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dissertation entitled

RESTRUCTURING 0F TELECOMMUNICATIONS:

THE CASE OF ISRAEL
presented by

Pierre Azoulay

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MSU In An Affirmative Action/Equal Opportunity Institution
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RESTRUCTURING OF TELECOMMUNICATIONS :
THE CASE OF ISRAEL

By

Pierre Azoulay

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunications

1994

 

 

 

 

ABSTRACT

Restructuring of Telecommunications :
The Case of Israel

By

Pierre Azoulay

In the past five or six years, Israel has built one of the most
advanced telecommunication infrastructure from scratch. Moreover,
dramatic changes have occurred recently in the policies followed by the

Israeli government in the field of telecommunication, mainly the opening of

certain segments of the market to competition.

This case study tries to explain those changes and policies, while at
the same time analyzing how they relate to Israel’s specific context and to

the dynamic of peace at work in the Middle East.

It finally sketches out the regulatory conditions under which Israeli
telecommunication manufacturers and service providers could place
themselves in a position to play a leading role in the global restructuring of
telecommunications in the Middle East. The study advocates a separation
of the regulatory body from the Ministry of Communications, and clear

procedures for the setting of access charges to the incumbent’s local

network.

 

ACKNOWLEDGMENTS

My warmest thanks to Michigan State University Department of
Telecommunications, to my Thesis Committee, and to the Rothberg School for
Overseas Students, Hebrew University of Jerusalem, Mount Scopus, Jerusalem,

Israel.

«In Israel, being reasonable means believing in miracles...»
David Ben Gurion

iv

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF FIGURES VIII

TABLES W

INTRODUCTION 1

1.1. Research Outline 2

1.2. Review of Literature 2

1.3. Research Methods 3

1.4. Israel on the economic world map 5

1.5. Israeli Telecommunications in a Nutshell 8

CHAPTER ONE

TEE ISRAELI TELECOMIVIUNICATION SYSTEM :

A CONTEXTUAL ANALYSIS 1 0

2.1. Basic Overview of Israel's Telecommunication Infrastructure ............................. 10

2.1.1. Bezeq, Public Telecommunication Operator 10

2.1.2. Domestic Telephone Network 1 1

2.1.3. International Communications 20

2.1.4. Cellular Phones 27

2.1.5. Data Communication Infrastructure 28

, 2.1.6. Broadcasting and Cable TV 31

2.2. The Building of the Israeli Telecom Infrastructure : A Contextual Explanation.. 32

2.2.1. A way to overcome the country's geographical isolation ........................... 32

2.2.2. Influence of the Arab-Israeli conflict 34

2.2.3. Human Influences : Immigration, Emigration, Jewish Diaspora ............. 36

2.2.4. An Export-Driven Economy 42

 

 

CHAPTER TWO

 

 

 

 

 

 

 

 

 

RESTRUCTURING IN A FIRST WORLD CONTEXT : ISRAELI PATTERNS ..... . ..... 49
3.1. The recent move towards competition 49
3.1.1. A Push for Liberniivnh’nn 49

3.1.2. A new framework for Bezeq's privatization 53

3.1.3. Bezeq gets a new operating license, Israel gets a telecom policy ! ........... 56

3.2. Finding a path to competition 59
3.2.1. «Fortress Bezeq» under Siege 59
3.2.3. A practical example : cellular phones 62
3.2.4. Opening of international voice transmission to competition .................... 67

3.3. A playground for telephone giants ? 69
3.3.1. Southwestern Bell strategy 70
3.3.2. The Long Distance Carriers also want their piece of the pie ................... 70
3.3.3. The AT&T connection 7 1
3.3.4. Confusion to remain until late 1994 72

 

CHAPTER THREE
TELECOMMUNICATIONS FOR GLOBAL RESTRUCTURING :

 

 

 

 

 

 

 

 

 

 

 

 

A CRITICAL ANALYSIS OF THE ISRAELI APPROACH 73

4.1. Regulatory Hurdles 73

4.1.1. Implementing Competition 73

4.1.2. Finding an Adequate Role for Foreign Capital 79

4.2. Foreign Influences against original Israeli Policies 82

4.2.1. Existing Competition 82

4.2.2. The Telecommunication Manufacturing Industry Example ..................... 83

4.2.3. American Influences 84

4.2.4. Deregulation or Re-regulation '? 85

4.3. Regulatory Prognoses 86
CHAPTER FOUR

INTERNATIONAL OUTLOOK, MIDDLE EAST PERSPECTIVE ....... . ....................... 87

5.1. Making the Middle Eastern telecommunication desert b(l)oom ........................... 87

5.1.1. Major imbalances 88

5.1.2. Possible Peace Dividends in the Telecommunication Area ...................... 89

5.1.3. The Boom can wait 92

5.2. Bezeq, Global Carrier ? 93

 

 

 

96

 

CONCLUSION

 

APPENDIX I

 

APPENDIX n

 

APPENDIX III

BIBLIOGRAPHY

100

103

104

104

 

 

 

TABLE OF FIGURES

FIGURE 1 : MAP OF ISRAEL X

FIGURE 2 : ISRAEL ON THE WORLD TELECOMMUNICATIONS MAP COMPARISON OF THE
TELEPHONE PENETRATION RATES IN SELECTED COUNTRIES, HIGH INCOME
COUNTRIES, THE WORLD, AND ISRAEL IN 1992. 12

FIGURE 3 : COMPARISON BASED ON PURCHASING POWER SUM OF TELEPHONE CHARGES

 

 

FOR ONE YEAR 1 8
FIGURE 4 : BEZEQ ANNUAL LINE INSTALLATION, 1983-1993 19
FIGURE 5 : GROWTH or INTERNATIONAL CALLS FROM ISRAEL (IN MILLIONS), 1987-1991. ........ 26
FIGURE 6 : CELLULAR GROWTH IN ISRAEL, 1987-1994 28

 

FIGURE 7 : ANNUAL PERCENTAGE GROWTH RATE FOR THE TOTAL INTERNATIONAL

 

 

 

TELEPHONE TRAFFIC To ISRAEL. MARCH 1950 —— MARCH 1985* ........................ 35
FIGURE 8 : ISRAELI POPULATION (IN MILLIONS), 1985-1993 37
FIGURE 9 : ISRAELI TELEPHONE PENETRATION RATE, 1985-93. 3 7
FIGURE 10 : TRADE DEFICIT AND EXPORTS IN MILLIONS OF US Dm IARS 46
FIGURE 11 : CLASSIC «STACK» MODEL ; APPLICATION To ISRAEL. 7 5

 

FIGURE 12 I A NEWSPAPER AD RAN BY CELLCOM, THE BELLSOUTH-LED JOINT-VENTURE
WHO WON THE SECOND OPERATING LICENSE FOR CELLULAR SERVICES IN
MARCH 1994. 104

 

 

TABLEI:

TABLEZ:

TABLE 3 :

TABLE 4 :

TABLE 5 :

 

BEZEQ INVESTMENTS IN TELECOMMUNICATIONS, 1986-1992. ............................... 15

 

 

 

BEZEQ'S INSTALLATION ACHIEVEMENTS 20
COMMUNICATIONS WEEK INTERNATIONAL/YANKEE GROUP TOP 40 RANKING OF
INTERNATIONAL CARRIERS. A COMPARISON BETWEEN BEZEQ AND THE EAST
ASIAN TIGERS. 2 5
ISRAEL'S TEN TOP-RANKED INDUSTRIAL COMP ‘ ""V‘ 46
ISRAEL TELECOMMUNICATIONS INDICATORS 1 0 O

 

 

 

 

Figure l : Map of Israel
SOURCE : Israel Information Service (IIS) Gopher

 

    

’l 'i "I" '75 I. Lu [MM .'

 

 

I‘sgrggi Humanitarian» and Cease-Fire Lines.

 

 

INTRODUCTION

The purpose of this work is to propose an in—depth evaluation of the
Israeli telecommunication infrastructure and of telecommunication policies in

Israel.

Israel is a very tiny country, located at the periphery of the Western
World. However, it is closely linked to Europe and North America, particularly
from an economic point of View. Many reasons can help us to understand this
strong integration. However, analyses on this topic in the mass media often
overlook the advanced state of the telecommunication system in Israel. It is
the eternal problem of causality : is it because of the high development of
telecommunications that the Hebrew state enjoys such tight relations with the
major trade blocs in the world ? Or is this development merely a result of a
linkage that exists because of cultural, demographic, as well as historical

reasons 7 One of the goal of this thesis is also to sort out the causality issue.

To answer these questions is important because of two main reasons :

—— In the past five or six years, Israel has built one of the most
advanced telecommunication infrastructures from scratch, thus attracting a

lot of interest from developing countries ;

—— Dramatic changes have occurred recently in the policies
followed by the Israeli government in the field of telecommunication. Will
Israeli telecom manufacturers and service providers in a position to play a

leading role in the global restructuring of telecommunications in the Middle
East ?

 

 

 

 

l . 1 . Research Outline

These observations lead us to organize this research around three basic

sets of questions :

To what extent has the specific historical, political, cultural, geographical
and economic context of the State of Israel affected the development of its

telecommunication system ? How did the wave of «Global Restructuring»

affect it (Chapter 'IVvo) ?
0 What are the restructuring patterns in Israel (Chapter Three) ?

What are the main problems facing local regulators ? We will attempt to
provide an in-depth, critical analysis about the new regulatory framework
that is taking shape exactly as we are writing this research, and try to
sketch out the political and economic implications of this new set of

regulations (Chapter Four).

0 In the light Of the Middle East peace process, the Arab boycott of Israel
could soon come to an end. Will the Israeli telecom sector (both on the
service side and on the manufacturing side) be assigned a key role in the

modernization of the telecom infrastructure in the area (Chapter Five) ?

1.2. Review of Lite_rature

The Literature about Israeli telecommunications is scarce. This is
especially true as far as the most recent developments are concerned.

However, some major studies on this topic have been done by Aharon

 

 

Kellerman, Professor of Geography at Haifa Universityl. The semi-monthly
Communications Week International had also some very good pieces about
Israel
AS far as economic data is concerned, the Israeli press in English («The
Jerusalem Post» and «The Jerusalem Report») is a very valuable source. Eli
Barnavi, Professor of History at Bar-Ilan University, has written a compact,
concise, very well~referenced book called «A Brief History of the State ofIsrael»2,
which I intend to use extensively for historical background information. The
same is true for Amos Elon's Masterpiece «The Israelis»?

An increasing amount of studies and articles is available on the theme of
«Global Restructuring of Telecommunications». I Intend to use this material in
order to evaluate Israeli policies in a more global context.

Lastly, the various databases available at MSU School of Business

provide also very valuable information.

1.3. Research Methods

The Research Method I used is the Case Study method. It is done by
first performing an in-depth survey of the literature and articles available on
the subject. To gather even more recent data, I traveled to Israel in August
1994. There, I met and interviewed various actors of the telecommunication
industry in Israel, among them Bezeq officials and civil servants at the
Ministry of Communications, Consumer group leaders, large business users,

potential competitors of Bezeq, etc.

 

1Kellerman, Aharon. The role of telecommunications in assisting peripherally located countries
: the case of Israel, in Collapsing Time and Space : Geographical aspects of Communication
and Information, London : Haepercollius Academic (1991).

2Barnavi, Eli. Une Breve H istoire de l 'Etat d'Isra'e'l, Presses Universitaires de France, 1982.
3Elon, Amos. The Israelis : Founders and Sons, Holt, Rinehart & Winston, 1971.

 

tel

 

—_i—'

From this trip, I gathered up-to-date information concerning the Israeli
telecom infrastructure and the new regulatory framework now being

implemented.

During the whole research process, I tried to put a particular emphasis
on the contextuality of my analysis. I inspired myself from a method pioneered
by Dr. Bella Mody in two studies about satellite technology in Mexico and
India4. Instead of focusing on a particular technology, I applied the same
approach while looking at the «domestic and foreign economic, scientific-
technical, political and cultural relationships»5 that influence the Israeli
telecommunication sector in general.

This contextual approach often shows that particular policy decisions
have more to do with «political, economic and sociocultural forces in the
surrounding environment, and their interactions», than with the overall goal of
welfare maximization, tariff reduction or service quality improvement.

The economic actors and factors influencing the regulatory process
include market power of the incumbent firm, foreign and local equipment
manufacturers, availabilty of local capital, inflation rate, etc. In the political
arena, powerful domestic and foreign interest groups include the party in power
and unions, while political factors like the peace process or the «special
American-Israeli relationship» also have a considerable influence.

Cultural forces influencing the decision-making process in this field
include groups pushing for integration to the world system, links with the
Jewish Diaspora among others.

The specific context of Israel has a «causal texture»6 that makes

generalization to othernational situations hazardous. For the same reasons, it

 

4Mody, Bella ; Borrego, Jorge. Mexico’s Morelos Satellite : Reaching for Autonomy ? in
Transnational Communications : Wiring the Third World, edited by Gerald Sussman and
John A. Lent, Sage Publications, 1991.

Mody, Bella. Contextual analysis of a communication technology : The case of satellites in
India, Telematics and Informatics, 1987 .

5Mody, Bella ; Borrego, Jorge (1991, Ibid.)

6Mody, Bella. First World Technologies in Third World Contexts, in Rogers, E. M. And F.
Balls, ed. Communication Revolution in North America and Western Europe. New Jersey :
Ablex, 1982.

 

 

 

—;——

is risky to analyze the ongoing changes in Israel through the prism of the
American or European model. I hope this work avoided these both traps.

1.4. Israel on the economic world map

Because Israel is a relatively new nation-state (it was founded in 1948),
available literature often misleads the reader in thinking that it is still a
developing country. Indeed, most of this literature would acknowledge Israel
top-ranking on the «developing countries» list, or the accomplishments of the
Israeli economy, but it would often fall short of understanding the new
economic phase the country entered about 15 years ago ; the research in this
field has simply being unable to keep track of the frenzy pace of economic
development there.

This is why it seems interesting to review some of the general
characteristics of Israeli economic and social fundamentals, before going into a

detailed analysis of the country’s telecommunication infrastructure.

Israel has a population of about 5.2 million7 and it extends over some
21,000 square kilometers (not including the West Bank and the Gaza Strip). In
terms of its gross national product, it is considered a developed country, so that
in 1992, its population numbered 0.1 percent of the world population, whereas
its GNP was about 0.2 percent of the world GNPS.

Looking at these economic fundamentals, Israel occupies a better
position than the less developed EurOpean countries (Ireland, Greece,
Portugal), similar to those of the most advanced of the East Asian Tigers
(Hong Kong, Singapore), and much above East European countries and LDC's.

Aharon Kellerman claims that «it has already become common wisdom
to identify three global economic cores, namely North America, Europe (either

Western Europe only, or, to some degree Eastern Europe as well), and the

 

 

7State of Israel, Central Bureau of Statistics. Jewish new Year 5754 Demographic Report,
September 1993.

8Data gathered in Dordick & Wang. The Information Society, Sage 1993.

 

 

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emerging Pacific Rim, centered on Japan and including some NICs, as well as
Australia and New Zealand»9.

Located at the periphery of these three cores, Israel nevertheless seems
to be a part of the world global economy. The Israeli economy is expanding
faster than any other in the industrialized West. While the latter entered a
period of persistent economic recession, Israel's growth rate in 1992 was
among the highest in the world —- a whopping 6.6% jump in the GNP“). Only a
few East Asian countries, like South Korea (5.8%) and Singapore (4.8%) came
anywhere close. What is more important, 1992 was Israel's third consecutive

year of high speed expansion.

Looking at social factors, instead of the usual focus on gross national
product, the Federation of Israeli Chambers of Commerce Economists arrived
at the conclusion that Israel compared favorably with most countries, even

with other developed Western nations11 :

0 Life expectancy is exactly 76 years, as in the US, compared to the
average expectancy of 76.4 in the seven most industrialized nations.

0 Israel's fertility rates are the highest among developed nations. As of
1991, there were 2.8 births per adult female, compared to the average 1.7
among the seven most industrialized nations in the world (the «G-7»).

0 Women's participation in the workforce lags behind most countries. In
1991, women made up only 34% of the workforce, to be compared with the G-7
average of 38.4%

0 Illiteracy stood at approximately 4% of the population aged 15 and over

in 1991, which compares well with the industrialized seven‘s average of 5%.

 

9Kellerman, Aharon (1991,1bid.)

10Sandler, Neal. Israel '8 Economic Boom : Miracle or Mirage. The Jerusalem Report (July 29,
1993).

11Rosenfeld Jose, Israel on par with the West. The Jerusalem Post Weekly Edition (August
21, 1993)

l W d ti E c .c. n V Fr 4 l lint.

 

 

—_7——

0 Daily caloric intake per capita stood at 3,174 calories in 1989, higher
than Britain's 3,149, Sweden‘s 2,960 and Japan's 2,956, but lower than
Ireland's 3,778, the U.S.'s 3,671, Denmark's 3,628, Switzerland's 3582 and
Austria's 3,495.

0 The child mortality rate up to age 5 stood at 12 out of 1,000 births in
1991. The rate is higher than Japan's and Italy's 6 per 1,000 and the US's 11
per 1,000, but lower than Portugal's 15 per 1,000. Argentina's 34 per 1,000 and
the Commonwealth of Independant States’ (CIS) 20 per 1,000.

Other indicators describing the overall «quality of life» (health care
access, proportion of students in the population, air pollution, etc.) tend to
demonstrate that Israel compares even better with the Western world than its

GNP per capita ranking seems to prove.

My purpose was here to roughly describe some Israeli realities for
readers who may not be familiar with it. However, the figures do not tell the
whole story.

The overall high-level of development cannot hide some huge
discrepancies between the Jewish and Arab population12 (although the gap
tends to be shrinking rapidly) and among the ashkenasim (Jews from East
European ascent) and the sefaradim (who came from the Arab world after the
creation of the state).

The reader should not lose sight of the fact that Israel is located on the
crossroads of three continents. Here more than anywhere else, Western
modernity often collides with multi-millennium traditional and religious beliefs.

The Israeli way of life is Americanizing rapidly, but this does not go
without severe confrontation with deep—rooted cultural and social realities.

Yuppies walking along the streets of downtown Tel Aviv with cellular

phones have little in common with Moroccan Jews living in the poor

 

12Muslim Arabs, Christian Arabs and Druzes account for more than 18% of the total
population (Central Bureau of Statistics, Jewish new Year 5754 Demographic Report,
September 1993).

 

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neighborhood of Hatikva13, a few miles from there ; cable TV may be more
widespread in Israel than in Europe. Still, there is 10% of the population
(mostly ultra-orthodox Jews) who would describe television as a tool of

depravation and debauchery. A lot more examples could be given.

From several viewpoints, Israel remains a remote extension of the
wealthy, Western core. The following chapter will therefore aim at showing how
this specific context has affected the development of its telephone system and

telecommunication industry.

1.5. Israeli Telecommunications in a Nutshell

Israel is able to claim the highest telephone density in the Middle East“,
leaving its Arab neighbors far behind. It was not always so : while several
members of the manufacturing community enjoy world class reputations, as
recently as 1980 observers described the telecommunication infrastructure as
barely adequate. As part of a wide-ranging liberalization program, the Israeli
government, convinced of the need for a strong emphasis on
telecommunications, formed Bezeq 10 years ago. Bezeq was charged with
operating and upgrading the national and international service infrastructure,
and immediately began the implementation of ambitious targets embedded in a

group of five year plans.

