It's been just over one year since Hot Mobile and Golan Telecom entered the cellular service market, creating a mobile revolution that shifted the balance of forces between companies and consumers, and between the companies themselves.
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Who are the winners and losers?
The losers, of course, are the three veteran cellphone companies — Partner Communications, Cellcom Israel and Pelephone — which have shrunk in size and profitability. The winners are consumers who have saved some NIS 6 billion in cell phone costs over the past 18 months.
But there are also some unexpected winners from this process. Two are the big Internet infrastructure companies, Bezeq and Hot Telecom, which have gained a more dominant footing. But the biggest surprise of all is that stock market investors who bought into the telecommunications sector have earned double-digit returns.
With the last of the telecommunications companies publishing their second-quarter earnings reports this week, marking the end of one year after the big shakeup of May 2012, the effects of steep competition in the industry have become entirely clear.
The veteran cellular companies' earnings have been hit hard by the reforms undertaken starting in 2010 by then-Communications Minister Moshe Kahlon. In 2011, revenues at the big three cellphone companies dropped NIS 3.7 billion compared with the year before. In 2012, the year of the big cell phone revolution instituted by Kahlon, Golan and Hot Mobile entered the cellular market, earnings dropped another NIS 1.8 billion at the big three.
Based on the latest quarterly reports from the big three cellular companies, it appears that their revenue has dropped another NIS 1.1 billion this year.
Among the cellphone companies, some were bigger losers than others. In the second quarter, Cellcom lost the largest number of subscribers — some 180,000 even though it added the Israel Defense Forces as a customer during the quarter.
On the other hand, Cellcom succeeded in limiting the drop in its cellular revenues. They declined just 16% from a year ago, versus 23% for Partner and 19% for Bezeq's Pelephone unit. Still, at NIS 80 a month Cellcom has the lowest average revenue per user, NIS 3 less than Partner and Pelephone.
For profitability, Pelephone has had the best record over the three veteran cellular operators. Its EBITDA dropped just 25% in the quarter, compared with 32% for Cellcom (without its Netvision unit) and 46% for Partner (not counting 0.12 Smile). Pelephone has had the highest EBITDA for the second quarter in a row.
That is a big achievement for Pelephone's CEO Gil Sharon. Until 2009 Pelephone was the laggard in all the three categories — EBIDTA, ARPU and net profit. Now it is the leader. One reason for that is management stability. Cellcom has changed CEOs once in the period and Partner twice. Another is that Pelephone is hosting HOT Mobile, an arrangement that earns it some NIS 55 million every quarter. Cellcom is hosting Golan, which is earning it about NIS 46 million a month.
On the savings front — which is critical for the cellular operators now that their revenues are dropping — everyone has taken cost-cutting steps. All told, the three reduced their costs NIS 472 million in the quarter from the same period a year ago. Partner, however, was the biggest cost-cutter, accounting for 41% of the total, with Cellcom accounting for 31% and Pelephone 29%.
But if Partner is winning on the efficiency front, its employees have suffered a big loss. The company has cut some 2,584 people from its payroll, or 40% of the total.
As for mobile users, the extent to which they benefitted from the revolution is evidenced by figures for average revenue per user from the fourth quarter of 2010, and comparing it to the second quarter of this year. At the end of 2010, the average mobile user was spending NIS 142 a month. By the second quarter of this year, the rate had fallen to an average of NIS 84, a drop of 41%.
What this means is that Israeli cellphone users have been saving on average NIS 58 a month due to the increased competition and lower rates. Assuming the rates don't continue falling, some 9,000,000 Israeli cellphone subscribers — many people have more than one phone and many Palestinians have Israeli phones as well — will be keeping some NIS 6 billion in their pockets every year.
Meanwhile, on the industry side, Bezeq has been the most profitable company in Israel's telecom sector, accounting just over half of all earnings before interest, taxes, depreciation and amortization, otherwise known as EBITDA, generated by the entire industry in the second quarter. That was up from 47% in the same quarter last year.
Even more notable is that HOT has become the second most profitable company in the sector with 20% of the total industry EBITDA, compared to 16% in the same quarter last year. Cellcom and Partner, by contrast, produced 16% and 13% of total industry EBITDA, respectively.
Why are Bezeq and HOT growing while their rivals are not?
The answer is that Bezeq and HOT's non-mobile services have benefited from the fact that landline communication services have not been the subject of any major reform efforts, allowing them to retain their exceptionally profitable duopoly. However, this may soon change as Communications Minister Gilad Erdan has turned his focus to landline and television.
Erdan has been advocating a reform in the wholesale bandwidth rates charged by the landlines. He is also urging the multi-channel television operators HOT and YES to offer customers smaller and cheaper basic packages, and has called for the expansion of the number of channels offered through the television converter box service Idan Plus.
Among Internet service providers, the market has been disrupted — but by subsidiaries of Internet infrastructure companies Bezeq and HOT rather than by new players. Partner reported that its ISP, 012 Smile, suffered a 7% drop in customers to 527,000 this year from 609,000 last year. ISP 013 Netvision reported less information about its customers, but its earnings have dropped 5%.
At the same time, the number of ISP Bezeq International subscribers has grown by 7%, and its Internet service revenues by 4%.
HOT launched its own ISP subsidiary in the past year, Hotnet that has signed up until now some 120,000 subscribers by offering the lowest Internet subscription prices in the market. Most of these new subscribers came from Internet users who already use Hot's cable infrastructure to access the web. Since Bezeq International's subscribers typically use Bezeq's DSL infrastructure to connect to the Internet, the main losers from Hotnet's entry into this market were 012Smile and 013Netvision.
While a year ago headlines may have focused on the new competitors in the cellular market and the deals they offered new customers to join their services, among the investors it paid to be a contrarian. Whoever bought stock in Partner, Cellcom and Bezeq 12 months ago would have achieved by now a returns of 67%, 43% and 49%, respectively.