Tech giants battle for data center real estate in Israel

Har Tov Data Center building site Photo: Eyal Izhar

Data Centers have become big real estate business as Amazon, Google, Oracle and Microsoft scramble to meet Israel's urgent cloud migration needs.

Five years ago, two major cloud computing players, Google and Amazon, were offered the possibility of hosting Israeli data centers. "The Israeli market is too small," their local managers were told. In retrospect, that was a big mistake. Today, the two giants are in an especially tight race to build large data centers as quickly as possible, to meet the requirements of the Nimbus government cloud tender, which they won.

Cloud computing is an area that allows businesses to get rid of a large portion of their IT infrastructure by transferring digital activity to remote computers. Google and Amazon won the Nimbus tender that determined which companies will migrate Israel’s government ministries and their auxiliary units, as well as the Israel Defense Forces (IDF), to the cloud, at an expected total government expenditure of NIS 4 billion over seven years. As of 2023, the beginning of their concession period, both Google and Amazon have committed to store all hosted government and defense data on Israeli territory only.

The 2019 Nimbus tender - offered exclusively to non-Israeli technology giants - has become the watershed in everything related to the Israeli market’s transition to the cloud. Two years along, it appears that data center investments have become a leading real estate trend. For example, singer Omer Adam announced a data center investment: a partnership with the Europe-Israel Group and others to establish a subterranean data center in Afula.

The business world is moving its local computing infrastructure to remote servers (cloud), due to the economic inefficiencies of maintaining storage, communication, graphics processing and artificial intelligence on company premises. These infrastructures are characterized by high levels of power consumption, special air conditioning needs, on-call computer experts, etc. The cloud computing service industry developed around these needs is led by Amazon, Microsoft, Oracle, Google, IBM, SAP - even China’s Alibaba. The potential in Israel is even greater because the country is late - relative to the rest of the world - in migrating to the cloud. Only 30% of all businesses with on-premise computing infrastructures have made the move.

Over the last two years, real estate developers have also discovered the market. The most prominent commercial real estate companies in Israel have already announced their entry into the field: Azrieli, through the acquisition of Compass Datacenters; Red Sea Group in partnership with Avner Papouchado’s Server Farm Realty (SFR); Melisron in partnership with Chirisa Capital Management; Gav-Yam (Bayside Land Corp.), which plans to serve its tenants through data centers in its industrial parks; Amot Investments, which plans to build a data center at the Tzrifin Logistics Center. Rani Zim Shopping Centers is also considering investments in this area.

Private equity funds, which generally see Israel as fertile ground for investing in startups, have identified the opportunity. Private equity giant KKR announced it will establish a 10.5 megawatts data center in Petah Tikva, covering 1.2 acres.

Estimates are that the growth rate per square meter of server room floor per year is about 2,000% per year.

This rapid penetration has created much local friction, partly because most of the new construction is being executed by companies with no relevant experience in Israel, or by companies inexperienced in data center operations and maintenance. The public still perceives data centers as harmless, air-conditioned high-tech office spaces, rather than industrial plants, with most ignoring the environmental consequences brought about by this construction.

This could have been prevented by proper regulation by the Ministries of Infrastructure, Communications, Science or the Interior. It would have also helped other real estate companies avoid poor planning. Data center communication infrastructures demand both extremely broad bandwidth and large capacity power lines that are not available everywhere in Israel. This, in turn, requires preparation for both fiber optic deployment, and coordination with the Israel Electric Corp., which does not tend to allocate special power lines if the facility in question is not yet operational.

That a government tender has proved a catalyst for the current furor over server farms has several negative outcomes. The first is the secrecy involved, the second is the poor planning. The terms of the tender were issued exclusively to those international technology giants eligible to bid for tender, and required a minimum annual revenue of $1 billion, a threshold that, from the outset, disqualified Israeli companies. The timetable, construction requirements, and terms of service were kept confidential, even though the tender deals with the future for all national data at all government ministries, as well as the IDF.

If the original intention of maintaining a veil of secrecy was to protect national data, the act of privatizing construction and operation of a giant data center to international tech giants, high-profile construction companies, and plans for densely populated rural areas, has caused information to leak to the public. There is also potential for a security threat, as data centers - especially those built above ground - are likely to become missile attack targets. The tender requires the franchisees to build a minimum of two data centers at a distance of 25 km from each other, but with no obligation to build underground.

Even after the data centers are built, Israel will still have a long way to go in deploying a functioning cloud services array. Although the Ministry of Finance has in recent months vigorously encouraged government ministries to migrate to the Google and Amazon clouds, the State Comptroller claims that an orderly cloud policy and unification under one authority has yet to be set.

