Ultra-cheap Cellular Package Sends Shivers Through an Ailing Israeli Industry

Rivals convinced deal offered by Suny unit of Hot Telecom aims to keep them off balance

Illustration: People holding cellular phones.
Tomer Appelbaum

Even for Israeli smartphone users who have enjoyed low rates since the 2012 cellular reforms, Monday marked a milestone in the history of ever cheaper packages: Suny Communications announced a package of unlimited calls and SMSs, as well as 50 gigabytes of data, for just 14.90 shekels ($4.20) a month.

That was 20% less than the next cheapest deal on the market – 19 shekels a month for just 10 gigabytes by Xfone, or we4g, which is committed to its low rate for two years. Suny won’t say how long its bargain deal is locked in.

For consumers, the news is good; for the Israeli cellular market it was a dark day that aroused worries in the industry that Suny’s parent company, Hot Telecom, was engaged in predatory pricing.

True or not, the Suny deal strikes another blow against Israel’s two biggest cellular companies – Cellcom Israel, which is controlled by the IDB group, and Partner Communications, whose main shareholder is the Israeli U.S. media mogul Haim Saban.

The cellular reforms have saved Israeli consumers 13 billion shekels since they were enacted, according to Bank of Israel estimates. But they have cut sharply into profits in a crowded market of six providers and high subscriber turnover.

The Suny announcement pushed Cellcom and Partner shares sharply lower in Tel Aviv Stock Exchange trading on Monday, although both recovered by the end of the day to pare their losses to 0.6% and 0.3%, respectively.

The shares have dropped sharply in recent months, prompting the Bank of Israel on Sunday to urge regulators to take measures to help the cellular companies, expressing concern that they wouldn’t be able to invest in next-generation 5G infrastructure. Communications Ministry officials earlier this month issued a statement in a similar vein and promised unspecified measures.

Many in the cellular industry are convinced that Hot and Bezeq are determined to push cellular rates lower, or at least prevent them from rising. The goal, they say, is to keep Cellcom and Partner off balance and coping with losses in their core mobile businesses as they enter market segments where Bezeq and Hot are now the dominant players.

Cellular telephony is certainly suffering from heavy competition, but it accounts for only 42% of the market. The other segments haven’t been buffeted by anywhere near the competition that is found in mobile. Bezeq has been declared a monopoly in five segments based on its control of the landline market. Hot has been declared a monopoly in television services.

However, Bezeq and Hot have in recent years begun feeling competitive pressure from Cellcom and Partner as they seek to diversify their businesses from mobile. The two companies entered the multichannel TV segment in 2015 and 2017, respectively, and in the first half of 2019 accounted for 22% of all subscribers, according to Communications Ministry figures.

However, they captured only 6% of revenues and that’s because they have to pay such high fees to Bezeq for access to its internet lines.

In internet infrastructure, competition is also growing. Through their IBC joint venture, Cellcom and Partner are now rolling out a fiber optic network that delivers internet at speeds of one gigabit. They have already connected 500,000 homes and count 100,000 subscribers.

The two have been taking subscribers from Bezeq over the last several quarters. Hot is worried, too, and last week launched for a second time a fast internet package of 500 megabits.

Industry sources speculate that Bezeq and Hot hope to pressure Cellcom and Partner to pare back their forays in segments like these by forcing cellular rates lower. In fact, Cellcom said it reduced capital spending in the second quarter by 18 million shekels from a year earlier to 113 million.

The Hot group’s readiness to allow a unit to offer even lower rates lacks business logic. As a closely held member of French-Israeli billionaire Patrick Drahi’s Altice group Hot doesn’t release financial data.

However, in the last report it did publish, in second quarter 2018, it posted an operating loss of 45 million shekels. Since then, the cellular market has only worsened and the limited information available on the company shows average revenue per user has been declining.

Meanwhile, Bezeq Pelephone mobile unit has pressured its rivals to keep rates low. When Cellcom announced last September that it planned to raise rates – a move widely understood to signal to competitors that they could do the same – Pelephone declared it would not.

Yet Pelephone is suffering losses (10 million shekels on an operating basis in the first quarter) while revenues have shrunk despite a growing subscriber base.

For its part, Suny, which is led by CEO Moshe Perry, said on Monday that its 14.90-shekel deal was made independently of Hot and insists it will be profitable. The cheapest package available from Hot Mobile, the cellular unit of Hot Telecom, is 29 shekels a month with a one-year lock-in on the price.

Although the company is the dominant player in the smartphone-instrument market – as the official importer of Samsung it sells 50,000 phones a month and controls 60% of the market – it is making its first foray into cellular services.

Its aim, Suny said in a statement, is to “establish market share for the company and expand services it offers customers while supporting the growth of the company and customer trust.”

The market was abuzz with rumors that Suny was tying the deal to phone sales, but the company denied this. Such a tie-in would violate the law.