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Founder at Refael Investment Group
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  • The End of the Cellular Cartel in Israel? ($PTNR ,$CEL) 0 comments
    Jan 6, 2012 2:25 PM | about stocks: PTNR, CEL
    I would like to share with you my 2 cents about the Israeli cellular market which these days is being revolutionized by new government regulations and increasing competition.

    DEVELOPING STORY...

    UPDATE 2 - January 5th 2012
    An article on BizPortal.co.il (a highly respected Israeli financial magazine) reports that Cellular operator Rami Levi Communication was able to sign up over 10,000 new subscribers within the 1st month of operation. According to Rami Levi "Our goal is to reach 250,000 subscribers within the next 2 years)
    www.bizportal.co.il/shukhahon/biznews02....

    UPDATE 1 - November 8th 2011
    Israeli media reports that Partner Communications Company Ltd. aka "Orange" (NASDAQ:PTNR)announced the layoff of hundreds of emplyoees as part of the efforts to become more efficient towards the new regulations and increasing competition.
    Pelephone & Cellcom Israel (NYSE:CEL) are expected to follow through.


    The Situation:
    Up until now there were 3 dominant companies in the Israeli cellular market: 
    Pelephone, Partner Communications Company Ltd. aka "Orange" (NASDAQ:PTNR) & Cellcom Israel Ltd.(NYSE:CEL).
    During the last decade, this oligopoly enjoyed an almost competition-free business environment with enormous profit margins of over 20% and very minimal regulations by the Israeli government.

    How could they avoid regulations?(The Answer: High Dividends!)
    PTNR and CEL which are traded on NYSE - had very appealing annual dividend rates (~10%) that helped the regulators avoid any changes to their business practices which included unfair charges and outrageous fees on cellular services, devices & accessories.

    All of that is about to transform dramatically!
    Change is here, competition is increasing and the profits celebration of this oligopoly is over. On March 2012 two new companies will be joining the Israeli cell market: Golan Telecom & Mirs (Now owned by "HOT"). While Cellcom, Partner & Pelephone use outdated 3G networks, the new competitors will be offering 4G speeds with the latest technologies the cellular market has to offer, not to mention major price slashing! (the new companies have to gain 7% market share EACH to get their deposits back from the government..that's over $100 million!)

    The SmartPhone Generation
    As of today, the Israeli media reports that around 44% of cellular consumers use a smartphone, and the number keeps on increasing day by day.
    Thanks to Free VOIP Apps (such as Skype, Viber & Whatsapp)users can now engage free calls and text messaging.
    International roaming is no longer needed as a simple WiFi connection allows users to skip high fees.

    New Government Regulations
    Israel now has a new minister in the office of communication, Mr. Moshe Kachlon, who promised the Israeli nation to be on the consumers’ side and to initiate a “nuclear war” against the Israeli cellular cartel.The new regulations include:
    1. Fees for networks links are CANCELLED
    2. Fees on contract termination are CANCELLED
    3. Increase of competition by allowing 2 new companies to join the market - Golan Telecom & Mirs (aka HOT).
    4. Regulations on Smartphone sales:
    The Israeli cellular cartel is selling smart-phones for outrageous prices (double and sometimes triple the price, compared to Amazon, Ebay or any private outlet.
    All of that is about to be revolutionized as a new regulation which is named in hebrew “Nitook Zika” is gaining more public awareness through Facebook groups with the media’s support.
    According to this new regulation, a consumer can now buy his brand new smartphone anywhere he/she wishes for half the price of the cartel’s retail price.

    Smartphone Upgrades = Profit Canibalization
    The Israeli cellular companies MUST give a full rebate on the device that was purchased privately, according to their full retail price!!!!! 
    For example:
    You can buy a brand new iPhone 4 at the apple store for $600, present your purchase invoice to the Israeli cellular company and get a full rebate of $1200!!!!! That’s right!!! A pure loss to the cellular company!

    The Result: A KNOCKOUT to the industry!
    Partner already cancelled the dividend payout & Cellcom's CEO for the last 6 years ,Amos Shapira, quit his job after locking a salary of nearly 50 Million NIS (according to the Israeli media).
    Can these events be related to the upcoming earthquake the industry is facing? or has the effect already began?? Only time will tell...

    Disclaimer: I'm holding a short position on CEL & PTNR.
    This blog represents my sole opinion. Any investment choices you make should be upon your own judgement and at your own risk.

    Eliran Refael is the founder of Refael Investment Group (facebook.com/Refael.Investment.Group)


    Disclosure: I am short CEL.
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