Cellcom Ordered to Cut Spending by NIS 600m a Year

Since the mobile operator is s already operating on a shoestring, cutting NIS 600 million from its annual expenditure in order to adapt to new competitive era will hurt.

Israel's major mobile network operators are being forced to cut costs in response to the stiff competition they now face from upstart virtual operators. TheMarker has learned that Cellcom's board of directors has directed CEO Nir Stern to slice annual spending by NIS 600 million, which amounts to around 15% of the company's expenses. Industry figures note that with Cellcom's reputation as an already lean organization the cuts will be painful.

The need for extensive cost-cutting is being felt by all three of Israel's long-established cellphone companies. Both Cellcom and Partner Communications (Orange ) are expected to record declines of around 20% in service revenue and 35% in equipment sales in their second-quarter reports. The veteran mobile operators are also bleeding subscribers, losing tens of thousands of customers a quarter to new virtual players like Golan Telecom. This trend is not only likely to continue but also to lead to a decline in per-customer average monthly revenues, leading the "big three" mobile companies to go on a "crash diet," as one industry executive put it.

Layoffs at Cellcom are unavoidable

The purpose of the belt-tightening is to diminish, as best as possible, the plunge in the earnings of Cellcom, Partner and Pelephone - earnings distributed in their entirety in dividends, which their owners desperately count on to repay loans they took out to acquire them in the first place.

Cellcom reported NIS 2.1 billion in cost of sales, NIS 990 million in selling expenses and NIS 685 million in general and administrative expenses in 2011. The company will find it hard cutting infrastructure-related expenses considering that its two main competitors are investing extensively in upgrading their networks. Cellcom invested NIS 520 million in fixed assets in 2011.

All three companies will be hard-put to cut their advertising budgets, mainly because little remains of them. Each spent $55 million to $65 million, at list price, on advertising in 2009, but by 2011 that fell to about $35 million. But they cannot afford to give up on advertising in light of the enticing packages offered by HOT Mobile and Golan Telecom. Pelephone's current campaign, offering a new plan for NIS 99 a month, is an example of the response required by the older companies to the new competition.

Cellcom plans to launch a multi-channel Internet protocol TV venture requiring the purchase of content, the purchase and subsidizing of converters and setting up a system of household installations, all entailing another period of heavy investment. And, if the Communications Ministry issues a tender for 4G frequencies within the year Cellcom will need to buy at least NIS 120 million worth.

Cellcom could save some money by reducing wages and eliminating annual bonuses but considering all the constraints it faces it will not be able to avoid layoffs.

All the cellular companies are going through a period of cutting back their workforces, mainly at their service centers - especially after the streamlining of calling plans reduced the number of customer calls. 013 Netvision had 1,644 employees when it was bought by Cellcom but was able to slash its workforce to just several hundred following the merger.

All this is true also for Partner, which will need to continue investing in its network and on advertising. The company is also entering the IPTV field and will need to buy LTE frequencies if there's a tender. Partner is probably the most aggressive company in reducing staff, due, no doubt, in part to its having been the largest employer in the sector previously. A high-ranking industry source estimated that Cellcom and Partner will each cut about 1,500 jobs over the next 12 months.

Competition also threatens HOT

HOT is spending large sums in establishing its HOT Mobile cellular network, both in technical and marketing areas. But industry sources say HOT Mobile's extremely cheap cell phone lines are cannibalizing the company's landline market. Meanwhile Bezeq reported just last week that it has lost 33,000 subscribers.

Both HOT and Yes are vulnerable to the imminent opening of the multi-channel television service market to competition. Both will need to offer a smaller variety of channels for just NIS 130 a month, far below each provider's current average per-customer revenue. Cellcom and Partner will be subsequently entering the field with even cheaper plans.

Dror Artzi