20-F 1 f20f2019_bcommunicationsltd.htm ANNUAL REPORT


 

 

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report __________

 

Commission file number: 001-33773

 

 

B COMMUNICATIONS LTD.
(Exact Name of Registrant as specified in its charter
and translation of Registrant’s name into English)

 

Israel
(Jurisdiction of incorporation or organization)

 

144 Menachem Begin Road, Tel Aviv 6492102, Israel
(Address of principal executive offices)

 

Tomer Raved, CEO, +972-3-6796121 (phone), +972-3-6796111 (fax)
144 Menachem Begin Road, Tel Aviv 6492102, Israel
(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Ordinary Shares, NIS 0.1 Par Value   BCOM   Nasdaq Global Select Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Ordinary Shares, par value NIS 0.1 per share 116,316,563 shares
(as of December 31, 2019)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☐                    No ☒

 

 

 

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ☐                    No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒                    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒                    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒

    Emerging growth company ☐

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17 ☐                    Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐                    No ☒

 

 

 

 

 

 

INTRODUCTION

 

Our ordinary shares are listed on the NASDAQ Global Select Market and on the Tel Aviv Stock Exchange, or TASE (symbol: BCOM). On April 14, 2010, we completed the acquisition of then 30.44% interest in Bezeq (TASE:BEZQ), Israel’s largest telecommunications provider, from Ap.Sb.Ar. Holdings Ltd. (a consortium of Apax Partners, Saban Capital Group and Arkin Communications) for an aggregate cash purchase price of approximately NIS 6.5 billion. In accordance with the terms of the transaction we designated seven directors to replace the Apax-Saban-Arkin Group’s representatives on Bezeq’s then 11 person Board of Directors. We began consolidating Bezeq’s financial results into our financial statements effective as of the closing of the acquisition.

 

The Bezeq Group operates the most comprehensive telecommunications infrastructure in Israel, with a broad range of telecommunications services across all of its markets. Through its wholly-owned subsidiaries, the Bezeq Group is a leading provider in Israel of fixed-line telephony services, fixed-line broadband internet infrastructure access services, Internet service provider, or ISP, services, cellular telephony services, international telephony, or ILD, services, international and domestic data transfer and network services and information and communication technology, or ICT, services, pay television services and other communications infrastructures and services. In each of these markets, the Bezeq Group holds a significant market share.

 

As used in this annual report, the terms “Company,” “we,” “us” and “our” mean B Communications Ltd. and its subsidiaries, unless otherwise indicated. As used in this annual report, “Bezeq” means Bezeq The Israel Telecommunications Corp. Ltd., “SP1” means B Communications (SP1) Ltd., “SP2” means B Communications (SP2) Ltd., “Pelephone” means Pelephone Communications Ltd., “Bezeq International” means Bezeq International Ltd. and “YES” (the trade name for DBS) and DBS mean DBS Satellite Services (1998) Ltd. Bezeq, Pelephone, Bezeq International and DBS are sometimes collectively referred to as the Bezeq Group in this annual report.

 

Our consolidated financial statements appearing in this annual report are prepared in New Israeli Shekels and are translated into U.S. dollars at the representative rate of exchange at December 31, 2019 (NIS 3.456 = $1.00). The dollar amounts so presented should not be construed as representing amounts receivable, payable or incurred in dollars or convertible into dollars. All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.

 

We have a trademark registered in Israel for “B Communications.” All other registered trademarks appearing in this annual report are owned by their holders.

 

Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.

 

FORWARD LOOKING STATEMENTS

 

Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Such forward-looking statements are also included in Item 4. “Information on the Company” and Item 5. “Operating and Financial Review and Prospects.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3D. “Key Information - Risk Factors.”

 

 

 

 

TABLE OF CONTENTS

 

      Page
PART I   1
  ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
  ITEM 3. KEY INFORMATION 1
    A. Selected Financial Data 1
    B. Capitalization and Indebtedness 2
    C. Reasons for the Offer and Use of Proceeds 2
    D. Risk Factors 2
  ITEM 4. INFORMATION ON THE COMPANY 17
    A. History and Development of the Company 17
    B. Business Overview 17
    C. Organizational Structure 87
    D. Property, Plants and Equipment 87
  ITEM 4A. UNRESOLVED STAFF COMMENTS 87
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 87
    A. Operating Results 87
    B. Liquidity and Capital Resources 97
    C. Research and Development, Patents and Licenses 111
    D. Trend Information 111
    E. Off-Balance Sheet Arrangements 111
    F. Tabular Disclosure of Contractual Obligations 111
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 112
    A. Directors and Senior Management 112
    B. Compensation 114
    C. Board Practices 115
    D. Employees 120
    E. Share Ownership 120
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 121
    A. Major Shareholders 121
    B. Related Party Transactions 122
    C. Interests of Experts and Counsel 123
  ITEM 8. FINANCIAL INFORMATION 123
    A. Consolidated Statements and Other Financial Information 123
    B. Significant Changes 129
  ITEM 9. THE OFFER AND LISTING 129
    A. Offer and Listing Details 129
    B. Plan of Distribution 129
    C. Markets 129
    D. Selling Shareholders 129
    E. Dilution 129
    F. Expense of the Issue 129
  ITEM 10. ADDITIONAL INFORMATION 129
    A. Share Capital 129
    B. Memorandum and Articles of Association 130
    C. Material Contracts 130
    D. Exchange Controls 130
    E. Taxation 131
    F. Dividends and Paying Agents 135
    G. Statement by Experts 135
    H. Documents on Display 135
    I. Subsidiary Information 136

 

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  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 136
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 137
PART II   138
  ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 138
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 138
  ITEM 15. CONTROLS AND PROCEDURES 138
  ITEM 16. [RESERVED] 139
  ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 139
  ITEM 16B. CODE OF ETHICS 139
  ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 139
  ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 140
  ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 140
  ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT 140
  ITEM 16G. CORPORATE GOVERNANCE 140
  ITEM 16H. MINE SAFETY DISCLOSURE 156
PART III   141
  ITEM 17. FINANCIAL STATEMENTS 141
  ITEM 18. FINANCIAL STATEMENTS 141
  ITEM 19. EXHIBITS 142

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The tables below as of and for the five years ended December 31, 2019 set forth selected consolidated financial data, which is derived from our audited consolidated financial statements. The audited consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 appear in this annual report.

 

Consolidated Statement of Income Data:
(Amounts in millions, except share and per share data)

 

   Year Ended December 31, 
   2015   2016   2017   2018   2019   2019 
   (NIS)   (U.S. $) 
                         
Revenues   9,985    10,084    9,789    9,321    8,929    2,584 
Depreciation, amortization and impairment   2,131    2,161    2,117    2,387    2,064    597 
Salaries   1,958    2,015    2,007    1,995    1,937    560 
General and operating expenses   3,876    4,021    3,906    3,394    3,276    948 
Loss from impairment of assets   -    -    129    2,294    1,274    369 
Other operating expenses(income)   3    21    149    635    (188)   (54)
Operating profit (loss)   2,017    1,866    1,610    (1,384)   566    164 
Finance expense   689    1,054    586    620    738    213 
Finance income   (154)   (123)   (69)   (89)   (266)   (77)
Profit after financing expenses (income), net   1,482    935    1,093    (1,915)   94    28 
Share of losses (profit) in equity-accounted investee   (12)   5    5    3    2    1 
Profit (loss) before income tax   1,494    930    1,088    (1,918)   92    27 
Income tax expense (benefit)   358    442    347    (59)   1,473    426 
Net profit (loss) for the year   1,136    488    741    (1,859)   (1,381)   (399)
Profit (loss) attributable to:                              
Owners of the company   210    (236)   78    (1,029)   (853)   (247)
Non-controlling interests   926    724    663    (830)   (528)   (152)
Net profit (loss) for the year   1,136    488    741    (1,859)   (1,381)   (399)
Basic earnings (loss) per share   7.04    (7.92)   2.62    (35.46)   (19.76)   (5.72)
Diluted earnings (loss) per share   6.97    (7.92)   2.62    (35.46)   (19.76)   (5.72)

 

Statements of Financial Position data:
(Amounts in millions)

 

   Year Ended December 31, 
   2015   2016   2017   2018   2019   2019 
   (NIS)   (U.S. $) 
Cash and cash equivalents   581    762    2,386    1,104    814    236 
Restricted cash   155    -    -    -    39    11 
Total assets   22,122    20,145    20,639    19,375    15,587    4,510 
Total current liabilities   5,199    4,256    4,111    6,908    3,627    1,049 
Non-current liabilities   13,532    12,588    13,442    11,703    12,162    3,519 

 

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B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

The following is a summary description of some of the material risks and uncertainties that may affect our business, including our future financial and operational results.  In addition to the other information in this Annual Report, the following statements should be carefully considered in evaluating our company.

 

Risks Directly Related to B Communications

 

We have a substantial amount of existing debt, restricting our financing flexibility. In the recent past, we faced a possibility of default, which we cured through a change of control transaction which we believe provided us with sufficient liquidity to service our interest payments on our outstanding debt until maturity (November 2024).

 

In March 2019, we announced that the aggregate material decline in the assets and the accounting equity of our company was expected to be in a cumulative range of NIS 700-800 million (as a result of all the write downs to date). Our Board of Directors decided at its meeting held on the evening of March 19, 2019, that as a result of the foregoing we should enter into a dialogue with the holders of our debentures in order to examine financial possibilities for strengthening our shareholders' equity or to obtain adjustments to the current Deeds of Trust governing the debentures. The Board further determined to withhold payments to its financial creditors until such agreements are finalized. This included payments we owed to creditors pursuant to our issued Series B and Series C Debentures. Throughout 2019, we were faced a high probability of default and considered various M&A and financing candidates.  

 

On December 2, 2019, we closed the transaction with Searchlight II, BZQ LP (“Searchlight”) and a company controlled by the Fuhrer family, T.N.R. Investments Ltd. (“Fuhrer”), whereby control of our company and Bezeq was transferred from Internet Gold – Golden Lined Ltd. (“Internet Gold”) to Searchlight and Fuhrer. The purchase of control was executed pursuant to the control permit granted by the Ministry of Communications (the “MoC”) to Searchlight and Fuhrer and our company on November 11, 2019 (the “Control Permit”). The transaction injected NIS 640 million into the Company, which helped to stabilize and significantly improve our position. As a result of the transaction, we fully repaid the balance of our debt obligations for our issued Series B Debentures, and we made a partial repayment in cash in the amount of NIS 614 million in respect of our obligations for our issued Series C Debentures.

 

The transaction also included an equity offering in Israel and a rights offering in the United States pursuant to Rule 801 of the Securities Act of NIS 70 million (including participation by Internet Gold), and also included the issuance of two new Series of Debentures: Series E Debentures (par value NIS 100 million) and Series D Debentures (par value NIS 58 million).

 

We historically serviced our substantial debt with dividend payments received from Bezeq. Bezeq’s determination to suspend the payment of dividends could affect our ability to repay our debt when it comes due.

 

As of April 23, 2020, we had approximately NIS 2.036 billion (US$ 589 million) of debt, which we historically serviced with the proceeds of semi-annual dividend payments from Bezeq equal to 100% of its half-yearly profits. Bezeq paid total cash dividends of NIS 0.6 billion NIS 1.3 billion, and NIS 1.4 billion in the years ended December 31, 2018, 2017 and 2016, of which we received NIS 181 million, NIS 338 million and NIS 380 million. On March 6, 2018, Bezeq’s Board of Directors updated its dividend distribution policy to distribute a dividend of 70% of its half-yearly profit (after tax). On March 28, 2019, Bezeq reported a NIS 1.06 billion loss for 2018 after write-offs during the year and announced that due to the losses, dividend payments would be halted for the next two years. Accordingly, we cannot expect to receive any dividends prior to 2022. However, we believe that we currently have sufficient liquidity to service the interest payments on our outstanding debt until maturity (November 2024).

 

2 

 

 

We have control over Bezeq as a result of our ability to nominate a majority of its board of directors

 

We have control over Bezeq based on two facts: (i) we hold significantly more voting rights than any other shareholder and the remaining holdings in Bezeq are widely dispersed; (ii) Israeli law and regulations require prior ministerial approval for any person to acquire holdings in Bezeq exceeding 5%, or to take actions together with other shareholders to cause the appointment of a director in Bezeq, or to influence Bezeq’s day-to-day operational decision-making policies. By these restrictions, the regulatory regime ensures that no individual or entity will interfere with the control of Bezeq by the holder of the Control Permit and that the Company is able to nominate the majority of the board of directors of Bezeq.

 

When our controlling shareholders, Searchlight and Fuhrer, purchased the control in Bezeq, they nominated two new representatives out of eight on Bezeq’s Board of Directors. In the upcoming Annual General Meeting of Bezeq’s shareholders scheduled for May 14, 2020 (the “Upcoming AGM”) the nomination by our controlling shareholders of a third director is on the agenda.

 

Bezeq is an Israeli issuer (TASE: BEZQ) and is prohibited under Israeli and securities law from passing confidential information about its business operations to us, or to any other third-party. Only limited non-public financial information is periodically reported by Bezeq to our company, in order for us to meet our reporting requirements as issuers. Therefore, we are generally not privy to non-public information concerning Bezeq.

 

We, Searchlight and Fuhrer are subject to the Control Permit for holding Bezeq shares. Failure to comply with this permit or other regulatory provisions relating to the control permit may result in the revocation of the Control Permit and our rights with respect to our Bezeq interest would be adversely impacted, which would materially and adversely affect our business and financial position.

 

The new Control Permit required the adoption of amendments to the Articles of Association (“AoAs”) of Bezeq and its subsidiaries prior to January 12, 2020 Bezeq in order to remain compliant with the requirements of our new control permit. Bezeq and its subsidiaries’ AoAs were not amended on time as required and therefore we are in breach of the Control Permit, which the MoC is aware of. The amendment of Bezeq’s AoA is on the agenda of the Upcoming AGM. The Company agreed with Bezeq’s board of directors that the amendments of the AoAs of Bezeq’s subsidiaries will be addressed immediately after the Upcoming AGM.

 

Pursuant to the Communications Order, we were required to obtain the prior written consent of the Prime Minister (who delegated his authority) and the Minister of Communications (“the Ministers”), in order to obtain a permit to acquire Bezeq. Under the Communications Order, no person may hold, directly or indirectly, “significant influence” over Bezeq or 5% or more of any particular class of Means of Control in Bezeq, nor may any person, together with any other person, appoint, elect or dismiss the general manager of Bezeq or cause the election, appointment or dismissal of any director of Bezeq, without the prior written consent of the Ministers. Subject to certain exceptions, prior written approval of the Ministers is also required to increase the holdings or other rights in excess of those determined in the initial approval, including by means of an agreement (including a voting agreement). No person may transfer control, “significant influence” or Means of Control in Bezeq to another, if, as a result of the transfer, the holdings of the transferee would require approval pursuant to the Israeli Communications Law or Communications Order and the transferor is aware that the transferee is not in possession of the requisite approval. For the foregoing purposes, “significant influence” means the ability to significantly influence the activity of a corporation, whether alone or together with or through others, directly or indirectly, other than as a result of holding Means of Control in that corporation or in another corporation, and including the ability derived from the corporation’s articles of association, a written, oral or other kind of agreement, or from any other source. In this context, the right to appoint an officer or holding 25% of our Means of Control is presumed to confer significant influence. “Means of Control” means the right to vote at a general meeting of Bezeq, appoint a director or general manager of Bezeq, or to participate in the profits of Bezeq or a share of the remaining assets of Bezeq after payment of its debts upon liquidation.

 

The Control Permit includes several other conditions, including the requirement that SP2, our subsidiary which holds our interest in Bezeq, be controlled exclusively by the other parties to the Control Permit and that the parties to the Control Permit hold not less than 25% of any type of Means of Control of Bezeq and SP2.

 

In addition, the Control Permit requires an “Israeli Party,” as defined in the Communications Order. Fuhrer is that party according to the Control Permit. The Control Permit also includes certain notice requirements regarding changes in the composition of the board of directors. If we, Searchlight, Fuhrer or any other party subject to the Control Permit fails to comply with the terms of the Control Permit or with other regulatory provisions relating to the control of Bezeq, such permit could be revoked and our rights with respect to our Bezeq interest would be adversely impacted, which would have a material adverse effect on our business and financial position.

 

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Any event in which a receiver is appointed with respect to our holdings in SP2 or SP2’s holdings in Bezeq, will constitute grounds for the cancellation of the Control Permit. In addition, in the event that the Ministers determine that a material change in the details included in the application for the Control Permit has occurred or the members to the Control Permit failed to provide requisite notifications in accordance with the Control Permit, and there is a real concern that the essential service provided by Bezeq will be harmed, the Ministers may cancel the Control Permit or set conditions for its continuation pursuant to the provisions of the Israeli Communications Law.

 

In the event that the Control Permit is cancelled and an application to reissue another control permit is denied, our holdings in Bezeq will become unapproved holdings pursuant to the Communications Order and we will not be able to exercise any right derived from our shares in Bezeq and we will be obligated to sell them or they will be sold by Bezeq or be liquidated.

 

If we do not maintain the control of Bezeq (as defined pursuant the Investment Company Act of 1940), we may be deemed to be an “investment company” under the Investment Company Act, which could materially and adversely affect our business.

 

Section 3(a)(1)(A) of the Investment Company Act of 1940, or the Investment Company Act, defines an investment company as any issuer that is, holds itself out as being, or proposes to be, primarily engaged in the business of investing, reinvesting or trading in securities and Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” (within the meaning of the Investment Company Act) having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. However, an issuer will be deemed not to be an investment company if no more than 45% of the value of such issuer’s total assets (exclusive of government securities and cash items) consists of, and no more than 45% of such issuer’s net income after taxes (for the last four fiscal quarters combined) is derived from, securities other than securities issued by companies which are controlled primarily by such issuer. Primary control is presumed if the issuer owns over 25% of the controlled company’s voting securities and the issuer has control greater than that of any other person. Accordingly, so long as we maintain control of Bezeq, we will not be deemed an investment company.

 

If we were to no longer maintain the control of Bezeq under the Investment Company Act definition, we could be required either (i) to change substantially the manner in which we conduct our operations to avoid being subject to the Investment Company Act or (ii) to register as an investment company. An investment company that is organized under the laws of a foreign country may not register as an investment company, or publicly offer its securities through interstate commerce in the United States, unless Bezeq applies to the U.S. Securities and Exchange Commission, or the SEC for an order permitting Bezeq to register under the Investment Company Act, and to make a public offering in the United States. The SEC may issue an order granting the application if it finds that, by reason of special circumstances or arrangements, it is both legally and practically feasible effectively to enforce the provisions of the Investment Company Act against the issuer, and further finds that granting the application is otherwise consistent with the public interest and the protection of investors.

 

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with certain affiliates, reporting, record keeping, voting, proxy and disclosure requirements, and meeting these requirements would be costly, if at all possible.

 

We are controlled by a single shareholder who can significantly influence matters requiring shareholders’ approval.

 

As of April 23, 2020, Searchlight held, approximately 60.2% of our outstanding share capital. Accordingly, subject to legal limitations, as long as Searchlight holds a significant interest in our company, it may have the ability to influence our business and affairs, including any determinations with respect to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional Ordinary Shares or other equity securities, our repurchase or redemption of Ordinary Shares and our payment of dividends. Similarly, as long as Searchlight has a significant interest in our company, it will have the power to significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to elect all of the members of our board of directors (except external directors, within the meaning of Israeli law), or prevent an acquisition or any other change in control of us. Because the interests of our major shareholders may differ from the interests of our other shareholders, actions taken by it with respect to us may not be favorable to our other shareholders. In addition, Fuhrer holds 11.4% of our outstanding share capital and Searchlight and Fuhrer have entered into a voting agreement for certain matters (e.g., election of directors).

 

4 

 

 

Due to the material weakness pertaining to the design of Bezeq’s internal control over financial reporting, such material weakness was considered a material weakness in our reports. We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results and the market price of our ordinary shares.

 

The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002 governing internal control and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources. 

 

As a consequence of the investigations of Bezeq and several of its directors and senior officers by both the Israel Security Authority, or the ISA, and Israel’s Police, we attempted to assess these investigations through the scope of our own internal control over financial reporting. However, due to provisions of Israeli law concerning obstructing investigation proceedings both Bezeq and we are prevented from examining all matters known to us that were raised in the investigations and accordingly we are unable to fully assess the effects of the investigations on our financial statements and internal controls over financial reporting. Subject to these limitations, in last year’s annual report, we reported that in connection with our assessment of our internal controls over financial reporting that we completed the work necessary to identify a material weakness pertaining to the design of Bezeq’s internal control over financial reporting relating to certain matters, principally the subjects of the investigations.

 

Our management then assessed the effectiveness of our own internal control over financial reporting within the framework of the “Internal Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations, or the COSO. Due to the material weakness pertaining to the design of Bezeq’s internal control over financial reporting, such material weakness was also considered a material weakness in our reports. Our auditors issued a “qualified opinion” on our financial statements because of the inability to obtain sufficient supporting evidence as to the effect, if any, of the investigations’ proceedings on the consolidated financial statements.

 

Bezeq published its 2018 financial report on March 27, 2019. Part 5 of that report, entitled, “Report on Effectiveness of Internal Controls,” summarizes the process and results of an internal audit lead by Bezeq’s Board of Directors and senior management in their remediation efforts. Bezeq’s management concluded that that Bezeq’s internal control over financial reporting for the period ending December 31, 2018 was “effective,” given that the incidents that were identified, in the aggregate, as giving rise to a material weakness in 2017 were remediated during the reporting period. We therefore believe Bezeq’s deficiencies were remedied in the subsidiary level. Bezeq published its 2019 financial report on March 19, 2020. Part 5 of that report, entitled “Report on Effectiveness of Internal Controls,” again reached the conclusion that Bezeq’s internal control over financial reporting for the period ending December 31, 2019 was “effective”.

 

In conducting its assessment of internal control over financial reporting, our management based its evaluation on the framework in “Internal Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations, or the COSO, of the Treadway Commission. As a consequence of the investigations of Bezeq and several of its directors and senior officers by both the ISA and Israel’s Police, we attempted to assess these investigations through the scope of our own internal control over financial reporting. However, due to provisions of Israeli law concerning obstructing investigation proceedings both Bezeq and we were prevented from examining all matters known to us that were raised in the investigations and accordingly we are unable to fully assess the effects of the investigations on our financial statements and internal controls over financial reporting. Therefore, Management concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2018. The standards applicable to our assessment of our internal controls are mores stringent than the standards applicable to Bezeq.

 

While we believe that our current internal controls are working appropriately, we remain unable to assess our internal controls for prior periods because of ongoing criminal proceedings against Bezeq and several of its directors and senior officers. Accordingly, the Company’s internal control over financial reporting remains ineffective as of December 31, 2019 because we cannot assess the impact, if any, of the criminal proceedings on our future financial statements.

 

We will maintain our own constant review of internal controls. We have in the past and may in the future identify material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could adversely affect our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.

 

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Risks Relating to the Bezeq Group

 

The Bezeq Group operates in a heavily regulated industry, which can harm its results of operations. Regulation in Israel has materially adversely affected our results.

 

The Bezeq Group companies are subject to government control and regulation relating to the licensing of operations, setting permitted areas of operation, setting tariffs, operation, competition, payment of royalties, relations between Bezeq and its subsidiaries and a ban on ceasing or limiting its services (which could oblige Bezeq to provide services under uneconomic circumstances). The continuing governmental control and regulation has at times resulted in government intervention that Bezeq believes impedes its business activities. Bezeq is exposed to the imposition of various sanctions by the Ministry of Communications, including fines. In addition, the Minister of Communications has the authority to change the terms of the licenses of the Bezeq group companies, affect existing tariffs and marketing offerings, and impose directives on them. Significant changes in the regulatory principles applicable to the communications industry as a whole and to the Bezeq Group companies in particular, could require Bezeq to make changes to its strategic plans and harm its ability to plan its business activities for the long term.

 

Former Executives of Bezeq, DBS and Eurocom Communications are under criminal investigation or facing indictments subject to hearings in Israel

 

The Israeli Police and the Israel Securities Authority, or the ISA, have recommended indictments of several former Bezeq, DBS and Eurocom Communications executives. Our Audit Committee engaged outside U.S. counsel to conduct an assessment of our internal controls and, as applicable, those of Bezeq in connection with the preparation of our financial statements to determine whether there have been any violations of the U.S. Foreign Corrupt Practices Act or any other laws. We incurred expenses in connection with such assessment and we may also incur substantial fines, civil or criminal sanctions, including fines and sanctions against our directors and officers, or third-party claims if any of our officers are directors are held liable under criminal laws and regulations. The Israeli law system might be insufficient to defend us and preserve our rights. We could also be subjected to risks to our reputation and regulatory action on account of any unethical acts by any of our employees, directors or other related individuals. These criminal developments have also added complexity to our corporate compliance regime. The Investigation may adversely affect the market price of our ordinary shares and could have a material adverse effect on our business, financial condition and results of operations.

