ESIS II: Regulatory Developments Report - II On-going developments

Update: July 1999

Israel - On-going developments

1. On-going changes in institutional structures

Following the elections held in Israel in May 1999 a new P.M. was elected, Ehud Barak, and a new coalition government formed (6.7.1999). The new government is lead by the Labour Party (Israel One) and has the support of 75 M.P. from a total of 120. The new Minister of Communications is Benyamin Ben-Eliezer (Israel One); the Minister of Education, Yossi Sarid (Meretz) and the person to be appointed as Minister of Science in coming weeks is Matan Vilnay.

The only significant change to be reported so far is the transference of the Second Authority for Television and Radio from the Ministry of Education, Culture and Sports to the Ministry of Communications.

2. On-going changes in the regulatory framework

As we have indicated in previous sections of this report Israel is undergoing significant changes in the regulatory framework in Israel are the result of the recommendations of several high level committees and their systematic implementation: the Brodet-Vax-Leon Committee (1996) opening the telecommunications market for competition; the Rosenne Committees for the implementation of these recommendations; the Peled Committee for an opens skies policy in broadcasting; the Gronau Committee for tariff reform in view of the liberalization of the market.

The new government is expected to continue this policy this trend; the government is committed to the process of liberalization and privatization of the telecommunications market. Indeed, the landmark in this process, the Brodet-Vax-Leon Committee was nominated under the previous Labour government (1996).

3. Media and telecommunication markets

The media and telecommunication market in Israel is very active with much action going on. The following information should provide the flavour of what is going on and have no intention to provide a comprehensive coverage of the market.

General Electric-Marconi establish risk capital fund in Israel: in early July Marconi bought the Israeli software company R.D.C. by US$ 39 m . It will become Marconi's development center for wireless communications and Internet technologies in its telephony division. A few months ago General Electric bought control of the imaging company Elscint by US$ 270 m. In early July visited Israel Dr Madeleine Glick, physicist and chief scientist at the Marconi Research Labs. She visited several development centers in the universities and several hi-tech companies, among them Orckit, El-Op, RAD, I.C.A.. The Yedioth Aharonot daily (6.7.99) reports that General Electric-Marconi intends to establish an investment branch in Israel which will invest tens of millions of dollars in hi-tech companies and start-ups.

RFI by the Ministry of Communications towards the introduction of Additional Cellular Operators in 2002: The Ministry of Communicatios published Jun 27 a call for the public's stand on mobile personal cellular services and communications messages and frequencies allocation. The Ministry present a five-year plan for allocation o a suitable spectrum of frequencies for these cellular applications, alternatives for message frequencies, and various questions regarding the method of frequency allocation. This is an indication of the Ministry's plans to expand cellular competition by tenders for new operators, implementation of third generation, and expansion of existing operators frequencies (Efi Landau, Israel's Business Arena June 24, 1999).

Pele-Phone Demands Ministry of Communications Permit to Compete in Inland Market: The company asked the Ministry to be allowed to compete in the LMDS frequencies tender which will enable a wireless infrastructure to be laid for the purposes of competition. Pele-Phone notes that even though Bezeq has a 50% holding in it, full separation is maintained between the companies in the management, marketing, and financial systems, and respecting employees and assets. Alternatively PelePhone lists three ways of ensuring that its activities in the inland market will not be prejudicial to competition: 1. Structural separation from a subsidiary company which will hold a stationary inland communications license. 2. Initial restriction of activity in this market to fields in which Bezeq is not a predominant operator. 3. Separation between the infrastructure and the provision of content services.

High Court of Justice rejects Cable TV Companies Petition against DBS Tiering Window: The cable TV companies petitioned the HCJ after being prohibited by the Ministry of Communications from supplying their subscribers with broadcasting tiers. Under the tiering method the subscriber may choose certain cable channel tiers in addition to the basic package and pay only for the services he actually receives. As decided by the cable and satellite broadcasting board DBS will have the exclusive right to offer tiering broadcasts for a period of eighteen months as from commencing services with an option to extend the window to twenty-seven months. It was also decided that the exclusivity granted DBS in tiering broadcasts would cease once it obtained 250,000 subscribers. The judges asked why the cable TV companies had chosen not to broadcast in tiering format when they were able to do so a few years ago. (Shmuel Dekalo, IBA July 4, 1999).

