STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Business Opportunities In An Era of Telecommunications

Liberalization

Daniel Rosenne

Director General, Ministry of Communications

rosenned@moc.gov.il

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSPresentation Agenda

Israel’s Telecommunications Market: General overview Cellular telephony International telecommunications

Telecom Liberalization: Regulatory reform New frequency allocations The new numbering plan Bezeq in the new era

Competition In Broadcasting Services Summary

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Israel’s Telecommunications Market

General Overview

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSIsrael's Telecommunications

2.8 million main telephone lines(47% penetration).

3 million cellular customers, on three networks: Pelephone, Cellcom & Partner/Orange. (48% penetration).

1.1 million cable-TV connected households. (3 operators, 70% of passed households, 92% household coverage).

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

The Telecommunications Services Market - 1998

InternationalLong-Distance

CableTV

Terminal Equipment& Business Systems

Internet services

CellularTelephony 38%

Fixed Services 40%

11%7%

2%2%

Total telecom services market ~ $ 3.7 billion

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

The Cellular Boom:Israel’s Telecommunications Services Revenues, 1995-1998 ($US M)

0

500

1,000

1,500

2,000

1995 1996 1997 1998

Fixed

CATV

International

Cellular

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

The Existing Regulatory Environment

Separation between regulation and operation (since 1984).Regulation responsibility - Ministry of Communications.

General operating licenses issued to Bezeq, cellular operators & facility-based international long-distance service providers.

Special licenses issued by the Ministry of Communications for value-added services.

Exclusive rights of Bezeq in fixed services canceled as of 1 June 1999.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

The Competitive Environment

Wide competition in customer premise equipment and value-added services.

Limited competition in cellular and international services.

Two monopoly areas: Bezeq - Domestic fixed services

(infrastructure, transmission, data communications & telephony).

Cable TV operators - Multi-channel subscriber television.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Modern Fixed Network

100% digital. #7 ISUP signaling. Country-wide Euro ISDN. AIN features. SDH transmission. Country-wide fiber deployment.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Internet Services Profile

~30 Internet service providers, 1 million users, 500,000 dial-up & 5,000 directly connected customers, 21,000 domains.

Typical tariffs: ~ $12 monthly fee, including 10 usage hours, ~ $1 for each additional hour. Unlimited access at < $1 per day.

IIX (Israel Internet eXchange) domestic interconnection service.

“Hands-off” overall regulatory policy.

High growth ~ 50% annual.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Cellular Telephony

Competition Introduced December 1994

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Cellular Operators

Pelephone Cellcom Partner/Orange

800 MHz 800 MHz 900 MHz

NAMPS & CDMA TDMA GSM

1987 1995 1999

BellSouth Hutchison Bezeq Safra Brothers Matav

Motorola Discount Investments Elbit.comPEC Tapuz

private investors free float

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Cellular Telephony

Rapid growth - 3 million subscribers, compared to 125,000 in January 1995.

In November 1999 the number of mobiles (2.9 million) exceeded the number of fixed lines.

Key expansion stimulators: Perceived low tariffs: ~ US $0.11 to 0.23/minute

air time, ~ $11 to 29 monthly charge. (300 min average monthly bill - $56 to 74)

Calling party pays (CPP). Nationwide coverage. Competition & marketing innovations.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

International Telecommunications

Facilities-Based Competition Introduced in July 1997

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

International Services Regulatory Environment

Three facilities-based international long distance service providers and several call-back & IBS operators.

Regulation covers: Maximum tariffs. Dialing parity. Interconnect agreements. International accounting - accounting

rates, proportionate return. Universal service obligations.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Facilities-Based International Service Providers

Golden Lines (012)Telecom Italia, SouthWestern Bell,Aurek, Globscom & Meitar/Kahn.

Barak (013)Sprint, Deutsche Telekom, France Telecom, Clalcom & Matav.

Bezeq International (014)The incumbent carrier, 100% owned by Bezeq.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSDialing Parity Rules

Per-call carrier-selection prefixes (01X). For each of the international service providers.

Pre-selection - subscribers choose a preferred provider for ‘00’ prefix and ’188’ international operator services.Pre-selections of existing subscribers that did notpre-select, will be blocked up to 1 May 2000.

Competitive practices - service & consumer data provided by Bezeq to all operators on non-discriminatory basis.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Resulting MarketEnvironment

Highly competitive market, with low customer switching barriers.

Drastic cuts in retail tariffs (example: $0.12/min to any destination).

International long distance calls - a commodity.

