Israel information technology report q1 2013

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TECHNOLOGY REPORT Q1 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2012

Business Monitor International

85 Queen Victoria Street

© 2012 Business Monitor International

All rights reserved

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

TECHNOLOGY REPORT Q1 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: December 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Israel IT Sector SWOT 7

Israel Telecommunications Sector SWOT 8

Israel Political SWOT 9

Israel Economic SWOT 10

Israel Business Environment SWOT 11

MEA IT Risk/Reward Ratings 12

Table: Middle East And Africa IT Risk Reward Ratings, Q113 14

MEA IT Markets Overview 15

IT Penetration 15

Sectors And Verticals 18

Market Overview 22

Government Authority 22

Background 22

Table: Government Initiatives 23

Hardware 24

Software 26

Services 28

Industry Developments 30

Industry Forecast 32

Table: Israel IT Industry – Historical Data And Forecasts (US$mn unless otherwise stated), 2009-2017 34

Industry Forecast Internet 35

Table: Internet Data And Forecasts, 2010-2017 35

Competitive Landscape 37

Internet Competitive Landscape 40

Macroeconomic Forecast 42

Table: Israel – Economic Activity, 2011-2016 44

Company Profiles 45

Ness 45

IBM 49

Hewlett-Packard 54

Matrix 60

Microsoft Corporation 63

Country Snapshot 68

Table: Israel's Population By Age Group, 1990-2020 ('000) 69

Table: Israel's Population By Age Group, 1990-2020 (% of total) 70

BMI Methodology 72

How We Generate Our Industry Forecasts 72

IT Industry 72

IT Ratings – Methodology 73

Table: IT Business Environment Indicators 74

Weighting 75

Table: Weighting Of Components 75

Sources 75

Executive Summary

BMI View: Israeli IT spending is expected to reach US$6.0bn in 2012, up 5% In Q112, several

indicators suggested moderating consumer demand, but vendors still reported a solid trading

environment for IT services across industrial, government, defence and financial services segments The current rate of PC penetration, while high for the region, represents potential for organic growth

Household penetration is estimated at around 75% The Israeli IT market should gain enough momentum

from key sectors to expand at a CAGR of 7% over BMI's 2013-2017 forecast period, due to momentum

from key segments

Headline Expenditure Projections

Computer Hardware Sales: US$2.5bn in 2011 to US$2.6bn in 2012, +3% in US dollar terms Forecast

in US dollar terms downwardly revised due to macroeconomic factors, but Israeli businesses are investing more to facilitate expansion and development

Software Sales: US$1.3bn in 2011 to US$1.3bn in 2012, +6% in US dollar terms Forecast in US dollar terms downwardly revised due to analyst modification, but device and data proliferation will drive

spending on customer relationship management (CRM), databases and business intelligence

IT Services Sales: US$2.0bn in 2011 to US$2.1bn in 2012, +6% in US dollar terms Forecast in US

dollar terms downwardly revised due to analyst modification but key segments such as government and defence will be a continued source of opportunities

Risk/Reward Ratings: Israel's IT rating score was 66.3 out of 100.0, up on the previous quarter Israel

has regained first place in our latest RRR table, ahead of both Qatar and the UAE

Key Trends & Developments

ƒ BMI forecasts overall solid growth for the Israeli IT market for 2012, despite a deteriorating

external economic environment 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 in areas such as business intelligence, server virtualisation, mobile devices and cloud computing

ƒ New cloud computing offerings and increased competition in this segment should fuel further demand from users Particular areas of opportunity for cloud computing include banking and

Businesses will, not only seek to make cost savings, but will look to boost efficiency and increase flexibility of response to customer needs

ƒ The growing emphasis of many multinational IT vendors on software and services revenues, has

led companies such as Dell and SAP to direct more investment in R&D at the Israeli

market However, 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 Defence 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

SWOT Analysis

Israel IT Sector SWOT

linguistically skilled workforce, and relatively low labour costs compared with most developed countries

