Regulators look to MVNOs to ramp up competition in Israeli mobile market - Incumbent mobile operators face pressure from new market entrants and regulatory moves

Around a dozen MVNOs and two new mobile licensees are set to be approved in Israel this year, representing a significant challenge to the country's four existing mobile players. Regulatory pressures – notably mobile termination rate (MTR) cuts – are also expected to impact operator profitability.

Israeli regulators have been mulling the introduction of MVNOs since 2007 in a bid to ramp up competitiveness in a market dominated by three high-margin incumbent mobile networks: Cellcom, Orange (Partner Communications) and Pelephone, the latter the mobile arm of fixed-line incumbent Bezeq. The decision to allow MVNOs was granted in December 2009 and the first wave of virtual operators were given licences last June and instructed to begin negotiations with the networks. Regulators forecast that MVNOs will eventually account for around 5-10 percent of the country's mobile market.

However, early progress in introducing MVNOs has been mixed, primarily due to operator reluctance to reach agreements. Last month it was reported that the very first MVNO licensee - Telecom 365, a unit of retail group Hamashbir – had returned its licence to the government citing limitations with the MVNO model with regards to mobile data services. Instead, the firm signed a separate deal with Pelephone to offer mobile services as part of a branding deal. This meant that in December 2010 another MVNO licensee, Free Telecom, became the first Israeli MVNO to agree terms with a network partner (Pelephone). According to GSMA Intelligence, while no Israeli MVNOs have officially launched to date, some thirteen firms have either been awarded MVNO licences or are waiting for approval. These include several major national retailers and the Israeli post office.

Meanwhile, the regulator has moved forward with plans to license two new full mobile operators in a further bid to stimulate competition. The deadline for applications is 1 February 2011 though existing players (with the exception of fourth-placed Mirs) are barred from bidding. The minimum bid for a licence is ILS10 million (US$2.71 million), with a framework in place to reimburse fees over this amount if certain conditions are met. Licensees will have seven years to deploy their new networks to meet coverage requirements.

Of more immediate concern for the incumbent operators is the regulator's targeting of MTRs, which are due to be slashed by more than half this month (January 2011) from ILS0.25 to ILS0.0687, as part of a process that will see them eventually reduced to ILS0.0555 by 2014. Other regulatory moves in the pipeline include plans to limit cancellation fees on contract tariffs, which operators fear could encourage churn.

Such moves reflect the fact that the Israeli mobile market has to date been dominated by what the regulator calls "a controlling group" of three large players, which enjoy roughly equal market shares and high ARPUs. According to the latest GSMA Intelligence data, Cellcom was the fractional market-leader with a 34 percent share of connections in Q3 2010, though second-placed Orange added the most subscribers (net additions) in the quarter and registered the strongest year-on-year connections growth (see table).

All three of the main mobile operators are looking to next-generation services as a strategy to keep them ahead of the new competition. This is certainly the case at former CDMA–based Pelephone, which claims to have migrated over 40 percent of its customer base to its new HSPA network by Q3 and that revenue from data, value-added and content services now account for around a quarter of mobile service revenue. Pelephone's parent Bezeq is also in the process of building a Next Generation Network (NGN) to offset declines in its legacy fixed business.

Market-leader Cellcom is also focusing on mobile data services as a growth driver, reporting in Q3 that data revenues (including SMS) now account for 19 percent of service revenue. It is also building an NGN to serve business customers. Meanwhile, Orange is ramping up its presence in the fixed-line broadband space via the proposed acquisition of 012 Smile, a local ISP, for US$218 million. The second-placed operator also launched a new prepaid discount offering (under the 'Pay less, get more' slogan) in an effort to combat the pending new MVNO entrants.

The fourth (and smallest) Israeli mobile network is Mirs, which is currently in transition after being sold by Motorola to Altice Group for US$170 million in late 2009 (it had originally targeted a buyout by one of its larger mobile rivals, but such a move was opposed by regulators on anti-trust grounds). Mirs currently uses the proprietary iDEN mobile technology (developed by its former US parent) but is reportedly looking to switch to a 3G technology such as WCDMA.

Jon Groves, Analyst, GSMA Intelligence:

The signing of the first MVNO agreement between Pelephone and Free Telecom means the Israeli regulators are on the verge of achieving their long-term goal of increasing competition in the market. With the majority of the new MVNOs expected to focus on the prepaid market it should not be a surprise that Pelephone is the first operator to break ranks and reach an MVNO hosting agreement due to its limited existing prepaid connections base. With this in mind Pelephone is expected to reach additional MVNO agreements in the coming weeks. In contrast Orange, with 27 percent of its existing connections on prepaid tariffs, has the greatest exposure to increased competition and is unlikely to actively encourage new market entrants. The operator has already set out to stoutly defend its territory ahead of the entry of MVNOs by launching new prepaid offers. However, the raft of potential new MVNOs will each face challenges in gaining substantial market share in an already saturated and primarily postpaid market. The crowded field of potential new entrants that has emerged is also likely to put a number of them off committing to launch. Those with strong existing customer relationships (such as Israel Post) or differentiated propositions for data services (such as those expected from Ituran) are likely to be more successful in carving out a niche.

Israel Mobile Connections, Q3 2010
Source: Company reports, GSMA Intelligence