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... Page Israel Information Technology Report Q1 2012 © Business Monitor International Ltd Page Israel Information Technology Report Q1 2012 Executive Summary Market Overview BMI projects that the Israeli... any information hereto contained Israel Information Technology Report Q1 2012 © Business Monitor International Ltd Page Israel Information Technology Report Q1 2012 CONTENTS Executive Summary... 21 Israel Information Technology Report Q1 2012 Internet Penetration 2011e 2015f e/f = estimate/forecast Source: BMI © Business Monitor International Ltd Page 22 Israel Information Technology Report
Q1 2012 www.businessmonitor.com ISraeL information technology Report INCLUDES BMI'S FORECASTS ISSN 1752-4245 Published by Business Monitor International Ltd. ISRAEL INFORMATION TECHNOLOGY REPORT Q1 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: January 2012 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 © 2012 Business Monitor International. All rights reserved. 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Israel Information Technology Report Q1 2012 © Business Monitor International Ltd Page 2 Israel Information Technology Report Q1 2012 CONTENTS Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 8 Israel IT Sector SWOT ........................................................................................................................................................................................... 8 Israel Telecoms Industry SWOT............................................................................................................................................................................. 9 Israel Political SWOT .......................................................................................................................................................................................... 10 Israel Economic SWOT ........................................................................................................................................................................................ 10 Israel Business Environment SWOT .................................................................................................................................................................... 11 IT Business Environment Ratings ................................................................................................................ 12 Table: Regional IT Business Environment Ratings .............................................................................................................................................. 15 Middle East & Africa IT Markets Overview................................................................................................... 16 MEA IT Regional Overview 2011 ............................................................................................................................................................................. 16 Israel Market Overview .................................................................................................................................. 23 Government Authority.......................................................................................................................................................................................... 23 Government Initiatives......................................................................................................................................................................................... 24 Outsourcing ......................................................................................................................................................................................................... 29 Industry Forecast ........................................................................................................................................... 32 Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) ............................................................................ 35 Internet ..................................................................................................................................................................................................................... 36 Table: Internet Data And Forecasts, 2008-2015.................................................................................................................................................. 36 Macroeconomic Forecast .............................................................................................................................. 38 Table: Israel – Economic Activity, 2011-2016 ..................................................................................................................................................... 40 Competitive Landscape ................................................................................................................................. 41 Company Profiles ........................................................................................................................................... 45 Ness ..................................................................................................................................................................................................................... 45 IBM ...................................................................................................................................................................................................................... 48 HP........................................................................................................................................................................................................................ 49 Matrix .................................................................................................................................................................................................................. 51 Microsoft.............................................................................................................................................................................................................. 53 Country Snapshot: Israel Demographic Data.............................................................................................. 55 Section 1: Population........................................................................................................................................................................................... 55 Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 55 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 56 Section 2: Education And Healthcare .................................................................................................................................................................. 