 

The Bezeq Group does not have complete information about the investigations, their content, the material and evidence in the possession of the statutory authorities on this matter. Furthermore, in view of the provisions of Israeli law and concern of obstructing the investigation, at this stage Bezeq must refrain from conducting any checks relating to matters that arose in the course of those investigations. This limits Bezeq’s ability to operate, including in connection with performing audit activity and reviews for the purpose of publishing Bezeq’s reports, as further described below. The lack of information and uncertainty have also led to our auditors issuing a “qualified opinion” on our financial statements because of the inability to obtain sufficient supporting evidence as to the effect, if any, of the investigations’ proceedings on the consolidated financial statements.

 

While all the former directors of our company and the directors and executives of Bezeq who were allegedly involved in criminal actions are no longer associated with us or the Bezeq Group, the companies in the Bezeq Group may be indirectly implicated in the alleged criminal behavior.

 

In March 2019, we were informed by Internet Gold that the SEC had issued a Formal Order of Private Investigation with respect to Internet Gold (no longer a controlling shareholder of our company). The Formal Order authorizes an investigation of possible violations of the Foreign Corrupt Practices Act with respect to the facts uncovered in the criminal investigations in Israel.

 

Bezeq is subject to restrictions on intercompany relations with its principal subsidiaries, which harms its ability to compete and adversely affects its business.

 

Bezeq’s general license obligates it to ensure that its relationships with its principal subsidiaries do not result in favoring them over their competitors. Separation is required between the managements of Bezeq and those companies, as is separation between the business, financial and marketing systems, assets and employees, which causes duplication and high administration overheads. In addition, Bezeq is currently limited in its ability to offer joint service bundles with those companies. Due to the entry of companies into direct competition with Bezeq based on the provision of service bundles to customers and the option of providing wholesale services in order to offer customers end-to-end services, the risk that this factor will affect Bezeq’s operations and results of operations has increased.

 

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The Bezeq Group companies and certain of our former officers and directors have been named in shareholder class action lawsuits related to the recent criminal investigations in Israel, and may be named in further litigation, government investigations and proceedings, which could require significant additional management time and attention, result in significant additional legal expenses or result in government enforcement actions, any of which could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows.

 

The Bezeq Group companies and certain of our former officers and directors have been named in shareholder class action lawsuits relating to the recent criminal investigations in Israel, and may become subject to further litigation, government investigations or proceedings arising out of the restatement. The pending litigation and settlements have been, and any future litigation, investigation or other actions that may be filed or initiated against us or our current or former officers or directors may be, time consuming and expensive. We cannot predict what losses we may incur in these litigation matters, and contingencies related to our obligations under the federal and state securities laws, or in other legal proceedings or governmental investigations or proceedings related to the restatement.

 

To date, we have incurred significant costs in connection with the internal investigation and pending litigation. Any legal proceedings, if decided adversely to us, could result in significant monetary damages, penalties and reputational harm, and will likely involve significant defense and other costs. We have entered into indemnification agreements with each of our directors and certain of our officers, and our amended and restated certificate of incorporation requires us to indemnify each of our directors and officers, to the fullest extent permitted by law, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Bezeq Group Companies. Although we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, our insurance coverage may not cover all claims that have been or may be brought against us, and insurance coverage may not continue to be available to us at a reasonable cost. As a result, we have been and may continue to be exposed to substantial uninsured liabilities, including pursuant to our indemnification obligations, which could materially adversely affect our business, prospects, results of operations and financial condition.

 

The Bezeq Group companies have historically been parties to legal proceedings, including class actions, which could result in their being ordered to pay significant sums, most of which cannot be estimated, and therefore, no provisions have been made in Bezeq’s financial statements for most of them. In addition, Bezeq’s insurance policies are limited to defined cover limits and to certain causes of action and might not cover claims for certain types of damages. In recent years, class actions against large commercial companies have become more numerous and severe. By their very nature, class actions may result in significant judgments or settlements. In addition, since Bezeq provides communications infrastructures as well as billing services to other licensees, parties suing those licensees in other class actions are also likely to try to involve Bezeq as a party to such proceedings.

 

Bezeq’s operations are subject to market risks such as currency fluctuations, inflation in Israel and the general economic environment and financial condition of the capital markets in Israel and worldwide.

 

Bezeq measures exposure to changes in exchange rates and inflation by the surplus or deficit of assets against liabilities, based on the type of linkage. While Bezeq’s exposure to changes in currency exchange rates against the shekel is low, its exposure to inflation rates is high, and therefore Bezeq takes steps to cover part of the inflation exposure. As a result, the annual rate of inflation and its distribution during the year can have a material influence on the erosion of Bezeq’s tariffs and its revenues and expenses during the year, which in turn could have a material adverse impact on its operating results.

 

From time to time, the Bezeq Group engages in currency hedging transactions to reduce the impact on its cash flows and results of operations of currency fluctuations. The Bezeq Group recognizes freestanding derivative financial instruments as either assets or liabilities in the statements of financial position and it measures those instruments at fair value. However, accounting for changes in the fair value of a derivative instrument, such as a currency hedging instrument, depends on the intended use of the derivative instrument and the resulting designation. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in our income statement without any reference to the change in value of the related budgeted expenditures. These differences could result in fluctuations in Bezeq’s quarterly results of operations.

 

Negative developments in, or the general weakness of, Israel’s economy, in particular increasing levels of unemployment, may have a direct negative impact on the spending patterns of retail consumers, both in terms of the products they subscribe for and usage levels. Stability in the financial market and the strength of economies in countries around the world, have recently been subjected to high volatility. While the Israeli economy has displayed economic resilience, reflected in economic expansion, low levels of unemployment and inflation rates within government targets, the continued increase in of housing prices, global economic shocks and uncertainty in the political and defense arenas may cast doubt over a continuation of these trends. In the event the local economy is negatively impacted following external or internal events, Bezeq’s business results may be harmed as consequence of lower revenues (including revenues from affiliates) or due to an increase in finance costs.

 

The Bezeq Group’s operations are vulnerable to damage or interruption, which could expose it to material risks.

 

Bezeq provides services using various infrastructure systems that include exchanges; transmission, data communication and access networks; cables; computer systems and others. The Systems have critical importance in operating Bezeq’s business and fulfill a vital function in its ability to perform its activities successfully. Hacking, interference, damage or collapse of the systems may impair Bezeq’s business. Some of Bezeq's Systems have backups, but nevertheless, damage to some or all of these systems, whether due to a technical fault (including in the event of termination of a contract with a supplier who is relied on for support of the Systems), a natural disaster (earthquake, catastrophe, fire), damage to physical infrastructures by communications service providers using them or malicious damage (including through cyber-attacks as set out below), could cause extreme difficulties in providing service, including if Bezeq is unable to repair the systems.

 

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Bezeq has a “cyber risk”, meaning a risk of occurrence of an activity intended to affect use of a computers, stored data or communication systems. This kind of an attack may lead to interference in the business, theft of information, reputational damage, damage to systems and information breach. As a leading communications company that provides diverse communications services in various segments, it is a target for and experiences cyber-attacks, which are handled by it.

 

Bezeq is an entity overseen by Israel National Cyber Directorate and is obligated to comply with stringent information security standards. Bezeq implements a protection policy that includes advanced security systems , which are operated in a manner that combines effective security with the operational needs of Bezeq and layers of security to protect its infrastructures and systems, which are designed to prevent and reduce the possibility of malicious or unintentional use of the mapping data of Bezeq’s network by an internal or external entity, and the possibility of an external entity taking control and managing network components or abusing information about Bezeq’s infrastructures and networks in any manner.

 

Bezeq overseas implementation of its protection policy, including testing its level of effectiveness and Bezeq’s readiness, as part of which, Bezeq conducts periodic tests and drills at different frequencies for different scenarios (including through external companies specializing in this field). Despite Bezeq’s investments in means of reducing these risks, Bezeq reports that it is unable to guarantee that these efforts will succeed in preventing harm or interference in the systems and the information related to them.

 

The current novel strain of coronavirus (COVID-19) may adversely affect our operations and business.  

 

In December 2019, COVID-19 was identified in Wuhan, China. This virus continues to spread globally and as of March 2020, has spread to over 150 countries, including Israel. The spread of this virus has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic.” Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus.

 

The Government of Israel initiated a total lockdown in some cities and travel between cities in the country was also heavily restricted. The lockdown or quarantine measures may result in material adverse effects to the operations of the Bezeq Group companies, including customer service, sales, installation of services, deployment, operation and maintenance of networks, if multiple employees and outsource personnel shall be prohibited from attending their positions.

 

We currently anticipate that the COVID-19 outbreak will have a negative effect on the operations of the Bezeq Group companies. The restrictions imposed as a result of the outbreak are likely to cause operating difficulties and have a negative impact on the Group’s ability to generate revenues due to the inability to market its products and services or its ability to provide on-site services. The spread of COVID-19 may also result in order cancellations, delinquencies and late payments, delays and delivery and installation suspensions. As a result, the Group’s business and operating results will likely be negatively affected. The extent to which COVID-19 impacts the Group’s business will depend on future developments, which are highly uncertain and cannot be predicted, including, reductions in consumer spending because of the financial impact of the pandemic.

 

The Bezeq Group companies could be subject to labor disruptions.

 

The Bezeq Group companies are subject to collective bargaining agreements that may reduce managerial flexibility and result in additional costs. The implementation of human resources and organization plans, including retirement and restructuring plans, involves coordination with the labor unions and with the employees’ committees. The implementation processes of such plans may cause unrest in labor relations and be damaging to the Bezeq Group’s ongoing activities.

 

Bezeq may face difficulties in obtaining some of the building and environmental permits required for the establishment and operation of its network sites, which could have an adverse effect on the coverage, quality and capacity of its network.

 

Bezeq is subject to the Israeli Non-Ionizing Radiation Law, which regulates the emission of electromagnetic radiation from broadcast facilities. While Bezeq is working to obtain permits to set up and operate its various broadcast installations, the difficulties it faces in this area, including difficulties stemming from the change in policy by relevant entities and amendments to statutes and standards, could have an adverse impact on the infrastructure of these installations and on the continuity of services using them, and as a result, on Bezeq’s revenues from these services. Bezeq’s third-party liability policy does not currently cover liability for electromagnetic radiation.

 

Frequent technological changes may negatively impact Bezeq’s operations and the value of its assets.

 

The communications sector is characterized by frequent technological changes and the shortening of the economic life of new technologies. The trend has created a need to invest significant resources in technology upgrades, has caused the lowering of barriers to entry into the sector by new competitors, increased depreciation rates, and in certain cases, resulted in the redundancy of technologies and networks owned by Bezeq (the cost of investment in which may still be recorded on its balance sheets).

 

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Impairment charges have affected our results of operations and may continue to affect our results of operations in the future.

 

Pursuant to the accounting standards, our company and Bezeq prepare valuations of our subsidiaries to periodically test for impairment of goodwill and of assets regarding which there are indications of impairment. Taking note of the business position of the subsidiaries and the discrepancy, if there is any, between the carrying amount in Bezeq’s accounts and their recoverable amount as a cash-generating unit, any decline in the value of the subsidiaries’ operations could lead to the recording of an impairment loss (write-off) in Bezeq’s books. Additionally, a significant change in circumstances that leads to a change in estimates could occur due to a high-intensity isolated event or as the result of a sequence of small changes that occur over time, which have a significant cumulative effect in the long term and/or due to a change in estimates (even on a small scale) regarding the long term. Valuations rely on assumptions which are correct at the time that might not materialize or could partially materialize and different perspectives affect, with varying intensity, the value of the activity, where assumptions for the long term many have a relatively large weight compared with assumptions regarding the short term. These assumptions are sensitive to values in the representative year, to the discounting interest rate and the permanent growth rate.

 

Bezeq and its subsidiaries have recorded significant impairment charges in recent years. Given the potential impact of the COVID-19 on the Bezeq Group’s businesses as a result of the outbreak, the values or the recoverable amounts of certain assets subsequent to the reporting date may be less than their carrying amounts as of December 31, 2019. Because the outbreak may also result in uncertainties in relation to the assumptions and estimations associated with the measurement of various assets and liabilities in the financial statements of Bezeq and our company that we may not have previously recognized or disclosed, the occurrence of the outbreak has added additional risks that the carrying amounts of assets and liabilities may require certain adjustments within the next financial year. Such charges could have a material adverse effect on our results of operations in the period in which they are recorded.

 

Specific Risks Relating to Bezeq’s Fixed-Line Communications

 

Competition from other providers could adversely affect the Bezeq’s business, results of operations and financial condition.

 

The competition in the domestic fixed-line communications industry has recently intensified, both from other domestic carriers including HOT, Bezeq’s principal competitor in this segment, and secondarily from other cellular operators. Competition strengthened significantly upon implementation of the wholesale market by the principal communications groups in Israel and other communications operators (holders of special or unified licenses) who compete with Bezeq in selling end-to-end service packages based on Bezeq’s infrastructures at prices prescribed by the Ministry of Communications and not pursuant to commercial terms determined by negotiation. Bezeq may also face competition in the future from potential infrastructure owners. The increased competition has led to the churn of some of Bezeq’s customers and has caused Bezeq to lower its prices for certain services and to an increase in the cost of acquiring new customers and retaining existing ones. The entities competing with Bezeq at present or those that might compete with it in the future, benefit from greater business flexibility than Bezeq, including the ability to cooperate with subsidiaries and affiliates for marketing joint packages of services. The ability of competitors to offer packages with tariff flexibility compared with the restrictions that prevent the Company from doing the same, harms the Company's ability to compete.

 

Bezeq’s tariffs for fixed-line services are subject to governmental control, which could have a material adverse effect on its business.

 

Bezeq’s tariffs for its main services (including interconnect fees) are subject to government control and intervention. The Minister of Communications is authorized to intervene in existing tariffs and marketing offers and impose directives on Bezeq. On average, controlled tariffs erode in real terms. Significant changes in Bezeq’s controlled tariffs, if implemented could have a material adverse effect on Bezeq’s business and results. Additionally, the restrictions applicable to Bezeq in marketing alternative payment bundles may make it difficult for Bezeq to provide an appropriate competitive solution to market changes and have placed Bezeq at a disadvantage to those competing with it in the sale of end-to-end service packages using wholesale Bitstream Access services, or BSA services, supplied by Bezeq. In the context of the implementation of a wholesale market, the Ministry of Communications has the power to set the price for which Bezeq will sell its services to license holders. The low prices set by the Ministry of Communications may adversely affect Bezeq’s level of revenues and profits.

 

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Specific Risks Relating to Pelephone

 

Competition from other providers has adversely affected Pelephone’ s business and results of operations.

 

Competition in the cellular telephony industry has intensified since 2012. This has led to lower prices and higher customer churn rates, which in turn has affected the results of Pelephone. Pelephone expects competition to continue to increase amid the changing legislation in Israel and consolidation in the telecommunications industry that permits certain service providers to market a combination of fixed-line telephony, fixed-line broadband internet infrastructure access, ISP and pay television services, or a “bundle”, for an aggregate price which is lower than the price of the individual products and services in the bundle. These competitive forces may create further downward pressure on prices, which may result in a decrease in Pelephone’s average revenue per user, or ARPU, and increase churn rates. Furthermore, the costs of establishing, maintaining and operating a mobile telephony network per subscriber is expected to be higher for Pelephone if it will not be allowed to operate under some form of network sharing model.

 

Currently, there are six operators with mobile telephony license in the cellular telecommunications market in Israel (Pelephone, Cellcom, Partner, Golan Telecom, HOT Mobile and XFone) and a few MVNO operators with mobile telephony licenses for hosting on another network (virtual operators). Partner and HOT Mobile operate under radio segment infrastructure sharing through a joint company. Cellcom and Golan Telecom operate under a network sharing agreement. Cellcom and XFone operate under a hosting and network sharing agreement.

 

Pelephone is subject to governmental control and regulation

 

The cellular industry in Israel is subject to legislation and standardization relating to issues such as the environment, increased competition, tariffs, product warranty and repair. Regulatory intervention in the industry may materially impact Pelephone’s structure of competition and operating costs. Changes in the regulatory principles applicable to the cellular industry as a whole and to Pelephone in particular, could require Pelephone to make changes to its strategic plans and harm its ability to plan its business activities for the long term.

 

Pelephone’s results of operations are subject to privacy concerns and hacking.

 

Pelephone operates information security systems to protect against unauthorized hacker access to the network and critical systems. Hacking events could impair performance or adversely affect Pelephone’s business.

 

In May 2018, provisions concerning privacy protection came into force under the Protection of Privacy Regulations (Information Security) 2017 that are expected to significantly affect the operations of many companies. These regulations apply to various companies, including potentially Pelephone, where some of them apply to all types of databases and others are relate to the level of database security.

 

Pelephone’s operations are subject to market risks such as currency fluctuations.

 

Pelephone is exposed to exchange rate risks as most of its terminal equipment, accessories, spare parts and infrastructure equipment are purchased in US dollars. While its revenues are in NIS. Any erosion of the NIS against the US dollar may affect Pelephone’s profitability if it is unable to adjust selling prices promptly.

 

Frequent technological changes may negatively impact Pelephone’s operations and finances.

 

The cellular market in Israel and worldwide is characterized by substantial capital investments in the deployment of infrastructure. The frequent technological changes in infrastructure and terminal equipment and the fierce competition in various market segments impose a heavy financial burden on the companies operating in the market, requiring them to update their infrastructure technology from time to time.

 

Pelephone provides its services through various infrastructure systems, including switches, data communications and access transmission networks, cables, computer systems and physical infrastructures. Pelephone's business is highly dependent on these systems. Pelephone has partial backup systems, however in the event of damage to some or all of the systems, whether due to a large-scale technical malfunction, natural disaster (such as an earthquake, fire, etc.), or damage to physical infrastructures (such as the introduction of viruses and cyber-attacks as set out below), significant difficulties may arise in providing of services, including in the event that Pelephone is not able to restore the systems quickly.

 

Information security, customer data protection and cyber risks - as a leading cellular company that provides service to hundreds of thousands of customers, Pelephone is a target for cyber-attacks aimed at harming the use of information systems or the information itself. Such attacks or hacking may cause interruption of business, theft of information/money, damage to reputation, damage to systems and information leakage.

 

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Pelephone has experienced cyber-attacks and part of its defensive strategy includes testing of its effectiveness and readiness. Pelephone conducts various tests scenarios and attack exercises (including through external companies specializing in this area). Cyber attacks against companies, including Pelephone have increased in frequency, scope and potential harm in recent years. They may occur alone or in conjunction with physical attacks, especially where disruption of service is an objective of the attacker. The development and maintenance of systems to prevent such attacks is costly and requires ongoing monitoring and updating to address their increasing prevalence and sophistication. While, to date, Pelephone has not been subject to cyber attacks that, individually or in the aggregate, have been material to it's operations or financial condition, the preventive actions Pelephone takes to reduce the risks associated with cyber attacks, including protection of its systems and networks, may be insufficient to repel or mitigate the effects of a major cyber attack in the future.

 

The inability of Pelephone to operate or use its networks and systems or those of its suppliers, vendors and other service providers as a result of cyber attacks, even for a limited period of time, may result in significant expenses and/or a loss of market share to other communications providers. The costs associated with a major cyber attack on Pelephone could include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cybersecurity measures and the use of alternate resources, lost revenues from business interruption and litigation from customers. Any occurrence could damage Pelephone’s reputation, adversely impact customer and investor confidence and result in a material adverse effect on Bezeq’s results of operation or financial condition.

 

Pelephone’s results of operations are subject to credit risk associated with consumer credit transactions.

 

Pelephone’s sales of terminal equipment are mostly credit-based. Most of this credit, which is not covered by either insurance or sureties, is exposed to risk. The credit is spread among a large number of customers and Pelephone’s collection mechanisms are efficient and competent.

 

Potential health risks related to cellular network sites and cellular telecommunication devices could have a material adverse effect on Pelephone’s business, results of operations and financial condition.

 

Pelephone operates hundreds of broadcast facilities and sells electromagnetic radiation emitting terminal equipment. While Pelephone is taking measures to ensure that the levels of radiation emitted by its broadcast facilities and terminal equipment do not exceed the radiation levels permitted in the Ministry of Environmental Protection guidelines (the levels adopted are based on international standards), no assurance can be given that it will be able to do so in the future. If health risks are found to exist or if the broadcast sites or terminal equipment are found to emit radiation levels exceeding the permitted radiation standards, thereby constituting a health hazard, this may have an adverse effect due to reduced consumption of Pelephone’s services, difficulty in renting sites, compensation claims for physical and property damages in substantial amounts and attempts to exercise the deeds of indemnity deposited by Pelephone with the planning authorities with respect to applicable law. Pelephone’s third-party liability policies do not currently cover electromagnetic radiation and any exposure to such claims could have a material adverse impact on Pelephone’s business, results of operations and financial condition.

 

Pelephone may face difficulties in obtaining some of the building and environmental permits required for the establishment and operation of its cellular antennas.

 

Pelephone is subject to the Israeli Radiation Law. Establishing and operating cellular antennas require building permits from various planning and building committees, a process that involves obtaining several approvals from State entities and local regulatory bodies. The inability to obtain and retain the necessary permits s may impact the quality of Pelephone’s existing network and the deployment of its new network.

 

Pelephone may be restricted in the conduct of its operations during periods of national emergency, which could negatively affect its business operations.

 

During periods of national emergency, the Minister of Communications and other governmental authorities may issue various instructions regarding the use of Pelephone’s network, including the use of the network by the Israeli security forces. In addition, the Israeli Equipment Registration and IDF Mobilization Law, 1987 permits the taking and use of engineering equipment and facilities by Israel’s Defense Forces. These actions could adversely affect Pelephone’s business operations.

 

Pelephone’s frequencies are exposed to interference which could impair the service quality of its services.

 

The frequencies used by Pelephone, 850 MHz, 1800 MHz and 2100 MHz, are exposed to interference and could impair the service quality of the networks operated by Pelephone. The factors that could cause interference include the fact that the 850 MHz frequency is also used for terrestrial television broadcasts by television stations in the Middle East on the same frequency, causing interference in Pelephone’s 850 MHz UMTS/HSPA network. Furthermore, the Jordanian networks also use the same 2100 MHZ frequency range that Pelephone uses and in view of the limited cooperation between the operators in Jordan and Pelephone, this could have an effect.  In September 2018, there were a series of highly publicized disruptions in the cellular service of Pelephone affecting both incoming and outgoing calls, text messages and wireless internet service. There can be no assurance that these disruptions will not reoccur.

 

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There has been a substantial decrease in international travel due to the coronavirus, which has had an adverse effect on our roaming services (inbound and outbound) and if such decrease continues for a long duration, will result in a material adverse effect on our roaming revenues and results of operations.

 

Specific Risks Relating to DBS

 

Competition from other providers and content piracy has adversely affected DBS’s business and results of operations.

 

Competition in the broadcast sector with HOT and more recently with Cellcom and Partner TV, and including the ability to subscribe to Netflix and Amazon Prime Video directly, requires DBS to constantly invest in attracting and retaining customers, and dealing with high subscriber churn rates between the companies. Competition also increased due to the increasing use of pirated broadcasts. The broadcasting sector is also exposed to piracy by viewers in viewing broadcasts without paying subscription fees and is exposed to unlicensed public access to content to which the broadcast providers have rights. These competitive forces may create downward pressure on prices, which may result in a decrease in the DBS’s ARPU and increase churn rates.

 

DBS’s operations are subject to market risks such as currency fluctuations, economic weakness and the security situation in Israel.

 

A material part of DBS’s expenses and investments are linked to fluctuations in the exchange rate of the USD (particularly content, satellite segments, purchase of decoders and additional logistics equipment). Therefore, sharp fluctuations in the exchange rate will have an effect on DBS’s business results. In addition, the loans taken out by DBS are linked to the consumer price index and, therefore, sharp rises in inflation rates could have a material effect on DBS’s business results. An economic recession increase in unemployment rates and a decrease in disposable income may lead to a decrease in the number of DBS’ subscribers, a decrease in DBS’ revenues and harm to its business results. In addition, an ongoing unstable security situation in large areas of Israel, which disrupts the day-to-day lives of the residents, could have an adverse effect on DBS’s business results.

 

Technological developments and improvements may negatively affect DBS and its operations. DBS made the decision to invest in OTT.

 

The development of new technologies may render existing technology inferior, forcing DBS to invest large sums to retain its competitive edge. Such technological advances and developments may also facilitate increased accessibility to video content, allowing other providers to offer content viewing services without the need for heavy investment that may make it difficult for DBS to recruit new subscribers, retain existing subscribers and offer its services. In order to compete effectively, DBS may be required to invest large amounts. Alternative multi-channel broadcasting infrastructures, such as DTT, a terrestrial implementation of digital television technology using an aerial to broadcast to a conventional television antenna (or aerial) instead of a satellite dish or cable television connections, and its expansion, may have an adverse impact on the financial results of DBS.

