Israel narrows the telecoms gap

Gad Perez

Recent events mean the laggard Israeli telecommunications market has turned a corner, but the delays have been costly.

Two recent events - the entry of HOT Telecommunication Systems Ltd. (TASE: HOT) into the fiber-optic venture IBC (Israel Broadband Company, which trades as Unlimited), and government approval for Bezeq Israeli Telecommunication Co. Ltd.'s (TASE: BEZQ) fiber-optic program - represent a big bang in Israel's telecommunications, the repercussions of which will be felt in the near future. The closeness in time of the two events is not coincidental. The outline plan that enabled Bezeq to embark on an investment in the billions of shekels is also what accelerated Hot's entry into IBC.

These two events, together with the award of 5G licenses in the mobile market and the forthcoming abolition of the split in the Internet market between infrastructure and service provision, set out new borderlines for the Israeli telecommunications market. The main aim is to narrow the gap between Israel and the rest of the world when it comes to surfing speed. This will facilitate the development of digital services and greater innovation in the economy.

The Hot-IBC deal would never have happened were it not for the approval given to Bezeq's fiber-optic proposal, and even more so were it not for the failure of the deal whereby Hot was to have acquired Partner. The aim of that deal was to overcome Hot's difficulty (some would say its owner's refusal) to enter on investment in a fiber-optic project without partners.

However you look at it, Hot has become a strange sort of telecommunications company, with no infrastructure that it owns outright. An unnatural hybrid has been created here, the result of continual regulatory distortions together with an owner, Patrick Drahi, who has utterly despaired of the local regulators. As a result, he has decided to invest the bare minimum in Israel, and to concentrate his main efforts on the rest of the world. Ultimately, Hot accounts for only a small fraction of the global business of Drahi's Altice, so that there is a limit to the resources that can be devoted to it.

Bezeq finds itself where it likes to be. It comes to life when it has a big infrastructure project before it. After many delays, crises, and disputes with the Ministry of Communications, the company is back to dealing with such a project. The question is whether it was right to wait for all the conditions to mature, or whether it should have embarked on the project earlier.

There are those who argue that Bezeq's delay in entering the fiber-optic market led to accelerated investment by its competitors, which have already reached a good level of deployment. Partner is already at 30% of households, and IBC is at 20%.

There is some overlap between Partner and IBC, but something significant happened in the market while Bezeq fought it out with the regulators over rollout terms: Bezeq lost its deterrent power. Its competitors became more sophisticated, and realized that if at one time the term "fiber-optic rollout" was reserved for infrastructure companies like Bezeq or Hot, the regulation and relaxations given to them had changed the picture. Now everyone understands that even mobile companies can achieve substantial deployment, and the demon isn't so scary.

It's an old argument within the company and in the Israeli telecommunications market whether Bezeq is better off pricing the use of its infrastructure high, which gives it competitors an incentive to build their own, or pricing it low, and remaining the main infrastructure company in the market.

As far as investment in fiber-optic networks is concerned, it seems that the die is cast. Bezeq's competitors have already decided that they want to invest in independent infrastructure, and rely on Bezeq as little as possible. Hot's entry into the IBC venture demonstrates this, as does Partner's rollout.

The more independent infrastructure that exists, the more unused capacity Bezeq will be left with. Some believe that Bezeq could have taken on the risk of embarking on the fiber-optic project without complete certainty, and that even with an obligation of universal deployment, the damage that it would have done to its competitors through early entry into the market would have forestalled the acceleration of their investments in this area. This argument has its merits, and will a criterion for examining future telecommunications projects.

As far as the regulator is concerned, his obstinacy led to faster development of competition in infrastructure and to a good result, namely that Israel will have alternative infrastructure to that of Bezeq. On the other hand, Israel has paid a very heavy price for this obstinacy. The country has deteriorated by all measures of telecommunications efficiency, and important reforms have not been made, because of the regulator's desire to punish Bezeq for past sins.

Each and every one of us has paid the price, and is paying it every day.

Published by Globes, Israel business news - - on September 30, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

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