One early feature was that Bezeq was given a partly privatized status,
with share issues implemented on a regular basis, progressively reducing the
state ownership of the company. Top of the list were the rapid digitalization of
the infrastructure, an improvement in telephone density, with consequent

improvements 111 customer relations. Waiting lists, for example, had been a

 

13hope, in Hebrew.

it stood at 34% in 1992 according to the Datapro Reports on International
Telecommunications.

 

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major headache by the early 1980s, with a general backlog of 200,000

installations at any one time.

By the early 1990s, however, the backlog had been cut to less than
14,000 and installation times were down to between two weeks and one month.
Network digitalization has proceeded rapidly, with the majority of the country
using digital exchanges. Digital microwave and fiber optic cabling has also been
extensively used to replace obsolete copper cable infrastructure. New services
being implemented include frame relay and metropolitan area networks linking
key industrial and commercial centers. X25 and 64 kbps digital leased lines

currently enjoy considerable popularity in Israel.

Not surprisingly given the political circumstances, Israel's
telecommunications traffic has grown substantially with Western Europe and
North America but has languished with most of the neighboring countries. The
country however has made considerable use of both advanced submarine cable

and satellite technology.

 

Although Bezeq already faces competition from value-added services
providers, «it still treats customers as if it were the only player», claims Jimmy
Schwartzkopf, general manager of the Israeli subsidiary of consultancy Meta
Group, Inc15. Moreover, the rapid expansion of population caused by the inflow
of immigrants will undoubtedly stretch Bezeq's manpower and financial

resources. In this context, what lies ahead for Israeli telecommunications ?

 

15Pinsky, Donne. Israel Forges Links, Plans Peace Cable, Communications Week
International (February 21, 1994).

 

 

 

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10

CHAPTER ONE
THE ISRAELI TELECOMMUNICATION SYSTEM :
A CONTEXTUAL ANALYSIS

2.1. Basic Ove_rview of Israel's Telecommunication
Infrastructure

2.1.1. Bezeq, Public Telecommunication Operator

In the early 1980s, Israel had an outmoded and inadequate
telecommunications network totally out of balance with the country's
expanding economy. Thus, in 1984, the Israeli government, anxious to improve
the dilapidated infrastructure as quickly has possible, formed Bezeq (the
Israel Telecommunications Corporation, Ltd.) as an independent corporation
and transferred the responsibility for the running of the country's network from
the Ministry of Communications to the newly formed organization.

Bezeq sales for the fiscal year 1993 were $1.670 billion”, an increase of
8.7 % over 1992. Dun & Bradstreet ranked the company number one in
revenues among 200 of Israel's leading industrial, trading and services

companies.

Apart from telecommunications, Bezeq, which is the country's largest
employer after Israel Aircraft Industries Ltd., operates most of Israel's radio
and TV broadcasting transmitters, as well as cable systems. Kol Israel, The
Voice of Israel, with its familiar «Shalom from Jerusalem» sign-off, entertains
short-wave radio listeners in a dozen languages. In addition, Bezeq publishes
phone directories in Hebrew, English and Arabic and runs the largest

telecommunications college in the country.

 

16Luboshitz, Kasierer & Co. Bezeq 1993 Annual Report, Tel Aviv (April 12, 1994).

 

 

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11

About 25% of Bezeq stock has already been sold to the Israeli public
since the government of Prime Minister Yitzhak Shamir decided in 1992 to sell
72% of Bezeq and to retain only a 28% stake in the company.

2.1.2. Domestic Telephone Network

Israel had the twenty first highest telephone penetration rate in the
world by 198717. In 1992, Israel’s ranking had went down to the twenty-fifth
spot18. The domestic telephone infrastructure has undergone vast
developments since 1985, when the system was moved from the Ministry of
Postal Services to state company status.

To take the measure of these improvements, it may be interesting to
compare throughout the years the Israeli share of the world telephone main
lines total number: in 1981, Israel accounted for 0.1% of the world population
and 0.2% of the world telephone lines total number”. In 1991, it accounted also
for 0.1% of the world population. But its share of the world telephone main lines

total number had jumped up to nearly 0.4%”!

On the world telephone map, Israel can clearly be located among the

developed countries, as shows the graphic displayed on the next page :

 

17Bezeq, Israel Telephone Company Annual Report quoted in Kellerman, Aharon (1991, Ibid.)
18World Telecommunications Development Report (1994), World Telecom Indicators, ITU,
Geneva.

19Kiellerman, Aharon (1991, Ibid.)

20UIT, Siemens, TelePress figures, 1993.

 

 

 

12

Figure 2 : Israel on the world telecommunications map
Comparison of the Telephone Penetration Rates in
selected countries, high income countries, the world, and
Israel in 1992.

SOURCE : World Telecommunications Development Report, World Telecom Indicators, ITU,
Geneva, 1994.

 

 

70..

60-

 

.101
I301
204

104

 

 

 

 

 

 

 

0- .
Israel I'SA Sweden Singapore Taiwan llong lhgh World
Kong Income
Countries

 

 

 

The development patterns of the Israeli telephone system are quite
similar to those that characterize the newly industrialized East Asian «Tigers» :
high growth in annual investments for the infrastructure trying to catch up
with a rapidly growing demand. This average investment in Israel during the
years 1985-1987 was about 7.1%o of the GDP, roughly the same number as
Singapore (75%), and much above Hong Kong's 43%;. Only South Korea

(14.6%) and Malaysia (171%) did better21.

 

211989 Annual International Telecommunications Statistics, Siemens AG, Germany.

 

 

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13

The Israeli telecommunication expenditures have skyrocketed since
then, due in major part, to the immigration of more than 450,000 Jews (mainly
from the former USSR) since 1989. For the 1993-1997 period, Bezeq plans to
spend $4.2 billion22 to improve the Israeli telephone network. But this would
translate into a substantial increase of the figure quoted above
telecommunications investments would account for about 1.4% of the GDP,

that is, twice as much as they did less than six years ago !

Telephone Penetration Rate

Israel, which is roughly the size of New Jersey, had about 1.7 million
access lines in 1991 for its 5 million inhabitants, or just 34 per 100
inhabitants, according to Zecharya Mizrotsky, Bezeq's spokesman23. That
gives it one of the highest telephone densities in the Middle East. In Tel Aviv,
Israel‘s commercial capital, the rate is approaching 91 access lines per 100
citizens. At the end of 1993, this number has jumped to 2 million (a 30%
increase from 1992), and the penetration rate stood at nearly 38%24.

In the predominantly Arab West Bank, however, density is under 10%,
and in the much poorer Gaza Strip, less than 3%. Interestingly, Bezeq provides
phone services to isolated Jewish settlements in the West Bank, while larger
Arab towns like Bethlehem and Nablus are served by the civilian
administration that has controlled day-to-day life in the occupied territories
since 1967.

An in-depth analysis of the telephone penetration rate as its relates to

demographic and social data will be provided later.

 

 

22Luxner, Larry. Israel's Bezeq Plans To Go Private Amid Massive Telecom Growth.
Telephony (June 1, 1992).

23Luxner, Larry (June 1, 1992, Ibid.)

2'i'Bezeq ready to install two millionth phone line. Briefs, The Jerusalem Post (January 22,
1994) [Anonymous].

 

 

 

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14

E ui ment and Technolo
We have already underlined some similarities between Israel and the
five «East Asian Tigers». In the field of telecommunications equipment
however, we must take a look at a major difference : Israel can rely, to a
certain extent, on its domestic telecommunication industry in order to supply

Bezeq with state-of-the-art switching and transmission equipment.

A key vendor in Israel's telecommunications history is Telrad
Telecommunications and Electronic Industries, which is the country's largest
vendor in the field, and a substantial exporter in its own right. Telrad employs
2,000 people and generates a turnover of over $240 million25, making it one of
the largest industrial concern of any sector in the country, and it is ultimately
owned by the country's largest industrial conglomerate, Koor Industries. It has
chiefly pioneered the development and manufacturing of public and private
switch technology, and claims a dominant market share in the supply of digital
switch technology to Bezeq : some 70 percent of Israel's subscribers on digital
line are connected to Telrad's digital exchanges”?

Another key supplier to Bezeq which has also found export success
outside Israel is Tadiran. The company produces across-the-range
telecommunications products from feature phone units, PBXs and CPE,

through multiplexers, to digital cross-connect facilities.

Original formulas of «coopetition» have been found with foreign
manufacturers ; Alcatel and Tadiran have signed a joint-venture to
manufacture the System-12 public switch in Israel. A similar agreement has
been signed between Telrad and Northern Telecom to manufacture the DMS-
100 switch.

Digital technologies in switching and transmission systems combined
with fiber optic cables in the interurban trunk system constituted a blueprint

for the general development of Bezeq's network. According to Bezeq's president

 

25McClelland, Stephen. Into the wide area, in Israel : A Telecommunications Hothouse,
Telecommunications (April 1994).
26McClelland, Stephen (April 1994, Ibid.)

 

 

 

 

Ih-‘r—i

(43m

 

 

15

and general manager, about 50% of Israeli switches were digital back in mid-
1992 ; 25% were crossbar and another 25% were in the process of changing.
The objective is to have only digital and crossbar switches by 1995, and reach
full network digitalization by late 1997. It is important to note that the
«digitalization rate», that is the percentage of digital switches stations in the

network, jumped to 53% in October 1992 from only 3% in 1984.

Table l : Bezeq investments in Telecommunications, 1986-

1992.

SOURCE : 1989, 1990, 1991, 1992, 1993, 1994 Annual International Telecommunications

Statistics, Siemens AG, Germany.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Annual Gross Investments Investment as a

in Telecommunications, share of Israelis
including Land and Buildings GDP

(US Dollars)

1986 310,649,000 7.1 %o
1987 226,420,000 6.5 %o
1988 250,796,000 6.9 %o
J 1989 383,700,000 7.8 %o
I 1990 372,752,000 7.6 %o
991 442,300,000 7.3 %o

 

t
’ 1992 ] 465,900,000

 

not available

 

 

 

 

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rela

com

bac'
tra1

S81“

enl

Jer

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lllt

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16

This explains why, in the recent years, the construction budget has been
used to upgrade the telephone network by replacing old analog switches and
related equipment both in tandem and local exchanges (Bezeq is now
completing the construction of a nationwide 2.5 gigabit per second fiber optic
backbone network), replacing old cables in the local network, expanding
transmission facilities, completing a computerized customer maintenance
service system in all major service areas, preparing the infrastructure for the

introduction of Integrated Services Digital Network (ISDN) and other
enhanced services. We must notice that in Israel's major cities, such as
Jerusalem, Tel Aviv and Haifa, there is a higher proportion of digitalization.

Here, Bezeq has introduced new services for its business customers.

Special emphasis has also been placed on new end-user equipment with
the introduction of multi-feature telephone sets (Yahalom systems), new key
systems and the accelerated introduction of touch-tone DTMF dialing

telephone sets.

In July 1994, Bezeq signed two major deals for the supplying of digital
exchanges with Telrad and Tadiran. Tadiran will provide Bezeq with 500,000
phone lines until the end of 1997 at the cost of N18 500 million27 (about 1.5
billion dollars), according to the accord. A similar deal was signed with Telrad,
who will supply 600,000 new telephone lines for N18 600 million23, within the
same time frame. It was one of the biggest purchasing contracts ever signed in
the local electronics industry. Before the signing, both Tadiran and Telrad had
agreed to reduce their prices by 20%. For the first time, Bezeq officials had
threatened to issue an international public tender for the supplying of this

transmission and switching equipment if the local suppliers did not adjust their

 

27Siegel, Judy. Bezeq signs two major telephone exchange pacts, The Jerusalem Post (July 6,
1994).

28Bezeq's deal with Telrad will digitize all phones by 1997. Business Briefs, The Jerusalem
Post (July 4, 1994) [Anonymous].

 

 

 

costs 1
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17

costs to those of their international competitors”. The speed by which the
remaining analog phone exchanges are replaced by digital ones, they argued,
depended on how quickly local suppliers were reducing their prices. Otherwise,
the company would have been «forced» to purchase them from a foreign

supplier”.

These two deals will make Israel one of the few countries in the world to
do away with its analog exchanges. Today, according to Bezeq own figures,
there are still 600,000 telephone lines whose subscribers cannot take
advantage of services only available via digital exchanges, including «call
waiting», «call forwarding», and itemized bills31. The network full digitization will
also allow the telephone company to give up its local area dialing plan, and to

move forward a universal, seven numbers dialing plan.

Telephone Tarifis

Israeli residential customers are billed about $29.00 bi-monthly,
amounting to a monthly charge of $14.50. Moreover, a «basic basket» of phone
services costs $273 a year, according to Yitzhak Kaul, Bezeq's General
Manager32. This compares to $289 in the United States, $305 in France, $383
in England, $432 in Italy and $501 in Germany. In all of Europe, in fact, only
Portugal and Greece offer cheaper basic service than Israel.

Related to the 1987 level of purchasing power, the figures taken out of
Siemens's 1989 Annual Telephone Statistics indicate only a slight change, as
shown by the graph below.

Israel's basic telephone tariffs seem to compare favorably with most

Western European countries, despite Bezeq's monopoly status.

 

29Siege], Judy. Bezeq to issue int '1 tender for phone exchanges, Briefs, The Jerusalem Post
Weekly Edition (February 26, 1994).

30Siege] Judy (February 26, 1994). Bezeq moves to accelerate digitalization, The Jerusalem
Post Weekly Edition.

3ISiege1, Judy (February 26, 1994, Ibid.)

 

 

18

Figure 3 : Comparison based on Purchasing Power Sum of
Telephone Charges for One Year

consisting of : Installation fee, distributed over 10 years ; Subscription rate for the largest
local network res. the highest tariff class ; Charges for 700 local calls and 200 long-distance
calls (3 min.) up to 100 km (daytime rate and nighttime rate mixed).
Calculated with Consumer Parities for International Comparison of Purchasing Power
Status : January 1, 1988 ; Consumer Parities : January 1988.
SOURCE : Study on National Telephone Tariffs Worldwide :A Detailed Comparison, Siemens

AG, Germany.

 

 

Sweden
Dennmark 5238
Spain 5242
Israel 5249
Greece $286
France $345
ltaly $375
UK 5394
US (New York) 7 $448

Germany F. R. $465

 

 

 

 

 

Recent developments

In addition to conventional long distance dialing, Bezeq has begun to
offer its customers specialized services such as itemized billing, wake-up

service, «177» toll-free calls and leased data lines, of which there are nearly

30,000 now in service.

Bezeq also gives free call waiting and call forwarding to all customers
who have digital lines. Voice mail, caller ID, caller ID blocking and other

«CLASS-type» services started in 1993.

 

32Luxner, Larry (June 1, 1992, Ibid.)

all-ti
With
inha

E
son

 

ubiq

beco

C0111]

 

 

19

In 1993 alone, Bezeq filled 252,027 orders for new telephone lines — an
all-time record and 31% more than installations in 1992, itself a record year.
With 2,028,400 mobile and telephone lines functioning, line density per hundred
inhabitants reached 36.8% on January lst, 1994, a 2% increase in a year !

F_igure 4 : Bezeq Annual Line Installation, 1983-1993
SOURCE : 1993 Bezeq Annual Report.

 

 

[300000

-250000

  
 
 
 
 
 
 
 
  
  
 

,200000

~150000

~100000

-50000

 

 

 

~O
93

, 86/8
83/84 84/85 85/86

 

 

 

To the chagrin of some old-timers, Bezeq also plans to do away with the
ubiquitous asimon — or public telephone token —— that, over the years, has
become as characteristic of Israeli life as falafel. It has gradually been replaced
by magnetic cards now accepted by nearly 15,000 pay phones throughout the

country.

 

 

T1

h 1(.
1‘

CL

 

 

 

 

20

Table 2 : Bezeq's Installation Achievements
SOURCE : Bezeq Annual Reports, 1990-1993.

1990 1991 1992 1993

Installationof 148,837 161,226 192,997 252,027
Telephone Lines

Card-operated Payphones 30 2,016 4,477 6,058

Installation of

«Yahalom» Office 2,836 5,547 6,405 7,894
Systems33

Direct Inward 74,250 128,000 225,750 397,620
Dialing Numbers

Local Network 1,641 2,084 1,925 2,040

Cables Laid (km)

Long-distance 2 0 9 4 1 4 44 5 6 3 8
Network Cables Laid (km)

Employees 9,480 9,728 9,968 9,878

 

 

2.1.3. International Communication;

 

 

 

There are several landmarks in the evolution of the Israeli international

telecommunication system. Until 1968, the system was based on poor radio

connections with between ten and thirty channels in operation. In 1960, a telex

service began, and in 1968, a maritime cable with 128 available channels

 

33«Yahalom» (Diamond) systems are multi-feature telephone sets.

 

 

 

started
transpl

lhne

concei
distar
hnkS'

1964,
earth
Since
Ocea
Since

Russ

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I1—1

21

started operations between Israel and France. In 1972, Israel first leased

tranSponders in communication satellites.

Satellite Communications

From a telecommunications standpoint, Israel represents a challenge.
More than half the country is desert and the majority of the population is
concentrated in urban centers or in small settlements separated by large
distances. Satellite communications are playing an important part in providing
links to remote communities.

Israel was one of INTELSAT's early members joining in November
1964, and makes extensive use of its international services via two standard A
earth stations linked to INTELSAT Atlantic and Pacific Ocean satellites.
Since 1980, it leased a transponder in a third satellite located over the Indian
Ocean (INMARSAT), which permits communications with Asia as well34.
Since the beginning of the 19908, because of the flow of new immigrants from
Russia, Bezeq has also been using a fourth satellite over the CIS to handle an

exponentially growing traffic between Israel and this part of the world.

In early 1992, Israel and the former Soviet republic of Kazakhstan
signed an agreement to open six direct lines between the two, while satellite
links will upgrade the number of lines to Russia from seven to around sixty to
facilitate communications between Israeli citizens and their families in various
ex-Soviet republics who have not yet emigrated. Bezeq will assist in the
installation and operation of the international system. It is building this
system both in Israel and in Kazakhstan, and will be using INTERSPUTNIK

satellite services35.

 

34US. Central Intelligence Agency 1992 World Factbook. US. National Technical Information
Administration, 1992.

35Telecommunications in the Middle East and Southeast Asia : Israel. Regional Overviews,
Datapro Reports on International Telecommunications (September 1991) [Anonymous].

 

 

40 kilon

«Shear

l
Experi]
1990. '1
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to leas

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Bezeq

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22

The Hebrew state also operates three ground stations in Emeq Ha'ela,
40 kilometers from Tel Aviv, and in Gal'on ; a third ground station, code-named
«Shaar HaShalom» (Peace Gate) has begun operation in Ramla in 199336.

Moreover, Israel will have its own satellite system, code-named AMOS.
Experimental satellites Oftekel and Oftek-2 were put into orbit in 1988 and
1990. The full capacity of AMOS-1 and AMOS-2 will probably not be needed by
Israel, and negotiations are believed to have taken place with foreign countries
to lease spare transponder capacity37. However, it will allow the Hebrew state
to use the slots allocated in geosynchronous orbit, so that they will not be
taken by additional ARABSATS.

Last development in this area : Motorola Corp. has invited Bezeq to
become a part of the Iridium satellite communications effort. The offer, that
would entail a 5% share in a $800 million offering, is currently examined by

Bezeq’s officials and the Israeli Minister of Communications”

Use g’ mritime Cables

The extension in the availability of international channels permitted the
introduction of nationwide direct international dialing in 1972-1973. In 1975, a
second maritime cable was put into service, this time ending in Italy and
having a capacity of 1,380 channels. Israel has also leased channels in
European continental cables and in transatlantic ones.