 

In March 2019, the boards of Bezeq and DBS approved an outline plan for DBS switching from satellite broadcasting to online transmission (OTT) in a gradual, prolonged process, expected to be spread over a period of up to seven years. DBS's average annual investment over the planned years is expected to be similar to the average annual investment in recent years. Based on this decision, DBS will routinely monitor market conditions, competition and the technological environment, and will periodically review the feasibility of the outline plan and the need, if any, to make adjustments in it, in the pace of its execution or in the manner of its implementation, considering the needs of its customers and DBS’s regulatory obligations.

 

DBS's board of directors' decision was made in light of the television content market trends, including the reduced entry barriers, entry of new players and the establishment of OTT transmission technologies, changes in the value chain and changes in consumption habits. Along with the differences between the old satellite transmission technology and the OTT transmission technology, the inherent advantages have required that DBS examine the need to establish OTT broadcasts. Taking into consideration, among other things, existing obligations regarding all matters relating to satellite technology, the decoder market, licensing under which DBS operates, the rights of available content and the development of faster internet speeds in the market.

 

As noted, the outline plan was approved for gradual and ongoing migration, and accordingly there is no certainty at this stage that the process or the migration will actually be implemented and that such migration will be carried out and completed. If the transition is carried out, it is expected to save DBS's expenses and for it to better adapt to changing market conditions.

 

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DBS is subject to restrictions on intercompany relations with Bezeq and its other subsidiaries, which harms its ability to compete and adversely affects its business.

 

DBS is restricted in entering into joint ventures with Bezeq with respect to offering communications service bundles. Both HOT and Cellcom, DBS’s principal competitors, are able to provide service bundles to their customers, which provide them with a significant advantage. DBS’s inability to ability to offer joint service bundles to customers has had a material impact on its business and competitive ability.

 

There are significant risks associated with providing satellite-based broadcasting.

 

DBS broadcasts its multi-channel pay television via space segments on the Amos 2 and Amos 3 satellites stationed at identical points in space. Malfunction of one of the satellites, damage to one of them or the unavailability of space segments on any of the satellites (including the unavailability of a new satellite scheduled to replace a satellite that ceased to broadcast) could disrupt and materially reduce the volume of DBS broadcasts, unless an alternative is promptly found to replace unavailable space segments. While DBS has attempted to provide for redundancy and has entered into a partial backup mechanism in its agreement with Spacecom, it may not be successful in fully replacing its broadcast capabilities and would likely not be able to provide all the channels it now offers. DBS is not insured against loss of revenues caused by satellite malfunction.

 

DBS is dependent on Spacecom, as the exclusive holder of the rights and the sole provider of space segments used by DBS.

 

Until such time as DBS switches from satellite broadcasting to online transmission (OTT) it will be dependent on Spacecom Communications Ltd., or Spacecom, as the exclusive holder of the rights and the sole provider of space segments used by DBS in providing satellite broadcasts. Spacecom is also responsible for operating the space segments. Any inability by Spacecom to provide DBS with the space segments necessary for its broadcasts would negatively impact DBS’s business and competitive position.

 

DBS is dependent on several third-party vendors and a disruption in those services could adversely affect its business.

 

DBS is dependent on certain providers of software, equipment, content and services, including broadcast encryption services in providing its satellite TV services. Failure to receive the products and services, or the failure to retain broadcast licenses and obtain access to new content from content providers services would negatively impact DBS’s business and competitive position.

 

DBS depends on its broadcast centers and central computing center in Israel and is susceptible to any event that could adversely affect their condition.

 

Damage to a broadcast center’s operations may significantly impair DBS’s ability to continue its satellite TV broadcasts. DBS operates broadcast centers in Kfar Saba and Re’em Junction in order reduce the risks involved if one of its centers sustains damage and improves the survivability of some of its broadcast capabilities. In the event of damage to one of the broadcast centers, DBS will be able to continue broadcasting only a portion of its channels from the other broadcasting center. This is more significant in the event of damage to the Kfar Saba center, which is the only center with the capacity to broadcast certain of DBS’s key channels. Both of the broadcast centers have identical encryption systems and therefore backup is also available for the encryption system in the event of damage to one of the broadcast centers. A significant malfunction in DBS’s central computer systems would also severely impact its operational capability. While DBS has a remote backup, site designed to be activated and provide partial computer services within a few hours in the event of malfunction, it will be extremely difficult for DBS to operate efficiently without the operation of the central computer systems. Damage to DBS’s logistics center could also lead to a disruption of its operations.

 

DBS’s technology is currently inferior to that of its principal competitor

 

DBS’s technology is inferior to that of HOT, its principal competitor. This technical inferiority prevents DBS from providing telephony and Internet services, and various interactive services, including VOD, via its infrastructure; and therefore, DBS is dependent on third parties in order to provide such services. In March 2019, the Boards of Bezeq and DBS approved an outline plan for DBS switching from satellite broadcasting to OTT in a gradual, prolonged process, expected to be spread over a period of up to seven years. DBS's average annual investment over the planned years is expected to be similar to the average annual investment in recent years. There can be no assurance that DBS will succeed in offering a competitive technology or that it will be able to increase or maintain its current subscriber base.

 

DBS is dependent on third-party encryption systems.

 

DBS encrypts the broadcasts it transmits via satellite and utilizes encoded smart cards that are installed in the decoders in subscribers’ homes. Defects in the encryption system or its enforcement or a breach thereof could make it possible for unauthorized persons to view broadcasts without payment to DBS, causing a reduction in revenues and a breach of the agreements between DBS and its content suppliers. A malfunction of the encryption system or its enforcement could have a material adverse impact on DBS’s operations and financial results.

 

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DBS’s frequencies are not exclusive, and are subject to interference, which could impair the service quality of its services.

 

The spectrum of frequencies used by DBS to transmit its broadcasts from the broadcast satellites to the satellite dishes installed in subscribers’ homes is allocated in accordance with the license from the Ministry of Communications and is defined as a frequency spectrum with a secondary allocation. An Israeli entity is allowed to make authorized primary use the frequency spectrum used by DBS. If the owner of the primary allocation uses the frequency spectrum, this may cause an adverse impact on the quality and/or availability of DBS broadcasts to its subscribers, which may adversely affect the financial results of DBS. The primary allocation holder has not made use of such frequencies in a manner that has caused any real or lengthy disruptions to DBS’s broadcasts. As DBS’s broadcasts are wireless transmissions from broadcast centers to broadcast satellites and from them to the receiver dishes in subscriber homes, the broadcast of wireless signals in the same frequency spectrum, whether or not they originate in Israel, and extreme weather conditions of heavy rain, hail or snow could cause disruptions to the quality and/or availability of the broadcasts provided by DBS to its subscribers. Such disruptions may have an adverse effect on DBS’s financial results.

 

Specific Risks Relating to Bezeq International

 

Bezeq International’s operations are subject to currency fluctuations.

 

The primary currency in which Bezeq International operates is the NIS. While the majority of Bezeq International’s revenues are derived from customers in Israel, Bezeq International uses services from providers worldwide and pays them for these services in foreign currency, primarily in US dollars. Changes in the exchange rates of the currencies in which Bezeq International operates against the NIS exposes it to rate differentials on the gap generated, which could adversely affect its profitability by increasing financing expenses, as well as its cash flows. To protect itself against currency exposure, for specific material transactions, Bezeq International engages in hedging transactions and purchases other financial instruments.

 

Technological developments and improvements may negatively affect Bezeq International’s operations.

 

Bezeq International’s operations are characterized by frequent technological developments. The development of technologies constituting attractive alternatives to some of Bezeq International’s products, such as Skype and WhatsApp as an alternative to long-distance calling, is likely to have a materially adverse effect on its operations. Furthermore, technological developments require frequent investment in infrastructure which could impact its financial condition.

 

Intra-organizational information security

 

Bezeq International operates information security systems to protect against information leakage or unauthorized hacker access to the network or critical systems. A hacking event may impair performance or adversely affect its business, disclose sensitive information, and even expose it to financial sanctions and legal proceedings.

 

Risks Related to Our Ordinary Shares

 

Our share price has been volatile and may decrease in the future.

 

The market price of our ordinary shares has been subject to significant price movements and could be subject to wide fluctuations in the future in response to factors such as the following, some of which are beyond our control:

 

  Changes in the economic condition and financial results of the Bezeq Group;

 

  The amount of dividends declared by the Bezeq Group;

 

  Continued articles in the press concerning the criminal investigations and indictments;

 

  Changes in the ownership of the controlling interest in our company;

 

  Global economic conditions;

 

  Price movements in the market price of Bezeq’s ordinary shares;

 

  Operating results that vary from the expectations of securities analysts and investors;

 

  Changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

  Regulatory changes that impact pricing of services and competition in Bezeq’s markets;

 

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  Changes in market valuations of other communications companies;

 

  Announcements of technological innovations or new services by Bezeq or its competitors;

 

  Announcements by Bezeq or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

  Announcements by third parties of significant claims or proceedings against us or Bezeq;

 

  Additions or departures of key personnel;

 

  Future sales of our ordinary shares; and

 

  Stock market price and volume fluctuations.

 

Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.

 

If we fail to maintain compliance with NASDAQ’s continued listing requirements, our shares may be delisted from the NASDAQ Market.

 

Our ordinary shares are listed on the NASDAQ Global Select Market under the symbol “BCOM.” To continue to be listed on the NASDAQ Global Select Market, we need to satisfy a number of conditions, including a minimum closing bid price per share of $1.00 for 30 consecutive business days. On April 22, 2020, we were notified that we were not in compliance with NASDAQ’s requirement that listed securities maintain a minimum bid price of $1.00 per share. We have until December 28, 2020, to regain compliance by meeting the applicable standard for a minimum of ten consecutive business days. If we are delisted from NASDAQ, trading in our ordinary shares would be conducted on a market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.

 

Risks Related to Operations in Israel

 

Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.

 

The Bezeq Group companies and we are organized and based in the State of Israel and Bezeq derives substantially all of its revenues from markets within the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence us. Conflicts in North Africa and the Middle East, including in Egypt and Syria which border Israel, have resulted in continued political uncertainty and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility in recent years. In addition, relations between Israel and Iran continue to be seriously strained, especially with regard to Iran’s nuclear program. Such instability may affect the economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect our business, financial condition and results of operations in the future. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on our business, financial condition and results of operations.

 

As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.

 

As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. As a foreign private issuer listed on the NASDAQ Global Select Market, we may follow home country practice with regard to the composition of the board of directors, compensation of officers, director nomination process and quorum at shareholders’ meetings. In addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

 

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We may be classified as a passive foreign investment company, which would subject our U.S. investors to adverse tax rules.

 

For U.S. federal income tax purposes, we would be classified as a passive foreign investment company, or PFIC, for any taxable year in which either: (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average quarterly value of our assets for the taxable year produce or are held for the production of passive income. Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC, but there can be no assurance that we will not be classified as such in the future.

 

If we were classified as a PFIC for U.S. federal income tax purposes, complex rules would apply to U.S. investors owning our ordinary shares. Such U.S. investors could suffer adverse U.S. tax consequences. If eligible, a U.S. investor may avoid many of the negative consequences of the PFIC rules by making a “mark-to-market” election (as explained below). For more information please see “Item 10. Additional Information – E. Taxation – United States Federal Income Taxation – Passive Foreign Investment Companies.” You are urged to consult your tax advisors regarding the application of the PFIC rules to you.

 

Our shareholders may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this annual report or asserting U.S. securities law claims in Israel.

 

We are incorporated in Israel and most of our executive officers and directors named in this annual report reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, all of our assets and most of the assets of our executive officers and directors and some of the experts named in this annual report are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.

 

Provisions of Israeli law, the licenses of Bezeq and our articles of association may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.

 

Following our acquisition of Bezeq, we and our shareholders are required to comply with the Communications Law, the Communications Order and regulations promulgated by the Ministry of Communications.

 

Pursuant to the Communications Order, we were required to obtain the prior written consent of the Ministers in order to acquire Bezeq. Under the Communications Order, no person may hold, directly or indirectly, “significant influence” over Bezeq or 5% or more of any particular class of means of control in Bezeq, nor may any person, together with any other person, appoint, elect or dismiss the general manager of Bezeq or cause the election, appointment or dismissal of any director of Bezeq, without the prior written consent of the Ministers. Subject to certain exceptions, prior written approval of the Ministers is also required to increase the holdings or other rights in excess of those determined in the initial approval, including by means of an agreement (including a voting agreement). Furthermore, under the Communications Order, no person may transfer control, “significant influence” or means of control in Bezeq to another, if, as a result of the transfer, the holdings of the transferee would require approval pursuant to the Communications Law or Communications Order and the transferee is not in possession of the requisite approval. For the foregoing purposes, “significant influence” means the ability to significantly influence the activity of a corporation, whether alone or together with or through others, directly or indirectly, other than as a result of holding “means of control” in that corporation or in another corporation, and including ability derived from the corporation’s articles of association, a written, oral or other kind of agreement, or from any other source. In this context, the right to appoint an officer and holding 25% of our means of control is presumed to confer significant influence. We received explicit governmental approval to keep the Control Permit even at a level of a 25% ownership interest. “Means of control” means the right to vote at a general meeting of Bezeq, to appoint a director or general manager of Bezeq, to participate in the profits of Bezeq or a share of the remaining assets of Bezeq after payment of its debts upon liquidation.

 

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders, including Israeli shareholders and shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are limited. Moreover, with respect to certain listed share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred. These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares.

 

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The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from those under Delaware law.

 

Because we are an Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his, her or its power in the company, including in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer of the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

 

Item 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We were organized under the laws of the State of Israel in 1999 as “Gold E Ltd.” We changed our name to Goldtrade Electronic Trading Ltd. in 2000, to Smile.Communications Ltd. in 2006 and to 012 Smile. Communications Ltd. in 2007. On March 16, 2010, we changed our name to B Communications Ltd. in connection with our acquisition of Bezeq (TASE: BZEQ).

 

We are a public limited liability company under the Israeli Companies Law, 5739-1999 and operate under such law and associated legislation. Our principal executive offices are located at 144 Menachem Begin Road, Tel Aviv 6492102, Israel, and our telephone number is +972-3-6796121. Our website address is www.bcommunications.co.il. The information on our website is not incorporated by reference into this annual report on Form 20-F.

 

Prior to our October 2007 initial public offering in the United States, we were a wholly-owned subsidiary of Internet Gold, a public company traded on the NASDAQ Global Select Market and the TASE.

 

On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares from Ap.Sb.Ar. Holdings Ltd. for a purchase price of approximately NIS 6.5 billion in cash and became the largest shareholder of Bezeq. The Bezeq interest was directly acquired by an indirect wholly-owned subsidiary of our company. In accordance with the terms of the transaction, effective as of the closing of the acquisition, we designated seven directors to replace the Apax-Saban-Arkin Group’s representatives. We began consolidating Bezeq’s financial results into our financial statements effective as of the closing of the acquisition and began reporting the consolidated results in our 2010 second quarter earnings release.

 

As part of our acquisition of Bezeq, we, Internet Gold, SP2, SP1, and other members of the Eurocom Group applied for a control permit of Bezeq, pursuant to the Communications Law and Communications Order. On April 13, 2010, the control permit was granted subject to the condition that SP2 is controlled exclusively by the other parties to the control permit, referred to as the Companies’ Control Permit.

 

Through its wholly-owned subsidiaries, the Bezeq Group is a leading provider in Israel of fixed-line telephony services and fixed-line broadband internet infrastructure access services, cellular telephony services, ISP services, ILD services, international and domestic data transfer and network services and ICT, pay television services and other communications infrastructures and services. In each of these markets, the Bezeq Group holds a significant market share.

 

On December 2, 2019, we closed the transaction with Searchlight II BZQ LP (wholly-owned by Searchlight Capital Partners) and a company controlled by the Fuhrer family (TNR Investments Ltd.). In the transaction, control of our company and Bezeq was transferred to these entities, after the liquidation of Eurocom Communications Ltd, pursuant to which the holdings in its subsidiary Internet Gold were sold. New control permits were issued to Searchlight, Fuhrer and our Company. According to the permit, the parties must hold not less than 25% of any type of mean of control of Bezeq. Our current ownership percentage is 26.3%. Additional information on our control permit and its requirements is provided herein under the Regulatory section.

 

B. Business Overview

 

Since April 14, 2010, we have been the largest shareholder of Bezeq, Israel’s largest telecommunications provider. Bezeq is the principal provider of communications services in Israel, providing a broad range of telecommunications operations and services, including domestic fixed-line, cellular and international communication services, Internet services, multi-channel television, online television transmissions (OTT), television and radio broadcasts, satellite broadcasts, customer call centers, maintenance and development of communications infrastructures, provision of communications services to other communications providers and the supply and maintenance of equipment on customer premises, which is referred to as network end point, or NEP services.

 

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In 2018, Bezeq applied to the Minister of Communications to approve a change in Bezeq Group’s legal structure so that the activity of the subsidiaries DBS, Pelephone, and Bezeq International could be transferred to a single partnership with full structural separation from Bezeq. However, after the Ministry of Communications published a hearing to examine whether to approve the request, Bezeq informed the Ministry that it had withdrawn the application so as to enable the Ministry to concentrate its resources on advancing cancellation of the Bezeq Group’s structural separation.

 

On February 13, 2019, the Board of Directors of Bezeq approved a request by each of the subsidiaries Pelephone, Bezeq International and DBS, to obtain approval from the Ministry of Communications for a change in the corporate structure, whereby all the operations and assets of each of the subsidiaries would be transferred to separate limited partnerships, wholly owned by Bezeq (Bezeq as a limited partner, and a company (separate and different in each partnership) wholly owned by Bezeq as a general partner).

 

On January 28, 2020, Bezeq received a letter from the Ministry of Communications that it was not possible to approve the application at that time. The denial of the application was for reasons that Bezeq believes are mistaken including, because there is no reason to take interim decisions that might affect the issue of structural separation in the Group and change the existing range of incentives, while the obligation of structural separation applied to the Group is currently being examined by a special team at the Ministry of Communications. As part of its examination, a broad range of alternatives are being assessed - from cancellation of the obligation of separation to strengthening the separation. In addition, in the Ministry’s opinion, this is a material change in the Group’s operations and not a technical change of the corporate structure.

 

Bezeq’s Board of Directors also approved a request to the Tax Authority to obtain approval to transfer the activity of the subsidiaries to such partnerships as a tax-exempt transfer under the provisions of Section 103 of the Income Tax Ordinance and a request that the assessment arrangement dated September 15, 2016, concerning spreading the losses of DBS will also apply to the partnership to which the activity will be transferred.

 

Previous Investigations

 

On June 20, 2017, the ISA launched a criminal investigation, or the Investigation. Eurocom Communications, Bezeq and DBS’ offices were searched and documents were seized. The ISA informed Bezeq that the Investigation addressed suspicions of crimes under the Israeli Securities Law and Penal Code in respect of transactions relating to Eurocom. Bezeq was initially informed that the Investigation related to the purchase of DBS shares by Bezeq from Eurocom D.B.S. Ltd., a company controlled by Mr. Elovitch. The Investigation was later expanded to include transactions to provide satellite communications services between DBS and Spacecom, a company also controlled by Mr. Elovitch, and with respect to dealings between the Ministry of Communications, Mr. Elovitch and Bezeq.

 

As part of the Investigation, the former Chairman of Bezeq, Mr. Shaul Elovitch, the former CEO of Bezeq, Ms. Stella Handler, the former CEO and CFO of DBS and certain other senior officers in the Bezeq Group were arrested and questioned. During the course of the Investigation, some of the suspects were released from arrest with certain restrictions, which include partial restrictions on contact with employees and senior officers of Bezeq Group and Eurocom and house arrest. Some of these restrictions expired and some were later re-imposed. Restrictions were imposed on Mr. Shaul Elovitch, which include dealing with matters relating to the Ministry of Communications and DBS. He was also barred from being in contact with members of the Board of Directors, senior officers and employees of the Bezeq Group companies. Matters relating to Bezeq Group companies (excluding DBS) may only be handled by the CEOs of those companies (excluding the CEOs of Bezeq and DBS) or by Mr. David Granot, the former Acting Chairman of Bezeq’s Board of Directors. Additional restrictions were imposed on Stella Handler, the former CEO of Bezeq, and she was also barred from making direct or indirect contact with members of Bezeq’s Board of Directors other than Mr. Granot.

 

On November 6, 2017, the ISA issued a press release regarding the conclusion of the Investigation and the transfer of the investigation file to the Tel Aviv District Attorney’s Office (Taxation and Economics). According to the notice, the ISA  concluded that there is prima facie evidence establishing the involvement of the main suspects in the case in offenses of: (1) fraudulently receiving funds in connection with the entitlement of Bezeq’s controlling shareholder to payment of NIS 170 million as part of the transaction for the purchase of DBS shares from Eurocom by Bezeq, payment that was contingent upon DBS meetings certain targets; (2) leaking material from the independent committee of Bezeq’s Board of Directors that was required to examine interested party transactions (the transaction for the acquisition of DBS shares by Bezeq and the transaction between DBS and Spacecom for the purchase of satellite segments for DBS) to Mr. Shaul Elovitch and his associates; and (3) promoting Bezeq’s interests in the Ministry of Communications, in violation of the Penal Code and the Israeli Securities Law. The notice also relates to the transfer of the investigation file to the District Attorney’s Office and that the District Attorney’s Office is authorized to decide on the continued prosecution of the matter.

 

Additionally, in a joint press release issued on February 18, 2018, the ISA and Israel Police announced that evidence found by the ISA during its investigation raised suspicion of additional offenses, and a new joint investigation was opened by investigators of the ISA and the Unit for Combating Economic Crime at Lahav 433, in which a number of suspects were arrested, including senior Bezeq Group executives Mr. Shaul Elovitch and Mr. Or Elovitch, Ms. Stella Handler, former CEO of Bezeq, and Mr. Amikam Shorer, the Group’s former Chief Strategy and Corporate Development Officer (all of whom have been released from their arrests). The officers are suspected of offenses of fraud, administrative offenses, perverting the course of justice, bribery, offenses under the Israeli Securities Law, deception and breach of trust in a corporation, and some of them are also suspected of offenses under the Prohibition on Money Laundering Law, 2000.

 

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On December 2, 2018, a spokesperson for the police and the ISA explained that the investigations were concerned primarily with the alleged suspicion of bribery, fraud and breach of trust committed by Prime Minister Benjamin Netanyahu and by Shaul Elovitch, the former controlling shareholder (through his ownership of Eurocom Communications), of our company and the Bezeq Group. The Israel Police and the ISA announced that they believed based on their investigation that there was sufficient evidence to substantiate the suspicions against the main parties under investigation, some of whom are former officers of Bezeq, as follows:

 

that Shaul Elovitch (formerly a controlling shareholder and chairman of Bezeq’s and our Board of Directors) committed bribery, obstruction of justice, reporting violations under the Securities Law and offenses under the Prohibition on Money Laundering Law.

 

that Or Elovitch (a former director of Bezeq, and also of our company) and Stella Handler (the former CEO Bezeq) committed corporate fraud and breach of trust, and reporting violations under the Securities Law.

 

that Amikam Shorer (a former officer of Bezeq) abetted bribery and committed corporate executive offenses, reporting violations under the Securities Law and offenses under the Prohibition on Money Laundering Law.

 

In February 2019, Israel’s attorney general recommended that the Prime Minister, be indicted subject to a hearing. He alleged that the Prime Minister committed bribery in allegedly intervening in regulatory and other business decisions that benefited Shaul Elovitch who allegedly ensured favorable media coverage in Walla! (Bezeq’s subsidiary) for the Prime Minister and his family. Both Mr. Elovitch and his wife, Ms. Iris Elovitch, were indicted in connection with the alleged bribery.

 

On January 28, 2020, charges were filed in the Jerusalem District Court against the former controlling shareholder of the company, Mr. Shaul Elovitch, in the Case dubbed “4000” (related to Bezeq’s subsidiary, Walla! Communications) on various offenses, including bribery and reporting offenses in an immediate report

 

Neither we nor Bezeq have complete information about the investigations described in this section, their content, the material and evidence in the possession of the statutory authorities on this matter. Furthermore, in view of the provisions of Israeli law and concern of obstructing the investigation, both we and Bezeq must refrain from conducting any of its own investigations relating to matters that arose in the course of those criminal investigations.

 

In its annual report for 2017, Bezeq provided initial disclosure about a material weakness in the effectiveness of the internal control over financial reporting and disclosure. During this period and through December 31, 2018, Bezeq’s management and Board of Directors pursued various broad and extensive courses of action, with the assistance of external consultants with the purpose of strengthening Bezeq’s internal control. In the light of the actions carried out to remedy the material weaknesses in Bezeq and based on an assessment of effectiveness carried out by Bezeq’s management under the supervision of its Board of Directors, Bezeq's Board and management concluded that the internal controls over the financial reporting of Bezeq as of December 31, 2018 and December 31, 2019 were effective.

 

Competitive Strengths

 

We believe that the following competitive strengths will enable us to retain our customer base, capitalize on growth opportunities and maintain and expand our current market share positions, which we expect to contribute to positive cash flow generation.