ƒ Strong defence and government spending provides base for IT demand

ƒ 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

ƒ Strong political support, with the government having implemented many policies

to aid in the development, success and expansion of the IT sector

Weaknesses ƒ 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

ƒ Digital divide, with 3% of bottom-income group having home internet access

Opportunities ƒ 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

ƒ Defence and government projects should be less sensitive to the economic downturn

ƒ Outsourcing, Software-as-a-Service (SaaS) and applications management likely

to grow fastest out of IT services, with particular opportunities in financial sector

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

ƒ Healthcare IT will be a growing source of opportunity

business sentiment

ƒ Other factors may affect business confidence, notably the security situation

ƒ The weaker local currency, and aggressive pricing, may continue to constrain growth and put pressure on margins

Israel Telecommunications Sector SWOT

ƒ Liberal mobile market consisting of four operators

ƒ Mature market with strong take-up of value-added and 3G services

slowed considerably and operators must look for alternative revenue sources

ƒ Lack of competition in all telecoms sectors

ƒ Regulator has been slow to license new services, such as WiMAX wireless broadband

ƒ Voice over Internet Protocol (VoIP) licensing and triple-play for Bezeq placed on hold, which could hinder prospects

Opportunities ƒ 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

ƒ 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

Israel Political SWOT

parliament, government members are still some of the most accountable in the region

ƒ Elections are for the most part free and transparent, ensuring that a broad spectrum of political views is represented within government

Weaknesses ƒ The protracted conflict with the Palestinians means there are persistent security

risks Strategies to minimise or end the conflict are domestically divisive, with tensions between Israel and Hamas set to remain elevated

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

ƒ The fallout between Turkey and Israel, caused by the Gaza flotilla incident of May 2010, has meant that Israel has lost a key Middle East ally

Opportunities ƒ A warming of relations with Greece has given Israel the ability to engage in

military exercises over a larger geographic area

of the Gaza Strip and Israel's military incursion into the territory in December 2008/January 2009 have added to uncertainty Despite the ongoing truce between Jerusalem and Gaza city, finding a lasting solution continue to pose a dilemma for Israel

ƒ 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

ƒ Iranian President Mahmoud Ahmadinejad's refusal to give up his country's nuclear programme raises concerns that an open military conflict between Israel and the Islamic republic could erupt in 2013

Israel Economic SWOT

Strengths ƒ The policy framework has stabilised in recent years, and recent austerity

measures will help to keep the fiscal deficit under control

ƒ The workforce is highly educated and skilled

ƒ The country's close ties with the US provide it with substantial financial assistance for economic and military ends

Weaknesses ƒ 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

ƒ The economy is highly exposed to that of the US, in terms of exports and investment

Opportunities ƒ In the long term, high levels of employment will underpin private consumption

pipeline has been targeted frequently in 2011, forcing the country to buy more expensive fuels from alternative sources Risks will likely abate, as production in recently discovered domestic gas fields is expected to begin over the coming years

ƒ 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

communication networks, as well as transparent legislation

ƒ 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 ƒ Historic political instability increases the risk premium of investment in Israel

ƒ Some limits on repatriation of capital exist and there are constraints on foreign investment in the high-tech sector

Opportunities ƒ Corporate tax rates, at 25%, have not increased markedly despite social

protests in 2011

ƒ The Qualified Industrial Zone agreements with Jordan and Egypt boost the potential for trade

the past two years

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

MEA IT Risk/Reward Ratings

BMI's Risk/Rewards Ratings (RRR) for IT markets in our Middle East and Africa coverage analyses the

potential for rewards from investments in the respective markets based on the dynamics of the IT market and key macroeconomic factors, as well as an assessment of industry-specific and external risks in the market Our rewards category is further split into two sub-categories, industry rewards and country rewards, while the risks category comprises industry risks and country risks

