Prime Minister and Minister of Communications Benjamin Netanyahu has agreed in principle to eliminate the structural separation in Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) in exchange for a commitment by the company to invest in infrastructure. Ministry of Communications director general Shlomo Filber is now set to implement this decision through a revision of Bezeq's license by Netanyahu. The issue involves one of the major disputes in the communications market, next to the question of allocating Bezeq's telephony to its competitors.
As reported exclusively in "Globes," in exchange for the elimination of its structural separation, Bezeq is slated to commit itself to investing NIS 5 billion in fiber-optic infrastructure over five years. Under the current structural separation, Bezeq must separate its business as an infrastructure company from its other business, such as international calls, cellular telephony, television, and Internet connectivity, which are conducted by its subsidiaries. The purpose is to generate competition in each sector by cutting the monopoly off from its subsidiaries, thereby equalizing conditions for all the players.
In 2012, the Hayek Committee recommended eliminating this separation, and then-Minister of Communications Moshe Kahlon accepted the recommendation, on condition that the company agree to cooperate with the reform in the landline telephony market. From there on, opinions are divided. Filber, Bezeq, and probably also Netanyahu believe that the state should carry out its part by eliminating structural separation, now that it has been proven that the reform in the landline market works. The Ministry of Finance and senior Ministry of Communications officials, on the other hand, strongly oppose the elimination of separation on the format advocated by Filber. They are demanding a gradual change, because a sudden change could upset the market, due to the enormous power of the Bezeq Group, which will be able to act without restrictions. They are demanding that structural separation be eliminated first between Bezeq and Bezeq International Ltd., and between Bezeq, DBS Satellite Services (1998) Ltd. (YES), and Pelephone Communications Ltd. at a later stage, in order to deny Bezeq monopoly power.
The Ministry of Finance strongly opposes the measure, and it appears that it is preparing for a major battle. Netanyahu and the Ministry of Finance ostensibly do not need the Ministry of Finance's approval for the measure, but when such important issues are involved, the parties usually look for joint solutions, rather than unilateral measures.
It is important to note that Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) and Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) have made it clear where they are concerned, eliminating structural separation without establishing an effective mechanism to restrain the company and impose transparency in its operations is likely to destroy them, and they will fight it tooth and nail. The two companies have made it clear to the Ministry of Communications that they are in the middle of economic work aimed at making sure that the Ministry of Communications imposes supervisory measures on Bezeq, and they expect no decision to be made in the matter without first giving their views a hearing.
Eliminating structural separation is likely to be enormously profitable for Bezeq, due to its ability to concentrate its activity and operate as a joint communications group. As it exists in Israel, the structural separation model involves damage to consumers, because Bezeq is barred from selling cheap service packages, and the consumer is therefore unable to benefit from lower prices and competition. On the other hand, Bezeq is Israel's most profitable communications company, with a 60% profit margin - an unprecedented figure, compared with telecommunications companies around the world. The fact that the company is earning so much money, while the other communications companies are losing money, is a situation that Knesset Economic Affairs Committee chairman MK Eitan Cabel has said is unacceptable.
The Ministry of Communications said, "The Prime Minister and Minister of Communications is continuing along the path set forth in the policy document published by Kahlon in 2012, with an emphasis on strengthening competition and offering the consumer attractive prices and an unequivocal commitment by Bezeq to continue investing and upgrading communications infrastructure in Israel."
Published by Globes [online], Israel business news - www.globes-online.com - on March 9, 2016
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