Global Telephony / July 1995
By Larry Luxner
An upstart Israeli cellular venture -- which tried to beat the competition with low prices and aggressive marketing -- has found itself entangled in one of Israel's worst telecom fiascos in years.
The company in question is Cellcom, a joint venture betweenBellSouth International (33%), Israel Aircraft Industries (10%), the Safra Banking Group of São Paulo, Brazil (33%) and the Israel Discount Bank investment group (24%). Headed by Ya'acov Peri, former chief of the country's domestic spy network, Cellcom won a 10-year government concession last December after promising to offer its customers the world's lowest rates for cellular service. It also promised to invest $300 million in infrastructure during the first three years of the concession.
With its only competitior, Pele-Phone Communications Ltd., charging 22 cents a minute during peak hours and 11 cents a minute during off-peak hours, it's no wonder Israelis rushed to sign up with Cellcom, which charges less than 3 cents a minute and no monthly fee.
"There was an unbelievable demand," said Ya'acov Solan, president of Solan Telecommunications & Computers Ltd. "In four months, they gained 80,000 customers. But they don't have enough capacity in their system. Second, they are not covering all the country, and third, they face many technical difficulties."
The biggest difficulty surfaced a few months ago, when Cellcom customers began complaining about getting recorded announcements saying the cellular numbers they were calling were busy, even when nobody was talking.
"People weren't able to get contact and didn't understand the reason. They thought maybe Cellcom overloaded the system with too many phones, too fast," said Ohad Marani, economics minister at the Israeli Embassy in Washington. "Now they discovered that it's not the system's fault but a problem in the chip of the cellular phones themselves."
Cellcom officials say their network, which uses TDMA digital technology, is blameless. Rather, the problem appears to be a software malfunction programmed into certain Alpha and Micro-tech Lite phones at the time of their manufacture in Motorola's Libertyville, Ill., factory.
"The source of trouble does not lie in any particular telephone. It affects an unknown group out of the tens of thousands of cellular telephones made by Motorola," according to a Cellcom company press release.
Interestingly, Cellcom's chief competitor in the cellular business is Pele-Phone Communication Ltd., a 50-50 joint venture between Motorola and Israel's state-owned telephone company, Bezeq. Founded in 1986, Pele-Phone (which means "miracle phone" in Hebrew) today has 170,000 customers throughout Israel and uses NAMPS technology.
"The phones that can be used with our network are dual-mode AMPS/NAMPS units by Motorola and Nokia," said Pele-Phone spokeswoman Ayelet Gradman. "Our units are not similar to the ones having problems, since we use different technology."
Oren Most, vice-president for marketing, said Cellcom arrived at the conclusion that the phones were to blame after randomly stopping Cellcom customers at public parks and at the Tel Aviv Marina, and discovering that their handsets were inadvertently jamming the system. That followed a thorough investigation of the network infrastructure by Cellcom and Northern Telecom, which had supplied Cellcom's switch and cell sites.
On April 27, Cellcom announced a temporary freeze on new line connections and phone sales. In a move aimed at preventing customers from switching to the competition, Cellcom also agreed not to bill current subscribers for air time until the freeze is lifted. That, Most concedes, is costing Cellcom tens of thousands of dollars a day.
"We came under tremendous criticism from consumers, the media and the Knesset [Israel's Parliament], but that was before the root cause was identified. Immediately after we found out, we announced a halt to our sales," said Most, adding that "it has nothing to do with the capacity of the system."
Indeed, Jim Caile, marketing vice-president of Motorola's Cellular Subscriber Group in Schaumberg, Ill., says the problem surfaced in Israel because customers there -- in the absence of a national paging system -- tend to leave their phones on all the time, treating it as a wireless home phone with mobility.
"Under certain circumstances, the TDMA phone would interfere with the signaling channel in an individual cell and make it difficult for people to make and receive calls. A very small percentage of phones have this problem, but we wanted to make sure we got a hold of every single phone, so we're reprogramming the phones with new software."
Most said 63,000 of Cellcom's 83,000 customers have Motorola phones, though even those using Nokia or Ericsson units were affected by the same jamming.
Even so, the urgent reprogramming of 63,000 phones is a logistical nightmare by any standards. To stem further losses, Celcom has been forced to rent out Tel Aviv's largest basketball stadium and fairgrounds for an entire month. There, 500 Cellcom representatives are doing the software upgrade -- an operation that takes 10 to 15 minutes per telephone -- for about 1,500 to 2,000 customers a day. As an incentive to bring their phones in, customers are given a free Motorola battery pack worth about $75, and free food and drinks while they wait.
Cellcom officials declined to speculate on how much Motorola's screw-up will cost their company in the long run, though a leading Israeli newspaper, Ha'aretz, recently put the figure at $50 million. Motorola's Caile said he doubts it's that much, but concedes that losses will definitely run into the millions of dollars. As to who will foot the bill for this fiasco, neither company would comment.
"Right now, we're not discussing money," said Most. "We're busy taking care of the customers."