1. 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

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

3. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Telecommunications Network & Services

4. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Israel's Telecommunications 2.8 million main telephone lines (45% penetration). 4.8 million mobile customers, on 4 networks (76% penetration). 1.3 million households connected to multichannel subscriber television Cable: 3 operators, 1.2 million subscribers, 70% of homes passed, 95% household coverage. Satellite: 1 operator, 0.1 million subscribers.

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

6. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Israel Internet Development Gallup Israel survey: Maariv, 30 March 2001, Haaretz, 17 July 2000 Connected households, using more than 1 hour/week 1997199819992000 29.0% 42.0% 21.0% 2001 13.2% 5.4%

7. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Telecommunications Services Market - 2000 International Long-Distance Cable TV Terminal Equipment & Business Systems Internet services Fixed Services 49% Mobile Services 32% 8% 7% 1.5%2.5% Total telecom services market ~ US $5 billion

8. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS The Mobile Boom: Israel Telecommunications Services Revenues, 1995-2000 (US $M) 500 1,000 1,500 3,000 19951996199719981999 0 2,000 2,500 2000 Mobile CATV Fixed ILD

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

10. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Mobile Services Competition introduced in December 1994 Rapid growth - 125,000 subscribers in January 1995. In November 1999 the number of mobiles (2.9 million) exceeded the number of fixed lines. Key expansion stimulators: 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. Calling party pays (CPP). Nationwide coverage & “Land-line”quality. Competition & marketing innovations.

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

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

13. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS International Traffic [Million Minutes/Year] 0 200 400 600 800 1995199719981999 1200 1000 2000 Outgoing Incoming 1996

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

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

16. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Ofek New World Israel’s first licensed CLEC Owned by Eurocom group (50.33%) & Arison investments (49%). Fixed services general license – as of 1 February 2001. Plans for modern IP based infrastructure, utilizing 1000 Km fiber cables. Covering 15 “natural zones” (out of 53). Will offer wide range of telephony & broadband data services, for business & households. Plans for US $1Bn investment, 1500 employees.

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

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

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

20. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Regulation Philosophy 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 anti- trust “ex-post” regulation.

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

22. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Fixed Wireless Access Auctions Up to 3 operators, selected in MSR (Multiple Simultaneous Round) combined auction. Frequency Allocations, for each operator: 26 GHz Broadband: 2 x 196 MHz. 3.5 GHz Narrowband: 2 x 12 MHz. Participation of Bezeq & cable operators in the auction is excluded. Reserve price: US $1.5 million. Roll-out obligation: 3 years. Tender published: 12 October 2000. Applications deadline: 3 April 2001.

23. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS 2G/3G Mobile License Auctions MSR (Multiple Simultaneous Round) combined auction. Frequency packages, for 4 licenses: 2G FDD: 2x10 MHz. 3G FDD: 2x10 MHz. 3G TDD: 5 MHz (for 3 packages only). Reserve price: US $100M. 25% reduction for new operators. Tender published: 28 March 2001. Applications deadline: 17 July 2001.

24. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Bezeq Tariff Rebalancing Price-cap regime - productivity gap (x-factor) of 3.5%. 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. 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. Per-second billing, as of May 2000 per-second billing with minimum charge per-call, replacing traditional “meter pulse”. 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.

25. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Bezeq’s Interconnection Rates TimeNational of DayTerminationOrigination Peak1.531.56 Interim0.91.56 Off-peak0.61.56 Weighted Average1.161.56 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 (>200km): 1.35-1.62.

26. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Mobile CPP Tariff Regulation [Sept. 2000] Cost-based CPP (Calling Party Pays) mobile call termination tariffs, as of September 2000. Eliminating discriminatory and anti- competitive practices resulting from subsidizing outgoing calls by incoming calls revenues. CPP mobile call termination tariffs: YearTariff [US ¢/minute] 200112 200211 200310

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

28. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Numbers [Millions] Number Type Old NNPNew NNP Geographic56160 - 320 Mobile880 Logical-160 – 80 New Services10100 Future Use-240 - 160 Will We Have Enough Telephone Numbers?

29. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Bezeq The Israel Telecommunication Corp Ltd. Israel's incumbent operator (ILEC). Annual sales – US $2.05 billion. 11,000 employees (8,200 in Bezeq, the parent company). Government holds 55% of Bezeq shares (remaining shares - publicly held). Government formally approved selling 50.01% of Bezeq shares to a single strategic investor. Government plans to complete privatization during 2001.

30. STATE OF ISRAEL MINISTRY OF COMMUNICATIONS Summary

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

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

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

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

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