Taking Stock / Six Telecom Myths

Here is an axiom that everybody who makes phone calls knows: Israel's telecommunications market has been opened to competition, sharply reducing prices of cellular and long-distance calls. The only arena in which prices remain unaffected is that of domestic calls, where Bezeq retains its monopoly.

Well, you would do well to read the paper that Professor Reuben Gronau, an expert on Israel's telecommunications industry, prepared at The Maurice Falk Institute for Economic Research, Jerusalem.

For years, Gronau has headed the committee that determines Bezeq's tariffs. He has analyzed the rates prevailing in Israeli telecommunications for the last 20 years, and in his latest report, he shatters several of the most entrenched myths.

l The myth: Bezeq was an omnipotent and oppressive monopoly until competition arrived.

The reality: For years, Bezeq was financially weak. It became stronger only after competition raised its head in two of its key areas of operation, in the last 10 years.

l The myth: Bezeq's profits had been depressed by its bloated workforce. Losses at its subsidiaries offset all its profits from its monopolistic operations.

The reality: Bezeq has been one of the most productive cash cows in Israel. In the last 15 years, it generated a staggering cash flow of NIS 45 billion. The ones fighting to lift its profits weren't the government, which owned it, or its management. The workers were the ones who fought to raise the company's rates, not out of concern for their corporation but because the more it earned, the more it could pay them, in wages and pensions (see next myth).

l The myth: Bezeq constantly streamlines. Every few years, it fires thousands of people.

The reality: True, Bezeq has fired thousands of people in recent years, but it doubled the real pay of the remaining ones. From 1995 to 2001, wages doubled in real terms while salaries in the business sector increased by 50 percent. If pay at Bezeq had adhered to the business sector's norms, the company could have saved NIS 3.7 billion. Add another NIS 3 billion paid as inflated severance compensation to retrenched workers.

l The myth: Since Partner Communications arrived on the scene, competition in the cellular arena has intensified immensely.

The reality: The consumer price index includes a component of telecommunications prices, including cellular. From 1997 to 2003, cellular tariffs rose by 40 percent in nominal terms, which is 10 percent in real terms. In other words, if the cellular companies are competing over anything, it is not price.

l The myth: Having three long-distance carriers assures competition over price.

The reality: When the long-distance market opened to competition in 1997, prices plummeted. Since then, they have steadily risen. From July 1997 to December 2003, long-distance calls rose 75 percent in price, despite the steep drop in prices the carriers paid for equipment, and despite the overcapacity.

l The myth: Competition imposes endless pressure on prices.

The reality: Most of the telecommunications markets opened to competition have just a handful of players, who learn very quickly not to compete over price. In the last seven years, the price of landline domestic calls, over which Bezeq has a monopoly, has dropped quickly, while the prices of long-distance and cellular calls - the so-called competitive arenas - have risen.

After reviewing developments in Israel's telecommunications market, Gronau's conclusion is that the competition the market mechanism was supposed to create is basically a mirage. The paucity of players leaves prices free to crawl upward, after an initial drop when the competition arrived.

On the other hand, the scorned method of price regulation actually brought relatively satisfactory results, he says.

Gronau admits, however, that the supervisory authorities have difficulty contending with the political echelon, and they lack the information they need to be truly effective.

You may have thought that allowing the cable companies to compete with Bezeq over domestic communications would be the harbinger of true competition, and end the era of regulation. Think again, says Gronau: Israel's market is too small and crowded, and the reality is entirely more complex.