There was only one movement in our RRR table this quarter, although six out of 11 countries in our regional coverage saw changes to their aggregate scores this quarter As a result, the overall average rating increased marginally to 51.3, up from 51.1 in the previous quarter South Africa moved up one place to eighth position, pushing down Oman to ninth Israel remained in first position despite a decrease

to its aggregate score, while Egypt stayed at the bottom despite an increase to its aggregate score this quarter

Industry Rewards

The regional average score in the industry rewards category this quarter was 37.3, slightly down from 37.7 in our previous update Israel has the highest score, reflecting the size of its IT market and average annual growth rate over the next five years Turkey and South Africa have second and third highest scores

in this category at 45 and 44.9, respectively, in our Q113 update South Africa's IT market is the biggest

South Africa Leads

MEA IT markets By Value (US$mn), 2011

Source: BMI

in the region, driven by a relatively developed hardware and services market South Africa also has a high average sector value growth rate, but its score in this category is held back by low access to power (28.1 compared with Israel's 68.7) Turkey also has a relatively large IT market, with strong projected growth over the next five years, but it is a less mature market than Israel in terms of the percentage of total IT sales that are hardware sales

Bahrain and Oman remain the two lowest ranked countries in this category, owing to the relatively small sizes of their IT markets, especially the consumer segment Both markets also lack depth, with software and services sales eclipsing hardware sales The other countries that score below the regional average are Kuwait, Lebanon, Qatar and Saudi Arabia Saudi Arabia is in this category because of a relatively slow sector value growth, compared to South Africa and Turkey, while Qatar is held back by a fairly small IT market estimated at around US$510mn at the end of 2012

Country Rewards

The main factors in our country rewards ratings are the rate of urbanisation and GDP per capita Kuwait and Qatar, two countries that score highly on these metrics, top this category, each with the maximum score of 100 Conversely, countries with a fairly large rural population and lower GDP per capita levels record lower scores in this category Egypt has by far the lowest score at just 25, compared with the regional average of 72.3 Egypt has the highest rural population in the region at 57%, while the country's GDP per capita was less than US$3,000 at the end of 2011 Following Egypt is South Africa with a score

45 and Turkey with a score of 55 Both countries, though having far bigger economies than most others

on our ratings table, have their scores in this category depressed by relatively low GDP per capita ratios

Industry Risks

Israel has the highest score, at 65, in the industry risks category this quarter, a testament to the strength of its IP protection and ICT policy By contrast, Lebanon's score of 20 is the lowest in the region and reflects the risk IT investors face over frequent policy changes and unauthorised usage or duplication of

intellectual property We upgraded South Africa and Egypt's scores this quarter to reflect efforts to develop comprehensive ICT growth and development policies However, both countries continue to score below the regional average because of the relatively weak implementation of IP protection policies

Country Risks

BMI notes that the political risk outlook for most countries in our IT coverage remains heightened due to

their exposure to the ongoing conflict in Syria as well as Iran's threat to secure nuclear weapons

Although these risks are mainly external, an escalation of any of the crises could have significant political and economic consequences for each country involved For its part, South Africa, which appears insulated from the political challenges in the Middle East, also faces internal risks ranging from increasing worker

UAE, Saudi Arabia and some resource-rich gulf states, score highly in our external risk factor, which assesses a country's import cover and debt/GDP ratio Lebanon has the lowest score in the country risks category due to relatively low external and financial risks ratings

Table: Middle East And Africa IT Risk Reward Ratings, Q113

Industry Rewards

Country Rewards

Industry Risks

Country Risks

IT Ratings

Regional Rank

Previous Rank

Scores out of 100, with 100 highest The IT Risk/Reward Rating comprises two sub-ratings 'Rewards' and 'Risks'

Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60% The 'Rewards' rating evaluates the size and growth

potential of an IT market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns Source: BMI

