The following numbers released by Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) subsidiary Pelephone Communications Ltd. today tell the story of Israel's mobile carriers for this year. Pelephone's equipment sales of handsets in each quarter of 2010 were NIS 287 million, NIS 289 million, NIS 283 million, and NIS 323 million, before jumping to NIS 501 million in the first quarter of 2011 - 75% more than for the corresponding quarter.
In effect, the government is providing cover for the mobile carriers to milk profits from handset sales. Does anyone remember last year's cry of anguish by Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) new controlling shareholder Ilan Ben-Dov over the pending catastrophe because of mandated reductions in inter-network connectivity fees, or the prophecies of doom by Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and the risk to the carriers' financial soundness, and that Pelephone joined the chorus?
And now, wonder of wonders, Pelephone's first quarter financials indicate that mobile carriers have found a way to take back what was taken from them, and how. It should be said that the companies were telling the truth when they hinted that they would raise prices in response to the reduction in connectivity fees. They have raised prices, especially for end equipment.
Pelephone broke an amazing record by boosting equipment sales 55% in one quarter, thereby more than compensating itself for the reduction in connectivity fees. We can assume that it will not be alone, and that Partner and Cellcom will report similar figures.
The carriers can do this because of the government's deafness, which will continue as long as no one at the Ministry of Communications breaks the carriers' monopoly in equipment sales. Israel is the only country where the carriers sell virtually all mobile phones. Consequently, Israeli consumers pay much higher prices than their peers in other countries who buy phones on the free market, not via the carriers. To this has to be added the 15% purchase tax that the carriers roll over onto the consumer.
The rise in equipment sales has several consequences. First, the mobile carriers are making a fortune on the growth in smartphone sales and the increase in average revenue per user (ARPU) from mobile Internet use, as smartphones create this traffic. In this way, the carriers also block customer churn to new carriers, because a subscriber who buys a smartphone from a carrier won't abandon it for a new competitor if the current carrier subsidizes the smartphone.
The result is that the Ministry of Communications' mobile reform by bringing in new carriers will have only limited effect unless it deals with this market failure.
Published by Globes [online], Israel business news - www.globes-online.com - on May 12, 2011
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