Have no optic illusions

Gad Perez

The investors in Israel Electric Corporation's fiber optic cable venture will need deep pockets and strong nerves.

Anyone who wishes to surf news sites, download the occasional song, send a few photographs, or even watch video at reasonable quality, can certainly make do with the bandwidth currently offered by Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and Hot Telecommunication Systems Ltd. (TASE: HOT). The world, however, is moving towards applications that will require much greater bandwidth, and according to forecasters, surfing speeds will double, or even triple, every two to four years (for mobile telephones, the trend is even more extreme). So what today seems like a reasonable speed (10-12 mega on Bezeq and Hot) will very shortly be considered desperately slow.

The fiber optic venture of Israel Electric Corporation (IEC) is designed to deal with just this problem. Fiber optic cables, made of glass fiber, permit transmission of huge quantities of information and surfing speeds currently the stuff of fantasy here. In those countries where fiber optic cables have been laid, people obtain speeds of 1 giga (1,000 mega) to the home.

As reported by "Globes", the consortium bidding for the tender in the venture will be headed by ViaEuropa, which will hold 50%, with the rest being divided between its partners: Rapac Communication and Infrastructure Ltd. (TASE: RPAC); the Zisapel brothers, through Bynet Data Communications; BATM Advanced Communications Ltd. (LSE: BVC); and Tamares Group, controlled by Poju Zabludowicz. Each will hold 12.5%. At the time of submitting its bid, the consortium will be required to deposit a NIS 14 million guarantee. At the closing, it will have to have equity of NIS 100 million, in addition to depositing a NIS 200 million guarantee. The consortium will own 60% of the venture, while IEC will own 40%.

Obstacles along the way

According to the plan, the fiber optic network is supposed to be laid along IEC's high-tension lines, with the last stretch to the home either being dug specially, or else connected by using the existing infrastructure of Bezeq or Hot, into which the fiber optic cables can be inserted. Besides the other risks in the venture (which will be discussed below), this last point could prove a serious obstacle to its success. Unless the regulator intervenes and the Ministry of Communications compels the companies to allow access to their telecommunications tunnels.

It is still hard to make a precise estimate of the total investment in the venture. Laying the cables for 60% of the population is supposed to take seven years, according to the terms of the license. This too is problematic, because the winner of the tender will probably not be able to cope with such wide deployment in so short a time. In Europe, it is taking twenty years to reach 50% of the population with fiber optic cable. It is therefore likely that the investor will have to ask for an extension, but at the moment this is not the most important issue.

The critical question is the finance that the owners will have to find before the venture can finance itself. That is to say, how many years will it take before the venture generates sufficient revenue for the owners not to have to inject capital? Estimates speak of between NIS 500 million and NIS 600 million that the winner will have to invest as intermediate capital before the venture becomes profitable.

A further obstacle is the fact that Bezeq and Hot have already started laying fiber optic cable to homes. To set up a company that deals in fiber optics that is not a telecommunications company versus two operators that are already working on it is a challenging mission.

Furthermore, it should be remembered that this is a venture aimed at selling fiber optic connections to carriers and not to end-users. The intention is to sell use of the cable to companies providing services, such as Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) or Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL). In such a situation, the venture is in a considerably inferior position versus Bezeq and Hot, selling the same kind of cable and access, but with service.

In fact, the only substantial advantage of the venture is the use of IEC's infrastructure. The above-ground deployment and IEC's engineering capabilities make it possible to lay fiber optic cables more cheaply and much faster. Laying a fiber optic cable along a power line costs much less than digging up sidewalks. It's only a pity that the cables can't be laid along above-ground power lines all the way.

A further important difficulty is the customers. The new venture has only two potential customers, Partner and Cellcom, and it is entirely dependent on them. If these companies don’t buy infrastructure from it, it has no raison d'être.

The two companies are currently negotiating with Bezeq and Hot on use of their infrastructures in the framework of the new wholesale market. How much room will be left for a new infrastructures venture is a good question. Look what happened to Tamares Telecom when it was forced to contend with competing undersea cables like those of Bezeq International and Med Nautilus. It was left almost without customers.

But it's not all gloom. If the venture succeeds, competition in this area will step up a rung, which must lead to lower prices. And that is even before we have talked about the importance of the difference the venture will make to the Israeli economy, which lags behind the world's advanced countries in deployment of fiber optic cable to homes.

Published by Globes [online], Israel business news - www.globes-online.com - on December 19, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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