State of Israel Ministry of Communications 1 Telecommunications Market in Israel May 2006

State of Israel Ministry of Communications 2 Presentation Agenda Israel Demographics Telecommunications Market Overview Bridging The Digital Divide

State of Israel Ministry of Communications 3 Israel Demographics

State of Israel Ministry of Communications 4 ISRAEL Demographics Population ~ 6.9 million. Households ~ 1.9 million. Average family ~ 3.6 persons.

State of Israel Ministry of Communications 5 Telecommunications Market Overview

State of Israel Ministry of Communications 6 Regulation Free and competitive markets promote growth, efficiency,customer satisfaction & wide geographical coverage. Facility-Based Competition in Israel.

State of Israel Ministry of Communications 7 From Monopoly to Competition Pelephone (Bezeq) Bezeq Mobile Services Pelephone Cellcom Partner Pelephone Cellcom Partner MIRS Fixed Services (Infrastructure, Transmission & Telephony) Bezeq Cable Companies Others: VOB International Long Distance Services Bezeq-International Barak Golden-Lines Bezeq-International Barak Golden-Lines Internet-Gold X-Phone Netvision State of Israel Ministry of Communications

State of Israel Ministry of Communications 8 Israel's Telecommunications Statistics 2005

State of Israel Ministry of Communications 9 Israel's Telecommunications 2.9 million main telephone lines. 6.5 million mobile customers, on 4 networks. 1.4 million households connected to multi- channel subscriber television Cable TV: 3 operators, 0.95 million subscribers, 97% of homes passed. Satellite DTH TV: 1 operator, 0.49 million subscribers.

State of Israel Ministry of Communications 10 Telecommunications Services Market Total telecom services market ~ US$ 5.7 billion, avg. annual growth of 7%

State of Israel Ministry of Communications 11 Fixed services Driven by Broadband Demand Actual competition started Q2 2002

State of Israel Ministry of Communications 12 Broadband Regulation Facility-Based Competition : 1. ADSL Access provided by Bezeq (up to 2.5Mb/s downstream). 2.Cable Modem broadband Internet services provided by cable TV firms - the new entrants (up to 3Mb/s downstream).

State of Israel Ministry of Communications 13 Universal Service Obligation (USO) by two players; both have countrywide infrastructures (100% pop. coverage by 4 years). Unlicensed usage of the 2.4 & 5 Ghz WLAN technology as a step of maximizing the Internet usage in the country. Broadband Regulation

State of Israel Ministry of Communications 14 Broadband 1,100,000 broadband lines (730,000 ADSL lines; 370,000 cable modems). Broadband subscriber growth ~50% last year. Broadband household penetration 52%. Broadband penetration per 100 inhabitants 16%.

Broadband Subscribers Growth in Israel 330k Competition begins Sub. Penetration

Source: TASC Ernst & Young * June 2004 Households` Broadband Penetration (end 2003)) Source * June 2004 Source: ECTA, MoC Israel

OECD Broadband Penetration at end of 2004 Israel

State of Israel Ministry of Communications 18 Bezeq in process of privatization Israel’s incumbent telecommunications operator. Annual sales ~2.2 billion US $ (inc. subsidiaries) Government holds 46% of Bezeq shares. May 2005 the government sold its holdings: -30% + options of additional 10.66% to financial/strategic investor for 972 mill’ US$

State of Israel Ministry of Communications 19 Cable TV firms - the new entrants Fully digitized HFC networks (750MHz). Cable Modem broadband Internet services (64Kb/s – 3Mb/s). Interactive TV Data services, T- mail, T- commerce. Universal IP telephony

State of Israel Ministry of Communications 20 Bridging The Digital Divide

State of Israel Ministry of Communications 21 Regulation Can regulation help to increase broadband penetration in rural areas and achieve universal coverage?

State of Israel Ministry of Communications 22 EU Regulation The EU framework does not include broadband as part of the Universal Service Obligation (USO). We believe this assumption needs to be challenged and reexamined.

State of Israel Ministry of Communications 23 Broadband Universal Service Obligation (USO) USO by two players in Israel; both have countrywide infrastructures. The critical stage: defining USO in the license before granting it to the operators.

State of Israel Ministry of Communications 24 Broadband Universal Service Obligation (USO) Actual coverage: by the end of % of incumbent’s lines. Special exceptions committee. Israel is one of the few countries that has adopted a broadband USO.

The Internet Environment in Israel Israeli consumers are early adaptors of internet technologies, including instant messaging, online services (e-banking, etc.), and VoIP: Skype users per 1000 inhabitants source: company data, from OECD Working Paper

State of Israel Ministry of Communications 26 Public Internet Access (PIA) in Israel The importance of PIA : service provision to inaccessible population due to coverage or cost problems. Relatively easy implementation of public broadband access all over Israel – In light of USO of two infrastructures and high broadband penetration.

State of Israel Ministry of Communications 27 Public Internet Access (PIA) in Israel PIA is accessible in education institutes, public libraries, community centers etc., but much remains to be done. Several examples of PIA existing projects: Tapuah (Apple) the Israeli society for the Advancement of the Information Age; Lehava (Flame) governmental project - bridging the digital divide within the Israeli society; Connecting high schools to broadband by ADSL.

State of Israel Ministry of Communications 28 PIA Projects in Israel Apple

State of Israel Ministry of Communications 29 Solutions for Rural Areas Israeli vendors` solutions helped to reach rural and remote areas. Israel’s broadband USO & internet public access models work well in a small, populated country. For larger countries, which are less populated, other models are much more suitable. For such countries, Israeli companies including Gilat Satellite Networks, Alvarion, Spacecom, and IP Planet network offer several proven and successful solutions for rural areas.

State of Israel Ministry of Communications 30 Conclusions Wide geographical competition is the best way to improve the incumbent’s coverage, grade of service, price performance and overall penetration to the benefit & welfare of the society. Such regulation, we believe, can help increase the level of competition in the field of broadband access and narrow significantly the digital divide within the country.

State of Israel Ministry of Communications 31 Mobile Services Competition Introduced December 1994 with 130K sub, 2005 – 6.5 million sub. On 4 networks all with USO Future plans - Numbers portability

State of Israel Ministry of Communications 32 Will 3G Succeed in Israel? Israel is well suited for 3G: Relatively wealthy country. Technology literate. High mobile penetration, extremely high usage. Heavy foreign Investments in mobile market. Favorable auction price Services launched by operators in recent months Each service country-wide availability - 24mo after initial commercialization.

3G Regulation In the coming years 3G UMTS networks will be able to offer internet access of up to 2Mb/s and a wide variety of services & contents inc. multimedia applications, games, video etc. Today there is no debate about the economic rationale of establishing 3G networks; Equipment is cheaper than GSM equipment was at its first steps. Commercial networks have been launched all over Europe and Israel in Cellular penetration is much higher than the penetration of computers; thus 3G may prove to be a very essential medium to increase broadband penetration. Conclusion: today 3G USO is important!

State of Israel Ministry of Communications 34 International Long Distance services

State of Israel Ministry of Communications 35 Facilities Based Competition Introduced July 1997: The incumbent, 2 privately – owned new service providers – additional 3 operators.

State of Israel Ministry of Communications 36 The End Thank you for your attention For more information