In an exclusive "Globes" interview, outgoing Hot Telecommunication Systems Ltd. (TASE: HOT.B1) chairman Hertzel Ozer said that he expected one of Israel's major mobile carriers to collapse.
"Globes": Hot Mobile is one of the cheapest companies in the market: two lines and Internet provision for NIS 60. Can you make a profit in the long term at these prices?
Ozer: "First of all, cellular costs today are much lower than they were three years ago. This was a scandal. I spoke out then, and said that the veteran cellular companies were cellular banks, not cellular companies. We knew the costs and how much money the companies were taking, and we lowered the price as soon as we could.
"We started out losing money, because we had many expenses for infrastructure, and we were a small company just beginning. Everyone expected the market to regain its sanity after we gained a market share, but then it turned out that the low prices were sane. I therefore predict that the average price at the veteran companies will fall. Their price is still higher than the price of deals with the new competitors, so I don't expect any change in the intensity of competition."
In other words, you believe that the prices will be low.
"Yes."
Will all the companies be able to survive under such price conditions? Ozer believes they will not. "I said it a long time ago - there are too many players here, and all the regulators in the world realize that." He adds, "A large number of players sometimes weakens the market, and regulators therefore encourage mergers and acquisitions, such as in France. Here, the regulators haven't wised up yet. They'll only understand when the situation gets worse and there's no choice, which is a pity."
Do you think that one of the veteran cellular companies will lose money this year?
"Definitely. Their EBITDA (earnings before interest, taxes, depreciation, and amortization) went down from NIS 2.8 billion before the new competition to less than NIS 1 billion in 2014, and will continue to fall, because the average income per subscriber in these companies is higher than the average price of a new deal in the market. It takes time for customers to realize these things. Keep in mind that where the market prices were, and at which prices we and Golan Telecom Ltd. entered. A process is involved, but the price at the veteran companies will fall. The process will end on the day on which their average income per subscriber drops to the point at which it reflects the price of a new deal.
"I believe that EBITDA will fall to NIS 600 million a year, and it's impossible to maintain a company at this profit, because it's before investments. In my opinion, therefore, losses or mergers are unavoidable. It's happening all over the world. Many people say that the apocalyptic warnings are premature, and that the companies are still making profits and have a strong cash flow. We saw what happened in the fourth quarter - the drop in cash flow. Six months from now, it will be completely different. Unfortunately, the situation is going in one direction."
In the case of Hot Mobile, you received support from the regulator, who initiated a consolidation of the cellular networks. He made it unnecessary for you to deploy a complete network. The networks consolidation agreement with Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) is helping with the low prices.
"True. I think that in this matter, the regulator did what was necessary, and that Minister of Communications Gilad Erdan deserves credit for the consolidation of the networks."
Do you agree with the assumption in the market that your consolidation agreement with Partner is what broke the market, and what helped you sell cheaply?
"It's one of the factors, but not the only one. We'd be selling cheaply even without the agreement. At the same time, the agreement shortened the period in which we're losing money. Keep in mind that part of it is that the rising number of subscribers, higher profit margins, efficiency, and overcoming growing pains. There's no doubt, though, that the agreement was one of the factors."
"There will be no television revolution"
In late 2014, the Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) communications group launched a television service, but Ozer is not very concerned about the new competition.
"They expected that what happened in the cellular market would happen with television, that prices would fall, but I said in advance that this wouldn't happen," he explains. "The profitability threshold in cellular was crazy, and there was enough fat to cut for new players. In television, there isn't. Anyone who wants in should have done it a long time ago.
"Content costs money. When you're talking about cellular, not every call creates cost for the operator. When you're watching video on demand (VOD) every additional subscriber generates cost for the company. If you want to compete, you need deep pockets. When you don't want to come with deep pockets, you come with a distorted solution. What is distorted? They provide DTT (digital terrestrial television), free Internet, and a little more VOD content. That's not what customers are looking for.
"Another point is that in television, there's an affiliation with the content. We know how critical this consideration is in people switching from us to DBS Satellite Services (1998) Ltd. (YES). When you add up all these things, you reach the conclusion that a dramatic revolution like the one in the cellular market is impossible, because there's no economic viability."
What will happen when there is triple play competition, following reform in the wholesale market? This reform will enable every communications company to buy Internet and telephone infrastructure from Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) at a wholesale price, and offer a full package of services, with no distinction between an Internet provider and an infrastructure provider.
"The wholesale market matter is more troublesome, because then competition will be in the core business and the Internet, and the infrastructure usage prices are very low right now. In just television, however… it's not that I'm apathetic. In the market, we take every little threat seriously. I think, however, that television by itself won't make big revolutions in the market."
Hot opposed reform in the wholesale market. Don't you think that it would have been better to cooperate and compete for customers, rather than to make the process more difficult?
"We had two arguments about the wholesale market. One is that the price levels at which the Ministry of Communications demanded that we sell infrastructure were below cost. The second was that the structure of the wholesale market was not suitable for our network. Now, though, we're about to change the model to restrict the entry to our network, so it may be more practical.
"We were very anxious about a model in which our infrastructure would be entered. We have bitter experience with having our infrastructure touched without any coordination with us. We went through a painful experience when Yes entered the VOD field, and every one of their customers disrupted the viewing of hundreds of our customers. It is to Yes's credit that they took responsibility for it, and corrected the situation. In principle, we don't oppose the wholesale market; we just want it to be under the right conditions."
How do you see the communications market in the coming years?
"We've constantly spoken of four communications groups, but in my opinion, we'll wind up with three. There are currently two companies that have built themselves for competition: Bezeq and us. I think that the cellular companies preferred withdrawing dividends to building companies, and now they're paying the price. Milking the cash cow and not investing in infrastructure will result in one of the companies collapsing, and a merger process will begin. I believe that the market will eventually stabilize around three companies providing all the services. There will be a further drop in the price of services, but not a dramatic one."
Do you think that Hot will acquire one of the companies, given the fact that you regard Hot as a company built for the long term?
"We haven't concealed our desire for an acquisition. Unfortunately, at the moment, it's impossible for the regulator, but the alternative will be worse for the market."
Partner and Cellcom: Stick to the facts
In response to Ozer's remarks, Partner stated, "He should stick to the facts. Dividends haven't been withdrawn at our company for three years. We've reduced our debt substantially, while investing in nationwide deployment of a 4G network, one of Israel's most advanced; information systems; services platforms; and customer service, which has won first place among the communications companies."
Cellcom responded, "We appreciate and respect Hertzel Ozer, and wish him success, but all the facts prove otherwise: Cellcom recruited 20,000 subscribers in the quarter, and is finishing the first quarter of 2015 with over 20,000 television customers, which is a phenomenal achievement. Furthermore, Hot and Yes are lowering prices to retain customers, and a "Globes" survey found that 40% were considering switching to Cellcom TV. All this points to extraordinary success, with a great effect on the market in such a short time, all before the launching of the triple packages."
Published by Globes [online], Israel business news - www.globes-online.com - on April 7, 2015
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