the internet in Israel compared with 52.5% of the latter. In order to deal with the digital divide problem, the following measures have been proposed: A senior minister for the high-tech sector should be appointed to coordinate activities currently carried out by various ministries. The minister should prepare a master plan for government policy in the information industry; Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone; © Business Monitor International Ltd Page 33 Israel Information Technology Report Q3 2011 Massive investment should be made in the educational system for training information workers; Aid to be given to the less wealthy to make them part of Israel's information industry. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q3 2011 Industry Forecast Scenario BMI projects that the Israeli IT market will grow to a value of US$5.6bn in 2011, consolidating a recovery in 2010 from the impact of the global economic situation. The market is forecast to reach US$7.3bn in 2015. The Israeli IT market should gain enough momentum from key sectors to expand at a CAGR of 7% over BMI's 2011-2015 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and SMEs. 2011 Outlook Spending on IT products and services is expected to report double-digit US dollar growth in 2011, recovering from a contraction in 2009 due to the economic slowdown and unemployment. In 2010 PC sales bounced back with modest single-digit year-on-year (y-o-y) growth. However, consumer caution was shown in a preference for lower-priced models, which resulted in flat or negative revenue growth. BMI forecasts solid growth for the Israeli PC market for 2011. Sales could receive a boost from computer purchases previously delayed as a result of the economic situation. Businesses will maintain a cautious attitude to IT investments in 2011 due to uncertainty about a sustainable global economic recovery in key export markets, but there should be growth areas. New form factors such as tablet notebooks will help to drive demand, following the launch of Apple's iPad on the Israeli market in H210. However, with Israel's growth prospects continuing to be constrained by lacklustre growth in consumption there were concerns about lower domestic demand, and BMI saw growth slowing in the second half of 2010 and 2011. Of particularly concern was a significant drop, in H210, in consumption of durable goods, which is a trend we expect to continue. Consumption of durable goods per capita fell 13% quarter-on-quarter (q-o-q). However, consumer spending should be supported by stimulatory fiscal spending as well as falling unemployment and low inflation and interest rates. In 2010, vendors reported a pick-up in the flow of IT projects, which continued into H111 with new large projects from the Israeli MOD and the Israel Electric Company. Vendors reported demand had revived in the key financial services vertical, where new projects in 2010 included 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. Migrations to Microsoft's Windows 7 operating system could trigger a new cycle of hardware upgrades in 2011, although much will depend on business and consumer confidence. More than 50% of Israeli computer users are estimated to still be using the Windows XP operating system. © Business Monitor International Ltd Page 35 Israel Information Technology Report Q3 2011 Market Drivers The Israeli IT market has several positive fundamentals that should keep it in positive territory during BMI's five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications and the new popularity of mini-computers. Trading conditions were challenging in 2009 as vendors such as Dell and HP made retrenchments, while others, such as Cisco, reportedly delayed local investment plans. Ness Technologies was among vendors reporting annualised falls in quarterly profits. There were reports from vendors of IT budget cuts. IT managers were looking to cut costs, and some projects were scaled back in key sectors for IT projects. Other vendors, however, reported continuing opportunities, with fellow local company Matrix managing to increase both local revenues and profits in H109. Per capita IT spending is expected to rise from US$735 in 2011 to US$964 by 2015. In 2009, a key factor was unemployment hitting consumer demand for big-ticket electronics goods, with real private consumption growth estimated at -2% in 2009 and just 1% growth in 2010. However, spending by key IT spending verticals such as defence and financial services are somewhat insulated from economic vicissitudes. 2010 saw vendors winning projects across a range of sectors from government to financial services, telecoms and utilities. Regulatory compliance will continue to necessitate IT spending by banks. The financial services sector accounts for about 15% of Israeli IT spending. Sectors 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. Opportunities As a result of this activity, IT services are expected to display the highest growth over the forecast period. © Business Monitor International Ltd Page 36 Israel Information Technology Report Q3 2011 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. Israel is also emerging as a location for some business process outsourcing (BPO) functions helped by government incentives. However, much depends on there being a sustained improvement in the economy, as well as the overall political environment. One potential demand driver will be organisations looking for help using efficiencies from cloud computing, such as SaaS and Infrastucture-as-a-Service. Particular areas of opportunity for cloud computing include banking and retailing, 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 and service infrastructures. Summary Although the Israeli economy is vulnerable to the global economic slowdown, BMI believes it has sufficient strength in key demand verticals to offset these downward pressures. The hardware market is forecast to grow from US$2.4bn in 2011 to US$3.0bn in 2015, with PC sales projected to rise from an estimated US$2.0bn to US$2.5bn. Over the period, software spending is expected to increase from an estimated US$1.2bn to US$1.7bn and services from an estimated US$1.9bn to US$2.6bn. Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f 4,428 4,826 4,633 5,004 5,604 6,108 6,414 6,799 7,343 IT market as % GDP 2.7 2.4 2.4 2.3 2.2 2.2 2.2 2.3 2.3 Hardware (computer market sales) 2,125 2,317 2,131 2,202 2,434 2,619 2,713 2,837 3,021 Services 1,417 1,544 1,529 1,701 1,924 2,119 2,247 2,405 2,624 Software 886 965 973 1,101 1,245 1,371 1,454 1,556 1,698 1,679 1,853 1,726 1,783 1,977 2,148 2,247 2,349 2,507 191 208 192 198 219 236 244 255 272 IT market PCs (including notebooks) Servers e/f = estimate/forecast. Source: BMI. ITU (Internet and broadband penetration). © Business Monitor International Ltd Page 37 Israel Information Technology Report Q3 2011 Country Context Consumer Expenditure, 2000-2012 (US$) 2000 2007 2008 2009e 2010e 2012f Consumer expenditure per capita 9,998 12,148 13,693 14,610 14,950 16,598 Poorest 20%, expenditure per capita 2,849 3,462 3,902 4,164 4,261 4,731 Richest 20%, expenditure per capita 22,445 27,273 30,740 32,800 33,563 37,263 Richest 10%, expenditure per capita 28,793 34,988 39,435 42,078 43,056 47,803 Middle 60%, expenditure per capita 8,231 10,002 11,274 12,029 12,309 13,666 12,993 17,451 18,074 na na na Poorest 