In fact, the matter is currently split between the Ministry of Finance, which is responsible for procuring cloud services, the Information and Communication Technology Authority (the ICT Authority) in the Ministry of Economy, which is supposed to incorporate government computer policy, and the ICT Authority’s Cyber Protection Unit (Hebrew acronym: YAHAV), which is responsible for approving government cloud projects.

Is the data center trend already about to end? Is Israel too small for dozens of data centers being built these days in every commercial area in Israel? "Of course, there’s no room for everyone," the CEO of one data center tells "Globes."

"Things will balance out in a few years, and out of the four major players currently chasing after Israeli clients, maybe two will remain. The rest of the data centers will have to cut prices," the CEO of another data center says that without ties to an international data center network, the local market has no economic justification.

"Companies in the Far East or Europe want to save the cost of migration if they have to move data from center to center. Most data center malfunctions aren’t due to missiles - they’re related to ill-informed management, poor maintenance, lack of proper ventilation systems - so geographic proximity and migration costs vary."

Amazon: As per usual - Entering in a big way

In Charge: Harel Ifhar, General Manager, AWS Israel. Amazon is partnering with Azrieli Group subsidiary Compass Datacenters.

Investment: Approximately $400 million per data center

Launch Date: 2023

Power Capacity: 16 MW each

Type: Above ground

The retail giant's cloud services division is entering Israel in its characteristic way: big. Amazon is the only one of the four technology giants to own the data center it is building in Israel. In contrast, Google, Microsoft and Oracle have long-term leases on Israeli-owned data center facilities. Theoretically, they will very easily be able to reduce their storage activity in Israel, if they wish to do so in the future.

Amazon is investing a huge amount of money in building three above-ground data centers - at Moshav Tnuvot in the Sharon region, the town of Shoham and the Mateh Yehuda Region - and is currently assembling a dedicated sales team of an estimated eight hundred Israeli workers, along with the existing Amazon Web Services (AWS) sales team in Israel. Two of the facilities are expected to be operational in 2023 - the minimum number of data centers required to provide service in the Nimbus government cloud computing tender.

Building and construction is being carried out by Compass Datacenters, an Azrieli Group subsidiary that specializes in data centers, which undertook to set up the three centers within up to three years from the signing date.

"The workers are working like crazy with the goal of handing over the building as quickly as possible," says a source in the Lev Hasharon Regional Council, where Tnuvot is located. "The locals, many who used to be farmers, are rubbing their eyes in disbelief at how Lev Hasharon has become the capital of Amazon in Israel."

"Globes" has learned that, following scheduling delays at the various construction sites, the data center at the Har Tov industrial area near Beit Shemesh in the Mateh Yehuda Regional Council, will be the first of the three to launch.

The facility, which covers a 6 acres above-ground area, is strategically located halfway between Tel Aviv and Jerusalem, a four-minute drive from Road 1. Amazon is investing in a diesel and gas infrastructure designed as back up in the event of a power outage, so that the facility will operate for weeks, even without a regular power supply. The Mateh Yehuda Local Council sources say construction is ongoing at night as well, and that Amazon tracks its pace via online monitoring.

Amazon's huge initiative stems from its policy of conquering a large share of the market quickly through investing huge amounts of capital in technology and manpower, while at the same time offering data centers with the strongest performance in the market. According to market estimates, Amazon is investing about $400-500 million at once in building its data centers, while its competitors, including Google and Microsoft, are investing about $150-200 million per data center over a longer period of time. The total initial investment, including equipment and initial operations, is estimated at about $1 billion.

"Unlike Google and Microsoft, that will provide an initial solution to about 50% of potential users in the government cloud services tender, and plan to complete the rest over time, Amazon is going for a more stringent approach that enables continuous compute activity for the entire potential population at peak usage times," explains a senior IT executive. "So, in case of an emergency, like a military attack, all government ministries and security activities can function without interruption. It’s not at all certain that the competition can offer similar service."

The volume of Amazon's investment is also reflected in the size of construction. While the Nimbus tender set a minimum of just two above-ground data centers, Amazon has committed to building three separate centers. Still, one has to wonder why the world’s largest information storage company has elected to build its data centers above ground, and at locations that are relatively close to each other. The companies that lost the tender - Oracle and Microsoft - are both building subterranean data centers, allowing them to make do with one data center apiece.

Amazon's three data centers are only a few dozen kilometers apart, with all three located in the central region. In the event of a catastrophe, such as a missile attack, Amazon’s strategic depth is insufficient. It is, however, fulfilling the terms set forth by the tender.

