Open letter to the Communications Minister

Fiber optics Photo: Shutterstock

Stephen Levey urges the new minister of communications to give urgent attention to Israel's abject failure in fiber broadband connection and 5G.

Dear Minister of Communications,

Congratulations on your appointment. Sadly, you have become Minister of Communications at a time of national emergency, and I do not use that term lightly. This emergency has been bequeathed to you following seven years of abject policy failure in the communications sector. To make matters worse, if you cannot deal with this situation, and quickly, Israel faces the potential of a lost decade of economic growth. The situation is that serious.

Today, fiber penetration to the home in Israel remains in the very low single digits. The OECD estimated that in mid-2018, less than 2% of homes in Israel had access to fiber as part of their fixed broadband connection. This compares to an OECD average of around 25% with some far less economically developed countries such as Latvia and Lithuania already at 60% penetration or higher.

At the same time, but just as troubling, the chances of Israel having a 5G mobile network operating before 2022 look close to zero. To put this in perspective, 5G will launch in the US, Canada, Mexico, China, Brazil, Korea & Japan, to name just a few, in the next 12-18 months. In Israel, the planning for the tender only started recently and in many respects this planning is irrelevant as none of the operators have the financial capability to pay for such a network. At the same time, 5G will require many more base stations than 4G. Approval for all these new base stations could take years be approved.

Let’s address three important questions. How did we get into this mess? Why does it matter? And finally, and most importantly, how do we get out of it?

It is worth analyzing how we got here in order to figure out a path forward. Regarding fiber penetration, the current situation is due to a two year stand-off between Bezeq and the MoC. Bezeq has a fiber optic network which is ready to be switched on, but refuses to do so without regulatory clarity from the Ministry regarding a whole host of issues, including some major sticking points regarding the pricing that Bezeq needs to offer competitors for use of the network as well as the insistence of the Ministry that Bezeq needs to offer universal coverage and at the same time won’t allow any differentiated pricing across different regions.

In short, to the outsider it appears as if the Ministry is trying to punish Bezeq for the previous misdemeanors allegedly committed by both Bezeq’s controlling shareholder and the previous Director General. At the same time, Bezeq is seen as an easy target as it is the only company in the sector that is still profitable. That is not to say that Bezeq should be given a free pass. But unless the MoC changes approach, Bezeq will not turn on its fiber network. It really seems to be as simple as that.

Let us now turn to the cellular market. When Golan Telecom launched in 2012 few commentators would have argued that Israel was not ripe for more mobile competition. The opening of the market to competition made perfect sense. However, as is so often the case, if we jump to the present day, the regulatory pendulum has swung so far towards allowing for hyper-competition that we are now at a point where none of the operators are able to make a profit.

Today there are too many operators, charging prices that make no economic sense, and if this is allowed to continue, one of them will eventually run into serious financial trouble. Cellcom still carries a large debt pile on its balance sheet and Partner, without its network sharing agreement with HOT Mobile, would be bleeding cash every quarter. And all this at a time when both companies have their own strategies for entering new markets to compete with Bezeq that also require heavy investment. None of these companies have the financial capability to invest in a 5G network today.

Why does any of this matter? Former British Prime Minister Gordon Brown once said that “Just as many years ago investment in road and rail infrastructure was a powerful stimulus to the economies then, so too in this new age we can invest in the digital infrastructure for the future, in telecommunications for future economic growth” This statement is true for any country, but for a country that considers itself to be at the forefront of the hi-tech world such as Israel it is especially true. Israel simply cannot afford to be left behind with respect to high speed internet. It will impact all aspects of economic growth and will make Israel a less attractive destination for capital.

All the more so with respect to mobile networks. The jump from 4G to 5G truly is a revolution; way more so than the move from 3G to 4G ever was. 5G networks will offer speeds up to 100x faster than 4G. But it’s not just about speed. 5G will offer shorter delays. Though it’s not always noticeable, there is often a brief lag in time from when data is sent to when it’s received. 5G should reduce this so-called latency, making it possible, for example, to watch high-speed virtual reality video with no delays or glitches. Finally, 5G will offer increased connectivity. Cell towers equipped with 5G technology would have greatly increased capacity over 4G. That means more people - and more devices - should be able to communicate at the same time.

As things currently stand, a revolution is taking place globally with respect to fixed and mobile internet speeds, a revolution that will impact the way companies transact and the way individuals communicate, and Israel is being left behind. This will impact our long term GDP growth.

Finally, and most importantly, what can you, Mr Ohana, do in order to deal with this crisis? First and foremost, surround yourself with advisors in your office who truly understand these issues. The MoC today is crammed full of professionals with their own personal agendas and histories. They will try and convince you that the current approach is working. It isn’t. They will tell you to keep pressuring Bezeq, maintain high levels of mobile competition, and eventually all the players will all accept this reality and invest in new technologies. No they won’t. Make sure you have a team that can stand up to this distorted logic.

Secondly, call an emergency summit. Invite the CEOs of all of the leading telecom companies to sit in a room with you and listen to them. Make part of such a meeting open to the public. Dig into the details and get a grip on quite how bad the current situation is.

Thirdly, negotiate with Bezeq and reach a deal so that the company will turn on its fiber network. Shlomo Rodav is a reasonable man. He understands that no deal won’t get him 100% of what he wants. Get involved in these negotiations personally. Do not leave it to the people who have failed to reach a deal thus far.

Fourthly, allow some sector consolidation to take place. Israel does not need 7 or 8 mobile operators. Competition will remain healthy if there are 4 or 5 players. Yes, prices will rise, but this has to happen. Current pricing is simply not sustainable. Allowing some consolidation and price increases will allow the remaining operators to invest in 5G networks.

Fifth, meet with the Histadrut and the key union leaders. Persuade them that for this sector to survive, efficiency measures are inevitable. Failure to cut costs today will lead to bankruptcies and far more job losses tomorrow. This might not be popular, but there really is no better option.

Finally, allow all of the mobile operators to jointly invest in only one 5G network which will then be shared. This is similar to the South Korean model, where it is estimated that the three major operators will save US$1bn over 10 years as a result of this plan. Additionally, it dramatically cuts the number of new base stations that are required. The Koreans estimated that each 5G network would need 8x more base stations than the 4G network, and thus having one network only partially solves this problem.

The challenges before you are considerable. The magnitude of the crisis is not well enough understood. The politics of the situation is complex. But the long-term sustainability of Israel’s economic miracle relies on you.

The writer is a partner at ION. ION has extensive investments in the Tel Aviv Stock Exchange

Published by Globes , Israel business news - en.globes.co.il - on May 23, 2019

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

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Fiber optics Photo: Shutterstock
Fiber optics Photo: Shutterstock
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