An important development is the East Mediterranean Optical System
(EMOS-l), an undersea fiber optic cable stretching from Israel to Sicily and
the rest of Europe, capable of providing a maximum of 20,000 voice and data
channels. This system started operations only a few weeks before the Gulf

War, allowing millions of calls (from anxious relatives to their families in Israel)

 

36Luboshitz, Kasierer & Co. Bezeq 1993 Annual Report, Tel Aviv (April 12, 1994).
37Israel : The Commercial and Regulatory Environment (September 1993,1bid.)
38143er 's Bezeq offered Iridium share. Interavia-Air-Letter (March 22, 1993) [Anonymous].

 

triggerc
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Israel '
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23

triggered by Iraq's Scud missile attacks against Tel Aviv to be handled without
particular problems.
Yitzhak Kaul, Bezeq president and general manager claims that EMOS-
1 and the TAT-8 transatlantic cable will eventually be connected, so that
Israel will have a fiber optic loop to the United States. Another cable from
Israel to Cyprus, CIOS, which will serve Greece, Turkey and Eastern Europe
started operation in 1993, with a capacity of 622 megabit per second. CIOS
will link with the planned cable between Cyprus on one hand, France and
Greece on the other hand. A link-up is also in the works with SEA-ME-WE 2
from Cyprus to Alexandria, and from there to Marseilles. SEA-ME-WE 2 will
also enable a connection to Southeast Asia and to Singapore through the Suez
canal. CIOS will provide diversity for the main EMOS 1 system. EMOS, CIOS
and EA-ME-WE 2 will provide mutual backup in the event of faults”. CIOS, at
251 kilometers and supplied by AT&T Submarines Systems Inc., will be the
world's longest unrepeated submarine cable, according to consultancy Kessler

Marketing Intelligence of Newport, Rhode Island”.

Telephone links with the Arab world

A very hot issue concerns the «telephone relations» between Israel and
its Arab neighbors, whom, as far as they are concerned, do not want official
phone links with a country with which they do not maintain diplomatic
relations.

Until recently, phone connections between Israel and the Arab countries
were virtually non-existent, except for the N18 15 ($6.20) per minute service
offered by Solan Communications Ltd., a Tel Aviv-based telecommunications
company.

As of April 1993, however, dialing the Arab world from Israel has

become considerably easier — thanks to new and much cheaper service widely

 

39Luboshitz, Kasierer & Co (April 12, 1994, Ibid.)
40Pinsky, Donne. Israel Forges Links, Plans Peace Cable, Communications Week

 

 

 

 

promote
thousaI
only $3

1
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August
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24

promoted by Bezeq. Bezeq's officials claim their company is switching
thousands of calls every day from Israel to 11 Arab countries and charging
only $3.08 to do it —— less than half of Solan's tariff.

Apart from this new service, Bezeq has also maintained normal phone
links to Egypt, the only Arab state officially at peace with Israel, and since
August 1994, with Jordan. Direct links should also soon be opened with
Morocco“. Fifteen circuits connect Israel and Egypt, though traffic is generally
light.

Inbound versus ogtbound international telephone trafijc

An interesting trend has been revealed when the volumes of inbound and
outbound telephone traffic are compared. The ratio of inbound/outbound calls
was 4:6 in 1950-1961. This ratio gradually changed towards a balanced
distribution, which was reached in 1961-1962. Since this date, which marked
the first massive expansion of international telephone use, the ratio has
constantly changed in favor of inbound calls. This ratio reached 7:3 in 1985—
1986, or on the average, a ratio of more than two incoming calls for each
outgoing one“.

There might be several reasons for this constant ratio change, but the
main one is that the call of international dialing used to be, and still is to a
certain extent, higher than abroad. This made cheaper to used collect calls
placed in Israel or to have the foreign party call in.

While this policy of high international tarifi's looked attractive in terms
of short-run national balances of payments, and in terms of revenues for
Bezeq, it is detrimental from the viewpoint of economic development and social
welfare. It increased the cost of international business in Israel at times when

exports and imports of goods, services and information were grong and

 

International (February 21, 1994).
41Makovsky, David. Official in Morocco to discuss phone links, The Jerusalem Post (July 4,
1994 .

42Kellerman, Aharon (1991, Ibid.)

 

 

 

 

becon
furthe
called

JeWis

rates
since
deaf 1

appre
decre

Tab
Gro
com

SOUl

 

 

 

25

becoming more important (see «2.4. An export-driven economy»). It
further reduced the number of social calls, while declared policy has always
called for increased ties between Israel and the West in general and with the
Jewish Diaspora in particular.

Several years ago, an international economist proposed to reduce the
rates of international calls in Israel to those of domestic long-distance ones,
since the cost of the infrastructure was paid off already. This proposal fell on
deaf ears at that time, since the important role of telecommunications was not
appreciated. However, changes have occurred in recent years, and a fast

decreasing in these rates is expected for the next period.

Table 3 : Communications Week International/Yankee
Group Top 40 Ranking of International Carriers. A
comparison between Bezeq and the East Asian Tigers.

SOURCE : Communications Week International (September 20, 1993).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mg Slander Int'l Change Total Int'l/Total Outgoing
Revenues43 ( 199 1-92) Revenue MITT44
19 Singapore 750 + 7.9 % 1,406 53.3 % 291
Telecom
24 Korea 638 + 14 % 6,380 10 % 275
Telecom
25 Bezeq 583 + 1.1 % 1,704 34.2 % 151
30 Telekom 293 + 14 % 1,340 21 % 116
Malaysia ]
Notice the weak progression of Bezeq, despite the increase in international trafi‘ic
carried. This can be explained by the ongoing wave of international tariff
lowering taking place in Israel.

 

43Revenues are in million of US Dollars.
44MI'I‘T stands for Minutes of International Telecommunications Traffic.

 

 

and a
count

Kong‘-

Figi
mill
SOUR
lnterr

net
bot]

inte

45L.

 

 

26

Summary
In 1993, Bezeq opened direct communication channels between Israel
and a number of countries, including India, South Korea, China (the two
countries resumed diplomatic ties in early 1992), Taiwan, Thailand and Hong

Kong“.

Figure 5 : Growth of International Calls from Israel (in
millions), 1987-1991.

SOURCE : Israel, The Commercial and Regulatory Environment, Datapro Reports on
International Telecommunications (September 1993). Note : 1991 estimated.

 

 

40]

   

304

20-

 

 

1987 1988 1989 1990 1991

 

 

 

All the new facilities have greatly enhanced Bezeq's international
network infrastructure and enabled it to cope with this growing demand for
both incoming and outgoing international traffic. For example, the volume of

international communications grew in 1993 by 14.6 %. During the same year,

 

45Luboshitz, Kasierer & Co (April 12, 1994, Ibid.)

 

910 i
Thes:

com:
orde
his
bid,

has

 

27

910 international circuits were activated to destinations around the word.

These represented 219% of the company's original circuit plan for this period“.

2.1.4. Cellular Phones

Bezeq began to put the infrastructure for cellular phone
communications in place in 1984. The FTP also bided for a foreign partner in
order to shape a joint-venture to operate the service. Motorola Corporation, the
biggest cellular equipment manufacturer worldwide, eventually carried off the
bid, investing $23 million in the project“. The new service used an analog-
based technology and a tiny bandwidth located within the 800 MHz frequency
range.

Bezeq-Motorola declared 2,000 subscribers to this service at the end of
1986, and 3,600 by end-198748 — a 80% growth in one year ! Although this
figure did not last the following years, this business is extremely profitable, as
the market is growing by leaps and bounds. The Bezeq-Motorola Pelephone
service was reported to have about 45,000 subscribers by mid-1993, and
understandably are signing up new users at a frenzied pace, so the number is
expected to reach 80,000 by the end of 1994. Based on models of market
penetration in the West, there could be 220,000 cellular phone subscribers in
1998.

Cellular revenues accounted for only 89 million New Israeli Shekels
(NIS) in 1992, about 2% of the company‘s NIS 4.19 billion total ($1.71
million)”. Their contribution to profits were probably greater, as Bezeq-
Motorola's infrastructure has reportedly been paid off with high user fees

during the first years of the service.

Bezeq also provides radio-paging in many areas of the country.

 

46Luboshitz, Kasierer & Co (April 12, 1994, Ibid.)

47Telecommunications in the Middle East and Southeast Asia : Israel (September 1991, Ibid)
[Anonymous].

481989 Annual International Telecommunications Statistics, Siemens AG, Germany.
49Rosenberg, David. Bezeq Laughs Last, The Jerusalem Report (August 26, 1993).

 

 

 

Beze:

previ

Fig
sou

 

 

28

As cellular services have recently been opened to competition, will the
Bezeq/Motorola joint-venture enjoy a competitive advantage due to its

previous monopoly status '? This topic will be discussed later.

Figure 6 : Cellular Growth in Israel, 1987-1994.
SOURCE : Bezeq Annual Reports.

 

 

 

70000-
60000.
500007
40000+
30000~

20000~

100004 I I I
0, - I

1987 1988 1989 1990 1991 1992 1993 1994

Nb. of Mobile Subscribers

 

 

 

 

 

 

 

 

Note .' Number of subscribers on January 1 of each year.

2.1.5. Data Communication Infrastructure

Bezeq presides over a national network that is the most modern of the

Middle East, although it is not as sophisticated as some Western Eur0pean or

 

 

 

North A
Sifranet,

based or

E
reached
in 1991
for 64
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$400 a
$1,800

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5031*;

 

29

North American networks. The backbone of Israel's national data network is
Sifranet, a network of digital leased lines. Sifranet is a point-to-point network

based on 250 time-division multiplexers from Ascom Timeplex Inc.

Digital Leased Lines Network

Sifranet, which comprises about 5,000 leased lines, has just about
reached its saturation point of carrying traffic. The problem started in earnest
in 1991, when Bezeq implemented an aggressive policy that lowered the prices
for 64 kilobit/s digital leased lines to well below those of 19.2 kbit/s analog
leased circuits. A 64 kbit/s digital leased line from Tel Aviv to Haifa now costs
$400 a month ; a 19.2 kbit/s analog line between the same two cities costs
$1,800 a month50.

The chance to triple bandwidth while cutting costs by more than half
started a customer stampede to Sifranet. As a result, the network is now
severely overcrowded ; the wait for a digital leased line can now stretch to six
months, and customers cannot buy anymore than 64 kbit/s of bandwidth.

To help alleviate network stress, Bezeq officials say they probably will
ask Israeli regulators to increase digital leased line prices. More importantly,
the PT is planning a second backbone, Sifranet Bet (Sifranet B), that will
accommodate 35,000 leased lines —— seven times more lines than the existing

network. Bezeq is currently accepting bids for network installation.

Packet Switching Network
Along with Sifranet, Bezeq presides over Isranet, an X.25 network based
on packet switches from Sprint Corp. Isranet offers X.25 connections at up to
64 kilobit/s, and 9.6 kilobit/s for other protocols, such as SNA. Joseph Dabbah,

Bezeq's head of data communication services, claims that the company

 

 

50Braue, Joseph. Telecom in Israel : Trying Harder, Data Communications, May 1993.

 

 

 

 

speed

imple
servi<
inclut
Metre
in thl
proje
Haifa

 

 

30

planned to increase SNA speeds to 64 kbit/s and asynchronous dial-up access
speeds from 2.4 kbit/s to 9.6 kbit/s51.

Data Communication Experiments

In addition to Sifranet Bet and the X25 upgrades, Bezeq plans to
implement several new services in the next eighteen months. A frame relay
service began in 1993 over Isranet. Several pilot projects are also planned,
including an ISDN pilot and trials to test fiber links to the home. A
Metropolitan Area Network pilot linking the main Israeli universities was also
in the works for this year, with commercial services targeted for 1994. The
project will be based on E3 (34 Megabit/s) fiber lines connecting Jerusalem,
Haifa, and Tel Aviv.

Other advanced projects include :

0 on-line information services in a joint-venture with local manufacturers
Elbit and Tadiran Telecommunications, and the participation of France
Télécom videotext unit Intelmatique SA ;

° experimentation of fiber to the curb to major buildings ; Hence, Bezeq is one
of the few carriers implementing «high-speed copper». Until it can put fiber
in the local loop, Bezeq intends to use HDSL technology to link PBXs to
local exchanges52 ;

0 video—on—demand trials with Israeli cable TV companies ;

' Asynchronous Transfer Mode (ATM) technology trials. Bezeq has already
installed an Alcatel ATM switch in its public network. «The plan is to go
toward ATM, but gradually», claims Amos Ron, Bezeq vice president of

marketing53.

 

51Braue, Joseph (Ibid.)

52Laws, Malcom. Carriers to Install High Speed Copper, Communications Week International
(April 11, 1994).
53Pinsky, Donne (February 21, 1994, Ibid.)

 

 

 

(ngani
used.t
custon
to lar
transI

nevvli

syste

 

 

31

The digital transmission service provided by Bezeq began as the
organization's entry into the competitive corporate network market. Bezeq
used the advanced state of Israel's digital infrastructure and implemented a
custom-designed time division multiplexing transmission network in response
to large corporate needs. The efforts in this area evolved into a general
transmission infrastructure for leased digital leased lines, implemented in a

new high-speed, leased-line interconnect service.

2.1.6. Broadcasting and Cable TV

Bezeq plans, installs, operates, and maintains Israel's broadcasting

systems :

' fl : for use by the Israel Broadcasting Authority (IBA), Bezeq operates
four networks : Radio 1, Radio 2, Radio 3 and the «Voice of Music» ; Radio 4
for Arabic speakers in Israel and other countries ; Radio 5 —— short wave,
intended mainly for broadcasts to Jewish Communities around the world.

Also, a network broadcasts on medium wave for new immigrants.

' Television : Channel One Israel TV operates on one channel daily ; part of
the evening broadcasts are in Arabic. Morning are devoted to educational
programming. Channel Two, the new, commercial channel, is available only
in some parts of the country. Bezeq operates four of the six transmitting

stations working throughout Israel.

' Cable TV : Israel has been divided into 27 concessions areas, which were

 

awarded to operators by Ministry of Communications tenders. Bezeq builds
and maintains cable TV networks as a contractor for some of the
operators. Work has been completed in Tel Aviv, Givatayim, Petah Tikva,
Ramat Gan, Ashkelon, Ashdod, Afulah, Upper Nazareth and other

localities.

 

 

capi

the

was

fon

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Sm

BC(

In:

Is

he

Sl

 

 

 

 

 

32

2.2. The Building of the Israeli Telecom
Infrastructure : A Contextual Explanation

2.2.1. A way to overcome the country's
geogaphical isolation

In its shortage of natural resources and its reliance on trained human
capital, Israel presents some similarity to Japan, and in its size and location at
the heart of the Middle East it is similar to Singapore. However, while Japan
was able to create a prOSperity sphere that spreads on the whole Pacific Rim,
and Singapore has become a regional telecommunications center, Israel is
almost totally isolated from the region that surrounds it.

With the exception of Cyprus and Egypt with which Israel maintains
formal telecommunications, transportation and limited trade relations, there
are almost no other direct contacts with other surrounding countries (though
some indirect trade exists through the West Bank, the Gaza Strip, and

Southern Lebanon).

In order to maintain a modern economy, Israel has developed close
economic ties with both Europe and North America. These have found their
most visible expression in the orientation of exports and imports to these
markets and in the evolution of a two-way tourism between «the two cores» and

Israel.

But these ties go even deeper. Not only are people and goods moving
between the two cores and Israel, but information does so as well.

For example, in 1991, according to Zecharya Mizrotski, Bezeq
spokesman, Israel ranked tenth in the world in volume of incoming calls to the
US, and fifth in data transmission to the US54. The United States accounted
for half of the 380 million minutes international long distance calls made by

 

54Luxner, Larry (June 1, 1992,1bid.)

 

 

 

Israel

Israel

and e
the l

area
with
cour

Kell
part
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33

Israelis in 1991, and is the largest supplier of telecom equipment to Bezeq after
Israel itself55.

The Jewish state also maintains a growing high-tech sector in both R&D
and specialized production. Israel was, thus, one of the first countries to join

the BITNET/EARN system, expanding the Internet overseas56.

Moreover, Israel considers itself an integral part of Western culture in
areas such as music and the arts. In addition, It maintains close relationships
with the Jewish Diaspora, which is scattered mainly in major Western
countries (and the former USSR)“. A longitudinal study conducted by Aharon
Krellerman58 showed that the importance of the Jewish population living in a
particular country was one important variable likely to increase substantially

the telephone flow between Israel and this country.

One last factor has to be mentioned : because it is frequently in the
focus of international news coverage, the world press and media maintain a
large body of representatives in Israel that may use telecommunications

extensively.

All these are major factors in the two way relationship between
telecommunication on one hand and social and economic life on the other. They
help us to understand why the building of a reliable telecommunication
infrastructure has always been for Israel, given its geographical location, a

primordial national interest.

 

55it may not be useless to recall that Israel currently receives $4 billion a year in economic
and military assistance from Washington, making it the largest recipient of US aid in the
World. Not surprisingly, the United States is also Israel's largest foreign sources of telecom
revenues.

56Kellerman, Aharon. The diffiision of BITNET : a communication system for universities,
Telecommunication Policy, 1986.

57not to mention the Israeli Diaspora : more than 400,000 Israelis are said to live abroad,
mainly in the United States and France.

58Kellerman, Aharon (1991, Ibid.)

 

 

 

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34

2.2.2. Influence of the Arab-Israeli conflict

Israel has lived in a continuous state of war since its birth in 1948. As
we have seen above, the main consequence has been that there are only three
ways to communicate with this country : by sea, by air or by using
telecommunications.

The fact that the country was, and still is, surrounded with countries
(with the exception of Egypt) «at war» with it, has emphasized Israel's reliance

on telecommunications.

The most striking example is provided by the country's general
mobilization system. Israel's tiny population does not allow the government to
keep a huge proportion of the work force in the military on a full time basis, so
that the IDF (Israel Defense Forces) is heavily dependent on the reserve army.
In case of major crisis or imminent war, it usually takes only a few hours to
complete a general mobilization. Typically, the news is diffused fiom the top to
the bottom using the telephone network.

As we shall see, major political events in the Middle East (in particular
wars) have had an important effect mainly on international communications.
The 1956 Sinai War was marked by growth in both telephones and telegraphs.
In the 1967 Six Days War however, telephone service was still limited so the
expansion in international telecommunication traffic is more evident in telex
and telegraph. It was only a year after the war, in 1968, that came a
breakthrough in the telephone service with the completion of the maritime
cable between Israel and France. This resulted in a 140%59 growth in telephone

use in 1968 alone.

High growth rate in 1973-1974 can also be related to the 1973 Yom
Kippur War. After several years of stagnation, 1977 was marked by the first
change in political power in Israeli history ; the new Likud administration and

its liberal monetary and international trade policies created more international
traffic.

 

59Kellerman, Aharon (1991, Ibid.)

 

 

 

traffic
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35

Interestingly, the Lebanon War had no impact in the form of increased
trafic as had earlier wars. Thus, we can observe a peak in 1982, when a
hyper-liberal policy, especially regarding imports was implemented, followed by
a decrease in growth the following year, when the Lebanon war raged in the
north. As opposed to these earlier wars though, we must recall that Menahem
Begin's government tried its best, at that time, to convince both Israelis and
the world that the «Peace for Galilee operation» was not a real war, but a
simple «police operation».