20%, expenditure per capita 3,703 4,973 5,151 na na na Richest 20%, expenditure per capita 29,168 39,177 40,576 na na na Richest 10%, expenditure per capita 37,418 50,258 52,053 na na na Middle 60%, expenditure per capita 10,697 14,368 14,881 na na na Purchasing power parity Consumer expenditure per capita e/f = estimate/forecast, na = not available. Source: World Bank, country data, BMI Rural/Urban Breakdown, 2005-2030 2005 2010e 2020f 2030f Urban population, % of total 91.7 92.0 92.2 93.0 Rural population, % of total 8.3 8.0 7.8 7.0 6,168 6,731 7,626 8,524 557 584 643 637 6,725 7,315 8,269 9,161 Urban population, total, '000 Rural population, total, '000 Total population, '000 e/f = estimate/forecast. Source: UN Population Division © Business Monitor International Ltd Page 38 Israel Information Technology Report Q3 2011 Internet Table: Internet Data And Forecasts, 2007-2015 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f 4,188 4,525 4,939 5,245 5,385 5,420 5,464 5,480 No. of internet users/100 inhabitants 61.9 63.8 64.5 65.3 66.1 66.1 67.1 58.0 No. of broadband internet subscribers, '000 1,684 1,850 2,023 2,132 2,208 2,291 2,328 2,350 No. of broadband internet subscribers/100 inhabitants 22.6 24.5 24.5 25.7 26.5 27.3 27.8 28.3 No. of internet users, '000 e/f = BMI estimate/forecast. Source: ITU, BMI With no new data published on the internet market, BMI has retained its current Industry Trends – Internet Sector 2008-2015 expectations for the market. We believe there were a total of 4.525mn users as of YE09 with penetration rates of 63.8% before rising to 67.3% as of 2015. For the most part, attention is being focused on the broadband market with Bezeq's attention firmly on the deployment of its fibre-to-the-cabinet (FTTC), which is helping to drive capacity for its residential and corporate customers' broadband access. This, combined with continued growth emerging from cable companies, e/f = estimate/forecast. Source: BMI 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. The availability of VoIP services is likely to fuel further demand, as consumers seek to take advantage of cheap international and national calling rates. 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. LLU is due to be implemented by the end of 2009. At the end of 2009 we estimate there to be a total of 1.85mn subscribers, equivalent to a penetration rate of 24.5%. This was expected to have increased by 9.4% to reach 2.023mn subscribers at the end of 2010. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q3 2011 Over the next five years ended 2015 we estimate average annual growth of 3% to reach 2.35mn subscribers and a penetration rate of 28.3%. © Business Monitor International Ltd Page 40 Israel Information Technology Report Q3 2011 Macroeconomic Forecast Growth To Moderate Slightly In H211 Economic activity in Israel will decelerate slightly through the end of 2011, and we project real GDP growth of 4.8% and 4.5% in 2011 and 2012 respectively, up from 3.8% and 3.3% previously. Private consumption and exports will lead the expansion, with government expenditure and fixed capital investment expanding at a slower pace. We caution that elevated political risk poses downside risks to our forecasts. The acceleration in Israel's economic recovery thus far in 2011 has prompted us to revise up our 2011 and 2012 real GDP growth forecasts to 4.8% and 4.5% respectively, from 3.8% and 3.3% previously (see our online service, March 7, 'Exports and Private Consumption To Rebound'). The output gap has nearly closed, with unemployment declining to a seasonally adjusted 6.0% in Q111 (its lowest level since Q308) and manufacturing production at its highest level since 2004. Growth in exports and private consumption has been robust as we expected. That said, while Q111 real GDP growth came in at 7.0% year-on-year (yo-y), it rose only 0.4% quarter-on-quarter (q-o-q), and a number of recent economic indicators point to an impending slowdown in economic momentum. Consequently, our 2011 forecast reflects only a moderate increase from real GDP growth of 4.7% in 2010. We expect private consumption to grow 5.3% y-o-y in 2011, up from 5.0% in 2010. Steadily declining unemployment, along with lower levels of underemployment, indicates that a larger number of Israeli consumers have more disposable income to spend. That said, the Bank Hapoalim Consumer Confidence Index fell 1.8 points to 131.8 in May, from 133.6 in April, which could signal that consumer durables purchases may decline over the coming months. Consequently, we expect only a moderate rise in household consumption for 2011. Expansion in gross fixed capital formation (GFCF) will slow in our view, due in part to higher interest rates. Q111 data from the Central Bureau of Statistics reveal that, while growth in transport, machinery, and other equipment experienced healthy growth, at 34.9% y-o-y, building and other construction works expanded by only 7.5%. The country's purchasing managers index (PMI) dropped 10.5 points to 48.0 in February, and by April the index still had not broken through 50 (indicating the likelihood of a slight contraction in manufacturing sectors). This suggests that firms will likely be reluctant to expand their operations and make fixed capital investments. Furthermore, the Bank of Israel (BoI) has raised its policy rate by 125bps so far in 2011, and we expect a further 100bps in rate hikes by the end of 2011 (see our online service, May 24, 'Rates To Rise Another 100bps'). This also will likely slow down the rate of investment in GFCF, and we have pencilled in growth of 4.6% for 2011, from 12.6% in 2010. Fiscal spending will grow marginally, in our view, as higher tax receipts allow the government to spend more while still meeting its deficit targets. The economic recovery has boosted personal as well as © Business Monitor International Ltd Page 41 Israel Information Technology Report Q3 2011 corporate income tax receipts, and the continuing rise in housing prices entails higher revenues from property taxes (see our online service, June 1, 'Fiscal Deficit To Narrow'). Government spending was lower than expected in Q111, but we believe public expenditure will accelerate going forward (as Q1 tends to be the quarter with the lowest level of fiscal spending) and we see expansion of 2.0% y-o-y. Exports drove the country's economic expansion in Q111, but there are signs that export growth is weakening. Indeed, following a 16.1% y-o-y increase in March, goods exports fell 3.1% y-o-y in April. The shekel will likely have a sizeable impact on the competitiveness of Israel's exports, and we expect the unit to strengthen going forward, averaging ILS3.3800/US$ in 2011 (see our online service, June 7, 'ILS: Further Appreciation Expected'). While the central bank had previously stated that Israeli exports have not been adversely affected by the strength of its currency, we expect currency appreciation to nonetheless have at least a moderate effect and temper the rate of export growth. Thus, while exports grew 13.4% y-o-y in 2010, we have pencilled in a more moderate 5.3% in 2011. Not only will the strength of the shekel depress external demand, but the anaemic recoveries of Israel's largest export markets, the US and eurozone, will also have a negative effect on exports. We have downgraded our 2011 real GDP growth forecast for the US to 2.6%, from 