The domestic telecommunications market is very hot, as competition with Bezeq looms. Cellcom, Aurec, and Eurocom are already discreetly sharpening their swords. It will be interesting. Consolidation in the telecommunications market, one way or another, will entail internal mergers, and even marriages with overseas companies. All Israel’s telecommunications cards are on the table. The question is, who will reshuffle them?
Yair Lapidot, general manager of Bank Leumi group company NC, and Kobi Yosef, a telecommunications analyst with the company, try to depict, in broad outline, Israel’s future telecommunications market.
"Globes": Yair Lapidot, where is the Israeli telecommunications market going?
Lapidot: "To a large extent, the competition model - in the long term - depends on the regulator in each market. If the regulator is less aggressive in terms of the model he imposes on the players, then the Israeli line-up will move in the direction of three players that will deal in everything - telephony, cellular, Internet, data, international communications, and content."
What’s the attraction of the Israeli market for players out to increase the size of the pie, rather than redistribute it?
"The Israel telecommunications market is estimated at $4.2 billion, if you take in all communications services, including Internet and business data communications. It’s true that it is not expected to grow significantly in revenue terms, because the introduction of competitors will cause prices to fall. But the crucial point is that, in the future, instead of hiring a video film from a machine or buying a computer game, you will receive it via the network. In other words, the telecommunications revenue pie will grow at a tremendous rate, because many services and products which are currently retail sale items will tomorrow become sources of telecommunications revenue, and we are talking sums not to be sneezed at.
"I believe all Bezeq’s competitors see competition with the telephony monopoly as an initial platform for competing in the future market of multimedia communications and e-commerce now taking shape. That is to say, telephony and data communications will remain the bread and butter for a long time to come, but that certainly isn’t the whole story."
Internet frenzy
Have you noticed, for example, the frenzy in the shares of Mashov Marketing, which owns the "Walla" portal?
"Although one can’t ignore this connection, I believe something bigger is at stake. The jump in Mashov Marketing shares is part of a trend gathering momentum in the Israeli market, as companies try to dominate the "content faucet". We are seeing all the communications infrastructure companies talking more and more about content as a critical area for them.
"Content is defined extremely widely here: television broadcasts, Internet, entertainment channels such as video on demand, online computer games, and multimedia applications. Uniting voice, picture, and data, will give the telecommunications companies of the future the tools to create new entertainment, educational, and commercial possibilities, all via the network."
This is where the question of separation between content and infrastructure comes in. Do you think such separation is necessary?
"This is an extremely tricky question. Bezeq is eager to get into content, and the cable television companies refuse to forego their exclusive rights on the cable channels in favor of DBS. The important thing is not who creates the content, but who markets it. It’s the marketer that forms the main contact with the customer, he wins a reputation and creates a brand name, and most of the revenue will evidently remain with him too."
Circumventing Bezeq
Where will Bezeq’s competitors turn?
"It seems the direction will be the data communications and Internet markets. Data is a hot, growing area: a $200 million market growing at annual rates of more than 30%. The sexiest field in the next few years will be fast Internet access, or broadband access services as it is called, which is expected to grow rapidly."
Kobi Yosef, we are already seeing Bezeq weaker in the data market. Why?
"The international call carriers have got into a situation in which they are losing a great deal of money, and they are therefore looking for additional revenue channels. The data communications market is an interesting one as far as they are concerned, and that’s why Bezeq will be harmed with the opening up of the market to competition.
"At present, you have to pay for using Bezeq’s infrastructure even if you don’t buy data communications services from it. Therefore, instead of paying Bezeq, the overseas calls companies will enable their customers to by-pass it by installing point to point lines that connect directly to their exchanges."
Internet market anomalies
The Israeli Internet market enjoys high valuations, but is still far from being profitable.
"The main problem is that the dynamics of the Israeli Internet market are extremely strange. Internet providers like NetVision and Golden Lines buy their bandwidth from overseas calls carriers. At the same time, Barak, Golden Lines, and Bezeq International are themselves becoming Internet providers. True, they are initially focusing on business customers, but there is a perceptible, and quite natural, trend of moving towards private consumers. This means that NetVision, Internet Gold, and all the rest of the Internet providers, in fact buy their bandwidth from the competition.
"The relevant legal provisions currently stipulate that Internet providers may buy their bandwidth directly from international companies, that is, without Barak, Golden Lines, or Bezeq International as intermediaries, only in the year 2002. These provisions create a unreasonable situation, because these are not fair conditions for competition. You are basically restricting one side (the Internet providers), and giving almost complete freedom to the other (the international call carriers). To my mind, the regulator should reconsider, and fix the anomaly in the market, and within a year to eighteen months enable the Internet providers to buy bandwidth directly from overseas.
"At the same time, I believe this area will be inundated by a wave of consolidation, in which most of the large bodies will swallow up the Internet providers, and merge them into the basket of services they offer. Barak can now be described as an Internet provider per se, as can Bezeq International, following its acquisition of the activities of ISDN-Net and Trendline."
We’re seeing Bezeq very eager to get into Internet.
