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Business Opportunities In An Era of Telecommunications Liberalization

Business Opportunities In An Era of Telecommunications Liberalization. Daniel Rosenne Director General, Ministry of Communications rosenned@moc.gov.il. Presentation Agenda. Israel’s Telecommunications Market: General overview Cellular telephony International telecommunications

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Business Opportunities In An Era of Telecommunications Liberalization

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  1. Business Opportunities In An Era of Telecommunications Liberalization Daniel Rosenne Director General, Ministry of Communications rosenned@moc.gov.il

  2. Presentation 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

  3. Israel’s Telecommunications MarketGeneral Overview

  4. Israel's Telecommunications • 2.8 million main telephone lines • (47% penetration). • 2.9 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).

  5. The Telecommunications Services Market - 1998 Cable TV International Long-Distance Internet services Terminal Equipment & Business Systems 2% 2% 7% Cellular Telephony 11% 38% Fixed Services 40% Total telecom services market ~ $ 3.7 billion

  6. The Cellular Boom:Israel’s Telecommunications Services Revenues, 1995-1998 ($US M) 2,000 Fixed 1,500 Cellular 1,000 International 500 CATV 0 1995 1996 1997 1998

  7. 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.

  8. 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.

  9. Modern Fixed Network • 100% digital. • #7 ISUP signaling. • Country-wide Euro ISDN. • AIN features. • SDH transmission. • Country-wide fiber deployment.

  10. Internet Services Profile • ~30 Internet service providers, 1 million users, 400,000 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.

  11. Cellular TelephonyCompetition Introduced December 1994

  12. Cellular Operators PelephoneCellcomPartner/Orange 800 MHz 800 MHz 900 MHz NAMPS & CDMA TDMA GSM 1987 1995 1999 BellSouthHutchison Bezeq Safra Brothers Matav Motorola Discount Investments Elbit.com PEC Tapuz private investors free float

  13. Cellular Telephony • Rapid growth - 2.9 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.

  14. International TelecommunicationsFacilities-Based Competition Introduced in July 1997

  15. 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.

  16. Facilities-Based International Service Providers • Bezeq International (014) The incumbent carrier, 100% owned by Bezeq. • Two new carriers, operating since July 1997: • Golden Lines (012) • STET, SouthWestern Bell, • Aurek, Globscom & Meitar/Kahn. • Barak (013) • Sprint, Deutsche Telekom, France Telecom, • Clalcom & Matav.

  17. Dialing Parity Rules • Per-call carrier-selection prefixes (01X). For each of the international service providers. • Pre-selection - subscribers can choose a preferred provider for ‘00’ prefix and ’188’ international operator services. Pre-selections of existing subscribers that will not pre-select up to 31 December 1999, will be blocked. • Competitive practices - service & consumer data provided by Bezeq to all operators on non-discriminatory basis.

  18. 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.

  19. International Traffic[Million Minutes/Year] 800 Outgoing 600 Incoming 400 200 0 1996 1997 1998

  20. Submarine Optical Cables Infrastructure EMOS CIOS Cable RFCS Capacity EMOS 1990 280 Mb/s CIOS 1994 622 Mb/s LEV 1998 5 Gb/s FLAG 1999 5 Gb/s LEV FLAG

  21. Telecommunications Liberalization

  22. Regulatory Reform • Competition in fixed services. • Structural change of the telecommunications sector: • Liberalization. • Privatization. • Re-regulation.

  23. Re-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.

  24. Competition 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 obligationsincluding equal terms service offering requirement, at non-discriminatory tariffs. • Cross-ownership rules, assuring fair competition.

  25. Facilities-Based Competition • New operators are required to set up their own facilities. • No unbundling or co-location requirements on existing operators. • Interconnection regulations: tariffs, technical requirements, equal access and number portability.

  26. Licenses for new operators • Generallicenses 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.

  27. New Operators’ Universal Service Obligations • Service offers will be defined by the licensee, at his will. • All services will be available throughout the ‘service area’ within 36 months after license award. • The ‘service area’ will be defined by the licensee. The minimum is 15 ‘administrative zones’ (out of 52), of which at least 3 are from a list of 37 ‘periphery area’ zones.

  28. 1999 2000 & onwards • Pelephone • Cellcom • Partner/Orange • PCS operators • Pelephone • Cellcom • Partner/Orange • Bezeq • Competing • Operators: • Wireline • Wireless • Bezeq • Bezeq International • Barak • Golden Lines • Additional operators • Bezeq International • Barak • Golden Lines Israel’s Telecommunications Map 1994 Mobile Services • Pelephone Fixed Services (Infrastructure, Transmission & Telephony) • Bezeq International Long Distance Services • Bezeq

  29. New Frequency AllocationsThe key for competitive and growing marketplace

  30. 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

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

  32. New NNP (National Numbering Plan)

  33. 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.

  34. New 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.

  35. Will We Have Enough Telephone Numbers? Numbers [Millions] Number Type Old NNP New NNP Geographic 56 160 - 320 Mobile 8 80 Logical 1 114 New Services - 80 Future Use - 320 - 160

  36. Bezeq In the New EraTariff Rebalancing, Structural Separation & Privatization

  37. 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 regulation. • Universal service obligation.

  38. 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%.

  39. Interconnection Rates Interconnection Israel EU Tariff 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

  40. Structural Separation • Structural regulation: • One can hold or control only one dominant entity in each tier (mobile, domestic & international). • Separation between ISP’s and major infrastructure owners (Bezeq, cable companies). • Bezeq: Permitted to be active in areas other than domestic (infrastructure, transmission & telephony) only by subsidiaries.

  41. Bezeq 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%.

  42. Competition InBroadcastingServices

  43. Broadcasting 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.

  44. “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).

  45. 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.

  46. Broadcasting License Tenders for 2000 • Second commercial television channel. • Independent cable/satellite channels: • Israeli music. • News (2 channels). • Jewish heritage. • Immigration absorption. • Arabic channel.

  47. Summary

  48. 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.

  49. 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.

  50. Proactive 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.

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