Telecom-Israel 2000 International Exhibition & Conference

1. Telecom-Israel 2000InternationalExhibition & Conference The Future is Here Daniel Rosenne Director General, Ministry of Communications rosenned@moc.gov.il

2. Presentation Agenda • Telecom Israel 2000 Event • Telecom Networks & Services • Manufacturing Industry • Summary.

3. Telecom-Israel 2000InternationalExhibition & ConferenceTel Aviv, 6 - 9 November, 2000

4. Telecom-Israel 2000 • A bi-annual international event: • Expectation of 150,000 participants, 6000 foreign visitors, 20 telecom ministers. • Following the remarkable success of Telecom-Israel 1998 - 100,000 participants, 3000 foreign visitors. • Exhibition: • 25,000 sqm. • Over 100 start-ups stands. • Conference: • over 100 industry leading speakers. • Combination of market giants with start-up entrepreneurs guarantees innovative and interesting discussions. • Pre & Post conference tours.

5. Telecom-Israel 2000Exhibition (1) • Source of telecom innovation - focused on unveiling new products, services and ideas. • Novel products & services: • Wireless • Mobile • Internet • Networking • Broadband access • Broadband switching • Optical networking • Multimedia • Interactive TV • Network storage • Network management • Messaging • Satellite • Test systems • E Commerce • Tele-learning • Tele-medicine

6. Telecom-Israel 2000Exhibition (2) • 270 stands in 9 pavilions. • 25 foreign companies & 8 national stands (Austria, Brazil, Canada, Cyprus, Hong-Kong, Italy, Netherlands, Taiwan). • Israel’s competitive advantage showcase: • System approach • Market driven development • Advanced research capabilities • Quality production • Flexible support.

7. Telecom-Israel 2000 Conference7, 8 & 9 November, 2000 • Three Plenary sessions: • Telecom in times of change • Research & development in Israel • Internet - the next generation • Parallel sessions: • Multimedia • Broadband access • Optical networks • Mobile networks • Messaging • IP & ATM • Portable Internet • Storage & Networking • Network security • Industry sponsored sessions & seminars. • Network management • Available government • Remote learning • Telemedicine • Interactive TV • E-Commerce • Telecom competition • Advanced telecom services • Telecom services marketing

8. Telecom-Israel 2000Start-Ups (1) • Israel is one of the largest world centers for start-up enterprise, with ~2000 active start-ups. • Innovative, technology-intensive systems, equipment and services, representing technology breakthrough. • Major international activity: • Strategic alliances and joint ventures. • Raising capital - venture, seed & risk investments. • Over 100 start-ups will be located in one central pavilion.

9. Telecom-Israel 2000Start-Ups (2) • Main Topics of the start-up pavilion: • Internet Billing • Internet Security • Internet telephony • Internet Multimedia • Video on Demand • E & M Commerce • Micro Browsers • 3G Cellular • Wireless • Assistance in pre-scheduling of one-to-one business meetings. • Brokerage event: www.matimop.org.il/telecom2000. • Satellite Communications • Optical Communications • Voice recognition • Messaging • CTI • Data Storage • In building networking • Tele Learning • Tele Medicine

10. Telecommunications Network & Services

11. Israel's Telecommunications • 2.8 million main telephone lines • (47% penetration). • 3.5 million cellular customers, on three networks: Pelephone, Cellcom & Partner/Orange. • (58% penetration). • 1.1 million cable-TV connected households. • (3 operators, 70% of passed households, 92% household coverage).

12. Telecommunications Services Market - 1999 Cable TV International Long-Distance Internet services Terminal Equipment & Business Systems 2% 2% 7% Fixed Services 35% 10% Cellular Telephony 44% Total telecom services market ~ $ 4.2 billion

13. The Cellular Boom:Israel Telecommunications Services Revenues, 1995-1999 ($US M) 2,000 Cellular Fixed 1,500 1,000 International 500 CATV 0 1995 1996 1997 1998 1999

14. The Existing Regulatory Environment • Separation between regulation and operation (since 1984). Regulation responsibility - Ministry of Communications. • General operating licenses issued to Bezeq, cellular operators & facility-based international long-distance service providers. • Special licenses issued by the Ministry of Communications for value-added services. • Exclusive rights of Bezeq in fixed services canceled as of 1 June 1999.