2.9% previously, on the back of a string of bleak economic data releases in recent weeks. As for the eurozone, while we have upgraded our 2011 growth forecast to 2.1%, from 1.8% previously, we believe that growth in the common area will slow down in H211. Given that the US and eurozone are Israel's largest trade partners, comprising 35.1% and 20.8% of Israel's total exports in 2009 respectively, weak recoveries in those economies will likely have a detrimental effect on Israel's exports through the rest of 2011. Growth in imports will outpace that of exports, and we forecast import growth of 8.0% for 2011. While international prices for food and energy commodities have moderated somewhat from their 2011 highs, they remain elevated compared to their 2010 levels. Furthermore, the strength of the shekel signifies that imports will be less expensive, which will also contribute to the higher level of imports. Taken together, we expect net exports to suffer mainly due to exchange rate effects and higher commodity prices. Risks to Outlook The uptick in public unrest across the Middle East and North Africa (MENA) in 2011 has the potential to derail Israel's growth momentum. Indeed, as-yet-unresolved political situations in all of Israel's neighbours – Lebanon, Syria, Jordan and Egypt – could lead to instability along Israel's borders, and disputes with the Palestinian territories regarding both their right to sovereignty and the reconciliation deal between Hamas and Fatah could also escalate tensions in the region. Either of these situations would likely depress private consumption and fixed investment, thereby posing downside risks to our real GDP growth forecasts. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q3 2011 Israel – Economic Activity 2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f 722.7 770.7 828.2 902.9 965.8 1,032.8 1,103.0 1,179.3 201.4 196.0 221.9 267.1 297.2 330.5 350.2 374.4 4.7 0.8 4.7 4.8 4.5 4.5 4.3 4.5 27,559 26,181 29,116 34,470 37,720 41,289 43,069 45,359 7.3 7.5 7.6 7.7 7.9 8.0 8.1 8.3 Industrial production 1,2 index, % y-o-y, ave 7.0 -5.9 8.1 7.0 5.5 4.5 3.5 3.5 Unemployment, % of 1,2 labour force, eop 6.5 7.2 6.6 6.0 6.5 6.5 6.5 6.5 Nominal GDP, ILSbn 2 Nominal GDP, US$bn 2 Real GDP growth, % 2 change y-o-y GDP per capita, US$ Population, mn 2 3 1 2 3 e/f = BMI estimate/forecast. Seasonally adjusted. Source: Central Bureau of Statistics/BMI. World Bank/BMI calculation/BMI. © Business Monitor International Ltd Page 43 Israel Information Technology Report Q3 2011 Competitive Landscape The Israeli IT services market is competitive; no vendor has a share of more than 15%. Leading multinational competitors IBM and HP are both estimated to have shares of less than 10%. In the PC market, the top three vendors, HP, Lenovo and Dell, enjoy a combined market share approaching 50%. Most PC market growth in 2010 was driven by growth in the laptop segment, where HP was the highest-selling vendor in H110, with a share of around 18.5%, according to an estimate by market research firm IDC. HP was also the leader in the overall computer market with 22%, ahead of Lenovo with 15% and Dell with 11%, based on IDC's figures. In Q111, US PC hardware leader Dell inaugurated a new Israeli R&D centre, which is part of the company's Enterprise Storage Business. The new centre is based on Exanet, which Dell acquired in 2010. The new centre will focus on developing storage technologies and cloud computing solutions. Leading IT services vendors, including Israeli companies Ness Technologies and Matrix, reported improved results in 2010 with a strong fourth quarter putting the seal on a year of recovery. Israel's domestic IT service companies have strong advantages owing to local knowledge and contacts. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenues. Ness Israel reported modest annualised revenues growth of 3% in Q111, to US$137.3bn. Revenues from the Israeli market were 42% of the total. Among major contracts signed in Q111 was a US$75mn fiveyear agreement with global finance leader Barclays Capital to develop a high-tech research and development centre in Israel. The outsourced software engineering model was hailed by Ness as pioneering. Another big win was a US$17mn deal with Israel Electric Corporation, for which Ness will implement a range of SAP solutions and provide support over a five-year period. Other successes included a US$10mn deal with the Israel MOD and a US$5mn deal with Derect Eretz, the operator of the Trans-Israel toll road. The company will hope to profit from the acquisition of Gilon Business Insight, a business intelligence provider acquired in H110. Among major project news in 2010, the company revealed it had completed the successful rollout of a next generation court system for the Israeli Courts Administration, and announced a large military intelligence system contract with the Ministry of Defence. Ness also revealed in June 2010 that its outsourcing contract with Israel's environmental protection ministry had been extended for an additional three years, in a deal valued at around US$2.6mn. Also in June, the company won a US$4mn healthcare sector outsourcing contract with Israel's Clalit Health Services. © Business Monitor International Ltd Page 44 Israel Information Technology Report Q3 2011 Ness' improved H110 results followed a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. However, Ness also won some major deals, including a five-year ILS42mn (US$11.2mn) outsourcing contract from Israel's ministry of immigration absorption. Under the deal, Ness will operate and maintain the ministry's IT systems, which support 600 users. The company also won an US$11mn outsourcing contract from the First International Bank of Israel and a US$4mn contract from the Israeli Ministry of the Interior. Matrix, the Israeli IT services market leader, also reported growth in revenues and profits thanks to momentum in key sectors and services. The company won new projects in the public sector and the insurance sector, with mobile/cellular projects a growth area. The company achieved some successes in the Israeli IT market in 2009 despite the challenging economic climate, with wins in key sectors including healthcare, financial services, defence and government. Revenues from core business in the software and solutions sector grew by about 10%. Other strong sectors in 2009 included defence, communications (with at least two major wins) and industrial. Despite the success of several strong local vendors, a share of government tenders is won by international players. Recent tender winners include Dell and HP, whose local suppliers have a contract to supply desktops and laptops to the government. The government receives favourable prices under the terms of the agreement, which include a strong service element. Despite Intel's substantial presence in Israel, the tender did not include Intel processors, but those of AMD instead. The national smart ID card project has also been an important area for major IT vendors such as IBM, HP and Sun, with 11 different vendors involved at various stages since 2001. A number of multinationals are well embedded in the Israeli market. Following the recent merger with EDS, HP is expected to take around 10% of the Israeli IT services market in 2010. HP Israel's software division hosts HP's biggest R&D centre worldwide, and