First Regional Forum on Telecommunications Reform in the MEDA Area Athens, 25-26 April 2001 Liberalization of Markets and New Regulatory Framework The Israeli Case

1
First Regional Forum on Telecommunications Reform
in the MEDA AreaAthens, 25-26 April
2001Liberalization of Markets and New
Regulatory FrameworkThe Israeli Case

• Daniel Rosenne
• Director General, Ministry of Communications,
  Israel
• rosenned_at_moc.gov.il

2
Presentation Agenda

• Telecommunications networks services
• Market overview
• Mobile services
• International long distance
• Fixed services
• Regulatory reform
• Regulation overview
• License auctions
• Tariff rebalancing
• New numbering plan
• Bezeqs privatization
• Summary.

3
Telecommunications Network Services
4
Israel's Telecommunications

• 2.8 million main telephone lines
• (45 penetration).
• 4.8 million mobile customers, on 4 networks
• (76 penetration).
• 1.3 million households connected to multichannel
  subscriber television
• Cable 3 operators, 1.2 million subscribers, 70
  of homes passed, 95 household coverage.
• Satellite 1 operator, 0.1 million subscribers.

5
Internet Services

• 40 Internet service providers, 1,000,000 dial-up
  10,000 directly connected customers, 50,000
  domains.
• Penetration 40 of households, 50 of
  businesses.
• IIX (Israel Internet eXchange) non-profit peering
  point.
• Hands-off overall regulatory policy.
• High growth 50 annual.

6
Israel Internet DevelopmentGallup Israel survey
Maariv, 30 March 2001, Haaretz, 17 July 2000

• Connected households, using more than 1 hour/week

42.0
29.0
21.0
13.2
5.4
1997
1998
1999
2000
2001
7
Telecommunications Services Market - 2000
International Long-Distance
Cable TV
Terminal Equipment Business Systems
Internet services
1.5
2.5
7
8
Mobile Services
49
Fixed Services
32
Total telecom services market US 5 billion
8
The Mobile BoomIsrael Telecommunications
Services Revenues, 1995-2000 (US M)
3,000
2,500
Mobile
2,000
Fixed
1,500
1,000
CATV
ILD
500
0
1995
1996
1997
1998
1999
2000
9
The Existing Regulatory Environment

• Separation between regulation and operation
  (since 1984).
• Regulation responsibility - Ministry of
  Communications.
• General licenses issued to facilities based
  service providers
• Fixed services - Bezeq, Ofek.
• Mobile services - Pelephone, Cellcom, Partner,
  MIRS.
• International long-distance services - Bezeq
  International, Golden Lines, Barak.
• Special licenses issued for value-added services.
• Termination of exclusive rights
• Fixed Services - 1 June 1999.
• International long distance - 31 December 2001.

10
Mobile ServicesCompetition introduced in
December 1994

• Rapid growth - 125,000 subscribers 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.
• ARPU (Average Revenue Per User) - US50 to 60.
• Calling party pays (CPP).
• Nationwide coverage Land-linequality.
• Competition marketing innovations.

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International LongDistance Services

• Competition introduced in July 1997.
• 3 facilities based operators
• Golden Lines (012)
• Telecom Italia, Fishman.
• Barak (013)
• Sprint, Deutsche Telekom, France Telecom,
  Clalcom Matav.
• Bezeq International (014)
• The incumbent carrier, 100 owned by Bezeq.
• Dialing Parity.

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Dialing Parity Rules

• Per-call carrier-selection prefixes (01X).
• For each of the international service providers.
• CPS (carrier pre-selection) - subscribers choose
  a preferred provider for 00 prefix and 188
  international operator services.
• Competitive practices -
• CPS balloting.
• Consumers data provided by Bezeq mobile
  operators on non-discriminatory basis.

13
International TrafficMillion Minutes/Year
1200
Outgoing
1000
800
600
Incoming
400
200
0
1995
1997
1998
1999
2000
1996
14
Fixed Services CompetitionDriven by Broadband
Demand

• Prolonged Delays
• Politics May 1999 elections.
• Government - cable companies disputes
• Fulfillment of universal service obligation.
• Competition - DBS services, content.
• Finance Ministry seeking payment for granting
  telecom license.
• Justice Ministry seeking limits on content
  control.
• Union disputes - safeguarding employee rights.
• Rough Road Ahead
• Telecom law change underway, allowing cable
  companies entry into telecom.
• Fixed wireless access tender.

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The Birth of New Entrants

• Regulation allowing fixed services licensing -
  published September 2000.
• Ofek fixed services license - granted February
  2001.
• Fixed wireless access tender - published October
  2000.
• Cable companies restrictions removal - Telecom
  Law update due during 2001.
• Roll out of several competitive fiber-based
  backbones - MedNet, Ofek, Cellcom, Israel
  Railways.

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Ofek New WorldIsraels first licensed CLEC

• Owned by Eurocom group (50.33) Arison
  investments (49).
• Fixed services general license as of 1 February
  2001.
• Plans for modern IP based infrastructure,
  utilizing 1000 Km fiber cables.
• Covering 15 natural zones (out of 53).
• Will offer wide range of telephony broadband
  data services, for business households.
• Plans for US 1Bn investment, 1500 employees.

17
TelecommunicationsCompetition Enhancement by
Regulatory Reform
18
Regulatory ReformPromoting Competitive Advantage

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

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Proactive Re-regulation

• The end of the access monopoly
• Facilities-based competition.
• Alternative infrastructure fiber, copper, cable,
  fixed wireless, satellite.
• Simple interconnection rules
• Non-discriminatory access, carrier pre-selection
  dialing parity.
• Non-discriminatory interconnection tariffs.
• Minimum compatibility requirements.
• Open access for value-added service providers.
• New numbering plan frequency allocations.

