With or Without Golan Telecom, Say So Long to Low Cellphone Rates

Whether or not the merger with Cellcom is approved, Golan is fated to disappear from the market, and that means that cellular rates will rise.

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

Golan Telecom is not just another Israeli company — it is a symbol, and that is the way Michael Golan planned it from the very first day.

He promised cellular customers that “their days as suckers” had ended, and invited everyone who wanted to avenge the cellular operators who had been exploiting consumers, to join the revolution he was leading. This Robin Hood image of Golan’s meshed perfectly with the atmosphere that reigned in the wake of the social protests of the summer of 2011.

Many people even thought that the cellular revolution was a result of the protests. The change Golan created in the cell phone market proves that courageous reforms could deal with the high cost of living in a quick and effective way.

Four years after the social protest movement receded, the cellular reforms are the only thing left from that optimistic period. Now, after Golan Telecom announced last Thursday that it has signed an agreement to be acquired by Cellcom Israel for 1.17 billion shekels ($300 million), even this last symbol is in danger.

At a time when housing prices are continuing to rise and the cost of living is showing no signs of easing off, the cellular reforms that Finance Minister Moshe Kahlon is credited with when he was communications minister remain one of the very rare cases in which the government acted clearly in favor of the consumer.

The announcement of the planned merger between Golan Telecom and Cellcom has, for very good reason, aroused much loud opposition in the cabinet and Knesset and from senior officials in the Finance Ministry. Kahlon knew how to exploit his cellular political dividend and ride it into the present coalition with 10 Knesset seats for his new party Kulanu — and the Finance Ministry. Now that the foundation of his achievement is at risk of crumbling, it is reasonable to assume the issue will become a bone of contention between Kahlon and Prime Minister (and Communications Minister) Benjamin Netanyahu.

Bibi holds the cards

As with every critical issue affecting the communications industry, Netanyahu holds all the cards. The merger requires the approval of two government bodies: The Communications Ministry and the Antitrust Authority. Maybe it is a coincidence, but Netanyahu is not only prime minister and communications minister, but now he is also economy minister, making him responsibile for appointing the new antitrust commissioner.

The previous commissioner quit after a major disagreement with Netanyahu over the natural gas framework, and now Netanyahu will name his successor. He will decide who this will be, and of course the choice of a new commissioner may very well depend on his views concerning the gas framework and the Cellcom-Golan merger.

Netanyahu can strangle competition in the cellular market and cut off the electoral branch on which Kahlon has perched himself — if the prime minister chooses to do so.

But even Netanyahu does not live in a vacuum. Kahlon’s fierce opposition to the merger, along with that of Public Security Minister Gilad Erdan — two former communications ministers — along with many other ministers as well as the media headlines — could very well lead to a public outcry and uprising on the social networks.

Netanyahu certainly does not want to be depicted as the person who buried competition in the cellular market, especially since the Communications Ministry under his direction has been working quite hard on the behalf of Bezeq and less hard on behalf of consumers. The changes Netanyahu is expected to make in the television industry will also put him in the spotlight, and not necessarily in a good way. If he has to choose his battles, his concerns will be primarily political, and it is not at all clear he will take the side of Cellcom and Golan.

As is his custom, this time Michael Golan is betting everything. It is not clear whether he foresaw the enormous criticism over the deal, but apparently Cellcom did. As part of the conditions of the merger agreement, Cellcom won an agreement that if the merger fails, Golan will have to pay Cellcom some 600 million shekels. This is a huge fine, unheard of in Israeli business for deals of such a size.

For Cellcom, this was a brilliant move, because it guarantees that Golan will disappear from the cellular business in any scenario.

If the acquisition is approved, Cellcom will get its hands on 900,000 subscribers from Golan, which will be the end of Golan. If the it isn’t approved, an increasingly likely scenario as public furor rises, then Golan will be forced to pay so huge sum it will collapse. Assuming Golan cannot convince its shareholders to put up such an amount, the company will have to ask for court protection from its creditors and go into receivership or liquidation. In that case, Cellcom will be able to buy up Golan’s assets at a bargain basement price.

As for competition in the cellular industry, there is no doubt whatsoever that there will be less. After all, this is the main reason Cellcom is buying Golan. On the other hand, prices in Israel for cellular service are among the lowest in the world. That has forced the veteran operators to cut costs drastically to keep their heads above water. They fired thousands of employees and cut back investment to a minimum. Now, they say can’t cut further without damaging the quality of voice and data services. They say it is only a matter of time before they begin losing money.

Cellular rates will certainly rise by tens of shekels per subscriber every month, but it is hard to believe they will return to what they were before Golan entered the market. The cellular industry has changed radically, ownership has changed and the balance of power is completely different. Today’s “all inclusive packages” will continue to guarantee long term competition because they enable consumers to quickly and effectively compare prices — something that didn’t exist before Golan entered the market.

In addition, the three large veteran cellular operators no longer can divide the market between theselves almost equally and avoiding any wars over market share. If the merger is approved, then Cellcom will have an almost 40% share of the market, which will provide incentives for its competitors to try to whittle away at it.

Still, the fear of reducedcompetitiveness is real and justified. The cellular operators have proven in the past that they can impose market discipline among themselfgves and milk subscribers. True, the atmosphere today is very different than in 2010, the year in which cellular competition hit the bottom, but cellular services are more essential than ever and cannot be left without true supervision.

Taking Golan to court

The Communications Ministry and the Antitrust Authority need to find alternatives to the merger thatwill allow Golan Telecom to continue to act as the druiver for continued competition in the industry. It is possible that this will require Michael Golan to go to court, and give up his shares, but the public’s good is more important than any shareholder.

The Communications Ministry watched passively as Golan dismantled its antennas and failed to invest in building its own network, complains a senior executive in the communications industry after the deal was announced. They knew Golan would not be able to meet the conditions of its license , which called for its developing its own network infrastructure, and even prepared a report on the matter a year ago, he says. The ministry planned to threaten Golan with a 60 million-shekel fine, but in the end decided not to pressure the company, at least not officially. In doing so, it allowed Golan to evade its commitment to becoming a full-service provider and remain a virtual network operator, notes the executive, who asked not to be identified. What did they think in the ministry, that he wouldn’t try to sell the company? asks the senior executive.

Thus, the announcement of the merger last Thursday morning should not have surprised anyone in the communications industry. Michael Golan may have repeatedly promised in radio ads in the days before that he was not selling the company, but the process of the sale moved so fast that it was only a matter of time until he would finally contradict himself.

Cellcom was the natural choice to buy Golan, which has been hosted on Cellcom’s network since it started in 2012. The companies signed a network-sharing agreement a year ago and planned to merge their networks. Because the Communications Ministry did not approve such a joint venture, Golan ran up a 450 million shekels in debt to Cellcom, which feared what if would lose it if anything happened to Golan, which is exactly what the company threatened.

Thus, Golan is worth more to Cellcom than to any of the other cellular companies, which is why it agreed to pay such a high price: 1.17 billion shekels, twice the amount observers thought it would ever get.