There are two telecommunications markets in Israel. One, the cellular market, is a stormy sea of intense competition and red ink. But the other, internet and landline telephony, is an island of serenity where Bezeq rules and pays it shareholders dividends from fat profits.
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That’s the picture that emerges from the 2016 annual reports of the key players in both markets, the last of which were released last week. The reforms that went into effect in 2012, opening up the mobile sector to competition, are still wreaking havoc, while the much more timid reforms in broadband internet have done little to put a dent in Bezeq’s grip.
In 2016, Bezeq’s net profit accounted for 83% of combined net profit for the entire Israeli telecommunication industry. It was also the only company to pay a dividend. Last month it told investors it expects to do even better this year, despite the scheduled introduction of reforms to enhance competition in landline telephony services.
Bezeq told shareholders that earnings before interest, taxes, depreciation and amortization would match 2016’s 4 billion shekels ($1.1 billion), while net profit would climb to 1.4 billion shekels (from 1.2 billion shekels). Bezeq tends toward conservative guidance on earnings, so the figures are likely to be higher.
In the cellular market, meanwhile, all the big players have cut their costs to the bone, but with average revenue per user a mere 60 shekels a month, the industry’s big three – Cellcom Israel, Partner Communications and Bezeq’s Pelephone unit – are struggling to see a profit.
“The situation is that the industry is no good,” said one cellular company CEO.
Partner finished the fourth quarter with a 7-million-shekel loss and Cellcom a 4-million-shekel operating loss. Partner enjoyed 50 million shekels in payments from its breakup with France’s Orange, which enabled it to turn a profit in the first half of the year, but in the third quarter it slipped into the red, even as it was gearing for revenues from multichannel television.
Meanwhile, the sale of upstart cellular provider GolanTelecom is being held up, reportedly because buyer Electra Consumer Products objects to the 350-million-shekel price tag it originally agreed. Electra insists market conditions have worsened and wants to reduce the sum.
The transition to smartphones saved the cellular industry for a few years, earning it profits from the sale of end-user equipment. But that revenue source ran out in 2016 when the price of smartphones fell and competition grew more intense.
Partner’s sale of equipment to users plunged 31%, to 729 million shekels, while Cellcom’s dropped 10% to 836 million shekels and Pelephone’s 9% to 812 million shekels.
Meanwhile, in broadband internet – the one area where Bezeq’s core business faces competition – new players have lost momentum. The reforms enabled them to piggyback on Bezeq’s network, saving the cost of rolling out their own infrastructure and lowering prices to users by as much as 40%.
The reforms got off to a strong start in 2015, with 100,000 subscribers moving to lower-cost internet in the third quarter. But a year later, the quarterly rate had contracted to just 24,000, albeit rising to 30,000 in the fourth quarter.
Multichannel television has been suffering a customer exodus going back several years as viewers opt for other alternatives. Bezeq’s Yes unit, for instance, lost 21,000 subscribers last year, to 614,000 by the end of the year. And Hot Telecom shed 13,000 subscribers to end with 811,000.
Many of them appear to be going to Cellcom TV, which added 52,000 subscribers, bringing its year-end total to 122,000. But other gainers are foreign companies like Netflix, Amazon Prime and pirate websites. To fight back, Hot has launched a new service that lets users watch films and TV on their smartphones, computers and tablets. Yes will be following suit.
The industry’s malaise is coming at the cost of reduced investment in their networks. Cellcom cut its spending by 7% last year, Pelephone by 43% and Partner by 45%. In Partner’s case, capital spending was a mere 5.5% of revenues.
Even the two landline telephony company reduced spending last year: Bezeq by 13.5% to 1.42 billion shekels (834 million shekels in landline), while Hot cut its spending by 13%, to 703 million shekels. Bezeq had promised to roll out its fiber-optic infrastructure faster, in exchange for easier regulations, but instead it’s delayed them.