Analysis

2019 Brought Major Changes for High-tech Firms in Israel

Alongside mega-investment in startups, repeat election campaigns generated a flood of Facebook ads

logos of mobile apps, Google, Amazon, Facebook, Apple and Netflix, are displayed on a screen in this illustration picture taken December 3, 2019.
REUTERS/Regis Duvignau

2019 will be remembered in Silicon Valley as the year in which the high-tech sector sobered up. There were failed attempts at public offerings and industry giants faced growing criticism and pressure from government regulators and the public.

There was also scandals about invasions of privacy, high-tech worker protests and allegations of anti-competitive practices. And when it comes to companies with an Israeli connection, there was the ouster of Adam Neumann, the founder of WeWork, the company that built a network of shared office spaces in the United States, Israel and a host of other countries around the globe. In short, there was a change in attitude toward the sector, which in many quarters is no longer seen as changing the world for the better.

In Israel, this was a good year for high-tech. The sector has continued to flourish. Masses of Israelis embraced new technology, but 2019 also produced more complex issues involving ethical dilemmas.

Startups’ mega-sums from investors

The most prominent trend in Israeli high-tech was the record number of Israeli startups that raised more than $100 million in financing rounds. There were 15 of them, compared to only four in 2018. And the amount of growth capital raised in advanced stage financing rounds shot up from $3.45 billion in 2018 to $5.24 billion this year, about a 50% increase according to the organization Start-Up Nation Central.

At the same time, the secondary market grew. Many of the large funding rounds involved company stakeholders – entrepreneurs, investors and employees – selling shares to new investors. All of this was in part the result of the growth in the sums available for investment in the sector, both in Israel and abroad.

Burgeoning investment.

Finally, there has been an increasing number of companies that choose to raise more from investors and grow rather than selling to a larger company at a relatively early stage. In many cases, the companies are valued at over a billion dollars (qualifying for “unicorn” status). Some plan to become even bigger, either to boost their price tag in a future exit or in advance of a public offering. But these high valuations are also a source of some concern over whether the companies can sustain such a valuation if and when the time comes for an exit.

Addicted to Netflix

In recent years, internet-based streaming and television services have attracted a large following in Israel – at the expense of more traditional cable TV and satellite services. A standout in 2019 was Netflix. In a survey conducted by Israel’s Partner Communications, about 40% of Israelis said that they had a Netflix subscription, as opposed to 25% in 2018. Even if not all of them were paying subscribers and used friends’ or relatives’ Netflix accounts, the figures reflect impressive penetration into the Israeli market.

Netflix’s success can be attributed to the buzz over the successful series that it has produced, but also to promotional efforts in Israel that web-based services Partner TV and Cellcom TV have made in it. This year, Netflix faced new competition from Apple TV+, which has Hebrew subtitles on all its programming. Amazon Prime Video also expanded its Hebrew-subtitled programming.

Binge watching.

Israelis, at least for the time being, continue to abandon Yes, the satellite television service provider, and Hot, the cable provider, in favor of Partner TV and Cellcom TV. For the third quarter of this year, Cellcom TV reported having 247,000 subscribers, about 20% more than the comparable quarter in 2018. For its part, Partner TV reported 176,000 subscribers, a whopping 66% increase.

By contrast, Bezeq Telecommunications reported that its Yes satellite television unit had 558,000 subscribers, following a loss of 4.5% of its subscriber base between third-quarter 2018 and third-quarter 2019.

For the average Israeli consumer, the competition has meant lower prices and an increase in content. The average monthly television service bill in Israel dropped from 246 shekels ($71 at current exchange rates) to 189 shekels between 2015 and 2019, the Communications Ministry reported.

Facebook’s Israeli political advertising

There has been bitter anguish in Israel over the two inconclusive Knesset elections this year, in April and September. Neither vote produced results to enable Prime Minister Benjamin Netanyahu of Likud or his primary challenger, Kahol Lavan party leader Benny Gantz, to form a government. As a result, Israelis will be heading to the polls again on March 2.

But one beneficiary of the political stalemate has been Facebook – along with other social media outlets – which sold a huge amount of political advertising during the campaigns.

Politicians discover.

In an effort to increase its transparency, in August Facebook began publishing data on the ads that it sold in Israel on political and social issues. Since August, the company says it generated about 17 million shekels in advertising on political and social welfare issues. The numbers appear to be incomplete, with the real figure being much higher.

And if you factor in the revenue that Facebook must have received in the first eight months of the year, which would have also included advertising for the first election round in March, the company must have attracted tens of millions of shekels in political advertising revenue this year aimed at convincing Israelis how to vote.

When it comes to the broader role of social media in the campaign, the level of poisonous rhetoric, hate and incitement in which Israeli politicians and individual voters engaged in 2019 on Facebook attained new heights – or depths – turning the social networks into an uglier place than ever.

Cyberspy technology

One final development that is not reflected in a chart: The Israeli high-tech sector has long been an exporter of cybertechnology, including advanced hacking and spy technology. The Israeli innovations can be used by governments and security agencies in their fight against crime, including terrorism, but this year, it again became apparent that it can find its way into the hands of undemocratic regimes and those who use it in morally questionable circumstances.

The Herzliya-based firm NSO, which this year was purchased by its founder at a valuation of a billion dollars, continued to garner headlines, including allegations that its technology was used to hack the Whatsapp messaging service accounts of human rights activists and journalists.

In addition, it turned out that veterans of Israeli army technology units have been joining the ranks of a company called Dark Matter, which according to foreign reports has been working for the United Arab Emirates and against journalists and human rights activists. And according to TheMarker and foreign reports, the technology of Israeli face-recognition firm AnyVision has been used to monitor Palestinians in the West Bank and East Jerusalem. That, in turn, led to an audit by Microsoft, one of AnyVision’s major investors.