We have summarized these trends in the graph displayed next page.

Figure 7 : Annual percentage growth rate for the total
international telephone traffic to Israel. March 1950 —
March 1985*

SOURCE : Kellerman, Aharon (1991). The role of telecommunications in assisting

peripherally located countries : the case of Israel, in Collapsing Time and Space :
Geographical aspects of Communication and Information, London : Haepercollius Academic.

 

 

 

 

 

 

160 -
140 ‘— Aflermath of the Six Days war
'20 I 1950 Sinai War
100 4 1973 Yom Kippur war
Likud comes
80 - to power
FrceTradc

60 - policy

40 a

20 -

0 ' -
1953 1963 1973 1983

 

*Computation of growth in telephone traffic are based on the number of calls (1953-1960)
and number of minutes (1961-1985).

 

 

 

 

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36

It is obvious that political events greatly influenced the quantity of
ingoing and outgoing international traffic to, and from Israel. Given its
geographical and political context, telecommunication has been, and still is a
very important variable when talking about the Hebrew state, so that it
seems nearly possible to write its history looking at the graph displayed above.

As a matter of fact, the sophisticated telecommunication infrastructure
(compared to its neighbors’) has given Israel a huge competitive advantage to
win its various wars against the Arab countries. This has provided a big
incentive for Israeli government, very much aware of this fact, to continuously

modernize and improve the country's telecommunication infiastmcture.

2.2.3. Humanilnfluenc/es :ri/Ilnmiggation,

migration... Jewish Diasngra

 

 

To complete our contextual analysis, it is important to take into account
some unique Israeli characteristics. Some of them are cultural while other ones
are purely demographic data. All of them have in common the fact to be
inherited from an ancient past. Interestingly, even as far as its telephone
system is concerned, it is impossible to talk about Israel without recalling its

unique Jewish character.

The Gig of Immigration

The State of Israel is predicated on the idea that any Jew in the world
can get automatic citizenship there. This policy is enforced by the «Law of
Return», approved by the Knesset (the Israeli parliament) in 1951.

Steady immigration has built up the economy, with especially strong
growth in the 19508 and 1960s. For much of the 1970s and 1980s, immigration
was sparse, chiefly because the Soviet Union would not allow Jews to leave.
But towards the end of 1989, Moscow ended almost all restrictions on exit

visas for Jews.

 

 

Figui
SOIHRC

Figi

8010
(1985

 

 

37

Figure 8 : Israeli Population (in millions), 1985-1993

 

SOURCE : Central Bureau of Statistics, Israel.

 

5.2.
5.1 .

5.
4.9.
4.8.
4.7..
4.61
4.5.
4.4
4.3 , , , , , , , ,
1985 1986 1987 1988 1989 1990 1991 1992 1993

 

 

 

 

 

 

Figure 9 : Israeli Telephone Penetration Rate, 1985-93.

SOURCE : 1989 Annual International Telecommunications Statistics, Siemens AG, Germany
(1985-1987) ; Bezeq, Israel Telephone Corporation (1988»1993).

 

 

40-,

35d

10‘

 

 

O I I I l I l I I
i 1985 1986 1987 1988 1989 1990 1991 1992 1993

 

 

 

 

 

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38

The floodgates opened, peaking in December 1990 when about 35,000
immigrants arrived in Israel and the government was forecasting that one
million Russians would be coming in the next five years. The rate has since
moderated to 5,000-7,000 a month. Even with the slowdown, some 470,000
immigrants reached Israel in the 1989-1992 period, and immigrants today
constitute nearly 10% of the population”.

This massive influx of new immigrants has compounded so far the
disparity in phone service between Arabs and Jews in Israel and the territories
it administers. Thus, Bezeq predicts that in the coming five years, it will install
800,000 to 1 million new telephone lines“. This represents a growth of 8% a
year, as opposed to a more usual 1%-3% annual figure.

From 1984 to 1988, the telephone penetration rate increased
substantially. Most analysts directly relate this progression to the new status
of the Israeli PTT (that is, the separation of the telephone administration from
the Ministry of Postal Services and its reshaping into a state-owned company
— Bezeq). However, a more comprehensive research62 would be needed to
establish without any doubt this causality relationship. Let us point out that,
so far, no scholar has ever proposed any alternative explanation.

From 1989 until 1993, the growth in the number of main telephone lines
has been boosted by the massive immigration : Bezeq has almost provided one
new telephone line for each new immigrant who reached the promised land
during this period !

Nevertheless, this dramatic increase in the number of main lines, does
not entail a comparative increase as far as the Israeli telephone penetration
rate is concerned : the population's rate of growth has remained too high to
allow Bezeq's investment to catch up ; as the pace of immigration eases and
the investments go on, the next years should see the penetration rate jump up

as well.

 

60Israel .' Liberalization and Privatization (July 1993), Industrial Investor [Anonymous].
61Luxner Larry (June 1, 1992, Ibid.)

 

 

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39

Links with the Jewish Diaspora

Special attention should be given to the links existing between the
Jewish Diaspora and Israel when talking about its telephone system.

Eight to nine million Jews live in the Diaspora, mainly in the USA (6
millions), the former USSR (about 1.5 million), France (600,000) and the UK
(300,000). The overwhelming majority feels strong links with Israel and
consider the Jewish state as the center of their spiritual life. Moreover, many
of them have some relatives living Israel.

Thus, it is not surprising that the size of the Jewish Diaspora is an
important variable when comparing the telephone traffic between Israel and a
particular country. How could we explain, for example, the high level of
telephone traffic between Israel and the former USSR since 1989 ? The
amount of trade between the two countries was and remains fairly low, and no
significant «Israeli colony» lives there. This increase in the traffic can be
directly related to the wave of immigration from the former USSR, and the
need for the new Israeli families to communicate with their relatives who

stayed in Russia.

The USA provide us with a similar example : the local Jewish
community is the largest in the world and many of its members and institutes
have strong bonds with Israel. There is also a growing Israeli community in the
USA which is coupled with more extensive social ties between Israelis and
Americans in general as a result of the more extensive business ties between
the two countries. These ties can be channeled through the telephone
especially since 1972 when satellites permitted direct telephone interaction
between the Jewish state and North America. Direct dialing in Israel and

reduced rates, especially in the USA, have assisted this process as well.

 

62For example, a comparative survey focusing on the corporatization processes in Israel and
other countries where such changes took place in the 1980s.

 

 

 

 

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I__—’

40

A study conducted by Aharon Kellerman63 for the years 1951-1988 has
shown a high correlation between these two variables —— the only exception

being Canada.

YeridaI Emigzation from Israel

«The last to leave is kindly asked to turn off the light», was a joke
commonly heard in Israel during the years following the 1973 Yom Kippur war.
Because after this war, it was not so patently obvious that Israel was the
safest place for Jews. The sense of absolute moral superiority of the sabras,
the Jews born in Israel, began to disappear. At the end of the 197 Os, looking at
the emigration/immigration statistics, the Israelis realized that «America had
become the greatest threat to the Zionist revolution»64.

By 1988, an estimated 300,000-400,000 of the roughly 4.7 million
Israelis had moved to the United States on a permanent or semi-permanent
basis — with an estimated 100,000 in California alone. An estimated 100,000
other Israelis are scattered in different countries throughout Western Europe.

These figures must be compared with the fact that only 50,000 of the 6
million American Jews have moved to Israel since the Jewish state was
founded in 1948 — some of them having moved back since —— and only 25% of
American Jews are estimated by the Israeli Ministry of Tourism to have
visited Israel even once in their lives.

During the 1970s, 265,000 Jews left the Soviet Union. Of those, roughly
165,000 went to Israel and 100,000 to the United States and Canada, with the
percentage of those going to America rising so sharply that Israel tried to force
Soviet emigrants to take direct flights from Moscow to Tel Aviv, so that it
would be impossible for them to «drop out» in European transit points and go to

America as refugees instead.

 

63Kellerman, Aharon (1991, Ibid.)
64‘Fr‘iedman, Thomas L. From Beirut to Jerusalem, Anchor Books (1990).

 

 

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41

Thomas L. Friedman, who was the New York Times’ corespondent in
Jerusalem during the 1980s, recalls in his book «From Beirut to Jerusalem»
(1990, Anchor Books, page 464 and 465) :

«It used to be a stigma for Israelis to immigrate to America. No Israeli
ever left Israel for America for good, only for "visits" —— or as one Israeli teacher
remarked to me, “My sister went to New York for one year —— fifteen years ago”.
No longer. In 1988, Bezeq, the Israeli national telephone company, began
running a television commercial during prime time featuring an elderly Israeli
grandfather sitting in front of a shabby bare desk and dialing a number.
Subtitled beneath the man were the words : Netanya, Israel, 6:30 am. The screen
was then given over to what appeared to be the Israeli grandfather’s children
living in Los Angeles. They were seated in a comfortable, affluent-looking living
room, which included a color television and an Israeli boy playing with a
football in the background. Their plush surroundings were subtitled : Los
Angeles, 8:30 pm. The family members then have a trans-Atlantic conversation
in Hebrew.

This commercial occasioned the following letter to the editor in the
Jerusalem Post from one Sarah M Schachter of Jerusalem : “Sirs, I was
appalled to see the new Bezeq commercial [...]. The not-so-subliminal message :
[Grandpa] is still in Netanya, but Los Angeles is the land of opportunity for the
young and ambitious. Emigration is indeed a major problem for the state of
Israel, but I think it is in poor taste for Bezeq to legitimize and exploit this
unfortunate act, and I am surprised that the editors of Israel Television included
this message on the air”.

The letter was followed by an editor's note which read : “This public
service announcement has been discontinued following complaints that it would
encourage immigration”».

It goes far beyond the point of this paper to argue about Jewish
emigration (or Yerida, in Hebrew, the fact of going down) from the promised
land. However, this fact has some very interesting repercussions as far as

Israeli telephone penetration rate is concerned.

Indeed, this rate is calculated with the statistics provided by the
Statistika, the Israeli Central Bureau of Statistics. These statistics do take in
account not only Israeli residents, but all Israelis, including the Yordim
(emigrants).

If we estimate the number of main telephone lines in Israel to 1.9 million
by the end of 1993, and the population living in the country to 4.7 million
inhabitants, the rate suddenly jumps up from about 36% to more than 40% !

 

 

 

 

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42

Having reprocessed these data, it becomes obvious that the telephone
penetration rate is actually higher in Israel than the authorities claim it to be,
because recognizing the real figures would entail the opening of a possibly risky
and passionate political debate about emigration.

As a matter of fact, the actual Israeli telephone penetration rate seems
to make the Israeli telephone system look very much like it is in most

developed European countries.

324- An Export-Driven .Econonz

AW):

Israel‘s statist economy has given way surprisingly easily to a free
market economy, given its history and the strong ideological support it long
enjoyed. The mainstream of the Zionist movement had its origins in Eastern
Europe socialism, and prior to the founding of the state the labor unions played
a major role in forming businesses, developing property, providing medical care
and creating jobs.

It was natural for the government to take the lead in developing the
country in the wake of the 1948 War of Independence. Faced with an
underdeveloped economy battered by war, few prospects of attracting private
capital and responsibility for absorbing hundreds of thousands of immigrants
from Europe and the Arab world, there were practical as well as ideological
considerations.

In the first 25 years of Israel's existence, the statist economy worked
wonders. Growth averaged around 10% annually and an industrial
infrastructure was built from scratch. A private sector functioned alongside
the state and labor—union sectors, but it was subject to regulations and quotas
governing virtually every aspect of business. But in the mid-1970s, the system

began to unravel as a severe recession followed the 1973 war. It took another

 

 

 

 

 

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43

ten years, a period of slow growth and mounting inflation, for Israel's
governments to abandon the old approach.

In 1985, the government worked out an economic stabilization program
with the immediate goal of bringing inflation down from its triple-digit level. But
the program went much further.

In the years that followed, the government eased regulations on foreign
currency, pared back its role in the capital markets, reduced import quotas and
eased requirements for licenses, cut taxes and price controls, and embarked on
a wide-ranging privatization drive. The liberalization has been gradual and far-

reaching, with the government steadily opening up new areas of the market

every year.

The 1980s push toward free-market economy

The Israel of the 1990s is a long way from its old image of an economy
enmeshed in tired socialism, isolated from the world and beset by war and
terrorism. The new economy began to take shape in the 19705, with the birth
of a high-tech industry nurtured outside the traditional state/labor union
establishment. It really gained ground in the mid-19805 as the government
took steps to stabilize the economy by putting brakes on chronic
hyperinflation.

The bloodletting that occurred in the aftermath cleared out a lot of
inefficient industry, especially in the union-controlled business sector.

The process moved a step forward with the liberalization of the capital
and foreign currency markets at the end of the decade, and the beginnings of
the government's privatization drive. By this time, Israeli exporters became
more adept at using one of Israel's unique advantages : it is the only country in
the world that enjoys free trade agreements with both Europe and the United
States.

The developments in Israel of the past five years have not been lost on
leaders in the international business community. Direct foreign investment,
negligible throughout Israel's history, has begun growing. Foreign investments
tripled in 1992 compared to 1991, jumping up to $589 million in 1992 from

 

 

 

 

 

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44

$210 million in 1991, according to the Bank of Israel“. Intel Corp. for example,
is planning a $1 billion investment to expand its Jerusalem semiconductor

fabrication plant“.

The Tel Aviv Stock Exchange has similarly begun attracting overseas
interest. Many foreign investors are inching their way into the field by way of
the more than 45 Israeli companies traded on New York stock exchange, more
than any other country except Canada. During that same year 1992, foreign
investors have bought for $213 millions shares of Israeli companies traded on
the NASDAQ67.

The importance of exports

 

Given the tiny Israeli domestic market, Israeli companies have been
compelled to find business opportunities abroad, so that goods sold in Israel
usually account for only a relatively small percentage of the sales. This also
explains why the trade deficit is almost down to zero, despite the fact of the
country's lack of natural resources and other raw materials.

We summarized these data in the graph and the table displayed on the
next pages.

The economic ties between Europe on one hand, the United States on
the other hand have found expression in research and development activities
and in the evolution of high-tech industries in Israel. The flow of information
has represented more than mere business and management contracts.
Several companies have leased phone lines for R&D purposes. The ties
between academic communities have also been enhanced as a result of these

developments. In addition, press coverage by Western media has become

 

65Israel .' l‘investissement étranger a triple en 1992, Le Figaro, Paris (March 1, 1993)
[Anonymous].

66Judy Siege]. Intel plans $1 billion plant, The Jerusalem Post Weekly Edition (October 21,
1993).

67Le Figaro (March 1, 1993, Ibid.)

 

 

 

 

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45

extensive over the years, so that much use is being made up of various forms
of telecommunications

We have already focused our attention on Dr. Kellerrnan's studies. Using
multiple regression analysis, it has proved that in the case of Israel, exports
and telecommunications go together, and that the role of telephones in this

area is even more important than with respect to tourism and social ties :

«In the examination of growth, exports were found to be the leading
variable for 1985-1987, and this was also the case for the annual geographical
models in the 19803. Exports thus proved to be of highest importance in both the
temporal and the spatial distribution of telephone calls in recent years. Second in
importance in both analyses were incoming tourists, who present a blend in
business and pleasure visitors, so that this variable is a social as well as an

economic one»68.

Another study focused on communications means in a sample of 17
percent of Israel's high-tech plantsG9. It was found that the telephone is widely
used for Marketing purposes to Europe (in 73.1% of the plants) and to the USA
(76.9%) and less so to other parts of the world (38.5%). Telex was used even
more than the telephone for international marketing, to Europe (84%), to the
USA (78%) and to the rest of the world (50%). It seems that managers

consider international communications crucial to their prosperity.

 

6i‘leellerman Aharon ; Cohen, Anat. International telecommunications as international
movement, The case of Israel, 1951-1988. Telecommunications Policy (March 1992).

69Shefer D. ; Frenkel, A. The Effects of Advanced Means of Communication on the Operation
and Location of High Technology in Israel (Haifa : Technion, The Samuel Neaman Institute
for Advanced Studies in Science and Technology, 1986).

 

 

 

Figur
an

SOURC:
Jerusale

 

 

 

L—jfldml .1! aslcnlm-I who,

46

Figure 10 : Trade Deficit and Exports In Millions of US
Dollars

SOURCE : Sandler, Neal (July 29, 1993). Israel's Economic Boom : Miracle or Mirage, The
Jerusalem Report.

 

 

 

 

 

Trade Deficit Exports
1000 . - 20000
800 ~ .- 18000
600 - - 16000
400 - . 14000
200 - - 12000
0 - 10000
-200 .. 1988 1989 1990 1991 1992 - 8000
.400 . - 6000
-600 a _ 4000
-800 .. E 2000
-1000 J 0
—0— Deficit + Export

 

 

 

 

 

Table 4 : Israel's Ten Top-Ranked Industrial Companies
SOURCE : Dun & Bradstreet International

Company Sales '92 in Percentage of
millions of

 

 

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47

This can explain why exports and international telecommunications
were found so highly interrelated in Israel.

As a first conclusion of this study, we could state that it is a blend of
economic, political, social and technological factors that have caused the size,
growth, and change in the Israeli telephone system.

Telecommunication can serve as a vehicle for international
understanding as long as it is accompanied by other ties such as two-way
tourism and business. Viewing the very existence of international
telecommunications as providing for better relations among countries would be
analogous to a car moving from one country to the other without people or
goods in it.

An important lesson that can be learned from the Israeli experience is
that distance is completely meaningless when it comes to international
telecommunications. The share of the remotely located North America in
Israeli traffic was larger in 1985-1986 than that of the UK, West Germany,
France, Switzerland, Belgium and the Netherlands combined. In addition to the
political, social and economic conditions necessary for overcoming space, there
needs to be a technologically reliable system. In Israel, the breakthrough in
this regard came relatively early, in 1968, with the inauguration of the first
maritime cable.

A more comprehensive study could focus on the analysis of quality of
service indicators70 time series in conjunction with telephone penetration rate
time series. However, this limited survey shows that as far as Israel is
concerned, telecommunications have undergone a fast sophistication process
in recent years, through the introduction of various enhanced and data
communication services.

The major problems of the Israeli system are more domestic than

international, namely the need to meet the demand for new lines as quickly as

 

70Such as call completion rate, digitization of the network, even distribution across the
country, etc.

 

 

 

 

 

possible, a

old equipm

 

48

possible, and the need to upgrade the system which is still partially based on
old equipment.

 

 

 

 

 

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RES’.
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Labor
had 1i

strain

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49

CHAPTER TWO
RESTRUCTURING IN A FIRST WORLD CONTEXT:
ISRAELI PATTERNS

In July 1992, Israel entered an era of change, with the election of the
Labor Prime Minister Yitzhak Rabin, after 15 years of right-wing regime. This
had ultimately brought dissatisfaction to the majority of Israelis, because of
strained relationships with Washington, mismanagement of the economy and
a high level of unemployment. Rabin's return to power breathed new life into
the Middle East peace process and the strained US-Israeli relationship.

The previous Shamir government introduced a number of measures
aimed at speeding up the liberalization of the economy, encouraging the private
sector, and reducing the state's participation. In the home market, greater
foreign competition was encouraged by reduction in tariffs and foreign currency
insurance. This, ostensibly, was designed to give indigenous industry a spur to
increase its productivity and efficiency and have a more effective force to
compete in export markets. As we will see, the new government basically went

on with the same policy.

