State of Israel Ministry of Communications Telecommunications Industry

State of Israel Ministry of Communications Telecommunications Industry in Israel august 2002 Ministry of Communications 1

State of Israel Presentation Agenda Ministry of Communications n Israel Demographics & ICT Statistics n Telecommunications Industry n Telecommunications Market Overview 2

State of Israel Ministry of Communications Israel Demographics & ICT Statistics 3

ISRAEL Demographics State of Israel Ministry of Communications l Population ~ 6. 5 million. l Households ~ 1. 8 million. l Average family ~ 3. 6 persons. 4

State of Israel’s ICT Sector - 2000 (Information & Communications Technology) Ministry of Communications l Israeli ICT GDP grew from NIS 8. 7 billion in 1990 to NIS 39 billion in 2000, 20% of business sector GDP. l ICT GDP is 14. 3% of total GDP. OECD highest - compared to 10 -11% in US. l Investment in ICT research and development is 23% of the ICT GDP. OECD highest - compared to 16 -17% in Finland. l 148, 000 employees. 5 Source: CBS, 2001

Israel's Telecommunications State of Israel Ministry of Communications l 3. 2 million main telephone lines (50% penetration, more than 95% of households) l 5. 5 million mobile customers, on 4 networks (85% penetration) l 1. 5 million households connected to multichannel subscriber television n Cable TV: 3 operators, 1. 2 million subscribers, 70% of homes passed, 95% household coverage. n Satellite DTH TV: 1 operator, 0. 3 million subscribers 6

State of Israel Ministry of Communications Telecommunications Industry 7

Israel's Electronics Industries State of Israel Source: IAEI, 2002 Ministry of Communications l Combined 2001 sales - $14. 25 billion, of which $11. 75 billion were exports sales. l Highly skilled workforce - 62, 000 employees, including over 63% scientists, engineers & technicians. l Sales per employee - over $230, 000. 8

Total 2001 Sales – $14. 25 billion Source: IAEI, 2002 Software 21% State of Israel Ministry of Communications Telecommunications 29. 6% Defense Systems 15% Components 16. 7% Industrial & Medical Systems 17. 7% 9

Leading Israeli Telecommunications & Electronics Companies Company Sales 2001 (US$M) State of Israel Ministry of Communications Line of Business Intel Electronics (Israel) 1614 Semiconductors Motorola Israel 1278 Communications & Semiconductors Vishay Israel 1182 Electronics & Electricity E C I 1170 Telecommunications Comverce 710 Telecommunications & Electronics Gilat Satellite Networks 505 Satellites Communications Telrad 470 Telecommunications Check Point 425 Software Formula 406 Software R A D 190 Telecommunications & Electronics 10

Industry Excellence Areas State of Israel Ministry of Communications l Telecommunications – networking & network management, billing, Internet, video & image processing, wireless, satellite communications, access networks, broadband & photonics, network security & VPN’s, messaging, home networking. l Computerized production equipment & imaging. l Software. l Semiconductors & photonic components. l Defense systems – missiles, anti-missiles & guided weapons, opto-electronics, radars, C 4 I, 11 EW (Electronic Warfare), simulation, training.

Statistical Highlights Source: IAEI, 2002 State of Israel Ministry of Communications Electronics All Other Industries Exports [% of total sales] 82 25 Added value [%] 68 42 Scientist, engineers & technicians [%] 63 14 Employees in R&D [%] 12 2 12

Major R&D Efforts State of Israel Ministry of Communications Stretching Boundaries of Imagination & Ingenuity l Innovative synergistic industry-academy cooperation, supported by the Chief Scientist, Ministry of Industry & Trade. l Over 100 industrial & academic participants. l Focused on establishment of the technological infrastructure for the next generation. l Key telecommunications R&D activities: n Digital wireless n Satellite systems n Broadband & optical technology n n Internet & Multimedia Telemedicine Microelectronics Network management 13

Technology Start-ups State of Israel Ministry of Communications l Israel is one of the largest world centers for start-up enterprises, with ~2000 active startups. l Innovative, technology-intensive activity, representing several technology breakthroughs. l Major international activity: n Strategic alliances and joint ventures. n Raising capital - venture, seed & risk investments. 14

Venture Capital State of Israel Ministry of Communications Source: IVC Research Center (The. Marker, 27 January 2002) l Investments by venture capital funds constitute an added value above financial contributions - in management, world market familiarity, strategic guidance and economic credibility. l During 2001, 526 Israeli companies raised $2. 0 billion (compared to 513 companies & $3. 1 billion during 2000). l 40% ($812 million) was invested by Israeli venture capital funds. l The active sectors are communications (42%), software (20%), life sciences (14%) & Internet (9%). 15

