STATE OF ISRAEL MINISTRY OF COMMUNICATIONS First Regional

STATE OF ISRAEL MINISTRY OF COMMUNICATIONS First Regional Forum on Telecommunications Reform in the MEDA Area Athens, 25 -26 April 2001 Liberalization of Markets and New Regulatory Framework The Israeli Case Daniel Rosenne Director General, Ministry of Communications, Israel rosenned@moc. gov. il

STATE OF ISRAEL Presentation Agenda MINISTRY OF COMMUNICATIONS l Telecommunications networks & services: n n Market overview Mobile services International long distance Fixed services l Regulatory reform: n n n Regulation overview License auctions Tariff rebalancing New numbering plan Bezeq’s privatization l Summary.

STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Telecommunications Network & Services

Israel's Telecommunications STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l 2. 8 million main telephone lines (45% penetration). l 4. 8 million mobile customers, on 4 networks (76% penetration). l 1. 3 million households connected to multichannel subscriber television n Cable: 3 operators, 1. 2 million subscribers, 70% of homes passed, 95% household coverage. n Satellite: 1 operator, 0. 1 million subscribers.

Internet Services STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l ~40 Internet service providers, 1, 000 dial-up & 10, 000 directly connected customers, 50, 000 domains. l Penetration ~ 40% of households, 50% of businesses. l IIX (Israel Internet e. Xchange) non-profit peering point. l “Hands-off” overall regulatory policy. l High growth ~ 50% annual.

STATE OF ISRAEL Israel Internet Development MINISTRY OF COMMUNICATIONS Gallup Israel survey: Maariv, 30 March 2001, Haaretz, 17 July 2000 Connected households, using more than 1 hour/week 42. 0% 29. 0% 21. 0% 13. 2% 5. 4% 1997 1998 1999 2000 2001

Telecommunications Services Market - 2000 STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Cable International Internet Terminal Equipment TV Long-Distance services & Business Systems 8% 7% Fixed Services 2. 5% 1. 5% 32% Mobile Services 49% Total telecom services market ~ US $5 billion

The Mobile Boom: STATE OF ISRAEL Israel Telecommunications Services Revenues, 1995 -2000 (US $M) MINISTRY OF COMMUNICATIONS 3, 000 2, 500 2, 000 1, 500 Mobile Fixed 1, 000 500 0 ILD CATV 1995 1996 1997 1998 1999 2000

The Existing Regulatory Environment STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Separation between regulation and operation (since 1984). Regulation responsibility - Ministry of Communications. l General licenses issued to facilities based service providers: n Fixed services - Bezeq, Ofek. n Mobile services - Pelephone, Cellcom, Partner, MIRS. n International long-distance services - Bezeq International, Golden Lines, Barak. l Special licenses issued for value-added services. l Termination of exclusive rights: n Fixed Services - 1 June 1999. n International long distance - 31 December 2001.

Mobile Services Competition introduced in December 1994 STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Rapid growth - 125, 000 subscribers in January 1995. In November 1999 the number of mobiles (2. 9 million) exceeded the number of fixed lines. l Key expansion stimulators: n Perceived low tariffs: ~ US $0. 11 to 0. 23/minute air time, ~ $11 to 29 monthly charge. ARPU (Average Revenue Per User) - US$50 to 60. n Calling party pays (CPP). n Nationwide coverage & “Land-line”quality. n Competition & marketing innovations.

International Long Distance Services STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Competition introduced in July 1997. l 3 facilities based operators: n Golden Lines (012) Telecom Italia, Fishman. n Barak (013) Sprint, Deutsche Telekom, France Telecom, Clalcom & Matav. n Bezeq International (014) The incumbent carrier, 100% owned by Bezeq. l Dialing Parity.

STATE OF ISRAEL Dialing Parity Rules MINISTRY OF COMMUNICATIONS l Per-call carrier-selection prefixes (01 X). For each of the international service providers. l CPS (carrier pre-selection) - subscribers choose a preferred provider for ‘ 00’ prefix and ’ 188’ international operator services. l Competitive practices n CPS balloting. n Consumers’ data provided by Bezeq & mobile operators on non-discriminatory basis.

