Last week, after Communications Ministry Director General Shlomo Filber said he planned to remove the structural separation now required between Bezeq’s operating units, Bezeq shares jumped 4%, adding 840 million shekels ($214 million) to the company’s market value.
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Was Filber’s announcement worth that much to Bezeq and its shareholders? The answer is yes, and here’s why: Bezeq International, the operating unit providing Internet services, now employs 2,000 people, about 800 of whom work in customer service and the rest at headquarters. Merging the unit into the parent company could eliminate 1,200 jobs.
Even it is just 1,000 jobs at an average cost of salary of 25,000 shekels a month, that amounts to saving 300 million shekels annually. But then there is the savings in rent and office overheads by consolidating all headquarters staff in one place. Marketing and operating costs can be saved as well. According to one knowledgeable source, the cost savings could amount to 600 million shekels a year for Bezeq. All told, say analysts who follow the company, ending structural separation could save the company 1 billion shekels annually.
Structural separation was imposed by regulators on the company 20 years ago, when the Internet was coming into its own and officials wanted to ensure a competitive market. Bezeq was allowed to provide Internet services so long as it was done through a subsidiary with standalone management, finance and operations that got no special preference from its parent. But while this aided competition it added to costs that were passed on to the consumer and a complicated system where households and business had to subscribe to an Internet service provider and an Internet infrastructure provider.
More recent policy has been to foster the emergence of four big telecommunications companies that will provide end-to-end services. That was the idea behind this year’s reform of the wholesale market, which gave companies lacking their own infrastructure, the cellphone operators Partner Communications, Cellcom Israel and others, access to Bezeq’s network – and to Hot’s – and regulated prices. That is the idea, but to date the reform has been slow to take hold. Only 170,000 out of two million web-connected households have opted out of Bezeq. The slow churn in the Internet market stands in stark contrast to the cellular market, where the rate is about 200,000 a month. The second part of the reform concerns landline telephony, which is a bigger business for Bezeq than Internet, generating 1.6 billion shekels a year, or 39% of the total. Bezeq was supposed to make its telephone network available to competitors starting last May, but has yet to act.
Bezeq remains a monopoly for most telecommunications services: It has 66% of the Internet infrastructure market, 56% of the landline phone market for households and 74% for businesses. Bezeq International is the biggest ISP. Bezeq is a giant, generating a 482 million-shekel net profit in the second quarter, versus 12 million for Cellcom and 9 million for Partner. Yet the Communications Ministry is moving forward with hearings to end structural separations, even though Filber denies anything will be implemented until Bezeq meets ministry-mandated milestones.
In the 100 days since Filber took over as director general – under the aegis of Benjamin Netanyahu, who also serves as communications minister – there’s a discernable pattern. The ministry approved a merger between Bezeq and its Yes satellite television unit. Filber approved cancelling an 11.3 million-shekel penalty on Bezeq for failing to implement telephony reforms. He is likely to award Yes a license to operate its own channel. Filber has created a Bezeq-friendly Communications Ministry, and the assumption is that whatever he is doing it is because Netanyahu wants it.
The prime/communications minister is highly sensitive to the power of the media and in that context is no doubt looking at Bezeq’s Walla! unit, the most-viewed website in Israel after Google and Facebook. Comcast estimates that 7% of Israel web time is spent on Walla! sites, more than twice the rate for Ynet. Walla! has been friendly to Netanyahu, and Netanyahu is now being friendly to Walla!’s owner.