56 Table: Education, 2002-2005 .............................................................................................................................................................................. 56 Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 56 Section 3: Labour Market And Spending Power .................................................................................................................................................. 57 Table: Employment Indicators, 2001-2006 .......................................................................................................................................................... 57 Table: Consumer Expenditure, 2000-2012 (US$) ................................................................................................................................................ 57 Table: Average Annual Wages, 2000-2012 .......................................................................................................................................................... 58 BMI Methodology ........................................................................................................................................... 59 How We Generate Our Industry Forecasts .......................................................................................................................................................... 59 Transport Industry ............................................................................................................................................................................................... 59 Sources ..................................................................................................................................................................................................................... 60 © Business Monitor International Ltd Page 3 Israel Information Technology Report Q1 2012 © Business Monitor International Ltd Page 4 Israel Information Technology Report Q1 2012 Executive Summary Market Overview BMI projects that the Israeli IT market will grow to a value of US$6.1bn in 2012, consolidating a recovery in 2011 from the impact of the global economic situation. The market should expand at a compound annual growth rate (CAGR) of 8% over BMI's 2012-2016 forecast period, owing to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and small and medium-sized enterprises (SMEs). In 2011, vendors reported solid demand for IT services across industrial, government, defence, and financial services segments, with new 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 As part of its modernisation agenda, the government is pressing ahead with various 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. In June 2011, Israeli IT giant Ness confirmed its acquisition by an affiliate of Citi Venture Capital International for approximately US$307mn. Ness reported revenue of US$141mn in Q211, with just 1% annualised growth, and revenue from the Israeli market at 42% of the total. Meanwhile, in Q311, rival Israeli vendor Matrix reported 16.6% growth in revenue to a record NIS435mn. Cloud computing is a major focus of IT company investment in the Israeli market. In H111, 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. © Business Monitor International Ltd Page 5 Israel Information Technology Report Q1 2012 Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.6bn in 2012, up from US$2.5bn in 2011. The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.3bn in 2016. The current rate of PC penetration, while high for the region, represents potential for organic growth. 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 smartphones and tables are emerging as alternative connectivity solutions. Software Israeli software spending is projected at US$1.4bn in 2012, up from US$1.3bn in 2011. The packaged software segment is expected to grow at a CAGR of around 9% 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$2.0bn in 2011 and this is expected to grow at a CAGR of 10% over the forecast period to reach US$2.9bn in 2016. In 2011, vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security, and utilities. 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. © Business Monitor International Ltd Page 6 Israel Information Technology Report Q1 2012 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 Q1 2012 SWOT Analysis Israel IT Sector SWOT Strengths Weaknesses Opportunities Threats One of the most modern economies in the region, with a highly educated, linguistically skilled workforce, and relatively low labour costs compared with most developed countries. Strong defence and government spending provides base 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 Q1 2012 Israel Telecoms Industry SWOT Strengths 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. Weaknesses 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. Opportunities Threats 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' revenue. Operators, Bezeq in particular, have resisted the introduction of number portability, which could lead to a price war and drive down mobile revenue. Operators are also hostile to the introduction of MVNOs. © Business Monitor International Ltd Page 9 Israel Information Technology Report Q1 2012 Israel Political SWOT Strengths Weaknesses Despite corruption allegations against some officials and members of parliament, government members are still some of the most accountable in the region. Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government. The protracted conflict with the Palestinians means there are persistent security risks, although violence in the West Bank has been reduced significantly. Strategies to minimise or end the conflict are domestically divisive. Frequent change to the composition of the coalition government often leads to policies becoming fragmented or significantly diluted. 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. Israel Economic SWOT Strengths Weaknesses Opportunities 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. Israel produces more technology start-up companies than any other country in the world except the US. The discovery of a large offshore gas deposit will bring foreign investment and is expected to serve the country's energy needs for decades. © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2012 Threats Israel's energy supplies are not stable at the moment – the Egypt-Israel gas pipeline has been targeted frequently in 2011, forcing the country to buy more expensive fuels from alternative sources. 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. Israel Business Environment SWOT Strengths The business environment is supported by sound infrastructure and communication networks, as well as transparent legislation. The banking system is one of the most sophisticated in the region, and offers a wide range of both consumer and commercial credit products. Weaknesses Historic political instability increases the risk premium of investment in Israel. Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector. Opportunities Corporate tax rates, at 25%, have not increased markedly as a result of social protests in 2011. The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade. Threats 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 11 Israel Information Technology Report Q1 2012 IT Business Environment Ratings BMI's Middle East and Africa (MEA) IT Business Environment Ratings compare the potential of the key regional markets over our forecast period, through to 2016. 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 Q112 ratings, country rankings are unchanged, reflecting stabilisation in most markets after the impact of the global economic downturn and political unrest. 2012 is expected to see IT market verticals retain momentum. To help maintain social stability, many regional governments have announced spending increases, including both capital investment and wage increases, which should boost spending on information technology. For example, to help maintain social stability, the Saudi government has announced US$93bn in handouts, including wage increases, which should boost consumer spending on durables such as PCs. 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, global economic headwinds and political instability mean that cautious spending patterns are likely to persist across many Gulf Co-operation 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. In most cases we do not see IT spending returning to its pre-crisis rate of growth over our five-year forecast period However, global trends such as cloud computing are relatively less established in the region but will grow in significance. Despite continued financial concerns concerning Dubai, the UAE retains the top spot in our Q112 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 2012, consolidating a recovery 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 12 Israel Information Technology Report Q1 2012 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 have contributed to a recovery in the UAE and other GCC markets such as Oman, 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, despite these developments, the hydrocarbon sector remains key to IT spending, with oil and gas companies investing in IT to enhance operational efficiency, optimise cost structures and boost overall business agility. The UAE is forecast to remain the largest market in the region. The IT market reported overall growth in 2011 but structural weaknesses still stand in the way of a more pronounced recovery, including weak credit conditions and Dubai's onerous debt repayment schedule. In the wake of the Dubai financial crisis, new 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 tourists 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 QAR6bn (US$1.6bn) in information technology and IT services as part of its ICT-2015 strategy. © Business Monitor International Ltd Page 13 Israel Information Technology Report Q1 2012 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 appears better placed than some other markets in the region to recover strongly from the recent economic slowdown. The kingdom 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 relative political stability compared with some other markets in the region will also attract vendors. Government-driven investments in transportation, property constructions and water and power plants will drive opportunities for IT vendors. In 2010/11 Kuwait's government spending was expected to increase by 10%, following a 38% decrease in the previous year, and some of this spending should carry through into 2011. A four-year government infrastructure spending plan, launched in February 2010, should mean more public sector IT opportunities. BMI also takes a positive view of market performance in Bahrain over the 2012-2016 forecast period. A particularly important factor is Bahrain's growing status as a financial hub. Global IT trends such as cloud computing, virtualisation and convergence will continue to gain ground in the Bahrain market. The same is true of Oman, which, 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 2012-2016 forecast period. In 2011, vendors reported a continued pick-up in the flow of IT projects, with a new large tender from the Israeli MOD. Our ratings also take into account opportunities in verticals such as financial services and small and medium-sized enterprises (SMEs), as well as 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. 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 recent spate of wage bargaining, along with low interest rates and relatively low inflation, has increased spending on bigticket items such as computers. Projected improvement in South Africa's broadband infrastructure, and international bandwidth, will also be a growth driver. The South African 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. 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. © Business Monitor International Ltd Page 14 Israel Information Technology Report Q1 2012 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. Table: Regional IT Business Environment Ratings Limits Of Potential Returns IT Market Country Structur e UAE 51 Israel Risks To Realisation Of Returns Risks IT BE Rating Regiona l Ranking 73 68 66.7 1 55 68 63 63.3 2 58 50 76 66 60.5 3 85 61 45 67 58 59.9 4 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 Limits Market Risks Country Risk 95 66 60 47 95 64 Qatar 36 100 Saudi Arabia 48 Kuwait 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, 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 15 Israel Information Technology Report Q1 2012 Middle East & Africa IT Markets Overview MEA IT Regional Overview 2011 Internet Penetration The Middle East region divides into two groups in terms of information society (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 e/f = estimate/forecast. Source: BMI advance the most in percentage terms, with penetration rising from about 57.2% in 2011 to 82.8% by 2015 (note: figures may vary elsewhere in report due to updated Broadband Penetration (per 100 population) 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. Similar contrasts are apparent in relation to e/f = estimate/forecast. Source: BMI broadband penetration, where mobile © Business Monitor International Ltd Page 16 Israel Information Technology Report Q1 2012 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 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. © Business Monitor International Ltd Page 17 Israel Information Technology Report Q1 2012 Market Growth And Drivers IT Market Sizes, US$mn IT spending bounced back strongly 2011e throughout the region in 2010. There is a 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 government, financial and enterprise e = estimate. Source: BMI 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. 