The euphoria that accompanied yesterday's closing of the mobile carriers tender is on the money. It is now possible to focus on the difficulties that the new carriers' will face and the many risks that they have assumed. We ought to begin on the right foot, and say, "We have arrived", which is the right thing, not only for the mobile market, but for the telecommunications market as a whole. However, things are going to be much more complicated that we think.
It is already possible to assess that there is little chance that both new carriers will go all the way and set up thousands of cellular antennas for the nationwide coverage mandated by the tender.
Mirs Communications Ltd. may be in somewhat better shape, but don’t bet on it, regardless of the declarations. The company currently has fewer than 1,000 antennas, and will need more than 2,000. Under current conditions, it is impossible to set up 2,000 antennas, which is why it is necessary to begin working right now on arrangements for building common antennas in some form or another.
Minister of Communications Moshe Kahlon and the tender winners are right that there is no point in building thousands of new cellular antennas. Mirs has a better opening position, but this would be an insane proposition for Hezi Bezalel's 018 Xfone Communications Ltd., since in addition to the license fee, the risk that the company is assuming is very great.
The talks are constantly about what the new carriers will do, and naturally everyone wants to hear how much prices will go down. But they forget that the current carriers have not yet said the final word, and they will have much to say. The three big carriers - Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), and Pelephone Communications Ltd. - can offer exactly what the newcomers can offer and at the same prices, and it will only depend on how much the old hands will want to pressure the new boys.
This is the risk that no one is talking about, so as not to dampen the joy. This may be good for us as consumers, but it should be remembered that no one is in the business to lose money, which is why we should not be surprised when demands for easements begin to soon ply the communications minister.
For Mirs owner Patrick Drahi, the deal is straightforward. He will merge Mirs with HOT Telecommunication Systems Ltd. (TASE: HOT) to create a telecommunications group that provides telephony, cellular, Internet, and cable TV services that can set up a cellular network at fairly low expenditure. Hook-ups to sites, real estate, information systems, customer service, and so on can all be integrated with the present system. This means that the NIS 2 billion set-up cost he has mentioned will be far less in practice.
As for Bezalel, it is hard to see how he will do it on the basis of a small company like 018 Xfone, but he apparently has a model that he wants to apply, and time will tell whether it will work.
What is certain is that the new carriers will not use the same model as the current carriers. The new companies will be much leaner. This means that their networks will have very thin and cheap architectures, which will rely on current sites of the current carriers. They will be based on very low costs in order to win as much market share as possible as fast as possible, in order to generate cash flow. Later, they will adapt to market developments and continue to develop it.
Under this model, it is not certain that the new carriers will sell end equipment, in order to avoid holding inventory, warehouses, and personnel. The distribution model is also still unclear. In order to sell mobile services, scores of points of sale are needed at large malls. Mirs has a minimal presence nationwide, and Xfone will be starting from zero.
So it is very nice that the new carriers want to cut mobile prices by 30%, and after years of enslavement to the current carriers, some catharsis is warranted. But it will be brief. The difficulties are rife, and the starting point of a saturated market is very problematic.
But now is the time to celebrate about the deliverance from our daily distress.
Published by Globes [online], Israel business news - www.globes-online.com - on April 12, 2011
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