3.1. The recent move towards competition

3.1.1. A Push for Liberalization

Bezeq, the Israeli telephone public operator, was partly privatized in
late 1990. Several reasons led to this new policy. Some have to do with a
general attitude of Israel's government and Israelis in general vis-a-vis private
enterprise. Some are however more specifically connected to the perception

Israelis had until the recent past towards their domestic telephone service.

 

 

 

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50

Having spoken several times with middle-aged Israelis about that
subject, I was always told of the «good old days» —— that is, until the late 197 Os
— when it was nearly impossible to obtain a telephone line in Israel without
«protekzia» («connections», in Hebrew). Statistics seems to corroborate this
common knowledge. Until 1984, the telephone waiting lists typically listed
several thousands of people. The waiting period often averaged five years.
Today, it has been cut to a matter of days and weeks.

Pressures from large businesses also existed. Surprisingly, it is mainly
national companies — and not the few trans—national corporations that did
business in Israel — which were the most vehement in their demand for lower
tariffs and better service. The Israeli large state sector was looking for a better
telecommunication infrastructure in order to improve its own internal
efficiency“. National firms, whose main markets were and still are abroad,
also wanted to be able to compete with better served and equipped companies

in world market.

Under the new arrangement, Bezeq has thrived financially. The
company's net profit rose 21% in 1991 to NIS 170.5 million”. And Yitzhak
Kaul, a former postmaster general who took over early in 1990 as Bezeq
president, said an additional one million telephone lines will be operating within ‘
four years. He did not keep his word : Bezeq installed «only» 600,000 lines during l

this period, but this still is an impressive achievement.

What are the political steps that have led to the implementation of this
new telecommunication policy ? Is it really the success story that the

government and Bezeq officials loudly claim it is ?

 

71Josepph Straubhaar gives other examples in his article Patterns of Liberalization and
Privatization of Telecommunications in Eastern Europe and the Third World, in
Telecommunications Politics : Ownership and Control of the Information Highway in
Developping Countries, Forthcoming, Lawrence Erlbaum Associates, Inc., 1995, co-edited
with Bella Mody and Johannes Bauer.

72Dockser Marcus, Amy. Privatized Israel Phone Firm Prospers, The Wall Street Journal
(June 30, 1992).

 

 

 

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51

The Likud administration policy

 

A few people contest that Israel's drive to sell off many of its state-
owned companies has helped transform Bezeq from government bureaucracy
into profitable enterprise. Long the target of public criticism, the national
telecommunications company is now struggling to undo years of consumer
dissatisfaction stemming from notorious inefficiency.

Bezeq is one of the largest Israeli companies to have been partly
privatized under a government program that began in 1988. At first, the sell-
off of the multi-billion-dollar collection went slowly, largely because of
opposition from cabinet ministers unwilling to give up power at the various
companies they controlled. Fears that the sale of utilities could endanger
national security, as well as opposition from workers fearing layoffs, also
contributed to the delay.

Yitzhak Shamir's cabinet intended to retain only a 28% stake in the
company, selling the other 72% to the public and one or two «strategic
partners» when it designed the privatization plan in 1990. Raphael Pinhassi, at
that time Minister of Communications, loudly advocated the complete
privatization of Bezeq :

«I come from the business world and know that as soon as you bring in
private businesses, you lower the price and increase the quality of service. That '3
why I was among the first to completely support the privatization of Bezeq and
all government-owned companies»73.

Off the record, he would also add that the push for «efl‘iciency» (synonym
of privatization) can be partly explained «because of American pressure so that
we will be eligible for more aid»74. This aspect must not be lost from sight : US
aid to Israel is given in exchange of Israel's government explicit commitment to

move towards a «free-market economy».

Among the right-wing coalition which governed Israel from 1990 to
1992, this policy did not cause much of an ideological problem. The

 

73Luxner Larry (June 1, 1992, Ibid.)

 

 

 

 

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privatization plan was rapidly prepared — and implemented. In 1990, the first
move was to sell 6% of the company to shareholders. Then another 19% was
ofi‘ered. Today, 25% of Bezeq shares are in public hands and traded on the Tel
Aviv Stock Exchange.

At the end of June 1992, a few days after the victory of Yitzhak Rabin's
Labor-oriented coalition in the general legislative elections, Yitzhak Kaul
thought that the program would go on, regardless of the outcome of these
Knesset elections. He declared to the Wall Street Journal :

«We are prepared to sell another 23% of the company in the coming
months. A total of 9% will go as an offer to institutional investors in Israel, and
another 14% will go to a strategic partner. [...] The government is still the main
owner of this company, and governments are not the best at handling businesses;

but as they continue to sell their shares, we are becoming more business-oriented».

Mr. Kaul also explained that «there are other issues such as employee
relations, tariffs, security and equity that we must deal with before we can take
[this] strategic partner. The one who has to make the final decisions is the
government. They are the main shareholders». But he remained confident that

by end 1992, «72% of Bezeq will be in private hands»75.

Workers concerns, other brakes to change

Mister Kaul had reasons to be concerned about the reactions of Bezeq's
workers. Indeed, worker relations had soared Bezeq's prospect somewhat. Like
their counterpart in Latin American countries, Bezeq's 10,000 employees were
— and still are — generally hostile to privatizing the company. In fact, union
leaders called a strike to protest a possible lowering of tariffs they believe
would hurt Bezeq's overall profitability.

 

74Luxner Larry (June 1, 1992, Ibid.)
75Dockser Marcus, Amy (June 30, 1992, Ibid.)

 

 

 

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The minister Pinhassi recognized that he was « [...] in a struggle with the
workers of Bezeq. They are very angry at the idea of privatization. They feel this
will cost them their jobs. 071 the other hand, they do not understand that if you
open the market to competition, there will be other companies and therefore more

jobs»76.

The new business-like approach had many Bezeq workers fearful of
layoffs as the company strives for greater efficiency and higher profits.
Workers lobbied MKs (Members of the Knesset) to oppose letting the
government share drop below 51%. And some critics contended with some
reasons that so far, privatization has not led to lower prices for consumers or

better service for the elderly, the handicapped, or the Arab minority.

The company's reform efforts had been hampered in part because
strategic business decisions often bogged down waiting for approval by
government ministers, who retained the right to appoint four of the eleven
members of Bezeq's board. Also, further sales of government shares had

stalled over disputes regarding tariffs rates.

Meanwhile, this did not prevent Bezeq's management to gear up for

competition by adopting several priorities «to keep consumers happy».

3.1.2,,Afinew framework for Bezeq‘s privatization

The new political context in Israel since June 1992 substantially
changed the pace of events. Like its right-Wing predecessor, the Labor Party

was committed to «liberalize the economy». Unlike the Likud, however, it had to

 

76Luxner Larry (June 1, 1992, Ibid.)

 

 

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take into account the powerful Histadrut, the giant labor union to whom it is
linked, which wanted to put the brakes on Bezeq's privatization program.

Consequently, the Israeli government decided to wait a little bit before
going further into the selling process. Some guidelines needed to be prepared,
argued the new communications Minister Moshe Shahal. An ad-hoc committee
composed by communications ministry officials was created, with the mission
to present «new licensing conditions».

More important though, the government decided to retain at least its

 

share in the company above the symbolic figure of 51%. This was the only
noticeable change as compared to Likud's policy. It was a very efficient way to
ensure, if not the cooperation, at least a less hostile attitude of the union

towards the privatization process.

In late September 1992, Moshe Shahal approved a set of guidelines
which were to be applied to the sell-off. It was also the first concrete articulate
conception of a telecommunication policy within the new competitive

framework to come.

The new licensing conditions would require Bezeq to surrender its
monopoly on cellular and international phone services and relinquish some
control in other sectors — changes that ministry and Bezeq officials had been
negotiating for several years.

The ministry would accept bids from prospective competitors over the
next year, with licenses awarded and operations launched by 1994.

Bezeq would retain monopoly control of public network infrastructure ‘
and basic domestic services. In some areas, Bezeq would provide services i
through sister companies or subsidiaries that have yet to be created. Bezeq ‘
would keep a controlling interest in these spin-offs.

Other areas to be opened for competition include installation and

removal of phone lines, value-added data and information services, certain

 

 

 

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55

satellite and microwave-based communications services, value-added

facsimile, and sales of end—user equipment such as phones and PBXs77.

The announcement ended two months of speculation about how
extensive deregulation would ultimately be. The main conclusion drawn by the
press was that the more sweeping version of the changes proposed in July as a

final act by outgoing minister Raphael Pinhassi was buried.

Bezeq's officials opposed Pinhassi's measures, believing that a broader
liberalization plan would threaten Bezeq‘s ability to finance its current network
upgrading project/8.

Shahal's move also quickly ended threats of strikes by Bezeq employees,
and threats of lawsuits by shareholders and by companies interested in

entering the market.

Finally, Bezeq received as a «gift» the treasury's permission to repay
NIS 1.4 billion of its NIS 4 billion debt to the government earlier than
scheduled, thereby saving NIS 160 million a year in interest payments79. We
should not lose from sight that the Israeli government has been looking for
huge amount of cash in order to settle new immigrants in the country. It seems
to have understood that a privatized Bezeq would probably bring huge sums of
money into the public treasury —— and it did : Bezeq paid dividends of $39.1
million in 199380, that is nearly 25% of the total dividends paid by all Israeli

state-owned firms.

 

77Shuman, Joshua. Israel Moves Toward Competition, Communications Week International
(October 5, 1992).

78Shuman, Joshua (October 5, 1992, Ibid.)

7i’Siegel, Judy. The Jerusalem Post Weekly Edition (September 18, 1993).

80Rosenfeld Jose. Privatization revenue soars, The Jerusalem Post Weekly Edition (April 2,
1994).

 

 

 

 

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3.1.3. Bezeq gets a new operating license, Israel gets
a telesenimuniqatiognglg.3

 

From PSTN stattus to licensee stg_tus, from service provider to
irjrastructure provider

 

 

Bezeq operates according to a general license for operation of
telecommunication activities and for provision of telecommunication services,
granted to it by virtue of the 1982 Law of Telecommunications. On July 12,
1992, the company’s general license was replaced by a new license. Bezeq
submitted objections to the license, which was suspended by the minister, and
in actuality never became effective. On March 1, 1994, a new license was
granted in place of any other license granted to the company previously. This
license specifies the conditions according to which Bezeq will operate, and
stipulates, among others, that the company will continue to provide telephone
and related infrastructure services (leased lines...), and that it will operate
through subsidiary companies which will provide other, «enhanced-type»
services. The definition of «enhanced services» is far-reaching : it includes the
providing of international services, from the service level to the infrastructure
level, as well as cellular services, and all types of data communications
services.

Management and accounting of the subsidiary companies will be
separate from management of the company. It was also stipulated that
provision of new services will be conditional on receiving a license ; moreover,
Bezeq’s operations outside the state of Israel will be restricted. In a nutshell,
from now on, Bezeq’s vocation will be from now on to provide infrastructure to

other service providers, rather than to provide services by itself.

The company filled an appeal to the High Court of Justice, requesting a
conditional injunction and a temporary injunction ordering the deferral of this
license for various reasons, including, among others, a claim for exceeding
authority and for economic damage. For probably the first time in the history

of telecommunications, a partly state-owned telephone company was

 

 

 

 

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57

challenging in court its own government —— which happened to be its main
shareholder!

Shulamit Aloni, the outspoken Minister of Communications who
succeeded to Moshe Shahal after a coalition crisis and signed the new license,
accused the company management of «dishonorable behavior»81.

Bezeq officials estimated the economic impairment of implementation of
the license alone at about 1.5 billion dollars over the next five year, arguing
that the company’s revenues from the so-called «enhanced services» accounted
for about 38% of Bezeq’s revenues in 199382. The «Directors’ Report» appended
to Bezeq’s 1993 Annual Report, published in May 1994, states that «{...] a
considerable change in the financial position of the company may result,
including a decrease in the results of its operations». Although the same report
adds that «due to the wide range of unknown variables, this evaluation may
change », this masked threat did not impress the Supreme Court Justices, who

rejected the suit against the communications ministry83.

Bezeq operations are under government supervision and most of the
tariffs for its services are determined pursuant to section 15 of the 1982 Law
of Telecommunications and are updated by regulations, which must be
approved by the Knesset Finance Committee. Changes in tariffs are subject to
the approval of the Minister of Communication and the Minister of Finance in
accordance with the 1985 Law for the Stabilization of Prices of Goods and

Services (temporary legislation).

On December 29, 1993, the 1994 Telecommunications Regulations
(Payments for Telecommunications Services Detailed in the Appendix to the
Law) were passed. These regulations determine telecommunications tariffs

b6ginning January 1, 1994. Pursuant to these regulations, the base tariffs

 

81Siegel, Judy. Era of Bezeq Monopoly ends, The Jerusalem Post Weekly Edition (March 26,
1994).

82Luboshitz, Kasierer & Co. Bezeq 1993 Annual Report, Tel Aviv (April 12, 1994).

 

 

 

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58

were updated and the cross-subsidy between various telecommunication
services was adjusted. As a result of the application of these regulations, the
tariffs were reduced by an average of 5.4%. At the same date, the 1994
Telecommunications Regulations (Means of Calculation of Payments for
Telecommunication Services and their Linkage) were also passed. These
regulations determine principally that the company’s tariffs will be reduced in
real terms, for increased efficiency factors, by 6% per year in 1994 and 1995,
and by 6.5%84 after that. Pursuant to the 1994 Telecommunications Order
(Reduction of Royalty Rate and Imposition of Compulsory Royalty Payment),
the rate of royalties paid by the company to the Israeli Government was
reduced commencing January 1, 1994 from 11% to 8% of most of Company’s
revenues from telecommunication services in Israe185. However, it was
determined that the royalties would also be applicable to the revenues from

radio and cellular services.

Privatizing Takes Time

Over the past decade, since privatization became the declared goal of the
government, the result is «not very impressive», claimed Bezeq Director General
Yitzhak Kaul in July at the annual conference of state company directorsss.
This slow process «doesn’t reflect an ideological battle, because everybody is for
this policy. But there are managerial and performance difficulties that slow
privatization». One of the problem that has delayed privatization at Bezeq is
that a decade after the company was founded, there remain disputes over
continuity of pension rights for hundreds of workers who came from the
communications ministry. Staffers are opposed to the government giving up
majority control of the company because they fear their work agreement would

be endangered.

 

83Siegel Judy. Bezeq to reorganize due to new license, The Jerusalem Post (July 11, 1994).
84Luboshitz, Kasierer & Co, (April 12, 1994, Ibid.)

85Luboshitz, Kasierer & Co, (April 12, 1994, Ibid.)

86Siege], Judy. Kaul : Privatize when economy is down, The Jerusalem Post (July 25, 1994).

 

 

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59

But as far as Bezeq is concerned, afier the privatization endeavour
stopped for nearly two years, far-reaching new developments should be seen in
1995. For example, the Japanese bank Yamaichi proposed carrying out part of
the issues for capital Bezeq had planned for 1994. Bezeq had said it wanted to
raise $700 million —- half of it abroad — to invest in local infrastructures".
Bezeq’s Board of Directors reviewed the offer, but finally selected the American
Investment Bank Morgan Stanley to carry out the issuing of $500 million
worth of the company’s shares on the American Stock Exchange88. Never
before such a large—volume issuing has been carried out by an Israeli company
on Wall Street.

Moreover, upon complete implementation of the liberalization in the
areas of international telecommunication and cellular phone services, it seems
in the Government’s intention to determine the state’s vital interest in the
company and the methods to accommodate those interests ; only after will it
possibly decide to sell effective control of the company to a strategic investor

(see also : 3.3. A Playground for Telephone Giants 7).

3.2. Finding a path to competition

3.2.1. «Fortress Bezeq» under Siege

The most lucrative segments of the telecommunication market are
Opening up to competition ; the users are angry, and make no ministry about
their will to see dramatic changes in the way the incumbent firm treats its
customers ; a never-ending legislative and legal guerrilla is taking place with

the government and the communications ministry. From all sides, it seems

 

87Siegel, Judy. Bezeq moves to accelerate digitalization, The Jerusalem Post Weekly Edition.
88Khoresh, Hadar, «Bezeq» Tegayes Khazi Milliard Dollar BaBursa HaAmerikanit, Yediot
Akharonot, Tel Aviv (August 28, 1994).

 

 

 

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60

that Mezoudat Bezeq («Fortress Bezeq ») is finding itself more and more under

assault.

Many large users, dissatisfied with Bezeq service, are going to competing
service providers. For exemple, Kupat Kholim Klalli, Israel’s national health
insurance institution, plans to use a very small aperture satellite (VSAT)
service supplied by Tel Aviv-based Gilat Communications Systems Ltd.
because Bezeq cannot provide links to all of the organization’s locations,
according to Menahem Daskal Kupat Kholim’s Chief Information Officer,
quoted in Communications Week International”.

To make things worse, in early 1994, the Ministry of Finance issued a
tender for the establishment of an internal government communications
system, prompting panic among Bezeq’s Board of Directors : Bezeq revenues in
1993 from the Government and the Israel Defense Forces accounted for about
7% of its total revenues. In the wake of appeals by the Ministry of
Communication and Bezeq, the Ministry of Finance ordered freezing of the
tender and examination of the matter, but this example shows the amount of

competitive pressure the once-telecom-monopoly now faces.

Hence, the company is taking dramatic steps that will make up for the

erosion of revenues to come —— at least, so hope its management.

Bezeq will reduce its manpower by more than 10% — or 1,250 positions
— by the end of 1994, preferably by early-pension schemes that will cost the
company NIS 400 million (about 135 million dollars) announced Bezeq
management at the end of July 199490. Yitzhak Kaul expects that enough
people will resign from Bezeq to meet the reduced manpower quota of 8,750 ;
they will be induced by «very generous» compensation similar to that given to
Israel Aircraft Industries retirees91. Bezeq expects the government to pay
generous early—retirement costs, because elimination of the company’s

monopoly in many areas has forced it to tighten its belt.

 

89Pinsky, Donne. Israel Forges Links, Plans Peace Cable, Communications Week
International (February 21, 1994).
90Siegel Judy. Bezeq to reduce staff by more than 10%, The Jerusalem Post (July 27, 1994).

 

 

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61

Since the ministry would no longer allow international calls to subsidize
cheaper domestic rates, Bezeq claims that it stands to lose about $140 million
a year. Bezeq says it will cut overseas rates by 40% if the government agrees
to release the company from its commitment of paying the treasury 8% in
royalties. If it does not agree, Bezeq will have to raise domestic rates and/or

services «a popular commodity»92.

The board also decided to establish two subsidiaries : one for
international calls (which would have an annual turnover of NIS 1.5 billion) and
one for telephone equipment, including exchanges (with a NIS 200 million
turnover). This decision must be approved by the communications minister

and the ministerial economics committee.

From an organizational point of view, Bezeq is committed to reduce the
number of its divisions, establish a business development unit and setting up

field units in a number of services93.

To sum things up, Bezeq plans to redeploy itself in the future along seven

main directions :

1. Modification of the capital structure, so that the equity/debt ratio will be
increased from 35% to about 45%, and in the wake of this, reduction of the
financial leverage and a decrease in interest costs.

.Reduction of the number of employees by about 1,350 until late 1997,

relative to the number of employees in 1993.

N

00

.Participation in communication projects overseas, in conjunction with

foreign communication project managers and Israeli companies.

.4;

.Closure of unprofitable activities if they cannot increase in efficiency,

reaching at least a break-even point.