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 potentially cause disruptions to distribution networks and have an impact on outsourcing operations. 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. © Business Monitor International Ltd Page 18 Israel Information Technology Report Q1 2012 Several sectors will offer particular IT Market Sizes, % Of National GDPs opportunities for IT vendors. 2011e-2015f Telecoms liberalisation and a big push 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 e/f = estimate/forecast. Source: BMI launched. The highest growing IT market in the IT Markets Compound Growth MEA IT market over the forecast period is 2011e 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. Sectors And Verticals e = estimate. Source: BMI 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. © Business Monitor International Ltd Page 19 Israel Information Technology Report Q1 2012 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. 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 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. © Business Monitor International Ltd Page 20 Israel Information Technology Report Q1 2012 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 21 Israel Information Technology Report Q1 2012 Internet Penetration 2011e 2015f e/f = estimate/forecast. Source: BMI © Business Monitor International Ltd Page 22 Israel Information Technology Report Q1 2012 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology Daniel Hershkowitz Minister 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. 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 © Business Monitor International Ltd Page 23 Israel Information Technology Report Q1 2012 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. Hardware The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.6bn in 2012, up from US$2.5bn in 2011. The market is expected to grow at a CAGR of 4% over the forecast period to reach US$3.3bn in 2015. BMI upwardly revised its Israeli PC market growth for 2011, consolidating a recovery from the impact of the economic slowdown, which hit consumer demand for electronic goods. Businesses are now investing more to facilitate expansion and development, rather than purely to realise cost efficiencies, but there © Business Monitor International Ltd Page 24 Israel Information Technology Report Q1 2012 should be growth areas. In 2010, Israeli computer shipments recorded a solid recovery. However, lower average prices meant revenue growth in most segments was flat or slightly negative. 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. 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. 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. Tablets 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. Tablets 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. © Business Monitor International Ltd Page 25 Israel Information Technology Report Q1 2012 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. Software Israeli software spending is projected at US$1.4bn in 2012, up from US$1.3bn in 2011. The packaged software segment is expected to grow at a CAGR of around 9% over the forecast period. In 2010 local IT leader Ness was among those vendors reporting a rebound in Israeli market revenue growth, with the company's annualised revenue growth increasing in each of the first three quarters. In 2011, 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. 2012 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. 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 26 Israel Information Technology Report Q1 2012 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. Services The IT services segment is forecast to reach a value of US$2.1bn in 2012, and this is expected to grow at a CAGR of 9% over the forecast period to reach US$2.9bn in 2016. 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 a pick-up in growth in 2010 after demand was hit by a slowdown in 2009. In H111, demand for IT services continued to be healthy, according to leading vendors, with new projects across public sector, industrial and financial verticals. The defence and homeland security sector was also solid. However, much will depend on confidence in the global economic recovery, particularly in key Israeli export markets. Vendors have had to adapt to an environment where some projects are commissioned more in response to immediate needs and with a focus on cost reduction. © Business Monitor International Ltd Page 27 Israel Information Technology Report Q1 2012 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. One potential demand driver will be organisations looking for help to utilise efficiencies from cloud computing such as SaaS and Infrastructure-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. © Business Monitor International Ltd Page 28 Israel Information Technology Report Q1 2012 Outsourcing Outsourcing has become a bigger factor and was 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. 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. © Business Monitor International Ltd Page 29 Israel Information Technology Report Q1 2012 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, a small number 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. 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 © Business Monitor International Ltd Page 30 Israel Information Technology Report Q1 2012 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 co-efficient 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; 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 31 Israel Information Technology Report Q1 2012 Industry Forecast BMI projects that the Israeli IT market will grow to a value of US$6.1bn in 2012, consolidating a recovery in 2011 from the impact of the global economic situation. The market is forecast to reach US$8.2bn in 2016. In 2011, vendors reported solid demand for IT services across industrial, government, defence, and financial services segments. The Israeli IT market should gain enough momentum from key sectors to expand at a CAGR of 8% over BMI's 2012-2016 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and SMEs. 2012 Outlook Spending on IT products and services is expected to moderate in 2012. In 2011 PC sales bounced back with modest single-digit year-on-year (y-o-y) growth. However, growth momentum is expected to moderate because of shifts in the global economic environment. BMI forecasts overall solid growth for the Israeli IT market for 2012. Businesses will maintain a cautious attitude to IT investments due to uncertainty about a sustainable global economic recovery in key export markets. There should however, be growth areas around business intelligence and cloud computing. Sales could receive a boost from computer purchases previously delayed as a result of the economic situation. New form factors such as tablets will help to drive demand in the consumer segment, while to some extent undermining demand for traditional notebooks. Consumer spending on durable goods such as PCs showed signs of falling off in 2011, with per-capita consumption of durable goods contracting by an annualised 14.5% q-o-q in Q211. However, consumer spending should be supported by stimulatory fiscal spending as well as falling unemployment and low inflation and interest rates. In H111, vendors reported a continued pick-up in the flow of IT projects, with new large tenders from the Israeli MOD and the Israel Electric Company. Vendors reported demand had revived in the key financial services vertical, continuing a trend established in 2010, when new projects 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. 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 © Business Monitor International Ltd Page 32 Israel Information Technology Report Q1 2012 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. Per capita IT spending is expected to rise from US$794 in 2012 to US$1,070 by 2016. Spending by key IT spending verticals such as defence and financial services are somewhat insulated from economic vicissitudes.Vendors will target projects across a range of sectors from government to financial services, telecoms, and utilities. Regulatory compliance will continue to necessitate IT spending by banks and the financial services sector, which accounts for about 15% of Israeli IT spending. Another 50% of IT spending is accounted for by government and military projects, which will have a relatively low sensitivity to economic downturn compared with the commercial sector. Government IT and digital-divide initiatives are important sources of opportunity for vendors, with recent projects ranging from government e-services portals to healthcare. The government remains determined to preserve the country's status as a high-tech powerhouse and drive development of the knowledge economy. While the defence sector is, and is expected to remain, the single most important vertical, investments by financial sector organisations should mean more large outsourcing deals. Other sectors of opportunity will include healthcare and telecoms, as well as infrastructure, transport, and the small office and home office sector. Opportunities As a result of this activity, IT services are expected to display the highest growth over the forecast period. 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 Infrastructure-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. © Business Monitor International Ltd Page 33 Israel Information Technology Report Q1 2012 Summary Although the Israeli economy is vulnerable to continued global economic headwinds, BMI believes that IT spending has sufficient strength in key demand verticals to maintain a positive trajectory. The hardware market is forecast to grow from US$2.6bn in 2012 to US$3.3bn in 2016, with PC sales projected to rise from an estimated US$2.1bn to US$2.7bn. Over the period, software spending is expected to increase from an estimated US$1.4bn to US$1.9bn and services from an estimated US$2.1bn to US$2.9bn. Opportunities As a result of this activity, IT services are expected to display the highest growth over the forecast period. 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 continued global economic headwinds, BMI believes that IT spending has sufficient strength in key demand verticals to maintain a positive trajectory. The hardware market is forecast to grow from US$2.6bn in 2012 to US$3.3bn in 2016, with PC sales projected to rise from an estimated US$2.1bn to US$2.7bn. Over the period, software spending is expected to increase from an estimated US$1.4bn to US$1.9bn and services from an estimated US$2.1bn to US$2.9bn. © Business Monitor International Ltd Page 34 Israel Information Technology Report Q1 2012 Table: Israeli IT Industry – Historical Data & Forecasts (US$mn, Unless Otherwise Stated) 2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f 2016f IT Market (US$mn) 4,826 4,633 5,143 5,708 6,051 6,535 7,058 7,552 8,156 IT Market as % GDP 2.4% 2.4% 2.3% 2.2% 2.2% 2.2% 2.3% 2.3% 2.3% Hardware (Computer market sales) (US$mn) 2,317 2,131 2,263 2,480 2,594 2,764 2,945 3,107 3,308 Services (US$mn) 1,544 1,529 1,749 1,960 2,099 2,289 2,497 2,699 2,944 Software (US$mn) 965 973 1,131 1,268 1,358 1,481 1,616 1,746 1,905 1,853 1,726 1,833 2,014 2,127 2,289 2,438 2,579 2,745 208 192 204 223 233 249 265 280 298 PCs (including notebooks) (US$mn) Servers (US$mn) e/f = estimate/forecast. Source: BMI. ITU (Internet and broadband penetration). © Business Monitor International Ltd Page 35 Israel Information Technology Report Q1 2012 Internet Table: Internet Data And Forecasts, 2008-2015 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f No of internet users, '000 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 e/f = BMI estimate/forecast. Source: ITU, BMI With no new data published on the internet market, BMI has retained its current 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 Industry Trends – Internet Sector 2008-2015 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, 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 e/f = estimate/forecast. Source: BMI 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. © Business Monitor International Ltd Page 36 Israel Information Technology Report Q1 2012 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. 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 37 Israel Information Technology Report Q1 2012 Macroeconomic Forecast Growth Outlook Less Bright BMI View: Israel's economy is set to decelerate further, as we now project private consumption and exports to expand at an even slower pace than before. Private consumption and fixed investment will drive the economy over the medium term, and we have pencilled in real GDP growth of 3.4% and 3.9% yo-y in 2012 and 2013 respectively, down from previous forecasts of 4.3% and 4.7%. The slowdown in Israel's economy has intensified in recent months, and we have therefore decided to revise down our 2012 and 2013 real GDP growth forecasts to 3.4% and 3.9% year-on-year (y-o-y) respectively, from 4.3% and 4.7% previously. We continue to highlight private consumption and fixed investment as the principal drivers of economic growth, especially as exports (which had been a major contributor) continue to slow. Fiscal expenditure will see marginal growth as the government seeks to balance the need to rein in the budget deficit with embarking on a programme of social reforms. Declining quarterly GDP figures also confirm our view of a deceleration. Private Consumption – Moderate Rise On The Cards: We are now slightly less optimistic regarding the outlook for private consumption, as reflected in downward revisions to our forecasts to 