Promote Cellular Competition

Israelis are major consumers of cellular telephone services. According to the Finance Ministry, the average Israeli household spends more than NIS 3,200 a year on cellular services, comprising some 2.4 percent of total household spending. Mobile phones have replaced landline phones in every sector of society and have become a staple, just like water and electricity. But unlike the rates for Bezeq's landlines, which are regulated, the price of cellular services is set by the market.

Articles published in TheMarker this week reveal that when it comes to cellphones, the power of the market has been detrimental to Israeli consumers. The government regulator, the Communications Ministry, has not managed to create the conditions for long-term competition among the three cellular operators. In recent years, these companies completed their penetration of the market, and immediately afterward sharply reduced the level of competition: They curtailed investment in new infrastructure, lowered the level of service to the customer and reduced their marketing budgets.

Without violating the antitrust laws, Cellcom, Partner and Pelephone have nevertheless managed to divide up the market among themselves such that each controls about a third of it. All three companies are primarily focused on preserving their existing customer base and have refrained from fighting to conquer additional market segments.

The cost of this minimal competition is borne solely by the individual customer: The business market remains competitive because businesses have the tools to compare prices and play the companies off against each other.

The individual, in contrast, is drowning in the various plans, special offers and perks, with no real ability to compare prices and services. Thus individuals can wind up paying as much as 10 times more for a one-minute call than a large corporation does.

The decline in competition is reflected in the companies' financial statements. From 2005 to 2009, the net operating profit of the three cellular companies combined has surged by 54 percent. Profitability, meaning the amount of profit the company earns on each shekel of income, has risen from 29 to 37 percent. And since none of these companies has grown stronger at the expense of its rivals, this growth in profitability has come entirely out of the customers' pockets - and has gone mainly to the shareholders.

During these four years, Cellcom, Partner and Bezeq (which is Pelephone's parent) distributed combined dividends of NIS 17.8 billion. Though part of this sum stems from Bezeq's landline operations and from profits earned before 2005, this figure nevertheless reflects enormous profitability.

The low level of competition will persist as long as barriers to new entrants into the market remain high. A new company seeking to enter the cellular market and set up its own network would have to invest about NIS 1 billion to buy frequencies from the state and construct the necessary infrastructure.

However, the state could lower these barriers: It could encourage new operators by allowing them limited use of their competitors' infrastructure for a limited time; it could allocate frequencies for free and reduce the royalties it charges; or it could reduce interconnection fees, meaning the cost of making a call from one network to another.

The importance of cellular services, and their sizable share in the average household's expenditure, requires the state to ensure that the market is competitive, and that monopolistic profits are not being earned at the consumer's expense.