15. BezeqThe Israel Telecommunication Corp Ltd. • Israel's national telecommunications operator. • Annual sales - NIS 9.3 billion. • 11,500 employees (8,500 in Bezeq, the mother company). • 5% royalties on income. • Regulatory environment: • Price cap tariff regulation (CPI - X formula). • Universal service obligations.

16. Bezeq Restructuring1995 -2000 • Structural separation - promoting fair competition. • Leaner Telco: • Improving efficiency & customer focus. • Getting ready for local competition. • Entering new markets.

17. Walla! Communications Portal & web hosting (32.5% by BI) Goldnet Communications B2B eCommerce (49%) yes Direct Broadcasting Satellite (30%) BezeqCall Communications CPE & Business Solutions (100%) GoNext Mobile Internet (51% by Pelephone) Bezeq Consortium Bezeq International ILD & Internet (100%) Pelephone Cellular Services (50%) Bezeq Fixed Services & Infrastructure (Holding Company)

18. Cellular TelephonyCompetition Introduced December 1994

19. Cellular Operators PelephoneCellcomPartner/Orange 800 MHz 800 MHz 900 MHz NAMPS & CDMA TDMA GSM 1987 1995 1999 BellSouthHutchison Bezeq Safra Brothers Matav Motorola Discount Investments Elbit.com PEC Tapuz private investors free float

20. Cellular Telephony • Rapid growth - 125,000 subscribers in January 1995. In November 1999 the number of mobiles (2.9 million) exceeded the number of fixed lines. • Key expansion stimulators: • Perceived low tariffs: ~ US $0.11 to 0.23/minute air time, ~ $11 to 29 monthly charge. (300 min average monthly bill - $56 to 74) • Calling party pays (CPP). • Nationwide coverage. • Competition & marketing innovations.

21. Average Number of Monthly Usage Minutes 1995 1996 1997 1998 1999 Fixed Bezeq 687 687 679 699 732 Mobile Pelephone 530 430 320 300 295 Partner 427 (Q4) Source: Bezeq Eurobonds Prospectus, August 2000; Partner annual report 1999

22. Cellular Competition: key trends for 2000 • New services: • SMS, WAP, wireless internet. • Content: news, media & data services. • New pricing models: • Regional pricing plans. • Pay as you use programs. • Low cost position for low usage segments. • Churn reduction plans.

23. International Long DistanceFacilities Based Competition Introduced July 1997

24. Facilities-Based International Service Providers • Golden Lines (012) • Telecom Italia, SouthWestern Bell, • Aurek, Globscom & Meitar/Kahn. • Barak (013) • Sprint, Deutsche Telekom, France Telecom, Clalcom & Matav. • Bezeq International (014) The incumbent carrier, 100% owned by Bezeq.

25. Dialing Parity Rules • Per-call carrier-selection prefixes (01X). For each of the international service providers. • CPS (Carrier pre-selection) - subscribers can choose a preferred provider for ‘00’ prefix and ’188’ international operator services. • Competitive practices – • CPS balloting. • Consumers’ data provided by Bezeq & Cellular operators on non-discriminatory basis.

26. Resulting MarketEnvironment • Highly competitive market, with low customer switching barriers. • Drastic cuts in retail tariffs (example: 0.20$/min to any destination). • International long distance calls - a commodity. • The incumbent carrier, Bezeq International, lost its dominant position (60% > billed minutes) within 70 days.

