Cellcom to switch focus from mobile to TV, Internet

Netflix on Cellcom

Cellcom has an alarming debt, and intense competition in the mobile phone market has put revenue into a tailspin.

A presentation by Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) obtained by "Globes" reveals its plan of action for the coming years. The plan's main direction is diverting resources and investments from mobile telephony to television and landline Internet.

Cellcom currently carries an alarming debt of NIS 2.2 billion, and the intense competition in the mobile telephony market is putting the company's revenue into a tailspin. The company therefore decided to put its resources into the company's future growth engines and find alternatives for future growth. Cellcom is also planning a major program for cutting operating costs in order to enable it to focus on increasing its market share.

The presentation, entitled, "Strategic Challenges in a Tough Market," was written in recent months. The plan sets the main future target for Cellcom: changing from a mobile telephony company into a communications group, instituting operational excellence, and searching for new growth engines.

Sources inform "Globes" that Cellcom CFO Shlomi Fruhling has recently been presenting this vision to leading capital market figures. Fruhling describes two clear trends requiring strategic decisions for the company's future. One is a consistent decline in revenue in the mobile communications sector. The other is that revenue in the stationary communications sector, which includes television and landline Internet, is on an upward trend.

The picture, however, is more complicated than that. While Cellcom is counting on television as a growth engine, stationary communications at this stage are losing more money than mobile telephony, despite the latter's decline. The reasons are the sales commissions that have to be paid to sellers who recruit a new subscriber and the cost of the equipment and installing it in the customer's home.

Nevertheless, Cellcom boasts of the numbers behind its entry into the television market, and says that it has changed the entire market. According to the documents, as of the end of 2018, the service, launched four years earlier, had 219,000 customers. Other companies joined the market after Cellcom, and the monthly price for a package fell from NIS 270 to NIS 99.

Cellcom says that television service made a substantial contribution to boosting its number of Internet customers in the wholesale market. According to the documents, Cellcom has a 40% share of the entire wholesale Internet market.

Cellcom is cutting its infrastructure investment by NIS 150 million

Despite Cellcom's optimism about the growth in television services, the company will find it very difficult to abandon its mobile telephony activity. While growth in the landline communications sector totaled only NIS 49 million in 2018, in comparison with 2017, the drop in revenue from mobile telephony was NIS 199 million, a considerable amount. That is only part of the problem.

Cellcom is also suffering from continual erosion in revenue from end-user equipment. It cash flow is dwindling and approaching negative territory, while other challenges, such as the estimated NIS 200 million frequencies recycling project, are imminent. And that is without 5G mobile communications technology, with all that involves. Xfone, and Golan Telecom with 5% of Cellcom's staff, are selling exactly the same product at the same price.

One of Cellcom's future challenges is how its IBC fiber-optic partnership with Israel Electric Corporation (IEC) and Israel Infrastructure Fund (IIF), in which Cellcom has a 35% stake, will work when IEC sells all of its fiber-optic activity to Cellcom and IIF for NIS 200 million, or NIS 103 million net.

Under the plan, Cellcom will undertake to buy 10-15% of the potential households in buildings connected by IBC for the next 15 years. Payment for each household purchased will be spread over 10 years.

The bottom line is that the company expects a big savings in the coming years in the expenses paid to Bezeq and Hot for their infrastructure services, because Cellcom expects a large increase in revenue from the sale of new Internet services based on the fiber-optic venture.

What caused the change in approach

Regulation has created a market with many players, in which competition has been intensifying since 2012: six operators in the mobile telephony market, plus three virtual operators. Furthermore, the barriers to switching between operations have been eliminated. It is now easy to switch: there is no commitment for any period and no subsidies by the operators for end-user equipment. Competition is focused solely on the price.

The presentation shows the steep change in mobile telephony prices since 2011, when the monthly price of a package averaged NIS 200. A year later, the price plunged to NIS 99, and reached a mere NIS 20 in 2018.

The dive in the price was accompanied by a substantial reduction in revenue, leading Cellcom to adopt a series of measures. The company first strengthened its service and sale departments in order to make its operations more efficient by training service representatives to provide a response for all of the services that it offered, instead of separate representatives for each service. Cellcom also launched one abbreviated number for providing a response to all of the group's services, thereby lightening the load on the telephone service centers through an application, software for solving malfunctions, and so on. In the television sector, Cellcom adopted a policy it calls "proactive" - active monitoring of customers with technical problems and contacting them to provide a solution.

Fewer personnel, less investments

Cellcom cut its staff by 53% in 2011-2018, and general and management expenses were reduced by 45%. Rent for cellular sites dropped, electricity costs were cut, the company saved money on advertising and marketing costs, repair laboratory activity was cut back, activity by Cellcom's logistics center was streamlined, and sales and office space was trimmed back. This trend is projected to continue in the coming years.

The most alarming figures in Cellcom's presentation concerns investments. The company does not say exactly how much it invested in each sector. Its investments totaled NIS 515 million in both 2011 and 2018, but landline investments accounted for 60% of the total in 2018, compared with 20% in 2012. Mobile telephony, Cellcom's bread and butter, is in a tailspin.

Published by Globes, Israel business news - en.globes.co.il - on July 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Netflix on Cellcom
Netflix on Cellcom
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