State of Israel Ministry of Communications Telecom Israel 2002 Exhibition and Conference: The Future is Here Tel-Aviv, 4 -7 November, 2002 For more information Telecom Israel 2002: http: //www. telecom 2002. co. il 16

Telecom-Israel 2002 Event State of Israel Ministry of Communications Tel-Aviv, 4 -7 November, 2002 l Important international exhibition & conference: n Exhibition: 4 -7 November 2002 n Conference: 5 -7 November 2002 l A showcase of hottest technologies and applications. l The place to see how new technologies, products, services and issues are reshaping the world of communications. l The future is here - Wherever you look, across the globe, Israel’s born products stand up. l We invite you to witness for yourself! 17

Telecom Israel 2002 Conference Program (preliminary) Tuesday, 5 Nov. Wednesday, 6 Nov. State of Israel Ministry of Communications Thursday, 7 Nov. Telecom, IT & Media at the Crossroad: Challenges and Opportunities After the Hype - Sober View of the IT, Telecoms and Media Industries Information is Power Civilian & Military Information Security at the Turn of the Century Network Infrastructure in a Competitive World - All Optical Core The New Mobile World - Will Mobile Operators Make the Change From Voice to Multimedia? Broadband Fixed & Mobile Access Networks - Will the Bottleneck Open? Delivering Business Services - The New Generation Application Service Provider Interactive Entertainment - Is There More than Sex, Shopping and Games? Intelligent Buildings and Home Networking - Towards Networked Home? Network Infrastructure in a Competitive Service and Network Security in an World - Next Generation Network: All IP Open Broadband World Switching and Service Delivery BB and 3 G - is the Future Bright? The Drivers for Successful Broadband Fixed and Mobile Implementation Telecom and Content Regulation - Critical Must or Unnecessary Burden? Government & Business Collaboration - Government Incentives and Business Motivation Support for Technology Development The Future of Fixed Services Competition - Is There Opportunity for CLEC’s? New Horizons for Internet Technology - What is the Next Big Thing? Consumer and Business Applications - The Future of B 2 C Retailing and B 2 B Trading Israel Telecommunications Market Will the Growth Continue? Fixed Mobile Convergence - Bundling or Bumbling? Managing Customer Relationship Adding Value Through Customer Management Startups and Venture Capital - Investments in the Future of Israel’s Technology 18

State of Israel Ministry of Communications Telecommunications Market Overview 19

Telecommunications Services Market - 2001 State of Israel Ministry of Communications Cable International Internet Terminal Equipment TV Long-Distance services & Business Systems 9% 7% Fixed Services 4% 26% 2% Mobile Services 52% Total telecom services market ~ US $5 billion 20

Percentage of total adult population Internet Users Across The World 2001 State of Israel Ministry of Communications Country average (31%) Percentage of the population who have personally used the Internet during the past month 21 Source: Tayler Nelson Sofres Interactive – Global e. Commerce Report 2001

Broad Band State of Israel Ministry of Communications l 100, 000 ADSL lines, 15, 000 Cable modems. l Competition launched January 2002. l Subscribers growth ~175% in the last 8 month. l Households penetration ~6%.

Regulatory Policy State of Israel Ministry of Communications l Public interest - the main issue l Competition - the key for innovation, entrepreneurship, investment & growth. l Key action areas: n Liberalization. n Re-regulation. n Privatization. 23

Regulation Ideology State of Israel 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 24 intervention, and should be abolished.

From Monopoly to Competition State of Israel Ministry of Communications 1994 Mobile Services Fixed Services (Infrastructure, Transmission & Telephony) International Long Distance Services 2000 2002 + l Pelephone (Bezeq) l. Pelephone l. Cellcom l. Partner l. MIRS l Bezeq l. Bezeq-International l. Barak l. Golden-Lines l. Bezeq l. Cable Companies l. Others: u. Wireline u. Wireless l. Bezeq-International l. Barak l. Golden-Lines l. Additional operators 25

State of Israel Ministry of Communications Fixed services Driven by Broadband Demand Actual competition started Q 2 2002 26

State of Israel Bezeq Consortium Ministry of Communications Bezeq Online Call Center (100%) yes Direct Broadcasting Satellite (44. 9%) Walla! Communications Portal & web hosting (36. 7% by BI) Bezeq International ILD & Internet (100%) Bezeq Call Communications CPE & Business Solutions (100%) Pelephone Mobile Services (50%) Bezeq Fixed Services & Infrastructure (Holding Company) 27

Bidding for Majority Stake in Bezeq State of Israel Ministry of Communications l Israel’s incumbent telecommunications operator. l annual sales ~2 billion US $. l 11, 000 employees (8, 500 in Bezeq, The parent company). l Government holds 54. 6% of Bezeq shares (remaining shares - publicly held). l Government issued a formal tender, for private sale of 50. 01% of the share capital of Bezeq. l Six groups filed applications at 13 February 2002. l The process is planned to be completed in 6 months. 28