Amazon's construction project in Israel, in fact, replicates the layout of projects in other countries. The data centers that back one another up in each area are called "availability zones", meaning data centers that are far enough apart so that one can operate instead of another in the event of a disaster, but are close enough to provide short response times for high-demand applications. The Amazon project in Israel should be seen as part of an international blitz, wherein the retail giant plans to launch 21 availability zones in six other countries, including Australia, India, Indonesia, Spain, Switzerland and the United Arab Emirates.

"Just as Microsoft became synonymous with government software provision in recent decades, Amazon now wants to position itself as the government cloud computing service provider, so that in a few years, people will say the government is Amazon," a senior cloud computing executive told Globes. "Amazon's vision is for HMOs and hospitals, public companies, even security companies, and universities to move to its cloud." Amazon forecasts $10 billion in revenue over a decade, but a glut in data center construction in Israel may put that figure in doubt.

At the same time, Amazon is aggressively marketing its prestigious online training courses to thousands of cloud computing engineers, free-of-charge.

Google: Last to join the race

In Charge: Boaz Maoz, Israel Country Director, Google Cloud

Hosted on data centers owned by three partners: SDS, Global Data Center and ServerFarm

Investment: Approximately $ 100 million per data center (a total investment of $4 billion)

Launch date: 2022

Power Capacity: 10-15 MW each

Type: Two subterranean data centers, one above-ground

Google was last to join the data center race, and its Nimbus tender win has bewildered observers. Google does not suffer from a lack of funds, but the planning of data center - including calculating costs, economic viability and the Israeli partners selection process - caused delays and led to an ongoing ping pong match between the Google’s Tel Aviv branch and its US headquarters. The series of delays is still not concluded and, as revealed by "Globes", Bnei Zion’s residents have petitioned against building Google's data center in the village until the health and environmental ramifications are clarified, thus creating a situation where the winner of the Nimbus tender - the one that is supposed to serve all government ministries, its auxiliary units and the IDF - will launch its third data center in Israel only in two years, at best.

Unlike Amazon, Google is not the developer and owner of the data center, but is hosted on its partners’ data centers. It is the only one that will distribute storage between three data centers, each with a different owner, and will be required to prove to the government that it can transfer data quickly from center to center in case of an emergency.

Google will probably be able to meet the challenge, because unlike the other giants, it is also involved in deploying Israel’s communications infrastructure, both as part of the project to lay submarine Internet cables between Europe and India, and as part of its global fiberoptic communications network. Cellcom and US-based Ciena are currently deploying a fiberoptic network with a bandwidth of 800 GB and a traffic volume of up to 33 Tb. per second.

After a lengthy search, Google chose three partnerships to set up three data centers in the central region. One, as mentioned, is Avner Papouchado’s Server Farm Realty (SFR), which works in partnership with the IIF - Israel Infrastructure Fund, and has begun the excavation and deep foundation stages for construction of a 2.5 acres data center in Moshav Bnei Zion. SFR has no experience in building server farms in Israel, and its choice of an inhabited rural area has already led to an initial attempt by local residents to delay construction.

The second partner is Global Data Center owned by Moshe Lesman, which was acquired last month by US-based EdgeConneX for $400 million. It is expected to complete construction of its data center by the end of the year. The third is the Shonfeld Data Services Center (SDS) facility located in Modi’in, which also hosts Microsoft’s cloud services. This is in the final stages of being equipped so that Google's first customers can be hosted on its servers as early as next year.

The effort to win the tender stems from the strategic decision to compete with Microsoft and Amazon over major corporate accounts, and the government and public sector. In Israel, Google suffers from being perceived mainly as a service provider to start-ups. Outside Israel, Google is more successful.

Google faces a sales challenge. Amazon is at a more advanced stage, both in building its data center and recruiting sales teams five times the size of the Google cloud sales staff. "Globes" has learned that the local sales team is preparing for the initial launch of the local data center in 2023. If not, the Accountant General has made clear that certain data which can be stored in a non-domestic cloud may be stored there with the approval of the Cloud Committee - a special committee composed of representatives of the ICT Authority, the National Cyber Directorate, and the Ministry of Justice - so long as Google ensures data protection and convenient migration to the site erected in Israel.

Still, Google competitors like Oracle have mused about what its information-sharing policy will be with those governments in whose territory Israeli information will be stored.

Oracle: The hope of winning has not been lost

In Charge: Eran Feigenbaum, Oracle SVP and Israel Country Leader. Hosted by Bynet Data Communications.

Investment: $200 million

Launch Date: October 2021

Power Required: 15 MW

Type: Subterranean

Oracle is the first of the four international technology giants to launch a large cloud services data center in Israel, thanks to having gambled early on the government tender, (which it eventually lost). A few years ago, it leased hosting services from IT systems services company Bynet Data Communications, after learning about the contract to construct a large subterranean data center. It was a pioneering deal, as Oracle invested $200 million in underground construction. Amazon, by contrast, has settled for three less costly above-ground data centers.