MEA IT Markets Overview

IT Penetration

The Middle East region divides into two

groups in terms of information society

development In the first group are richer

and more technologically advanced

countries, such as Israel and the UAE,

where internet penetration is relatively

high and many households have access to

broadband services In 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 South Africa is projected to

advance the most in percentage terms,

with penetration rising from about 16.3% in 2012 to 24.1% by 2016 (note: figures may vary elsewhere in report due to updated forecasts after time of writing) Egypt, where the second biggest increase is

forecast, will have 55.4% penetration by 2016, up from 40.1% in 2012 The UAE is one of the most ready states in the region, with internet penetration seen as reaching 78.1% within the forecast period Growth in the number of internet subscribers is also forecast to pick up in Saudi Arabia, with a 21% increase between 2012 and 2016

e-Similar contrasts are apparent in relation to broadband penetration, where mobile broadband is now a major driver of overall penetration, due to 3G mobile service roll-outs across the region, and a

proliferation of mobile connectivity devices such as smartphones and tablets Broadband penetration, which currently ranges from 5.8% in Kuwait to 41.4% in Saudi Arabia

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 Saudi Arabia's 55.5% penetration see as the highest in 2016 Israel is projected to reach 28%, ahead of Qatar with 26.6%, the

second and third highest respectively among the countries covered by BMI

Internet Penetration

Per 100 Population

f = BMI forecast Source: 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 to above 20% by 2016 In Saudi Arabia, PC penetration is currently above 25% and should increase

to around one-third by 2016 Even in Israel, where household penetration is estimated at above 75%, there

is potential for further growth

Government initiatives will drive more use of computers in education In 2011, the Egyptian government announced a EGP150bn new school building programme, which should provide opportunities for IT suppliers Around 25% of Egypt's schools are not equipped with computers In the UAE, the Ministry of Education is leading an initiative to supply computers to state 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 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 The Kuwaiti government plans to spend US$104.3bn over the next four years, in an attempt to diversify the economy away from oil and boost the private sector Egypt aims to make 200 government services available soon online through a new e-government portal

Meanwhile, 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

Broadband Penetration

Per 100 Population

f = BMI Forecast Source: BMI

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 quality notebooks available to SMEs Qatar's ICT governing body, ictQatar, has made increasing SME utilisation of IT a key policy objective However, access to credit remains a barrier for smaller companies

high-in Egypt and elsewhere

Drivers are increasing economic

diversification and strong spending from

non-oil sectors such as government,

finance and enterprise By 2016, 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 drive opportunities for

IT vendors

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

In many Middle Eastern states, the hydrocarbon sector remains a key one for IT spending Expected increases in both oil output and prices should provide support for higher IT budgets in this vertical

Regional sector giants, such as Saudi Aramco, and Kuwaiti leader KNPC are investing in IT to enhance

operational efficiency, optimise cost structures and boost overall business agility

Market Size

As % Of National GDP

f = BMI forecast Source: BMI

The banking sector will also remain a

major user of technology as banks and

other financial services organisations

look to become more efficient and launch

new services Telecoms is another growth

area for technology spending, as service

providers look to exploit the potential for

increased revenue generation from new

services by implementing tools that

facilitate more personalised offers to

customers

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 To help maintain social stability, the Saudi government has announced US$93bn in handouts, including wage increases, which should boost consumer spending on electronic items such as PCs However, a further deterioration of political stability in countries such as Egypt could potentially cause disruptions to

distribution networks and have an impact on outsourcing operations

The highest growing IT market in the MEA IT market over the forecast period is expected to be Egypt, with compound growth of 89% for 2012-2016 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 BMI highlights strong growth for GCC countries, including Qatar

(47%), where the decision to award Qatar the 2022 FIFA World Cup is expected to fuel a wave of

investment in IT products and services Government spending, investment and private consumption growth are all expected to trend upwards in 2012, as Qatari real GDP growth reaches a projected 28.6%

in US dollar terms Other high-growth opportunities are forecast to include the UAE (72%) and South Africa (66%)

