Focus on Issues: Israel May Be High-tech Superpower, but Its People Are Still Not Logging on

Israeli Internet users cheered last week when Microsoft announced that it will soon launch the first Hebrew-language portal backed by a non-Israeli company together with Internet Gold, a leading Israeli Internet service provider.

Although several local Hebrew-language portals exist, the move reflected the desire of large Internet companies like Microsoft, the world’s biggest software company, to have portals — or gateways to the Internet — tailored to foreign markets around the globe. Last week’s agreement came after Microsoft launched 27 similar portals around the world, and other portals like Yahoo! and Excite also have significant international operations.

For companies like Microsoft, Israel, with 6 million people, is a small market. But Microsoft’s late arrival to Israel’s shores also highlights the fact that Israel’s Internet market is relatively underdeveloped.

Even though Israel has gained international acclaim for its rapidly growing high-technology sector, its Internet market lags behind the rest of the world’s. Players and analysts in Israel’s high-tech and Internet industries said a combination of factors ranging from the language barrier to the structure of Israel’s telecommunications sector have combined to inhibit the development of the Internet in Israel.

“There are thousands of Israeli start-up companies and so many great ideas and entrepreneurs launching initiatives for the Internet,” says Avi Weiss, an Internet researcher for the International Data Corp., a market research company. “But there is a wide gap between the new technology coming from Israel and local Internet usage.”

According to Weiss, who is compiling his second comprehensive survey of the Internet in Israel, the Internet penetration rate in Israel is about 10 percent, compared with about 15 percent in Europe and more than 30 percent in the United States. Weiss points to several reasons for the lag:

Personal computers are expensive in Israel — often twice the price of computers in the United States — and therefore only about 36 percent of all Israeli households have PCs, compared to about 46 percent in the United States.

Standard Web browsers were not designed for right-to-left languages like Hebrew. Companies took a long time to agree on a standard technology to deliver Hebrew content online, and even this requires users to set up their browsers to read Hebrew characters.

Internet usage in Israel is expensive. Until last year, Israel’s leading Internet service providers did not offer monthly unlimited surfing packages, and there is no flat monthly fee for local telephone calls as there is in the United States. This means that during most hours of the day, Israelis pay per minute to use the phone lines that link them to the Internet.

“The reality of Israel’s high-tech infrastructure stands in stark contrast to Israel’s image as a high-tech superpower,” says a report on the Internet published last August by the Institute for Advanced Strategic and Political Studies, an Israeli-based liberal economic think tank. “Both the users and the public at large suffer.”

According to the report, Israel ranked 36th out of 44 countries in terms of Internet charges. The study says the total cost of 20 hours of surfing the Web in Israel is about $49.83 compared with about $19.95 in the United States.

Much of the problem is attributed to a lack of competition for elements of the Internet infrastructure. Although there is fierce competition among Internet service providers, local telephone hookups are controlled by Bezek, the state- owned telecommunications company. The institute estimates that high prices and slow Internet speed caused $61 million in charges to Internet users who suffered from inflated telephone and Internet bills.

Those who are willing to brave the charges and venture online despite high costs are enjoying more and more Hebrew language content. International Data Corp. says there were 7,200 Israeli Web sites in mid-1998 and this number is growing by nearly 6 percent a month. But Israeli surfers are not doing much shopping.

Although American Jews are making the most of e-commerce, buying everything from Judaica to travel packages to Israel online, e-commerce in Israel is tiny. Last year Israelis only carried out about $3 million in transactions online.

This year, that number will jump to about $10 million, but these figures are tiny compared to the United States. According to the Yankee Group, a U.S. market research firm, consumer online business is expected to jump from $14.9 billion last year to $37 billion this year.

Koby Bremmer, marketing director at Eagleshade.com, a Tel Aviv company that builds Web sites for Israel’s biggest companies, says Israel’s corporate sector still does not understand the Internet.

“Big Israeli companies do not yet understand the power of the Internet,” he says. “They have not even budgeted the Internet into their business plans.”

This, he explains, has created a chicken-and-egg situation, where Israeli companies are not yet willing to invest in the Internet until they see more people online, and the public does not come online until there are more local sites to shop on.

Shally Tshuva, managing director of Foresight, a Tel Aviv high-tech consulting firm, is more upbeat. “We are about two years behind the U.S. in e-commerce,” she says. “But we will begin to see the sparks of e-commerce during 1999.”

In part, the e-commerce lag is a product of the low penetration rate. But it is also caused by Visa C.A.L., one of Israel’s biggest credit card franchises, which during 1998 scared people away from online shopping by refusing to allow its credit card to be used for Internet transactions, claiming they were not safe.

Tshuva also says that the generally low level of development of the Internet in Israel is misleading.

“Israel is considered a very high-tech country not because of its 6 million population, but because of about 2 million who are relevant,” he says. There are, says Tshuva, about 1 million Arab citizens and 1 million Russians who are less well off than the average Israeli and are not interested in the Web. Another 1 million haredim and other religious Jews shun the Internet for religious reasons.

None of this bothers Eli Holtzman, chief executive of Internet Gold, the Israeli Internet service providers that sealed last week’s deal with Microsoft. Since Internet Gold’s launch in 1996, the country has grown to become one of Israel’s two top service providers. Internet Gold is now a public company traded on the Nasdaq exchange in New York, and also hopes to become a regional service provider by buying up stakes in providers in Greece, Turkey and Cyprus.

“Israel may lag behind the U.S. by two or three years, but emerging markets are two or three years behind Israel,” he says. “I think it will all come together next year. By then, there will be between 1.5 million and 2 million Israelis online, and this will attract Israeli entrepreneurs to reach into their pockets and invest.”