4.5% and 4.6% y-o-y in 2012 and 2013 respectively, from 5.0% and 5.1% previously. The unemployment rate continues to be low, at 5.6% in August, boding well for household spending. However, a host of less sanguine economic indicators will weigh on consumer sentiment, including a slowdown in the rise of the composite state-of-the-economy index, relatively weak PMI figures (although PMI rose to 50.7 in October from 44.3 a month earlier, many of its components are still below 50, which indicates contraction in manufacturing), and weaker export expansion. Statements by policymakers regarding decelerating growth and elevated political risks will also impact consumer confidence, in our view, and weigh somewhat on household spending. Durable goods spending, which contracted by a seasonally adjusted and annualised 10.0% quarter-on-quarter (q-o-q) in Q311 after a 14.2% decline in Q2, is being hit relatively hard by the loss of confidence, and we expect this trend to continue over the medium term. Government Spending – Mild Expansion Ahead: We maintain our forecasts for an expansion of government spending in 2012 and 2013 of 1.5% and 1.5% respectively. The Trajtenberg committee reforms (made in response to public protests in the country in Q311) are likely to receive parliamentary approval and thereby increase the level of fiscal expenditure on social programmes. Furthermore, policymakers appear to be increasingly open to the idea of higher fiscal deficits than previously anticipated. However, we expect the realities of the government budget, which will see a decline in revenues on the back of impending tax reforms (see our online service, November 15 2011, 'Fiscal © Business Monitor International Ltd Page 38 Israel Information Technology Report Q1 2012 Consolidation Plans To Unravel'), as well as a continued commitment to maintain fiscal discipline, to keep a lid on expansionary fiscal policy. Fixed Investment – The Other Major Driver: Fixed investment will continue to be a major contributor to growth. The trajectory of interest rates in Israel has changed tack in recent months, from a period of steadily rising rates to a situation where Bank of Israel Governor Stanley Fischer is stating that cuts to the headline interest rate, now at 3.00%, are not out of the question. Expectations of lower interest rates will induce greater fixed investment, as will the government's strong focus on housing and energy projects (see 'Economic Momentum Set To Decelerate', August 18 2011). We project expansion of 4.0% and 3.5% y-o-y in 2012 and 2013 respectively. Net Exports – Trade Deficit To Widen: The slowdown in export growth will be a major drag on economic momentum, as exports comprise over 37% of GDP. Monthly exports, which came in at US$4.4bn in September, have been on a steady decline after hitting a high of US$5.5bn in May. Key export markets, including the US and eurozone (which jointly accounted for 52.4% of 2010 exports), are continuing to see anaemic expansion, and our 2012 forecasts of 1.6% for the former and 1.2% for the latter do little to inspire confidence of a major bounce back. Israel's shallow trade relationships with faster-growing regions, including the Middle East, Asia, Africa, and Latin America, also bode ill for external demand over the medium term. We have revised down our 2012 and 2013 forecasts for export growth to 3.5% and 3.8% y-o-y respectively, from 4.5% and 5.0% previously. We project moderate growth in imports of 4.2% and 3.5% y-o-y in 2012 and 2013 respectively. While imports have ticked down in recent months, we believe the expansion of fixed investment to lead to growth in imports of capital goods. On the other hand, our forecasts for declining food and fuel commodity prices suggest that the country's import bill will be contained. Beyond 2012 We project private consumption to continue driving Israel's economy over our five-year forecast period. While fixed investment will be the other major driver in the near term, we believe export growth will accelerate as the US and eurozone come out of their respective crises and as Israeli exporters re-orient themselves towards higher-growth markets. Fiscal discipline will continue to be a major policy focus, in our view, and thus we expect government spending to play a minor role. © Business Monitor International Ltd Page 39 Israel Information Technology Report Q1 2012 Table: Israel – Economic Activity, 2011-2016 2011 2012f 2013f 2014f 2015f 2016f 902.9 964.8 1,032.6 1,104.6 1,180.1 1,262.4 255.8 270.3 290.9 312.0 335.3 360.7 4.8 3.4 3.9 4.3 4.4 4.5 33,825 35,123 37,202 39,301 41,591 44,077 7.6 7.7 7.8 7.9 8.1 8.2 Industrial production 1,2 index, % y-o-y, ave 7.0 5.4 4.7 3.8 3.5 3.5 Unemployment, % of 1,2 labour force, eop 6.0 6.5 6.5 6.5 6.5 6.5 Nominal GDP, ILSbn 2 Nominal GDP, US$bn 2 Real GDP growth, % 2 change y-o-y GDP per capita, US$ Population, mn 2 3 1 2 3 f = BMI forecast. Seasonally adjusted. Source: Central Bureau of Statistics/BMI. World Bank/UN/BMI. © Business Monitor International Ltd Page 40 Israel Information Technology Report Q1 2012 Competitive Landscape The Israeli IT services market is competitive. However, 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 2011 was driven by growth in the laptop segment. HP was again the overall PC market leader in the MEA region in Q311, with growth of 37.1%, according to IDC, with Dell in second place. In Q111 US PC giant 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. Meanwhile, Acer's inventory problems resulted in the vendor losing ground in the regional market. Israel's domestic IT service companies have strong advantages owing to local knowledge and contacts. For example, Ness Israel's long-term relationship with the Israeli Department of Defense makes it a strong player in the defence and homeland security vertical. Despite their global ambitions, Israel remains an important market for these companies and typically accounts for 40-50% of revenue. This proportion typically increased during the recent global economic crisis, due to lower demand from the US and Europe and the company's relative strength in their home markets. Matrix, the Israeli IT services market leader, also reported growth in revenue and profit in 2011 owing 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. In Q311, Matrix reported 16.6% growth in revenue to a record NIS435mn, preserving its leading position in the Israeli value-added services market. Matrix's core software and services division reported 19% growth in that quarter, and revenue of NIS302mn. Meanwhile Ness Israel reported modest annualised revenue growth of just 1% in Q211, to US$141mn. This was down from annualised growth of 3% in Q111, to US$137.3bn. Revenue from the Israeli market were 42% of the total. Among major contracts signed in H111 was a US$75mn five-year 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. Meanwhile, in Q211 Ness also signed a US$6mn SAP implementation for a leading insurance group and four other US$1mn plus projects across several verticals. © Business Monitor International Ltd Page 41 Israel Information Technology Report Q1 2012 Among major project news in 2010, Ness 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 Defense. Ness announced 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. The vendor also won 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. 