"Over the past year, 10% of Bezeq’s inland call minutes stemmed from time on the Internet. This means growth in inland call minutes comes mainly from the Internet. We estimate that regular telephone consumption is an exhausted field, and that it has even been eroded in recent years because of cellular telephony. That being the case, the Internet is critical for Bezeq, and will be all the more so when the cable companies come in. Over the past year, Bezeq benefited from the sharp growth in the Internet providers’ subscription list. Those subscribers generate inland call minutes that are important to Bezeq's revenue growth in this area."
Few companies will reach domestic subscribers
Yair Lapidot, why doesn’t the cable telephony market represent the first target for Bezeq’s competitors?"
Even if the cable companies merge tomorrow morning, cable telephony won’t come straight-away, but only after data communications and Internet. This is firstly because the investment in telephony is significantly higher than that in digital upgrading of the cable networks. Voice communications systems on cable currently cost some $700 per subscriber.
"The high costs of transmitting telephony to the home are the reason why we don’t think many players will make it to the domestic consumer. Besides, call tariffs are not high, and will fall further after implementation of the Grunau report."
Which puts Cellcom, for example, in an excellent position
"Correct, because Cellcom’s infrastructure is deployed nation-wide. I believe that, in competing with Bezeq, the cellular companies will give you a ‘Bezeq tariff,’ and even less, when you talk from home, and possibly even from the office, and a regular cellular tariff when you are away from those places. From a technological point of view, it’s possible to locate the source of a call and coordinate with the billing system, as, for example, Cellcom did with its 20% discount campaign for calls made by soldiers from the northern border.
"As soon as low tariffs from home are available, quite a few people will prefer to make telephone calls from their cellular phone. Future cellular telephone technology will be of a much higher quality than today’s, and even now, reception quality is pretty good on the new digital instruments.
"This is a business model in which the profit is net profit, because they won’t have to make significant additional investments in infrastructure."
Phenomenal Cellcom
Telephony isn’t everything. What about Cellcom getting into data communications?
Cellcom has announced its intention of using LMDS technology, which enables fast, wireless data transmission. The Ministry of Communications plans a frequencies tender, which we believe Cellcom stands a good chance of winning.
"Cellcom is a company where everyone is employed on personal contracts. It is run in a businesslike manner, with no works committees and public uproar as you have at Bezeq. In terms of cashflow, it’s in a significantly superior position to Partner. Cellcom is a cash cow, with both the capital and the human resources needed to compete with Bezeq, and I think its management is very good. The company has managed to position itself very nicely, and I can only describe its entry into the telecommunications market as phenomenal, because there’s no better word."
So you think Cellcom will be the main contender against Bezeq?
I believe so. I have no doubt Cellcom will be a very significant factor in the Israeli telecommunications market. You have to add in the backing of BellSouth and Deutsche Telekom, partners with capabilities that should not be underrated. As soon as it becomes possible, Cellcom will provide a telephony service from the home, I estimate without charging for hire, and possibly at lower tariffs than Bezeq’s. In such a situation, you won’t need to disconnect from Bezeq, because you won’t have to pay for line hire twice. Call me optimistic, but I believe Cellcom will be the first telecommunications company in the world to be set up on the basis of a cellular company."
Will Cellcom do to Bezeq what it did to Pele-Phone in terms of market share?
Highly unlikely. Cellcom’s entry into this field will be harder and take longer. It will be a very tough story. DBS is also saying they will find it very difficult to banish the cable companies from the home, and they are looking around untiringly for new target markets. It will be very hard to make a domestic telephony Bezeq subscriber disconnect from Bezeq."
Eurocom, Partner - also rans?
Eurocom is also spoken of as a competitor for Bezeq. What does it have to offer?
"Eurocom is in an inferior position. It may perhaps be able to be a minor partner, as it currently is in Partner, for example, in partnership with the cable television companies. Eurocom has considerable understanding of telecommunications, but Cellcom or Aurec understand the field no less well, and are better set up. Eurocom’s Internet provider - Internet Gold - may be an important asset, but it isn’t enough to turn the company into a leading partner in a consortium competing against Bezeq. In other words, vis-a-vis Bezeq, there’s nothing in it for them."
What role do you see for Partner in the future telecommunications market?
"To tell you the truth, I find it hard to see how they mean to succeed. Partner’s initial marketing success, about 30,000 customers, was mainly due to a backlog of customers waiting for the company’s advent. Then again, the number of Cellcom subscribers grew by a similar figure in January. The problem with the Israeli market is that there are no heavy users that don’t already have cellular. To reach a third of the market, as it wants, Partner has to steal the profligate customers from Pele-Phone and Cellcom. Cellcom and Pele-Phone know who those customers are, and they are matching Partner’s offers.
"Partner’s problem, even if the cellular market as a whole reaches 50% penetration, is on the revenue side. Unless the cellular companies introduce new applications, revenue won’t grow at double-digit rates, because every new user will pay much less because of the fierce price competition. I estimate that, by the year 2000, revenue growth in the cellular sector will fall below 10% for the first time. This is not an encouraging sign for a company investing a billion dollars to enter the market. Nevertheless, if the severe malfunctions in Pele-Phone’s digital network continue, Partner’s sales will presumably receive an extra boost."
Published by Israel's Business Arena on February 8, 1999