 

The Bezeq Group is a leading provider of telecommunications services and owner of telecommunications infrastructure in Israel and provides diversified telecommunications offerings across all Israeli telecom markets.

 

The Bezeq Group is the largest and the incumbent telecommunications provider in Israel, offering a broad range of services through its advanced, comprehensive and nationwide telecommunications infrastructure. The Bezeq Group holds a leading position in each of the markets in which it operates. As a leading provider in each of these markets, the Bezeq Group has been able to maintain its strong performance and benefit from economies of scale. In addition, such leading positions across a diverse range of telecommunications offerings reduce the Bezeq Group’s exposure to market and regulatory conditions. We believe that the Bezeq Group’s ability to maintain a leading position in the Israeli telecommunications market in the face of competitive and regulatory pressures reflects the underlying strength of its advanced nationwide network infrastructures, the strength of its brands and its extensive offering of high-quality content.

 

The Bezeq Group operates in an attractive macroeconomic environment with a developed telecommunications market.

 

The Israeli telecommunications market is highly developed and benefits from favorable dynamics, including high penetration rates across all telecommunications services, high penetration of postpaid contracts in the cellular telephony market, rapid adoption rates of new technologies and significant expenditures on telecommunications services by consumers and businesses. In addition, Israel is expected to experience steady population growth, which should provide a natural expansion of the addressable market. In particular, Bezeq expects such population trends will lead to a steady demand for fixed-line telephony services in Israel, especially among certain sectors of the growing population in Israel where fixed-line telephony is in widespread use. Furthermore, a relatively young population contributes to the attractiveness of the market, as such consumers typically spend more on telecommunications products and services while also driving increased demand for new technologies. We believe that the potential future growth in the Israeli telecommunications market will be driven by continued strong demand for higher bandwidth, both on the broadband internet and mobile platforms, and advanced value-added services and technologies across all telecommunications services.

 

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The Bezeq Group owns advanced nationwide network infrastructures and is positioned at the forefront of technological innovation across all of the telecom markets in Israel.

 

The Bezeq Group has historically made substantial investments in its fully owned infrastructure, which is one of the most technologically advanced in Israel and enables the Bezeq Group to reach customers nationwide. Bezeq has a Next-Generation Network (NGN) based on a core IP network and deployment of an optical fiber network to street cabinets (a network topology known as Fiber to the Curb, or FTTC) and also based on an access network (a system that connects NEPs on the subscriber’s premises to the network and engineering systems). Bezeq completed the deployment of the network at the end of 2015. The connection from the home, or the terminal equipment (equipment which is installed on the subscriber’s premises, e.g., the actual telephone, private exchanges, fax machines, modems, routers, etc.) through which the subscriber receives the service, to the access network is based on copper cables and optical cables that connect the access systems to the backbone over optic cables (through special pipes or an above ground network) and to a limited degree through wireless systems. Today, using VDSL2 technology, it is possible to provide a bandwidth of up to 100 Mbps downstream, as well as innovative added-value services. Other advantages of the new technology are simplification of the network structure and better management ability.

 

Pelephone's LTE network is deployed in most parts of the country, and Pelephone continues to deploy its network in accordance with a regulated plan.

 

Pelephone operates three technologies: MIMO4x4, Beam Forming and Quam 256, enabling improved performance and increased browsing speed on fourth generation websites.

 

In 2019, Pelephone launched its IMS based services: Voice over WiFi as an improved solution for indoor coverage, as well as Voice over LTE that enables vacating third-generation frequency resources for future LTE use. In addition, it enables Voice over LTE sequence service with Voice over WiFi. During the coming decade Pelephone will be required to continue establishing new broadcasting sites to comply with the terms of its mobile telephony license.

 

In the ISP, ILD, data transfer, networks and ICT services segment, Bezeq International is currently the sole ISP in Israel to own and operate its own high-speed submarine optical fiber communications cable system. The JONAH cable, which was launched in January 2012, has a capacity of over 7.0 Tbps and provides Bezeq International with greater capacity for utilization than any other ISP in Israel. In addition, Bezeq International is able to obtain such capacity at an incremental cost, while other ISPs in Israel are required to purchase capacity and rely on one of the two other cable operators in Israel (MedNautilus and Tamares). The JONAH cable is fully redundant (i.e., utilizes two equipped fiber pairs), and in addition, Bezeq International has available capacity on two alternate submarine routes to Europe.

 

In the multi-channel pay television segment, DBS is the only licensed provider of multi-channel television broadcasts via satellite in Israel. While DBS relies on third party providers for the provision of satellite capacity, it owns the satellite dishes that carry the signals from such satellites to subscriber residences and set-top boxes. DBS differentiates itself from its main competitor, HOT, by offering a wide range of high-quality content and by utilizing technology to be the first pay television services provider to offer new and innovative value-added services to subscribers. For instance, DBS was the first provider in Israel to offer a set-top box that combined PVR, VOD and HD capabilities in one device (branded as “yes MaxTotal”). DBS’s PVR offering enables subscribers to download a movie or series to their yes MaxTotal set-top box over the Internet and watch recorded content immediately or at a later time. DBS is also the only provider in Israel that offers a multiroom service allowing subscribers to watch recorded content on multiple capable set-top boxes and in 2014 DBS introduced its TV Everywhere service, branded as yesGo, which allows subscribers to watch content from mobile devices. In 2015, DBS began to offer a HDPVR converter known as yesQuattro that allows the recording of up to 4 channels simultaneously in addition to the channel being viewed, has increased the number shows that may be recorded, and allows the automatic recording of prime-time content (6:00 PM to midnight) on two channels that the subscriber can select for seven days (known as PrimeTime service).

 

DBS also operates its yesGo service, which allows subscribers to view the channels included under the service that they have purchased for home television viewing and VOD content, over a variety of terminal devices (smartphones, tablets and PCs). Other providers enable VOD viewing through the Internet, such as AppleTV and Netflix,

 

In July 2019, DBS began marketing detachable services bundles that contain its content services (satellite or Sting TV services), together with Bezeq International's ISP and landline home telephone services.

 

The Bezeq Group’s brands are among the strongest and most widely recognized brands in Israel and are supported by its substantial investments in marketing, strong product and service offerings, extensive distribution network and leading customer service offerings.

 

The Bezeq Group’s brands are among the strongest and most widely recognized brands in Israel, including Bezeq, Pelephone, Bezeq International and DBS. The Bezeq Group’s brands have been supported by its sustained and substantial investments in strong product and service offerings, marketing, extensive distribution network and leading customer service offerings. We believe the Bezeq Group’s product and service offerings combined with its advanced technology and infrastructure are the key factors driving the association of the Bezeq, Pelephone, Bezeq International and YES brands with reliability, speed, excellent service and innovation throughout Israel. The Bezeq Group’s marketing campaigns focus on and highlight various elements regarding each of its brands. For example, Bezeq focuses on the value-added services offered with its fixed-line broadband internet infrastructure access service, Pelephone highlights the speed of its network, Bezeq International focuses on providing faster Internet speed than its competitors and its strong customer service, and DBS emphasizes its large selection of high quality international content and the subscriber viewing experience associated with it. Furthermore, the Bezeq Group also provides its customers with award winning customer service offerings in order to enhance customer loyalty.

 

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The Bezeq Group has an extensive offering of high-quality content.

 

Through its wholly-owned subsidiary, DBS, the Bezeq Group is able to complement its extensive telecommunications infrastructure with a wide array of high-quality content. For instance, DBS, which benefits from strong content differentiation in the pay television market, provides a leading selection of television series and movies. With respect to television series, DBS broadcasts new television series at a minimal delay, in some cases within hours from the time the content is originally aired in the United States or worldwide. DBS also has an agreement with HBO pursuant to which DBS aired all of HBO’s new English language television series and movies, the majority of which were only aired in Israel on DBS. The Bezeq Group’s extensive offering of high quality content distinguishes it from competitors, and we believe that such distinction will likely enhance the Bezeq Group’s competitive position if and when the Israeli wholesale market develops and the Bezeq Group’s competitors that do not currently offer bundled packages with pay television begin doing so.

 

The Bezeq Group’s strong cash flow generation supports providing for investment in the business and maintenance of a conservative level of leverage.

 

The Bezeq Group is a highly cash generative business and has a proven track record of consistent operating cash flow generation. The Bezeq Group’s stable, and in some segments, growing customer base and attractive offerings and services, together with its focus on profitability, provide it with strong revenues and operating cash flow. While generating strong cash flow, the Bezeq Group has continued to invest in its business, technologies and infrastructure through major capital expenditure programs, several of which were completed in the last four years (including, the deployment of Bezeq’s NGN, Pelephone’s advanced 3.5G UMTS/HSPA+4G cellular network and the launch of Bezeq International’s JONAH cable).

 

The following table sets forth the Bezeq Group’s operating cash flow and ratio of capital expenditures to revenues for the years ended December 31, 2017, 2018 and 2019.

 

   Year ended December 31, 
   2017   2018   2019 
   (NIS in millions except percentages) 
Operating cash flow   3,525    3,512    2,924 
Capital expenditure, net   1,432    1,492    1,142 
Capital expenditure, net as a % of revenue   14.6%   16.0%   12.8%

 

Products and Services

 

The Bezeq Group provides a wide range of telecommunications services for its business and private customers, including domestic fixed-line telephony and fixed-line broadband internet infrastructure access services, cellular telephony services, ISP, ILD, data services, ICT solutions, multi-channel television broadcasts via satellite, customer call centers, maintenance and development of communications infrastructures, provision of communications services to other communications providers and the supply and maintenance of equipment on customer premises, also known as network end point (NEP) services.

 

Since May 2010, Bezeq has been permitted to offer joint service packages with its subsidiaries to private subscribers, and since July 2012, Bezeq has been permitted to offer joint service packages with its subsidiaries to business subscribers, in each case, subject to the approval of the joint service package by the Ministry of Communications and other conditions contained in Bezeq’s license. The joint service packages must be capable of being “unbundled” such that each service included in a package must be offered separately and on the same terms, which effectively prevents the Bezeq Group from enhancing the attractiveness of the offer by offering a discount on the joint service packages. Joint service packages marketed by Bezeq’s subsidiaries that include the services of Bezeq are also subject to similar limitations, including “unbundling” (except for a bundle offered by a subsidiary that only contains Bezeq’s fixed-line broadband internet infrastructure access service).

 

Bezeq currently offers packages that combine a subscription to Bezeq’s fixed-line broadband internet infrastructure access and to the accompanying ISP service, with the ability to choose from any ISP provider in Israel, including Bezeq International. The packages are “unbundled” and offered at the same price that the standalone services would cost if subscribed to separately. In addition, Bezeq offers packages to business customers that combine Bezeq’s business data lines and the accompanying ISP service from Bezeq International. These packages are also “unbundled” and offered at the same price that the standalone services would cost if subscribed to separately. Business customers are also not required to use Bezeq International as their ISP provider and have the ability to choose any ISP provider in Israel.

 

These restrictions, and in particular the unbundling obligation which severely limits the Bezeq Group’s ability to offer discounts on the components of the bundle, puts the Group in a competitively inferior position as compared to the competing communications groups which are not subject to similar restrictions in marketing joint bundles (other than a restriction on marketing a joint bundle of HOT-Net and other companies in the HOT Group). Bezeq’s restrictions are more significantly manifested with the implementation of the wholesale BSA services and the option for ISPs to provide end-to-end services to customers at reduced prices compared with the bundles that Bezeq can market, which can be unbundled.

 

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Below is information regarding the results of each of the Bezeq Group’s main segments of operation in 2018 and 2019:

 

Bezeq Fixed Line (Bezeq’s operations as a domestic carrier)

 

   Q1
2018
   Q2
2018
   Q3
2018
   Q4
2018
   Q1
2019
   Q2
2019
   Q3
2019
   Q4
2019
   2018   2019 
Revenues (NIS million)   1,063    1,064    1,043    1,026    1,043    1,020    1,025    985    4,196    4,073 
Operating profit
(NIS million)
   473    387    451    (87)   531    875    440    296    1,224    2,142 
Depreciation and amortization
(NIS million)
   204    211    218    217    207    204    225    225    850    861 
Net profit (NIS million)   263    202    257    (155)   321    562    175    134    567    1,192 
Cash flow from operating activities (NIS million)   516    507    583    600    471    416    484    476    2,206    1,847 
Payments for investments in property, plant & equipment, intangible assets and other investments
(NIS million)
   205    313*   233*   225    210    333*   145*   193    976    881 
Proceeds from the sale of property, plant & equipment and intangible assets
(NIS million)
   7    (58)**   8    270**   39**   340**   14    14    227**   407**
Payments for leases   33    29    28    9    34    27    25    28    99    114 
Number of active subscriber lines at the end of the period
(in thousands) (1)
   1,889    1,865    1,843    1,818    1,792    1,768    1,743    1,718    1,818    1,718 
Average monthly revenue per line (NIS) (ARPL) (2)   53    52    51    51    50    49    49    48    52    49 
Number of outgoing use minutes (million)   1,055    1,010    960    989    926    865    888    820    4,014    3,499 
Number of incoming use minutes (million)   1,191    1,151    1,125    1,160    1,090    1,056    1,099    1,046    4,627    4,291 
Total number of internet lines at the end of the period (thousands) (5)   1,653    1,662    1,663    1,656    1,635    1,613    1,589    1,575    1,656    1,575 
The number of lines provided as wholesale internet lines at the end of the period (thousands) (5)   574    600    617    626    624    612    601    592    626    592 
Average monthly revenue per internet subscriber (NIS) - retail (ARPU)   92    93    93    96    96    97    98    98    96    97 
Average bundle speed per internet subscriber - retail (Mbps) (3)   53.5    55.4    57.4    59.1    61.5    64.0    66.2    67.8    59.1    67.8 
Telephony churn rate (4)   3.0%   2.8%   2.7%   3.1%   3.0%   2.7%   3.0%   2.9%   11.6%   11.7%

 

(1)Inactive subscribers are subscribers whose Bezeq lines have been physically disconnected (not including a subscriber who neglected to pay his debt to the Company on time in (roughly) the first three months of the collection process).

 

(2)Excluding revenues from transmission services and data communication, internet services, services to communications operators and contractor and other works. Calculated according to average lines for the period.

 

(3)For bundles with a range of speeds, the maximum speed per bundle is considered.

 

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(4)The number of telephony subscribers (gross) who left Bezeq Fixed Line during the period divided by the average number of registered telephony subscribers in the period.

 

(5)Number of active Internet lines including retail and wholesale lines. Retail - Internet lines provided directly by the Company. Wholesale - Internet lines provided through a wholesale service to other communications providers.

 

(*)In Q2 2018 - including permit fee payments in the amount of NIS 112 million (75% of the requirement) for the sale of the Sakia property. In Q3 2018 - including payment of purchase tax in the amount of NIS 9 million. In Q2 2019 - including payment of a betterment levy in the amount of NIS 149 million on the sale of the Sakia property. In Q3 2019 - including an amount of NIS 75 million received in respect of the betterment levy.

 

(**)In Q2 2018 - land appreciation tax paid on the sale of the Sakia property was recorded as a reduction of amounts received from the sale of property, plant and equipment in the amount of NIS 80 million; in Q4 2018 - including proceeds of the Sakia sale in the amount of NIS 155 million; in Q1 2019 - including proceeds of the Sakia sale in the amount of NIS 5 million, as well as a refund of land appreciation tax that was received in the amount of NIS 5 million. In Q2 2019 - including the proceeds of the Sakia sale in the amount of NIS 323 million.

 

Domestic Fixed-Line Communications (Bezeq)

 

Bezeq is the incumbent and largest provider of fixed-line telephony and fixed-line broadband internet infrastructure access services in Israel. Its products and services include basic telephony services on domestic telephone lines and associated services and fixed-line broadband internet infrastructure access services through its nationally deployed, high quality infrastructure network. Bezeq also offers transmission and data communication services, services to other communications operators and broadcasting services. Bezeq’s new high-speed next generation network, or NGN, is the most advanced fixed-line communications network in Israel. The NGN, which covers 100% of Israeli households, uses VDSL2 technology and enables Bezeq to provide bandwidth of up to 100 Mbps (download) speed, as well as innovative value-added services.

 

Fixed-Line Telephony Services

 

Bezeq had approximately 1.72 million active fixed telephone lines as of December 31, 2019. Bezeq’s fixed-line telephony services include basic telephony service on domestic telephone lines and associated value-added services, such as voice mail, caller ID, call waiting, call forwarding and conference calls. Bezeq also offers its business customers national toll-free numbers which provide for full or partial payment for customer calls by the business customer.

 

Bezeq offers a variety of payment plans, ranging from a monthly subscription fee per fixed telephone line and charge per second of use, to various fixed-line telephony packages comprised of monthly amounts of minutes for a fixed monthly fee.

 

Most of Bezeq’s fixed-line telephony services are subject to regulatory tariff control and the prices for such services are governed by such regulations. With respect to services that are not subject to tariff control, Bezeq is required under the Israeli Communications Law to set reasonable tariffs for such services. In addition, Bezeq is allowed to offer “alternative payment packages” for services that are subject to tariff control, with different pricing than the regulated tariff, subject to certain conditions.

 

Fixed-Line Broadband Internet Infrastructure Access Services

 

Bezeq provides broadband internet access infrastructure services using .xDSL technology. Internet service has become one of Bezeq's main occupations and a central channel for its investments in technology, marketing, advertising and customer acquisition and upgrades. The average speed of Bezeq's Internet subscribers at the end of 2019 was 67.8 Mbps compared with an average of 59.1 Mbps at the end of 2018. The minimum speed of the package provided for new customers is usually 15 Mbps.

 

xDSL service is also provided on subscriber lines free of charge for the access line. According to the decision of the Ministry of Communications, Bezeq may not apply differential xDSL pricing between subscribers who use the service together with telephony service and subscribers who only use the xDSL service.

 

Bezeq is obligated to provide broadband internet access services in a wholesale BSA format to service providers that provide end-to-end Internet services in this way to their customers, including infrastructure.

 

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Graph – Changes in bundle speeds of Bezeq's Internet subscribers in 2013-2019 (in Mbps at the end of each year) *:

 

 

* For bundles with a range of speeds, the maximum speed per package is taken into account.

 

Transmission and data-communication services

 

Data communication services are network services for point-to-point data transmission, data transmission between computers and between various communications networks, services to connect communications networks to the internet, and remote access services.

 

Bezeq offers transmission services, including at high speeds, to communication operators and their business customers over a variety of interfaces. There is also a decline in use of Bezeq’s transmission and data communication services.

 

Cloud and digital services

 

This category includes virtual server services; Bcyber service; smart home, smart business and smart city services; private virtual PBX (IP Centrex) services; and B144 service, which is Bezeq’s advertising platform for digital advertising and marketing platform to small businesses, BCam, Wi-Fi, SMS and remote backup.

 

Other Services

 

Bezeq provides services to other communications operators, including cellular operators, international call operators, HOT, NEP operators, ISPs, domestic carriers, and Palestinian communications providers. Among the services provided by Bezeq are infrastructure services, infrastructure upgrades, connection to Bezeq’s network, billing services, leasing of space, and services in leased premises.

 

Broadcast services

 

Bezeq operates and maintains radio transmitters which are operated by the Israel Broadcasting Corporation, Israel Army Radio (Galei Zahal) and also maintains and operates the transmitters of several regional radio stations and the DTT transmitters for the Second Authority. Bezeq is not responsible for the content of the broadcasts.

 

Contract work

 

Bezeq installs, maintains, and operates networks or subnetworks for various customers (e.g., the Ministry of Defense, HOT Telecom, radio and television broadcasting companies, cellular operators, international call operators, local authorities, municipalities, and government bodies). Bezeq has agreements with HOT Telecom to provide installation, maintenance and network hosting services using Bezeq’s infrastructures.

 

The following table shows the distribution of Bezeq's revenues by main products and services in its segment of operation, 2017-2019 (in NIS millions):

 

   2017   2018   2019 
Revenue from Internet infrastructure services   1,544    1,596    1,578 
Percentage of total fixed-line revenues   36.38%   38.04%   38.74%
Revenue from fixed-line telephony   1,281    1,156    1,039 
Percentage of total fixed-line revenues   30.18%   27.55%   25.50%
Revenue from transmission and data communication services   975    977    948 
Percentage of total fixed-line revenues   22.97%   23.28%   23.27%
Revenue from cloud and digital services   230    260    274 
Percentage of total fixed-line revenues   5.42%   6.20%   6.73%
Revenue from other services   214    207    234 
Percentage of total fixed-line revenues  5.05%  4.93%  5.74%
Total revenues from the domestic fixed line communications  4,244   4,196   4,073 

 

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Bezeq is not dependent on a single customer, and there is no customer that accounts for 10% or more of Bezeq's total revenue. Bezeq’s revenues are divided into two main customer types: Private (50%) and business (50%): The distribution is by revenue, as shows in the following table (in NIS millions):

 

   2017   2018   2019 
Revenue from private customers   2,232    2,101    2,029 
Revenue from other business customers   2,012    2,095    2,044 
Total revenue  4,244   4,196   4,073 

 

Pelephone

 

   Q1
2018
   Q2
2018
   Q3
2018
   Q4
2018
   Q1
2019
   Q2
2019
   Q3
2019
   Q4
2019
   2018   2019 
Revenue from services
(NIS million)
   431    438    449    437    417    430    446    416    1,755    1,709 
Revenue from the sale of terminal equipment
(NIS million)
   188    164    155    181    161    140    166    186    688    653 
Total revenue
(NIS million)
   619    602    604    618    578    570    612    602    2,443    2,362 
Operating profit (loss)
(NIS million)
   2    2    (2)   (4)   (10)   (8)   16    (97)   (2)   (99)
Depreciation and amortization
(NIS million)
   158    159    161    177    157    156    157    163    655    633 
Net profit (loss)
(NIS million)
   9    7    6    2    2    2    18    (69)*   24    (47)*
Cash flow from operating activities (NIS million)   239    181    194    156    195    136    200    146    770    677 
Payments for investments in property, plant & equipment, intangible assets and other investments, net (NIS million) (1)   69    90    69    78    63    82    72    75    306    292 
Payments for leases   75    50    64    70    69    46    76    51    259    242 
Number of postpaid subscribers at the end of the period (thousand) (2) (5)   1,760    1,800    1,817    1,831    1,842    1,866    1,895    1,911    1,831    1,911 
Number of prepaid subscribers at the end of the period (thousand) (2) (5)   786    801    368    374    382    397    415    425    374    425 
Number of subscribers at the end of the period (2)   2,546    2,601    2,185    2,205    2,224    2,263    2,310    2,336    2,205    2,336 
Average monthly revenue per subscriber (NIS) (ARPU) (3)   57    57    68    66    63    64    65    60    62    63 
Churn rate (4)   8.0%   7.3%   9.1%   9.0%   8.6%   7.5%   7.3%   7.3%   33.3%   30.7%

 

*Include non-recurring expenses resulting from implementation of collective labor agreement of NIS 59 million.

 

(1)Net of immaterial sales of PP&E.

 

(2)Subscriber data includes Pelephone subscribers (without subscribers from other operators hosted on the Pelephone network and excluding IOT subscribers from Q3 2018) and does not include subscribers connected to Pelephone services for six months or more but who are inactive. An inactive subscriber is one who in the past six months has not received at least one call, has not made one call / sent one SMS, or has performed no surfing activity on his phone or has not paid for Pelephone services. Prepaid subscribers are included in the list of active subscribers from the date on which the subscriber loaded his device and are removed from the list of active subscribers if he makes no outgoing use of his device for six months or more. Notably, a customer may have more than one subscriber number (“line”). The subscriber list includes subscribers who use different services (e.g. data for car media systems), from which the average revenue is substantially lower than for other subscribers. On the change in the definition of subscribers from Q3 2018, see note (5) below.

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(3)Average monthly revenue per subscriber (postpaid and prepaid). The index is calculated by dividing the average total monthly revenues from cellular services, from Pelephone subscribers and other telecom operators, including revenues from cellular operators who use Pelephone's network, repair services and extended warranty in the period, by the average number of active subscribers in the same period. On the effect of the change in the definition of a subscriber from Q3 2018 on the ARPU index, see note (5) below.

 

(4)The churn rate is calculated at the ratio of subscribers who disconnected from the company's services and subscribers who became inactive during the period, to the average number of active subscribers during the period. On the effect of the change in the definition of a subscriber from Q3 2018 on the churn rate, see note (5) below.

 

(5)From Q3 2018, Pelephone updated the definition of an active subscriber so that its subscriber listing will no longer include IOT subscribers, and it added a separate comment for prepaid subscribers so that a prepaid subscriber will be included in the list of active subscribers from the date on which the subscriber loaded his device, and it will be removed from the list of active subscribers if no outgoing calls were made for six months or more. As a result of this change, at the beginning of Q3 2018, 426,000 prepaid subscribers and about two thousand IOT subscribers were written off Pelephone’s subscriber listings. This led to an increase of NIS 11 in the ARPU index and an increase of 1.5% in the churn rate in Q3 2018.

