Taking Stock / Neither Market nor Watchdog Bite

1. After two months of negotiations, lobbying, pressure, and spin galore, at an 11:00 A.M. press conference last Thursday, Communications Minister Ehud Olmert announced his decision regarding slashing "interconnection fees" - the cellular phone companies' charges for completing calls to subscribers that originate on other networks.

The fees are the rate a cellular or landline subscriber pays to call another cellular device. It is a fee over which there is no real competition, since the caller cannot choose the company that will complete the call to the subscriber he seeks. The rate is currently 53 agorot, and it is worth NIS 3 billion in annual revenues for the cellular companies.

The bottom line is simple: from a 67 percent slash in prices in the next year and half that Olmert sung about to the high heavens just two months ago, we are left with half the slash in twice the time - three years.

2. Olmert's results are disappointing relative to the relief he announced at the start - but they cannot be revoked. This decrease will cost the cellular companies hundreds of millions in revenues, a highly unusual step in the regulation of the young sector, and after the first public acknowledgment of a market failure in the cellular market, the regulator must step in to resolve it.

Olmert's original declaration forced the CEOs of all the cellular providers to admit there is a failure in the price of incoming calls due to the industry's oligopolistic structure. Even the CEO of the merged cable television company, not known for his love of regulation, chimed in to say intervention was necessary. That intervention became legitimate, and the only question now is the price.

Due to public debate over the interconnectivity fees, there is a chance to see watchdogs and consumers more aware of the cellular providers' monopolistic power. In the future, this could lead to additional steps or a change in consumer behavior.

3. The cellular companies' success in moderating the price cuts can be attributed to professional failure by the Communications Ministry. The companies pointed out a series of alleged mistakes in the analysis conducted by the British consulting firm Analysis on which Olmert's original announcement was based. The ministry has still not managed to provide sufficient answers to those claims.

4. But it isn't just homework the ministry failed to do. It folded in another example of the difficulty politicians and government officials have when facing strong financial powers like the cellular companies.

The Communications' Ministry's economists and Prof. Reuven Grunau succeeded in forcing many regulatory changes over the Israeli communications monopoly Bezeq in recent years on amazingly similar matters. But here they faced private shareholders - identifiable people - and not a public body that doesn't specifically belong to anyone.

5. The clearest expression of the ministry's difficulty in facing up to the cellular companies compared to Bezeq is Olmert's decision to allow them to continue using air time units of 12 seconds. A cellular customer who talks for 3,4,5 or 12 seconds pays for all 12 of them.

A Bezeq customer who calls a Bezeq telephone is charged according to one second units; a Bezeq customer who calls a cellular subscriber is charged according to 12 second units rounded up. That odd "rounding up," which has no basis in technology nor in economics, is worth about a quarter of a billion shekels a year to the cellular phone companies.

6. Olmert's decision to instigate a unified call fee in the cell sector could be good news for the consumer. Maybe this should have been the structure right from the start for creating a new, more competitive market structure. The problem is that Olmert didn't give a timeline, and given the ministry's failure in the interconnectivity affair, market expectations are low.

7.. Next year, Bezeq is supposed to be transfered to private ownership. If there is something to be learned from the cellular companies, the moment Bezeq is privatized, the government's ability to force regulation on it will drop dramatically. When Nochi Dankner, Haim Saban or any other businessman is the ruler of the roost at Bezeq, any attempt to hurt it will encounter a decisive, aggressive response.

The meaning is simple: Where there is a competitive market structure, privatizing Bezeq could raise competition a notch. But there will be other places where market players will know how to "live and let live," where consumers will be hurt, and watchdogs will find it harder and harder to deal with business sector giants.