Desperately seeking something (about fast Internet)

by Hadar Horesh   
The Marker
March 3, 2003

State-run phone company Bezeq (TASE: BZEQ ) announced last week 
it had reached the 200,000-subscriber mark for its high-speed 
Internet service. The cable television companies do not usually 
publish their figures in this area, but industry sources estimate 
their subscribership at about 80,000. 

Israel has now joined the list of countries that have a large 
broadband Internet subscribership. The age of high-speed Internet 
in Israel began in late 2000 after a tough struggle, mainly 
because Communications Ministry officials had difficulty 
understanding the nature of the new service. 

Broadband technologies have existed since the mid-1980s and 
began to spread rapidly in the mid-1990s. Israel, which is 
usually quick at adopting new communications technologies, 
was late in joining the trend. For various bureaucratic and 
legal reasons the initiative to grant a high-speed Internet 
license to the cable companies in 1999 failed. 

Bezeq, which was relatively late in preparing its infrastructure 
for the new service, was forced to suffer the Communications 
Ministry's deliberate bureaucratic foot-dragging because it 
felt that if Bezeq received a license before the cable companies, 
it would control the market and stymie effective competition. 
It was only at the end of 2000, under heavy political pressure, 
that then-communications minister Binyamin Ben-Eliezer consented 
to grant Bezeq a license and bring Israel into the broadband era. 

The beginning was somewhat lame, as Bezeq was marketing an 
expensive service by any standards. Monthly fees were NIS 149 
for a surfing speed of 1.5 megabits per second. Public awareness 
and demand for the service were much lower than expected, 
due to the immense efforts that Bezeq and the cable companies 
had invested in obtaining their licenses. 

In the service's first year of operation Bezeq ignored the 
criticism of the high price, stridently claiming that it would be 
impossible otherwise, considering that the Communications Ministry 
refused to allow Bezeq to provide both the infrastructure service 
and access service directly. 

Lower prices did the trick 

Only in September 2001 was the formula found for springboarding 
the use of the high-speed network - Bezeq began offering service 
packages at lower prices. For NIS 90-100 per month high-speed 
became the logical choice for moderate to heavy surfers (in terms 
of surfing time). Most surfers would barely notice the difference 
in the surfing speed between high-speed surfing at 1.5 megabits 
per second in the expensive packages and 0.25-0.5 mbps in the 
cheaper packages. 

The market was supposed to get a boost at the beginning of 2002, 
when the cable companies received their licenses to operate 
high-speed Internet. It turned out, however, that the companies, 
which had looked to the high-speed Internet as the key to 
rescuing their businesses and to competing effectively with 
Bezeq, had not prepared properly to provide efficient service 
or to compete with Bezeq. Only in September 2002 did the three 
cable companies - Tevel, Golden Channels and Matav - come up 
with a joint operating and marketing plan. 

Their advertising campaign and Bezeq's response were unimpressive 
but were nonetheless effective. Bezeq's data show that awareness 
of high-speed Internet did rise. In the fourth quarter of 2002 
Bezeq signed up 50,000 subscribers, a 24-percent increase over 
the previous quarter. From September to December 2002 the 
cable companies attracted 40,000 subscribers, a respectable 
achievement, considering the competition. 

High-speed Internet also received a boost from the Internet 
Service Providers (ISPs), who at first had belittled the 
business potential of broadband services. At first only Bezeq 
International, a subsidiary of Bezeq, supported the development 
of the new market. The last to hop on the bandwagon was 
Internet Zahav, which only realized the enormity of its business 
error toward the end of 2002. 

Mainly video and music clips 

Broadband Internet has become a product for the masses. 
Most high-speed surfers are young, usually male and use the 
service mainly to download music and video files using file-sharing 
programs such as Kazaa. 

Pnina Shenhav, Bezeq's vice president for marketing and 
sales, says that the company's surveys show that half of the 
subscribers are aged 14-24, and 75% of them are male; 
that there are children in 18% of the homes hooked up to 
broadband services and that one-third of the surfing time 
is devoted to downloading music and videos files. 

These figures paint a different reality than that promised 
two years ago, when the cable companies and Bezeq accused 
the Communications Ministry of harming Israel's technological 
and educational development. The high-speed Internet lobby 
used to talk about e-learning, the merging of the TV and 
the computer, on-demand video services, e-commerce, video-phoning 
and multi-player online computer games - a new and wonderful world 
that would be created as soon as the communications minister signed 
the licenses. In effect, surfers benefit mainly from short film 
clips and the faster delivery of e-mail messages - and that's 
about it. 

"The market will jump to the next level only when suitable content 
is developed," says Shenhav. The main problem is that there is 
no local content for the Israeli surfer, and almost all the 
high-speed Internet content comes from abroad. The high cost 
of the hook-up and the distance affect the speed of downloading 
files and the surfing experience. 

An open garden 

In the next stage the competition between Bezeq and the cable 
companies is supposed to expand to other services, mainly 
regarding access to content. In the past year Bezeq has been 
considering several models for handling high-speed Internet 
content, even though the Communications Ministry is insistent 
on not allowing Bezeq to be involved in providing content. 
One of the proposed models is that of an "open garden," 
in which Bezeq would build the infrastructure and all the 
ISPs would be allowed to use it to transmit content to the 
company's subscribers. Bezeq is even willing to allow the 
ISPs to reach the cable companies' high-speed Internet 
subscribers via its infrastructure. 

The largest and most daring local high-speed Internet content 
initiative was that of Nonstop, which was founded by Matav, 
but closed in September 2001. Nonstop closed due to Matav's 
financial difficulties and the delay in its receipt of a 
high-speed Internet license. Even after the granting of 
the licenses, however, neither Matav nor any other entrepreneur 
embarked on another initiative. 

Now that there are close to 300,000 high-speed Internet 
subscribers, no one here can claim that the market lacks 
potential. The main problem is the creation of a popular 
service and charging money for it. Internet entrepreneurs 
in Israel and elsewhere still bear the scars of failed attempts 
to sell services over the web. The high-speed offerings of 
local Internet sites have been quite dismal, consisting mainly 
of film clips and abridged versions of TV series. 

Bezeq claims that it can set up a network of servers beside 
residential neighborhoods, thus providing direct high-speed 
access to content. The Communications Ministry has delayed 
the implementation of such a plan for various reasons, 
but mainly because it wants to prevent Bezeq from being 
directly involved in providing content. 

Communications Ministry director-general Uri Olenik claims 
that Bezeq could get a permit to set up such a network via 
one of its subsidiaries, but Bezeq contends that the network 
must be part of its own infrastructure.