When Oracle considered the security and government market, it was clear to them that an above-ground data center was out of the question. "One data center under the ground is better than three above ground," says a senior IT market source who knows Oracle well. "In a country that gets attacked by missiles every few months, constructing a place to store all government data above ground is not an option, especially when the location isn’t kept secret. What would prevent the enemy from trying to hit the data centers and their surroundings?"

No less than Oracle, Bynet should get credit for its pioneering spirit. Six years ago, Bynet announced intentions to build a subterranean data center, 30% more expensive than above-ground. Planning began three years ago, construction took only a year and a half and, as mentioned, the building is now being completed. Oracle was looking for data centers for hosting, and found Bynet, having also examined other providers such as ONE Software Technology and EMET Computing.

The underground structure leased by Oracle on Har Hotzvim in Jerusalem is the largest data center in Israel, covering 3.45 acres, and extending four floors or 50 meters underground. It meets the strict "Tier 3" standard - which Google’s Petah Tikva and Amazon’s Har Tuv data centers are also expected to meet - with a 15 MW capacity, the highest in Israel at present.

The Har Hotzvim facility has been unofficially serving several dozen customers over the past two months, and the official launch is planned to take place after the holidays. Among Oracle's cloud customers: Strauss Group (which switched over from SAP), online network Terminal X, and Walla Tours.

Oracle is interested in building another data center in Israel. For clients wishing to do so, the Abraham Accords enable it to run servers in the UAE, allowing for available and fast service within minutes. In the event of an emergency, Bynet is obligated to transfer the information within a few minutes to its other data centers in Lod or Tel Aviv.

Oracle took a risk about five years ago, before the Nimbus tender was announced, to gain a significant foothold in the Israeli defense market. In the end, it lost the tender to Amazon and Google. Defense establishment representatives argued before the government tender committee that the Oracle Big Data Cloud Service lacked the support capabilities for remote working and remote encryption. On the other hand, a new Gartner Group study gives Oracle a boost, stating that, for the first time, Oracle's cloud services capabilities exceed Google’s. Given this research, Oracle wishes to strengthen its foothold among start-up industry and technology companies as well.

Oracle filed a lawsuit against the results of the tender, hired a lobbying firm, flew its CEO Safra Catz to Israel, and is campaigning to win it anyway. Industry insiders believe that, as with similar tenders in the US, chance are good that the court will permit additional players to provide cloud services to government ministries.

Microsoft: "Walls 1.5 meters high"

In Charge: Ronit Atad, CEO of Microsoft Israel. Hosted by Shonfeld Data Services Center.

Investment: $ 150 million

Launch Date: Deployment begins in the fourth quarter of 2021, official launch only in 2022

Electric Capacity: 20 megawatts

Type: Subterranean

Microsoft is running second in the race to launch data centers and data centers for its cloud service in Israel, after Oracle, but long before Amazon and Google, who will launch their competing services only in two years. Microsoft gambled on building its data center with the enigmatic Schonfeld Engineering. Owned by Yossi Schonfeld, this is its first data center construction project, having previously built logistics centers nearby. Nonetheless, Google has also selected this data center for hosting, in the initial phase of its operations in Israel.

The launch of Microsoft's data center in Modi’in has been delayed several times even though it has been under construction for five years. The best-known setback was a series of workplace accidents that happened last year. Schonfeld Engineering’s CEO and other officials were summoned to a hearing at the Safety and Health Administration, and the company was fined NIS 70,000 due to dangerous working conditions.

Microsoft planned to launch its data center this year, but the official launch will probably only be next year. However, IT administrators report that the structure is ready for servers to be installed, and preparations are being made to receive customers as of the first quarter of 2022. "This is an underground bunker with walls one and a half meters thick, with redundancies for all systems: servers, air conditioning, control, and generators," says a senior executive who visited the site recently. "The intention was to win the Nimbus tender and there was a lot of pressure to build and equip it in time. When Microsoft lost the tender in April, and later withdrew its petition over the loss, there was less time pressure to launch."

Despite losing the Nimbus tender, Microsoft has a significant foothold in the government sector, bolstered by the fact that many ministries - and ministry staff - are accustomed to working with Microsoft software and have initiated requests to migrate to that cloud service.

Published by Globes, Israel business news - en.globes.co.il - on September 27, 2021

Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Har Tov Data Center building site Photo: Eyal Izhar
Har Tov Data Center building site Photo: Eyal Izhar
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