Communications ministry cuts cellphone interconnect fees

73 percent reduction to begin next year "will save the public about one billion shekels a year," says Communications Minister Moshe Kahlon.

Cellphone user 311 (photo credit: Ariel Jerozolimski)
Cellphone user 311
(photo credit: Ariel Jerozolimski)
Interconnection fees charged on mobile phone calls will be slashed by 73 percent from the beginning of next year in a move which will reduce consumer bills and increase competition, the Communications Ministry announced on Thursday.
“The reduction in cellular interconnection fees will save the public about one billion shekels a year, significantly reduce the price of a call from landlines to mobile phones and boost competition by enabling the entry of new players into the cellular market, already in the coming months,” said Communications Minister Moshe Kahlon.
The interconnection fee, which is charged by mobile phone operators when connecting users between networks, will be lowered from the current 25 agorot per minute to 6.87 agorot before value-added-tax from January 2011. After that, fees will gradually decline to 6.34 agorot per minute in January 2012, 5.91 agorot in January 2013 and 5.55 agorot in 2014.
The reduction plan is based on recommendations from a report by London-based NERA Economic Consulting, and is supported by the ministry’s economics departments and by the Finance Ministry.
The ministry added that the reduction in the interconnection fee will lower costs to households and businesses by hundreds of millions of shekels a year in particular on calls from land lines to mobile phones.
In an initial assessment report submitted in May this year, NERA recommended the rate be cut to 4.14 agorot per minute before VAT, which is the actual cost to the companies, and a fraction of the current charge of 25 agorot per minute. By 2014, the fee should come down to 2.57 agorot including VAT according to the original report.
However in light of the fierce opposition and immense pressure exercised by the three main mobile phone operators in recent months and expectations that they would take the issue to court, which would have delayed any decision, the ministry compromised on a gradual reduction in fees. At the same time, the ministry did not bend to the cellular companies proposal to merely cut fees to 17 agorot per minute, which they deemed to be a fair rate.
Cellcom, the leading mobile operator by market share said on Thursday that the reduction is expected to have a material adverse effect on the company’s results and that it intends to take measures to mitigate as much as possible the expected adverse effects, through revenue enhancement as well as cost reduction.
“Absent any efforts to mitigate the expected loss of revenues, these changes are expected to have an annual direct adverse effect (based on the company’s current calls and SMS data) of approximately NIS 320 million on the company’s net income, for the first reduction,” said Cellcom.
“The company will study the Communications Ministry detailed decision, once received, and will then determine its steps against the decision, such as filing a petition with the Israeli Supreme Court of Justice.”
Partner announced earlier that the cuts will have a similar impact on its operations on an annualized basis. According to Deutsche Bank, the absolute potential impact on Partner should be slightly lower than Cellcom, and on Pelephone the impact should be significantly lower.
However, the actual impact on the companies is estimated to be far lower, mitigated with higher tariffs and efficiency measures.
“The mobile operators will not stand pat,” said Richard Gussow, analyst at Deutsche Bank.
“The operators are likely to raise airtime tariffs and cut costs to compensate. This will be more difficult now due to a subsequent regulatory measure that prevents the operators from raising tariffs while a customer is still under contract.
Nevertheless, we believe that the impact can be mitigated through the raising of tariffs as contracts expire.”
The Communications Ministry is hoping that reduced interconnect fees will enable other operators to venture into the cellular marketplace in Israel and boost competition through the entry of retail players called “mobile virtual network operators.” An MVNO does not have its own network infrastructure and therefore enters into a business relationship with a larger mobile network operator, pays wholesale fees for minutes and then sells the minutes at retail prices under its own brand.
“In our opinion, the real reason behind the cuts is to pave the way for MVNOs, which are likely to be significantly cheaper,” said Gussow. “As an MVNO will start off with virtually no market share, it has the competitive disadvantage that nearly all outgoing calls will be out of network, thus necessitating the addition of an interconnect fee.
“With a sharp initial tariff cut, this competitive disadvantage is narrowed. We continue to believe that an MVNO remains the greatest threat to the profitability of the mobile operators, as it could lead to lower tariffs, particularly in the non-business market in about mid-2011.”
In recent months, the Communications Ministry has received 12 applications for an MVNO, including applications from the Israel Post Office and Hamashbir Lazarchan department store chain. The latter received the first MVNO license in June 2010, and expects to be operational by the end of 2011.
In addition, the Communications Ministry is this month expected to issue a tender for a new mobile carrier license to boost competition in the cellular market dominated by the three main operators. Mirs Communications Ltd. announced recently that it intends to bid in the tender.