the company also has significant production facilities in Israel. With a total of 5,000 employees, HP reported computer sales of around US$850mn in 2007. However, as a result of the economic slowdown, HP announced in March 2009 that it was shutting down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. Another foreign investor rumoured to be contemplating cutbacks in Israeli resources was European software company SAP, which has around 900 employees in the country. SAP announced in 2009 that it was to dismiss 6% of its global workforce. However, other foreign firms are continuing to invest. IBM Global Services is increasing its local presence and in 2008 announced it was establishing a new systems and technology group lab in Israel. The new research and development facility focuses on storage and microchip technology solutions and follows IBM's acquisition of several IT storage solutions start-ups. Dell reportedly accepted an invitation © Business Monitor International Ltd Page 45 Israel Information Technology Report Q3 2011 from the Israeli government to establish a new research and development and business centre in Jerusalem. In 2008, IBM announced a cooperation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. IBM's clients in the retail sector include supermarket chain Clubmarket, with which IBM has an ILS100mn outsourcing contract. EDS Israel, which employs more than 900 people, has won contracts from many organisations including the Ministries of Health, Transport and Education and an estimated US$80mn deal with ECI Telecom. 2010 saw a number of Israeli vendors winning contracts to implement or update SAP solutions as spending recovered following the economic slowdown. In September 2010, Ness won a US$3.7mn, fiveyear contract from Israel's Meitav Regional Water and Sewage Corporation to provide development, improvement and maintenance services for the company's SAP-based ERP and billing system. The contract also included an optional three-year extension, valued at US$2.2mn. In 2008, SAP reached an agreement with Ness to purchase the latter's SAP Sales and Distribution division in Israel. The acquisition was in line with SAP's focus on enhancing direct operations in Israel and other high-growth Middle Eastern markets. SAP implementations are a major IT services category in Israel, and SAP aims to be closer to its customers and partners. However, SAP will continue to work with Ness as a systems integrator and the latter will also retain its SAP Academy training centre. In Q109, Ness completed an ILS80mn municipal taxes and water billing and collection project for the Tel Aviv Jaffa municipality, based on SAP solutions. Meanwhile, in 2009, SAP's major enterprise software rival Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems relating to credit card management 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal, which is jointly owned by Israel Discount Bank and First International Bank of Israel, concerning the project. Microsoft Israel has an annual turnover of around US$1bn. It hopes its Windows 7 operating system, launched in October 2009, will continue to boost sales throughout 2011, with around half of Israeli computers still based on the Windows XP operating system. In summer 2009, Microsoft continued to lay the groundwork for the new operating system launch and released the enterprise version of the software in August. Microsoft anticipated support from leading PC makers would underpin success for the new system, despite some caution from businesses. Israel also hosts an important research and development centre for Microsoft. As of Q111, the centre, which employs 600 workers, was reported to be developing 13 new products in various areas. and in 2010 © Business Monitor International Ltd Page 46 Israel Information Technology Report Q3 2011 the centre launched Microsoft's new unified access gateway (UAG) product for the Windows 2008 Server R2. The UAG product is already used in the Windows 7 operating system to provide PCs with online access to enterprise servers. The product positions Microsoft to make a play for the SaaS market opportunity. About 70% of the centre's work is now focused on cloud computing, with Microsoft Israel expecting to hire up to 100 new workers for cloud computing projects. Cloud computing is a major vendor focus and will continue to attract investment from all sections of the industry chain. In April 2011, telecoms equipment vendor Alcatel-Lucent unveiled a new cloud computing centre in Israel. The global centre will develop cloud-based and open architectures for communications carriers. Due to the economic downturn, in H109 Microsoft laid off 50 of the approximately 600 workers at its Israeli research and development centre. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft will cooperate with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. Microsoft has a number of other high-profile clients for its CRM solutions, including leading Maccabi Healthcare Services, which deployed a CRM system based on Microsoft's Dynamics CRM platform. Other local clients include Super-Pharm Israel, the leading drugstore chain, and Tehila, a division of the Israeli Ministry of Finance, which provides IT services for the government of Israel. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, of which 40% were Vista. While US companies often have a long history in Israel, the major Indian vendors such as Satyam Computer Services and Tata Consultancy Services have built their presence in the Middle East over the past few years. Tata opened an Israeli office in 2006. Satyam has also experienced strong growth in the Middle East region and is looking to grow its consulting and outsourcing businesses by 100% over the next few years. Internet Competitive Landscape Once again, Israel tops the regional broadband penetration rate and retains its position as the second-most developed broadband market in the Asia continent, behind South Korea. At end-2005, Israel's household penetration rates stood at 65%, against South Korea with 75%. Following in Israel's footsteps is Bahrain. The kingdom has increasingly focused on raising take-up of ADSL services through various promotions, such as reducing tariff prices by as much as 50%, and projects involving greater network rollouts. However, the bulk of the MEA region is underdeveloped, with penetration rates less than 2%. This is largely the result of high tariffs for broadband services, as many operators in the region have a near monopoly and can dictate prices. Moreover, with many ISPs leasing lines from these incumbent operators, they are in turn also charged high rental prices, which are passed on to the end-user. © Business Monitor International Ltd Page 47 Israel Information Technology Report Q3 2011 Israel experienced dramatic growth in the number of internet users in recent years, with penetration rising from around 17% in 2000 to 56% by 2005. BMI estimates penetration rose to 64% at end-2009. © Business Monitor International Ltd Page 48 Israel Information Technology Report Q3 2011 Company Profiles Ness Services Israeli company and global provider of end-to-end IT services and solutions. Ness specialises in outsourcing, systems integration and application development, software and consulting as well as quality assurance and training. Recent Developments Ness reported revenues of US$137.3bn