We should get used to it: every discount by a mobile carrier will renew the wave of assessments about the future of the industry and again raise the question, how long can the market continue to function at such low prices?
On Sunday, Golan Telecom Ltd. announced an aggressive campaign, offering a mobile plan (with just one gigabyte Internet access) at NIS 35 a month. The campaign was launched simultaneously with an offer by mobile virtual network operator (MVNO) Youphone Ltd. of NIS 48 a month.
012Mobile, Rami Levy Communications Ltd., and HOT Mobile Ltd. also have plans at NIS 50 a month, or even less. This is party time for consumers, but it's a disaster for the industry. The veteran carriers are able to profit from the current circumstances, but the new carriers are losing money hand over fist.
For months, the capital market has been rife with speculation over the future of the mobile market, even since the "Globes" expose that Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) controlling shareholder Haim Saban met Golan Telecom shareholder Xavier Niel, the partner of Michael Golan in the carrier, in Paris.
Even before that, there have been reports that Niel and Golan's contact person met representatives of Partner and Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) with an offer to buy Golan Telecom. Michael Golan has denied the reports, but there is growing evidence that the meeting took place.
"Look how long it is taking for the Antitrust Authority and the Ministry of Communications to approve the network sharing agreements between Partner and Hot Mobile and between Golan Telecom and Pelephone Communications Ltd. or Cellcom," says a top telecom executive, in response to reports about quiet talks on a merger between Hot Telecom and Partner.
Last week, "Globes" reported that the Antitrust Authority was about to approve the network sharing agreement between Hot Mobile and Partner with restrictions, but that it would reject the agreement between Golan Telecom, Pelephone, and Cellcom. Top telecom executives therefore believe that the difficulties that the regulators are causing the carriers over network sharing will necessarily force them to merge. When this will happen is unclear, but it might only occur when one of the carriers crashes or can longer meet the terms of its license.
As "Globes" has previously written and analyzed, the Partner-Hot Mobile network sharing agreement greatly strengthens Hot Telecommunication Systems Ltd. (TASE: HOT.B1), giving it stamina for the long haul. This is not such a good decision for Partner, which has limited resources, and the network sharing agreement brings the carriers closer and could serve as a springboard to a merger.
It is important to note that Minister of Communications Gilad Erdan and Antitrust Authority director general David Gilo have a different agenda. Neither of them wants to sign a directive that will reduce competition in the mobile market, mainly because of fear of public criticism.
This is why that, until one of the carriers crashes or ends up in critical condition, the regulators will not allow a merger of any of them. This also means that, as far as the regulators are concerned, allowing network sharing between carriers is the way to maintain competition in the market and prevent mergers. The question is how many networks they will allow to be consolidated, and whether Israel will have two or three mobile networks to serve the five current carriers.
Distress in a time of uncertainty
Sources told "Globes" that they believe that mergers are inevitable within a year, and that the market cannot sustain five carriers. There are many reasons for this, such as the format for the wholesale market, which will turn the Israeli market into a telecommunications consortia market. Another reason is investment in 4G and the need for carriers to enter the new world of capital-intensive products and services.
Among the carriers, Golan Telecom is the most vulnerable, which is why in all the speculation it will be the first to wave the white flag. The carrier might be sold to a competitor, or it might acquire another company. The latter speculation may be more realistic, given that Niel is a media tycoon. His perspective of the markets is not the same as Saban's or of Cellcom's new controlling shareholders, Moti Ben-Moshe and Eduardo Elsztain.
Golan Telecom would struggle to survive in the structure of telecommunications groups. The need for additional investment to provide telephony and television services is something that the carrier is not built for at the moment, which is why is it more likely that it will prefer a merger over investment in a market where it has no edge.
It should be remembered that speculation will be affected by the regulators' decision on network sharing, which is why Michael Golan told Edran that if the two-network model is rejected in favor of the three-network model, it will mean higher mobile prices.
Under conditions of three networks, Golan Telecom will have to team up with either Pelephone or Cellcom to set up a 4G network. This means a much greater investment than under conditions of two networks, and to finance this, Golan Telecom and the other carriers will have to raise prices. It is possible to assume that Michael Golan's remarks were made out of distress, but his distress is the distress of the entire market in a time of uncertainty.
Uncertainty is something that carriers worldwide have to live with, because of exogenous factors, such as technology changing business models. In Israel, the Ministry of Communications is the greatest cause of uncertainty because of its inability to make a decision. This harms the entire market, and not just the carriers.
Published by Globes [online], Israel business news - www.globes-online.com - on April 1, 2014
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