International Traffic [Million Minutes/Year] 1200 1000 STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Outgoing 800 600 400 Incoming 200 0 1995 1996 1997 1998 1999 2000

Fixed Services Competition Driven by Broadband Demand STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Prolonged Delays: l Politics: May 1999 elections. l Government - cable companies disputes: n Fulfillment of universal service obligation. n Competition - DBS services, content. n Finance Ministry seeking payment for granting telecom license. n Justice Ministry seeking limits on content control. l Union disputes - safeguarding ‘employee rights’. Rough Road Ahead: l Telecom law change underway, allowing cable companies entry into telecom. l Fixed wireless access tender.

The Birth of New Entrants STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Regulation allowing fixed services licensing published September 2000. l ‘Ofek’ fixed services license - granted February 2001. l Fixed wireless access tender - published October 2000. l Cable companies restrictions removal Telecom Law update during 2001. l Roll out of several competitive fiber-based backbones - Med. Net, Ofek, Cellcom, Israel Railways.

Ofek New World Israel’s first licensed CLEC STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Owned by Eurocom group (50. 33%) & Arison investments (49%). l Fixed services general license – as of 1 February 2001. l Plans for modern IP based infrastructure, utilizing 1000 Km fiber cables. l Covering 15 “natural zones” (out of 53). l Will offer wide range of telephony & broadband data services, for business & households. l Plans for US $1 Bn investment, 1500 employees.

STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Telecommunications Competition Enhancement by Regulatory Reform

Regulatory Reform Promoting Competitive Advantage STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Competition in fixed services. l Structural change of the telecommunications sector: n Liberalization. n Re-regulation. n Privatization.

STATE OF ISRAEL Proactive Re-regulation MINISTRY OF COMMUNICATIONS l The end of the access monopoly: n Facilities-based competition. n Alternative infrastructure: fiber, copper, cable, fixed wireless, satellite. l Simple interconnection rules: n Non-discriminatory access, carrier preselection & dialing parity. n Non-discriminatory interconnection tariffs. n Minimum compatibility requirements. l “Open access” for value-added service providers. l New numbering plan & frequency allocations.

STATE OF ISRAEL Regulation Philosophy l l l l l MINISTRY OF COMMUNICATIONS Consumers are the focus. Competition is essential. Interconnection is the key. Technology neutral regulation is an important concept. Facilities based competition is the preferred way. Unbundling is interim “competition promotion” method. Structural separation & cross-ownership limitations are important to assure fair competition. Cable companies should be regulated as common carriers. “Hands off” regulation of new services (e. g. internet). Transform from sector specific “ex-ante” to general antitrust “ex-post” regulation.

STATE OF ISRAEL Re-regulation Covers: MINISTRY OF COMMUNICATIONS l Competition rules - ownership, resale. timetable. l Universal service - obligations, reciprocal compensation. l Interconnection - rules, tariffs, terms. l General license owners - obligations, structural regulation, services. l Numbering - administration, portability, new numbering plan. l Tariff rebalancing. l National Emergency & Security issues.

Fixed Wireless Access Auctions STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Up to 3 operators, selected in MSR (Multiple Simultaneous Round) combined auction. l Frequency Allocations, for each operator: n 26 GHz Broadband: 2 x 196 MHz. n 3. 5 GHz Narrowband: 2 x 12 MHz. l Participation of Bezeq & cable operators in the auction is excluded. l Reserve price: US $1. 5 million. l Roll-out obligation: 3 years. l Tender published: 12 October 2000. Applications deadline: 3 April 2001.

2 G/3 G Mobile License Auctions STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l MSR (Multiple Simultaneous Round) combined auction. l Frequency packages, for 4 licenses: n 2 G FDD: 2 x 10 MHz. n 3 G TDD: 5 MHz (for 3 packages only). l Reserve price: US $100 M. 25% reduction for new operators. l Tender published: 28 March 2001. Applications deadline: 17 July 2001.

Bezeq Tariff Rebalancing STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Price-cap regime - productivity gap (x-factor) of 3. 5%. l One step rate rebalancing in April 1999, almost eliminating cross-subsidies between services Further adjustments were made on May 2000 & March 2001. Voice traffic still subsidizes telephone access. l Simpler tariffs: Simple tariff matrix Local calls or urban-toll calls during peak hours (0800 -1800, Sunday to Thursday), unified tariff for off-peak hours. l Per-second billing, as of May 2000 per-second billing with minimum charge per-call, replacing traditional “meter pulse”. l Special Internet promotion dialup tariffs, as of May 2000 Customer choice between number of alternative tariff plans, bundling local call minutes in exchange for monthly fee.