in Q111, with revenues from the Israeli market at 42% of the total. One big win reported by Ness in the Israeli market in Q111 was a US$17mn deal with Israel Electric Corporation, for which Ness will implement a range of SAP solutions and provide support over a five-year period. Other successes included a US$10mn deal with the Israel Ministry of Defence and a US$5mn deal with Derect Eretz, the operator of the Trans-Israel toll road, Among major developments in Q111 was a US$75mn five-year agreement that Ness signed with global finance leader Barclays Capital to develop a high-tech research and development centre in Israel. The outsourced software engineering model was hailed by Ness as pioneering. Ness Israel reported that revenues and earnings were up 16% in the final quarter of 2010, with software product engineering and systems integration divisions performing well. The company reported full-year 2010 revenues of US$571.8mn, up 12% y-o-y. The company's top 20 customers accounted for only 36% of the company's fourth-quarter revenues, with the largest customer accounting for less than 4%. Among major projects in 2010, the company revealed it had completed the successful rollout of a next generation court system for the Israeli Courts Administration and announced a large military intelligence system contract with the Ministry of Defence. Ness also revealed in June 2010 that its outsourcing contract with Israel's Ministry of Environmental Protection had been extended for three years in a deal valued at around US$2.6mn. The company also won a US$4mn healthcare sector outsourcing contract with Israel's Clalit Health Services in June. In September 2010, Ness won a US$3.7mn, five-year contract from Israel's Meitav Regional Water and Sewage Corporation to provide development, improvement and maintenance services for the company's SAP-based ERP and billing system. The contract also included an optional three-year extension, valued at US$2.2mn. The company continued to be strong in the financial services sector, with a US$1.1mn contract win in October 2010 from Israel Direct Insurance (IDI) to implement a company-wide, SAP-based ERP system. The new system will comprise financial, logistics and HR modules. At the end of 2009, Ness won a five-year ILS42mn (US$11.2mn) outsourcing deal from Israel's Ministry of Immigration Absorption. Under the contract, Ness will operate and maintain the ministry's IT systems, which support 600 users. The company also won an US$11mn outsourcing contract from the First International Bank of Israel and a US$4mn contract from the Israeli ministry of the interior. © Business Monitor International Ltd Page 49 Israel Information Technology Report Q3 2011 On September 14 2009, Ness Technologies launched its stock on the Tel Aviv Stock Exchange (TASE), having received approval for the listing from TASE authorities. Ness Technologies common stock will continue to be listed on the NASDAQ exchange in the US and will remain subject to the rules and regulations of NASDAQ and the US Securities and Exchange Commission. Ness hoped the dual listing would increase its visibility and status in the Israeli market, with almost a third of the company's business aimed at Israeli customers or delivered by an Israeli workforce. The listing came despite a series of disappointing quarterly results in 2009, which added up to a 17% decline in revenues compared with the previous year. The company witnessed a 19% decline in revenues in Q309, following from a 20% decline in Q209, although more than half of this headline decline was due to currency translation from non-dollar revenues. The steepest declines in H109 were experienced by the company's Systems Integration and Application Development division, while Software Product Engineering continued to perform well. Ness had been on the rise with several landmark deals in the past two years. These included an eight-year US$120mn outsourcing contract, including hardware, with the First International Bank of Israel, in which Ness is serving as lead sub-contractor to EDS. Ness also made the headlines for a 10-year multimillion outsourcing contract with Israel's Yellow Pages, which, although far smaller at approximately US$8.5mn, was one of the largest projects in Israel at that time. The project was subsequently extended. Future Plans Ness forecasts top line growth and operating margin expansion in 2011 with a trend of sequentially increasing quarterly revenues, except for the second quarter. Mess will look to strengthen its position as a provider of enterprise solutions, following the acquisition in 2010 of Gilon Business Insights. Gilon is a provider of business intelligence services in Israel. Ness said it will continue to focus on margin improvements in its Israeli business and reductions in non-core staff. The company will also continue its policy of streamlining nonprofitable/non-strategic operations. During 2010, the company announced plans to sell its software distribution business in Europe. The company has already signed an agreement to sell its Asia Pacific integration and application development operations. Ness will also hope to profit from the acquisition of Gilon Business Insight, a business intelligence provider, acquired in H110. Ness will also continue to provide outsourcing services from its development centres in India, Bangalore, Mumbai and Hyderabad, and from its centres in Israel, Eastern Europe and Asia Pacific. Revenue Ness Israel reported modest annualised revenues growth of 3% in Q111, to US$137.3bn. This was down from quarterly revenues of of US$157.4mn in Q410 and a 16% y-o-y rise. Revenues were US$141.3mn in Q310, up 15% on the same period of 2010. This represented an increase over an annualised 10% rate of growth in Q210, to revenues of US$139.7mn for the quarter. The company claimed healthy bookings growth and y-o-y quarterly revenues growth in each of its main segments. The improved results in 2010 followed a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. Annual © Business Monitor International Ltd Page 50 Israel Information Technology Report Q3 2011 revenues for 2009 were reported at US$547mn. Israel accounts for around 40% of Ness' revenues. Presence With 7,800 employees, Ness maintains operations in 16 countries and partners with more than 100 software and hardware vendors worldwide. In 2010, Israel accounted for 37% of the company's quarterly revenues, with North America at 33%, Europe 28%, and the rest of the world just 2%. Sectors Ness' Software Product Engineering division continued to be a strong performer in Q111, with a major boost from the software engineering outsourcing contract signed with Barclays Capital. In the same quarter, Ness' Commercial and Civilian business unit reported 4% annualised organic growth, with the biggest win being the US$17mn contract with Israel Electric Corporation. The Defence and Homeland Security unit was described as slightly behind plan with revenues but reported strong operating margins, boosted by a big deal with the Israel Ministry of Defence. © Business Monitor International Ltd Page 51 Israel Information Technology Report Q3 2011 IBM Services Global services, business consulting, services, digital media, solutions and IT services. Recent Developments IBM has enjoyed successes in the Israeli retail sector with clients including supermarket chain