01

. Emphasizing of Bezeq’s marketing activities.

 

918iegel Judy (July 27, 1994, Ibid.)
92Siegel Judy (July 27, 1994, Ibid.)
938iegel, Judy (July 11, 1994, Ibid.)

 

 

 

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62

6. Acceleration of digitalization with increased efficiency and reduction of
purchase prices. By 1997, all of the country’s phones will be hooked up to
digital switches. The company will invest over NIS 10 billion in
infrastructure over the next five years ; by then, the country will have 3
million phone lines, compared with 2 million today94. Bezeq will issue a
tender to a foreign company for the supply of «intelligent telephone
network» technology. Local companies will not be included in the tender
because they lack the necessary experience95.

7. Increased efficiency in the area of the company’s assets management”

3:23.- A practical, example 3 celLulgryhones

The first real fissure in the Bezeq telecommunications monopoly has
started opening. The government owned company had long been the object of
blue-ribbon panels urging competition. It will see some as early as December

1994, on the cellular telephone market.

A Transparent Process
The government set basic technical standards for a second operator,
bids were sought in September 1993, and the winner will be in business by the
end of 1994. But there will be only one competitor permitted against the
Motorola/Bezeq joint—venture. Israel has issued a 10-year license to operate

the network, with an option for renewal for another 6 years.

A slew of firm, including local companies Tadiran, Elbit and Clal,
prepared proposals in the high-stakes contest. At least four major foreign
companies — GTE, SouthWestern Bell, BellSouth and McCaw Cellular, the
largest US cellular operator (recently bought by AT&T) — wanted to join the
locals. Another coalition had taken shape : New Zealand Telecom and US firms

 

94Siegel Judy (July 27, 1994, Ibid.)
95Siege1 Judy (July 27, 1994, Ibid.)
96Luboshitz, Kasierer & Co, (April 12, 1994, Ibid.)

 

 

 

 

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Bell Atlantic and Cellular Communications International Inc. teamed with the
locals IBM Israel, Idan and Elitech from the Formula Software Group and

Leumi & Partners Investments Bankers97.

A foreign company was being allowed to control up to 80% of the
corporation that won the public tender in May 1994, if at least 20% of the
shares were held by Israeli companies98. Moreover, shareholders in the
partnerships had to prove they have a combined equity of at least $200
million. The ministry said bidding groups should also be at least 25% owned by

 

a company that had operated a cellular telephone network with some 100,000

subscribers for at least three years”.

On the incumbent side, in accordance with section 50 of the 1982 Law of
Telecommunications, amended in 1992, Bezeq’s exclusivity in provision of
cellular services was canceled. Thus, a memorandum of understanding was
signed between the Government, Bezeq, and Motorola Ltd. whereby a jointly
owned corporation will be granted a new license for operation of cellular
telephone services. The license will be for a period of 10 years commencing in

1994 with the option to extend for another 6 years.

The whole process of selecting the bidders was particularly transparent,
as Shlomo Waxe, Ministry of Communications’ General Director —— and ,
Minister Aloni’s right hand — clearly stated that the winner would be the ‘
company who would commit itself to the lowest price for the best quality of
service. To ensure that the bidders’ commitments would be serious and

consistent, a system of penalties was set as part of the awarding mechanism.

 

97Shuman, Joshua. Foreign Partners for cellular networks. The Jerusalem Post Weekly
Edition (December 4, 1993).

988iegel, Judy. The Jerusalem Post Weekly Edition (October 30, 1993).

9913rael Rules Set In Cellular Bids. The New York Times (November 15, 1993) [Anonymous].

 

 

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Limited Competition, Hyge Consequences ?

The winning bidder faced a formidable opponent in Bezeq/Motorola, on a
less-than-level playing field. The communications ministry has try to make
competition as fair as possible. Bezeq/Motorola and the second operator will get
equal bandwidth space in the SOD-megahertz range, at a premium in Israel
because the army occupies so much of it. And it has rejected efforts to force
the second operator into the 900-MHz range, which would have required
advanced European GSM digital technology. This may seem surprising,
because GSM technology would have allowed inter-country roaming between
Israel and Europe. According to France Telecom’s Pierre Jandotloo, four main
reasons can be given :

0 GSM privacy algorithms were considered «too safe» by the Israeli
military ;
0 The price of GSM equipment remains higher than the price of TDMA

American technology, which was eventually selected ;

0 The IDF did not want to relinquish the frequencies (and Mister Waxe
served previously as the IDES Chief Information Officer) ;

0 «American pressures».

Let us also add that, since the fiequencies given to the new entrant are
located in the same range that Bezeq/Motorola’s, users will not have to junk
their old phones in order to switch, so the new firm will not have a 80,000-user

handicap.

Bezeq will enjoy one crucial advantage. Its infrastructure, in place since
1984, has already been paid off. The second company will have to make a
capital commitment of up to $100 million now101, and will not have the
flexibility to woo subscribers by cutting fees. Bezeq-Motorola may lose its

monopoly, but not its dominance of the market.

 

100Interview with the Author at France Telecom’s facilities in Paris (July 25, 1994).
101Rosenberg, David (August 26, 1993, Ibid.)

 

 

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There is plenty of upside, however. Lower rates induced by competitive
pressures will enable the market to expand rapidly. And the winning license will
benefit of advanced, digital TDMA-technology, when the incumbent will still be
stuck with its same creepy, analog system. The rate-cutting will come out of
the pockets of the operators, because Bezeq will still have a monopoly
connecting cellular phones to the regular phone network. Bezeq is obligated to
charge both Bezeq-Motorola and the new firms the same rates, but nowhere

does it says that the charges will be low.

The old monopolist could easily come out the biggest winner of all from

competition.

Bypassing the Local Loop

CellCom Israel, a consortium of Discount Investments, Brazilian
banking brothers Moise and Joseph Safra, and the Regional Bell Operating
Company BellSouth was selected in mid-May 1994 by the communications
ministry to operate Israel’s second cellular phone network. The new company
has already signaled its attention to provide stiff competition for Motorola and
Bezeq, which have had the cellular monopoly up to now. CellCom will charge
only 534 shekels ($178) per year for its service, compared to 2,800 shekels
($935) currently charged by Bezeq (the Bezeq-Motorola fee is half of what it
was before the ministry announced it would have a second cellular phone
franchise). Local air time will cost eight agorot (2.5 cents) per minute during
the first year of use, compared to Bezeq‘s 68 agorot per minute (22.5 cents)102.

The writing is on the wall : in attacking so aggressively the market, the
«BellSouth consortium» wants to knock out its opponent, allowing its users to

bypass Bezeq’s local loop.

 

102Lipschitz Sugarman, Margo (June 16, 1994). Cellular Winners, Briefing, The Jerusalem
Report.

 

 

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66

CellCom is now looking for hundreds of qualified employees. Its license is
effective for 10 years, and the new company will start offering services in Tel
Aviv before the end of 1994 and throughout the country within 15 months.

The Competition Stops Here I

The communications ministry is far from enthusiastic about a Bezeq
proposal to supply a «poor man’s cellular phone» based on CT-2 technology,
that is usable only within a small radius. Bezeq applied in July for ministry
approval for the proposed service. Bezeq intends to start the service within
university and hospital campuses to test its technological and economic
aspects. The French aerospace and avionics company Dassault, which runs
the service there, has already expressed interest in cooperating with Bezeq in

supplying CT—2 service in Israel.

But the ministry spokesman said it «tends not to approve CT-2 for use in
urban areas»103, because it would harm efforts to introduce the second cellular
phone service, in which the CellCom consortium is investing hundreds of
millions of dollars, as well as harm existing Pelephone service. He added,
however, that the ministry would consider allowing CT-2 service within
campuses and other institutional locations «if frequencies were available».
Bezeq said that if it received ministry approval, it could start the service within
a few months.

For the same set of reasons, PCN or PCS licenses will only be awarded
four or five years from now, that is, when CellCom recoups its initial

investment.

 

 

103Siege], Judy (July 21, 1994). Bezeq proposes «poor man’s cellular phone», The Jerusalem
Post.

 

 

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3.2.4. The next step : opening of international voice
tressnsssiqa t9. sweating!!!

 

The special geographical situation of Israel was one of the key reasons
for the high development of international telephone links with its main trade
partners. Therefore, it is not surprising to see that, although Bezeq was only
ranked the forty-third telecom operator in the world104, it was ranked the
twenty-fifth international carrier worldwide in 1992 by Communications Week
International 105. This same year, according to the same ranking, 34.2% of its

revenues came from international communications.

Policy makers in Israel are well aware of the strategic importance of
this segment of the market, and are currently looking for policies allowing them
to open it to competition, hoping that the breakdown of the Bezeq monopoly
will help to drive the prices down. The rationale for opening this crucial segment
of the market does not stop here, as the Ministry of Communications also
wants to use competition in order to improve the global Israeli infrastructure ;
compelling a new entrant to invest in a new undersea cable system between
Israel and Europe is one possibility which ministry’s officials are currently
looking into.

Therefore, we are very clearly talking about competition at the
infrastructure level, not about other «intermediary» solutions such as voice
resale and/or unbundling of network and services, even though resellers can

coexist with Bezeq and its future infrastructure-based competitor.

This is the reason why, as part of the government's liberalization policy,
the communications ministry will issue a tender for a second international

dialing services operator probably during the last quarter of 1994, the license

 

10‘1'Seventh Annual Ranking IDATE/Télécoms Magazine, Télécoms Magazine (November
1993).

105Top 40 International Telecommunications Carriers, Comunications Week International,
(September 20, 1993).

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68

winner being selected early in 1995 and in business by the end of this same

year.

In prevision for this new competitive framework, Bezeq international
phone rates plummeted 29% on January 1, 1994106. Bezeq's Chairman Moshe
Haba said the lower rates will shrink Bezeq's annual income by NIS 300
million, arguing that it will reduce the company's ability to invest in local
infrastructure and purchase more expensive equipment produced locally.
«There is no precedent for a 10% immediate rate cut in an efficient company», he

added107.

The problem of cross-subsidies is high on the agenda of the new
communications minister, Shulamit Aloni, who said that she expected a
further 11% cut in overseas call rates to eliminate completely the cross-
subsidization.

The Minister of Communication and the Minister of Finance have been
assigned the responsibility for establishing rules regarding the terms of
agreement between license holders and foreign entities, maximum tariffs for
outgoing calls, Bezeq’s fee for service provided to other operators, and
arranging tenders for other operators to provide international
telecommunication services.

What are the potential winners of the new license ? According to France
Telecom’s Pierre Jandot108, the guess is less difficult than for the cellular
license bid ; it may well be one of the three mega-consortium now emerging on
the international scene : the EUNetCom-Sprint alliance, the Unisource-AT&T

alliance, or BT-MCI’s new international joint-venture.

 

106Siege], Judy. Int'l phone rates plummet 2.9%, The Jerusalem Post Wekly Edition (January
8, 1994).

107Siegel, Judy (January 8, 1994, Ibid.)
108Interview with the Author (July 25, 1994, Ibid.)

 

 

 

 

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3.3. A playground for telephone gj ants ?

It is relatively easy to understand the lust the decision to privatize
Bezeq provoked. The growth rate in the telecommunication area reaches 8% in
Israel, as compared to 3 or 4% in other industrialized countries. As a
consequence, the last time that Bezeq's shares were sold on the market for a
total value of NIS 200 million, the overall demand peaked to NIS 34 billion109!

With all the major companies which present themselves as potential
successful bidders for the new private Bezeq, the scene may look confusing at

first glance. These companies could be put in one of the following categories :

0 those who focus their attention on the Israeli telephone company itself ;
0 those who would like to take over the companies to be created on the
competitive segments of the telecommunications market, such as
cellular phones, data communications, or international

telecommunications ;

those, finally, who under took an «all out» strategy, preparing themselves

to bid for Bezeq and its future competitors at the same time !

Because so many of these telephone giants are interested in Bezeq, it
finds its bargaining power enhanced. When less developed countries privatize
their phone system, they do so for a variety of reasons, mainly the lack of
domestic capital or local expertise. In the case of Israel, only the former seems
to have had an impact. However, large national companies, banks, financial
groups do exist in Israel, so we could object that domestic capital was indeed
available. The trouble is, all these conglomerates are strongly linked to the
Histadrut, the Labor Union, whose tremendous economic power is seen as far
too important in Israel. To find a foreign strategic partner for Bezeq then

became the only possible solution.

 

109Peretz, Dana. Israel, Eretz Mouvtakhat Lakheurot HaTikshoret Haamerikaniot. Yediot
Akharonot, Tel Aviv (December 3, 1992).

 

 

 

 

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3.3.1. Southwestern Bell strategy

With Bezeq's future sell-off, American telephone giants feel they have
found a good deal. The foreign company whose name was mentioned as the first
«serious bidder» was the RBOC Southwestern Bell. During his trip to the United
States in August 1992, where he met President Bush in Kennenbunkport, the
newly elected Israeli Prime Minister Yitzhak Rabin met the regional phone
company's top executives. They went then to Israel, attending several
business meetings with officials and high public servants from the Finance and
the communications ministry, as well as with Bezeq's staff.

A spokesman for Southwestern Bell confirmed in January 1993 that the
company was currently negotiating a possible «joint-business partnership»
with Israeli-based Clal Industries Ltd110. This Israeli conglomerate, whose
activities range from manufacturing (electronics, computers, buildings) to
finance and insurance business would have also like to be part of the game. In
order to demonstrate its interest in Bezeq, the company recently created a new
company called «ClalCom».

Such an agreement with Clal would place Southwestern Bell in line to
make a possibly successful bid for majority ownership of Bezeq. While
confirming talks with Clal, the spokesman for Southwestern Bell declined at
that time to either deny or confirm reports that his company was planning to
bid for Bezeq.

9:3.2. The Long Distance Carriers also want their
Diego gaming

The American Long Distance Carriers AT&T, MCI and Sprint cannot
get their words fast enough to hit a share of Israel's international

telecommunications market.

 

110Mason, Charles F. SW Bell Appears Ready For Israeli Deal. Telephony (January 4, 1993).

 

 

 

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AT&T, MCI and Sprint share the network that links Israel to the United
States. Each telephone communication between the two countries uses a
cable belonging to one of the three companies : 40% of Bezeq's international
telecommunications are to the USA. Although there is a unified tariff, Bezeq
signed separate agreements with all of the «Big Three». AT&T accounts for
72% of the market, followed by MCI (18%) and Sprint (10%)111. We must recall
that Israel ranks tenth in the world in the list of countries calling the United
States, and fifth for data base consultation.

Interestingly, each one of these companies now maintains similar
business relationships with Israel : each one manages a telephone traffic to, or
from the United States ; each one is currently in the process of creating joint-
ventures with one, or several local companies ; each one recently opened offices

in Tel Aviv.

333.3. The AT&T connection

 

Among the «Big Three», AT&T could, however, enjoy a competitive
advantage because of its old implantation in Israel. The first official agreement
between AT&T and Israel was signed in 1950. Since then, and until a very
recent period, AT&T was alone on the market. The company took advantage of
this long history to sign with Bezeq an agreement to provide its very popular
EasyLinkTM service“?

Moreover, thousands of Americans live in Israel, and more than a million
Jewish and Christian American tourists visit the Holy Land annually. With
this in mind, in 1992, AT&T added Israel to its growing list of «USA Direct
countries». But the service is seen as a bit of an irony. AT&T did, after all, back

off from its offer to help Israel start direct service to the Arab world, after

 

111Peretz, Dana (December 3, 1992, Ibid.)
112EasyLinkTM is an enhanced telecommunication service providing E-Mail, EDI, and access
to big commercial data bases located to the USA.

 

 

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72

thinly veiled threats from Jordan and other Arab governments to oppose the
idea.

Yitzhak Shamir's former communications minister Raphael Pinhassi,
frankly presented the dilemma faced by AT&T managers :

«The Arab countries told AT&T not to provide service to Israel, or AT&T
would lose their business. AT&T had to decide»113.

Nevertheless, the controversial service was reinstated in December
1991 with the help of another telephone giant, though neither the

communications ministry, nor Bezeq's General Manager would say which one.

Finally, AT&T, like Southwestern Bell, has chosen to position itself on
all the fronts, proposing to bring its expertise and money not only in the
international telecommunications area, but also in seeking the place of

«Bezeq's strategic partner».

3.3.4. Confusion to rem_ai_n until late 1994

If Nynex, Southwestern Bell and AT&T's top-executives have already
started to discuss with Bezeq's officials, the final decision will be made at the
highest level (that is, the Prime Minister’s office). Governmental agencies will
also probably be in charge of negotiations management. Before a crucial and
decisive phase, domestic matter will have to be definitely settled, such as the
tariffs monopoly issue — currently discussed by Israel's Supreme Court, and
the capital structure of the new company. Thus, the Israeli
telecommunications scene could remain confusing at least until late 1994.

Everybody seems to agree on only one matter : there is no domestic
company in Israel able to provide money, know-how, experience and new

markets at once.

 

113Luxner Larry (June 1, 1992, Ibid.)

 

 

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73

CHAPTER THREE

TELECOMNIUNICATIONS FOR GLOBAL
RESTRUCTURING : A CRITICAL ANALYSIS OF
THE ISRAELI APPROACH

4.1. Regulatory Hurdles

4.1.1. Implementing Competition

Liberalization Typical Problems

If the balance has often shifted between left and right in Israeli politics,
in the telecommunications area however, the policy direction remains
essentially the same : to push competition as far as possible, without hurting
Bezeq's profitability. This causes several problems which are not unknown to
US and European regulators : as soon as enhanced services, and possibly some
basic services, are open to competition, the traditional structure, made of

average pricing and cross-subsidies, is altered.

In Israel, it is the former which is the most crucial problem : the PSTN
hook-up fee has traditionally been very high114. There has been a consistent

endeavor, on the other hand, to put prices more and more in line with costs.

If new competitors try to skim off profitable large users from Bezeq, the
national telephone operator may be tempted to cross-subsidize the new
competitive services with money coming from its regulated, stileonopolistic
services. How can it be avoided ? A consistent framework is lacking at this

point.

The problem of interconnection between the incumbent's facilities and

those of he new competitors must also be solved. How much will Bezeq make

 

114Noam, Eli. Telecommunications in Europe, Chapter 24, Oxford University Press, 1992.

 

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74

them pay ? How should the level of these access charges be regulated '? In the
area of international dialing services, if a good regulatory framework is
implemented, adequate interconnection agreements might allow true

competition to take place.

Competition cannot be decreed
Telecommunications scholars usually break up the telecommunication
industry in three different layers : the network layer, involving facilities such
has public switches, transmission equipment and network intelligence ; the
basic services layer, which usually includes voice/fax communications, both
local and long distance voice services, and leased lines services ; and the
enhanced services layer (cellular telephony, data communications, value-added

services, etc.)

In which of these areas can workable competition be actually reached ?
Some argue, for example, that even the local loop may be competitive in Israel,
given the fact that most of the population is concentrated on the coastal plain
and the Jerusalem area. Therefore, basic services tend to be defined in a

narrow fashion.

The new Minister of Communications, Shulamit Aloni, is confronted with
a classic regulatory dilemma : regulators are unwilling to liberalize non-
competitive markets ; but how is it possible to tell if a market is competitive
until it has been liberalized 7

 

 

 

 

E

 

 

75

Figure 11 : Classic «Stack» Model ; Application to Israel.