The incumbent carrier, Bezeq International, lost its dominant position (60% > billed minutes) within 70 days.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

International Traffic[Million Minutes/Year]

0

200

400

600

800

1996 1997 1998 1999

Incoming

Outgoing

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Submarine Optical Cables Infrastructure

LEV

EMOS CIOS

FLAG

Cable RFCS Capacity

EMOS 1990 280 Mb/sCIOS 1994 622 Mb/sLEV 1998 5 Gb/sFLAG 1999 5 Gb/s

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Telecommunications Liberalization

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Regulatory Reform

Competition in fixed services.

Structural change of the telecommunications sector:

Liberalization. Privatization. Re-regulation.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSRe-regulation Includes:

Competition rules - open access & non-discrimination. Universal service - obligations, reciprocal compensation

(if required). Interconnection - tariffs, technical standards. General license owners - obligations, structural regulation,

services, coverage, interconnection. Numbering - administration, portability, new numbering

plan. Policy - regulatory activity. National security.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSCompetition Rules

Three tier market structure: Mobile services (Cellular & PCS). Fixed domestic services (infrastructure, transmission, data

comm’s & telephony). International services.

Facilities-based competition.

Universal service and open access obligations including equal terms service offering requirement, at non-discriminatory tariffs.

Structural separation & Cross-ownership rules, assuring fair competition.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Facilities-Based Competition

New operators are required to set up their own facilities.

No unbundling or co-location requirements on existing operators.

Interconnection & open access regulations: tariffs, technical requirements, equal access and number portability.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Licenses for new operators

General licenses for fixed domestic services (infrastructure, transmission, data services & telephony) will be issued to applicants meeting economic and know-how criteria.

General license requiring limited spectrum resources (mobile, FWA) shall be issued through public tenders.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Israel’s Telecommunications Map

Pelephone(Bezeq)

Bezeq

Bezeq

1994

Pelephone Cellcom Partner/Orange

1999

Bezeq

Bezeq International Barak Golden Lines

2000 & onwards

Pelephone Cellcom Partner/Orange PCS operators

Bezeq Competing

Operators: Wireline Wireless

Bezeq International Barak Golden Lines Additional operators

MobileServices

FixedServices

(Infrastructure, Transmission & Telephony)

International

Long DistanceServices

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

New Frequency Allocations

The key for competitive and growing marketplace

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

New Frequency Bands Allocations

Band Application Allocation Year

2 GHz DCS/UMTS 300 MHz up to 2005

2 GHz N-FWA/WLL 20 MHz 2000

3.5 GHz N-FWA/WLL 60 MHz 2000

26/28 GHz B-FWA/LMDS 1600 MHz 2000

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

License Auctions for 2000

Fixed Wireless Access: Broadband (26/28 GHz) & Narrowband (2/3.5

GHz) + Microwave frequencies. Up to 4 operators, selected in MSR (Multiple

Simultaneous Round) auction. Participation of Bezeq & CATV operators in the

auction will be excluded. Tender process planned to begin early 2000.

Additional Mobile Competition: 2G (DCS-1800) & 3G (UMTS). Allocations for new & existing operators. Detailed to be announced during 2000.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

New NNP (National Numbering Plan)

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Existing NNP Adopted by Bezeq in the late 80’s, as part of the

network digitization program.

8 digits number length: Fixed: A NXX XXXX

(area code + exchange code + local number) Mobile: 5X NX XXXX

(network Identification + subscriber number)

Services: variable length, 2 to 10 digits.

Prefixes: 0 - long distance (00, 01X - International)1 - service prefix* - access to network services# - service deactivation.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSNew NNP

Additional digit (9 digits number length): Step 1 - Mobile: 5A [N]XX XXXX

(A = 0,2,4; N = 2,3,8 for Cellcom; 4,5 for Orange, 6,7 for Pelephone)

Step 2 - Fixed: A [N]XXX XXXX

Area codes consolidation: Area code 6 reclaimed for advanced services. Further future consolidation (end up with 2 to 4 areas).

Services numbering re-arrangement : 1XX for life-threatening emergency; 1XXX for other services. 1 YYY XXX XXX logical numbering.

Toll-free number portability.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Numbers [Millions] Number Type

Old NNP New NNP

Geographic 56 160 - 320

Mobile 8 80

Logical - 160 - 80New Services 10 100

Future Use - 240 - 160

Will We Have Enough Telephone Numbers?

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Bezeq In the New Era

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Bezeq in the New Era

Tariff controls, until market share in domestic services (infrastructure, transmission, data services & telephony) falls bellow 60%.

Tariff re-balancing, dealing with access deficit and cross subsidies.

Structural separation.

Universal service obligation.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Bezeq Tariff Rebalancing - April 1999

One-step rate rebalancing, almost eliminating cross-subsidies between services (voice traffic still subsidizes telephone access).