Sectors And Verticals

Hardware will continue to dominate MEA 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 delayed as a result

of the economic situation

IT Market Compound Growth

2012-2016 (%)

Source: BMI

Sales of notebooks are growing roughly twice as fast as desktops in many markets In 2011, Saudi

retailers reported a surge in demand mobile PCs, in many cases fuelled by price cuts PC sales were stronger than previously expected, although this growth was driven in part by promotional price cutting

The notebook sector was the main factor driving retail segment growth across the region in 2011 as consumer sales felt the benefits of aggressive channel promotions Notebooks are expected to account for more than 60% of total sales over the forecast period However, in a few markets such as Egypt, desktops still account for around half of the total PC market in volume terms

Much of the growth of notebooks has been driven by price cuts In 2011, average notebook costs dropped

by up to 25% for some models Many notebooks now retail in the price range US$544 to US$680, down from an average price of around US$800 before the financial crisis The launch of notebooks based on the Android operating system has supported this trend, as Android netbooks are often cheaper than Windows

7 ones

However, the growing popularity of tablets is expected to provide a growth area in 2012, after the product

category enjoyed a surge of popularity in 2011, fuelled by Apple's iPad Tablets will be a growth area

across the region in 2012, and the devices, originally seen as primarily for consumers, are forecast to experience increasing take-up in the business segment However, the popularity of alternative

connectivity devices such as tablets and smartphones has undercut replacement sales of notebooks

Market Structure

% Of Total IT Market

f = BMI forecast Source: BMI

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 The year 2012 should, however, see a boost from systems upgrades deferred from 2009 Migrations to the

Windows 7 operating system and new Intel core technology could trigger a new cycle of hardware

upgrades, although much will depend on business and consumer confidence Around half of Saudi

businesses still use computers based on the Windows XP operating system Meanwhile, about one-third

of computers in the UAE are still based on the Windows XP operating system

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 (CRM) will be a growth area, and other high-growth categories are set to include business intelligence, storage and security products The security software market is very important throughout the region as increased investments in IT hardware over recent years are now driving spending on secure content management technologies

There are some challenges for the regional software market One key issue is that of illegal software: across the region, up to 80% of software is counterfeit Another important factor is low income, including the high costs of operating systems such as Windows, which has led to activity to promote open source in

countries such as Egypt, championed by IBM and other vendors

Over BMI's five-year forecast period, Software-as-a-Service (SaaS) business models are expected to

provide a growing opportunity for vendors, with increasing demand for industry-specific applications Government adoption will also be a key driver in many countries, such as the UAE, where cloud services are central to the emirates government's e-government strategy for the next three years

BMI predicts that demand for IT services will grow strongly during the 2013-2017 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 25% 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) Surveys suggest that cloud spending was an IT investment priority for around one-quarter of MEA businesses in 2011 Cloud

services are central to the UAE's e-government strategy for the next three years In 2011, Kuwaiti data

communications services providers such as Zajil signed agreements with partners to expand their

cloud-based product offerings Particular areas of opportunity for cloud computing include government, banking and retailing as organisations in those fields look to save money on hardware investments

Cloud computing is also becoming viable in markets such as South Africa due to improved and cost bandwidth availability

lower-Market Overview

Government Authority

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:

ƒ Establishing a national policy and priorities for R&D;

ƒ Developing scientific and technological infrastructure;

ƒ Establishing and strengthening foreign scientific relations;

ƒ Participating in the establishment of research centres, including regional R&D centres;

ƒ Participating in the development of scientific and technological human resources;

ƒ Increasing awareness of science within the public, especially the youth of Israel;

ƒ Developing digital infrastructure (facilitating access to information);

ƒ 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 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 revenue.

