Mark Goldberg

Low prices, at a high cost

As regular followers know, I travel to Israel a couple times a year. My daughter has a mobile plan that has ridiculously low prices for a huge data bucket and calling to 56 countries; I have a couple add-on SIM cards that cost an additional $10 per month for me to use or share with friends and family when they are travelling to the region.

Obviously, consumers love paying low prices. As I have written before, we all want lower prices for everything, other than our own wages.

Israel’s mobile market is a relevant case study. At least one observer says Israel’s experience “is a tale of short-sighted regulatory decisions that destroyed the profitability of the cellular market and undermined the ability and motivation of the facilities-based service providers to invest in infrastructure”. Yossi Abadi heads the telecommunications and media practice for one of Israel’s largest law firms. He prepared evidence on “The Israeli MVNO Experience” for the CRTC’s “Review of mobile wireless services” (TNC 2019-57). In his evidence, he asserts that low mobile service prices have led to operators “struggling with massive financial pressures that impact their ability to invest in new infrastructure… Mobile broadband subscriptions per capita have declined from #4 in the OECD in 2010 to #29 in 2017. For cellular network speeds, Israel is ranked 64th with an average download speed of 23.63 Mbps while Canada is ranked 2nd with an average of 65.90 Mbps.”

Mr. Abadi’s evidence examines the market reforms introduced in Israel in 2009 that were designed to stimulate competition and reduce mobile prices, changes “mainly driven by short-term political considerations: to cause rapid reductions of prices by increasing the number of players.”

Between 2010 and 2018, revenues for Israel’s 3 incumbent carriers, fell 61% (from ₪18.9B to ₪7.3B). “As revenues sank, the three wireless incumbents were forced to slash spending and lay off workers. Total sector telecom employees fell from 49,700 in 2010 to 25,900 in 2017, a 48% decline.” Per capita capital spending fell more than 12% at a time when OECD average spending increased by 5%; Canada’s per capita investment increased by more than 21% over the same period.

According to the evidence, as a direct result of its policies, “Israel now lags behind other OECD countries in communications infrastructure.”

Israel rolled out fourth-generation mobile networks several years behind most OECD countries. Israeli 4G represented just 14% of total mobile subscriptions as of December 2017. By contrast, in Canada, 4G comprised 62% of mobile subscriptions as of December 2017. Population coverage in Israel of 4G is about 89%. This is surprisingly low for a country with a population density of 433 persons per square Km. In contrast, Canada has 4G coverage to 99.4% of the population, and a population density of just 4 persons per square Km (less than 1/100th of Israel’s).

In 2016, the director general of the Communications Ministry told reporters, “We have a problem with the implementation of the reform because the companies don’t have enough money to invest in infrastructure.” As a result, Mr. Abadi sees difficulty for Israel’s mobile industry to invest in 5G.

His evidence concludes that Israel’s experience “is a cautionary tale that any regulator should examine before introducing MVNOs in order to reduce retail mobile prices.”

Prices did fall, but so did the quality of the networks. The massive reductions to revenues caused major reductions in capital expenditures, network roll-out and expansion, market capitalizations of the participants and even the number of employees.

The short term consumer benefits from policies driving low mobile prices may lead to higher and broader economic costs in the long run.

Yossi Abadi will be speaking about Israel’s mobile experience on June 5 at The 2019 Canadian Telecom Summit. Have you registered yet?

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