Clubmarket, with which IBM has a ILS100mn outsourcing contract. In 2008, IBM launched a cooperation agreement with Retalix to develop an integrated management solution for grocery and convenience store retailers. In 2008, IBM announced it was establishing a new systems and technology group lab in Israel. The research and development facility focuses on storage and microchip technology solutions, after IBM's acquisition of three local IT storage solutions start-ups in 2008. Among these, IBM acquired privately held Diligent Technologies for a sum rumoured to be around US$200mn. IBM's software lab in Israel was established in 2008, representing what the company called a 'strong vote of confidence' from IBM for the software development capabilities in the country. The facility consists of three strategic software development teams currently operating in Rehovot and Jerusalem and will focus on the areas of search, metadata management and collaborative real-time technologies. In total, IBM Israel now has three research labs, including the long-established Haifa Research Lab and the System Development Lab, and employs a total of 650 developers and researchers to develop solutions for IBM clients in Israel and beyond. Future Plans IBM Global Services plans to launch application hosting and storage services in Israel designed for large enterprises. IBM customers will be able to purchase capacity for their information systems and applications using the services. Revenue In Q110, IBM reported revenues of US$23.7bn, up 2% y-o-y. Net revenues were US$3.4bn, up 9% y-o-y. In its fiscal year 2009, IBM reported revenues of US$95.8bn, down 8% y-o-y. Revenues from the EMEA region were US$32.6bn, down 12% y-o-y. Presence Total IBM staff in Israel has been reported at as many as 2,000, employed at Haifa Labs and its various IBM facilities in Rehovot and Jerusalem. Around 60% of IBM staff are estimated to be employed in services. Sectors IBM is standardising its services offerings for smaller companies in the region, launching IBM Express Managed Services, which includes packaged offerings of application and infrastructure managed services sold through IBM business partners. © Business Monitor International Ltd Page 52 Israel Information Technology Report Q3 2011 Oracle Services Technology services, consulting and integration. Recent Developments As a result of the economic slowdown, HP announced in March 2009 it would shut down several wide digital printer production lines at its HP Indigo plant in Kiryat Gat. This followed earlier reports that HP was to invest US$4.1mn to build a new factory to expand its wideformat printer production in Israel. HP said that the new factory in the Caesarea industrial zone would start out with 4,000m2 of production space, which could later be expanded. A large part of HP's R&D and manufacturing of digital printers is based in Israel. HP continues to look on Israel as a promising location for acquisition targets and has spent around US$6bn to date on high-tech companies in Israel. In 2007, the company spent around US$4.5bn to buy Israeli software support company Mercury. Among other local acquisitions was NUR Macroprinters, an Israel-based manufacturer of industrial wide-format digital inkjet printers. HP paid around US$117.5mn to acquire all of the company's assets. In 2007, HP announced a re-designation of the HP Europe, Middle East and Africa (EMEA) framework from May that year, with greater focus being placed on the Middle East. HP is the leader in the PC segment and continues to drive sales through its worldwide marketing campaign, The Computer is Personal Again, and through an increasing product portfolio. In 2007, HP gained kudos for its landmark contract from the Israeli military for outsourced management of the navy's IT infrastructure. The value of the deal is estimated to be worth several million shekels and highlights the importance of defence spending for the market. HP has recently spent on acquisitions in the Israeli software sector and announced plans for a new International Technology District (ITD), which will offer support to Israeli start-ups. HP hopes the new ITD will develop strategic relations with around 300 Israeli start-ups. In 2007, HP announced initiatives designed to expand HP partner businesses in the region. The core of the campaign is an enhanced partner strategy focusing on four areas: predictability, partnering, profitability and portfolio. Future Plans Today, HP's focus is on more personalised campaigns, which drive higher cross-sales. Like IBM, it is now leveraging its capabilities into the SME segment. On the enterprise side, HP adopts personalisation not only per customer but also per user, within each of a number of key target accounts. Revenue In Q310, HP reported global net revenues of US$30.7bn, up 11%, while EMEA region revenues, which include Israel, were up 9% to US$10.9bn. HP's personal systems group (PSG) reported a 12% rise in shipments, and a 17% rise in revenues to US$9.9bn. However, the Services division achieved only 1% growth to US$8.6bn. For its 2009 fiscal year, HP reported revenues of US$114.6mn, down 3% from US$118.4bn in 2008. While HP does not provide a detailed regional breakdown, in 2007 HP Israel reported local computer sales of around US$850mn. © Business Monitor International Ltd Page 53 Israel Information Technology Report Q3 2011 Presence 5,000 employees, 730 of whom are employed at HP's software division, which hosts HP's biggest research and development centre in the world. Sectors HP is the leader in the PC segment and drives sales through its worldwide marketing campaign, The Computer is Personal Again, and through an increasing product portfolio. HP is leveraging its capabilities into the SME segment. HP's plans for the market focus on developing new solutions partnerships that offer greater value for the customer. HP offers support services through a subsidiary company, HP-OMS, which offers 24-hour support. However, helplines are hard to come by. © Business Monitor International Ltd Page 54 Israel Information Technology Report Q3 2011 Matrix Services A leading systems integrator in Israel, Matrix is the largest company in the Formula Group and trades on the NASDAQ as FORTY. Shareholders include Bank Leumi and Migdal. Recent Developments In Q310, Matrix reported growth in revenues and profits thanks to momentum in key sectors and services. The company won new projects in the public sector and the insurance sector, with mobile/cellular projects a growth area. Telecoms was another growth vertical in summer 2010. Major projects included a new interface and integration for a high-tech organisation, a core financial system in the field of taxation for a leading bank, and a multichannel project for a pharmaceutical company. Matrix reported continuing successes in the Israeli IT market in 2009, despite the challenging economic climate, with wins in key sectors including healthcare, financial services, defence and government. Among tender wins in the Israeli market were a project to implement a core system in three hospitals, a software and hardware upgrade for a leading credit card company and a large-scale testing project for a government organisation. The company also reported several new projects in Q109, including several financial sector implementations. The company credited its continued profitability