ISRAEL Telecommunications Market Intelligence Report

SUMMARY

In June 2004, Israel's Ministry of Communications (MoC) finally published regulations for companies wanting to compete with Bezeq in the domestic fixed-line telephone services market from September 2004. The MoC stipulated that all companies participating in the fixed-line market should be at least 20%-owned by Israeli investors. However, to date only one company has been so licensed, the HOT Telecom venture owned by Israel's three main cable TV operators: Matav - Cable Systems Media, Golden Channels, and Tevel.

The proposed merger of the three cable TV operators has been a long-running affair and has still not been definitively agreed. Matav, which also owns an 18.5% stake in international operator Barak ITC and a 1.2% holding in Partner Communications, is emerging as the dominant partner and is likely to be the resulting entity should the merger proceed. In November 2004, Matav concluded preliminary discussions with Tevel and its shareholders regarding its acquisition of Tevel's assets, including its 35% holding in Golden Channels. If the merger goes ahead, Matav will have over 560,000 cable TV subscribers, equivalent to around 60% of the Israeli cable TV market, in addition to the 35% stake in Golden Channels.

New international operators entered the market in 2004, to compete with Bezeq International, Barak ITC, and Golden Lines International; the latter two companies were only allowed to enter the market in July 1997 although the telecommunications law had been amended as early as 1992 to allow for the licensing of two new facilities-based international service providers by July 1995.

As new regulations allowing additional companies to hold international telecommunications services licences took effect in April 2004, three companies quickly applied for such licences: Israeli ISPs NetVision and Internet Gold, and new entrant Xphone Communications, a subsidiary of Xfone Inc of the US. Internet Gold was the first to launch services, in August 2004, followed by NetVision in November and Xfone in December that year. To date, no further international licences have been issued. The MoC has indicated that it will continue to bar the mobile operators from entering the international call market.

Competition is currently strongest in the mobile communications market, and there have been recent ownership changes to all four operators: in August 2004, Bezeq increased its ownership of its Pelephone Communications subsidiary to 100%; IDB Discount Corp has reached agreements with Cellcom Israel shareholders BellSouth and Brazil's Safra Group to acquire their 34.75% stakes and thereby increase its holding to 95%; and, Hutchison Telecommunications International Ltd (HTIL) took control of Partner Communications in March 2005 when it increased its holding to 52.15%. Meanwhile, MIRS Communications, whose licence was amended in December 2001 to make it Israel's fourth cellular operator but did not acquire 3G frequencies in the December 2001 tender, will soon revert to full Motorola ownership.

Partner is the only one of Israel's cellular operator known to have launched commercial 3G services, which it offers under Hutchison's 3 brand. The company had a soft launch in June 2004 and a commercial launch in December 2004, although it still only offers post-paid 3G services. The company had around 35,000 3G subscribers by mid-2005. Cellcom selected Ericsson to supply the first phase of its 3G network in January 2004, and finally completed a selection procedure for the supply of the entire network in September 2005. Ericsson also won this tender. Pelephone had upgraded its network to CDMA 20001xRTT technology by the end of 2003, and from June 2004 began upgrading this network with EV-DO technology. Services were launched over the EVDO platform in September 2004.

In July 2004, the Ministerial Committee on Privatization decided to sell the state's remaining holding in Bezeq via a private offering of 30% of the company's share capital and the issue of warrants for the purchase of an additional 10.66% of the share capital. In May 2005, it was announced that the preferred bidder for the sale was Ap-Sab-Ar Holdings (Apax-Saban-Arkin Group), a partnership headed by media mogul Haim Saban and backed by SGC Israel Ventures (owned by Mr Saban), Apax Partners, a UK private equity company, and Mori Arkin, a local businessman. The offer price for the state's holdings was NIS4,237 million. The transaction, which was subject to various approvals, had not been completed at the time of writing.

This report contains profiles on the following organisations:

Ministry of Communications; Barak ITC; Bezeq; Cellcom Israel; Golden Lines International; HOT Telecom; Internet Gold; Matav - Cable Systems Media; NetVision; Partner Communications; Pelephone Communications; Xfone Communication; Alvarion; Ceragon Networks; ECI Telecom; Gilat Satellite Networks; RAD Group; Telrad Networks; VocalTec Communications; Israel Internet Association.

TABLE OF CONTENTS

• COUNTRY BACKGROUND
  • General Information
  • Economic and Social Data
  • Telecommunications Data
• TELECOMMUNICATIONS REGULATION
• SUMMARY
• REGULATION
  • Israel: Regulatory Bodies and their Responsibilities
  • Legislation
• COMPETITION
  • General Telecommunications Licences issued by MoC (September 2005)
  • General Broadcasting Licences issued by MoC (September 2005)
• PRIVATISATION
• COMMUNICATIONS MARKET INDICATORS
  • Comparison of Bezeq's Operating Results With CMA Averages, 2004
• ICT MARKET VALUE
• FIXED-LINE SERVICES MARKET
• INTERNATIONAL SERVICES MARKET
• DATA/INTERNET MARKET
• MOBILE MARKET SHARES
• CABLE TV/PAY-TV MARKET
• ELECTRONICS INDUSTRY
• MAJOR OPERATORS
  • Major Operators
• MAJOR MANUFACTURERS
  • Major Manufacturers
• INDUSTRY ASSOCIATIONS
  • Industry Associations

INDEX OF TABLES

• General Information
• Economic and Social Data
• Telecommunications Data
• Israel: Regulatory Bodies and their Responsibilities
• General Telecommunications Licences issued by MoC (September 2005)
• General Broadcasting Licences issued by MoC (September 2005)
• Comparison of Bezeq's Operating Results With CMA Averages, 2004
• Major Operators
• Major Manufacturers
• Industry Associations

INDEX OF CHARTS

• Israel: Cellular Market Shares, end-2004
• Israel: Cable TV Market Shares, end-2004