The Israeli IT market is growing at a five year CAGR of 6%, IBM invests in Israeli cleantech start ups, the iPad gets the green light, and Ottawa’s Enablence acquires Israel’s Teledata Networks.

Business Monitor International has projected that the Israeli IT market will have a value of US$4.9bn in 2010 and will grow at a five year CAGR of 6% to a projected US$6.2bn in 2014. The Israeli IT market should have enough momentum from key sectors to expand over the 2010-2014 forecast period, thanks to relatively stable demand from defence and government sectors, and opportunities in verticals like financial services and small and medium-sized enterprises (SMEs). Spending is forecast to resume single-digit growth in 2010, with a boost, particularly in the second half of 2010, from computer hardware tenders delayed from 2009.

The Israeli IT market has a number of positive fundamentals, which should keep it in positive territory during the five-year forecast period. Low computer penetration of around 30% offers potential for continued 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 IT sector jobs feared to be at risk. This represented a major concern for the Israeli government, given that high-tech accounts for around 10% of Israel's economy, with annual sales estimated at around US$25bn. 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 modernisation agenda, the government is 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 agreements with vendors like Dell and HP.

Competitive landscape

The Israeli IT services market is competitive, with leading multinational competitor IBM estimated to possess Israeli IT services market share of below 10%. However, following its merger with EDS US giant HP was projected to take around 10% of the Israel IT services market last year. 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.

Leading Israeli IT services vendors experienced mixed fortunes in the first half of 2009. Market leader Matrix reported wins in a number of key sectors including healthcare, financial services, defence and government. In the third quarter Matrix reported 100% annualised growth in net profits, and 7% growth in operating profits on flat revenue growth. Ness Israel, by contrast, reported a 19% decline in revenues during the second quarter, although 30% of this was due to currency fluctuations.

In 2009, enterprise software giant Oracle was in discussion with Israel Credit Cards Cal (ICC-Cal) concerning the future of a major computerisation project being implemented by Oracle. Oracle initiated the project, to replace and upgrade ICC-Cal's computer systems, some 18 months ago. However, differences had apparently arisen between Oracle and ICC-Cal concerning the project. Meanwhile, in 2008, Oracle rival SAP reached an agreement with Ness to purchase the latter's SAP sales and distribution division in Israel.

Computer Sales

The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is projected at US$2.2bn in 2010, up from US$2.1bn in 2009. The market is expected to grow at a CAGR of 5% over the forecast period to reach US$2.7bn 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, with spending on household equipment down by 6.7% in early 2009, and although a slight recovery in expected into 2010, trading conditions remained tough.

Software

Israeli software spending is projected at US$1.0bn in 2010, up from US$973mn in 2009. The packaged software segment is expected to grow at a CAGR of around 7% over the forecast period. Businesses were expected to remain cautious in H209, 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. Spend 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 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$2.2bn in 2014. In 2009, there were reports of IT managers scaling back projects, and vendors will have to adapt to an environment where some projects are commissioned more in response to immediate needs.

Government and defence 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 capitalise in the past, Israel is starting to emerge as a desirable location for packaged applications and localisation services.

E-Readiness

Israel's 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 incumbent telco 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.

Telecommunications

The Israeli market has been stable for some time, but the Israeli government is moving to create a wholesale market in all sectors of communications. Considerable merger and acquisition activity is taking place as the major fixed-line, mobile, Internet and pay TV players all aim to consolidate or improve positions across all sectors. 3G subscribers make up at least a third of the total and revenue from mobile data has grown steadily.

IBM to invest in Israeli cleantech start ups

IBM Israel announced a program for investing in cleantech (energy and water) in cooperation with the Ministry of Industry, Trade and Labour. The announcement is part of a general move in the past few years by the computing giant to get into cleantech, after indentifying it as a growth engine. Up to now, IBM has invested in its more traditional areas, such as information technology. The company has invested through its Global Technology Unit, not necessarily in start ups. By contrast, the new investment channel is directed at cleantech start ups.

Israel baffles with iPads ban

Israeli customs has stopped confiscating the iPads upon entry. The Israeli Communications Ministry blamed the iPad's Wi-Fi, which supposedly uses low-powered American standards as opposed to the European standards on which Israel relies for electronics. The ministry is worked with Apple and local distributor iDigital to approve the import of iPads into the country.

Ottawa’s Enablence acquires Israel’s Teledata Networks

Ottawa-headquartered Enablence Technologies Inc, a supplier of fibre-to-the-premise (FTTP) equipment for triple-play residential and business services and optical components and subsystems for access, metro and long-haul markets, announced it has signed a definitive merger agreement to acquire Teledata Networks Ltd, an Israeli corporation. Teledata provides products and solutions enabling telecom providers to migrate to Next Generation Networks. The company has accumulated a wide installed base, spanning millions of lines in over 55 countries worldwide, including Brazil, Chile, Costa Rica, Kazakhstan and South Africa, many of which are Tier 1 service providers.