Paul Allen, Microsoft founder pledges $20 m in CommTouch IPO: Through GO2NET and Vulcan Ventures Allen will invest $20 m in the IPO which is scheduled to be held in Wall Street today. CommTouch has been developing e-mail solutions for Internet sites since 1998. It is expected to rise $50 milllion in the IPO at company value of $200 million. CommTouch largest shareholders are venture capital funds Gemini, Concord, Evergreen, Apax-Leumi, Dr Nahum Sharfman and Amir Lev) and a group of investors led by issue underwriter Warburg Dillon Read which entered the company at market value of $150 million. (Eliav Alalouf, IBA, July 7, 1999).

Bezeq buys 25% of Walla the Israeli Internet Portal and Search Engine by $ 19.7 m: Walla controlled by Formula through Mashov Computers operates an Internet site that serves as Portal and search engine. Bezeq will receive an option for a year to enlarge its participation to 50%. Bezeq asked the Anti Trust Commissioner, David Tadmor for approval of the deal. Bezeq needs also the approval of the Minister's Committee for Privatization. (Hametz Sagih, Haaretz, 2.7.99).

Bezeq-Kol negotiates with Cellcom and Partner the establishment of cellular sites: Bezeq-Kol a subsidiary of Bezeq deals with the final loop market, including import, marketing and installation of exchanges and communication systems for organizations. The company is interested in setting marketing packages which include exchanges access both to the cellular network and the regular fixed telephony network of the Bezeq. This will enable for companies to direct the call to the first free line of the addressee. (Hametz Sagih, Haaretz, 2.7.99)

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The Israeli Communications Market will reach NIS 21.3 Billion in 2003: The Forsythe Research Company published today the results of a report carried out for the Ministry of Communications. The Israeli communications market should reach NIS 21.3 billion in 2003 compared to a value of N14.8 billion in 1998. The amount of inland communications should grow from NIS 5.6 billion in 1998 to 6.7 billion in 2003. The cellular activity is expected to grow more rapidly from NIS 5.7 billion in '98 to 9.4 billion in 2003. The prediction is that the most significant growth is to be expected in the area of the Internet that in 1998 amounted to NIS 250 million and may reach one billion in 2003. In the cables there will be a small growth from NIS 1.6 billion in '98 to 1.9 billion in 2003. A similar growth rate is expected in the area of international communications were the activity in 2003 is expected to reach NIS 2 billion compared to 1.6 billion in 1998. (Hametz Sagih, Haaretz, 23.6.99).

Intel president says that Israel is an important target for the risk capital of the company: Craig Burt, Intel world president visited Israel on the occasion of the inauguration of the new Intel fabric in Kyriat Gat. He stated that Israel is an important target for Intel and perhaps the most important one outside the United States. He said that from the beginning of '99 Intel invested in 10 startup companies in Israel compared to 4 in 1998. In parallel to the main business Intel invests in young companies what can be considered as risk capital. The goal is that those companies eventually join the mainstream of Intel activities. In 1998 80% of Intel's investments were in the United States but this trend is expected to change in 1999 when about 50% of the risk investments will be outside the United States. Israel is an important target for such investments, specially in the are of the Internet. (Hametz Sagih, Haaretz, 22.6.99).

MED-1 refused buy offer at a value of $ 100 million: From an assesment of Clal Industries by economists of Lehman Brothers MED-1 was valued at $ 115 million a little more than the figure offered for the company. MED-1 operates the under sea communication cable "Lev" which connects Israel, Cyprus and Italy and was layed out in October 1998. Also the Bezeq company operates under sea cables but the "Lev" cable has 40 times the capacity of Bezeq's cables. Lately MED-1 is expanding its activities in view of the upcoming opening of the communications market in Israel to competition. It started laying out a cable parallel to the Israeli coast offering the necessary infrastructure to operators interested in competing with the Bezeq. An additional project is the laying out of an additional cable that should reach Spain and Portugal. MED-1 will be in the near future sign an agreement with the American company Global Crossings. Until three months ago the Bezeq maintained 21.25% of the companies shares. After Bezeq retired MED-1 is in the hands of the Cypriot company CYTA 9.22%; Aureq 14.39%; Globscom 14.39%; Zohi (Shay Livnat) 15.66%; Clalqom (from Clal Industries) 23.17% and Telecom Italia 23.17%. Lately Bezeq has tried to buy back shares of the company and asked for permission from the Anti Trust Commissioner and the Ministry of Communications. It seems that permission has been refused. (Alona Koren, Haaretz, 21.6.99).