Bezeq’s Interconnection Rates Time of Day National Termination Peak 0. 9 1. 56 Off-peak 0. 6 MINISTRY OF COMMUNICATIONS 1. 53 1. 56 Interim STATE OF ISRAEL 1. 56 Origination Weighted Average 1. 16 1. 56 Per minute rates, per second billing; US cents, $1 = NIS 4. 116, $1 = 1. 11 € EU 2000 “Best current practice” termination charges, US ¢: Local: 0. 45 -0. 81, single transit (metropolitan): 0. 72 -1. 35, double transit (>200 km): 1. 35 -1. 62.

Mobile CPP Tariff Regulation [Sept. 2000] STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Cost-based CPP (Calling Party Pays) mobile call termination tariffs, as of September 2000. l Eliminating discriminatory and anti-competitive practices resulting from subsidizing outgoing calls by incoming calls revenues. l CPP mobile call termination tariffs: Year Tariff [US ¢/minute] 2001 12 2002 11 2003 10

New NNP (National Numbering Plan) STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Additional digit (9 digits number length): n Step 1 - Mobile: 5 [N]XXX XXXX (N = 2 for Cellcom, 4 for Partner, 6 for Pelephone, 7 for MIRS). n Step 2 - Fixed: A [N]XXX XXXX l Area codes consolidation: n Area codes 6 & 7 reclaimed December 2000. l Services numbering re-arrangement : n 1 XX for life threatening emergency; 1 XXX for other services. n 1 YYY XXX logical numbering. l Toll-free (1 -800) number portability.

Will We Have Enough Telephone Numbers? STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Numbers [Millions] Number Type Old NNP New NNP Geographic 56 160 - 320 Mobile 8 80 Logical - 160 – 80 New Services 10 100 Future Use - 240 - 160

Bezeq The Israel Telecommunication Corp Ltd. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l Israel's incumbent operator (ILEC). l Annual sales – US $2. 05 billion. l 11, 000 employees (8, 200 in Bezeq, the parent company). l Government holds 55% of Bezeq shares (remaining shares - publicly held). l Government formally approved selling 50. 01% of Bezeq shares to a single strategic investor. l Government plans to complete privatization during 2001.

STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Summary

STATE OF ISRAEL Regulatory Policy MINISTRY OF COMMUNICATIONS l Structural changes - achieving strategic advantage in competitive global markets. l Competition - the key for innovation, entrepreneurship, investment & growth. l Key action areas: n Liberalization. n Re-regulation. n Privatization.

STATE OF ISRAEL Regulation Philosophy MINISTRY OF COMMUNICATIONS l Free and competitive markets promote growth, efficiency, customer satisfaction & economic advantage. l Market restructuring, in transition from monopoly to open and free market, during a short time period, requires active and balanced regulatory intervention. l Once competitive marketplace is achieved, a strong regulator will provide unnecessary intervention, and should be abolished.

The Future of Regulation: Open Communications Infrastructure STATE OF ISRAEL MINISTRY OF COMMUNICATIONS l A system of largely free-market competition with just enough governmental oversight to ensure that competitors stay within bounds. l Best combination of the benefits of government oversight with those of laissezfaire. l The bounds are the basic essentials: n Open access. n Universal access. n Interconnection. n Fair competition. n Public safety & security.

Israel's Telecommunications Map 1994 Mobile Services l Pelephone (Bezeq) 2000 l Bezeq International Long l Bezeq Distance Services MINISTRY OF COMMUNICATIONS Post 2000 l Pelephone l Cellcom l Partner l l l Bezeq l Ofek New World l Others: u Wireline u Wireless l Bezeq-International l Barak l Golden-Lines l Additional operators Fixed Services (Infrastructure, Transmission & Telephony) STATE OF ISRAEL Pelephone Cellcom Partner MIRS Others

STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Thank you for your attention For more information http: //www. moc. gov. il