Table: Government Initiatives

Gov@Net – Government intranet

ƒ 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

ƒ 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

ƒ This project will create a unified language for cross-government activities

Government EIP

ƒ 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

ƒ The Government ISP project has been operational since 1998, providing essential infrastructure for government communication

public-ƒ To date, 60% of the governmental bodies have voluntarily joined the project

Shoham – E-commerce infrastructure and service

ƒ 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

ƒ 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$2.7bn in 2013 The market is expected to grow at a CAGR of 5% over the forecast period to reach US$3.3bn in 2017, higher than previously forecast

BMI has downwardly revised its Israeli PC hardware market forecast as of Q113, due in part to the risk

of a further escalation of hostilities between Israel and Gaza Businesses are now investing more to facilitate expansion and development, rather than purely to realise cost efficiencies, but there should be growth areas However, lower average prices have meant that revenue growth in most segments has lagged shipments

As the Israeli economy's growth cools in the first half of 2013, enterprises will remain cautious about capital spending, but there could be a boost from computer hardware tenders previously delayed because

of the economic situation Migrations to Microsoft's Windows 8 operating system, and a new wave of

lower-cost ultrabooks, should stimulate new cycles of hardware upgrades, even if the exact dimensions of the boost are unclear In 2012, retailers claimed that many businesses and consumers were waiting for the October 2012 release of Microsoft's new operating system before investing in an upgrade

The release of Windows 8 could also provide a fillip to the Ultrabook market as tablet makers leverage its capabilities to offer devices with touch screens and convertible designs Much will depend on business and consumer confidence Israeli PC shipments recorded a strong recovery in 2010 from the effects of the economic slowdown, and the recovery continued in 2011, but a moderation was expected in 2012

Consumer spending is also expected to moderate in 2013, with the government's policies being less supportive of private consumption The 1% rise in VAT that was part of the government's package of austerity laws, approved by parliament in August 2012, will also have an impact on discretionary

spending on items such as PCs and notebooks However, 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 Meanwhile, there were signs in early 2012 of a consumer slowdown, although low unemployment and inflation, and a wage rise for public sector workers, should prevent this from being too severe

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, although

as recently as 2008 desktops still took around two-thirds of unit sales In 2010-2011, however, the share

of desktops declined precipitously, due in large part to demand for non-PC form factors such as

smartphone and tablets

This trend of preference for mobility is expected to continue over the 2013-2017 forecast period Despite its declining share of sales, however, the desktop sector is still significant, largely due to business and government end-users Netbooks were a driver of PC market growth in 2010, but have plateaued in the

face of competition from 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 first emerged as a significant market factor 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 (US$1,000), about twice the price of the device in the United States

Other vendors such as Samsung with its Galaxy series have followed Apple in releasing 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 continued growth area While tablets were initially positioned as consumer devices, there has been an increasing level of procurement from the enterprise sector

Ultrabooks, higher-performance notebooks designed as a response to Apple's increasingly popular

MacBooks, are an emerging product category that Intel and certain vendors backed heavily However, in H112, sales of the devices fell far short of Intel's prediction While exact sales figures were hard to arrive

at, as vendors do not yet typically break out Ultrabooks as a separate category of notebook sales,

Gartner's recent estimate of global Ultrabook sales in the region of half a million units in H112, would

represent about 0.5% to total notebook sales in that period There is some suggestion that Ultrabooks has

Due to initially high prices, these devices therefore seem unlikely to enjoy the hoped-for success, at least initially In the United States, in H112, the average market price for an Ultrabook was upwards of

US$900, compared with an average of around US$500 for a Windows notebook In contrast to netbooks, which prospered against the backdrop of the global financial crisis in 2008/2009, the relatively higher-priced category of Ultrabooks appears ill-time given the current global economic malaise Vendors appear

to have realised this and are moving ahead with plans to supply low-end Ultrabooks Meanwhile, the release of Windows 8 in October 2012 could provide a boost to adoption of Ultrabooks as consumers and businesses upgrade to the new operating system

