Israeli Cable Operators Get Ready to Launch PacketCable™-based IP Telephony

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By Alan Breznick

Alan Breznick, a veteran business journalist, is editor of Cable Datacom News and a frequent contributor to this newsletter.

Despite the ongoing struggle with the Palestinians and a slumping economy, three Israeli cable operators are counting on PacketCable™-based voice-over-Internet-Protocol (VoIP) to be the next hot service for their nation's technology-crazed consumers.

The three cable companies - Golden Channels, Tevel and Matav-Cable Systems Media - are gearing up to launch PacketCable-based VoIP service throughout Israel after gaining the government's permission to set up a national inland telephony network last November. Plans call for the trio to start offering the service in October or November under the companies' year-old operating and marketing consortium, Hot Telecom.

The move will pit Hot Telecom against Bezeq, Israel's powerful national phone company, in the country's estimated $1 billion voice market. As in the U.S. and Canada, the two industries already compete ferociously in the high-speed Internet access and multichannel video markets.

Golden Channels, Tevel and Matav say they will spend a total of $100 million over the next three years to set up and deploy their spanking new PacketCable-based IP telephony network. They then reportedly intend to invest at least another $65 million in the network as they try to make inroads against Bezeq, which is partly owned by the government but is in the process of being privatized.

Seeking to boost their financial strength, the three cable operators also hope to turn the Hot Telecom entity into a full-blown corporate merger after completing the VoIP service launch. The Israeli government has told the companies that they can carry out their long-sought merger if they meet certain conditions, including starting voice service by late November and investing at least $80 million in voice infrastructure by June 2006.

Unlike their counterparts in the U.S. and Canada, the three Israeli companies have not said much about what features they will offer on their joint VoIP service. Nor have they spelled out their packaging and pricing plans yet, other than to say that they expect to undercut Bezeq's prices by 15% to 20%.

But, in direct competition with Bezeq, the Hot Telecom partners have made it clear that they will offer both residential and commercial VoIP service across the country. As part of their mandate from the government, they have also made a commitment to providing universal phone service, just like Bezeq does, within a few years.

Once it launches the IP telephony service, Hot Telecom's business plan conservatively calls for signing up 300,000 VoIP subscribers, or 10% to 12% of the entire Israeli market, over the next few years. The three companies say they expect to generate more than $100 million in revenue within five years and positive cash flow within three years.

"We're pretty excited," says Dave Dial, president of Lucent Cable Solutions, which was chosen as the primary network integrator to set up the network. "We think they've got a good plan."

In fact, other Israeli cable industry executives and experts have suggested that Hot Telecom could end up siphoning off as much as 15% of the phone market in just two years. For instance, Israeli Minister of Communications Ehud Olmert has said he expects to see "rapid and large-scale competition" in the voice business once the cable companies enter it.

Industry experts agree that Golden Channels, Tevel and Matav should score well in the telephony market, after having already spent hundreds of millions of dollars to upgrade their facilities for advanced new services. Like their North American counterparts, the three cable companies have used their upgraded lines to roll out digital video and cable-modem services to consumers in recent years, with some success.

"I think they're as well equipped as cable companies in any market," says Israel "Sruki" Switzer, a former Israeli cable consultant who's worked with all three companies and is now largely retired. "Their systems are capable and have been upgraded. They can do it as economically as anybody else."

Although it still holds a 50% stake in Bezeq, the Israeli government is also showing strong support for Hot Telecom's competitive thrust. In one key move, the Ministry of Communications has announced that cable telephony subscribers will not have to pay connectivity charges for the first 1 billion minutes offered by the consortium, saving them about 40 million in Israeli currency.

Competing against Bezeq in its prime phone market won't be all that easy, however. Despite some slippage recently because of the growing popularity of cell phones, the state-owned phone monopoly still dominates the Israeli voice market with more than 2.9 million land-line telephone customers in a nation of no more than 2 million households. That total includes a whopping 980,000 business customers.

Bezeq also rules in Israel's high-speed Internet access market, although cable operators have started gaining ground in recent months. The phone company reports that it now has more than 500,000 DSL subscribers, up from 430,000 at the end of last year. In contrast, the cable companies now have a total of about 300,000 cable modem customers under the Hot Telecom brand, up from 220,000 at the close of 2003.

With 40% of Israeli households now hooked up to some type of high-speed service, Bezeq and HotTelecom both see broadband deployment continuing to expand. In fact, Bezeq CEO Amnon Dick has targeted high-speed data as one of the company's biggest growth engines.

Plus, even more than most of the phone companies in North America, Bezeq has made serious incursions into cable's core video market. In by far its biggest video play, the phone company has invested heavily in Yes, Israel's direct broadcast satellite (DBS) company, and now owns 50% of it. Since starting operations four years ago, Yes has signed up about 400,000 DBS subscribers despite its own financial problems. In contrast, the three cable operators have lost a combined total of about 200,000 customers.

"Bezeq took an increased financial interest in the satellite company to damage the economics of the cable companies and keep them from getting into data and telephony," Switzer says. "And they wanted to act as a spoiler in the video business."

Besides Bezeq, the Hot Telecom consortium also faces the major market hurdle posed by Israel's incredibly high usage of wireless phones. Switzer believes that only Finland can match Israel's love affair with cell phones, which is increasingly prompting consumers and businesses to cut their land-line ties.

"The problem in the Israeli market is that the land-line market is declining because it's one of the most thoroughly penetrated cell phone markets," Switzer says. "Everybody's got a cell phone or two or three."

Nevertheless, the Hot Telecom partners, determined to generate fresh revenue and cut their heavy debt from costly plant rebuilds, are eager to move forward with VoIP. In preparation for their commercial rollout, the cable operators are now conducting a market trial with 2,000 homes and 200 businesses in Tel Aviv, Israel's largest city. Plans call for expanding that trial even further before the official launch.

The three cable operators have also enlisted a number of prominent equipment suppliers and other tech vendors to aid with the telephony rollout. As the primary network integrator, Lucent heads the list with a contract worth $35 million over the next three years. Other vendors will supply another $15 million worth of equipment.

In a big victory for Lucent, Hot Telecom selected the company in July, choosing it over Binat in the final stages. Nortel Networks, Siemens, and Netcom Systems also bid for the highly prized contract. In addition, the three Israeli cable operators looked at equipment from Cisco Systems and Terayon Communication Systems.

"It's the first time we've done a whole country for cable," Dial says. "There's no question we're proud of this…. It is a huge challenge."

Under the $35 million contract, Lucent's role is to provide "an end-to-end solution" for Hot Telecom, including network design, engineering, deployment, maintenance, and integration of operations support and billing systems. Lucent is also managing project subcontractors and running an interoperability testing center to make sure that all the VoIP-related equipment and software works well together.

"We're working with over 20 vendors," Dial says. "They've got a dual-vendor strategy in many of those elements... There's quite a mix.'

Indeed, the list of other cable tech vendors includes: Nortel and Gallery IP telephony, which are providing the soft switches; Audio Codes and Nuera, which are supplying the media gateways; and C-Cor. Lucent is also handling other assignments for Hot Telecom, such as network security.

"We're talking about other things with them now," says Dial, who's logged plenty of flights between Lucent headquarters in Murray Hill, N.J. and Tel Aviv over the past year. "We've been working this opportunity since last January or February."

Dial said the biggest headache of setting up the new Hot Telecom phone network is "just the inherent nature of a VoIP deployment with the number of vendors that need to be factored into a design." All that complex work, he notes, amounts to "a significant challenge."

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