Taking Stock / What Olmert Should Be Asking Pundits

Are you an economist? Jurist? Former regulator? Public relations expert? Lobbyist?

Has one of Israel's cellular phone companies already asked you to represent it in its battle against lowering interconnection fees?

If not, examine yourself - because everyone with a name in this field has already been asked: Dr. Yoram Turbowicz, CPA Itzhak Swary, consultant Eyal Arad, lobbyist Boris Krasny - all have already received offers, and most are considering them favorably.

This will be a world war. On one side, the three Israeli cellular companies - among the giants of the business sector, with enormous financial resources and huge public relations budgets. On the other, Communications Minister Ehud Olmert, who astonished the market by making a decision that was at odds with all of his previous behavior.

For the cellular firms, which take in more than NIS 3 billion from incoming calls, it is worth investing large sums in this war: Contrary to their initial claim - that they can fully compensate for lower interconnection fees by raising rates for outgoing calls - in reality, the lower rates on incoming calls will severely hurt their revenues and raise the level of competition in this market.

The economists, jurists, lobbyists and public relations experts hired by the cellular firms will try to explain to the Communications Ministry, the media and anyone else with clout who is willing to listen that the communication minister's intervention in the price of incoming calls is unnecessary, harmful, Bolshevik, anti-competition and inappropriate for a dynamic and competitive market such as the cellular one.

But before the great battle begins, we have a suggestion for Communications Minister Ehud Olmert. At every meeting you hold with the cellular companies' representatives, ask them the following little question:

What do they call a situation in which, when a company raises the price of a product or service, in practice, it becomes cheaper and demand for its products rises? What do you call a situation in which, when that same company lowers the price of a product or service, in practice, it becomes more expensive and demand for it falls?

Sounds imaginary? An inverted demand curve? A Giffen good? Something taken from a class in economic theory? No, this is more or less the actual situation in the cellular market - and one small example will suffice to demonstrate.

Let's assume that tomorrow morning, Cellcom decides, of its own initiative, to cut rates on incoming calls to its own network in half. What happens to Cellcom? You won't believe it, but the relative price of the services that it offers its customers rises.

Why? Because the rates on incoming calls to Cellcom's network are paid by customers of Pelephone and Orange. Since the Israeli cellular market is divided more or less evenly among the three cellular firms, lowering rates on Cellcom's incoming calls lowers the price of about two-thirds of the outgoing calls made by customers of the two competing networks. In other words, Cellcom would become more expensive.

And of course, this is equally true in the other direction: If Cellcom were to double its rates on incoming calls tomorrow, it would then become the cheapest network - because the increase in incoming call rates would have to be paid by Pelephone and Orange customers who call Cellcom customers.

And if Cellcom raises its rates, can the consumers punish it? Obviously not - because Pelephone and Orange customers cannot choose the network to which the person they are calling subscribes.

The task of the cellular companies and their representatives is to explain to the communications minister, and to all of us, that the bizarre dynamic described above is not a market failure: that this is indeed a competitive market. That strikes us as a difficult task, but we are convinced that a combination of economic, legal and communications brains, such as the cellular firms know very well how to hire, will produce impressive results.

In particular, we are awaiting the brief submitted by representatives of Partner-Orange - the most aggressive of the cellular firms, whose managers and shareholders are especially sensitive about the company's profitability and share price. Because, if our memory does not deceive us, it was Partner that, five years ago, submitted a forceful brief on incoming call rates to the Communications Ministry, in which it pointed out the glaring market failure in this area.

Why did it do something so odd? Obviously, because at that time, it was the smallest player in the market. Its customers were the ones who paid the steep incoming call fees charged by Cellcom and Pelephone, but it did not benefit from its own incoming call fees in exchange, because it controlled a very small market share.

Today, Partner controls more than a third of the market: It benefits from excessive incoming call rates just like Cellcom and Pelephone do. And ever since it entered the monopolistic club, it has had trouble seeing what it saw so clearly from outside: the market failure, the lack of competition and the enormous damage that this causes the consumers.