27. International Traffic[Million Minutes/Year] 1000 Outgoing 800 600 Incoming 400 200 0 1996 1997 1998 1999

28. Submarine Optical Cables Infrastructure EMOS CIOS Cable RFCS Capacity EMOS 1990 280 Mb/s CIOS 1994 622 Mb/s LEV 1998 5 Gb/s FLAG 1999 5 Gb/s MN1 2001 3.84 Tb/s LEV MED Nautilus 1 FLAG

29. Additional Aspects

30. Internet Services Profile • ~30 Internet service providers, more than 1 million users, 600,000 dial-up & 5,000 directly connected customers, 30,000 domains. • Typical tariffs: ~ $12 monthly fee, including 10 usage hours, ~ $1 for each additional hour. Unlimited access at < $1 per day. • IIX (Israel Internet eXchange) non-profit peering point. • “Hands-off” overall regulatory policy. • High growth ~ 50% annual.

31. The Israel Internet-2 Network • Part of the global research network for the NGI (Next Generation Internet). • Connecting Israel to the forefront of scientific and industrial R&D, through: • StarTap - US NSF/I-2/NGI interconnection point. • Quantum - EC International test network (TEN-155). • Q-Med - Mediterranean consortia (Cyprus, Greece, Israel, Italy) Quantum extension. • 34 Mb/s connection to London, 45 Mb/s connection to Chicago (155/622 Mb/s - planned). • 10 Mb/s & 155 Mb/s domestic connectivity (622 Mb/s, 10Gb/s - planned).

32. Civilian Telecommunications Satellites • AMOS-1: TV distribution, SNG & VSAT • launched May 1996. • Geostationary orbit at 4o West. • 7 transponders, covering Middle East & Central Europe. • Designed, manufactured and controlled by Israel Aircraft Industries. • Gurwin-II TechSAT: communications, remote sensing & research • Launched July 1998. • 830 km altitude sun-synchronous circular orbit. • 50 kg, 3-axis stabilized Earth-pointing microsat. • Designed, manufactured and controlled by the Technion - Israel Institute of Technology.

33. Telecommunications Competition Enhancement by Regulatory Reform

34. The Competitive Environment • Wide competition in customer premise equipment and value-added services. • Limited competition in cellular and international services. • Two monopoly areas: • Bezeq - Domestic fixed services (infrastructure, transmission, data communications & telephony). • Cable TV operators - Multi-channel subscriber television.

35. Regulatory Reform(Promoting competitive Advantage) • Competition in fixed services. • Structural change of the telecommunications sector: • Liberalization. • Privatization. • Re-regulation.

36. Proactive Re-regulation • The end of the access monopoly: • Facility-based competition. • Alternative infrastructure: fiber, copper, cable, fixed wireless, satellite. • Simple interconnection rules: • Non-discriminatory access, carrier pre-selection & dialing parity. • Non-discriminatory interconnection tariffs. • Minimum compatibility requirements. • New numbering plan & frequency allocations.

37. Competition Rules • Three tier market structure: • Mobile services (Cellular & PCS). • Fixed domestic services (infrastructure, transmission, data comm's & telephony). • International services. • Facilities based competition. • Non-discriminatory access - to all networks. • Universal service obligations- including equal terms service offering requirement, at non-discriminatory tariffs. • Cross-ownership limitations, assuring fair competition.

38. Re-regulation Covers: • Competition rules - ownership, resale. timetable. • Universal service - obligations, reciprocal compensation. • Interconnection – rules, tariffs, terms. • General license owners - obligations, structural regulation, services. • Numbering - administration, portability, new numbering plan. • Bezeq tariff rebalancing • National security.

39. Licenses for new operators • Generallicenses for fixed domestic services (infrastructure, transmission, data services & telephony) will be issued to applicants meeting economic and know-how criteria. • General license requiring limited spectrum resources (mobile, FWA) shall be issued through public tenders.