 

Cellular Telephony (Pelephone)

 

Pelephone is among the leading cellular telephony services providers in Israel. Pelephone provides cellular telephony services, sells handsets and other end-user equipment, and provides repair services for handsets sold by Pelephone.

 

Pelephone  As at and for the year ended December 31,
2019
 
   (in millions, except percentages) 
Revenues (in NIS)   2,362 
Estimated market share (as of September 30, 2019)   21.2%
Total Subscribers   2.31 
Churn rate   30.7%

 

Services provided by Pelephone:

 

Package services. Package services provided by Pelephone include:

 

Basic telephone services (voice) including basic voice services, call completion and auxiliary services such as call waiting, follow-me, voice mailbox, voice conference call and caller ID, MMS multimedia messages.

 

Browsing and data communications services – Internet browsing using 3G and 4G mobile devices.

 

Messaging service – a service for sending and receiving SMS text messages and multimedia MMS messages.

 

IOT Services (Internet of Things) - Pelephone began to offer its customers advanced IOT solutions (such as smart building networks with command and control systems).

 

Roaming Services - Pelephone provides its customers with roaming coverage in more than 220 countries worldwide. Pelephone also provides incoming roaming services for the customers of foreign operators staying in Israel.

 

Servicing and repair services – Pelephone offers expanded repair and warranty services; for a monthly fee entitling the customer to mobile handset repair and warranty services, or for a one-time payment at the time of repair.

 

Added value services - Pelephone offers its customers added value and supplementary services such as Pelephone cloud backup services, anti-virus and cyber security services, etc.

 

PTT (Push to Talk) services - Pelephone began offering its business customers the most advanced PTT services worldwide, enabling fast and secure organizational communications at the push of a button.

 

Pelephone provides part of these services under hosting agreements with other cellular operators that use Pelephone’s network, so that they can provide services to their customers.

 

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The mobile radio telephony segment is extremely competitive. Competition in this sector has led to high subscriber churn between the cellular operators and erosion of their revenues, and to an increase in the internet browsing volume included in the base package that has caused significant erosion of the average revenue per user (ARPU). The growth in number of postpaid subscribers in the past four years compensated for the price erosion and allowed Pelephone to maintain stable income.

 

The terminal equipment market is also fiercely competitive among the cellular operators and competing against the numerous stores that sell terminal equipment imported by parallel import. In 2019, the trend of manufacturers launching device models at lower prices compared to previous years continues which, together with the decrease in number of devices sold to end customers, has led to further decile in average revenue per device. To minimize damage to revenues, Pelephone increased the range of equipment it sells and it also sells non-cellular electronic equipment.

 

Most terminal equipment and electronic products are sold with installments. The decrease in terminal equipment sales over the years has led to a decrease in trade receivables as well as a decline in trade payables to terminal equipment suppliers.

 

The cellular market growth rate is lower due to penetration rate saturation1. The penetration rate at September 30, 2019 was 120%.

 

Pelephone also offers various types of mobile phones, on-board telephones, hands-free devices and accessories that support its range of services. Pelephone also offers its customers other terminal equipment such as tablets, laptops, modems, television sets and game consoles.

 

Revenue from products and services

 

Terminal equipment – Pelephone offers various types of mobile phones, on-board telephones, hands-free devices, and accessories that support its range of services. Pelephone also offers its customers other terminal equipment such as tablets, laptops, modems, speakers, smart watches, headphones and related electronic equipment.

 

The following table provides a breakdown of Pelephone’s revenues from products and services (NIS in millions) in the last three years:

 

Breakdown of Pelephone's revenues from products and services (in NIS millions):

 

Products and services  2017   2018   2019 
Revenue from services   1,782    1,755    1,709 
Percentage of Pelephone's total revenue   70%   71.8%   72.4%
Revenue from products (terminal equipment)   764    688    653 
Percentage of Pelephone's total revenue   30%   28.2%   27.6%
Total revenue  2,546   2,443   2,362 

 

 

1Penetration rate - the ratio between the number of subscribers in the market and the total population in Israel (excluding foreign workers and Palestinians, although they are included in the number of subscribers).
 

Breakdown of revenue from customers (in NIS million):

 

Products and services  2017   2018   2019 
Revenue from private customers   1,541    1,415    1,334 
Revenue from business customers (*)   1,005    1,028    1,028 
Total revenue  2,546   2,443   2,362 

 

(*)Revenue from business customers include revenues from hosting agreements, most of which was from Rami Levy.

 

At the end of 2019, Pelephone had 2.3 million subscribers, consisting of 1.8 million postpaid subscribers and 0.4 million prepaid subscribers. Revenues from the prepaid subscribers are immaterial relative to Pelephone's total revenues. Following the update of the definition of an active subscriber, beginning the third quarter of 2018, 0.4 million prepaid subscribers were deleted from Pelephone's subscriber base.

 

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Bezeq International

 

   Q1
2018
   Q2
2018
   Q3
2018
   Q4
2018
   Q1
2019
   Q2
2019
   Q3
2019
   Q4
2019
   2018   2019 
Revenues (NIS million)   352    336    333    370    341    339    329    330    1,391    1,339 
Operating profit
(NIS million)
   33    29    30    19    33    17    (21)   (86)   111    (57)
Depreciation and amortization (NIS million)   43    45    46    60    46    46    47    51    194    190 
Net profit (loss) (NIS million)   24    20    20    13    25    10    (18)   (67)   77    (50)*
Cash flow from operating activities (NIS million)   67    54    73    106    56    48    64    87    300    255 
Payments for investments in property, plant & equipment, intangible assets and other investments, net
(NIS million) (1)
   31    44    26    25    33    34    40    21    126    128 
Payments for leases   9    9    9    9    8    8    8    8    36    32 
Churn rate (2)   6.0%   6.0%   5.8%   7.7%   6.6%   6.2%   7.1%   6.3%   25.5%   26.2%

 

* Including non-recurring expenses resulting from implementation of collective labor agreement and impairment losses in a total amount of NIS 115 million.

 

(1)Include long-term investments in assets.

 

(2)The number of Internet subscribers who left Bezeq International during the period, divided by the average number of registered Internet subscribers in the period.
 

ISP, ILD, Data Services and ICT (Bezeq International)

 

Bezeq International is the leading provider of ISP services in Israel and one of Israel’s leading providers of ILD and international and domestic data transfer and network services. Bezeq International provides comprehensive communications solutions that include ISP and related value-added services, international and domestic telephony, PBX supply and support, ICT, cloud computing services, data communications and information security, website server hosting and related managed services. Bezeq International also owns the JONAH high-speed submarine optical fiber communications cable system connecting Israel and Europe, which provides increased bandwidth (capacity and speed) and has positioned Bezeq International as the sole ISP in Israel to own and operate an advanced international network.

 

In the internet service provider (ISP) sector, some 80 companies have so far been granted ISP licenses, among them holders of special licenses for providing these services and special general licenses authorizing them to provide international call services, domestic operator services and MRT services.

 

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ISP Services

 

In the Internet services sector Bezeq International provides Internet service provider (ISP) services for private and business customers, including requisite terminal equipment and support over DSL based transmission, configuration and cable infrastructure. and access services to Bezeq’s Internet infrastructure (as part of the wholesale market); hosting services offering site and server storage services at a designated installation, including value added services (such as monitoring and control); information security services; Internet and LAN network connection security using required terminal equipment or software, including monitoring; data services including international IP based data communication solutions for business customers with global deployment; and high speed Wi-Fi services, including public hotspots. Bezeq International also markets packages that include DBS's Sting TV, an internet-based television services platform (together with internet access services). In 2019, Bezeq International expanded marketing of packages that include yes content services, in addition to Sting TV, together with ISP services and Bezeq International's home phone line, and DBS also began marketing Bezeq International's ISP services. The packages are subject to the detachability obligation Bezeq International provides these Internet services primarily via its exclusive wholly-owned Jonah submarine cable between Israel and Italy, launched in December 2011. Bezeq International is the only provider among ISPs operating in Israel to own a submarine cable. Ownership of the sub-marine cable frees Bezeq International from dependence on infrastructure providers, and also allows it to offer its customers higher quality browsing.

 

Voice (telephony) services

 

In the voice services sector Bezeq International provides international direct dialing (IDD) services to business and private customers; toll-free dialing overseas for business customers; international call hubbing and routing services - transferring international calls between foreign telecommunication providers (worldwide); phone-card services enabling prepaid and postpaid dialing from Israel overseas and from abroad to Israel, and the 1809 service that allows dialing from Israel to other countries. Furthermore, Bezeq International provides domestic telephony services.

 

International data services

 

Bezeq International provides international data communication solutions for business customers including customized global deployment. The services are provided via Bezeq International’s submarine cable and the optic cables deployed from Israel to Europe over which Bezeq International has long-term user rights, and through its business partnerships with leading global telecom providers such as British Telecom, which provide its customers access to their sophisticated global network services.

 

In addition to the foregoing services, Bezeq International offers ITS licensees to provide Bezeq International’s services and ISP licensees the use of its international capacities (through leasing or by purchasing indefeasible rights of use), over Bezeq International’s submarine cable, and the user rights it acquired in European terrestrial infrastructures and in other international networks.

 

Business Sector-Data Services and ICT

 

Bezeq International provides ICT (Information and Communication Technology) solutions for business customers. Customer ICT solutions include extensive communications solutions such as server and web hosting services, technical maintenance and support services, system and networking services, outsourcing and out-tasking services, security and risk management solutions, IP based services, cloud computing services, online backup services, market and advertising services for businesses over a digital platform (Bigger) and equipment sales. Bezeq International has adopted a comprehensive solution model with a single contact person, fully responsible for dealing with the customer (one service provider, one responsibility).

 

Bezeq International markets and maintains communication systems for the entire the Israeli market, and PBX exchanges, telephony networks and IP communications, mainly for its business customers. As part of its service contracts, Bezeq International provides maintenance services for various PBX exchange manufacturers. These services are given for gateways, PBX exchanges and network end points (NEP) for lines used as both internal and external lines.

 

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DBS

 

   Q1
2018
   Q2
2018
   Q3
2018
   Q4
2018
   Q1
2019
   Q2
2019
   Q3
2019
   Q4
2019
   2018   2019 
Revenues (NIS million)   375    375    367    356    343    337    334    331    1,473    1,345 
Operating profit (loss)
(NIS million)
   (1)   (17)   1    (1,139)*   (45)   (24)   20    (6)   (1,156)*   (55)
Depreciation, amortization and impairment (NIS million)   79    79    81    84    55    68    50    46    323    219 
Net profit (loss)
(NIS million)
   1    (10)   (2)   (1,137)*   (50)   (27)   15    (7)   (1,148)*   (69)**
Cash flow from operating activities (NIS million)   86    60    34    46    53    22    37    31    226    143 
Payments for investments in property, plant & equipment, intangible assets and other investments, net
(NIS million)
   62    75    79    81    64    73    69    32    297    238 
Payments for leases   8    8    9    6    8    7    8    7    31    30 
Number of subscribers (at the end of the period, in thousands) (1)   580    582    584    574    568    565    558    555    574    555 
Average monthly revenue per subscriber (ARPU) (NIS) (2)   214    215    210    206    200    198    198    198    211    199 
Churn rate (3)   6.1%   4.7%   5.1%   5.6%   5.6%   4.9%   5.5%   5.2%   21.5%   21.2%

 

(*)See Note 9 to the 2019 Financial Statements concerning impairment of assets.

 

(**) Including non-recurring expenses of NIS 45 million resulting from the implementation of the collective labor agreement in DBS.

  

(1)Subscriber - a single household or small business customer. In the case of a business customer that has more than a certain number of decoders (such as a hotel, kibbutz, or gym), the number of subscribers is standardized. The number of business customers that are not small businesses, is calculated by dividing the total payment received from all the business customers that are not small businesses by the average revenue per small business customer, which is determined periodically. In Q4 2018, the standardization formula was updated as a result of which the number of subscribers fell by 7,000. This is partially due to the fact that the average revenue per small business customer in the special offers (at least 100 customers per offer) increased in 2018 as a result of customers moving over to packages that are richer in content at a higher price.

 

(2)Monthly ARPU is calculated by dividing total DBS revenues (from content and equipment, premium channels, advanced products, and other services) by the average number of customers in the period.

 

(3)Number of DBS subscribers who left DBS during the period, divided by the average number of DBS registered subscribers in the period. The churn rate includes DBS subscribers who moved from satellite services to Sting TV and the reverse. DBS believes that the rate of movement is negligible and is not more than 1% of all DBS subscribers in the year.

 

Multi-Channel and online television transmissions (OTT), Pay Television (DBS)

 

DBS's goals are to maintain its market share and customer base, while maintaining its business and competitive position in the sector and continuing its streamlining measures.

 

To achieve these goals, along with efforts to reduce costs, DBS intends to invest considerable effort in marketing and sales, and in appropriate marketing strategy designed to continue attracting subscribers; and to retain existing customers; continually improve the array of services to subscribers; improving the added value offers to customers; creating differentiation and innovation in its broadcasting content, to increase the amount of content purchased by each subscriber and expand DBS's value-added services, and to invest in the development and integration of advanced technologies and new services. These efforts include DBS's drive to increase the rate of penetration of advanced services, including the PVR decoders and VOD and HD services among its subscribers as well as to also provide its content on additional platforms, such as yesGo and StingTV, in a way that will increase DBS revenues and subscriber loyalty to DBS's services.

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In March 2019, the Boards of Bezeq and DBS approved an outline plan for DBS switching from satellite broadcasting to online transmission (OTT) in a gradual, prolonged process, expected to be spread over a period of up to seven years. DBS's average annual investment over the planned years is expected to be similar to the average annual investment in recent years. DBS intends to routinely monitor market conditions, competition and the technological environment, and will periodically review the feasibility of the outline plan and the need, if any, to make adjustments in it, in the pace of its execution or in the manner of its implementation, taking into account the needs of its customers and DBS’s regulatory obligations.

 

DBS provides subscribers of its satellite broadcasts online VOD services via the internet (OTT). These services are provided for a service subscription fee (most subscribers currently have special offer subscriptions that exempt them from this fee), while some of the content is provided for an additional charge.

 

Connecting Satellite Subscribers to VOD services requires the use of specific types of decoders. In recent years, the number of satellite subscribers connected to VOD services and the consumption of VOD services has increased significantly due to the increased supply of available content, increase in available band width at subscribers' homes and significant increase in use of advanced decoders.

 

DBS also operates its online OTT yesGo service, allowing satellite subscribers to view satellite broadcasts of the channels included in this service, which they have purchased for home television viewing, as well as VOD content, via various terminal devices.

 

To allow reception of DBS services online, dish antennas are installed on buildings and several types of decoders are installed in the subscriber’s home: decoders enabling reception of SD broadcasts only, and advanced decoders, some of which are PVR converters for recording content, some are HD Zapper decoders for receiving HD broadcasts, and some combine all the foregoing features (HDPVR decoders). DBS also markets state-of-the-art PVR decoders that enable higher resolution viewing, known as 4K or UltraHD.

 

Most of the PVR decoders also enable MultiRoom service through which, via a home network, content recorded on such decoders can also be viewed through other (HD Zapper or HDPVR) decoders in the subscriber's home. The majority of satellite subscribers use advanced decoders of various types (HD Zapper, HDPVR, PVR and PVR 4K decoders).

 

Pursuant to the provisions of the Communications Law, the terms of DBS's broadcasting license and the Council's decisions, its satellite broadcasts include a basic package or one of the core packages that every subscriber is required to purchase, as well as additional user selectable channels, either as packages or as individual channels.

 

Currently, most of the satellite subscribers have a special campaign subscription, the highlights of which include the offer of a vast majority of linear channels and VOD service at an all-inclusive price that reflects a price discount for most subscribers when joining. The high enrollment rate for the special campaign, decreased the average revenue per subscriber (ARPU), and this reduction, together with additional measures were intended to help DBS cope with the increasing competition and decrease in the number of subscribers. Continued enrollment is expected to cause further decline in the ARPU.

 

Sting TV Services

 

In 2017 DBS launched its online television service under the name, StingTV, which includes linear TV channels and VOD content. The service is based on the Android TV operating system which allows content to be viewed via a streamer, smart TV and other terminal devices. The service is made up of a number of content packages, with each package containing linear channels and VOD content, and subscribers can join one or more of these packages, according to their choice.

 

As a rule, this service is relatively low priced compared with services provided under broadcasting licenses and does not include the full range of content offered to the Satellite Subscribers. The service is primarily digital (subscribing and customer service are via online interfaces), based on subscriber self-installation (if installation of a streamer is required).

 

DBS  As at and for the year ended December 31, 2019 
   (in millions,
except
percentages)
 
Revenues (in NIS)   1,345 
Estimated market share2   32%
Subscribers (in thousands)   555 
Churn rate   21.2%

 

 

2Market share was calculated out of the foregoing total number of subscribers of DBS, HOT, Partner and Cellcom as specified below (and not out of the total number of viewers and subscribers in the market, due to lack of actual figures in this regard). The estimate of DBS's market share in 2019 and 2018 is based on the number of subscribers of DBS, Cellcom and Partner (based on their reports of the number of their subscribers at the end of the third quarter of 2019), and of HOT, where with regard to 2019 and 2018 HOT did not publish the number of its subscribers, and therefore the figures relating to HOT are estimated by DBS, taking into account past trends and existing figures for the other market participants). Nonetheless, there is no certainty that the figures assumed for HOT are accurate, and therefore it is possible that the actual market share may be different from those estimated.

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Marketing, Sales and Customer Service

 

Under the structural separation limitations, each of the Bezeq Group companies maintains independent marketing and sales operations.

 

Domestic Fixed-Line Communications (Bezeq)

 

Bezeq has marketing, sales and service systems for its business and private customers, which include customer managers for the business sector, combined sales and service call centers around the country, technical support centers for private and business customers, Bezeq stores throughout Israel offering sales and services, as well as a virtual online shop.

 

Bezeq markets its services mainly through advertising in the mass media, telephone sales centers, customer managers and an array of independent dealers which are mainly ISPs, outsourced sales centers, and ISPs which, upon establishment of the wholesale market, mainly market end-to-end service packages based on Bezeq’s wholesale BSA services. Bezeq also has independent service and sales channels on its website (adapted to surfing from mobile phones), a dedicated application (Bezeq Sheli, My Bezeq), and also offers an Interactive Voice Response (IVR).

 

Cellular Telephony (Pelephone)

 

Pelephone’s distribution network includes 400 points of sale at which it is possible to enroll for Pelephone’s services. The point of sale network is diverse and includes stores and stalls operated by Pelephone, retail chains that market Pelephone products and 24 customer service and sales centers deployed around the country that engage in sales, repair of devices and customer retention. In addition, Pelephone operates an internal and external telemarketing network. As a rule, these dealers are paid a commission on sales.

 

In the past year Pelephone continued expanding its distribution network. Pelephone’s subscriber service network includes online channels, including Pelephone’s website and 8 call centers.

 

ISP, ILD, Data Services and ICT (Bezeq International)

 

Bezeq International has sales channels for the private market, including customer recruitment and retention call centers, a country-wide direct sales network (providing “door to door” and point of sale services), a technical support and customer service network and a distribution channel system that includes external marketing and dealership centers. The business market sales channels include customer recruitment centers and business and administration service and solution centers for business customers. Bezeq sells Bezeq International services as part of joint service bundles.

 

Multi-Channel Pay Television (DBS)

 

DBS customer service operations are carried out mainly by in-house and outsourced call centers, as well as by self-service via interactive voice response, DBS’s website and set-top boxes. Field technical support and installations are performed by DBS technicians and subcontractors.

 

DBS’s sales operations are carried out via door-to-door sales personnel, call centers and third-party dealers. DBS focuses its marketing strategy on media campaigns with high presence on television as well as other medias such as radio, newspapers, Internet and billboard commercials, using well-known international actors and marketing special offers. DBS’s campaigns highlight its role as a global technology pioneer with leading value- added services (VOD, PVR, HD, MultiRoom, streamer and mobile applications). DBS also highlights its relationships with other well-known, popular brands.

 

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Networks

 

Domestic Fixed-Line Communications (Bezeq)

 

Bezeq has a Next-Generation Network (NGN) based on a core IP network and deployment of an optical fiber network to street cabinets (a network topology known as Fiber to the Curb, FTTC), and also based on an access network (a system that connects NEPs on the subscriber's premises to the network and engineering systems). The connection from the home to the access network is based on copper cables and the connection from the access systems to the backbone is based mainly on optic cables. In addition, some of the peripheral equipment (equipment installed at the subscriber, such as routers) is owned by Bezeq and leased to the customer. In the NGN, download broadband speeds of up to 100 Mbps and innovative added value services can be provided using VDSL2. Other advantages of the new technology are simplification of the network structure and better management ability.

 

Bezeq is expanding the deployment of infrastructure, including optical fiber deployment since 2013 so that the fibers will be as near to the customer's premises as possible (FTTH/FTTB), as a basis for future provision of more advanced and broader-band communication services than those currently provided based on new technologies using the copper cables on the customer's premises.

 

Bezeq slowed the pace of deployment of the fibers significantly in 2017. Bezeq is focusing its efforts on examining the readiness of the new technologies, which will allow it to provide the service more extensively, and on investments in the existing network with the purpose of increasing the bandwidth, quality and survivability of the network. On March 28, 2018, Bezeq applied to the Ministry of Communications to regulate the ultra-high-speed segment so as to enable national deployment of these speeds. On December 23, 2018, the Ministry of Communications contacted Bezeq for clarifications, according to which the Ministry requires further information to complete its examination with respect to implementation of 35B technology (expansion of the xDSL technology with which speeds of up to 300 Mbps can be reached, depending on the quality of the copper infrastructure) in terms of provision of services in an orderly and proper manner without materially harming competition, including the option of laying down conditions to ensure the absence of such harm.

 

As at the end of 2019, the Company deployed optical fibers directly to 120,000 buildings and in certain areas to a point at the center of a group of buildings. All in all, the connection potential is up to 1.5 million households and businesses.

 

Call for public comments of Ministry of Communications with respect to the ultra-wide bandwidth infrastructure deployment policy in Israel

 

On December 18, 2018, the Ministry of Communications published a call for public comments with respect to the principles for deployment of ultra-wide bandwidth infrastructure in Israel setting out the basis for the policy under consideration at the Ministry which, according to it, is intended to supplement the existing system of incentives and create regulatory certainty for the communications companies in terms of regulation. In the call for public comments, the Ministry presented initial principles according to which it is considering formulating regulation aimed at providing a solution for the different issues. Subsequently, the Company held open discussions on the subject with the Ministry of Communications’ representatives, in which, and in the response that it submitted to the call for comments, the Company raised its position on the failures that it believes are inherent in the intentions published in the call for public comment.

 

Further to the above call for public comment, the Ministry announced the establishment of an interministerial team to review the policy for deployment of ultra-wide bandwidth fixed communication infrastructure in Israel that includes representatives from the Ministry of Communications, Ministry of Finance and the Competition Authority. On November 5, 2019, the Ministry of Communications published the interministerial team’s recommendations to the public’s comments:

 

A. The Company will be able to choose the statistical areas in which it will deploy and operate optical fiber networks to all households in those areas. Notice of the areas selected must be submitted to the Ministry of Communications by the specified date and this will be written into the regulations that will obligate the Company. Deployment in these areas must be completed within five years.

 

B. A fund will be set up to provide financial incentives for deployment of an optical fiber network to all households in all statistical area in which the Company announced that it will not deploy a fiber network (“the Incentive Areas” and “the Fund”, respectively). The Fund will allocate monies through tenders and winners will be determined on the basis of the lowest offers for deployment per household in the areas in which the optical fiber network is to be deployed.

 

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C. The Fund will be financed by annual payments made by license holders under the Communications Law (including the Company) of 0.5% of their annual revenues.

 

D. To encourage the Company to undertake a wide deployment and limit the Incentive Areas, and to reduce the deployment costs in the Incentive Areas and create a high level of competition, the team recommended: To establish limitations on the Company’s deployment in the Incentive Areas; the Company will not be able to compete in the tenders for the allocation of monies from the Fund; the cost of use of the Company’s physical infrastructures in the Incentive Areas will be set using a different method of calculation than set out in the regulations for the wholesale market and as a result will be significantly lower; and winners of the tender will be obligated to provide BSA service to other license holders.

 

Notably, the team was also of the opinion that the examination should be continued regarding the deployment obligation of HOT as part of an additional expert opinion, in accordance with developments in the HOT network and to adjust the HOT deployment obligation, taking note of the advantages of its existing infrastructure and scope of the deployment of its passive network.

 

The team believes that implementation of the proposed regulations will, in the short term, lead to wide deployment of a fiber optic network, and within a reasonable time to a nationwide deployment of a fiber optic network.

 

The recommendation documents also indicate that in order to implement the recommendations, amendments to the regulations, secondary legislation and licenses will be necessary.

 

On December 15, 2019, Bezeq forwarded the comments to the team’s recommendations stipulating that in order to effectively promote deployment of the fiber network, several amendments to the proposed outline are required: The tariffs for use of Bezeq’s infrastructure (ducts and/or dark fiber) in the Incentive Areas; the regulation is unreasonable and contracts the principles of the law and economics; Bezeq must be allowed to participate in tenders in the Incentive Areas; amendment must be made regarding the Company’s rate of deployment and time constants for connection of customers.

