The Pelephone-Cellcom war marked a new high last week, when Motorola announced a sale on Nokia cell-phones for NIS 300. Four days before that announcement, evidently, the information was leaked to Cellcom, who preempted Pelephone with a haymaker - slashing all equipment prices to NIS 1,000 from NIS 1,900 and up.
Over the two years since Cellcom’s penetration, the number of cellular telephone subscribers has grown from the Pelephone monopoly’s 100,000 to one million for both companies, as of December, 1996. The penetration rate of this thirsty market is 20% and the market is not yet satiated. The two companies sell an average 20,000 instruments per month, with the market almost evenly divided between them, although Pelephone maintains a slight lead. After only two years on the market, Cellcom has ended 1996 with a client base of 450,000, a NIS 1 billion sales turnover and 2,000 employees.
Pelephone is one of Israel’s most profitable enterprises. Owned jointly by Motorola and Bezeq, the company is set to record a 50% rise in sales turnover, compared to NIS 1.25 billion last year.
The Cellcom-Pelephone marketing war is characterized by hard-line tactics reminiscent of street-gang wars. The advertising budgets invested in this war are estimated at a 2:1 ratio, or $10 million for Pelephone compared with $5 million Cellcom.
The situation is a rare one in marketing terms. In December 1994, the new contender entered an arena dominated by a monopoly for ten years. The new kid, Cellcom, entered the market with prices one-eighth those of Motorola, at NIS 0.087 per minute of air time, compared with the old-timer’s NIS 0.67.
Despite the price gap, Pelephone made the decision not to change its pricing strategy, a fairly amazing step, as in no other market would the side that was attacked choose to retain this sort of price gap. Pelephone took into account that its decision could lead to a mass migration of clients, perhaps complete abandonment. It should be remembered that, along with lower prices, in its ads Cellcom emphasized its technological advantage over Motorola’s outdated analog technology, introducing the world’s most advanced digital technology, TDMA.
Cellcom made its presence known from the first day it entered the market. The population crowding Cellcom’s storefronts did not represent the upper percentile, which to that point had characterized cellular phone users. Pelephone kept tabs on how Cellcom was loading its new system with more and more non-business clients, and tried to take heart in the phenomenon. Pelephone’s assessments were that Cellcom was succumbing to the pressures of consumer demand, and if it kept going that way, collapse was imminent.
The collapse came, but for other reasons. In late March 1995, about half a year after its establishment, Cellcom’s network collapsed. Three months passed before the company located the problem and it took another three to recover from the subsequent crisis. During this time, while Cellcom was not selling any instruments or billing clients for air-time, Pelephone benefited from the unscheduled shot in the arm and embarked on an advertising blitz. Things went on this way and the fact that Pelephone did not reduce prices was, in retrospect, a very lucrative decision for the company.
Cellcom ended 1995 with a client base of 200,000, despite the crisis. The impressive number shows Cellcom succeeded in maintaining the public’s faith, due to its extraordinary handling of the situation. The company adopted a policy of openness in relation to the consuming public, and carried out a widespread software upgrade program for the Alpha instruments owned by customers.
In early 1996, a new game began. Cellcom raised its prices to NIS 0.16 per minute but the tariff was still one quarter that of Pelephone’s.
Cellcom created a new market game plan, forcing Pelephone to become more and more aggressive. This past year was characterized by a serious reduction in Pelephone telephone instrument prices, to make up for the expensive air-time and to gain an advantage over Cellcom’s expensive telephones.
On Passover eve, April 1996, Pelephone came out with the Mango, an Israeli invention which quickly became headline news in the world cellular market. 150,000 instruments were snapped up within 6 months, out of a total 500,000 sold this year. No other marketing success story in Israel can touch this one.
Mango, says its competitors - who initially tried to denigrate the product - is indeed a spark of marketing genius though they believe this spark will eventually turn into a marketing error. Pelephone, they say, introduced Mango on the assumption it could aggressively penetrate the private youth market. It was clear Israelis would love the Mango telephone, although the instrument’s functions are limited.
The bright blue Mango telephone allows users to receive incoming calls, but allows them outgoing calls to only one private number, in addition to connecting to emergency police, fire department and first aid services. Mango’s peppy advertising campaign has a music video-like esthetic and the instrument has become a favorite among teenagers and soldiers, whose parents want them to phone home.
As soon as Mango was announced, Cellcom came out with a series of daily comparative ads, explaining why Mango was not and could not be a sensible thing. The campaign lasted no more than a week, during which time tens of thousands of Mangos were sold, and the public went wild, demanding the new gadget. Cellcom continued to claim this was a tactical error. After two months, Cellcom came out with an answer to Mango, the Cellcom Bonus.
What lies beyond the recent close competition? As Cellcom is set to raise its tariffs in January 1997, (permitted by the terms of the Ministry of Communications tender), the company launched a full-frontal assault on the market, in order to sign up as many clients as possible within a short period of time. The strategy is based on the fact that its low air-time advantage is expected to lose its appeal, after the price rise.
Therefore, Cellcom has issued a series of discounts and Pelephone has responded in kind with a wide-spread Mango-Plus campaign, for use at work and in the field. Cellcom struck back with a sliding price scale, and Pelephone came out with cut-price Nokia phones. Cellcom is now offering "caller identification" services and the aggressive price war continues. Cellcom intend to capture consumers before the January change.
The volatility is also apparent in special offers to the institutional market. The two companies have signed contracts to supply cellular phones to the Teachers Unions, comprising 130,000 people. Cellcom was awarded a general controller’s contract to supply 2,000 instruments, then quickly closed deals with IBM, Strauss, Digital and others.
The Secondary School Teachers Union decided to give members cellular phones as an end-of-year gift. The organization bought 31,000 Pelephone instruments, at NIS 7.5 million volume.
Another variable should also be taken into account: the Ministry of Communications will name a third cellular service provider to enter the ring during the coming year. With the entry of the third provider, the battle is expected to intensify, beyond the price of services to the telephones themselves. At first there was Motorola, then Nokia entered the market, then Ericsson, AT&T and AudioVox. The third service provider, based on GSM technology, is expected to bring a wave of new brand names along with it, including Sony.
The two current market players are apprehensive. They want to greet the third service provider with as fat a client list as possible. The arms race between them is fiercer than ever before.