Government Changing Channels on Israel’s TV Duopoly

Reforms in television industry meant to bolster consumer rights and increase competition to HOT and Yes.

Amitai Ziv
Amitai Ziv
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Amitai Ziv
Amitai Ziv

Following intensive reform of the cell phone industry, the government is ready to start watching TV the industry, that is. The Communications and Finance ministries have their eye on the HOT and Yes duopoly as multichannel broadcast providers.

A list of reforms planned for the industry will be presented over the next few weeks, from caps on contract termination fines through expansion of digital terrestrial television, or DTT, the array of channels available freely to non-subscribers. HOT and Yes are expected to put up a fight.

Yes CEO Ron Eilon, left, and HOT CEO Herzl Ozer. Below: Communications Minister Moshe Kahlon, spearheading the reforms.Credit: Archive: Ancho Ghosh / Jini and Eyal Toeug

The inter-ministerial “DTT Team” is at the center of the initiative to increase competition in the sector.

The task force has been meeting over the past few months to discuss the future of freely-available stations, which currently includes channels 1, 2, 10, 33 and 99. In the course of its review the group has collected local and international industry data revealing the extent of the problems arising from lack of competition in Israel’s multichannel market.

A 2008 survey by Israel’s Central Bureau of Statistics shows that multichannel television reception is, on average, one of the highest household expenses averaging NIS 2,400 per year, more than water, dental care and public transportation.

Government figures revealed for the first time, show that monthly charges for HOT, which provides service via cable and Yes, a satellite service, have been consistently climbing over the years. HOT’s average revenue per user rose from NIS 182 per month in 2006 to NIS 208 per month in 2010.

A similar trend was seen for Yes: Its average revenue per user rose from NIS 210 per month in 2006 to NIS 230 per month in 2010.

Average revenues for HOT traditionally trail those of Yes because it still has about 100,000 subscribers connected to its cheaper analog package.

Profit margins for the two companies have also been rising. In 2006 the EBITDA rate (operating profit without depreciation and amortization) for Yes was around 20% of revenues, whereas last quarter the company reported this figure reaching 35%, close to the level reported by cell phone companies. Results for HOT were similar but included its more profitable phone and internet activities.

A captive consumer

A senior official cited the Gronau Commission report from 2008, critical of the multichannel industry, which stated: “Absence of additional competitors in the multichannel television sector is reflected in the prices paid by the consumer for cable or satellite services. The price of NIS 196 per month for a multichannel package in Israel (with a two-year commitment) is significantly higher than the average price in Western countries. Competition in Israel hasn’t created a situation in which the Israeli consumer is free to choose the number of channels included in a package and cannot choose a basic package of 10 to 20 channels at a reduced price. Likewise, consumers cannot purchase converters separately to lower monthly subscription costs. The duopolistic solution arrived at in the Israel’s multichannel television market does not give the consumer the range of possibilities given to consumers in other countries.”

The Israeli TV market is split between HOT with 60% and Yes with 40%. Most Western countries have a third platform to choose from: Internet Protocol television.

The inter-ministerial task force found that in many countries IPTV has a 10% to 15% market share and is growing in popularity.

Until now the government has tried several methods to solve the multichannel television problem.

At first the treasury tried to initiate legislation for a reform obligating the cable and satellite service providers to offer small groups of channels at reduced prices, but Yes and HOT objected to the move and the legislation was defeated.

In August the two companies said they would voluntarily propose a model for stripped-down packages but haven’t presented anything yet.

TheMarker has learned that Communications Minister Moshe Kahlon is unsatisfied with this lack of progress and intends to revive the reform bill.

It remains to be decided whether to accomplish this via an amendment to the law or through a hearing procedure.

Another government action was the shortening of contract terms.

The Communications Ministry’s Council for Cable & Satellite Broadcasting decided that from November 2010 minimum contracts for HOT and Yes subscribers would be reduced from 36 months to 18 months.

TheMarker has learned that the government intends to take this one step further by reducing contract termination fees.

The ministry will be announcing a hearing to be held on this subject in the next few days, with the goal of instituting a similar mechanism to that decided on for cell phone services.
Royalties and a new platform

The government also, under pressure from the treasury and for fiscal reasons, has acted on the issue of royalties paid by the companies, but lack of competition in the industry is being given as justification for raising the rate.

The treasury says that royalties can be a tool against uncompetitive industries and restore part of the companies’ surplus profits to customers.

In 2010 Yes and HOT had to pay just 1% of their revenues for royalties. In 2011 the rate will be 1.75% and in 2012 will go up again, to 2.5%.

But the most effective arrow in the government’s quiver for enhancing multichannel TV competition is the new DTT platform for free channels called IDAN Plus.

The interministerial team recently decided to expand this platform within a year from the currently available five channels to 18 free channels, but this won’t include children’s or sports stations, in order not to cut into pay TV’s profits too much.

Among the stations to be added are channels 9, 23, radio stations and a high-definition version of Channel 1.

The task force expects free channel expansion to lower market penetration of multichannel providers by 5% to 10% and cut into their revenues by a combined NIS 50 million to NIS 100 million a year.

A senior member said that the expanded IDAN Plus platform will make it easier to launch an internet-based hybrid over-the-top platform, with free content delivered over the air and premium content provided by Internet video on demand. The reform will probably be submitted for the government’s decision this Sunday.

Europe leads the way

The DTT task force found that free channel platforms had already been launched throughout Europe over the last couple decades and include more channels than available in Israel, and therefore decided to expand broadcasts offered through this medium.

In April 2010 the Italian firm Digita published comparative data for DTT in Europe, showing Italy leading the continent with 40 free channels, followed by the United Kingdom with 38.

Other leaders include Spain with 19 free channels and France with 18.

The Second Authority for Television and Radio, responsible for Israel’s commercial broadcasting industry, announced this week that on March 30 analog broadcasts will be shut down.

In Israel today there are still 100,000 viewers watching Channels 1 and 2 through this fading technology with the aid of an antenna, most of whom are expected to purchase a digital box for free telecasts and join the community of IDAN Plus viewers.

HOT and Yes are preparing to defend themselves from attack by all available means, with lobbyists and plans to petition the High Court of Justice.

Yes CEO Ron Eilon says his profits aren’t even close to those of the cell phone service providers. A glance at the figures bears this out.

Despite climbing revenues, Yes’ bottom line is close to nil, sometimes on the negative side.
For the third quarter of 2010 Yes reported net income totaling a mere NIS 18 million, and this followed a NIS 50 million loss the previous quarter.

HOT’s situation isn’t much better: In the third quarter of 2010 its television operations suffered a NIS 7 million operating loss.

In fact the two companies don’t distribute dividends to their shareholders, and their billions of shekels of debt preclude any profit distributions.

Their market shares are also shrinking. In a presentation to investors B Communications, the controlling interest holder in Bezeq, they showed that market penetration of the multichannel television companies decreased from 70% in 2007 to 67% in 2010.

The companies could easily claim that there is a clear trend of abandoning cable and satellite TV for computer viewing of either legally available or pirated television content.
And the companies, which buy their content from abroad, could claim sensitivity to any rise in the value of the dollar.

HOT and Yes say they operate in an unprofitable and threatened industry and any further blow could put them out of business.

The companies like to remind the government about how their over-intervention dragged the Tevel cable company into insolvency. They saying that if the ministers aren’t careful this time, its DTT threat and the other proposed measures might lead them the two firms into bankruptcy.

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