40. Proposed New Frequency Bands Allocations Band Application Allocation Year 800/900 MHz Cellular 30 MHz 1998 2 GHz PCS/UMTS 175 MHz up to 2005 3.5 GHz N-FWA/WLL 72 MHz 2000 26 GHz B-FWA/LMDS 1200 MHz 2000

41. License Auctions • Fixed Wireless Access: • Broadband (26 GHz) & Narrowband (3.5 GHz). • Up to 3 operators, selected in MSR (Multiple Simultaneous Round) auction. • Participation of Bezeq & CATV operators in the auction will be excluded. • Tender process planned to begin summer 2000. • Additional Mobile Competition: • 2G (DCS-1800) & 3G (UMTS). • Allocations for new & existing operators. • Tender process planned to begin during 2001.

42. 2000 Post 2000 • Pelephone • Cellcom • Partner/Orange • PCS operators • Pelephone • Cellcom • Partner/Orange • Bezeq • Competing • Operators: • Wireline • Wireless • Bezeq • Bezeq International • Barak • Golden Lines • Additional operators • Bezeq International • Barak • Golden Lines Israel's Telecommunications Map 1994 Mobile Services • Pelephone (Bezeq) Fixed Services (Infrastructure, Transmission & Telephony) • Bezeq International Long Distance Services • Bezeq

43. Bezeq Tariff Rebalancing - April 1999 • One step rate rebalancing, almost eliminating cross-subsidies between services (voice traffic still subsidized telephone access). • New price-cap regime - productivity gap (x-factor) of 7% (6% in 1999, will be adjusted if Bezeq output deviates from predictions). • 6% average rate decrease (21% decrease on voice traffic, 16% increase on fixed monthly payment. Typical tariffs - NIS 0.208 for local call, NIS 36.1 monthly payment, 532 NIS for line installation). • ROE (before tax) - 10.5%.

44. Bezeq Tariff Update - May 2000 • Annual efficiency factor update (6%). • Elimination of regional tariffs (replacing traditional 3 x 3 tariff matrix [3 distance zones, 3 time zones] with simple tariff matrix – local calls or urban-toll calls during peak hours, unified tariff for off-peak hours). • Per-second billing (replacing traditional “meter pulse” with per second billing and minimum charge per call). • Alternative tariff plans (Customer choice between number of alternative tariff plans, bundling local call minutes in exchange for monthly fee).

45. Interconnection Rates Interconnection Israel EU Tariff benchmarks Local 0.6 – 1.4 0.7-1 Urban Toll - 1-2 National Toll 0.6 - 2.9 1.7-3 US cents, $1 = NIS 4.16

46. Bezeq Privatization • Government holds 55% of Bezeq shares (remaining shares - publicly held). • In August 2000, government formally approved selling 50.01% of Bezeq shares to a single strategic investor. • Privatization planned to be completed by spring 2001.

47. New NNP (National Numbering Plan)

48. Existing NNP • Adopted by Bezeq in the late 80’s, as part of the network digitization program. • 8 digits number length: • Fixed: A NXX XXXX (area code + exchange code + local number) • Mobile: 5X NX XXXX (network Identification + subscriber number) • Services: variable length, 2 to 10 digits. • Prefixes: 0 - long distance (00, 01X - International) 1 - service prefix * - access to network services # - service deactivation.

49. New NNP • Additional digit (9 digits number length): • Step 1 - Mobile: 5 [N]XXX XXXX (N = 2 for Cellcom, 4 for Orange, 6 for Pelephone) • Step 2 - Fixed: A [N]XXX XXXX • Area codes consolidation: • Reclaim area codes 6 & 8 (end up with 5 areas). • Services numbering re-arrangement : • 1XX for life threatening emergency; 1XXX for other services. • 1 YYY XXX XXX logical numbering. • Toll-free (1-800) number portability.

50. Will We Have Enough Telephone Numbers? Numbers [Millions] Number Type Old NNP New NNP Geographic 56 160 - 320 Mobile 8 80 Logical - 160 - 80 New Services 10 100 Future Use - 240 - 160