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Regulation Philosophy

• Consumers are the focus.
• Competition is essential.
• Interconnection is the key.
• Technology neutral regulation is an important
  concept.
• Facilities based competition is the preferred
  way. Unbundling is interim competition
  promotion method.
• Structural separation cross-ownership
  limitations are important to assure fair
  competition.
• Cable companies should be regulated as common
  carriers.
• Hands off regulation of new services (e.g.
  internet).
• Transform from sector specific ex-ante to
  general anti-trust ex-post regulation.

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Re-regulation Covers

• Competition rules - ownership, resale. timetable.
• Universal service - obligations, reciprocal
  compensation.
• Interconnection - rules, tariffs, terms.
• General license owners - obligations, structural
  regulation, services.
• Numbering - administration, portability, new
  numbering plan.
• Tariff rebalancing.
• National Emergency Security issues.

22
Fixed Wireless Access Auctions

• Up to 3 operators, selected in MSR (Multiple
  Simultaneous Round) combined auction.
• Frequency Allocations, for each operator
• 26 GHz Broadband 2 x 196 MHz.
• 3.5 GHz Narrowband 2 x 12 MHz.
• Participation of Bezeq cable operators in the
  auction is excluded.
• Reserve price US 1.5 million.
• Roll-out obligation 3 years.
• Tender published 12 October 2000. Applications
  deadline 3 April 2001.

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2G/3G Mobile License Auctions

• MSR (Multiple Simultaneous Round) combined
  auction.
• Frequency packages, for 4 licenses
• 2G FDD 2x10 MHz.
• 3G FDD 2x10 MHz.
• 3G TDD 5 MHz (for 3 packages only).
• Reserve price US 100M. 25 reduction for new
  operators.
• Tender published 28 March 2001. Applications
  deadline 17 July 2001.

24
Bezeq Tariff Rebalancing

• Price-cap regime - productivity gap (x-factor) of
  3.5.
• One step rate rebalancing in April 1999, almost
  eliminating cross-subsidies between services
• Further adjustments were made on May 2000
  March 2001.
• Voice traffic still subsidizes telephone access.
• Simpler tariffs Simple tariff matrix
• Local calls or urban-toll calls during peak
  hours (0800-1800, Sunday to Thursday), unified
  tariff for off-peak hours.
• Per-second billing, as of May 2000
• per-second billing with minimum charge per-call,
  replacing traditional meter pulse.
• Special Internet promotion dialup tariffs, as of
  May 2000 Customer choice between number of
  alternative tariff plans, bundling local call
  minutes in exchange for monthly fee.

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BezeqsInterconnection Rates

• Time National
• of Day Termination Origination
• Peak 1.53 1.56
• Interim 0.9 1.56
• Off-peak 0.6 1.56
• Weighted
• Average 1.16 1.56

Per minute rates, per second billing US cents,
1 NIS 4.116, 1 1.11
EU 2000 Best current practice termination
charges, US Local 0.45-0.81, single transit
(metropolitan) 0.72-1.35, double transit
(gt200km) 1.35-1.62.
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Mobile CPP Tariff Regulation Sept. 2000

• Cost-based CPP (Calling Party Pays) mobile call
  termination tariffs, as of September 2000.
• Eliminating discriminatory and anti-competitive
  practices resulting from subsidizing outgoing
  calls by incoming calls revenues.
• CPP mobile call termination tariffs
• Year Tariff US /minute
• 2001 12
• 2002 11
• 2003 10

27
New NNP (National Numbering Plan)

• Additional digit (9 digits number length)
• Step 1 - Mobile 5 NXXX XXXX
• (N 2 for Cellcom, 4 for Partner, 6 for
  Pelephone, 7 for MIRS).
• Step 2 - Fixed A NXXX XXXX
• Area codes consolidation
• Area codes 6 7 reclaimed December 2000.
• Services numbering re-arrangement
• 1XX for life threatening emergency 1XXX for
  other services.
• 1 YYY XXX XXX logical numbering.
• Toll-free (1-800) number portability.

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Will We Have Enough Telephone Numbers?
Numbers Millions Number Type Old
NNP New NNP Geographic 56 160 -
320 Mobile 8 80 Logical - 160 80 New
Services 10 100 Future Use - 240 - 160
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BezeqThe Israel Telecommunication Corp Ltd.

• Israel's incumbent operator (ILEC).
• Annual sales US 2.05 billion.
• 11,000 employees (8,200 in Bezeq, the parent
  company).
• Government holds 55 of Bezeq shares (remaining
  shares - publicly held).
• Government formally approved selling 50.01 of
  Bezeq shares to a single strategic investor.
• Government plans to complete privatization during
  2001.

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Summary
31
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.

32
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.

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The Future of Regulation Open Communications
Infrastructure

• A system of largely free-market competition with
  just enough governmental oversight to ensure that
  competitors stay within bounds.
• Best combination of the benefits of government
  oversight with those of laissez-faire.
• The bounds are the basic essentials
• Open access.
• Universal access.
• Interconnection.
• Fair competition.
• Public safety security.

34
Israel's Telecommunications Map
1994
Mobile Services

• Pelephone
• (Bezeq)

Fixed Services (Infrastructure, Transmission
Telephony)

• Bezeq

International Long Distance Services

• Bezeq

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Thank you for your attentionFor more
informationhttp//www.moc.gov.il