Mobile competition

By
August 27, 2015 22:01
3 minute read.
iphone 6

Apple's iPhone 6 (R) and iPhone 6 Plus.. (photo credit: REUTERS)

Michael Golan is the poster boy of a capitalist revolution in the Israeli mobile phone market. Even America, that bastion of free market enterprise, has failed to undertake such a move due to the power of the telecom cartels there.

The 37-year-old immigrant from France, formerly known as Michaël Boukobza, led an aggressive marketing campaign over the past three years that brought down cellular phone bills in Israel by nearly 90 percent. “Stop being a sucker,” the motto Golan made famous, resonated with Israelis who hate the idea of being anybody’s fool.

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Instead of charging per minute, Golan offered no-contract packages of calls, including free long-distance calling to certain destinations, text messaging and unlimited Internet surfing for NIS 99 a month. Golan and his partner, Xavier Niel of Iliad Communications, have already performed a similar feat in France.

Now Golan Telecom, the company headed by the two Frenchmen, has announced it is seeking to consolidate the market by either being bought out or acquiring one of the large mobile phone companies. But whether or not Golan remains in the telecom market, it is highly doubtful that prices will return to anywhere near the levels reached before Golan came on the scene. Israelis have tasted the fruits of capitalist competition facilitated by an enlightened regulatory regime. There can be no turning back.

Until the appearance of Golan Telecom and a number of other cellular phone companies, Israelis paid some of the world’s highest rates. For years Pelephone, Cellcom and Partner managed to keep their rates artificially high.

A small elite group of telecom executives kept competition to a minimum. When Cellcom entered the market in 1994, it charged a price of just 8.5 agorot per minute, but within a short time it raised the price to 50 to 60 agorot a minute. None of the large companies had an interest in undercutting their “competition.”

This state of affairs was not unique to Israel. Jean Tirole, a French economist at the Toulouse School of Economics awarded the Nobel Prize in economics last year for his work on regulating competition, noted the difficulty of encouraging competition among mobile phone networks.

“You would not expect a huge amount of competition, because of the huge fixed costs of establishing the networks,” Tirole said.

But the problem is not just the nature of the telecom business. In the US, the cartel of Internet, mobile, and cable companies has a huge influence on politicians and regulators.

Many of the latter find work in the same companies they just finished regulating. “Regulatory capture” was the term used by Tirole to refer to the ability of telecom cartels to prevent reforms to increase competition.

Luckily for Israel, a number of factors came to together to make it possible for change. First, Moshe Kahlon was appointed communications minister and proceeded to advance reforms that many of his predecessors had considered, but had not succeeded in implementing.

The solution was simple. In order to get around the huge fixed costs of setting up their own networks, Golan and other companies were allowed to piggy-back on the existing networks of the large cellular companies. In exchange they paid a fair “rent.”

Also, the socioeconomic demonstrations of the summer of 2011protesting the high cost of living gave an additional tailwind to Kahlon’s reforms. Israelis were fed up with paying exorbitant mobile phone bills resulting from a combination of lax regulatory controls and cartel-like behavior on the part of the cellphone operators. And this was not just a consumer issue. There were serious negative externalities to the high price of mobile phone services.

After bringing down mobile costs so significantly, Golan Telecom is now considering its future. In part, regulatory constraints are to blame. As part of the deal with the Communication Ministry, Golan Telecom must invest in its own network of antennas that is capable of covering 40% of Israel, even though Golan has already reached an agreement with Cellcom to use its network.

After doing so much to bring down costs, Golan might be leaving the stage. If it does, will prices start rising again? We doubt it. Israelis have become accustomed to a truly competitive mobile phone market facilitated by an effective regulatory regime and aggressive marketing. Even America has something to learn from the Israeli example.

There will be no turning back.


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