Cellphone prices

We have entered into a promising era of more reasonable cellular phone costs. On Monday, two additional cellphone operators – Golan Telecom and HOT Mobile (the result of a merger with the former Mirs) – launched their networks.

Targeting the heaviest cellphone users – the bread and butter of the cellphone business – the two companies offered unlimited calling packages at surprisingly low prices. Golan Telecom’s package of unlimited calls, SMS and Internet costs NIS 99 a month, while HOT Mobile’s package is slightly cheaper at NIS 89 a month.

Comparable packages at Orange, Pelephone and Cellcom cost between NIS 179 and NIS 289.

What took so long for real competition to take hold? For years Israelis have paid a premium to use cellphones. Of 34 OECD countries, Israel was ranked either fourth or fifth highest in cellphone costs depending on the category. Light users – those who made just 30 calls and sent 100 text messages a month – paid on average $23 compared to an OECD average of $16 a month; moderate users – 300 calls, 225 text messages – paid $100 a month compared to an OECD average of $64; and heavy users – 900 calls, 350 text messages – paid $180 a month compared to an OECD average of $122. The data were collected in August 2010, before a series of reforms was implemented by the Communication Ministry.

Limited competition and regulatory oversight allowed the big three cellphone network operators – Pelephone, Cellcom and Partner – to enjoy huge profits at the expense of the consumer. In 2010, for instance, the three companies had combined net profits of NIS 3.6 billion. One year later, after the implementation of various Communication Ministry reforms, aggregate profits fell to NIS 2.3b. and this trend is expected to continue. It should come as no surprise that the stocks of Bezeq (which owns Pelephone), Cellcom and Partner have fallen between 22 percent and 34 percent since the beginning of the year.

So what happened after more than 20 years during which first Pelephone and later Cellcom and Partner charged exorbitantly for their service and nothing was done to stop them? A number of factors came together. But the driving force behind the reforms that led to increased competition and lower bills was Communication Minister Moshe Kahlon.

First, Kahlon forced the companies to slash their interconnection fees – the charge they deduct for connecting subscribers to a different network. Next, he forced them to do away with the “exit fine” operators charge subscribers for switching to a competitor.

These reforms made it easier for additional cellphone operators to compete with the big three. Previous communication ministers attempted such reforms, but backed down to pressure from the powerful and rich companies and their numerous lobbyists in the Knesset.

In parallel, the idea was floated in the Communication Ministry with Kahlon’s encouragement to allow “virtual” operators to use existing cellphone networks to offer competitively priced services. Earlier this year, You, Home Cellular and Rami Levy Communications became the first “virtual” cellphone operators.

Now Golan and HOT, which have set up actual physical mobile networks, have entered the market.

The big winners of the increased competition will be the consumer.

The big losers will be the big three cellcom companies.

Kahlon proved that under the right circumstances and with the ample doses of courage and resolve, a government minister can make a real impact.

Unfortunately, there is also a downside to the increased competition. Each of the big three mobile phone operators employs between 6,000 and 7,000 salespeople, customer service personnel and engineers.

Sabina Podval, an analyst at Leader Capital Markets, estimates that as many as half of them might be laid off if Golan and HOT manage to maintain their low prices over time. But that is the price of competition.