 

      

Local Loop Monopoly

 

 

Network Facilities

 

 

 

Reglatigg a Competitive Environment
But the most worrying problem is that, as of today, it is still the
government who is in charge of regulating the market. The same Ministry of
Communications that owns 70% of Bezeq and appoints its Chief Executive
Officer will also regulate Bezeq profits and tariffs, as well as the access charges
that the new competitors are going to pay. Such a situation is notoriously
unhealthy. With so much financial interest at stake, can the state be expected

to behave in a fair way vis-a-vis Bezeq's competitors ?

The Israeli market will probably allow a semi-private monopoly on most
basic services. In those conditions, regulation will be needed in order to set fair
price/profit levels (through rate of return, incentive or price-cap rate
regulation). And for competitive services, regulation may be required in order to
get private competitors to contribute toward the upgrading of the basic

system.

 

 

 

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76

Many solutions can be imagined. The Knesset, the Israeli Parliament,
could set up a new committee to handle the regulation. But MKs115 may lack
the expertise to solve the very complex problems the telecommunication
industry now faces. They may also be influenced by their constituents, who will

want the prices to go down, thus neglecting strategic long-term interests.

That is why the most logical solution seems the creation of an «Israeli
FCC». Everyone agrees that the task cannot be left to the courts : like in many
other developing countries, «they are chronically overloaded and years behind
their case loads, so that the judicial system might be an unlikely source of
effective regulation, particularly in an area where technology and services change
so quickl »115. Moreover, setting up independent commissions and committees
to handle problems in which direct intervention from the state is not needed,
nor desired, is already an old tradition in the Israeli political life. Another reason
for such a choice is that the United States are seen as a model for many Israeli
policy makers ; they are tempted to adopt what they believe is the «American
Model».

But the most persuasive argument is that it could clear up the dreadful
atmosphere between the Ministry of Communications and Bezeq. When the
Telecommunication Administration was «corporatized» in 1984, part of the old
top management was hired by the ministry. For whatever set of reasons, a
solid animosity developed over time between those who stayed civil servants,
and those who went on to the board of the newly created company, says Daniel
Charbit, Bezeq’s internal consultant for international affairs117. According to
Bezeq, these ministry officials have since then tried «all the tricks they could» to
undermine Bezeq’s position on the market. «They want to break us down»,
claims Charbit, adding that an independent commission, patterned upon the
OFTEL/FCC model, could put an end to this never-ending war of attrition. He
also points out the contradiction between the logic of corporatization and the

rigid set of bureaucratic procedures his company has to cope with. For

 

115Members of the Knesset.
116Straubhaar, Joseph (Forthcoming, 1995, Ibid.)

 

 

 

 

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77

example, every change in tariffs has to be approved by the Knesset Finance
Committee ; Bezeq is also not allowed to grant any discount on volume, as it is
common practice in other countries.

According to Shlomo Waxe’s Special Assistant, Avi Teitelman, the
ministry is currently reviewing very seriously the matter118. Teitelman says
that the creation of the commission is likely, but only because it can not be
created within the framework of the communications ministry. It is the desire
of the ministry to hire top consultants, university professors, policy makers for
the job, and they could not be paid decently as civil servants. Thus, the
creation of a separate body is the only solution remaining. He goes on saying 2
«If I could set up this committee as part of the ministry, I would definitely do it».
In Teitelman’s view, the problems such a commission could solve are
essentially those of access charges on one hand, and those of cross subsidies
between new entrants’ different services on the other hand. It could also be the
authority who draws the line between different services, at a time when these

lines tend to blur.

The structural level of regulation would remain in the hands of
government. In Teitelman’s words, «the licenses are the terms for competition».
Thus, the ministry/s vision for «an Israeli FCC» is a minimalist one : it would be

more of a consultative body than a regulatory agency.

The Problem of Access Charges

The most burning problem Israeli regulators have to face is setting rules
to calculate access charges to Bezeq’s local network, for CellCom as well as for
the new international operator.

In the case of the cellular market, the guidelines to calculate access
charges are part of the license granted to CellCom. But it does not seem to
provide a real solution, because these guidelines are in fact only general

principles ; mainly, it recognizes that the conditions must be favorable to the

 

117Interview with the Author at Bezeq’s facilities in Jerusalem (August 11, 1994).

 

 

 

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78

new entrant, at least in the beginning. Bezeq is going to propose a set of access
charges to the ministry, who will have to review it and accept or refuse it.
Bearing in mind that access charges are what decide the level of profitability of
the new entrant, the whole procedure seems awkward, as Bezeq is not likely to
propose anything that could fit in its competitor’s business plan.

Apparently, the ministry is now aware of the problem, and the level of
access charges itself will be part of the license granted to the new international
competitor. But those conditions will be set only for a short period, possibly
three years, as ministry’s officials confess that they want to leave all their

options open in case the market does not develop the way they think it should.

Price Regulation

Is price regulation the best way to regulate the market ? Avi Teitelman
gives himself five years to find out. In the cellular area, Bezeq’s prices are not
regulated any more, allowing it to strike back against CellCom aggressive
tariff-cuts. In the international area, all cross-subsidies will soon be eliminated.

What about the other services and companies ? According to the
ministry, Bezeq has recently engaged in predatory pricing with its «Bezeq Card»
service, patterned upon American calling cards services. By charging only a
very low surcharge (about one shekel, or 25 cents), Bezeq was effectively
killing all possible competition in an emerging market, asserts Avi Teitelman.
As it is a new service, the ministry has barred this service to reach the
market, pursuant Bezeq’s new operating license. This may preserve potential
for competition, but the downside is that it can possibly hamper Bezeq’s
possibility to be a true, global carrier on the international scene, offering a

complete range of telecommunications services.

As far as the other companies are concerned, their prices were not
regulated at all, because of their small size. But the ministry will have to
reconsider this position, as new entrants may also cross-subsidize unprofitable

services with more cash-generating activities. This won’t be easy, because

 

118Interview with the Author in Jerusalem (August 16, 1994).

 

 

 

the:

 

 

79

these joint-ventures, led by cash-rich foreign telephone companies, are going to
dump their services into the Israeli market, in order to win a respectable
market share as early as possible. BellSouth can afford to lose a few dozen
million dollars during the next five years, but can Bezeq sustain the same

amount of competitive pressure ?

Line of Busing Restrictions

 

Like in America, stringent lines of business restrictions exist in Israel.
Bezeq is not allowed to carry video signals, and local cable TV companies are
barred from entering the telephone market. What is the rationale for such a
policy ?

The biggest Israeli Banks (Bank HaPoalim, Bank Leumi, Israel
Discount Bank) hold majority ownership of most Israeli cable TV companies.
They are also the biggest potential investors in the country. Released of any
regulatory safeguards, they could well be in a better position than Bezeq itself
on the phone market, specially as far as the local loop is concerned. The
ministry, as Mister Teitelman puts it, «tends to think that Bezeq is put under
enough competitive pressure with the opening of the cellular and the

international market».

1.1372,, Finding an Adgqlgte Role for Foreign Capital

 

We have previously discussed the interest showed for Bezeq sell out by
some of the biggest telephone companies in the world. Israeli authorities have
publicly announced that they were planning to sell 15% of Bezeq's shares to a
«foreign strategic partner». Why Bezeq needs a foreign partner seems a fair

question to ask.

First of all, even the biggest among the Israeli union- or state-owned
conglomerates are probably too small to be involved in billion dollar deals like
this one. And if the Labor Party-dominated Histadrut Trade Union was part of

 

 

 

 

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80

such a deal, it would inevitably raise «fears of insider deals among friends,
political patronage, corruption, insider deals, etc»119.

It is true to point out that foreign companies often do not hesitate to use
corruption and insider deals to achieve their goals, but «they don't have the some
political implications as favorable deals to already powerful national
groups»120. A strong involvement of local conglomerates such as Koor or Clal
Industries would be interpreted by investors as a step backward, instead of a

step toward further competition and renewal of the public telephone operator.

A more positive rationale for foreign involvement also exists in the mind
of Israeli policy makers. Israeli authorities are very much aware of the growing
integration of the Israeli economy to those of the three major trade zones in the
world (the European Union, the NAFTA area and the Pacific Rim).

A political consensus exists in Israel today, which favors this integration
trend ; the telecommunication market appears to be one of the area in which
foreign participation could enhance the chances of the growing, export-oriented,

private sector to increase its competitiveness in the global economy.

The specificity of the Israeli case is that, although the reasons for
privatization are very typical of the industrialized world, the narrow domestic
capital base is a strong incentive for foreign investment. Also, one can wonder
if the potential buyers will not be scared away by the competitive framework
envisioned by Israeli authorities. Paradoxically, these same American
companies which advocate so loudly competition at home, will often require
from foreign governments a «monopoly shelter» when they decide to invest

abroad, in order to recoup their investment over a short period of time.

This has often been observed in Third World countries such as Mexico,
where monopoly status has been granted to Telmex when France Télécom and
SouthWestern Bell took over, in exchange of firm commitments to upgrade the

existing network and expand service to rural areas. But in Israel, universal

 

119Straubhaar, Joseph (Forthcoming, 1995, Ibid.)
120Straubhaar, Joseph (Forthcoming, 1995, Ibid.)

 

 

 

 

 

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81

service has long been achieved, and it will be very interesting to see what the
foreign companies will obtain at the bargaining table.

The number of companies bidding for the second cellular tender incite us
to think that Bezeq will not be in a situation of weakness. Foreign investors
have the ongoing peace process in mind : if it succeeds, controlling a share of
the Israeli market, by far the most advanced in the Middle East, could provide
them with a decisive advantage when the wave of «Global Restructuring» will
hit countries like Egypt, Jordan, or the Gulf States.

Will the winner have to commit itself to invest in advanced services,
such as corporate broadband networks or video delivery services to Israeli
households ? Interesting echoes of the American debate about the «information
super highways» can already be heard in Israel. But for the moment, Bezeq’s
license prohibits all kind of Cable TV/Telephone cross-ownership, and according

to Avi Teitelman, it is not likely to change.

Will the profits have to be reinvested locally ? This may be an option
favored by Israeli policy makers, but chances are, the government would not
get as much money as it could expect under such a provision. Indeed, the state
of Israel will need a lot of money to integrate new immigrants from Russia, or
to resettle Jewish settlers from the West Bank and the Gaza strip within
Israel's pre-1967 boundaries. The money the state will get from the 25% Bezeq
shares it still wishes to relinquish could help him to launch a massive
construction program, or to reduce its debt.

One thing is sure : when the time to choose a foreign partner comes,

there will be tradeoffs between short-term budget requirements and long term

considerations for the country's telecommunication infrastructure.

 

 

 

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82

4.2. Forgjgn Influences against original Israeli Policies

fliefisistiafissesatin}!

By law, Bezeq is the only company to have a «general permit» for
telecommunications services, although it has been a long time since there is no
restrictions on the minister's granting special licenses to other for particular
services. A wide-ranging license was granted to the Postal Authority in 1990.
Other organizations provide telex service, data transmission, and remote data
processing. The leading company is Aurec, which supplies electronic mail

services in addition to other valuevadded services in partnership with Bezeq.

Rival international telex service is provided by the Postal Authority,
RAM Telex, which uses Bezeq's telephone and data transmission lines to
capture a 25% market share121. Bezeq competes with these firms, subject to
its own tariffs. The large Histadrut—controlled industrial group Koor owns a
domestic value-added network known under the name of KoorNet, offering
telefax, telex, and data transmission service. KoorNet also competes with
Aurec and Kav Manche in Electronic Data Interchange (EDI) and VANS.

Moreover, former Minister of Communications in the Likud-led
government, Raphael Pinhassi, literally «gave away» limited licenses to small,
local companies two days before he stepped out of office in July 1992.
Companies like Solan, Elron, Adir, Euronet, Intersat Business Services or
Darcom have been providing since then services like Internet access, value-
added services over Bezeq’s infrastructure, maintenance of private networks
and PBXs, international voice «call-back» service, and so forth. The latter three
even operate a satellite earth station, in competition with Bezeq.

These little companies are a source of controversy today, because they
claim that their license allows them to channel calls in and out of Israel

directly. On the contrary, the ministry would like to step their activities

 

121Noam, Eli (1992, Ibid.)

 

 

 

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83

backward, as they realize that the call-back systems do not bring any
currency into the national treasury. Such unleashed competition on the
margins of the international market could also scare away the new entrant
next year, or improve the terms of the license in its favor. However, Avi
Teitelman downplays these fears. He notices that even according to Israeli

standards, the total revenues of these companies is very smalll22.

Competition is therefore not entirely new in Israel. But so far, it only
concerns a very tiny part of the market, and there are no indications that
these «competition pioneers» will be strong contenders when the range of

competitive services will broaden.

4.2.2. The Telecommunication Manufacturing
w
In 1991, according to the Association Of Electronics Industries Annual
Report123, more than 33,000 engineers, scientific researchers and technicians
worked for the domestic computer and telecommunication industry. The same
report claims that each member of this population contributed for more than
$1 million to the 1991 $3.3 billion revenue of these industries. Moreover,
exports accounted for more than 67% of this figure. Telecommunications civil
industry alone accounted for 21% of this $3.3 billion figure. With telecom
military industry included, the figure was as high as 26%. In other words, the
Israeli telecommunication industry alone, brought more than $760 million in

revenues to Israel in 1991.
Bezeq's privatization will tend to eliminate the gap between the national
telephone company and Israeli private telecommunication manufacturers : as

the national PTT will shy away from the administrative routine inherited from

 

122Interview with the Author (August 16, 1994, Ibid.)
123Danan, Arnnon. Israel : nouvelle terre promise des télécoms. Télécoms & Réseaux, Paris
(January 1993).

 

 

 

 

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84

its past, Israeli authorities hope it will learn to operate in a competitive
environment.

As a consequence, the Israeli telecommunication infrastructure will be
able to rely on the solid, competition-oriented «telecom industry/telecom service
provider(s)» couple. Undoubtedly, it will be an incentive to lure foreign investors

— from Asia in particular —- who used to avoid the Hebrew state.

4.2.3. American Influences

Israeli policy makers often tend to compare the problems and dilemmas
ahead to those faced by State Public Utilities Commissioners, the FCC, and
the Congress in the United States. The Israeli press often compare Bezeq with
AT&T, basically asserting that «Israel needs its Modified Final Judgment». This
can seem unfair to the state monopoly, thinking about Bezeq's
accomplishment during the last decade — which can be very well compared to
«the great leap ahead» made by the French PTT during the 19708. Eli Noam's
«network tipping» theory can help us understand this paradox124.

International dialing services play the same role in Israel as long
distance calling plays in the USA (what is the point of defining a domestic long
distance service in a country roughly the size of New Jersey ?). The kind of
unrest that exists among Israeli businesses about the high level of
international rates, is very similar with the unhappiness showed by business

America during the pre-breakup years.

Continuing on with our Bezeq-AT&T analogy, it seems therefore logical
to open this specific service to competition. We must point out, however, that
nobody is advocating the breakup of Bezeq. On the contrary, authorities are
fearful of any brutal change, that could, over the long run, hamper Bezeq's
capacity to be a first-role player in the building and upgrading of the telephone
infrastructure in the neighboring Arab countries. As Mister Teitelman points

out, the difficulty is to come up with a regulatory environment adapted to a

 

124Noam, Eli. Telecommunications in Europe, Chapter 3, Oxford University Press, 1992.

 

 

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take

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85

small country (in terms of surface as well as in terms of inhabitants) that
takes into account the very small size of the incumbent, as an international

operator on the global, «restructured» market.

There are some common points, as well, between the Israeli and the
American situation as far as potential competitors for telephone service
providing are concerned. Cable TV is developing at a very fast pace in Israel, so
that the basic cable penetration rate can be estimated at 30% already.
Therefore, it is not unrealistic to think of cable operators as a serious possible
alternative for the delivery of telephone services. The Electric Company of
Israel (ECI), the state-owned electricity utility monopoly, could also use its

existing infrastructure for telecommunication purposes.

Given the strength of these potential alternative carriers, chances are
that, if competition is to go one step further in the future, it will be facilities
based. As we pointed out previously, however, this won’t be on the regulatory

agenda before a long time (probably not before the next decade).

Israeli policy makers should not yield to the temptation of an easy
comparison with the USA. In many ways, this is totally misleading. The 1984
Modified Final Judgment solved some problems, but created new ones for the
next decade. Rabin government’s difficult, specific and nearly impossible
challenge, is to accomplish in one year what took US. regulators ten years of

work.

412.4,. Deregulation orRe-regulatiion ?

 

The introduction of competition in the telecommunication market is
often followed by a wave of deregulation measures. Joseph Straubhaar states
that «deregulation has only really been pursued in advanced industrial systems,
where reliance on market competition instead of regulation builds on existing

infiwtruetum development»125_

 

125S’craubhaar, Joseph (Forthcoming, 1995, Ibid.)

 

 

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86

If this is undoubtedly the case in Israel, a major difference exists
nonetheless : Israel has not gone through the stage of regulation yet ; it has not
set up a «FCC» or an «OFTEL». The challenge in front of the Israeli government
is to leapfrog this stage, creating a new regulatory framework while at the

same time increasing competition.

Herein lies the Israeli hiatus : if Israel belongs to the industrialized world
as far as the technological advance of its telephone system is concerned, in the
field of regulation, it lags behind First World countries who are trying to
implement greater competition. From this point of view, a comparison with
some newly industrialized and third world countries, such as Korea and Mexico,

seems more relevant.

4.3. Regulatory Prognoses

Into the foreseeable future, it is likely that Bezeq’s new subsidiaries will
gain more and more independence from their holding company, possibly with
foreign partners joining them in the battle against their new competitors. They
will be totally part of the successful, hyper-competitive Israeli private
telecommunications sector, so that it is difficult to know what stage this
independence process will actually reach.

Many foreign companies will undoubtedly find their way into the Israeli
market, most of them offering only a limited number of very specialized
services.

But even in the long run, there may be no suitable alternative to Bezeq’s

access network, so that the main regulatory issue will remain, in the years to

come, the setting of access charges.

 

 

 

 

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87

CHAPTER FOUR
INTERNATIONAL OUTLOOK, MIDDLE EAST
PERSPECTIVE

5.1. Making the Middle Eastern telecommunication
desert bglloom

The Arab-Israeli conflict even took its toll in the area of current and
future telecommunications. The Israeli infrastructure could have served
neighboring countries, especially Jordan, which recently developed its own
international infrastructure.

Instead of that , an Arab boycott, under which all Arab countries had to
ban trade with Israel was decided immediately at the end of Israel's
Independence war in 1948. A «Secondary Boycott» prohibited trade with
companies doing business with Israel. In fact, this secondary boycott turned
out to be much more harmful from the Israeli point of View, because, until very
recently, it made large Trans National Corporations shy away from Israel.

Right now, out of the 1,000 biggest companies in the world, only five
have significant investments in Israe1126.

On the other side, Israel was caught in a never-ending arms race in order
to maintain its edge on the battlefield. A huge portion of the Israeli economy
was built in relation to military industries ; the country devoted about 20% of

its wealth to expenditures directly or remotely linked to IDF needs.

 

126Sandler, Neal. Best Deal Forward, The Jerusalem Report (September 9, 1993).

 

 

 

 

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88

As a consequence of the state of war, the gap between Israel and its Arab
neighbors widen throughout the years, but this is especially true when talking
about telecommunications. In the afiermath of the White House historic
signing ceremony on the thirteenth of September, can we foresee new
opportunities for the development of a Middle Eastern telecommunication
infrastructure ? In this regard, will the gap between Israel and the Arab

countries be an asset or a handicap if peace is to be reached in the region ?