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 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. © Business Monitor International Ltd Page 42 Israel Information Technology Report Q1 2012 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. 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 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. © Business Monitor International Ltd Page 43 Israel Information Technology Report Q1 2012 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. 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 44 Israel Information Technology Report Q1 2012 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 revenue of US$141mn in Q211, with just 1% annualised growth. Revenue from the Israeli market accounted for 42% of the total, and Ness reported that demand in its market was solid across key verticals such as industrial, government, financial services, and defence. One big win reported by Ness in the Israeli market in H111 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 H111 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. The company's top 20 customers accounted for only 37% of the company's Q211 revenue, with the largest customer accounting for about 5%. Ness Israel reported full-year 2010 revenue of US$571.8mn, up 12% y-o-y. 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. On September 14 2009, Ness Technologies launched its stock on the Tel Aviv Stock © Business Monitor International Ltd Page 45 Israel Information Technology Report Q1 2012 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 revenue compared with the previous year. The company witnessed a 19% decline in revenue 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 revenue. 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 In June 2011, Ness entered into an agreement under which an private equity fund affiliate of Citi Venture Capital International (CVCI) will acquire Ness in an all-cash transaction valued at US$307mn. Ness forecasts top line growth and operating margin expansion in 2011 with a trend of sequentially increasing quarterly revenue, 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. Revenues Ness Israel reported modest annualised revenue growth of 1% in Q211, to US$141bn. This was up 3% from Q111. Improved results in 2010 followed a 17% decline in full-year 2009 revenue compared with 2008, although around one-third of this was due to foreign currency effects. Annual revenue for 2009 were reported at US$547mn. Israel accounts for around 42% of Ness' revenue. © Business Monitor International Ltd Page 46 Israel Information Technology Report Q1 2012 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 revenue, 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 revenue, but reported strong operating margins, boosted by a big deal with the Israel Ministry of Defence. © Business Monitor International Ltd Page 47 Israel Information Technology Report Q1 2012 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. Revenues In Q110, IBM reported revenue of US$23.7bn, up 2% y-o-y. Net revenue were US$3.4bn, up 9% y-o-y. In its fiscal year 2009, IBM reported revenue of US$95.8bn, down 8% y-o-y. Revenue from the EMEA region were US$32.6bn, down 12% y-o-y. Presence Total IBM staff in Israel have 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 48 Israel Information Technology Report Q1 2012 HP 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. Revenues In Q310, HP reported global net revenue of US$30.7bn, up 11%, while EMEA region revenue, 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 revenue to US$9.9bn. However, the Services division achieved only 1% growth to US$8.6bn. For its 2009 fiscal year, HP reported revenue 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 49 Israel Information Technology Report Q1 2012 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 50 Israel Information Technology Report Q1 2012 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 revenue 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. Revenues In Q310 Matrix reported that company revenue increased by around 6.6% to approximately ILS373mn. Operating profit were up by about .3% to approximately ILS32.5mn, while net profits grew 4.5% to around ILS21mn. © Business Monitor International Ltd Page 51 Israel Information Technology Report Q1 2012 Presence Employs around 3,500 IT professionals. Sectors Software solutions and services remains the company's core area, accounting for 66.3% of total Revenue in Q310, and revenue of ILS253.7mn. revenue from the marketing of software were ILS38.4mn for the quarter, down from ILS42mn in the same period of 2009. Revenue in the infrastructure, integration and communication sector amounted to approximately ILS55.7mn for the quarter. Revenue in the training and deployment sector were around ILS35mn for the quarter. © Business Monitor International Ltd Page 52 Israel Information Technology Report Q1 2012 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 hoped its Windows 7 operating system, launched in October 2009, would 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. Revenues For its fiscal year ending June 30 2010, Microsoft reported record revenue of US$62.48bn, up 7% on the previous year. Microsoft has said it expects double-digit growth in its Middle East revenue over the next three to five years. Before the financial crisis in 2009, revenue had increased 25% annually for the past five years. While Microsoft does not release a detailed © Business Monitor International Ltd Page 53 Israel Information Technology Report Q1 2012 regional revenue 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 revenue 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 54 Israel Information Technology Report Q1 2012 Country Snapshot: Israel Demographic Data Section 1: Population Population By Age, 2005:2030 (mn, total) Population By Age, 2005 (mn) 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 0-4 -0.4 -0.2 0.0 Male 0.2 0.4 -1.0 -0.5 0.0 2030 Female 0.5 1.0 2005 Source: UN Population Division Table: Demographic Indicators, 2005-2030 2005 2010e 2020f 2030f Dependent population, % of total 36.7 35.6 37.3 36.7 Dependent population, total, ‘000 2,538 2,648 3,092 3,365 Active population, % of total 63.3 64.3 62.6 63.2 Active population, total, ‘000 4,373 4,783 5,178 5,799 Youth population*, % of total 27.1 26.0 24.5 21.9 Youth population*, total, ‘000 1,873 1,939 2,031 2,008 