Back in April, shares of the big three Israeli cell carriers -- Cellcom Israel
You could have chalked it up to the global flight to safety that was starting, but in early May, the Israel Ministry of Communications dropped a bomb: Over a period of three years, it would reduce the maximum interconnect tariff payable by one carrier to another for use of a rival's network by nearly 90% to new Israeli shekel 0.0257, and the rate for SMS messages was slated to decline 95%. The MOC also announced that it would cut the price of 3G UMTS frequencies by 94%, lowering the barrier to entry into the market about as low as Futurama's Hermes could go.
The companies currently make fat profits, about 100% of which are handed to shareholders in dividends yielding greater than 10%. As a result, there's little incentive for the companies to invest in new infrastructure or other improvements to service, which would detract from free cash flow that can feed the dividends.
According to Israeli newspaper Haaretz, sources say the final decision has been revised up to a gradual reduction to NIS 0.05 -- which is slightly better but still potentially harmful. The fees are passed on to subscribers, and while they are ostensibly only supposed to cover the cost to the carrier, the companies are profiting about NIS 30 million per month from the fees. By lowering the fee as well as the price of entry into the market, the MOC hopes to drive down prices for customers and drive up competition, forcing more investment in order to keep up with new competitors.
If its plan works, the MOC could make it harder for the big three to maintain their high dividends, but it would also be good news for companies that provide the infrastructure, such as Alvarion
Indeed, Bezeq has already partnered with Alvarion in the past to serve hospitals and universities. Alvarion is also branching into the LTE mobile network field as well, mitigating worries that WiMAX is losing the standards war.
If Bezeq, Cellcom, and Partner get serious about providing better services, 4G LTE or WiMAX will probably be on their list of priorities.
In the long run, the telecoms should be able to adapt to the new regulations, but whoever helps them along the way will stand to make a nice profit.
Fool contributor Jacob Roche wishes his native Federal Communications Commission would shake a few trees for his benefit. He owns shares of and calls on Cellcom Israel. He also serves on Motley Fool Options as a Community Fool. Cellcom Israel is a Global Gains recommendation, Partner Communications is an Income Investor recommendation. The Motley Fool has a disclosure policy.