5.1.1. Major imbalances

As far as telecommunications are concerned, Israel does not have large
common points with the Arab countries that surround it. If the Israeli
telephone penetration rate is about 40%, in the West Bank, the figure drops
below 10%, and in the much poorer Gaza Strip, under 4%. In Jordan, the rate
ofiicially stands slightly below 10%. But other economic indicators also show
major imbalances :

0 the GDP per capita stands at about $12,000 in Israel, whereas it is about
$2,000 in the West Bank and $1,000 in Jordan. This means that the Israeli
economy is about twenty times «bigger» than the Palestinian one ;

0 the illiteracy rate among the population aged 15 is below 5% in Israel,
whereas it stands at 20% in Jordan and 40% in the occupied territories ;

0 unemployment stands at 11% in Israel, despite mass immigration in the
recent years. Moreover, the figure is decreasing. In the occupied territories, the
rate is as high as 40% ;

0 life expectancy reaches 75 years in Israel, but only 65 in the West Bank ;

0 the infant mortality rate is below 10 per thousand in Israel, where it is

about 30 per thousand in Jordan and slightly above 40 per thousand in the
West Bank and the Gaza Strip127.

 

127All these statistics come from the 1988 World Bank Report. They were quoted in the
French daily «Le Monde», September 14, 1993.

 

 

 

 

 

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89

These figures, even aggregated, only give a superficial view of the
discrepancy between Israel and what might become Palestine in another five
years. The Palestinian telecommunication infrastructure will have to be built
nearly from scratch. However, Palestinian do enjoy some advantages : their
work force is comparatively more skilled than in most Arab countries ; the
Palestinian Diaspora is powerful, rich, and willing to invest in the regions under
autonomy ; more important, the «international community» promised the PLO
massive financial aid in the coming years, in order to ensure occupied
territories taking off.

When talking about Jordan, the problems are slightly different. As
opposed to the PLO, King Housings regime enjoys stable institutions and the
Jordanian telecommunication infrastructure, although still underdeveloped,
already exists. In the aftermath of a highly probable Israeli-Jordanian Peace

treaty, Israel would be in a very good situation to help modernize it.

511.2. ,EossiblePeace Dividends in t_h.e
Telecommunication Area

 

Despite the Arab boycott, economic links between Israel and the Arab
countries have always existed, but only on a small scale. There are no official
figures, but Gill Feiler, economist at Israel's Bar-Ilan University estimates
Israeli trade with the Arabs at $400-500 million a year128 — in agricultural
products and inputs like fertilizer, pharmaceuticals, and consumer products
like air conditioners. Most of the goods do not require large service components.
The common Israeli knowledge tends to say that «it is one thing to sell stoves,

and quite another to market sophisticated telecommunications equipment».

The potential is much larger than current sales. A study by Tel Aviv
University's Armand Hammer Fund for Economic Cooperation in the Middle

 

128Rossant, John ; Sandler, Neal ; Gauch, Sarah. In the Middle East, Business May Be

 

East
good

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90

East suggests a potential after-peace market of $2.2 billion129 a year in Israeli
goods to Syria, Egypt, Saudi Arabia and the United Arab Emirates,
particularly in agricultural products and telecommunications equipment. With
the fraying of the Arab boycott (since the Gulf War, Saudi Arabia and Kuwait
have quietly disregarded the secondary boycott), such an evolution could

possibly take place in the near future.

In addition to the territories, one source says that Morocco is the main
area of focus for business people. Koor CEO Benny Gaon (Koor is the biggest
Israeli conglomerate), who visited this country in June 1993, predicts that
given the right conditions «the Middle East could become a captive market for
Israeli industry»130.

As for the others, Lebanon is always in the background : Egypt, the only
Arab state formally at peace with Israel, is near dormant because of religious
unrest there ; the Gulf is an unknown entity, and Syria and Iraq do not exist on

the business map.

As far as telecommunications are directly concerned, Bezeq can expect
its nearly 3-year old direct dialing phone service to Arab countries to boom with
the Palestinian autonomy agreement implementation. For example, Bezeq
provides since August 1994 direct «official» microwave phone links with Jordan,
via Ramallah (located in the West Bank) and the Allenby Bridge. During the
first four days of direct phone connections between the two countries, 25,000
calls were made from Israel to Jordan131 l Bezeq has also invited Jordan to
forge direct phone links with Egypt, Europe, and the US through Israel’s

connection to the undersea Mediterranean fiber-optic cable.

 

Brokering Peace, Business Week (June 14, 1993).
129Sandler, Neal (September 9, 1993, Ibid.)
130Sandler, Neal (September 9, 1993, Ibid.)

1318iegel, Judy ; Rosenfeld, Jose). Bezeq reports 25,000 calls made to Jordan in four days,
The Jerusalem Post (August 11, 1994).

 

 

 

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91

Thus, it seems very likely that the Arab countries, which strongly
protested when this service started a few years ago, will welcome this new

communication opportunity with their old enemy.

As the Middle East peace talks gather momentum, a plan is underway
to let Israel establish its first two-way communications links with Syria and
Lebanon.

Telecom operator in Israel, Lebanon, Egypt, Syria and Turkey are in
discussions with project leader and equipment supplier STC plc to pave the
way for installation of an undersea cable linking the five countries. But the
project will proceed in its full form only if peace talks between Israel and Syria
succeed. If successful, the East Mediterranean Fiber project would allow
callers in Syria and Lebanon to reach Israel directly. For political reasons, calls
between Israel and these countries are routed through several other countries,
which Bezeq declines to identify132. Two-way communications already exist
between Egypt and Israel on one hand, and between Turkey and Israel on the
other hand.

Several Arab countries —— the Gulf states, Morocco, Jordan, Egypt,
Lebanon — now realized the importance of having a good telecommunication
infrastructure in order to speed up the process of their national development.
The Palestinian-Israeli Declaration of Principles mentions the importance of
such an infrastructure. Indeed, it advocates (Annex IV, 2. b. B. point 8.) the
creation of a «Regional Economic Development Program in the field of tourism,

transportation and telecommunication»133.

For Israel and Arab countries communication ministers, this agreement
could arrive just in time, allowing the latter to upgrade their telephone
systems, while granting Israeli telecommunication companies new horizons —

and markets.

 

132Pinsky, Donne (February 21, 1994, Ibid.)
133lsraeli-Palestinian Declaration of Principles. The New York Times (September 1, 1993).

L

 

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92

5.1-3.-...Ih_9_B_ganL<;§n_wait

- -..-——u—_--—. .— ...—..—

 

In the aftermath of the signing ceremony on the White House south
lawn, a dispute took place in Israel between those who said Israel would be the
Switzerland of the Middle East, and those who said Israel would be the
Singapore of the Middle East. Such an argument can appear totally
surrealistic. The Tel Aviv stock market took off immediately after September
thirteenth, but it will take years before the Israeli economy gets real benefits
from the peace agreement. Economic changes do not take place overnight. The
media were swept away by similar economic euphoria when mass immigration
began from the Soviet Union, totally ignoring the difficulties and the price of

absorbing the immigrants.

The Arab contras are not targets for Israeli exports. It is even more true
when talking about telecommunication hardware and software. Despite
widespread misconceptions, most Arab countries are poor. The total imports of
all of them put together are about $130 billion a year134, equivalent to the
Netherlands imports and much less than Italy's, France's or England's. The
economy of the entire Arab world is smaller than Canada's. And at least partly
in response to half a century of Arab boycott, Israel’s industry makes little
that the Arab economies lack.

Thus, Israel does not have much to offer them in the telecommunication
area. Most Israeli export goods are expensive, produced in small quantities, and

intended for sophisticated buyers.

Experts agree that the most important peace dividend is probably the
least tangible : an end to the outcast status that has blocked closer trade and
investments links with the advanced industrial powers. There is also a
widespread hope that it will enable Israel to complete its transition from an
inefficient if self reliant siege economy to a full fledged member of the world's

high-income technological elite.

 

134Caspi, Arie. The Boom Can Wait, The Jerusalem Report (October 7, 1993).

 

 

 

 

 

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93

While it may be too soon to positively say that «Israel can play the role
of Switzerland in the Middle East», a more realistic view would be that it will
possibly serve as a base for companies, who will look to Israel as an entry
point in the Middle East.

5.2. Bezeq, Global Carrier ?

 

One interesting aspect of the Israeli situation is that Bezeq is itself
engaged in a global strategy, while at the same time being the target of bigger,
American or European «Global Players».

Bezeq operates overseas on two different planes. The simplest is offering
to funnel international phone calls through Israel to and from the client
country, such as Kazakhstan. The second is bidding on franchises to install
lines and operate regional networks : In Hungary, Bezeq recently won a
contract for 2 million lines in three regions covering an area about the size of
Israe1135. On these lines, Bezeq will not only offer telephone service but also
carry cable TV, something it is forbidden to do in Israel.

Along the same model, Bezeq and Elbit Ltd. signed in 1993 an agreement
with the company holding concession for the establishment and operation of
local communication systems in Poland. Bezeq and Elbit will own 50% (in equal
parts) of the venture, and the remainder will be owned by the company holding
the concession (40%) and the World Bank (10%). The investment in the
project, due to begin in 1994, is estimated at about $12 million, which will be
financed partially by Bezeq and Elbit (about $2 million by each of the partners)
and the balance by the World Bank. And Bezeq is already negotiating to build a
network for up to 200,000 subscribers in another region in Poland136. The

operator is bidding on similar projects in Ukraine and Russia.

 

135Rosenberg, David (May 19, 1994, Ibid.)
136Rosenberg, David. Bezeq in Baku, Market Place, The Jerusalem Report (May 19, 1994).

cor
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94

In each of those cases, Bezeq signs a memorandum with the host
country, sends in a team of experts to see what opportunities exist, and

proposes an appropriate project.

Bezeq’s decision to go international two years ago is part and parcel of
wider changes going on in telecommunications in Israel and around the world.
The company, once a monopoly supplier of telecommunications services, faces
or will face competition in every sector of the market, including cellular,
international services, data communications and selling of CPE (Customer
Premises Equipment) to subscribers. It must find new opportunities or face

stagnation.

As the Israeli market has opened up, so has the international market.
The decrepit and primitive phone systems of the old communist bloc need to be
upgraded quickly, and governments are prepared to give up monopolies to get

rapid access to foreign financing, advanced technology and improved services.

The fact that Bezeq is not a big, established company by international
standards could even be an advantage, to the extent that it shares common
characteristics with the customers it is adamantly pursuing : a small country,
whose telecommunication infrastructure was backward until recently, and is
now advanced. «In the past five to six years, Israel has built one of the world’s
most advanced telecom infrastructure from scratch, and we attract a lot of
interest from developing countries who came here to see how we did it», confirms

Yoav Krill, Bezeq vice-president for international afiairsl37.

Many potential customers carry a high degree of risk —— Azerbaidjan is
at war, the independence of Macedonia is not recognized everywhere. Bezeq
claims it is taking those factors into account in costing projects : returns have
to justify the risk. This is why Bezeq’s exposure in any one project is relatively
small. The company’s operating license prohibits it from investing more than

$100 million in all overseas projects, and more than $20 million in any one of

 

137Pinsky, Donne (February 21, 1994, Ibid.)

 

 

 

95

them138. It always work with partners — a local telephone company or
another foreign firm. financing often comes from international organizations
like the World Bank.

So far, Bezeq has focused on Eastern Europe and the ex-USSR because
that is where the first opportunities arose. But Bezeq is also eyeing the huge
Chinese market and looks forward to approach Arab countries. Bezeq would
like to be part of international consortia bidding to improve the telecom
infrastructures of its neighbors. Because of its technical competence, the
geographic proximity, and the language skills of its engineers, the Israeli

company thinks it has all the assets necessary to be successful.

Another solutions is for Bezeq to propose its network as a gateway to
the neighboring countries. It could allow them, in the meantime, to provide
services which they do not — or cannot —- provide at this time, such as data
communications. As Bezeq’s Daniel Charbit puts it, «the situation is moving a
lot»139.

 

138Rosenberg, David (May 19, 1994, Ibid.)
139Interview with the author at Bezeq’s facilities in Jerusalem (August 11, 1994).

 

00

priv

rear

 

96

CONCLUSION

Israel enjoys an advantage over other poorer countries who decided to
privatize their public telephone operators, because it stated clearly the

reasons and rationale for change :

o the need for a closer integration to the world economy ;

o the need to drive tariffs down, thus increasing the productivity of Israeli

businesses ;
o the need to speed up the implementation of new technologies ;

0 the need for a clear historical and ideological break with the «public

ownership of key means of production» dogma.

In the case of Israel, internal forces seem to have, first and foremost,
driven the push for liberalization ; among them, the local, export-oriented,
private industry and the flow of new immigrants into the country can be
considered the most important factors. External factors, like foreign aid
provided by the USA, or pressure from Trans-National Corporations (TNCs)
seem to have played only a minor role.

Also, this research tends to show that, if an improvement in the
telecommunication infrastructure has occurred at the same time as the
corporatization of the telephone administration (1984-1994), there is no strong
evidence to show that the partial privatization of Bezeq (1988-1994-199?)
accounts for much in this process. The telephone penetration curve, for
example, presents a relatively linear, upward slope.

At the same time, a brief survey of trends is enough to show that, in
such situations, there is a need for great care in the elaboration and
enforcement of regulation. If the regulatory framework is too weak, the new

competitive environment would be threatened by two dangers.

The first danger, for Israeli policy-makers, is market failure. It could

result in the absolute dominance of the incumbent, which would drive prices up

 

 

 

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97

instead of down ; or in successful «cream skimming» of Bezeq's revenues by
alternative carriers, which would put the principles of universal service and

access at odds with market realities.

Abdala cites the «capture theory of regulation»140, which states that
regulatory agencies sometimes begin «their existence with the public interest in
mind», but eventually surrender «to the interests of the firms they regulate». We
saw that this is not a major risk in the current Israeli situation, but the
guidelines for market regulation remain far too fuzzy, particularly as far as the

setting of access charges is concerned.

Another problem is whether the state, as a majority shareholder, is
«susceptible to such thoroughgoing change in labor, operations, technical and
managerial aspects as efficiency and financial viability might require»141.
Bezeq's civil servants will not necessarily become market-oriented managers ;
nor will Israeli politicians stop seeing the public enterprise as a zone of control

and patronage.

Brain power is now more valuable than oil, and Israel has a piece of the
largest proven reserve of it. Even before the Soviet immigration, Israel had
more scientists and engineers per capita, and higher rates of literacy and math
skills, than any other nation. Its heavily subsidized military enterprises were
bound to incubate successful high-tech spin-offs, and they did : Israeli
manufacturers of computers and telecommunications are exporting high-

quality, well-priced products into expanding global markets.

The Israelis are betting that, ten years from now, a peaceful Middle
East will hopefully be one of the fastest growing areas — if not the fastest —- in
the world. In this perspective, Israel is positioning itself to be a
«telecommunications hub>>142 for the whole area. Israel has the technological,

commercial, and human assets to create a «Singapore in the Middle East»,

 

1“Abdala, M. A. The Regulation of newly Privatized Firms : An Illustration from Argentina,
Latin American Studies Association, Los Angeles (1992).

141Straubhaar, Joseph (Spring 1993, Ibid.)

142Straubhaar, Joseph (Spring 1993, Ibid.)

 

 

 

98

attracting large Trans-National Corporations by giving them
telecommunication «incentives» such as low tariffs, high quality of service,
tolerant rules on leased lines, a broad range of digital services, etc. However,
the authorities' ability to provide the regulatory framework which could bring

this vision closer to reality remains to be seen.

APPENDICES

 

 

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q-CLTI

 

 

 

 

 

APPENDIX I

Table 5 : Israel Telecommunications Indicators

SOURCE : «W, World Telecommunications Development

Report, ITU, Geneva, 1994.

 

 

 

 

 

 

 

 
 
 
 
 
  
 

 

 
 
  

 

  
 
  
 
 

 

Total (M) 5.2
Density (per kmz) 250
Total (B US$) 63
Per capita 1,280
1983 (k) 1,040
1992 (k) 1,845
CAGR (%) 6.6
1983 25.30
1992 35.56
CAGR 1983-1992 (%) 3.9
1983 (k) 221.0
1992(k) 13.0
CAGR 1983-1992 (%) - 27.0
Total demand (k), 1992 1,858.5
Satisfied demand (%), 1992 99.3
Waiting time (years), 1992 0.1
Total (k) 2,058
Used (%) 82.8
Automatic (%) 100.0
Digital (%) 60.4
Residential (%) 74.0
Total (k) 1,260.6
Per 100 households 91.3
Faults cleared by next working day 88.0
Unsuccessful local calls (%) ~ 0
Faults per 100 main lines per year 21.0

 

99

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

1988 (k) 6.3
1992 (k) 4.4
CAGR 1988-1992 (%) _ 11.2
1992 (k) 60.0
Public data networks subscribers (k), 1992 1.84
Videotex subscribers (k), 1992 2.10
Internet hosts (1993) 48
Leased circuits (k), 1992 12.48
1990 (k) 15.2
1992 (R) 36.1
CAGR 1990-1992 (%) 53.9
1983 (M Minutes) 35.7
1992 (M Minutes) 153.1
CAGR 1983-1992 (%) 17.6
Minutes per inhabitant (1992) 29.5
Minutes per subscriber (1992) 83.0
1983 (k) 7.8
1992 (1:) 10.0
CAGR 1983-1992 (%) 2.8
1983 133
1992 185
CAGR 1983-1992 (%) 3.7
Telecom revenue (M US$) 1,703.3
Net income (M US$) 142.6
Pre-tax net profit (%) 8.4
Income tax (M US$) 58.2
Profit (M US$) 84.3
Post-tax net profit (%) 5.0
Per inhabitant, 1992 (US$) 328.2
Per main line, 1992 (US$) 923.0
Per employee, 1992 (US$) 170,898
As a % of GDP (1991) 2.4
Total, 1992 (M US$) 503.9
Per inhabitant, 1992 (US$) 97.1
Lines added, 1991-1992 (k) 142.1
Per main line added, 1992 (US$) 323468

As a % of revenue, 1992

 

 

 

101

 

 

 

 

 

 

 

 

 

 

 

 

 

1988 (M US$) 297.2
1991 (M US$) 444.1
CAGR, 1988-91 (%) 14.3
1988 (M US$) 127.9
1991 (M US$) 215.0
CAGR, 1988—91 (%) 18.9
Forecast 2000
1992 35.56
Forecast 2000 47.69
Total (M US$) 1,865
Per year (M US$) 233.1
Total (R) 1,242
CAGR (%) 6.6
Smbols Used : k Thousands
M Millions
B Billions
US$ United States dollars
% Per cent

CAGR Compound Annual Growth Rate

 

 

 

 

Fig
sou

102

APPENDIX 1[

Figure 12 : «Talkman Versus Pelephone»
SOURCE : Yediot Akharonot, August 5, 1994.

 

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Yedioth Akharonot, the largest Israeli daily, previewing the new competitive
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103

APPENDIX 1]]

Figure 13 : A newspaper ad ran by CellCom, the BellSouth-
led Joint-Venture who won the second operating license
for Cellular Services in March 1994.

 

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BIBLIOGRAPHY

 

 

 

 

 

 

 

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105

 

 

 

 

 

2.42? g)?

CPU

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CL €-

CL

CL

QLJ

SJ

ST

SC

WW

 

 

 

 

 

 

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