from the November 2010 issue

Israel Information Technology Report Q3 2010

New report provides detailed analysis of the Information Technology
BMI projects that the Israeli IT market will have a value of 77$4.9bn in 2010. The Israeli IT market should gain enough momentum from key sectors to expand at a compound annual growth rate (CAGR) of 6% over BMI's 2010-2014 forecast period, thanks to stable demand from defense and government sectors as well as opportunities in verticals like financial services and small and medium-sized enterprises.

Spending is expected to resume single-digit growth in 2010 after a contraction in 2009. In early 2010, there were reports of a pick-up in the flow of projects. Vendors reported that demand had revived in the key financial services vertical, where new projects included an $11mn IT outsourcing tender by the First International Bank of Israel. Healthcare, the public sector and utilities were also generating projects.

The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during BMI's five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High Internet penetration and growing broadband penetration are drivers for the retail segment, while the financial services sector accounts for about 15% of Israeli IT spending.

Industry Developments
In 2009, Israel's high-tech sector suffered as demand for high-tech exports dropped by at least 10-15%, with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israeli government given that high-tech accounted for around 10% of Israel's economy, with annual sales estimated at around $25b. Major IT firms were retrenching in Israel, including SAP, Cisco and HP. IT is viewed as an important policy tool for the Israeli government's 2008-2010 socio-economic policy framework. In 2009, the National Economic Council recently submitted a policy agenda to the government, which specified two main policy tracks of reducing poverty and achieving balanced growth. The first track was expected to emerge as the main priority.

As part of its modernization agenda, the government is pressing ahead with various other strands of its government project. Among other initiatives, there has also been spending on computers in healthcare and the nationwide paperless court initiative. The e-government program is leading to increased demand for computers, with the Israeli government reaching supply agreements with vendors like 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) center worldwide, and the company also has significant production facilities in Israel.

Leading IT services vendors, including Israeli companies Ness Technologies and Matrix as well as US company IBM, experienced mixed fortunes in the Israeli market in 2009. Ness Israel reported a 17% decline in full-year 2009 revenues compared with 2008, although around one-third of this was due to foreign currency effects. Meanwhile, market leader Matrix reported wins in a number of key sectors including healthcare, financial services, defense and government.

In 2010, Microsoft Israel, which as an annual turnover of around US$1bn, hopes that sales of its Windows 7 operating system, launched in October 2009, will boost its sales. Microsoft anticipated that support from leading PC makers would underpin success for the new system, despite some caution from businesses. Israel is also an important R&D centre for Microsoft, and in 2010 the company's Israel R&D center launched a new unified access gateway product. Computer Sales The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at $2.2bn in 2010, up from $2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.6bn in 2014. Spending is expected to resume single-digit growth in 2010, after a contraction in 2009 due to the economic slowdown and unemployment hitting consumer demand for electronics goods. Household consumption moved into negative territory in 2009, and although there was a slight recovery in H209, trading conditions remained tough.

Israeli software spending is projected at $1.0bn in 2010, up from $973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses are expected to remain cautious, deferring investments or looking for 'good enough' solutions to immediate problems. However, there should still be several growth areas going forward. Spending on software is shifting towards the SME segment, which forms the mainstay of the Israeli business sector. 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 defense and healthcare.

IT Services
The IT services segment is estimated at US$1.6bn in 2010, and this is expected to grow at a CAGR of 7% over the forecast period to reach US$2.1bn in 2014. In early 2010, there were reports of a pick-up in the flow of projects, but growth is expected to reach a higher trajectory in the second half of our five-year forecast period.

Government and defense are two key sectors likely to be a continued source of opportunities, because the factors driving spending in each case are not particularly sensitive to economic vicissitudes. Another key area of opportunity is healthcare IT. Despite failing to capitalize in the past, Israel is starting to emerge as a desirable location for packaged applications and localization services.

Israel's relatively high PC penetration and the growing availability of broadband access mean that internet penetration is likely to continue its upward trajectory. The government has announced that it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines.

Israel's strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq's network and will stimulate much greater competition. LLU was due to be implemented by end-2009.

Reprinted from the Israel High-Tech & Investment Report November 2010

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