Cable and Wireless will agree to the postponement of the date for enlarging its share in the Bezeq: A possible settlement of the dispute between Cable and Wireless and the Minsitry of Communications have been proposed - Cable will postpone the date for enlarging its share of the Bezeq and the Ministry will refrain from impeding the options agreement of Cables. Representatives of Cable and Wireless and those of the Ministry of Communications and the Ministry of Justice have disagreed so far about the date to which will be postponed the enlargement of Cable's share in the Bezeq. Cable received the authorization of the Ministry of Communications to enlarge its share to 20% in August 20, 1999. Cable which maintains 13% of Bezeq's shares; however Cable signed option agreements with the Hong Kong bank HSBC and with the investment bank Merryl Lynch thereby they bought for her Bezeq's shares and maintain them in trust until she receives permission to enlarge her shares to 20%. HBSC maintains 4% of Bezeq's shares and Merryl Lynch 3%. The options agreement establish that these shares should be sold to Cables and Wireless in the date of August 20, 1999 at an agreed price and a premium. The Ministry of Communications point of view is that these agreements are illegal and demanded their annulation. The Ministry is afraid that the enlargement of Cable's shares in the Bezeq prior to the selling of the control share to an strategic partner will impair the competition between international companies and provide Cable with advantages which will damage the selling process. In the latest weeks, following the postponement of the offer of Bezeq's shares in the Stock Exchange an effort has been made to advance the selling of the company to an strategic investor. (Hametz Sagih, Haaretz, 10.6.99).

Aureq, Monitin and Yediot Tikshoret buy 32.3% of the shares of Netvision for 17 million dollars: Netvision is the leading Israeli provider and the estimate is that there are 90,000 subscribers so that the deal reflects a price of more than $ 550 per subscriber. Aureq, Monitin (owned by Eliezer Fishman), and Yediot Tikshoret are the owners of the cable TV companies Aruzei Zahav and Eidan; on the other hand the cable TV company Tevel owns 33.3 of Netvision's shares. The deal needs to be approved by the Anti Trust Commissioner David Tadmor and from the Ministry of Communications. The buyers group announced that the Internet is an strategic domain from the point of view of the cable TV companies and will become a leading area of activities for them. Rami Belinkov, CEO of Aruzei Zahav said that in '99 the Internet will continue to expand in Israel and he expects that by 2000 the number of home users will reach half a million. With the completion of this deal the shares of Netvision will be divided between Elron Electronics Industries (32.3%); Tevel Cable TV (33.3%); and Aureq, Yediot Tikshoret and Monitin (32.3%). (extract from Hametz Sagih, Haaretz, 25.12.98).

4. On-going changes on IS policies

With the new government several organizational changes are expected in the structure of the different Ministries. A new Ministry for Science and Culture will be composed by the former Ministry of Science and the divisions of Culture and Sports of the Ministry of Education, Culture and Sports. The Second Authority for Television and Radio will be transferred from the Ministry of Education to the Ministry of Communications. No IS policy changes are to be expected until these organizational changes take place.

The new government announced a change of national priorities with budgetary preference being given to education and other investments in infrastructures. This may possibly be reflected in the IS policy.

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Acknowledgments:

The present report is in debt with the maintainers of the main government sites in Israel which have provided access to much of the material included here. First and foremost the Ministry of Communications and its International Relations Unit (http://www.moc.gov.il); and the Government Internet Committee and the IT Policy group at the Ministry of Finances (http://www.itpolicy.gov.il and http://www.mof.gov.il ). Other important sources are the Ministry of Foreign Affairs (http://www.israel-mfa.gov.il); the Ministry of Education (http://www.education.gov.il); The Ministry of Trade and Industry http://www.mti.gov.il ; The Ministry of Science (http://www.most.gov.il) and the Israeli Internet Association (ISOC-IL) http://www.isoc.org.il ; the Israel's government portal at the P.M. office http://www.info.gov.il and the Parliament site http://www.knesset.gov.il

Many other souhave been employed but an special mention should be made to the online databases of the Israel's Business Arena http://www.globes.co.il and the Haaretz newspaper (Hebrew).

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