Israel Electric Corporation to Bring Much-needed Competition to Communications Sector

But while consumers are likely to benefit from the IEC's new super-fast Internet network, increased competition brings with it increased risks.

It would be hard to overestimate the level of competition that Israel Electric Corporation's new super-fast Internet network will bring to the communications sector in Israel. Introducing a major new network requires enormous investment in advanced infrastructure, and this prevents many potential competitors from crowding the field of providers. Apparently, only monopolies can become players.

Bezeq, for example, established an extensive communications infrastructure many years ago when it had a monopoly as a phone provider. The cable company HOT established a competing network when it had a monopoly in television. And soon, the Israel Electric Corporation will be establishing a third network on top of its existing power grid, building upon a sector in which it too enjoys a monopoly.

These investments will greatly benefit consumers. Israel is one of the only countries in the world that has two nationwide landline networks and will soon be getting a third. Prices for services such as Internet and phone plans are already comparable to those in other countries, and Bezeq and HOT are investing in upgrading their systems at levels on par with companies overseas.

When IEC joins the field, it will significantly increase the level of investment in the communications sector. Bezeq and HOT will rush to offer services as good or better than those of the new player, and they will work faster to build fiber-optic networks. None of these companies will be able to afford lagging behind their competitors in technological innovation.

Alongside increased competition, however, there are also increased risks. These investments will no doubt lead to a large increase in the demand for broadband in the coming years, but it is not yet clear if this demand will actually be enough to justify the tremendous investments that are expected in this market. There is a distinct possibility of over-investment, as happened in the United States in the 1990s, as well as between 2000 and 2004 in Israel when HOT and YES competed over the multi-channel TV market.

In order to prevent such a scenario, the Communications Ministry must level the playing field. The strict regulations which now govern the communications sector deny Bezeq and HOT the opportunity to compete on equal terms with other players. Removing these restrictions is a first step in making the field more equitable.
HOT and Bezeq must act quickly to pre-empt the IEC's entry into the wholesale market. Cellcom and Partner have been negotiating with Bezeq for over a year, trying to reach a long-term agreement. If Bezeq keeps stalling, Partner and Cellcom may opt for a strategic alliance with the IEC, which would pose a real threat to Bezeq’s slice of the market. If Bezeq's strategy is similar to that of its subsidiary Pelephone, which opened up its network to competitors, it is likely that Bezeq will soon reach a deal to sell communications services wholesale to one of the cell phone providers.

Given the threat posed by IEC, the communications sector is likely to undergo rapid changes. The Communications Ministry has done its job of pushing IEC into the arena, thus creating the conditions for communications services. Now it must allow free competition to drive the market. For regulators, this is a difficult process. It’s much easier to seek more and more authority. Letting go is harder.

Bloomberg