Pensionable population, % of total 9.6 9.5 12.8 14.8 Pensionable population, total, ‘000 665 709 1,061 1,357 e/f = estimate/forecast. * Youth = under 15. Source: UN Population Division © Business Monitor International Ltd Page 55 Israel Information Technology Report Q1 2012 Table: 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 Section 2: Education And Healthcare Table: Education, 2002-2005 2002/03 2004/05 110 110 Gross enrolment, secondary 93 93 Gross enrolment, tertiary 57 58 Adult literacy, male, % na 98.5 Adult literacy, female, % na 95.9 Gross enrolment, primary Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO Table: Vital Statistics, 2005-2030 2005 2010 2020f 2030f Life expectancy at birth, males (years) 77.5 78.4 80.1 81.2 Life expectancy at birth, females (years) 81.6 82.6 84 85.2 Life expectancy estimated at 2005; f = forecast. Source: UNESCO © Business Monitor International Ltd Page 56 Israel Information Technology Report Q1 2012 Section 3: Labour Market And Spending Power Table: Employment Indicators, 2001-2006 2001 2002 2003 2004 2005 2006 2,503 2,547 2,610 2,679 2,740 2,810 2.8 1.7 2.4 2.6 2.3 2.5 38.4 38.4 38.6 39 39.1 39.4 Employment, '000 2,265 2,284 2,330 2,401 2,494 2,574 – % change y-o-y 1.9 0.8 2.0 3.0 3.8 3.2 – male 1,236 1,238 1,258 1,300 1,340 1,384 – female 1,029 1,046 1,073 1,101 1,154 1,190 — female, % of total 45.4 45.8 46.0 45.8 46.2 46.2 Total employment, % of labour force 90.4 89.7 89.2 89.6 91.0 91.6 Unemployment, '000 234 262 280 278 246 236 – male 121 138 143 137 125 119 – female 113 124 137 141 122 118 – unemployment rate, % 9.4 10.3 10.7 10.4 9.0 8.4 2000 2007 2008e 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 Economically active population, '000 – % change y-o-y – % of total population Source: ILO Table: Consumer Expenditure, 2000-2012 (US$) Purchasing power parity Consumer expenditure per capita e/f = BMI estimate/forecast. na = not available. Source: World Bank, Country data; BMI calculation © Business Monitor International Ltd Page 57 Israel Information Technology Report Q1 2012 Table: Average Annual Wages, 2000-2012 Local currency 2000 2006 2007 2008e 2009e 2010e 2012f Total 81,492 89,592 92,210 94,331 95,606 97,137 100,273 Non-agricultural 82,584 90,612 91,176 93,273 94,534 96,048 99,149 103,980 113,913 114,622 117,258 118,843 120,746 124,645 7.4 3.4 2.9 2.3 1.3 1.6 1.6 Total 19,983 20,358 22,771 25,155 26,557 26,982 28,649 Non-agricultural 20,251 20,589 22,516 24,873 26,259 26,680 28,328 Manufacturing 25,498 25,884 28,306 31,269 33,012 33,541 35,613 Total, purchasing power parity 25,969 30,546 32,710 33,203 na na na Manufacturing Wage growth, % y-o-y US$ e/f = BMI estimate/forecast. na = not available. Source: ILO, BMI © Business Monitor International Ltd Page 58 Israel Information Technology Report Q1 2012 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, 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 of all 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. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small © Business Monitor International Ltd Page 59 Israel Information Technology Report Q1 2012 domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: Trends manifested through historical data; The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a ‘second opinion’ on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: Trends in historical modal split data; Evidence of government policy favouring one or more modes over others; Government and or private sector investment plans in specific modes. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 60 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... International Ltd Page 21 Israel Information Technology Report Q1 2012 Internet Penetration 2011e 2015f e/f = estimate/forecast Source: BMI © Business Monitor International Ltd Page 22 Israel Information Technology Report Q1 2012 Israel Market Overview Government Authority Government Authority Ministry of Science and Technology Daniel Hershkowitz Minister The Ministry of Science and Technology has undergone... 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 31 Israel Information Technology Report Q1 2012 Industry Forecast BMI projects that the Israeli IT market will grow to a value of US$6.1bn in 2012, consolidating a recovery in 2011 from the impact... 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 © Business Monitor International Ltd Page 29 Israel Information Technology Report Q1 2012 Leveraging IT For Growth IT will... International Ltd Page 25 Israel Information Technology Report Q1 2012 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... the report Source: BMI © Business Monitor International Ltd Page 15 Israel Information Technology Report Q1 2012 Middle East & Africa IT Markets Overview MEA IT Regional Overview 2011 Internet Penetration The Middle East region divides into two groups in terms of information society (per 100 population) development In the first group are richer and more technologically advanced countries, such as Israel. .. underpin private consumption growth Israel produces more technology start-up companies than any other country in the world except the US The discovery of a large offshore gas deposit will bring foreign investment and is expected to serve the country's energy needs for decades © Business Monitor International Ltd Page 10 Israel Information Technology Report Q1 2012 Threats Israel' s energy supplies are... economic recovery, particularly in key Israeli export markets Vendors have had to adapt to an environment where some projects are commissioned more in response to immediate needs and with a focus on cost reduction © Business Monitor International Ltd Page 27 Israel Information Technology Report Q1 2012 Defence and government spending represent a significant component of Israeli IT demand and have some immunity... to realise cost efficiencies, but there © Business Monitor International Ltd Page 24 Israel Information Technology Report Q1 2012 should be growth areas In 2010, Israeli computer shipments recorded a solid recovery However, lower average prices meant revenue growth in most segments was flat or slightly negative As the Israeli economy recovers, enterprise sales could receive a boost from computer hardware... infrastructure as well as the construction of stadiums The Qatari government has outlined plans to invest QAR6bn (US$1.6bn) in information technology and IT services as part of its ICT-2015 strategy © Business Monitor International Ltd Page 13 Israel Information Technology Report Q1 2012 Saudi Arabia, Bahrain and Oman rank slightly behind their equally fast-growing GCC peers on grounds of general business... 50% of Israeli computer users are estimated to still be using the Windows XP operating system 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 © Business Monitor International Ltd Page 32 Israel Information Technology Report Q1 2012 further