Division for Economic Policy Research
Exclusive Analysis
IASPS Internet Update
In
August 1999, the Institute for Advanced Strategic & Political Studies
published Policy Studies No. 43,
entitled, "Internet Infrastructure in Israel: A Proposal for Reform"
(available at http://www.iasps.org/policystudies/ps43.pdf).
This important and timely study, authored by Koret IASPS Fellow Amir Etzioni,
describes and analyzes in careful detail the failure in Israel to take full
advantage of the opportunities the Internet provides. Indeed, as the study aptly points out, "regulatory
limitations and a structurally non-competitive marketplace have retarded the
development of the Internet infrastructure in Israel . . . [resulting in]
Israeli Internet users pay[ing] a high price for Internet service and receiv[ing] in return a slow and 'crowded' infrastructure." The Policy
Studies quantified the damage to the Israeli economy at over $100 million.
As interesting and important as the study itself, IASPS Policy Studies No. 43 succeeded in
uncovering yet another dangerous move against Israel’s Internet marketplace,
already beset by a host of problems.
Since the publication of this study, IASPS has further documented that
Bezek, the state telecommunications monopoly, is no longer satisfied with its
almost total control over the local telecommunications market. It now seeks to enter the Internet service
provider (“ISP”) market, and to do so in a way that allows it to leverage its
position as the state-owned telecommunications monopoly in Israel. This discovery underscores the findings of Policy Studies No. 43 and is yet another
example of the audacity and sheer power that result when the power of the State
is granted to what should otherwise be a private company competing on equal
terms for profits.
The
revealing IASPS study that led to this discovery did so by decisively and
analytically identifying the culprits in this tale of woe: State intervention and regulation. On the one hand, the State has intervened in
almost every aspect of the telecommunications industry, most notably by
providing and maintaining the telecommunications monopoly granted to Bezek, a
company controlled and principally owned by the State. As a result, "[t]here is no competition
for domestic communications service -- Bezek maintains almost total control
over the Last Mile and the local backbone.
Most consumers have no choice but to use Bezek's telephone lines to
reach the Internet."
On the
other hand, the State, through the Communications Ministry, regulates almost
every aspect of the telecommunications market and most often in ways that
destroy any competitive advantage Israel might otherwise enjoy in the intensely
competitive international hi-tech, communications-driven marketplace. The most destructive of these regulations is
the required licensing of Internet providers.
As Policy Studies No. 43
explains:
The license issued for Internet service allows only value adding activities based on the current infrastructure. This means that the licensee is allowed to operate only by using the infrastructure of someone who has a license for general communications activity (in other words, Bezek, at the local level). The provider is forbidden to use advanced technologies to transmit commercial Internet communications within Israel . . . unless Bezek provides them the technology. Use of such technology as an alternative to Bezek would naturally lower costs and whittle away at Bezek’s profits. It therefore seems unlikely that as long as Bezek enjoys monopoly status, Israeli consumers will ever be able to benefit from new technology. Even Bezek’s move to new technologies, which could improve its own infrastructure (with digital subscriber lines, or DSL, for instance), is slow and will probably not be implemented until Bezek faces competition. (italics added for emphasis)
The sentence highlighted from the quote above
underestimates, it turns out, the unchecked power of a state monopoly
controlling the critical and lucrative telecommunications market. In an effort to force IASPS to incorporate
Bezek propaganda in a subsequently published document, a Bezek economist was
directed to write a letter to IASPS (copying company lawyers, board members,
and telecommunications ministry officials) articulating various positions
purporting to challenge the IASPS Internet study. Ignoring the banal and patently absurd, one discerns the
“chutzpah” of raw state-sanctioned monopoly power at work.*
In essentially one breath, Bezek concedes that the
“bottleneck” that occurs in Internet traffic in Israel is the result of an
antedated infrastructure, an infrastructure owned and controlled by Bezek, and
largely protected from the competitive forces of change and improvement by
Bezek’s monopoly status. In the same
breath and without missing a beat, Bezek drops what can only be described as
“the other shoe.” If Bezek were
permitted by law to compete directly as an ISP, the letter’s author knowingly
surmises, it would be interested in being the “deep pockets” to finance the
technological and infrastructure improvements necessary to alleviate Israel’s
slow and overcrowded cyberspace highways.
The facts that Bezek would have us ignore, which makes all
of this so revealing, are, oddly enough, well known in Israel. Surely enough, Bezek is today competing as
an ISP, but only through a subsidiary that is not allowed by law to benefit
from cross-subsidization. Thus, by
presenting the proposal as it does, Bezek is all but saying that as the State
monopoly, owing its power and its profits to the protective and distorting
cover of its monopoly status, it does not see sufficient justification in
investing in an infrastructure that its competitors might take advantage of,
notwithstanding that Bezek would also enjoy the benefits of such investment as the
provider of local telecommunications services and as an ISP, through its
subsidiary.
But, that is precisely the crux of the problem. Bezek refuses to make the necessary
improvements because it would then have to compete on relatively equal terms
with other ISPs through its subsidiary.
Thus, Bezek has devised a new ploy.
Disguised as an advocate of free markets and long-term investments in
infrastructure (akin to the wolf in Little Red Riding Hood), Bezek argues for
the right to compete directly as an ISP.
Left unstated ofcourse is that Bezek would retain its monopoly
status. The result of such a maneuver
would allow Bezek to take control of the ISP market shutting down yet another
dynamic and burgeoning telecommunications marketplace. The techniques of cross-subsidization
available to Bezek as the local telecommunications monopoly would put Bezek
in a position to “out compete” all other ISPs, resulting in a single ISP
market, which is to say no market at all.
Ignoring the patently illegal and overt methods of cross-subsidization
available to Bezek, one is left with what would amount to a deadly arsenal:
Bezek could offer “surfing” at a reduced price or even free during peak hours
so that Bezek would profit from telephone line usage, Bezek could use its
presence all over the country to offer far more choice for server connectivity,
and Bezek could take advantage of the fact that it owns all of the
telecommunication infrastructure for economies of scale and of usage not
otherwise available to the other ISPs who are legally prohibited from
introducing their own infrastructure..
This list is by necessarity only a partial one. The point to be understood is that the
result of any or all of these tactics would eliminate competition in the
dynamic ISP marketplace. It should be
equally clear that the Bezek strategy is transparent. Mr. Etzioni anticipated this suggestion by recommending that the
State ought to eliminate all ISP licensing requirements, as is the case in most
Western countries. However, this
measure would be effective only if all of the study’s recommendations were
adhered to, notably the full-scale de-monopolization of Israeli
telecommunications and the wholesale privatization of Bezek. So long as Bezek enjoys its monopoly, the
country’s economic losses will run in the tens of millions of dollars. If these recommendations were implemented,
it would be appropriate to support Bezek in its application to provide Internet
services on the same basis as all of the other competitors in the field.
* Note:
In the Bezek letter addressed to IASPS, another revealing
aspect of a state-owned and sanctioned monopoly comes into focus. The author of the study, Mr. Etzioni, made
an international comparison of the cost of Internet access and did so by taking
data directly from a table appearing in a document published by the
well-respected International Telecommunications Union (“ITU”). The data taken from the ITU table was the
most recent version available in the public reference centers, including at the
Telecommunications Ministry library.
The Bezek letter argued that a revised version was now
available which improved Israel’s rather dismal ranking relative to many other
countries. Indeed, the Bezek letter
included a copy of a “revised” table, but failed to indicate in what published
document the “revised” table was to be found.
What becomes clear upon a more careful investigation, is that in
drafting the letter, Bezek was unable to control the urge to bully and
misdirect. For example, and Bezek most
certainly should have understood this, the data in Policy Studies No. 43 that used the “table” referenced by the Bezek
letter do not relate to the fundamental points of the study (including the
dollar amount of the damages caused to the Israeli economy due in the main to
Bezek’s monopoly stranglehold), nor do they affect any of the recommendations
suggested by the study’s author.
Furthermore, and even more telling is what the Bezek letter did not
say. Thus, while it appears to be the
case that the publicly-available table used in the study placed Israel in a
less competitive position relative to other countries than it might in fact
occupy, Bezek’s “revised” table is simply not logically or statistically sound:
[1] According to ITU officials, the
table Bezek now wishes to rely upon was not available to the general public at
the time the study was published and as of the date of the Bezek letter was
still not available. In other words,
according to ITU officials, the document Bezek demands IASPS re-publish is not
publicly available for scholars and researchers to examine.
[2] The so-called “revised” table
apparently reflects data provided to ITU by Bezek that was not independently
verified.
[3] Bezek apparently submitted revised
data to ITU on telecommunications pricing in Israel that in and of itself does
not accurately reflect the real price to the consumer in Israel. To no one’s surprise, the “revised” Bezek
figure appears to understate the true pricing levels.
[4] The data in the so-called “revised”
table (as is also the case with the current table) includes hidden payments to
Bezek categorized as ISP charges, again masking the real way in which Bezek’s
monopoly power undermines Israel’s competitive status worldwide.