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$1.5bn in 2013, up 8% year-on-year The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period In the past couple of years, there has been pick-up in demand for systems and upgrades in both public and private sectors, with investments by government organisations such as the Israeli Ministry of Defense and Israeli Police, and

from utilities leader Israel Electric Company

Despite the uncertain global economic outlook for Israel's export-based economy, opportunities for software vendors continue to exist 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) 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 quarter

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 8 operating system should have a positive impact on 2013 sales despite business caution and the fact that the pre-launch publicity for Windows 8 was more low-key than for its predecessor Windows 7 Microsoft is touting the touchscreen capabilities of Windows 8 and Q412 saw the release of a new wave of Windows 8 tablets and notebooks Around 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

Current areas of enterprise demand include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP)

implementation and CRM CRM is a particularly buoyant area, while in 2011 vendors continued to sign

up new business intelligence customers

The security software segment is an important opportunity, potentially worth tens of millions of dollars, and awareness of security issues has grown with the rise of cloud computing Israel has also 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

Given the current focus on many businesses of controlling costs, the pay-on-demand Service (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

Software-as-a-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 recent financial crisis, regulatory compliance and demand for new services will continue to drive IT spending by banks Vendors have reported that the key financial services

segment has 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

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$2.3bn in 2013, and this is expected to grow at

a CAGR of 7% over the forecast period to reach US$3.0bn in 2017 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

A slowing economy will pose a challenge to Israeli market IT services vendors in 2013, with the

downtrend in business investment expected to continue into H113 However, demand for IT services has generally continued to be healthy, according to leading vendors, with new projects across public sector, industrial and financial verticals The defence and homeland security sector has also been 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

Defence and government spending represent a significant component of Israeli IT demand and have some immunity to economic vicissitudes The Ministry of Defence has awarded a number of multimillion dollar

IT contracts, including a US$10mn tender for a new command and control system Among other smaller recent government projects, the Israeli Police awarded a US$6mn contract

Meanwhile, the healthcare and utilities sectors have also been generating outsourcing projects, such as 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 Following a recovery in 2010 from the economic slowdown, vendors reported that demand had revived in the key financial services vertical, where

recently projects have 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

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 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

Outsourcing

Outsourcing has become a bigger factor and was forecast to account for about 20% of IT services

spending, or at least US$424mn, in 2012 Key sectors for IT outsourcing include:

ƒ 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

ƒ 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

ƒ 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 is an important element of the Israeli government's socio-economic policy framework The National Economic Council submitted a policy agenda to the government that specified two main policy tracks to reduce poverty and achieve 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

IT will 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.The Israeli Association of Electronics and Software Industries has 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 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:

ƒ 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

ƒ Regulations should be amended to facilitate rapid investments in communications, technological infrastructure, bandwidth and fast internet backbone

ƒ Massive investment should be made in the educational system for training information workers

ƒ Aid to be given to the less wealthy to make them part of Israel's information industry

Industry Forecast

BMI projects that the Israeli IT market will grow to a value of US$6.5bn in 2013, and the market is

forecast to reach US$8.2bn in 2017 In 2012, several indicators suggested moderating consumer demand, but vendors still reported a solid trading environment 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 2013-2017 forecast period, thanks 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)

2013 Outlook

Spending on IT products and services is expected to moderate in 2013 BMI has downwardly revised its

Israeli market forecast as of Q113, due in part to the risk of a further escalation of hostilities between Israel and Gaza Meanwhile the Israeli economy continues to cool and sluggish external demand and weaker consumer spending are likely to weigh on headline growth throughout the year The government

is set to rein in spending, while leading indicator data paint a relatively negative picture for private consumption and fixed investment

BMI still forecasts overall solid growth for the Israeli IT market for 2013 There should be opportunities

for vendors around business intelligence and cloud computing Sales could receive a boost from

