Israel’s Internet Hinges on Bezeq Revamp, Minister Says (1)

Jan 11, 2017 9:01 am ET

(Bloomberg) -- The future of internet in Israel may depend on allowing a reorganization of Bezeq Israeli Telecommunication Corp., despite concerns the move could undermine years of efforts to make the local market more competitive.

“If we don’t move ahead with a national fiber-optic infrastructure, Israel’s internet will get stuck in another two or three years,” Regional Cooperation Minister Tzachi Hanegbi, whose brief includes Bezeq, said in an interview with Bloomberg. “Without the advanced network, we’re in danger of going from Start-Up Nation to Stuck-Up Nation.”

Hanegbi supports a move that will allow Bezeq, which has already installed about 60 percent of its advanced network, to cut its tax burden by offsetting losses from its satellite broadcasting unit Yes. The unit has an accumulated loss of 5.3 billion shekels ($1.4 billion) that can be applied over eight years, said Roni Biron, co-head of research at Excellence Nessuah Brokerage Ltd.

Officials at the Finance Ministry and lawmakers in parliament’s Economics Committee oppose the step, concerned that strengthening Bezeq, the country’s largest telecommunications company, will impede competition. Finance Minister Moshe Kahlon told Channel 2 on Jan. 7 that he would review the proposal.

Ending Monopoly

Shares of Bezeq rose as much as 0.6 percent Wednesday morning in Tel Aviv before declining 0.2 percent to 7.038 shekels as of 11:36 a.m. That was in line with the 0.2 percent fall in the TA-25 stock index.

The step would be the first easing of regulations aimed at helping newcomers enter a market Bezeq monopolized in the early 1990s. With the launch of wireless services in that decade, Bezeq was required to form subsidiaries to offer services beyond phone calls, which later came to include internet and multi-channel television. The company’s monopoly on fixed-line telephony ended in 1999.

Today Bezeq and its main competitor, Hot Telecommunication System Ltd., control Israel’s two nationwide fixed-line networks for local and international calls and Internet. Hot offers cable multi-channel television on its network and several companies offer services on space leased on the two infrastructures. There are also three major wireless networks, one controlled by Bezeq’s Pelephone Communications Ltd., that lease out space to smaller rivals.

Bezeq’s market share in the private fixed-line market had dropped to 56 percent by the end of 2015, according to a company report from last March. It controlled 68 percent of the internet-provider sector, and 26 percent of the wireless market, the report said.

The regulatory change is contingent on a Bezeq commitment to invest some 700 million shekels in the advanced fiber-optic network this year and to complete 76 percent of the network by 2020, Hanegbi said.

“It’s important to ensure progression toward a nationwide fiber network, and Bezeq is well positioned to do so,” analyst Biron said, adding that the ministry should consider making similar demands of Hot.

Weekly Gain

Bezeq finished 2016 as the fourth-worst performer on the TA-25, but its shares rose 8 percent in the last week of December, their biggest weekly jump in more than two years, after the company announced the ministry was considering the rule change. Trading volume jumped more than five-fold that week.

A future step in easing restrictions on Bezeq would be allowing units to bundle services so the company can cut prices. The impact that could have on competition is a main concern of those who oppose changing the regulations.

Hanegbi will hold a public hearing so critics, likely to include Bezeq competitors Partner Communications Co. and Cellcom Israel Ltd., can air their concerns. Cellcom, Hot and Partner all declined to comment. The minister has asked the state comptroller, who requested that any decision be delayed pending a report on the proposed changes, if he can start the hearing process now.

The path won’t be smooth. Earlier this month, opposition lawmaker and Economics Committee member Micky Rosenthal accused Prime Minister Benjamin Netanyahu of “pulling strings” for the benefit of Bezeq’s controlling shareholder, Shaul Elovitch. Netanyahu, who is acting communications minister, has recused himself from Bezeq issues due to his personal ties to Elovitch.

Political Ties

“Regulation is always political, but in this case, it is particularly political,” said Gil Dattner, equity analyst at Bank Leumi Le-Israel Ltd.

To counter criticism, Bezeq CEO Stella Handler created a Facebook page on which she said that lifting regulations on Bezeq would eventually benefit consumers by as much as 1,000 shekels a month.

Proposals for restructuring Bezeq have been under consideration since 2012, and making some changes now would give the company “the incentive to invest in what is important to us,” Hanegbi said. “If no one builds the fiber-optic network, the country will be way behind.”

(Adds share price in fifth paragraph.)

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