in the face of the global economic slowdown to preparatory measures taken at the end of 2008. The company cut operational expenses, including senior management salaries, and exercised what it described as 'extreme caution' in tenders. In 2008, Matrix reported tender wins in sectors including defence, communication and industrial. Specific successes included winning a ILS20mn project to implement a CRM system at long-time customer Bezeq, as well as a number of public sector CRM projects. Successes in 2007 included the implementation of a pension consulting system for the Mizrahi Tefahot Bank, contracts based on the Matrix CRM system for three capital market companies and a large-scale integration project for the Airport Authority. Matrix also won a tender from the Ministry of Finance to make government forms available online. The project, which focuses particularly on tax forms, is expected to cost around ILS2mn spread over two years, with the option of further expansion. Matrix is also focusing on the growing outsourcing market with government as well as corporate IT departments and has recently appointed a new sales and marketing manager for its Talpiot division. The division has a dedicated software development centre, with around 25 projects currently claimed to be under way. Future Plans Services include implementing integration projects, developing and marketing software technologies and products for business systems, providing infrastructure and consulting services, outsourcing contracts, training and assimilation, and acting as a distributor for global leading software products, hardware solutions and IT infrastructures. Revenue In Q310 Matrix reported that company revenues increased by around 6.6% to approximately ILS373mn. Operating profits were up by about .3% to approximately ILS32.5mn, while net profits grew 4.5% to around ILS21mn. © Business Monitor International Ltd Page 55 Israel Information Technology Report Q3 2011 Presence Employs around 3,500 IT professionals. Sectors Software solutions and services remains the company's core area, accounting for 66.3% of total revenues in Q310, and revenues of ILS253.7mn. Revenues from the marketing of software were ILS38.4mn for the quarter, down from ILS42mn in the same period of 2009. Revenues in the infrastructure, integration and communication sector amounted to approximately ILS55.7mn for the quarter. Revenues in the training and deployment sector were around ILS35mn for the quarter. © Business Monitor International Ltd Page 56 Israel Information Technology Report Q3 2011 Microsoft Services Software, consulting and support services. Recent Developments Israel is an important R&D centre for Microsoft, and as of Q111 the centre was working on developing 13 new products. In 2010, the centre launched Microsoft's new unified access gateway (UAG) product for the Windows 2008 Server R2. The UAG product is already used in the Windows 7 operating system to provide PCs with online access to enterprise servers. The product positions Microsoft to make a play for the SaaS market. In summer 2009, Microsoft continued to lay the groundwork for its new Windows 7 operating system launch and released the enterprise version of the software in August. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. In 2007, Microsoft sold 450,000 Windows XP and Vista operating systems in Israel, 40% of which were Vista. Microsoft also continues to make progress in the enterprise software segment. In 2008, Microsoft won a substantial CRM tender from Leumi Card, estimated at around ILS15mn. Microsoft cooperated with Matrix to specify and implement a Microsoft Dynamics CRM 4.0 solution. The company also reported some big wins in the local market in 2007, in both the public and private sectors. Maccabi Healthcare Services deployed a CRM system based on Microsoft's Dynamics CRM platform. The system was designed to integrate all existing IT administrative systems for the healthcare group, which has more than 5,300 clinics in Israel and covers around one-quarter of Israel's population. The system was developed with the help of integrator Eyron.net. In 2007, Microsoft Israel was also selected by Super-Pharm Israel, the leading drug store chain, to roll out a portal project based on Microsoft Office Share Point Portal Server 2003. The portal was due to have been rolled out to more than 120 stores by end-2007. Future Plans About 70% of the work at Microsoft's Israel R&D centre is now focused on cloud computing, with Microsoft Israel expecting to hire up to 100 new workers for cloud computing projects. In 2010, Microsoft hopes its Windows 7 operating system, launched in October 2009, will boost local sales. Microsoft is continuing its efforts to sell software upgrades to the Israeli government, despite Israel's decision to stop buying Microsoft applications amid calls for an antitrust commission investigation into Microsoft's 'monopoly' status. Microsoft now sees services as an important contributor to raising customer satisfaction and generating product demand and is changing the way it runs its services operations in two significant ways. Firstly, it plans to align services more closely with its enterprise sales force. Secondly, Microsoft is creating a stronger role for its services operation in providing product support to enterprise customers. Revenue For its fiscal year ending June 30 2010, Microsoft reported record revenues of US$62.48bn, up 7% on the previous year. Microsoft has said it expects double-digit growth in its Middle East revenues over the next three to five years. Before the financial crisis in 2009, revenues had increased 25% annually for the past five years. While Microsoft does © Business Monitor International Ltd Page 57 Israel Information Technology Report Q3 2011 not release a detailed regional revenues breakdown, Microsoft Israel is estimated to have an annual turnover of around US$1bn. Microsoft has said it expects double-digit growth in its Middle East revenues over the next three to five years. Presence Microsoft's R&D centre ,which deploys 600 workers, was reported to be developing 13 new products in various areas. The company has anticipated hiring another 100 workers for cloud computing projects. Sectors In the early 1990s, Microsoft made Hebrew one of the central languages at its development centre at Redmond. Since then, all Microsoft programs have been translated into Hebrew at a cost of US$100mn. © Business Monitor International Ltd Page 58 Israel Information Technology Report Q3 2011 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part in all of our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. IT Industry Forecasts There are a number of criteria that drive our forecasts for each IT variable. IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor data and low apparent agreement between many sets of figures in terms of market definition, base and methodology. In addition, forecasts are naturally affected by consideration of a variety of internal and external political and economic factors. © Business Monitor International Ltd Page 59 Israel Information Technology Report Q3 2011 Within best-practice techniques of time-series modelling, BMI’s quarterly updated forecasts are improved substantially by intimate knowledge of the prevailing features of each local market. Individual variables taken into account in creating each forecast include: Overall economic context, and GDP and demographic trends; Underlying ‘information society’ trends; Projected GDP share of industry; Maturity of market structure; Regulatory developments and government policies; Developments in key client sectors such as telecommunications, banking and e-government; Technological developments, and diffusion rates; Exogenous events. Estimates are calculated using BMI’s own macroeconomic and demographic forecasts. IT Ratings – Methodology Our approach in BMI’s IT Business Environment Ratings is threefold. First, we seek accurately to capture the operational dangers to companies operating in this industry globally. Second, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were traditionally evaluated on a subjective basis. Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the IT industry. Overall, the ratings system, which integrates with those of all 16 industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe. Ratings System Conceptually, the ratings system divides into two distinct areas: Limits of potential returns: Evaluation of sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. Indicators The following indicators have been used. Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets. © Business Monitor International Ltd Page 60 Israel Information Technology Report Q3 2011 Table: IT Business Environment Indicators Indicator Rationale Limits to potential returns Market structure IT market value, US$bn Sector value growth, % year-onyear (y-o-y) Denotes breadth of IT market. Large markets score higher than smaller ones Denotes sector dynamism. Scores based on annual average growth over five-year forecast period Government initiatives and spending Denotes spending boost provided by public sector, which can be a crucial determinant of sector development Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales – compared to services/software – indicates that the overall IT market is immature Country structure Urban-rural split GDP per capita, US$ Urbanisation is used as a proxy for development. Predominantly rural states therefore score lower A high GDP per capita supports long-term industry prospects. Overall score for country structure is also affected by the coverage of the power transmission network across the state Risks to potential returns Market risks Intellectual property (IP) laws ICT policy Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting Subjective evaluation of official policy towards IT development, as enshrined in statute and tax code Country risk Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal cause of economic crises. Such a crisis would cut investment Short-term financial risk Rating from BMI’s CRR, to denote risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding Trade bureaucracy Legal framework Bureaucracy Corruption Rating from CRR to denote ease of trading with the state Rating from CRR denotes the strength of legal institutions in each state – security of investment can be a key risk in some emerging markets Rating from CRR denotes ease of conducting business in the state Rating from CRR denotes the risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete Source: BMI © Business Monitor International Ltd Page 61 Israel Information Technology Report Q3 2011 Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted. Table: Weighting Of Components Component Weighting Limits of potential returns 70% – IT market 65% – Country structure 35% Risks to realisation of potential returns 30% – Industry risks 40% – Country risk 60% Source: BMI Sources Additional sources used in IT reports include national ministries and ICT regulatory bodies, national industry associations, and international industry organisations such as the International Telecommunication Union (ITU), officially released company results and figures, and international and national industry news agencies. © Business Monitor International Ltd Page 62 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... International Ltd Page 22 Israel Information Technology Report Q3 2011 Internet Penetration 2011e 2015f e/f = estimate/forecast Source: BMI © Business Monitor International Ltd Page 23 Israel Information Technology Report Q3 2011 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology) Minister Daniel Hershkowitz The Ministry of Science and Technology has undergone... International Ltd Page 33 Israel Information Technology Report Q3 2011 Massive investment should be made in the educational system for training information workers; Aid to be given to the less wealthy to make them part of Israel' s information industry © Business Monitor International Ltd Page 34 Israel Information Technology Report Q3 2011 Industry Forecast Scenario BMI projects that the Israeli IT market... International Ltd Page 25 Israel Information Technology Report Q3 2011 Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.4bn in 2011, up from US$2.2bn in 2010 The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.0bn in 2015 BMI has upwardly revised its Israeli PC market growth for 2011, consolidating... © Business Monitor International Ltd Page 27 Israel Information Technology Report Q3 2011 Software Israeli software spending is projected at US$1.2bn in 2011, up from US$1.1bn in 2010 The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period In 2010 local IT leader Ness was among those vendors reporting a rebound in Israeli market revenues growth, with the company's... the report Source: BMI © Business Monitor International Ltd Page 16 Israel Information Technology Report Q3 2011 Middle East And Africa IT Markets Overview MEA IT Regional Overview 2011 The Middle East region divides into two groups in terms of information society Internet Penetration (per 100 population) development In the first group are richer and more technologically advanced countries, such as Israel. .. in information technology and IT services as part of its ICT-2015 strategy © Business Monitor International Ltd Page 14 Israel Information Technology Report Q3 2011 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. .. 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 © Business Monitor International Ltd Page 31 Israel Information Technology Report Q3 2011 Industry Developments IT was an important element of the Israeli government's socio-economic policy framework for 20082010 The National... a Wi-Fi option © Business Monitor International Ltd Page 26 Israel Information Technology Report Q3 2011 Tablet notebooks emerged in 2010, spearheaded by Apple's iPad In October 2010, Apple released the Hebrew-compatible version of its operating system for the tablet, which was expected to boost imports of the device to Israel Previously Israeli users of the iPad were obliged to pay for a less than... support through its subsidiary HP-OMS Other vendors such as Oracle and EDS also have a sizeable presence © Business Monitor International Ltd Page 24 Israel Information Technology Report Q3 2011 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 As well as the opening up of the financial and telecoms... to implement reforms © Business Monitor International Ltd Page 15 Israel Information Technology Report Q3 2011 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 51 95 66 60 73 68 66.7 1 Israel 47 95 64 55 68 63 63.3 2 Qatar 36 100 58 50 76 66 60.5 3 Saudi