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Isarel's Bezeq to lose local telephone monopoly
The Middle East / January 2001

By Larry Luxner

TEL AVIV--Israel, which leads the world in cellphone usage, boasts dozens of cutting-edge telecom manufacturers and enjoys the Middle East's highest (863 erator Cellcom, which is l penetration rate, still suffers from one major Third World deficiency: a monopoly on basic local phone service.

However, that could quickly come to an end.

Late last year, the Knesset Finance Committee gave preliminary approval to draft regulations submitted by the Ministry of Communications that would open the domestic phone market to competition for the first time since Israel's establishment in 1948 -- ending the fixed-line monopoly long enjoyed by giant Bezeq Israel Telecommunications Corp. Ltd.

The move followed a ruling last April by Israel's attorney-general, Elyakim Rubenstein, that cable TV companies do not have to compete in a tender to offer telephony and rapid Internet services.

This is significant because, at present, Israeli subscribers and even Internet access providers can access the Internet only through Bezeq. If cable companies are allowed to offer their subscribers Internet access independently, it will establish a precedent, opening up competition.

Rubenstein's decision has been heartily endorsed by Communications Minister Binyamin Ben-Eliezer, who has been pushing for open-market access for years.

"I don't intend to allow any more delays in creating real competition in these services," Ben-Eliezer said in a statement. "We mustn't allow a situation in which Bezeq has a monopoly in broad-banded Internet, and without competition, the economy will suffer severely."

Bezeq, which was partially privatized three years ago, is Israel's largest company, with $2.2 billion in 1999 revenues. The government owns 54.6% of Bezeq and Haifa-based Ze'evi Group another 19.4%. The remaining 26% is traded on the Tel Aviv Stock Exchange.

The Barak government was to have sold a 50.1% share of Bezeq to a strategic investor, but renewed violence between Israel and the Palestinians will undoubtedly delay those plans, say analysts.

"The current situation is not conducive to the sale of Bezeq," said Shani Kogan, a telecom analyst at Tel Aviv investment bank Nessuah-Zannex, in an interview with the New York-based Daily Deal. Added Yaron Jacobs, director of Israel's State Corporations Authority: "It's unclear at this point whether the tension in the region will have an impact on our plans for Bezeq."

Before the latest flareups in the West Bank and Gaza, an adviser was to have been selected by the end of October. Since then, Bezeq shares have reportedly fallen by more than 15% on the Tel Aviv stock market. The company's current market valuation is just over $4 billion.

At the moment, foreign investment banks are vying for a contract to advise the SCA on the Bezeq privatizations, including Goldman, Sachs & Co., Salomon Smith Barney Inc., PricewaterhouseCoopers and ABN Amro NV. The Ministry of Communications has made it clear that Israeli investors must control at least 20% of the consortium selected by the government, and that it must also include an established telecom operator.

Bezeq currently has 2.85 million fixed lines in service, translating into a telephone density of 46 percent -- the highest in the Middle East and ahead of that of many European countries. It also owns 50% of Israel's No. 2 cellular provider, Pelephone Ltd., which has 1.3 million subscribers, and is currently negotiating with four investor groups to buy the other half of Pelephone from Motorola Inc., and then sell it back to Bezeq once the state-owned telco is privatized.

So many Israelis have cellphones today that Bezeq pay phones at shopping malls and major intersections in Tel Aviv and Jerusalem often go unused for hours at a time.

Yet entrepreneurs say the lack of competition in basic phone service stifles growth within Israel.

"Bezeq has a monopoly on local service," says Ami Amir, CEO of RADVision Ltd., one of the country's leading high-tech companies. "At the end of the day, the wire to your home is owned by Bezeq."

Bezeq makes no secret of the threat it sees coming from new rivals.

"Thinking short-term can turn you into a dinosaur feeding off vanishing turf and headed for extinction," said Israel Tapoohi, Bezeq's chairman of the board, in a prepared statement. "Bezeq's privatization, I am convinced, is the key to transforming the state monopoly into an agile, cost-conscious, market-driven company, capable of delivering sustained growth in earnings and add shareholders value. We must therefore, while planning for the next 5-10 years, also ensure that our decisions can be leveraged for success in the following decades."

In addition to its stake in Pelephone, Bezeq has also acquired ISDN-NET and Trendline, two popular ISPs. Also, a consortium in which Bezeq is the major shareholder (30%) has been awarded a license for the introduction of DBS services in Israel. At the turn of the century, Bezeq will introduce public pay phones working on smart cards; it's also exploring e-commerce opportunities.

While Bezeq didn't have any immediate comment about the new legislation, company spokesman Rami Mintz did say that by the end of 2001, the company plans to add an eighth digit to all Israeli fixed phone numbers, and a seventh digit to all Israeli cellular numbers, "in order to create the possibility for other companies to enter the market."

The way things are going, that's likely to happen within months rather than years.

The Eurocom Group, a telecom holding company based in the Tel Aviv suburb of Ramat Gan, says it's ready to apply for an operator's license "within a few days" after the Communications Ministry gives the green light.

Eurocom's new subsidiary, Ofek, announced that it has already invested $15 million in preparations to enter the market, and will spend around $1 billion to build its telecom infrastructure and hire up to 1,500 employees over the long term. The company will base its infrastructure on the latest Internet protocol (IP) and local multichannel distribution service (LMDS) broadband technologies.

"Ofek will be a leading provider of advanced telephony services in Israel, as well as an attractive alternative for customers who currently use Bezeq," Noga Barak, Ofek's vice-president for marketing, told The Jerusalem Post. "We will be competitive in price, and will offer more services than Bezeq presently does."

Eurocom, one of Israel's leading holding companies in telecom, already has interests in Internet Gold (a major ISP); Partner-Orange (a cellular provider) and YES (a direct satellite broadcasting venture). All these companies are based in Tel Aviv.

Other entities hoping to compete against Bezeq include international long-distance provider Barak and cellular phone operator Cellcom.

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