The Internet/Telecom Corner

No Competition, No Market

In the previous Quarterly Report, I wrote of the birth of a broadband communications monopoly in Israel. Bezek was awarded a license to supply ADSL Internet services while Bezek's competitors were not, and technologies in competition with ADSL were not allowed. I can now update you on this subject. 

High-speed Internet services are actually in competition with ordinary Internet services. Intrusive, high-handed and misguided government over-management of the communications sector in Israel over many years has meant that Bezek, which was originally a monopoly in provision of the infrastructure for ordinary service, now represents a monopoly in ADSL service. This situation, which may be amusing to you if you aren't living in Israel, has created "competition" between two different Bezek divisions. Bezek, the monopoly in domestic communications infrastructure, is competing with Bezek, the monopoly in broadband Internet service. 

Perhaps there were some in Israel who hoped that, just maybe, Bezek wouldn't understand the significance of this situation. Alas, Bezek's management understands very well that high-speed Internet services harm Bezek's income from the older-style Internet services it also offers. Actually, Bezek knew this all along. Bezek went into high-speed Internet services, only because it feared that local cable television companies would do likewise. Had Bezek not been afraid, it would probably have remained on the sidelines for some years yet. 

It was this fear which led Bezek to put enormous pressure on the government to grant it a license to provide high-speed service. At the end of 1999, Herzl Ozer, Bezek's assistant managing director for marketing, gave testimony to the Knesset. As part of the effort to pressure the government, he pledged in Bezek's name that ADSL services would cost about $10 per month. 

During the first half of 2000, Bezek waged a huge advertising campaign offering to put consumers on a waiting list for the ADSL service. Bezek explained how much better its future service was going to be than the future service of the cable television companies. The cable companies waged their own advertising campaigns leading consumers to believe there was a competitive market. The market, however, was "virtual" and existed only in the ads. It was impossible to purchase the product being advertised. Israelis saw competition only during the period when it wasn't possible to purchase the product, since the government was still busy trying to determine the best way to regulate the high-speed Internet market (and service, naturally, could not be provided until the government made its decision). When the government finished "thinking," a task which caused a delay of some years in the introduction to Israel of high-speed Internet service, the government decided that, at this stage, only Bezek should be permitted to provide high-speed Internet service. The cable television companies would be forced to wait many months more to receive a similar permit. 

Now we come to the point. As soon as the threat of competition was lifted, there was no longer any need for Bezek to persuade consumers to hook up to its ADSL service. The service promised at $10 a month, immediately became $35 a month. And what about all the advertising? On January 29, 2001, journalist Hadar Horesh reported in Ha'aretz that Bezek had ceased almost all advertising of ADSL services. Even the big banner on the Bezek website, by means of which the public could register for future ADSL services, was sharply shrunk in size and moved to a small corner of the site, now that one could actually register for these services! After all, why should Bezek introduce a good product that will hurt sales of another Bezek product? Once the competition was eliminated, this was pointless. 

This story provides an instructive example of the destructive power of government interference in the Israeli communications market. Bezek is doing just what a smart company does - exploiting to the fullest the gifts bestowed on it by government, and withholding as long as possible high-speed Internet service from the Israeli market. 

The solution is simple. All the milk that has already been spilled cannot be put back in the bottle, but the immediate opening of the broadband Internet market to competition would prevent the spilling of a whole lot more. 

Who knows, perhaps in the new Israeli government, the decision makers will understand that competition in the Israeli communications market is crucial for the economic future of Israel. All that remains for those same decision makers to do is to reduce their involvement in the market and stop interfering. But past experience shows that decision makers (new ones and old ones alike) find it very difficult to reach this decision. For if the problems they themselves cause disappear, then what would we need them for? 

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