BMI's Executive Summary

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Market Overview

The Israeli IT market should grow robustly over BMI's forecast period providing opportunities for vendors in many sectors. Despite geopolitical constraints, BMI estimates that the local IT market reached a value of around US$4.4bn in 2007, and will continue to grow at a compound annual growth rate (CAGR) of around 9% for the next few years. Computer sales have been especially buoyant in 2007 with the positive economic situation and low interest rights prompting higher than expected spending. Consumers and enterprises are increasing outlay on IT, while spending in traditional sectors such as government and military also remains strong. High internet penetration and growing broadband penetration remain further strong drivers for the retail segment, with growing interest in multimedia and mobile computing applications. However, desktops still dominate the market to a greater extent than in many other countries.

2007 continued the upward trend established in 2006, with Israel's IT market driven by a buoyant economy which is fuelling a revival in enterprise IT. Israel's IT market is benefiting in part from recordbreaking foreign investment, and a growing demand for major IT outsourcing solutions. However, government IT and digital divide initiatives are also important drivers of opportunity for vendors, while investments by financial sector organisations are on the rise.

Competitive Landscape

Multinational as well as Israeli companies have been among the big winners as robust economic growth continues to drive IT spending. Microsoft reported some high profile wins in 2007 in both public and private sectors. Leading Israeli HMO Maccabi Healthcare Services deployed a CRM system based on Microsoft's Dynamics CRM platform. In 2007 Microsoft Israel was also selected by Super-Pharm Israel, the leading drugstore chain in Israel, to roll out a portal to cover more than 120 shops.

However, Israel's domestic IT Service giants have also been growing strongly. Ness Technologies, one of the leading providers expected revenues for 2007 in the range of US$557 to $565mn. Meanwhile, fellow Israeli IT giant Matrix also saw a revenues rise of more than 10% and reported a number of successes including the implementation of a pension consulting system for the Mizrahi Tefahot Bank. Israel typically accounts for 40%-50% of revenues for these companies.

Industry Developments

The 2005-2007 master plan of the government's ERP project called for implementation in around ninety government units by the end of last year. The project leverages mySAP ERP to restructure government with a particular focus on financial, logistics and human resource components. Dubbed 'Merkava', the mySAP based project has cost an estimated ILS800mn since launch in 1999 and as of the beginning of 2007 covered around 40 government units.

The government recently announced that it has chosen Microsoft search technology to power its government services portal gov.il. With the economy booming the government is also pressing ahead with other strands of its e-government projects. Among other initiatives there has also been spending on computers in healthcare and the nationwide paperless court initiative.

Computer Sales

Computer sales in Israel (including servers and accessories) are forecast at US$1.7bn for 2007, up from US$2.2bn in 2006. The market is expected to grow at a CAGR of 7% over the 2006-2011 forecast period, to around US$2.3bn by 2011. Computer sales grew strongly in the first three quarters of 2007. Growth is being driven by a generally buoyant economy is encouraging buoyant retail sales with as many as 10% of Israelis expected to purchase a computer in 2007.

In 2007 desktop sales were reported to be far outstripping those of notebooks by 3:1. This reflects the fact that despite strong growth in demand for notebooks, the desktop sector is still unsaturated. PC penetration was only 26.4% in 2005, while digital divide issues mean that 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.

Software

Spending on packaged software in 2007 was estimated to be US$886mn, up from US$772mn in 2006. The packaged software segment is expected to grow at a CAGR of around 11% over the forecast period. Spending on software is shifting towards the small-medium enterprise (SME) segment. Increased IT budgets were meaning increased spending on enterprise solutions in 2007.

Reviving or emerging areas of opportunity include customer relationship management (CRM) solutions, as well as business intelligence management. A survey of IT managers suggested that areas of high demand in 2007 would include management of Microsoft systems and servers, as well as systems management, basic data management, firewalls, enterprise resource planning (ERP) implementation, andCRM. In terms of verticals, the financial sector is very hot at the moment, with other areas to watch including defence and healthcare.

IT Services

The IT services sector had a value of around US$1.4bn in 2007, and this is expected to grow strongly to US$2.2bn by 2012. A number of major outsourcing deals included that awarded to HP by the Israeli Navy for management of its IT infrastructure has highlighted the growing opportunity. 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. However, the government is now actively promoting Israel to multinationals, and Israel is starting to emerge as a location for packaged applications and localisation services.

E-Readiness

In 2007, Israel had around 4.2mn internet users, representing a penetration rate of around 58% of the population. Broadband penetration was around 19.6 %, or around 1.4mn accounts. The government has announced that it intends to make a big effort to narrow the digital gap. In order to deal with the problem, the following measures have been proposed:

• A senior minister for high-tech should be appointed to co-ordinate 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 well-off to make them part of Israel's information industry.

Competitive Landscape for Middle East & Africa Information Technology: Sample of  
Companies Ranked

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Company profiles, including SWOT (strengths, weaknesses, opportunities and threats) analyses, business activity, leading products and services. BMI forecasts for all headline macroeconomic indicators, including real GDP growth, inflation, fiscal balance, trade balance, current account and external debt. Company profiles and SWOT analyses covering competitive positioning; leading products, services and brands; annual sales and share of domestic hardware, software and components markets; headline financials and M&A; pan-regional expansion strategies and strategic partners. Companies covered include:

Network of Information Technology Sources

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BMI's Middle Eastern and African IT Reports are based on an extensive network of multilateral organisations, government departments, IT industry associations, chambers of commerce and company reports. Information sources include: