Market Overview
BMI projects that the Israeli IT market will grow to a value of US$5.6bn in 2011, consolidating a recovery in 2010 from the impact of the global economic situation. The market is forecast to reach US$7.3bn in 2015.
The market should gain enough momentum from key sectors to expand at a compound annual growth rate (CAGR) of 7% over BMI's 2011-2015 forecast period, thanks to stable demand from defence and government sectors as well as opportunities in verticals such as financial services and small and mediumsized enterprises (SMEs).
In 2010, vendors reported a pick-up in the flow of IT projects, which continued into H111 with new large projects initiated by the Israeli Ministry of Defence (MOD) and the Israel Electric Company. The Israeli IT market has strong fundamentals that should keep it in positive territory during BMI's five-year forecast period. Household computer penetration of around 75% offers potential for further growth. High internet penetration, including growing broadband penetration, are drivers for the retail segment, while the financial services sector accounts for about 15% of Israeli IT spending.
Industry Developments
In May 2010, the Israeli Ministry of Finance launched a programme called 'Relative Advantage' to boost Israel's high-tech sector. During the economic downturn, Israel's high-tech sector suffered as demand for high-tech exports dropped by at least 10-15%, with as many as 10,000 sector jobs feared to be at risk. This represented a major concern for the Israeli government given that high-tech accounted for around 10% of Israel's economy, with annual sales estimated at around US$25bn.
As part of its modernisation agenda, the government is pressing ahead with various other strands of its egovernment project. Among other initiatives, there has been spending on computers in healthcare and the nationwide paperless court initiative. The e-government programme is leading to increased demand for computers, with the Israeli government reaching supply agreements with vendors such as Dell and HP.
Competitive Landscape
The Israeli IT services market is competitive, with leading multinational competitors IBM and HP (following its merger with EDS) both estimated to have Israeli IT services market shares of around 10%. HP Israel's software division hosts HP's biggest research and development (R&D) centre worldwide, and the company also has significant production facilities in Israel.
Among major developments in H111 was a US$75mn five-year agreement that domestic IT services leader Ness signed with global finance leader Barclays Capital to develop a high-tech research and development centre in Israel. The outsourced software engineering model was hailed by Ness as pioneering. Ness reported revenues of US$137.3bn in Q111, with revenues from the Israeli market at 42% of the total.
Cloud computing is a major focus of IT company investment in the Israeli market. In Q111, US PC hardware leader Dell inaugurated a new Israeli R&D centre, which will focus on developing storage technologies and cloud computing solutions. Meanwhile, cloud computing now accounts for around 70% of the work at Microsoft's Israel-based R&D centre.
Computer Sales
The Israeli computer hardware market, including desktops, notebooks, servers and accessories, is forecast to reach US$2.4bn in 2011, up from US$2.2bn in 2010. The market is expected to grow at a CAGR of 6% over the forecast period to reach US$3.0bn in 2015. BMI has upwardly revised its Israeli PC market growth for 2011, consolidating a recovery from the impact of the economic slowdown, which hit consumer demand for electronics goods.
In 2010, Israeli computer shipments recorded a modest recovery compared to the same period of 2009. Household consumption moved into negative territory in 2009, and, although there was a slight recovery in H209, trading conditions remained tough.
Software
Israeli software spending is projected at US$1.2bn in 2011, up from US$1.1bn in 2010. The packaged software segment is expected to grow at a CAGR of around 8% over the forecast period. In Q111, the pick-up in demand for systems and upgrades continued in both public and private sectors, with investment by government organisations such the MOD and Israeli Police, and from utilities and financial sector companies.
Software spending is shifting towards the SME segment, which forms the mainstay of the Israeli business sector. Spending on enterprise solutions has grown since 2007, with reviving or emerging areas of opportunity including security, customer relationship management (CRM) solutions and business intelligence. In terms of verticals, the financial sector has been a mainstay of demand, with other key opportunities including defence and healthcare.
IT Services
The IT services segment is forecast to reach a value of US$1.9bn in 2011 and this is expected to grow at a CAGR of 8% over the forecast period to reach US$2.6bn in 2015. In 2011, vendors reported a continued flow of new projects in sectors such as government, financial services, homeland security and utilities. Government and defence are two key sectors likely to be a continued source of opportunities, while other growth areas include healthcare IT and Utilities. Despite failing to capitalise in the past, Israel is starting to emerge as a desirable location for packaged applications and localisation services.
E-Readiness
Israel's relatively high PC penetration and the growing availability of broadband access mean internet penetration is likely to continue its upward trajectory. The government has announced it intends to make a big effort to narrow the digital gaps that manifest themselves across various demographic lines. Israel's strong broadband growth has long relied on a handful of developments across the market. These include the competition between Bezeq and the cable companies, with five major internet service providers (ISPs) vying for market share from both the corporate and residential markets, which enjoy high PC penetration rates, advanced telecoms infrastructure and minimal regulatory intervention. Another development likely to stimulate growth is the introduction of local loop unbundling (LLU), which will give alternative operators access to Bezeq's network and stimulate much greater competition.
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