Taking Stock / Partner, Then and Now

The series of columns we published on the sorely needed reform in pricing by Israel's cellular carriers has garnered two main types of responses.

Many cellular users were surprised to learn how the cellular companies compile their charges. They have been using cell phones for 10 years and more, yet never understood that a large part of their bill, by Bezeq or other companies, consisted of charges they pay when they get a call from somebody else. Meaning, for incoming calls.

Many had conducted extensive market research before contracting with this or that cellular provider. Many changed provider when a rival offered better terms. Many thought they got fantastic deals with subsidies via their employer. Few realized that they had no control over a large part of their bill, because it consisted of charges the cellular carriers impose for incoming calls.

Having understood the deal, they asked us: What can we do? Answer: Nothing.

The cellular providers are an oligopoly protected by law. The three carriers charge the same fee for airtime for incoming calls, with the blessing of the Communications Ministry.

Most calls in Israel are made to cellular devices. That charge for incoming calls is basically a regressive tax forced down the throats of most of Israel's people.

That was one kind of reaction. The second came from the cellular carriers and their friends in the business sector and media. Our analysis is populist and one-sided, they argue. They will shortly present their own analysis clarifying the logic behind the charge for incoming calls.

A few gripping extracts

We accept the challenge. We decided yesterday morning to publish several utterly fascinating extracts from a report by an economist on incoming call fees.

1. "Indirect customers (meaning, people paying for incoming calls) have zero bargaining power. They are held captive by the supplier.

"Paradoxically, the cheaper the outgoing fee becomes, at the expense of the indirect customers, the weaker the bargaining power of direct customers becomes. The gap in demand elasticity between direct and indirect customers leads the suppliers to cross-subsidize, in order to meet the needs of direct customers on the one hand, and expand the base of (direct) customers and the network, at the expense of captive (indirect) customers on the other hand."

2. "A considerable part of the revenues by the major operators does not derive from customers, but from the captive market. Because the suppliers have no direct agreement or contract with the captive users (the indirect customers), and because of the void left by the regulator's nonintervention in pricing structure, the big operators manage to create tremendous revenue leverage from third parties who are not their direct customers. That represents an unprecedented economic anomaly and could create a huge scope of cross-subsidization.

3. "The indirect customers (the initiator of incoming calls) are in fact captive consumers of the cellular companies. They bear the burden of (generating) half (the companies') revenues but the company has no commercial commitment toward them, and has no economic interest to serve them or act for their benefit. Where rating asymmetry is allowed, it generates absurdity and distortion.

4. "The bargaining power of buyers depends directly on the scope of information available and accessible to them. The distinction between incoming airtime rates and outgoing airtimes rates is complex to a degree that makes it difficult to efficiently transmit to the public of customers. At present most of the indirect customers are not aware of the price or of the prejudicial treatment they receive. That lack of information helps weaken the customers' bargaining power, which was feeble to begin with because of the low demand elasticity."

There were further enlightening quotes we could have mustered, some even more extreme, but the message is clear enough: said economist believes the companies' practice of charging through the nose for incoming calls or, interconnection fees, is a glaring flaw in the market.

Who is this economist? Another clown from academia? Another nameless, faceless ministry bureaucrat, good at opinions but who's never run so much as a kiosk in his life? Or just some Yossi Economist who has an ax to grind?

Dear reader, we have a surprise for you. The author of the above deathless prose is David Boaz. Who is he? He is the former budget director at the Finance Ministry. More to the point, he wrote the analysis at the behest of Partner Communications five years ago.

Partner not only commissioned the report, it gave a copy to the Communications Ministry when fighting the practice of rival companies Cellcom and Pelephone Communications, which were charging for incoming calls.

Why would Partner give the watchdog the report? Because when doing that, it was a small cellular startup and the interconnection fees its rivals were charging threatened its very survival. A source in the Partner management told us this week that the warp created by the rivals' charges for incoming fees almost torpedoed Partner's flotation on Wall Street in 1999.

So before all those experts, lawyers and lobbyists the cellular trio hired start to write learned opinions on the upsides of interconnection fees, maybe they should read Partner's own report first.