Oxygen, the grandiose plan for laying a worldwide undersea fiber optic cable network for extremely rapid data communications transmission, has yet to receive final approval for investment by Bezeq International. If and when the undersea infrastructure is laid, rapid international data communications is assured.
Internet communication in Israel currently takes place through the Med 1 undersea cable, whose width is insufficient to transmit the required volume of data. For that reason, the Internet link between Israel and the US is very weak. Oxygen is intended to supply the bandwidth and facilitate the necessary power.
This ease has additional implications: the commencement of the Oxygen project is expected to cancel the economy of scale advantage enjoyed by large telephony companies, like AT&T, since anyone can acquire this kind of package without infrastructure investment, in order to compete with the giants.
Originally, the project was intended to first connect Europe with the US, reaching Israel only in 2004. But the advent of an Israeli investor, Bezeq International, changed the plan, advancing the target date of local hook-up by three years.
The current obstacle is financing for the project. Oxygen is now at the due diligence stage. Assuming that financing is completed in the coming months and the project gains the full confidence of Bezeq, the first stage will be completed, and Israel will be hooked up to rapid Internet at the end of 2001. In the meantime, the potential investor, Bezeq International, is still trying to make an educated decision, and perhaps also understand what it has gained. Bezeq International general manager Uri Yogev comments for the first time on his company's involvement in the Oxygen project.
"Globes": It sounds a little too big for you, a $15 billion international project.
Yogev:"You're right; the project is enormous, although the cost of constructing the first stage, connecting Tel Aviv to New York, is $1.5 billion. Due to the growth of the undersea cable industry, the banks and the capital market really like financing projects in this sector, which means that, in order to execute a $1.5 billion project, you need $400-$500 million.
"In other words, we needed $500 million for the project's first stage, of which Bezeq International will invest $150 million, in exchange for 25% of the capital. The project will clearly require further issuance, when our investment will either grow, or be diluted."
Who is responsible for the due diligence?
"We chose the Monitor Strategy Consulting firm for due diligence. Monitor is worldwide, so it is familiar with a wide range of international communications markets and companies. I estimate they will finish their work in a month and a half. We have also retained a large US law firm to handle the legal aspects."
How does a gigantic enterprise like Oxygen get to an Israeli communications company?
"We met the Oxygen people two years ago, when we carried out significant work, which included signing capacity purchase commitments with a variety of operators over the globe. Oxygen couldn't find a large telecommunications company that would agree to finance the project. On the other hand, they had no problem getting a commitment from young communications competitors of the traditional companies."
How is it that other telephony companies, like Deutsche Telekom and AT&T, didn't go for the idea like you did?
"I think it has to do with the fact that the concept harms existing monopolistic operators, while benefiting new companies."
What will be the local consequences of the Oxygen project?
"As of now, the cost of undersea cable communication in the Middle East is very high. At Med 1 prices, it's more expensive to go from Israel to Italy than from Italy to the US. That's why the Israel-US link goes by way of Europe. That's the economic rationale that reduces the risk of the project."
What will happen if you decide not to invest in Oxygen after due diligence?
"Even is the Oxygen project is not realized, Bezeq International intends to lead and be a partner in constructing an undersea cable connecting Israel, Europe, and the US, with construction commencing in 2000."
Does Bezeq International intend to keep 25% of the project, or will it sell part of it to partners?
"We are examining all the possibilities. It is certainly possible that we will include one or more additional partners in the group, although we will clearly remain the dominant factor".
In a number of recent press interviews, Bezek chairman Izzy Tapoohi spoke of issuing Bezeq International. Are there any such plans?
"I haven't heard of any intention to issue Bezeq International, except for what I've read in the newspaper. I would be very glad, though, if the company were issued and added to Bezeq's value, just as I would be glad to see the entrance of a strategic partner".
Do you share the view that overseas calls activity, currently the chief source of revenue, will not remain significant in the future?
"Before the beginning of competition, overseas calls accounted for 90% of Bezeq International's revenues. The current proportion is 70%, which I estimate will drop to 50% in two years, although total minutes has more than doubled.
"The continual drop in prices reduces revenues from overseas calls, but there is a corresponding significant increase in Internet and data communications and added value services, such as overseas calls cards, toll-free numbers, and other services."
How many paying households are there in the Israeli Internet market, excluding duplications?
"I estimate at most 400,000 households, and s probably less. Most of the growth is in the business sector, which is traditionally Netvision's strong point. We're growing there, however, since there is a demand for Internet solutions, which include international communications."
Published by Israel's Business Arena on November 15, 1999