AWS halts Israel data centers expansion

In recent months, Amazon Web Services (AWS) has been exploring the possibility of expanding its cloud service in Israel by adding more data centers. As the biggest winner of the tender for Israel’s Nimbus government cloud service, AWS is committed to establishing a local service area in Israel. As the local franchisee, companies and government organizations can connect to its cloud service at a facility located in Israel. Until then, the only option for Israeli companies and government ministries was to store data and perform cloud processing at sites abroad such as Ireland, Germany and the US.

Following its tender win, AWS leased three large data centers in Shoham, Tnuvot in Sharon and in the Har-Tov industrial zone near Beit Shemesh, and launched its Israel service area in August 2023. AWS recently began a due diligence process to locate additional sites for the construction of new facilities, but “Globes” has learned that the process has been terminated.

The decision does not necessarily mean that AWS will not expand in Israel. Contrary to its past practice, AWS did not build new data centers in Israel but leased server space in existing facilities built by Schonfeld Engineering at various sites in the country. But terminating the process to examine a more significant expansion reflects a certain cooling in the cloud giant’s forecasts and growth plans in Israel.

The Israeli market is struggling to grow

Why is AWS cooling about expansion in Israel? Market sources explain that the entire Israeli market is at a lower growth point than the cloud providers expected when they invested billions of shekels here in building data centers to operate local cloud computing services. Google, which won the Accountant General’s tender for government cloud computing, also rented data center space from companies such as SDS, Serverfarm, and EdgeConneX, while other giants Microsoft and Oracle have also established an Israeli cloud service area, despite losing the government tender.

At the same time, over the past two years, more and more Israeli-founded tech companies have chosen to establish their headquarters in the US. The Israel Innovation Authority reported that 80% of Israeli companies establish their headquarters abroad.

This does not just involve setting up offices and hiring local employees. “Globes” has learned that more and more Israeli companies from the private sector prefer to decentralize their computing resources and take many components out of Israel and store them in data centers abroad, mainly in Ireland, the Netherlands, Germany and the US, even if these companies are focused on the Israeli market.

The CEO of a large Israeli company recently admitted in private that the company keeps its data in Ireland. “We understand that business continuity in Ireland is higher than in Israel, especially since the costs there are lower,” the executive said on condition of anonymity.

The reasons for increasing computing activity abroad are varied, but this company is no exception: Despite Ireland campaigning against Israel – for example, filing a lawsuit against it at the International Court of Justice in The Hague – Israeli companies are not afraid of sanctions against them, since to harm Israeli activity on its territory, would mean antagonizing cloud providers like Amazon andGoogle.

“Investors want to get data out of Israel”

Even today, 18 months after AWS launched its cloud service in Israel for the local market, prices are more expensive than most cloud regions in Europe, although Israel is in the middle of the global price range offered by the company.

AWS charges 4.79 cents per hour for one cloud pulse, a single unit of consumption that serves as a benchmark for usage pricing, for a cloud services for servers in Israel, while prices in Ireland are only 4.56 cents per hour. AWS’s Israel region is more expensive than most of AWS’s operating regions in the US and Europe, with the exception of Zurich and Frankfurt, and is priced similarly to Milan.

AWS Israel region is ranked 18th in overall pricing, along with Milan, among AWS’s 33 service regions worldwide. There is a reason for the average price. Compared with other AWS regions worldwide, the Israel region is considered to be sparser in computing resources. However, the rule of thumb in the computing world states that the more services the service region offers, the greater the customer traffic, the more servers the provider purchases, and the price can be lowered.

AWS is not the only cloud provider, but it is the biggest of them. Google was the first to open a local service region in Israel in November 2022, while Microsoft opened last year. For both companies, the Israeli region is priced low on a worldwide comparison.

In a survey published by Israeli human resources management company HiBob, 27% of those questioned in Israel admitted that their companies had transferred data abroad from departments or certain areas following the outbreak of the war.

Aman IT Group unit Eshnav Information Systems CEO Olga Gankin admits that she has received requests from customers to transfer their cloud computing abroad. “No one comes forward and explains the reason, but most of them cite instability over the last year and a half, and that it’s weighing on their business continuity. They usually don’t take everything out, but cloud systems related to development and sometimes also those related to the product.”

Gankin explains that there is a difference between companies that operate in the Israeli cloud, which are, for example, government companies, and tech companies and startups, where the trend is to transfer activities abroad, even if not always all of them. This stems from the fact that most of the work is intended for markets outside Israel and that there are multiple branches of the company, and also because of the brain drain, which is very troubling for the companies.

“Therefore, when companies establish activities abroad and deploy data centers that are geographically closer to the target markets or to the development and product branches, they reduce the risk of employees fleeing and feel more secure in terms of business continuity.”

She adds, “The risk of cyberattacks has increased in Israel, as has the risk of missile attacks, economic and legal instability. Investors who identify with Israel and invest to support local industry are also seeking to take data out.”

One of the most sought after destinations – Ireland “It takes time for a company like Amazon, which opened its service area in Israel, to roll out all its services here, and it happens more gradually,” says Roi Ravhon CEO and co-founder of Finout, an Israeli startup that helps companies plan their cloud costs. “For most companies that are not familiar with Israeli customers, there is not a high incentive to run on local servers. Companies that also serve European customers and must comply with European privacy regulations – prefer Ireland or Frankfurt, but most Israeli companies go to server areas in the US – like Virginia and recently Ohio. Only after that do the UK and Canada come onto the list of priorities.”

Gankin explains that most of the demand she receives is directed towards Europe: “Ireland is one of the most sought-after destinations due to the fact that it has some of the largest data centers in Europe, which work on every type of regulation with a very wide range of solutions and are also economically attractive. Additional customers are targeting the Netherlands and recently also the Central European region such as the Czech Republic or Slovakia.”

She adds, “The draining of data overseas can be stopped, as they did with legislation in Germany – there they limited what type of data can be stored abroad and what is required by law to be stored in Germany. But Israeli companies want to grow at a rapid pace, and most customers are not in Israel anyway – so I’m not sure there is a way to stop the trend, especially if the security situation is unstable.”

Published by Globes, Israel business news – en.globes.co.il – on January 20, 2025.

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