 

Tariffs for service on the ultra-wide bandwidth fiber infrastructure

 

Tariffs for BSA service on Bezeq’s network - on July 24, 2019, Bezeq received hearing documents from the Ministry of Communications, regarding determining a maximum tariff for access to ultra-wide bandwidth managed on Bezeq’s fiber network. According to the Ministry, the hearing on this subject is part of the comprehensive fiber plan being formulated and includes a recommendation for setting a maximum tariff for BSA service over fiber. According to the hearing documents, the maximum tariff is temporary and will be applicable immediately upon provision of the service. This tariff will remain in force until a tariff is set by Bezeq in accordance with the regulatory guidelines to be adopted following publication of the fiber plan. It is clarified that the Company does not currently operate a fiber optic network that reaches the homes of private customers and it will only be possible to provide the BSA service once such a network has been established, if at all. Bezeq submitted its comments on the hearing on September 8, 2019, stating that corrections should be made to the factual assumptions used to calculate the service tariffs proposed by the Ministry, where the derived tariffs are much lower than they should be. Bezeq further stated that there is no logic or foundation to the determination that the installation prices are part of the service price and that a basic condition for providing the service is that infrastructure is already in place in the NEP section that the end customer or the service provider has the right to use, an issue which Bezeq claims is not regulated in this hearing. Bezeq also noted that instead of the temporary tariff, it should be determined that from the outset tariffs for wholesale service on optical fibers will be set by the Company based on generally accepted Economic Replicability Tests around the world.

 

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Tariffs for the service of service providers - on August 4, 2019, Bezeq received hearing documents from the Ministry of Communications concerning a standard tariff for fiber-based Internet services (FTTP). According to the hearing documents, this is another layer in the regulations that will apply to the provision of fiber-based Internet services, whereby the Ministry is considering to determine that the provision of FTTP services by service providers (who do not have a deployment obligation) cannot discriminate against subscribers based on the type of infrastructure they are using, including if the infrastructure belongs to the service provider or to another infrastructure owner or other party. The Company submitted its comments on the hearing on September 8, 2019 and stated that it is extremely important that effective enforcement mechanisms should be in place, including significant sanctions for breach of the regulations, for effectively maintaining the proposed model, and that discrimination should be prohibited, whether regarding different tariffs or in kind.

 

Shared use of fiber optic infrastructure in existing residential buildings

 

On January 5, 2020, Bezeq received the hearing documents on joint use of fiber optic infrastructure in existing residential buildings. The hearing documents set out the principles under consideration to regulate vertical deployment of the fiber optic infrastructure in existing residential buildings (and further indicate that regulation of such deployment in new residential building is also being reviewed). According to the hearing document, the Ministry believes that provisions should be established to compel joint deployment of fiber optics infrastructure to be deployed in existing residential buildings in a FTTH configuration with appropriate compensation for the operator that deploys the infrastructure. According to the proposed arrangement in the hearing documents, domestic operators that intend to deploy fiber optic infrastructure in an existing residential building where there is no fiber infrastructure will be required to offer all other domestic operators joint use of fiber infrastructure that it deploys in the building in return for participation in the costs of setting up the infrastructure or another commercial agreement between them. The domestic operator that deploys the fiber optic infrastructure will be required to do so in a way that allows joint use thereof by at least one domestic operator, in addition to the operator/operators that have agreed with the joint operator on joint use of the fiber infrastructure before its deployment. The joint operator will own the infrastructure and will be responsible for ongoing maintenance and repair of faults throughout the life of the infrastructure. The Hearing Documents also indicate that the fiber infrastructure to be deployed from the communication cabinet on the floor to the subscriber’s apartment is, apparently, part of the “internal wiring”, as defined in the Communications Law, and accordingly, the subscriber will be permitted to purchase the internal wiring from the license holder according to the provisions of that section, and similarly in respect of payment for this segment, and the proposed arrangement will not apply to existing residential building in which fiber optic infrastructure was deployed prior to start of the arrangement. On January 30, 2020, Bezeq filed its comments to the hearing that it agrees with the starting point regarding the great importance of regulating vertical deployment to promote deployment of a fiber network and provide ultra-wide bandwidth services in Israel, and there is therefore no rationale or justification to exempting fiber optic infrastructures deployed in building until now from the joint principle. Additionally, the existing deployment covers a substantial percentage of apartments in the relevant buildings for joint use.

 

Bezeq’s IT

 

Bezeq’s IT system supports four main areas: marketing and customer Management, engineering infrastructures of the telecommunications networks, company resources management, and company-wide systems. The IT system is large and complex and supports critical work processes and handles very large volumes of data. This system consists of a large number of systems and subsystems some of which are information systems which started being developed many years ago, while others are modern and were developed and applied recently. Most of the systems operate in open computer environments.

 

Cellular Telephony (Pelephone)

 

Pelephone has a resilient and advanced network system in Israel, allowing it to offer its services with nationwide coverage and consistent high quality. Pelephone’s cellular telephony license is valid until September 8, 2022. During the years ended December 31, 2019, 2018 and 2017, Pelephone had net capital expenditures of NIS 292 million (approximately $84 million), NIS 306 million and NIS 309 million, respectively, for its network infrastructure.

 

Pelephone currently operates communications networks using the 4G LTE, UMTS/HSPA and the 4G LTE technology is based on GSM standards. The advantages of this technology are greater data communication capacity and faster download rates than with the 3G technologies. All the terminal devices that support this technology also support the 3G technologies and the transition between the technologies is seamless.

 

UMTS/HSPA is a digital technology based on the GSM standard. This technology is globally widespread and enables subscriber identification and services to be provided through a SIM card, which can be moved from one handset to another. The advantage of this technology is that it supports download speeds of up to 42 Mbps and upload speeds of up to 5.7 Mbps. This communication network is Pelephone’s primary network.

 

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Pelephone’s networks cover substantially all of the population in Israel. Pelephone is continuing to expand and improve the coverage, capacity and quality of its 3.5G UMTS/HSPA+ network. Pelephone’s network architecture is based on two mobile telephone switching offices (MTSOs), each one with an IP based core network that can support all the traffic in the network.

 

At present, Pelephone’s network infrastructure is based at two switch farms that are connected to more than 2,200 sites. Pelephone’s network is interconnected with the networks of Bezeq and HOT in several locations across Israel. Pelephone’s network is also connected to all of the cellular networks in Israel, the eight Israeli ILD operators, the fixed-line telephone network of Paltel and the cellular network of Wataniya, and indirectly to the cellular network of Jawwal in the Palestinian Authority.

 

Pelephone’s transmission network is made up of leased lines (fiber optic) from Bezeq and Pelephone’s own microwave links. Pelephone’s UMTS base stations are connected using a hybrid connection (ATM for voice calls through Bezeq’s SDH network and IP for data calls through Bezeq’s metro Ethernet network).

 

Frequency usage rights

 

There is a shortage of frequencies for public use in Israel (among other things, because of the designation of numerous frequencies for security uses). As a result, the government limits the number of licenses granted for using frequencies. A tender is expected to be conducted in 2020 for allocation of additional frequencies to the cellular operators.

 

Under its mobile telephony license and the Wireless Telegraph Ordinance, Pelephone has rights of use of frequencies in the 850 MHz and 2100 MHz spectrums for operating its UMTS/HSPA network, and in the 1800 MHz spectrum for operating its LTE technology network. During the course of 2017, Pelephone returned two 1 mega bandwidth frequencies in the 850 Mhz spectrum to the national pool of frequencies and towards the end of April 2017 it received a temporary allocation of 5 mega bandwidth on the 1800 Mhz spectrum. This allocation has use restrictions and is for a limited period. On December 30, 2019, the Ministry of Communications reallocated the temporary allocation of this band until December 31, 2020 under terms and restrictions, to allow Pelephone to prepare for the expected changes involved in switching frequencies in the first giga spectrum.

 

Switching frequencies in the first giga spectrum

 

In July 2018, the Ministry of Communications informed Pelephone that it plans to adapt the cellular frequencies in Israel to European standards and to the region in which the State of Israel is located, so that Pelephone and another cellular operator will be required to switch the frequencies alloted to them in the 850 MHz spectrum to others in the first giga spectrum. On February 5, 2020 the Ministry of Communications informed Pelephone of its intention to execute the plan to switch the 850 MHz frequencies that Pelephone uses, in light of the electromagnetic interference caused to neighboring countries due to the failure to adjust the allocation of cellular frequencies in Israel to the frequency commissioning based on European standards and the region in which the State of Israel is located. According to the plan, Pelephone will receive 800 MHz frequencies in place of the 850 MHz frequencies, while in the first stage and to deal with the foregoing interferences, the number of 850 MHz frequencies used by Pelephone will be reduced to 5 MHz (instead of the current 10 MHz), as of May 31, 2020. Pelephone submitted, at the request of the Ministry of Communications, its position on a number of issues, and on March 17, 2020, the Ministry announced its final decision regarding implementation of the outline according to its notice dated February 5, 2020.

 

The foregoing decrease in the number of 850 Mhz frequencies may adversely affect the services provided by Pelephone. It is noted that the frequency serves the Company’s 3G services, however impairing these services may also affect the 4G services in certain areas due to possible network overload and roaming on 4G networks. It is emphasized that Pelephone is unable, at this stage, to estimate the scope of the damage. Pelephone is reviewing the matter and adopting measures to minimize the damage, if any.

 

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Switching frequencies is a complex engineering project that requires replacement and upgrading of the active/passive infrastructures at all of Pelephone’s radio sites and is liable to incur substantial costs that could vary depending on the process and timing to be determined by the Ministry of Communications.

 

Pelephone's foregoing estimates are forward-looking information, as defined in the Securities Law. These assessments may not materialize, may materialize partially or substantially differently from that expected, depending on, among other things, how the plan will be implemented in practice and on the condition of Pelephone's network.

 

Tender for mobile radio telephony services over advanced bandwidths (the “Tender”)

 

On July 15, 2019, the Ministry of Communications published a tender for the allocation of additional frequencies including frequencies for 5G. The highlights of the Tender are, inter alia, as follows:

 

Proposed frequencies in each frequency range are:

 

700 MHz - Bandwidth 30x2 MHz

 

2,600 MHz - Bandwidth 60x2 MHz

 

3,500-3,800 MHz - Bandwidth 300 MHz

 

Operators of existing networks may compete in the Tender.

 

In addition, new players may compete for 100 mega (out of 300) in the 3,500 MHz range, on condition they comply with qualifying conditions. Winners among the new players will be granted special licenses for providing specific 5G services; however, they will not be entitled to provide earlier generation cellular services and will be 5G operators only.

 

The Tender will allow bidders to compete simultaneously for all the frequency ranges and to offer combined bids.

 

The Tender includes, among other things, provisions concerning network coverage and quality requirements that will be formalized as part of an amendment to the mobile licenses of the existing operators.

 

The Tender includes options for receiving the following incentives:

 

Option of a discount on the frequency fees in the first four years, subject to the approval of the Ministry of Communications and Ministries of Finance.

 

Option of receiving a performance grant for the deployment of 5G sites pursuant to the conditions provided in the Tender (such as compliance with scope of deployment, time schedules, duration and timing of the deployment compared with others and additional conditions set out in the Tender).

 

Based on the terms of the Tender, the date of payment for the frequencies was set in February 2022. Bidding in the Tender is expected to take place during the first half of 2020. Pelephone intends submitting a bid in the Tender. At this stage, Pelephone is unable to estimate the effects and outcome of the Tender.

 

Trademarks

 

Pelephone has a number of registered trademarks. Its primary trademark is "Pelephone".

 

Software, computer systems and databases

 

Pelephone uses software and computer systems, some under purchased licenses and others which were developed by Pelephone's IT department. Many of these licenses are limited in time and are periodically renewed. The primary systems used by Pelephone are Oracle Applications’ ERP system and Amdocs’s customer management and billing system. Pelephone is also upgrading its CRM system (customer management) on the state-of-theart Salesforce cloud platform.

 

Infrastructure sharing agreements and providing right of use of networks

 

As previously indicated, infrastructure sharing allows consolidation of the cellular operators' sites and substantially reduces the operating and maintenance costs of the radio sites of each operator. Pelephone is not party to a network sharing agreement, therefore it does not benefit from the savings of a shared radio network, but on the other hand it has exclusive control of its cellular network, maintenance of its technological channel and the scope of its investments. Furthermore, the inventory of frequencies in Pelephone’s network is smaller than that of the competitors' networks.

 

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Construction and Operation of Sites: Permits, Licenses.

 

Once a new coverage area has been identified, Pelephone’s technical staff determines the optimal base station location and the required coverage characteristics. The area is then surveyed to identify network sites. In urban areas, typical sites are building rooftops. In rural areas, masts are usually constructed. Technical staffs also identify the best means of connecting the base station to the network. Once a preferred site has been identified and the exact equipment configuration for that site decided, Pelephone begins the process of obtaining necessary approvals.

 

The construction and changing of most of these network sites requires building permits from local or regional authorities, as well as a number of additional permits from governmental and regulatory authorities, such as construction and operating permits from the Ministry of Environmental Protection, permits from the Civil Aviation Authority, in certain cases, and permits from the Israeli Defense Forces.

 

Pelephone uses software and computer systems, some under purchased licenses and others which were developed by Pelephone’s IT department. Many of these licenses are limited in time and are periodically renewed. The primary systems used by Pelephone are: Oracle Application ERP system and Amdocs customer management and billing system.

 

ISP, ILD, Domestic Services and ICT (Bezeq International)

 

In December 2011, Bezeq International completed the deployment of a new high-speed submarine optical fiber communications cable system connecting Israel and Europe, which was launched in January 2012 and has increased bandwidth (capacity and speed) at affordable rates and positioned Bezeq as the sole Internet service provider in Israel to own and operate such infrastructure. This high-speed optical fiber system named JONAH, covers 2,300 kilometers across the Mediterranean, is fully redundant (i.e., utilizes two equipped fiber pairs) and leverages Alcatel-Lucent’s advanced submarine communications networking technology. The cable system can operate at 100 gigabits-per-second data transmissions to enable data capacity of over 7.0 Tbps between Tel Aviv and Bari, Italy. This ultimate data capacity could allow the simultaneous download of 100,000 MP3 files in one minute and the streaming of 15,000 HDTV channels. The system integrates Alcatel-Lucent OALC-5 cable, optimized with coherent submarine fiber (CSF), repeaters and the 1620 Light Manager submarine line terminal which is designed to accommodate 10G/40G/100G wavelengths in the same platform, enabling seamless capacity upgrades on a flexible grid for channel spacing without traffic interruption. This solution, which features advanced optical coherent technology, offers a pathway to multi-terabit capacity using 100G channels, far exceeding the maximum capacity achievable with 40G. This protects the investment from the risk of obsolescence or capacity limitations due to changes in transmission technology. Bezeq International’s submarine optical fiber communications cable is extended from Bari terrestrially through Interoute’s network to major European cities such as London, Frankfurt and Milan.

 

In parallel with the completion of the deployment of JONAH in the fourth quarter of 2011, Bezeq International invested in the purchase of a submarine fiber pair connecting Israel to Cyprus, known as the ARIEL cable, which extends to Marseilles, France via the ALEXANDROS submarine cable. In addition, Bezeq International holds multiple 10Gbps capacity indefeasible rights of use via the MedNautilus submarine cable system. Bezeq International’s capacity on the JONAH, ARIEL and MedNautilus submarine cables allows the delivery of faster connectivity to Israel and the Mediterranean region, fostering the delivery of innovative IP-based services for which capacity and speed are critical elements to meet end-users’ demand. Bezeq International is the only telecom operator in Israel that provides three different routes of multiple 10Gbps to Europe.

 

In July 2014, Bezeq International launched the “Bigger” service for the business sector in which it offers an innovative digital platform for managing the marketing and advertising of small and medium size businesses.

 

Bezeq International  As at and for the year ended December 31, 2019 
   (in millions, except percentages) 
Revenues (in NIS)   1,339 
ISP     
Estimated market share   30%
Churn rate   26.2 
ILD     
Estimated market share   27%

 

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PBX services

 

Bezeq International markets and maintains communication systems for the entire Israeli market, and PBX exchanges, telephony networks and IP communications, mainly for its business customers. As part of its service contracts, Bezeq International provides maintenance services for various PBX exchange manufacturers. These include services for gateways, PBX exchanges and network end points (NEP) for lines used as both internal and external lines.

 

Breakdown of Bezeq International’s revenue (in NIS millions):

 

   2017   2018   2019 
Internet services   670    659    632 
% of total revenues   43.56%   47.35%   47.23%
Voice services and communications (PBX, ICT, Data) for business   867    732    707 
% of total revenues  56.44%  52.65%  52.77%
Total revenues   1,537    1,391    1,339 

 

Bezeq International is not dependent on any single customer and it does not have one customer that provides 10% or more of its total revenues.

 

Breakdown of revenue from private and business customers (in NIS million):

 

   2017   2018   2019 
Revenue from private customers   488    468    441 
Revenue from business customers   1,049    923    898 
Total revenue   1,537    1,391    1,339 

 

Multi-Channel Pay Television (DBS)

 

DBS is the sole DTH provider in Israel. DBS operates a hybrid platform of satellite and IPTV OTT. DBS’s IP platform, based on progressive download technology, enables DBS to provide its VOD service, which was launched in March 2010 using OTT technology, with a versatile and user-friendly interface in HD quality incorporated into the electronic program guide.

 

DBS owns the satellite dishes and other endpoint devices that carry and receive the signals from such satellites to subscriber residences and set- top boxes. In addition, DBS leases some of the set-top boxes and cards that decode the coded signals received from the satellite to its subscribers, while other set-top boxes and cards are provided to subscribers for a deposit (an immaterial number of set-top boxes are sold to subscribers).

 

Following is a table containing a breakdown of DBS’ revenues (in NIS millions):

 

   2017   2018   2019 
Revenue from broadcasts and multi-channel television services to subscribers   1,629    1,431    1,316 
Percentage of revenue   99%*   97%*   98%*

 

*The revenues balance is mainly due to payments from channels for broadcasting by DBS.

 

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Competition in the Israeli Telecommunications Market

 

The market is characterized by competition among communications groups (Bezeq’s Group, Hot Group, Cellcom Group and Partner Group) operating in parallel in several segments (fixed-line and cellular telephony, fixed-line and cellular Internet services, multi-channel television and international calls). In addition to the communications groups, competitors such as Golan Telecom, MVNO cellular operators, international operators and ISPs, including service providers in the wholesale market, also operate in the market.

 

The competition between the communications groups is reflected by increased use of service bundles (including various combinations of several different communication services). Communications groups market joint service bundles consisting of different communication services of the companies in each group. As a rule, the marketing of the joint bundle enables the communications group to offer its customers a comprehensive solution that does away with the need to subscribe to several different providers, and to offer more attractive tariffs than purchasing each service separately (in some cases with "cross-subsidization" among the bundle components). These trends were reinforced with implementation of a wholesale BSA service, allowing operators that do not own infrastructure and those that are not part of a communications group to offer a full end-to-end service bundle (including infrastructure) to their customers.

 

Providing customers with comprehensive services that meet their different needs is becoming easier due to technological convergence, regulatory changes and regulation through a single general license granted to different communications operators, enabling communications services that required separate licenses in the past to be provided under the same license.

Stricter restrictions apply to Bezeq Group in marketing service bundles than to the other Groups, as set out below.

 

On January 29, 2020, Partner reported that it had received an offer from HOT and its controlling shareholder to acquire 100% of its issued share capital. Later, Partner announced that its Board of Directors resolved to review all of its business options. On March 31, 2020, HOT retracted its proposal. On February 16, 2020, Electra Consumer Products Ltd. (“Electra”) reported that it is negotiating with Cellcom for Cellcom to acquire Electra’s holdings in Golan Telecom. On the same day, Pelephone submitted a conditional bid to acquire full ownership and control of Golan Telecom. On February 18, 2020, Electra report that it has signed a binding memorandum of understanding with Cellcom, Golan Telecom and the Board of Directors and CEO of Golan Telecom for the sale of all Golan Telecom shares to Cellcom, subject to compliance with the preconditions that include mainly obtaining approval from Competition Commissioner and Ministry of Communications and the absence of any material adverse change.

 

Structural changes and mergers between competing communications groups and companies may have material implications on the structure and competition of the communications market and on the Group’s activity. At this time, Bezeq is unable to assess these effects, considering, inter alia, that the negotiations to obtain the approvals for the mergers between these competitors are in the initial stages.

 

Fixed-Line Telephony Services Market

 

Wholesale market

 

The wholesale market enables communications providers to compete with Bezeq while using its physical infrastructure, including infrastructure segments, and its services, at controlled prices that are not set by Bezeq. The wholesale market allows communications providers to offer their subscribers broadband services and end-to-end service packages, including access infrastructure.

 

Telephony

 

Bezeq estimates that at the end of 2019, its market share in the fixed-line telephony market was approximately 53% of the private sector and 71% of the business sector, an increase of 1% in the private market and maintaining its market share in the business market, compared with 2018.

 

Bezeq and HOT Telecom both own nationally-deployed fixed-line telephony infrastructures and are in fierce competition with each other, which is manifested by HOT combining Internet infrastructure, telephony and cable television, and possibly cellular services as well, to households. HOT also markets telephony services to business customers.

 

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Bezeq also faces competition from license-holders for domestic fixed-line communication services, including VoB, which provide the service on Bezeq’s broadband access service, including the wholesale BSA service.

 

Since July 2017, Bezeq has provided telephony services on its network in a resale format to unified license holders that are permitted to provide domestic carrier services. At present, the number of subscribers for this service is negligible.

 

Since August 2018, Bezeq offers a wholesale telephony service in a similar format to that of the service portfolio, at the tariffs of the Use Regulations

 

Competition in telephony from the cellular companies

 

Bezeq believes that the continued substitution of fixed lines by mobile lines is one of the causes of the reduction in the average traffic per line, and of the growing removal rate of telephone lines.

 

In 2019, the trends that began in 2012 continued, marking a leap in competition in the cellular communications market in Israel. The activity of the new infrastructure operators, Golan and HOT Mobile, and to a lesser extent the activity of virtual cellular operators, continued the trend of erosion of prices and maintained the high level of mobility of customers between the companies. 

 

Partner and Cellcom also provide domestic fixed-line services through companies they own, and they sell service bundles that combine fixed-line and cellular telephony and Internet services.

 

In the cellular telephony sector, the trend has been for cellular users to use applications that allow making calls and sending messages via the Internet.

 

VoC services

 

According to the Ministry of Communications policy, VoC service is a fixed service, the provision of which will be regulated by a general Domestic Carrier License or special license that currently provide VOB services, since VOB or VoC telephony services are telephony services which use IP technology over another entity’s data transmission network (irrespective of whether such network is mobile or fixed) and it is therefore a single fixed service.

 

As a result of the Ministry of Communications’ decision to provide an exemption to cellular operators from requiring a general license or a permit to set up and operate access points, the cellular operators can use Wi-Fi access points as part of their networks to provide services. This provides them with a transition to providing cellular telephony services over a Wi-Fi network and assists in diverting loads to this network from their cellular network.

 

Internet infrastructure segment

 

Bezeq estimates that at the end of 2019 its market share in the Internet infrastructure market was approximately 63% (compared with 69% at the end of 2018). The competition in this field is also active.

 

Competition from HOT Group – HOT's Internet infrastructure is deployed nationwide, through which a range of communication services and interactive applications can be provided. The HOT network is currently the main alternative to competition with Bezeq’s infrastructure in the private sector. HOT was compelled to provide wholesale services, including BSA services, and to the best of Bezeq's knowledge, it has started selling wholesale BSA services on its network since mid 2018. In 2019, HOT started to market a 500 Mbs high-speed Internet service.

 

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To the best of Bezeq’s knowledge, after several delays and relief granted to HOT over the years for implementation of the universal service obligation imposed on it, on July 28, 2019, the Minister of Communications adopted the recommendations of the advisory committee and approved the provision of services by HOT in areas without infrastructure based on a technology neutral format, i.e. without being under obligation to deploy physical infrastructure, but it will be permitted to make immediate use of any cellular network to provide its services at download speeds of 12/30 Mbps. The adopted recommendations also prescribed milestones for upgrading the network for the alternative cellular network, minimum service quality and reporting obligations.

 

Competition from ISPs and communications groups - operating the wholesale market enables ISPs and related companies (holders of a single license) to offer customers service bundles that also include Internet infrastructure based on Bezeq's infrastructures and services (in exchange for controlled tariffs to be paid by the communications providers to Bezeq). Moreover, if and insofar as the mechanism for preventing a 'margin squeeze' is implemented, similar to the one described in the Ministry of Communications hearing, Bezeq's ability to market promotional offers of its retail services will also suffer, in terms of both time to market (TTM) and prices at which the services are offered.