Windows-8 driven upgrades and computer purchases previously delayed as a result of the economic situation The move to mobility and new form factors such as tablets and ultrabooks will help to drive demand in the consumer segment, while to some extent undermining demand for traditional notebooks

Consumer spending continued to slow in H112, after spending on durable goods such as PCs showed signs of falling off in 2011 However, consumer spending should be supported by stimulatory fiscal spending as well as falling unemployment and low inflation and interest rates

Meanwhile, despite the challenging trading conditions, vendors have reported a continued flow of IT

projects, with large tenders from the Israeli Ministry of Defense and the Israel Electric Company

Following the global financial crisis, vendors reported demand had revived in the key financial services

vertical, with new projects including an US$11mn IT outsourcing tender by the First International Bank of Israel Healthcare, the public sector and utilities were also generating new projects or significant

contract extensions

Migrations to Microsoft's Windows 8 operating system could trigger a new cycle of hardware upgrades

in 2011, although much will depend on business and consumer confidence A substantial share of Israeli

computer users are estimated to still be using the Windows XP operating system Windows 8 could also fuel the Ultrabook market as tablet makers leverage its capabilities to offer devices with touch screens and convertible designs

Market Drivers

The Israeli IT market has several positive fundamentals that should keep it in positive territory during

BMI's five-year forecast period Household computer penetration of around 75% offers potential for

further growth High internet penetration and growing broadband penetration are drivers for the retail segment, along with interest in multimedia and mobile computing applications and the new popularity of mini-computers

Per capita IT spending is expected to rise from US$850mn in 2013 to US$1.1bn by 2017 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,

One potential demand driver will be organisations looking for help in using efficiencies from cloud computing, such as Software-as-a-Service 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

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$2.7bn in 2013 to US$3.3bn in 2017, with PC sales

projected to rise from an estimated US$2.3bn to US$2.8bn Over the period, software spending is

expected to increase from an estimated US$1.5bn to US$1.9bn and services from an estimated US$2.3bn

Industry Forecast Internet

Table: Internet Data And Forecasts, 2010-2017

No of internet users/100

f = BMI forecast Source: ITU, BMI

As with our fixed-line and mobile

telephony forecasts, we have revised

and extended our forecast for the

development of Israel's internet user

and broadband subscriber markets

Our new set of forecast figures runs

to the end of 2017 There were

approximately 5.115mn users as of

2011, giving Israel a penetration rate

of 67.6% We expect steady, but

slowing, growth in the number of

internet users to continue for the

duration of our forecast, resulting in

6.356mn internet users in 2017,

equivalent to a penetration rate of 77.7%

Meanwhile, owing to a lack of reliable data on the number of mobile broadband subscribers (specifically those subscribers who use USB dongles and data cards to access the internet via laptops, PCs and

smartphones), our forecast for the Israeli broadband sector is currently based on fixed broadband

connections only Data published by incumbent telco Bezeq suggests that the number of fixed broadband subscribers had increased to around 1.800mn at the end of 2011, up by 2.2% y-o-y BMI believes that, by

the end of 2012, Israel's broadband subscriber base will have risen to 1.860mn; this is equivalent to a

Industry Trends – Internet Sector

2010-2017

f = forecast Source: BMI

Over the next five years ending 2017 we envisage average annual growth of 3.9% for the Israeli

broadband sector This will see the subscriber base reach 2.112mn subscribers, equivalent to a penetration rate of 25.9% We expect the growing popularity of mobile broadband services to result in slowing demand growth in the fixed broadband sector Nevertheless, we identify several developments which will sustain fixed broadband growth for the duration of our forecast and beyond These include Bezeq's ongoing deployment of its fibre-to-the-cabinet (FTTC), a development which is helping to drive capacity for its residential and corporate customers' broadband access Meanwhile, recent months have seen considerable reductions in the price of broadband tariffs being offered by the major operators Another development likely to stimulate growth is the introduction of LLU, which will give alternative operators access to Bezeq's network and will stimulate much greater competition