Golan-Cellcom Tie-up Provokes Strong Feelings, Few Options

Cellular competition is lauded by consumers, loathed by industry.

Golan Telecom's CEO Michael Golan at the company's offices in Tel Aviv.
Eyal Toueg

Whether you’re a cellphone user or a cellphone operator, the prospective takeover of industry upstart Golan Telecom by its much bigger and more established rival stirs lots of feelings. For consumers, it threatens the end of an era of super-low cellular rates, while for operators it promises the end of plummeting profits.

The anger is such that Yuval Karniel, who teaches at the Interdisciplinary Center Herzliya, urged Golan users in an op-ed in TheMarker this week to fight the merger with what he called a “real public protest.” The method: dropping the service in droves.

“Here’s the perfect opportunity to demonstrate the power of the masses, the power of the public, the power of social networks,” he said. “A giant wave of cancellations at Golan Telecom will undo almost immediately the merger with Cellcom.”

Anger at Golan Telecom and its controlling shareholder and chief pitchman is real; the company has indeed lost subscribers since the agreement with Cellcom was announced a month ago. Golan had marketed itself as a consumer hero, taking on the three veteran companies, including Cellcom, with cheaper and cheaper packages.

The problem is that if subscribers abandon Golan, the merger may be endangered but so would Golan’s future. That would effectively lead to the same result: a reduction in the number of mobile companies in the market from five to four.

The other side of the debate is epitomized by Chen Herzog, chief economist at BDO Consulting Group, who has been railing at the intensely competitive cellular market created in 2012 when then-Communications Minister Moshe Kahlon’s reforms made it easier for new entrants like Golan to enter the market and lure subscribers.

Herzog says that while consumers are celebrating low rates, the networks they rely on for service are aging and the industry has no money to upgrade them. Partner Communications cut its capital spending 50% in the third quarter and Cellcom its spending by 40%.

“In the last few years mobile users in Israel have enjoyed the lowest rates in the world. Many think these low rates are the result of a competitive market and so they are surprised to discover that Golan Telecom and wants to merge with Cellcom,” Herzog said.

“But an analysis of the industry shows they shouldn’t be surprised — conditions in the Israeli market are characterized by unsustainable competition but there is an illusion of competition that was created by a shortsighted regulatory platform.”

One key example of that is the 600 million shekels ($156 million) that Golan is estimated to owe Cellcom. The money has often been mischaracterized, by TheMarker and others, as a penalty when actually Golan owes Cellcom for piggybacking on its network when it was supposed to be investing in a network of its own.

The 600 million shekels in savings was effectively passed on by Golan to its subscribers in rates that have fallen to as low as 29 shekels a month for a package of local and international calls and Internet.

Cellcom says it will forgive the debt if its 1.17-billion-shekel acquisition of Golan is approved by regulators, but if the merger with Cellcom collapses, Golan will be hard-pressed to repay it. Golan will also be liable for a 270-million-shekel penalty from the government for failing to use the frequencies it was awarded for its own network.

In an interview with TheMarker, Avi Berger, a former Communications Ministry director general, proposed a solution that would keep Golan in the market without a merger.

“Golan has more than one option. It can opt to be a virtual carrier without its own network. It should return the license for frequencies, pay the penalty and take a virtual-operator license instead,” he said.

Without its own network, Golan will no longer be a fully independent players and the market will effectively be down to four players.

But a BDO analysis is optimistic about a scenario like that. An index of competition it created showed that Israel has the most competitive of nine developed-country cellular markets, but even if competition is whittled down to just four rivals it will still be the third most competitive after Britain and Germany.