Haaretz 2-8-2012
Analysts: Quarterly earnings will expose cost of the cellular upheaval
May 14, 2012 will go down in the history of the Israeli telecommunication market as the day the oligopoly was broken.
By Amitai Ziv | Aug.02, 2012 | 7:36 AM
May 14, 2012 will go down in the history of the Israeli telecommunication market as the day the cellular oligopoly was broken. With the entry of Golan Telecom and HOT Communications, rates fell to a fraction of their former cost and the face of the industry changed overnight.
The impact of that event will become clearer starting this week when Bezeq becomes the first of the telecom players to report its second-quarter earnings, giving analysts a chance to see how the reforms impacted the veteran players. (Bezeq provides wireless service through its wholly-owned subsidiary Pelephone.)
Bezeq’s financial statement won’t tell the whole story, of course, because Golan and HOT began operating in the middle of the second quarter. But if analysts disagree over anything, it’s only how much pain the advent of competition is causing the incumbent companies.
Until competition reared its hairy head, there had been only three substantial cellular service providers: Pelephone, Cellcom and Partner Communications, which operates under the “orange” brand. The three had been quite free to charge sky-high prices and each had, more or less, a third of the highly-saturated Israeli market. Suddenly they were faced not only with mobile virtual network operators but with new absolutely real operators as well.
Analyst Uri Licht of IBI – Israel Brokerage & Investments thinks Cellcom lost 25,000 subscribers while Bezeq’s Pelephone shed 15,000; Pelephone seems to have the strongest brand, Licht said.
Sabina Podval of Leader Capital Markets agrees. “In our view Pelephone’s performance will be the best among the three big companies. One of the reasons is that HOT Mobile, which worked the hardest to recruit customers, is hosted on Pelephone’s network,” she said, but cautioned that the gain was not a long-term one because HOT is building its own network.
Tzahi Avraham of Clal Finance is more pessimistic about the damage done to the three veteran mobile companies. “Close to 180,000 people left the veteran companies to date, but the earnings report only covers the period to June 30. At Partner, the loss could reach 40,000 customers,” he said. He declines to comment on Cellcom, which belongs to the same business group, IDB, as Clal Finance.
“Partner is an interesting story. The company tried to stand firm against the drop in prices and keep its rates at NIS 125 to NIS 135 a month. The company said, ‘We’ll lose a few more subscribers, but our ARPU will erode less’,” Avraham said, referring to the industry term for average revenue per user.
The analysts agree that the erosion of ARPU will for now be relatively small, a drop of one or two shekels from the first quarter, so that Pelephone’s will likely be NIS 95-96.
“The turbulence in the cellular market won’t stop, certainly not at this stage, perhaps in another few months. The results of the second half of 2012 will be significantly lower,” said Avraham.
Licht assesses the damage in financial terms. “The hit to income from services will be about 20%. On income from [the sale of] phones, the drop will be much more significant, tens of percent, and this is a trend that will continue for the rest of the year,” he said. “Net income at Cellcom and Partner will be around NIS 120 million, about 50% of what they earned a year ago.”
One bit of good news for the cell phone companies, the analysts agree, is cash flow, which is likely to have shown an improvement because operators reduced credits to customers as well as their inventory of unsold phones.
The landline business did not escape the impact of heightened competition in mobile.
“The positive trend in landline stopped. We believe that after several quarters of net increases in landline subscriptions, Bezeq is likely to show net negative growth. That is mainly due to HOT’s strong marketing drive,” said Podval.
HOT’s success in mobile spilled over into the landline segment both because of increased media exposure and because the company placed sales booths in shopping malls, where both types of service were being sold, Podval explained.
Licht said the cell phone companies have begun offering land/mobile packages, too. The companies have not invested too much effort in that and it will not affect their second quarter results, but it does create a new competitive threat to Bezeq.