The general mood in Israel’s communications market is that 2005 will be the breakthrough year for competition against Bezeq's (TASE:BZEQ) existing fixed-line services. This is only a feeling, not something more concrete, because Israel’s communications field is strewn with skeletons of failed competitors and blanketed with disappointed hopes for a brighter competitive future.
Nonetheless, this time it seems that the wheels of competition in inland telephony cannot be stopped. It may take another six months, or a year, but ultimately, each and every one of us will be able to choose not to make a call from a Bezeq telephone.
The VoIP breakthrough
The anticipated VoIP revolution in Israel is part of the larger global revolution. This revolution is not led by the regulators, but, as with every communications revolution in history, by a new technology that will make everything we once knew unrecognizable. VoIP (Voice over Internet Protocol) is the foundation of this revolution, one that is already underway in international markets.
It is now possible to transmit voice, video and data over IP networks. In other words, the type of communications infrastructure is becoming less relevant. Telephone lines that once carried voice alone can now carry pictures and data. The same is true for television cable lines, which can now carry out all the same functions of Bezeq’s copper wires.
The unification of services has opened the door to almost unlimited possibilities, not only for Israel’s communications giants Bezeq and the cable companies but for all communications providers, however small they may be. Internet service providers (ISPs) with cable or satellite hook-ups can easily provide local or international calls carriers without any additional investment, since there is no difference between the transmission of bytes of data and bytes of voice.
Easing the regulations
This means that every communications provider in the market has the potential of providing exactly the same services now provided by Bezeq and the cable companies, which invested billions of shekels in laying networks of lines across the length and breadth of Israel, and whose advantages are vanishing as if they never existed at all.
This is what's now happening in Israel. The market is about to face full competition, and it only waiting for the Ministry of Communications to release it from its regulatory shackles. As of now, these regulations do not allow just anyone to provide voice services, as they stipulate very stringent criteria.
The Ministry of Communications has taken the first step toward change by allowing companies wanting to provide VoIP services to test-market their fee-based services, while the ministry carries out a comprehensive study of the subject. Only Golden Lines has received a permit for a trial so far, but NetVision,Internet Gold Lines (Nasdaq:IGLD), Bezeq subsidiary Bezeq International are in line to get licenses too.
Golden Lines is taking the test seriously. It already offers participating business customers inland telephony service at cheaper rates than Bezeq's. Golden Lines' test is limited to 7,000 subscribers, which is enough to enable it access to a large part of the business market, and take away Bezeq revenues.
Golden Lines CEO Stella Handler once said that the test would initially be limited to a few customers, who would receive the basic service. The test will be greatly expanded in January 2005, and will operate fully in March. Golden Lines uses the 072 prefix.
Cable is coming
However, the most significant development in the Bezeq competition comes from the cable companies, which do not need regulatory approval. The cable companies' joint telephony venture, HOT Telecom is already offering telephone numbers and advertising its services, which will probably be launched before the end of the year.
HOT Telecom's VoIP network is wholly based on the cable companies' independent infrastructure. The cable companies estimate set-up costs at $100 million over the next three years. Lucent Technologies (NYSE:LU) was chosen as the network integrator.
The breakdown of this cost between the cable companies, based on their stake in HOT Telecom is as follows: Golden Lines (41%), Tevel (32%) and Matav Cable Systems Media (Nasdaq:MATV; TASE:MATV) (27%). The cable companies predict that HOT Telecom's revenue will reach $100 million a year five years after launch. HOT Telecom believes it will reach a positive cash flow rate within three years of launch.
In order to ease the cable companies' entry into telephony, the Ministry of Communications announced that it would not charge connectivity fees from cable customers during the first two years. The benefit is estimated at NIS 40 million. HOT Telecom's business target is to win 12% market share within a few years of launch. Bezeq currently has 2.9 million subscribers. The cable companies believe that their business plan is conservative and that HOT Telecom has a good change of winning a larger market share.
The missing player in the VoIP competition is Cellcom, the company that was expected to become Bezeq's biggest competitor. The reasons for Cellcom's delay are varied. First, its shareholders are fighting among themselves, and therefore have trouble agreeing on a strategic plan for VoIP. The company's board of directors may also be partly responsible for the delay.
Second, Cellcom is already fighting the Ministry of Communications decision to slash connectivity charges. The cut will force the company to adapt all its activities to the lower income, including entry into new fields.
Published by Globes [online] - www.globes.co.il - on November 15, 2004