New price-cap regime - productivity gap (x-factor) of 7% (6% in 1999, will be adjusted if Bezeq output deviates from predictions).

6% average rate decrease (21% decrease on voice traffic, 16% increase on fixed monthly payment. Typical tariffs - NIS 0.208 for local call, NIS 36.1 monthly payment, 532 NIS for line installation).

ROE (before tax) - 10.5%.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSInterconnection Rates

Interconnection Israel EUTariff benchmarks

Local 0.8 0.7-1

Urban Toll 1.3 1-2

National Toll 2.5 1.7-3

$1 US = NIS 4.16

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSBezeq Privatization

Government holds 54% of Bezeq shares (remaining shares are publicly held).

Government plans to sell all of its holdings through IPO & private placement. The process shall begin in 2000.

Government approval required for holding of more than 5%.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Competition InBroadcasting

Services

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSBroadcasting Networks

Radio - Public radio - 7 national AM/FM radio stations,

AM Arabic channel & world-wide short-wave service.

Commercial radio: 14 local FM radio stations.

Television - Public channel (Channel 1). Commercial channel (Channel 2).

Multi-channel subscriber TV - 3 regional cable TV operators, providing service over 550 MHz (50 channels) systems, including 7 self-provided program channels.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

“Open Sky”Broadcasting Policy

Creating competitive broadcasting market. Key policy ingredients -

Public broadcasting - new definitions (goals, structure, finance).

Commercial broadcasting - introduction of second commercial television channel & private country-wide radio stations.

Multi-channel subscriber television - introduction of direct broadcasting satellite, in competition with cable television.

Broadcasting digitization - radio & television, terrestrial, cable television & satellite (DAB/DVB).

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Competition inMulti-Channel Subscriber TV

License for DBS (Direct Broadcasting Satellite) issued January 1999: Digital system, 60-120 cm receiving antennas. Basic package of ~10 channels. Additional pay channels/channel packages. Local content obligations.

Additional independent cable/satellite channels, based on advertisement revenues.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Broadcasting License Tenders for 2000

Second commercial television channel.

Independent cable/satellite channels: Israeli music. News (2 channels). Jewish heritage. Immigration absorption. Arabic channel.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Summary

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Israel’s Regulatory Policy

Structural changes - achieving strategic advantage in competitive global markets.

Competition - the key for innovation, entrepreneurship, investment & growth.

Key action areas: Liberalization. Re-regulation. Privatization.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Regulation Philosophy

Free and competitive markets promote growth, efficiency, customer satisfaction & economic advantage.

Market restructuring, in transition from monopoly to open and free market, during a short time period, requires active and balanced regulatory intervention.

Once competitive marketplace is achieved, a strong regulator will provide unnecessary intervention, and should be abolished.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONSProactive Re-regulation

The end of the access monopoly: Facility-based competition. Alternative infrastructure: fiber, copper, cable,

fixed wireless, satellite. Simple interconnection rules:

Open access, carrier pre-selection & dialing parity. Non-discriminatory interconnection tariffs. Minimum compatibility requirements.

New numbering plan & frequency allocations.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Israel’s Telecom Future: Real and Sustainable Growth

Technology-enabled evolution: From simple fixed voice and narrowband to

broadband, mobile, internet & advanced services. From circuit switching to IP based infrastructure.

Rapid growth:Prediction for additional 1 million fixed connections, 1.5 million cellular customers & 1 million Internet users by 2003.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Everything Is Internet!

The Economist, May 2nd 1998

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS1999 Was a Good Year

Successful launch of Partner/Orange (3rd cellular operator).

Balloting for preselection of international long-distance providers.

Issue of DBS license (yes).

Continued CATV industry consolidation.

IPO’s for Partner/Orange & Internet-Gold.

Telecommunications law update (interconnection, numbering, etc.).

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

2000 will be an Exciting Year

CATV/DBS compromise over content/tiering.

Tender for fixed wireless access licenses.

CATV operators become telecom operators.

Bezeq supplies ADSL services.

Bezeq privatization.

Further IPO’s.

Tender for additional cellular operator/s & additional frequencies for existing cellular operators.

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

Value Creation: The Key for Growth

Key growth drivers: Investments:

Access competition Broadband

User requirements: ‘Internet’ life style ‘Mobile’ culture

Growth is demand driven: Consumer ‘S’ curve Pricing stimulate demand Service differentiation Targeted Packaging

Applications: PC/TV xDSL/Cable Mobile gadgets Home LAN

Competition: Flexible packaging Innovation

Marketing Branding Targeted offerings Loyalty/churn

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

http://www.moc.gov.il

STATE OF ISRAEL

MINISTRY OF COMMUNICATIONS

The EndThank you for your attention