The real pillars of the Israeli economy

Make no mistake. Pop no corks. The firm stand that Communications Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu took against the mobile service companies regarding network interconnect fees does not promise real change in the cellular market, which rakes in NIS 18 billion a year in "cellular taxes" from the public.

	A line outside a National Insurance office. It supports families, not the cellular industry.
	Photo by: Alon Ron

Lowering interconnect fees - which you pay when you use your cell phone to call someone on another network, for instance from Orange to Pelephone - is just the first step. More is needed to institute real structural change. Israel needs more mobile operators, either ones with their own infrastructure or virtual ones, that use existing infrastructure. High interconnect fees are the main obstacle to the entry of new players, but not the only one. The regulator needs to create a package for new operators, including interconnect fees of near-zero.

The army of lobbyists hired by the tycoons for the opening skirmish of the reform war, the interconnect fees, is just the advance brigade. The mobile providers are marshaling vast numbers of forces for the major battles to come.

Their tactic is clever, of course. They reach "compromises" with the finance and communications ministries that the politicians can then claim as achievements while the genuine reform dissolves and disappears.

Since the war has only just begun, now is a good time to learn the jargon employed by the cellular battalions in order to be able to argue effectively later on.

b "The cellular industry is a pillar of the Israeli economy. It supports 15,000 families." (The chairman of one of the mobile service companies, speaking with the press. )

Pillar? Why not backbone, brain, family dog? The cellular companies are infrastructure companies, no different in substance from the Israel Electric Corporation or the Mekorot Water Company. Like them, they are a sort of monopoly that almost everybody needs. By the same logic one could argue that reform of the electricity or water sectors is unthinkable because they employ thousands of people or because they are pillars of the economy.

The difference between the cellular companies and Mekorot or the IEC, or any other government monopoly, is that the extra income they make by virtue of their monopolistic status goes to three tycoons, while the government monopolies give the extra money to their thousands of workers.

From now on, do not say: The cellular companies are pillars of the Israeli economy. Say: The people who pay the cellular rates are the pillars of the Israeli economy.

b "I've been there. I've been where economic decisions turn into populist decisions. I've seen and experienced the grievous result of these decisions... I'm talking about the cable industry, which was reduced to a dramatic crisis a decade ago." (Same chairman. )

How very creative of the cellular companies, to harness the public's loathing of the multichannel television companies to argue that reforms don't work anyway. They failed in television so they'll fail in mobile communications, too.

Well. Let's revisit the facts. The multichannel television sector had been the sole fief of the cable monopoly, which fought fang and claw against allowing competition. In the first years after satellite television company Yes was established despite all, cable fees dropped, service improved dramatically and most important, so did content.

But after the duopolistic structure became firmly established all those achievements for the consumer began to erode. Now the multichannel television market is aching for the next reform, which could be based on high-speed Internet as a way to bring new players into multichannel TV.

But why exactly was the cable industry reduced to crisis back then? Was it the regulator's fault? Not exactly. The problem was that the owners of the cable companies decided to eliminate the new competition at any cost. They poured billions of shekels into beefing up their holdings in the cable companies at bubble prices. They paid insane prices for content from abroad and threw money into all sorts of business adventures.

Of course, that sort of behavior isn't unique to Israel's cable industry. Lots of mistakes were made in lots of places during the dot.com bubble era. But Israel's cable company owners not only borrowed vast amounts, they also refused to strengthen their equity base by bringing in partners or converting debt (bonds ) into shares. They refused to dilute their holdings and kept their companies highly leveraged and starved for cash for a decade.

Why? Did it make economic sense in the first flush of high-speed Internet? They did it mainly because they were power-mad. Certain cable company owners don't see their companies as cash-flow machines but as positions of power in the telecoms arena.

So from now on say: Indeed, we must not repeat the mistakes of the cable industry. We must not permit infrastructure companies to become hostage to the whims or troubles of their owners.

b "Do we want to reach a situation in which cellular infrastructure in the State of Israel can't support advanced devices? Do we want to be a nation with telecoms infrastructure like Sudan and Afghanistan?." (Same chairman. )

Hmm. What is he saying? That if interconnect fees are cut or competition arises we won't be able to make the investment needed to stay at the forefront of technology.

Sir, read your own company's financial statements. In the last five years it netted NIS 4.1 billion. During that time, what dividends did it pay - 10% of profit, 20% perhaps? How about 180%? From the start of 2006 it has paid NIS 7.5 billion in dividends, including distribution based on past profits. Minus past profits, the dividend rate is 100% of profit.

Meaning that the company first hands out every single cent of its monopolistic gains as dividends and then threatens that it won't have any money for investment.

From now on, say: When the regulator examines whether the companies have the wherewithal for necessary investments, it must declare that any dividends beyond 100% that were distributed in the past were a management error that will be amended.

b "We'll have to lay off employees." (A number of cellular company managers have said something to this effect. )

Hmm. Interesting. Are these employees superfluous, remaining on the payrolls as a sort of community service that the cellular companies generously provide? If they are making a genuine contribution to the company, if they are creating value, they won't be fired just because income drops.

From now on, say: You can't fire workers who generate value.

b "Service will suffer." (Ditto. )

Hmm. Also interesting. How will they diminish service? Won't it simply cause users to switch to another provider? Of course, the managers who say this are counting on there not being a genuine alternative.

From now on, say: The companies' ability to withhold service attests mainly to the structure of the market and the need for reform.

b "The cellular companies claim you don't care about endangering them financially by dramatically cutting interconnect fees, that all you care about is clipping a coupon as a protector of the people." (A journalist interviewing the communications minister. )

Who is endangering the cellular companies? We already know that from the above bit on dividends. More interesting is the end of the question. Is it possible that the communications minister is acting just for the sake of appearances?

Indeed, the behavior of the communications minister is worrying. It has become all too common for politicians to "clip a coupon" in order to work for some tycoon, to arrange jobs for you and the boys, to benefit your constituency, to grease the palms of party central committee members. But Kahlon introduced a new concept, clipping a coupon in order to please an entire public! Millions of cellular users, thousands of small-business owners and hundreds of startup entrepreneurs who want the most advanced telecommunications market possible.

From now on say: We need a solution for politicians who want to please the public, and it won't be easy.