 

Competition from the Partner and Cellcom communications groups - based on an independent fiber network that enables providing an ultra-high speed Internet service - Partner and Cellcom provide an increasing volume of Internet services at ultra-wide bandwidth speeds on an independent fiber network, while also using Bezeq’s passive infrastructure in the wholesale market. According to media reports, these groups have reached such deployment (as opposed to connection) of 840,000 households (as at the end of the third quarter of 2019, including IBC in Cellcom data). Bezeq has not yet started providing ultra-wide bandwidth services, including due to the effect of regulation in this regard, which has not yet been established, on the economic feasibility in providing the service.

 

Competition from cellular operators – the cellular companies have deepened their Internet activities on the cellular range both in the private sector and in the business sector. Unlike the fixed-line communications segment (where the provision of access infrastructure services, mainly by HOT, is separate from provision of Internet access services, by the ISP), the cellular Internet service is provided as a single unit. Browsing services are provided both from the cellular handset and through a cellular modem that connects laptop and desktop computers in combination with Internet access services.

.

The fact that Bezeq’s is restricted in marketing DBS television services (including over the Internet) in view of the structural separation restriction imposed on it puts it at a material competitive disadvantage.

 

Transmission and data communications

 

In addition to Bezeq, other companies operating in this segment are Cellcom, Partner and various internet companies. To the best of Bezeq's knowledge, Cellcom has deployed and set up a transmission network which it uses for its own needs and to compete with Bezeq's services in the transmission and data communications market. Partner also operates in the transmission and data-communication service segment combined with telephony and Internet to business customers.

 

Cellcom and Partner use Bezeq’s physical infrastructures as part of the wholesale service to compete with Bezeq in this segment and/or for self-consumption. Also operating in the segment are the infrastructure owners IBC (at the reporting date, in a negligible volume) and HOT (deployed nationwide). These infrastructure owners are permitted to use Bezeq’s physical infrastructure.

 

Competition from IBC and other competing infrastructure

 

IBC, whose universal deployment obligation according to long-term milestones set out in its license (enabling provision of services to license holders) was reduced, is setting up fiber infrastructure to provide Internet over the grid (and has started operating commercially in a limited number of cities). According to media reports, as at the publication date of this report, the number of customers enlisted by IBC is negligible.

 

According to the Ministry of Communications’ decision dated August 8, 2018, IBC’s deployment obligation was reduced to gradually reach at least 40% of households in Israel within 10 years, and only after the Cherry Picking period (which will last three and a half years) will the new license holder be required to provide accessibility for at least one household in the periphery for every household provided with access in the center of the country.

 

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On January 13, 2020, a hearing document dealing with granting IBC the option of providing a reverse bundle service private end customers and other services to large business customers was published (“the Hearing Document”). According to the Hearing Document, the Ministry is considering to approve IBC’s requests as follows: (1) To permit it to operate on cooperation with access providers whereby IBC and the access provider sign an agreement together with the end customer for the access provider to provide Internet access services and IBC Internet infrastructure services and IBC to provide associated services (“Reverse Bundle Services”) to the end customer, and (2) to allow IBC to sell its services to companies in the business sector and to serve as an ISP providing services in the business market, under its special license. According to the Hearing Document, the applications will be approved with conditions (including approval to market Reverse Bundle Services for a limited period of five years or a volume of 400,000 end subscribers, whichever is earlier, equal marketing to access providers and end subscribers, and maintaining the structural separation obligation and prohibition on preference), in a manner that translates into increased competition in the fixed-line infrastructure market, while reducing the differences compared to the regulation applicable to its competitor IBC. The Hearing Document also indicates that since the government’s decision stipulates that IBC will engage with license holders only and not directly with private consumers (other than large business customers with the Minister of Communications’ approval), and if the hearing recommendations are formulated into a final decision, it will be necessary to amend government’s decision in this regard and appropriate amendments in the IBC license will also be required. On February 3, 2020, Bezeq submitted its comments focusing on (1) the material difference between the purpose behind establishment of the IBC venture and the current cumulative situation. Bezeq believes that in this situation, it will not be possible to continue to operate by provision of further relief to IBC. (2) the fact that the transaction for the sale of Cellcom’s fiber network to IBC and IBC allegedly being based on the same network as the main platform for it to comply with the terms of its license and to provide Internet services to end customers apparently change the rules of the game. Bezeq believes that since at present the details of the transaction and its implications have not been fully disclosed to it and do not mention the Hearing Document at all, a hearing cannot be held without receiving full and complete information in this regard. Accordingly, Bezeq applied to receive complete information and the Ministry’s comments to the new circumstances that have been created. It was further clarified that in this situation, and before receiving the required details and clarification, any move that offers changes and benefits to IBC is invalid, lacks transparency and is not adopted or implied on the basis of complete information.

 

To the best of the Company’s knowledge, the acquisition of control of IBC by Cellcom and another investor (Israel Infrastructures Fund) was concluded on July 31, 2019, under which Cellcom sold its fiber optic infrastructure to IBC.

 

Hearing on licensing for new operators to provide Internet access infrastructure services

 

In March 2020, the Ministry of Communications published a “hearing document for licensing for new operators seeking to provide a broadband Internet access infrastructure service” according to which, in view of the fact that the procedure to obtain a general license to provide Internet access infrastructure services is complicated, as part of the Ministry of Communication’s policy to encourage the introduction of new communication technologies, and to promote competition and entry of new competitors in the communications market, and against the backdrop of actions taken by the Ministry to encourage deployment of broadband Internet infrastructure, the Ministry believes that it is fitting to lower the entry barriers and the official threshold requirements for new operators wishing to provide the service. Accordingly, the hearing document proposes a regulation hierarchy, so that anyone wishing to provide the service will be able to do so in the first stage in the format of a special license and will not require a general license. Bezeq is studying the hearing documents, but at the same time, it believes that under specific circumstances, the principles of the hearing may lead to possible impairment of Bezeq’s business in scopes that it is unable to estimate at this stage. On March 12, 2020, Bezeq sent a letter to the Ministry of Communications clarifying that it is not a standard hearing, but a fundamental and material change of policy in the communications sector, and that from past experience, such changes are made by means of a comprehensive and exhaustive analysis, and usually after the work of a public committee. Bezeq requested receiving a draft of the special license, which, according to the hearing documents, the Ministry was supposed to publish, but failed to do so. Bezeq requested adjusting the original schedule for a response and to schedule it for at least 60 days after the date of publication of the draft of the special license.

 

There are also currently a number of infrastructures in Israel with the potential to serve as communications infrastructures, which are based on optical fibers and mostly owned by government companies and entities, such as Israel Railways, Mekorot Israel National Water Co., Petroleum & Energy Infrastructures Ltd., and the Cross Israel Highway Ltd. Some municipalities are also trying to create an alternative to installation of pipes or fibers by deploying their own infrastructures.

 

Wholesale market

 

At the beginning of 2015, Bezeq started providing a wholesale BSA service to service providers, whereas as at the end of 2019, the number of wholesale internet lines on Bezeq’s network was 592,000, which constitutes 38% of all Bezeq subscribers. In this regard, it is noted that these lines also include lines that were not on Bezeq’s network in the beginning (new or from a competitor's network). There are only few subscribers to the wholesale telephony services.

 

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Fixed-line telephony

 

In recent years this segment has been characterized by a decline in demand, which is reflected in the decrease in the rate of ownership of fixed telephone lines and in a gradual erosion of the number of calls originating in fixed-line networks. Bezeq believes that this trend is due mainly to the rise in the scope of use of cellular phones in view of the comprehensive call-minute deals the cellular companies market extensively in recent years and the decrease in prices in the segment (Bezeq estimates that 85% of all calls originate in the cellular network), and from an increase in VoIP calls (see Section 2.1.4). In 2019, the number of Company lines declined by 6%. Likewise, the number of call minutes (incoming and outgoing) on Bezeq’s fixed telephone lines declined by 11% compared with 2018. The average monthly revenue per phone line decreased by 5%.

 

Graph - Rate of households without a fixed-line home telephone line

 

 

Internet Access-Infrastructure and ISP Services

 

In the Internet segment, a growth has been recorded in recent years in terms of number of subscribers. Moreover, the Internet segment is characterized by a rise in broadband speeds and the adoption of advanced services and value-added applications. Bezeq believes that in 2019, there was a 3% increase in the number of fixed-line Internet subscribers in Israel compared to 2018. In 2019, the number of Internet subscribers (retail and wholesale) of Bezeq decreased by 5% compared to 2018. In 2019, there was an increase in the number of fixed-line Internet subscribers using the fiber optic infrastructure of the Subsidiaries. These companies do not publish the number of subscribers connected and Bezeq does not have information regarding this figure. In addition, in 2019, the number of wholesale market subscribers on the cable infrastructure of HOT increased. HOT does not publish the number of subscribers and Bezeq does not have information regarding this number. Average monthly revenue per internet subscriber (retail) rose by 4% compared with 2018.

 

Graph - Breakdown of Internet lines on Bezeq infrastructure (quarterly, in thousands):

 

 

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Bezeq deals with competition in domestic fixed-line telecommunication services in several ways:

 

Bezeq launches new communications services, value added applications (such as smart home, smart facilities, integration services, etc.), bundles of products and services, and joint bundles to broaden the scope of use of subscriber lines, respond to customer needs and strengthen its technological innovation image. Bezeq invests in enhancement and modernization of its infrastructure so as to enable it to provide advanced services and products for its subscribers.

 

Bezeq is working on the penetration of a high-speed internet infrastructure service and on increasing the number of its customers for the service. NGN enables customer upgrades to higher speeds, and the creation of added value for the customer by means of broader consumption of content, leisure and entertainment applications.

 

Bezeq works constantly to improve the quality of its services and to maintain its customers, as well as to simplify and automate processes, and to adapt its operations to the structure of competition in its segment.

 

Bezeq has simplified its tariff structure and offers its customers alternative payment packages, tracks and campaigns.

 

Bezeq offers consumption adapted packages and tracks to promote subscription to the telephony service.

 

Bezeq is acting to reduce its operating expenses and is focusing on investing in growth activities as a means of decreasing maintenance expenses. Nevertheless, Bezeq’s ability to adjust its expenses in the short and medium term is limited due to the structure of its costs, which are mainly rigid in the short and medium term (in particular depreciation expenses and expenses related to salaries and salary incidentals, as well as operating costs such as infrastructure maintenance and building leasing and maintenance)..

 

In April 2018, Bezeq launched its new router - Be. This is an advanced router with an innovative design and cutting-edge capabilities including, among others, smart Wi-Fi which provides quality, continuous browsing on home Internet, cyber protection and preparation for a smart home. The router and services are managed by a dedicated application. At the end of 2019, the number of Bezeq customers using the Be router was 321,000 (approximately 33% of the Bezeq’s retail Internet customers).

 

The transmission and data communications segment

 

The transmission and data communications segment for business customers and communications providers is characterized by a rapid increase in the customers’ broadband consumption, but in general by lower prices per given volume of traffic. This stems both from development of the technology allowing greater bandwidth at lower prices than in the past, and from competition in this area. There is also a decline in use of Bezeq’s transmission and data communication services by communications providers, in part as a result of the trend of entry of communications groups. This trend is expected to increase due to the use of physical infrastructure (as part of the wholesale services provided by Bezeq) also for cellular requirements. 

 

ISP Market

 

The market is saturated with competitors, the major competitors are Bezeq International, Cellcom, Partner and Hot Net. Bezeq International estimates that its share of the ISP market at September 30, 2019 was 30%. Competition in 2019 was reflected by price erosion. Developments in this market in 2019 include:

 

  Continuation of the service bundle sales trend, particularly in view of the wholesale sales model operations (provider + infrastructure) in 2019.

 

 

Increasing the competitors' foothold in the fiber optic infrastructure sector and their ability to provide high-speed internet services.

 

Increasing competition among ISPs of reverse bundle packages.

 

  Increase in Triple bundle sales trend that include, IP and infrastructure services, in addition to television services, in an inseparable service package.

 

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Cellular Telephony Services Market

 

The cellular communications market in Israel is extremely competitive, which is reflected in the high subscriber churn between operators, substantial erosion of rates and profit margins.

 

Pelephone's strategic goals are to continue the growth of its customer base while promoting and marketing integrated communication packages and synergies with the Group's companies, further development of network innovations and technologies, and providing excellent service. Further streamlining and improvement of the cost structure.

 

In 2020, a number of factors are expected to affect Pelephone’s activities, the main ones being: 1) Continuing competition and increasing value to the customer: Pelephone expects that in 2020, the subscriber churn between the companies will continue, and that the competition will focus on increasing value and browsing volume in the packages offered to the customer. 2) Cellular network and product innovations: In 2020, Pelephone expects to continue promoting a few services and products that will allow it to increase its revenues and image advantage against the competitors, such as: Cyber, IOT, Big Data, and PTT services and to continue focusing on large-scale launches of devices. 3) Increase in Pelephone subscribers' consumption of services: Pelephone expects that as a result of the increase in browsing volume offered in its packages, the upward trend of online data communications consumption will continue. 4) Digital transformation: In 2020, Pelephone is expected to continue to develop and expand its online service and sales channels. 5) Frequencies Tender: A tender will be held in 2020 to allocate additional frequency ranges to the cellular operators and Pelephone is expected to deploy network equipment that support the allocated frequencies, if it wins an allocation under the tender. 6) Synergies with the Bezeq Group’s subsidiaries: In 2019, Pelephone began to implement synergetic processes with the Bezeq Group's subsidiaries. These processes are expected to continue in 2020.

 

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Cellular network and product innovations

 

Infrastructure sharing

 

Infrastructure sharing allows consolidation of the cellular operators’ sites and substantially reduces the operating and maintenance costs of the radio sites of each operator. Infrastructure sharing in the market is as follows:

 

Partner and HOT Mobile operate under radio segment infrastructure sharing through a joint company that received a special ten-year license for providing radio cellular infrastructure services to cellular operators.

 

Cellcom and Golan Telecom engaged in a network sharing agreement.

 

Cellcom and XFone engaged in a hosting and network sharing agreement.

  

Virtual operators - MVNO

 

While several MVNO licenses have been granted to virtual operators, only a few MVNO licenses are active.

 

The cellular telecommunications market is dynamic with frequent technological developments in all areas of operation (handsets, telecommunications network technologies and value-added services). These developments impact the segment of operation on a number of levels.

 

Establishment of cellular networks using advanced technologies

 

Technology developments and the desire to widen the range and quality of services offered to the customer, require the cellular operators to periodically upgrade their network technologies. As of 2019, Pelephone’s LTE network is deployed in most parts of the country, and Pelephone continues to deploy its network in accordance with a regulated plan. Expanding capacities and speeds with LTE technologies and development of the next cellular generations depends on the allocation of frequencies.

 

Pelephone operates three technologies: MIMO4x4, Beam Forming and Quam 256, enabling improved performance and increased browsing speed on fourth generation websites. In 2017, Pelephone began integrating Carrier Aggregation technology (frequency aggregation - that enables optimal utilization of the frequency spectrum and increases browsing speed) at some of its sites.

 

In 2019, Pelephone launched its IMS based services: Voice over WiFi as an improved solution for indoor coverage, as well as Voice over LTE that enables vacating third-generation frequency resources for future LTE use. In addition, it enables Voice over LTE sequence service with Voice over WiFi.

 

Pelephone constantly reviews new technologies that come onto the market and the need to upgrade its existing network technologies, depending on the competitiveness of the market and the economic viability of the investment in such technologies.

 

Smartphones

 

The introduction of smartphones continues to increase the consumption of data transmission services, coinciding with the increase in supply of apps and video services. In addition, there has been an increase in the rate of smartphones that support LTE technology, a technology that allows better browsing. This increase has led to a further increase in consumption of 4G Data.

 

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Below is a breakdown of the number of subscribers of Pelephone and of its competitors in 2019 and 2018 (in thousands of subscribers, approximate).

 

      Pelephone   Cellcom   Partner   HOT
Mobile(2)
   Golan Telecom   MVNO and other operators(1)   Total subscribers in market 
As of December 31, 2018  No. of subscribers   2,205    2,851    2,646    1,579    906    476    10,663 
   Market share   20.7%   26.7%   24.8%   14.8%   8.5%   4.5%     
As of September 30, 2019  No. of subscribers   2,310    2,767    2,651    1,629    923    639    10,919 
   Market share   21.2%   25.3%   24.3%   14.9%   8.5%   5.8%     

 

(1)Most of the MVNOs and other operators (including XFone) are private companies which do not publish figures regarding the number of their subscribers and these figures are based on estimates.

 

(2)Hot Mobile’s subscriber data for the third quarter of 2019 are based on an estimate.

 

(3)The number of subscribers as of September 30, 2019 and December 31, 2018, are based on public reports issued by Cellcom, Partner, HOT Mobile and Golan Telecom (in Electra’s financial reports).

 

In recent years, the Ministry of Communications has adopted several regulatory measures aimed at increasing competition in the cellular communications market. The proliferation of cellular operators in the market led to extreme competition, which continued, and even intensified due to the entry of another operator (XFone) in 2018. This ongoing trend led to high subscriber churn between operators and to a decline in prices of cellular service packages, resulting in significant erosion of rates and profit margins, on the private customer market as well as the business customer market.

 

To compensate for the erosion of package prices, Pelephone adopted a growth strategy along with streamlining measures and adjusted cost structure.

 

ILD Market

 

As of the end of 2019, there are more than ten participants in the market (including Bezeq International, Cellcom, Partner, Golan Telecom and HOT Mobile). Bezeq International estimates that its market share for outgoing international calls at December 31, 2019 is 27%, an increase compared with its market share of 23.3% at December 31, 2018.

 

The international telephony market in Israel has in recent years seen a decline in call volume, (incoming and outgoing), mainly due to the service bundles offered by the cellular companies that include international calls as well as the multiple free applications that enable calls via the web. In 2019, there was a significant erosion in the international call market.

 

In 2019 the internet access market recorded negative subscriber recruitment rates, primarily due to the entry of online television operators (OTT) that market “triple” packages containing internet provider and infrastructure services, in addition to television services. Furthermore, many subscribers switched from retail market packages to wholesale market packages. At the same time, as a result of the increase in traffic and bandwidth demand due to a change in the subscriber usage mix (primarily real time viewing and listening), Bezeq International is required to increase its operating capacity and international capacity for which it purchases usage rights.

 

Communication solutions for the business sector

 

In the ICT sector Bezeq International competes with competitors such as Binat, Teldor, IBM and others. In 2019, Bezeq International continued to establish its position in the ICT market and gained recognition and endorsement from leading global suppliers in the market.

 

NEP services - the traditional telephone exchange sector includes a large number of competitors and fierce competition which has given rise to erosion of service prices.

 

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Bezeq International promotes its business with emphasis on differentiating it from its competitors as the owner of its own international infrastructure (Jonah cable) for its customers’ traffic providing high quality browsing performance, as well as its leading customer service. The fact that, unlike some of its competitors, Bezeq International is unable to offer its services as part of a non-detachable communications services bundle, adversely affects its operations.

 

Pay Television Services Market

 

Currently, there are several competing groups in the market. DBS’s main competitors are HOT, which was declared a monopoly in the multi-channel television broadcasting sector and holds the largest share of the market, Cellcom, which holds the largest share of the market among the players that do not have broadcasting licenses, as well as Partner and Netflix. Over the past year DBS’s share of this market has decreased, mainly due to the increased competition.

 

The following is a breakdown of DBS’s subscriber numbers and market shares, to the best of its knowledge, as at December 31, 2017, 2018 and 2019:

 

2017 2018   2019 
Subscribers
(in thousands)
  Market share   Subscribers
(in thousands)
   Market share   Subscribers
(in thousands)
   Market share 
587   37%   574    34%   555    32%

 

There are several operators in the subscriber television broadcasting sector operating in a number of key categories:

 

Broadcasting licensees under the Communications Law operating in the multi-channel television sector - DBS and HOT, that provides cable television services, and has a pronounced monopoly under the Antitrust Law in the multi-channel television broadcasting sector. DBS and HOT provide linear channel and VOD services.

 

Online OTT multichannel television providers - Cellcom (has been operating for a few years) and others that started operating in 2018 include, Pelephone, Triple C Cloud Computing Ltd., STINGTV (offered by DBS), Next (offered by HOT, in collaboration, via Rami Levy Marketing. These services combine VOD content and linear channel viewing (including the DTT content that is transmitted via the system or online) and can be viewed via a special decoder or via an apps downloaded on a range of terminal devices.

 

Online television content streaming providers – The online television content streaming providers are mainly international providers such as Netflix, Apple TV services (that charges per viewing) and Amazon Prime services, which provide VOD content viewing options. Currently, some of this content is not translated into Hebrew.

 

Competition in the market focuses on broadcasting content, price of services, quality of services, as well as offering of additional services, such as HD and 4K broadcasts, VOD services and state-of-the-art terminal equipment and advanced user interfaces. Competition also involves offering additional communication services together with video content.

 

DTT network

 

There is a digital terrestrial television broadcasting system (DTT), known as Idan+, through which certain channels are broadcast to the public free of charge.

 

At present the channels broadcasts via the Broadcasting Corporation (CAN 11, CAN Education and Channel 33), the commercial channels (Keshet and Reshet), Channel 20, Music Channel (Channel 24), Channel 23 and the Knesset Channel (Channel 99). A DTT operator is entitled to broadcast additional channels, including radio channels, thematic channels (for which most broadcasts are devoted to a topic set out in the Digital Television Broadcasting Law, 2012 (the “Broadcasting Law”) and dedicated mini-channels that comply with conditions relating to special purpose set out in their license or are devoted primarily to one topic.

 

There are broadcasting fees for these channels, however the Ministers of Communications and Finance may decide that the government will subsidize broadcasting fees applicable for subject-based channels and niche channels.

 

Under the Broadcast Distribution Law, a broadcaster whose broadcasts are part of the “open broadcasts” (ie, television channels transmitted via the digital stations), will provide each content provider consent to the transmit its broadcasts via the Internet free of charge, however, without derogating copyrights and production rights pursuant to the law and subject to certain conditions set out in the law, including obtaining a license from the copyright holders and performers (including through the broadcasting entity). With regard to the commercial channels, the applicability of the foregoing arrangement was deferred for five years (until January 2022), during which special arrangements will apply, including granting a license to any registered content provider that applies for one, at the best price and under the best terms granted by the commercial channel to other content providers under another broadcasting license that is valid when the license is granted, and all as set out in the interim provisions of the Law.

 

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HOT, Partner and Cellcom offer their services together with the other media services they provide, including as part of non-detachable bundles (such as the Triple bundles providing landline and mobile telephony and TV services).

 

Competition in the sector increased significantly in 2019, mainly due to the entry and establishment of local and international online television service providers, which operate at relatively low prices. These providers that operate via the internet, without requiring designated infrastructures, and also without regulatory supervision, have an adverse impact on DBS’s competitive position. DBS believes that this intensification of the competition could have a significant adverse effect on its operations and results. In 2019, Cellcom and Partner, as well as Netflix’s operations in Israel, became further established in the television sector.

 

Competition in the television sector is fierce with a relatively large number of players, some of which operate at very low-price levels, increasing the competition in the sector. Increasing the number of subscribers in the current state of competition is mainly possible by recruiting new subscribers from the competitors, requiring substantial resources to be invested in retention of existing subscribers and recruitment of new subscribers.

 

The total market share of the broadcasting licensees, DBS and HOT, is being eroded and DBS’s share is estimated to be 49% of households in Israel. Cellcom’s market penetration rate is estimated to be 9.5% and Partner’s market penetration rate is estimated to be 7% of the total households in Israel. DBS does not have information regarding the number of subscribers to the international companies operating in the market or the number of DTT viewers, and DBS believes that most of them are, in addition, also subscribers of the local TV providers operating in the market. DBS estimates that the increasing of the total market share of these players has been slowed down due to the fact that a large part of the remaining households are not potential audiences

 

Regulatory

 

The Israeli Communications Law and the Communications Order provide that acquiring Bezeq requires a control permit from the Ministers. As part of our acquisition of Bezeq, we, Searchlight, Fuhrer, SP2, SP1, applied for authorization for a control permit of Bezeq, pursuant to the Israeli Communications Law and Communications Order. On November 11, 2019, the Control Permit was granted. According to the Communications Order, we are not allowed to transfer our control permit or any Means of Control which will result in a decrease of our minimum holding requirement in Bezeq without the prior consent of the Ministers. The foregoing includes a transfer of the Bezeq interest in one transaction or a series of transactions, by one party or together with the other parties to the Control Permit. However, the parties may transfer the Means of Control of Bezeq among themselves, subject to compliance with certain conditions set forth in the Control Permit.

