Israel’s Cellular Competition: Beware of Unintended Consequences

Photo credit: David Rabkin, rabkin.co.il

Communication Minister Moshe Kahalon’s incredible persistence in introducing competition to the cellular carriers has been a tremendous blessing for consumers. For years, we Israeli consumers have paid wireless carriers way too much. It was, in fact, government regulation in an unholy alliance with the owners of the cellular careers, that enabled this oligopoly to persist. Minister Kahalon used old fashioned capitalism (read: open competition) to decisively slaughter the oligopoly and drive prices down by 75%.For that, Minister Kahalon deserves our thanks and the politician of the year award.You see: when competition strikes, efficiency rises and the market finds price equilibrium.

Sort of…

There are two unintended consequences of this competition that Minister Kahalon must stay vigilant in making sure they do not hurt innovation or employment.

The first, is infrastructure spending. The Israeli cellular carriers have now had their profits reduced by the new competition while, at the same time, at least one of them is shoveling buckets of debt for Ilan Ben Dov. This means that free cash flow is limited and, hence, the carriers will do their best to limit CAPEX spending in new, improved and faster infrastructure and services. This means that new services will roll out slowly in Israel and coverage and service in general may suffer in both speed and ubiquity. You need look no further than the reduction in CAPEX spending by cellular carriers in the US to see this. US Carriers continue to reduce CAPEX as a % of revenue and, as profits and revenue go down at Israeli cellular carriers, you can expect to see a similar trend at Orange, Celcom, Pelephone and Golan and it might even be more dramatic. With a rise in mobile computing and devices, this is potentially crippling to innovation in Israel and to service for the consumer.

The second area of unintended consequences is unemployment. I have written about this before (in hebrew) when the Celcom employees were laid off. Reduced profits means the cellular companies will need to find ways to get more efficient. Many of them will pursue a Giffgaff like model which means they will need many fewer employees. This means that many of the tens of thousands of cellular company employees currently working today will need to find new employment. In his hat as welfare and employment minister, Minister Kahalon needs to find innovative ways to deal with this unemployment problem as well.

[Originally published on 15th July 2012 by MIchael Eisenberg]