Incumbent main services & technologies State of Israel Ministry of Communications l 100% digital exchanges & transmission (mainly SDH). l Interconnection with mobile & ILD operators. l ISDN & ADSL Access. l Data Network – TDM, F. R, ATM, 64 Kb/s – 622 Mb/s. 29

Cable TV firms - the new entrants State of Israel Ministry of Communications l Fully digitized HFC networks (750 MHz). l Cable Modem broadband Internet services (64 Kb/s – 2 Mb/s). l Interactive TV l T- mail, T- commerce. l Future plans – IP telephony and data services over cable. 30

State of Israel Ministry of Communications Mobile Services Competition Introduced December 1994 31

Mobile Operators State of Israel Ministry of Communications Company Pelephone Cellcom Partner MIRS Licensed 1987 1994 1998 2001 Market share 28% 40% 28% 4% Frequencies (Mhz) 800, 2000 800, 1800, 900, 1800, 800 2000 Technology (present) NAMPS & CDMA TDMA & GSM Future CDMA & UMTS i. DEN (ESMR) i. DEN 32

Mobile Technologies: key trends State of Israel Ministry of Communications l New services: n SMS (interoperable), WAP, SHTML wireless internet. n Content: news, media & data services. n Location based services. n M(obile) – Commerce (vending machines, parking, gas station, etc). 33

2 G/3 G Mobile License Auctions State of Israel Ministry of Communications l MSR (Multiple Simultaneous Round) combined auction. l Frequency packages: n 4 Bands: 2 G FDD, 2 x 10 MHz. n 4 Bands: 3 G FDD, 2 x 10 MHz. 3 G TDD: 5 MHz (for 3 packages only). l Reserve price: 2 G: US $45 M. 3 G: US$55 M. l Tender published: 28 March 2001. l 18 December 2001 auction produced NIS 34 1, 026 million.

Why Will 3 G Succeed in Israel? State of Israel Ministry of Communications l Israel is well suited for 3 G: n Relatively wealthy country (~$20 K GDP/cap). n Technology literate. n High mobile penetration, extremely high usage. l Favorable auction price - $42/pop Germany $544, UK $537, France $287, Italy $211, Ireland $211, Austria $91, Denmark $80. l Light rollout requirements: n Operators do not have to launch services unless they are sure they will succeed. n Each service country-wide availability - 24 mo after 35 initial commercialization.

State of Israel Ministry of Communications International Long Distance services Facilities Based Competition Introduced July 1997 1 state – owned, 2 privately – owned service providers 36

Submarine Optical Cables Infrastructure State of Israel Ministry of Communications EMOS Cable RFCS Capacity EMOS CIOS LEV MN 1 280 Mb/s 622 Mb/s 5 Gb/s 3. 84 Tb/s 1990 1994 1998 2001 LEV CIOS MED Nautilus 1 37

The Israel Internet-2 Network State of Israel Ministry of Communications l Part of the global research network for the NGI (Next Generation Internet). l Connecting Israel to the forefront of scientific and industrial R&D, through: n Star. Tap - US NSF/I-2/NGI interconnection point. n Géant – The pan-European Gigabit research network. l 45 Mb/s connection to Géant (London), 45 Mb/s connection to Star. Tap (Chicago). l 10 Mb/s & 155 Mb/s IP, ATM & SDH domestic connectivity. l http: //www. internet-2. org. il 38

Civilian Telecommunications Satellites State of Israel Ministry of Communications l AMOS-1: TV distribution, SNG & VSAT n launched May 1996. o n Geostationary orbit at 4 West. n 7 transponders, covering Middle East & Central Europe. n Designed, manufactured and controlled by Israel Aircraft Industries. l Gurwin-II Tech. SAT: communications, remote sensing & research n Launched July 1998. n 830 km altitude sun-synchronous circular orbit. n 50 kg, 3 -axis stabilized Earth-pointing microsat. n Designed, manufactured and controlled by the Technion - Israel Institute of Technology. 39

Amos 2 Satellite State of Israel Ministry of Communications l Launch Planned for Q 2 2003. o l Geostationary orbit at 4 West (co-located with AMOS 1). l 11 active transponders & 3 backup transponders, 72 MHz bandwidth each. l High power - planned for DTH TV distribution, two-way Internet services and broadband VSAT networks. l 3 spot beams: n Middle East - supporting up to 11 transponders. n Europe - supporting up to 6 transponders. n US East coast - supporting up to 8 transponders. l Designed, manufactured and controlled by Israel Aircraft Industries. l Owned & operated by Spacecom Ltd. 40

State of Israel Ministry of Communications The End Thank you for your attention For more information http: /www. moc. gov. il 41