 

According to the Control Permit, the parties (through SP2) must hold not less than 25% (or a lower rate at the Ministers’ approval, in accordance with section 3(A2) of the Communications Order) of any type of Means of Control (as described below) of Bezeq. We retained a 26.34% ownership interest in Bezeq following the closing of the transaction and we still retain this ownership interest level

 

Our SP2 subsidiary owns most of our Bezeq shares. In accordance with the Control Permit, SP2 is required to notify the Ministers of any changes in the composition of its board of directors. We, Searchlight and Fuhrer are also required to notify the Ministers of any “Unapproved Holdings” in Bezeq (as described below) immediately upon becoming aware of such event. We, Searchlight and Fuhrer are also required to notify the Ministers in the event a shareholder becomes a “principal shareholder” (namely, holds, directly or indirectly, over 5% of our issued and outstanding share capital) and regarding any 1% or more change in the holdings of a “principal shareholder” within 48 hours of becoming aware of such change. Our Articles of Association require our shareholders to notify us within a specified period of time after crossing any such threshold.

 

Under the Communications Order, no person may hold, directly or indirectly, “significant influence” over Bezeq or 5% or more of any particular class of Means of Control in Bezeq. The Communications Order defines “holding” as the holding, acquisition, transfer and encumbrance of the Means of Control in Bezeq, defines “significant influence” as the ability to substantially influence the activity of a company, either alone or together with others or using others, directly or indirectly, which arises by virtue of the possession of Means of Control therein or in another corporation, including where such ability is pursuant to the corporation’s articles of association, or pursuant to an agreement (whether written or oral) with the controlling shareholder. “Means of Control” is defined under the Communications Order as the right to vote at a general meeting of Bezeq, to appoint a director or general manager of Bezeq, or to participate in the profits of Bezeq or a share of the remaining assets of Bezeq after payment of its debts upon liquidation. Additionally, no person, together with any other person, appoint, elect or dismiss the general manager of Bezeq or cause the election, appointment or dismissal of any director of Bezeq, without the prior written consent of the Ministers. A person shall be deemed to have “significant influence” if (i) he has the right to appoint a director or the chief executive officer; or (ii) if that person holds 25% or more of the Means of Control of a corporation. Additionally, no person, together with any other person, may appoint, elect or dismiss the general manager of Bezeq or cause the election, appointment or dismissal of any director of Bezeq, without the prior written consent of the Ministers. We received explicit governmental approval to keep the Control Permit even at a level of a 25% ownership interest.

 

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Subject to certain exceptions, the prior written approval of the Ministers is also required to increase the holdings or other rights in excess of those determined in the initial approval, including by means of an agreement (including a voting agreement). Furthermore, under the Communications Order, no person may transfer control, “significant influence” or Means of Control in Bezeq to another, if, as a result of the transfer, the holdings of the transferee would require approval pursuant to the Israeli Communications Law or Communications Order and the transferee is not in possession of the requisite approval. Any such unauthorized holding or acquisition is referred to as “Unapproved Holdings.”

 

The Communications Order provides that in the event that a person holds “significant influence” or Means of Control in Bezeq, to a degree that requires the Ministers’ prior approval, without receiving prior approval for such Unapproved Holdings (including as a result of the realization of a pledge over Means of Control), such person must report such Unapproved Holdings in writing to Bezeq and must submit an application to the Ministers for approval of such Unapproved Holdings all within 48 hours. Such application is required to be in the form of the questionnaire annexed to the Communications Order and must be accompanied by a power of attorney authorizing Bezeq’s board of directors to sell the applicant’s Exceptional Holdings (unless the Ministers have granted an exemption from providing a power of attorney). Following the submission of the application and all relevant documents, the Ministers have 60 days to inform the applicant and Bezeq as to their decision.

 

In addition to the possibility of obtaining a retroactive approval as described above, the Communications Order establishes the following procedure for the sale of Unapproved Holdings: (i) with respect to a person who has not applied for approval by the Ministers, as described above, such person must sell his Unapproved Holdings within seven days; (ii) with respect to a person whose permit has been revoked or has expired, and who has not submitted a new application, such person must sell his Unapproved Holdings within 14 days after the date of the revocation or expiration, as the case may be; and (iii) with respect to a person who has applied for approval by the Ministers, including a party whose permit has been revoked or has expired and who has submitted a new application, and whose application has been rejected, such person must sell his Unapproved Holdings within 60 days after the date on which the Ministers informed such person that his application has been rejected. If a person does not sell his Unapproved Holdings as detailed in sub-sections (i)-(iii) and Bezeq holds a power of attorney from such person as required by the Communications Order, Bezeq will sell the Unapproved Holdings within 60 days, on a stock exchange, in Israel or abroad, or through an off-exchange transaction. The proceeds of the sale will be delivered to the holder, less expenses involved in the sale.

 

In accordance with the Israeli Communications Law and Communications Order, and as set forth in our Articles of Association, a holder of Unapproved Holdings (including a holder that submitted an application for approval which was submitted to the Ministers, whether such application was rejected or has not yet been approved) will not be entitled to any rights in respect of its holdings in Bezeq, including with regard to the receipt of dividends, unless and to the extent permitted under the Communications Order. Accordingly, a holder of Unapproved Holdings will not have any voting rights at a general meeting of shareholders. Each shareholder participating in a general meeting of shareholders is required to certify to us prior to the vote or, if the shareholder is voting by a proxy or any similar instrument, on such proxy card or similar instrument, as to whether or not his holdings in our company or his vote require the approval of the Ministers pursuant to the Israeli Communications Law and Communications Order. In addition, no director may be appointed, elected or removed from office by virtue of the vote of a holder of Unapproved Holdings. If a director is appointed, elected or removed from office by virtue of the vote of a holder of Unapproved Holdings, such appointment, election or removal from office shall have no effect.

 

The holding of control, “significant influence” or 5% or more of any particular class of Means of Control without the required approval or in violation of the terms of the approval constitutes a criminal offense and could subject the holder to criminal penalties as follows: (i) a person transferring control of Bezeq or acquiring and holding control over Bezeq without the required approval is subject to three years imprisonment or a fine currently in the amount of NIS 2.26 million as well as an additional fine for each day the offense continues (currently in the amount of NIS 14,000 per day); (ii) a person holding “significant influence” or more than 5% of the Means of Control of Bezeq without the required approval is subject to six months imprisonment or a fine currently in the amount of NIS 226,000 as well as an additional fine for each day the offense continues (currently in the amount of NIS 14,000 per day); and (iii) a person transferring “significant influence” or Means of Control of Bezeq, knowing that as a result of the transfer, the holdings of the transferee require approval pursuant to the Israeli Communications Law or the Communications Order, without being first shown the appropriate approval by the transferee, shall be subject to a fine currently in the amount of NIS 226,000.

 

SP2 must at all times be held by an “Israeli Party,” as defined in the Communications Order, to the following extent:

 

  At least 19% of each of the Means of Control of SP2 must be held by an Israeli Party at all times; or

 

  At least 19% of the rights to vote at the general meeting of shareholders of SP2 and the rights to appoint directors of SP2 must be held by an Israeli Party at all times; and

  

  The right to appoint at least one-fifth of the directors of Bezeq and Bezeq’s subsidiaries and not less than one director of each such company will be held by an Israeli Party at all times, provided that the percentage of the Israeli Party’s direct or indirect shareholdings in Bezeq is not less than 3% of any of the Means of Control of Bezeq. Indirect shareholdings will be calculated as the product of the Israeli Party’s lowest rate of holdings in each of the Means of Control in SP2, multiplied by the percentage of the holdings of the parties to the Control Permit in each of the Means of Control in Bezeq.

 

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Notably, on March 8, 2020, the Company received hearing documents published by the Ministry of Communications on “change in the minimum holding requirement for means of control of a general license by an Israeli entity”. In the hearing, it was recommended to amend the Communications Order and other legislative provisions setting out Israeli requirements regarding additional communication license holders, to grant the option of exchanging the Israeli requirement under the law with a provision according to Section 13 of the Communications Law and the procedure set out in it, whereby alternative provisions to the Israeli requirements will apply to the relevant license holder.

 

Since Fuhrer was deemed the Israeli party, it was resolved in the Control Permit that Fuhrer shall refrain from transferring means of control of Bezeq without the prior written approval from the Ministers, if such transfer decreases its holdings of means of control of any kind in Bezeq to a lower rate than required in the Communications Order.

 

The new Control Permit following the Searchlight-Fuhrer transaction determined that provided Searchlight and Fuhrer are joint controlling shareholders of our company and that Searchlight and Fuhrer hold a stake in our company of at least 35% of each type of means of control of our company, they may transfer some of the means of control in our company, on condition that their holdings do not exceed 50% and that:

 

Other than Searchlight and Fuhrer, there is no other controlling shareholder of B Communications or entity that holds 17% and more in our company.

 

Searchlight’s holding in our issued capital exceeds that of Fuhrer.

 

Transfer of means of control will only be implemented according to one or more of the methods included in section 3(A3) of the Communications Order.

 

The parties to the Control Permit may not be controlled by any foreign country, foreign government company or a foreign company controlled by a foreign government company. The Control Permit will terminate if the foregoing condition ceases to exist with respect to any such party without the approval of the Ministers. The Ministers may authorize a foreign government company to hold an interest in any such party, provided that the foreign government company’s aggregate direct or indirect holdings in Bezeq do not exceed 5% of any type of Means of Control of Bezeq and that it does not control such party.

 

According to the Communications Order a “principal shareholder” or a person with “significant influence” in Bezeq shall not be; (i) a hostile state, a citizen or resident of a hostile state, a corporation registered or incorporated in a hostile state or a corporation controlled by a citizen or resident of a hostile state; or (ii) a government corporation, unless approved by the Ministers.

 

In the event the Ministers find that the information they were provided in the application for the control permit is incorrect, that there has been a material change in the details provided by the parties to the Control Permit which justifies its cancellation, or such parties failed to submit a required report, and the Ministers determine that there is probable cause to believe that the provision of the services that Bezeq is required to provide pursuant to its general license (including basic telephone, infrastructure, transmission and data transmission services and ancillary services) or the grounds for determining that any such service has been harmed, the Ministers may take action to cancel the Control Permit. Upon its cancellation, all the shareholdings purchased under the Control Permit will be deemed Unapproved Holdings as described above.

 

If we or any other party subject to the Control Permit fails to comply with the terms of the Control Permit or with other regulatory provisions relating to the control of Bezeq, such permit could be revoked and our rights with respect to our Bezeq interest would be adversely affected.

 

Any event in which a receiver is appointed with respect to our holdings in SP2 or SP2’s holdings in Bezeq will constitute grounds for the cancellation of the Control Permit. In the event that the Control Permit is cancelled and an application to reissue a Control Permit is denied, our holdings in Bezeq must be liquidated within 15 to 60 days (depending on the cause for such cancellation) pursuant to the Communications Order.

 

The provisions of the Control Permit are subject to the terms of the Communications Order and Israeli Communications Law, as they may be amended from time to time.

 

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The new control permit required us to adopt further amendments to our Articles of Association in order to remain compliant with the requirements of our new control permit. Our Articles of Association were also amended as follows:

 

Article 1 added a definition for any control permit issued by the Israeli Minister of Communications to a shareholder of ours in connection with the control over our company.

 

Article 44 was amended to add a new paragraph (e) that provides that no Joint Appointment (as defined in the Communications Order) may be made without the prior written approval of the Ministers (i.e.., the Israeli Prime Minister and Israeli Minister of Communications), and any such Joint Appointment that is not approved by the Ministers will be null and void.

 

Article 44, paragraph (g), which describes our shareholders’ obligation to comply with Israeli regulatory requirements that are applicable to us, was amended to include a reference to the control permit (to the extent relevant) issued by the Communications Minister to a shareholder of ours.

 

As mentioned above, the Control Permit required the adoption of amendments to the AOAs of Bezeq and its subsidiaries prior to January 12, 2020 in order to remain compliant with the requirements of our new control permit. Bezeq and its subsidiaries’ AoAs were not amended on time as required and therefore we are in breach of the Control Permit, which the MoC is aware of. The amendment of Bezeq’s AoA is on the agenda of the Upcoming AGM. Bezeq’s Board of Directors agreed that the amendments of the AoAs of its subsidiaries will be addressed immediately after the Upcoming AGM.

 

The Concentration Law

 

In December 2013, the Knesset passed the Concentration Law, which regulates the following principal matters: (i) limitations on the control over companies with publicly held debt or equity securities through a pyramidal ownership structure by imposing a limitation on the number of public companies (tiers) in such pyramidal structure; (ii) authorizes financial regulators to set forth limitations on the amount of credit that financial institutions are permitted to provide to a corporation or a group of companies under the control of the same controlling shareholder; and (iii) limitations on the holdings by a significant non-finance company in a significant finance company or the holdings of both kinds of companies under common control; and (iv) requires governmental authorities responsible for the award of rights in public assets (including in the communications field) in certain events to consider control concentration factors and industry-specific competitive factors. As a result of the Searchlight-Fuhrer transaction, the pyramidal ownership structure was removed and the Company and Bezeq are not subject to any limitation related to a pyramidal structure.

 

Regulatory Requirements Relating to the Bezeq Group

 

At the reporting date, the Bezeq Group is subject to several regulatory restrictions in terms of joint ventures between the Bezeq Group companies, including the obligation to maintain structural separation between Bezeq and its subsidiaries and the restriction on marketing joint service bundles that include the services of Bezeq and its subsidiaries. These restrictions place the Group in an inferior position in terms of competition, which is worsening over time compared with other communications groups.

 

Against the background of the challenges facing the Group and the future needs forming in the communications market environment, in parallel with Bezeq’s actions to cancel the structural separation, the Board of Directors and Bezeq are taking measures to implement a comprehensive strategic plan for the Group as a communications group within the complex regulatory restrictions imposed on it.

 

Structural separation

 

The Communications Law grants the Israeli Telecommunication Ministry the authority to order accounting segregation between different services provided by the same group or company and to demand separate companies for the provision of different services, including separation of services to a license holder from services to a subscriber, and provisions regarding implementation of the separation.

 

Bezeq’s domestic carrier license stipulates that it must maintain structural separation between itself and its subsidiaries. This requires the managing of Bezeq and that of its subsidiaries to be fully segregated.

 

The structural separation restrictions place the Group in an inferior competitive position, which is worsening over time compared with other communications groups that are not subject to such far-reaching limitations, and compared with the option for the operators to provide end-to-end services to subscribers using wholesale services, mainly BSA. These structural separation restrictions also give rise to high management overheads.

 

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On February 14, 2019, Bezeq petitioned the Supreme Court against the Ministry of Communications asking to cancel the structural separation in Bezeq Group immediately, after the Ministry failed to accept Bezeq’s requests. Bezeq believes all conditions justifying and requiring cancellation of the structural separation under the policy document dated May 2, 2012 concerning the need for increased competition in the fixed-line communication wholesale market have been met.

 

On September 19, 2019, (after several extensions) the State filed its response to the petition. The State’s response argued that the petition should be dismissed since the petition is premature, prior to completion of the examination of the issue of structural separation by the special professional team appointed for this purpose by the Director General of the Ministry of Communications. It was also argued that the petition should be dismissed on its merits.

 

On December 31, 2019, the Company filed its answer to the response of the State, explaining that the policy document establishes a clear commitment for respondents to cancel the structural separation obligation, which they should have done since its conditions have now been met, and Bezeq’s request to issue a conditional order should be accepted.

 

On January 30, 2020, a hearing was held. The State notified the court that the professional team’s recommendations will be filed within four months and a revised notice for the State will be submitted to the court by June 15, 2020.

 

Marketing of joint service bundles with a subsidiary to ease the effect of the structural separation restriction

 

Bezeq was permitted to offer subscribers joint service bundles with its subsidiaries, subject to approvals by the Ministry of Communications and several terms enumerated in the Domestic Carrier license, including:

 

  The bundles must be unbundleable, meaning that a service included in them will be offered separately and on the same terms.

 

  At the time of submitting a request for approval of a bundle, there is a group of services in similar format being marketed to a subscriber as a package by a license-holder who is not a subsidiary of Bezeq, or there is a group that includes license-holders who provide a private subscriber with all the services included in the joint service bundle.

 

  Joint service bundles marketed by the subsidiaries including the services of Bezeq, are also subject, according to their licenses, to similar limitations, including a requirement for unbundling (except for a bundle marketed by a subsidiary that contains only Bezeq’s Internet infrastructure service).

 

These limitations, and in particular the unbundling obligation, which severely limits the Group’s ability to offer discounts on the components of the bundles, puts the Group in a competitively inferior position compared to the competing communications groups, which are not subject to similar limitation in marketing bundles (other than a limitation on marketing a joint bundle of HOT-Net and other companies in HOT Group). On February 5, 2019, the Ministry published a hearing that it is considering revising the HOT Telecom and HOT-Mobile licenses to allow them to market joint service bundles to the business sector, with certain restrictions). Bezeq’s limitation is more significantly manifested with implementation of the wholesale BSA services and the option for ISPs to provide full end-to-end services (infrastructure + service provider) to customers at reduced prices compared to the unbundleable bundles that Bezeq can market on which the following restrictions are imposed:

 

Marketing joint service bundles with DBS - On March 27, 2017, the Ministry of Communications notified Bezeq that it would not approve Bezeq’s request to market joint service bundles with DBS, given that the Ministry will, in the near future, be completing several regulatory measures that will allow more complete implementation of the wholesale market reform, including regulation of telephony resell, new regulations relating to Bezeq’s retail tariffs, regulation of a mechanism to reduce profit margins and regulation of the conditions for marketing reverse bundles. According to the Ministry’s notice, it is therefore willing to review requests of this kind for joint service bundles which include internet, telephone and television, in at least six months’ time, after it has examined the effect of the above measures on the market and is certain that Bezeq satisfies the regulatory requirements. On February 15, 2018, the Ministry addressed Bezeq’s announcement regarding its intention to send interested customers a link to the Sting site, expressing its position that marketing DBS internet-based television (“Sting”) by Bezeq is not in conformance with the structural separation provisions of Bezeq’s license.

 

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Marketing joint service bundles of internet infrastructure together with ISP - In 2017, further to the Ministry’s demand, changes were made to the bundle sales format, mainly splitting the bundle after a year. In 2018, Bezeq submitted a request to the Ministry to replace the existing bundle marketing with a marketing model under which Bezeq issues a tender to select a single IPS provider that is not a subsidiary as the sole marketer of Bezeq offering bundles for an unlimited time (because of the damage incurred by customers due to the requirement to split the bundle). In December 2018, the Ministry rejected Bezeq’s request, noting that in its opinion marketing a bundle through the wholesale marketing track is the correct channel.

 

On January 23, 2019, the Ministry of Communications distributed a letter regarding the reverse bundle stipulating that the provisions of the service providers’ licenses obligate them to contact the service subscribers prior to disconnecting them from the services and that disconnecting subscribers and reconnecting them to a reverse bundle in a single bill is a violation of the Ministry’s decision. Subsequently, on March 4, 2019, Bezeq received notice from the Ministry of Communications that in a meeting held with Bezeq’s representatives, the Ministry is considering changing the reverse bundle format, mainly granting Bezeq the possibility of renewing the contract with subscribers in a single bill after a short cooling off period during which the bill will actually be split, and of canceling the mechanism set out in the Ministry’s decision dated March 16, 2017.

 

On March 25, 2020, Bezeq received a letter from the Director General of the Ministry of Communications including a temporary decision concerning changing the marketing arrangements for the reverse. In accordance with the decision, the need to split the reverse bundle after a year is cancelled and Bezeq can contact customers at any time to renew the reverse bundle. Bezeq will have to offer as part of the reverse bundle all suppliers. It was noted in the letter that the decision was given at the outbreak of the coronavirus in Israel and accordingly the validity of the decision is limited to three (3) months.

 

Marketing joint bundles with Pelephone - On February 10, 2019, the Ministry rejected Bezeq’s application to market a joint bundle of internet infrastructure (with or without an infrastructure provider) together with Pelephone’s cellular services, because it did not find that approval of the request would contribute to competition in the communications market, but would rather lead impairment of the competition developing on the wholesale market and the existing competition in the cellular market, and strengthening the power of Bezeq Group and its existing competitive edge. The rejection letter further indicated marketing joint service bundles was discussed by the inter-ministerial team which is examining the structural obligations applicable to Bezeq and HOT groups (the team for examination of the structural separation obligation). Joint bundles with Pelephone were approved in the past.

 

On July 24, 2019, Bezeq received hearing documents from the Ministry of Communications, in part concerning a change in the marketing formula of the “reverse bundle”. According to the information in the hearing documents, the Ministry is considering changing the formula presented at the hearing on March 26, 2019, and determining, inter alia, that Bezeq will not be obligated to market a reverse bundle for ISPs that have accumulated over 100,000 wholesale BSA customers on Bezeq’s network and have also provided accessibility to over 100,000 households to their independent optical fiber infrastructure on Bezeq’s physical infrastructure. The Ministry will also determine that the provisions for breaking up the bundle after 12 months will be cancelled. According to the hearing, this format will enter into force after the launch of Bezeq’s fiber project and a reasonable possibility will be provided to purchase the BSA service on the fiber network. Bezeq submitted its comments on the hearing on September 8, 2019 in which it made clear that there is no reason to make the necessary change in the format of the bundle conditional on the launching of Bezeq’s fiber project.

 

Further to the oversight proceeding conducted at Bezeq in February 2019, on November 26, 2019, Bezeq received a final supervision report and notice of the intention to impose an overall fine of NIS 2,572,000 for Bezeq failing to comply fully with the provisions of the license in respect of the “reverse Bundle. On January 1, 2020, Bezeq submitted its answer that it did not violate the provisions of its license or of the Ministry and, therefore, it believes sanctions should not be imposed on it.

 

There are more limitations on cooperative ventures between Bezeq and the Bezeq Group companies, both under competition laws and conditions laid down by the Competition Commissioner in approvals of mergers between Bezeq and the Group Companies, which prohibit discrimination in favor of Group Companies when providing certain services, and by power of the orders of Bezeq’s license, which oblige it to provide its services equally to all.

 

Lifting of the restrictions on structural separation and waiving the limitations applicable to cooperative ventures between the Bezeq Group companies as indicated above, if lifted, may form various opportunities for the Bezeq Group to utilize synergies or facilitate utilization of such synergies.

 

Partnership Structure

 

In August 2018, Bezeq announced that it was filing an application for the approval in principle by the Minister of Communications to change the legal structure of the Bezeq Group so that it will continue to operate in its present format as a public company for the provision of fixed-line domestic telecommunications services, and at the same time, establish a wholly owned registered partnership to which the assets, licenses, and activities of DBS, Pelephone and Bezeq International, will be transferred and will continue to maintain the complete structural separation from Bezeq. The purpose of the change is to adapt the structure of the subsidiaries to the technological, economic and competitive realities in the telecommunications market in order to promote the telecommunications market in Israel and to support reasonable profitability of the Bezeq Group for the benefit of its employees and shareholders. The new legal structure is expected, subject to the approval of the Tax Authority, to enable the offset of losses from the profits of the entire Bezeq Group. The request does not change Bezeq’s position regarding the cancellation of the structural separation.

 

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On December 13, 2018, Bezeq received an update from the Ministry of Communications wherein the Ministry’s professional staff discussed the request and decided to ask for public comments on the matter. . In a subsequent notice, the Ministry indicated that along with the application submitted by Bezeq to change its legal structure, it is reviewing all structural separation obligations in Bezeq and HOT groups and the need to revise them, including regulations to provide a solution for the discriminatory issues in the use of infrastructure. The Ministry noted that it is weighing whether the above application regarding the legal structure of Bezeq can be approved prior to the completion of the foregoing review. In the notice, the Ministry indicated that this application gives rise to concern that approval thereof at the present time could lead to strengthening of the Bezeq Group’s competitive advantages in the retail level at the expense of the different competitors. According to the notice, approval of the application at present will increase Bezeq’s incentive to discriminate against competitors in the use of its infrastructure and thereby leverage its advantage in the infrastructure segment over the service provision segment and strengthen the Group’s retail power, which in any event is already strong, prior to examination of the appropriate balances. The notice further indicated that in view of the foregoing, the Ministry is deliberating whether it is possible to approve the application at present and under which terms. Bezeq withdrew its application shortly thereafter.

 

On February 13, 2019, Bezeq’s Board of Directors approved a request by each of Bezeq’s subsidiaries, Pelephone, Bezeq International and DBS, to obtain approval from the Ministry of Communications for a change to the corporate structure, whereby the entire business and assets of each of the subsidiaries would be transferred to separate limited partnerships wholly owned by Bezeq (Bezeq as a limited partner, and a company (separate and different in each partnership) wholly owned by Bezeq, as General Partner).

 

On January 28, 2020, Bezeq received a letter from the Ministry of Communications that it was not possible to approve the application at that time. This was for reasons that Bezeq believes are mistaken including, because there is no room to take interim decisions that might affect the issue of structural separation in the Group and change the existing range of incentives, while the obligation of structural separation applied to the Group is currently being examined by a special team at the Ministry of Communications. As part of its examination, a broad range of alternatives are being assessed - from cancellation of the obligation of separation to strengthening the separation. In addition, in the Ministry’s opinion, this is a material change in the Group’s operations and not a technical change of the corporate structure.

 

Bezeq’s Board of Directors also approved a request of Bezeq to the Israel Tax Authority to obtain approval to transfer the business of the Subsidiaries to the said partnerships as a tax-exempt transfer in accordance with the provisions of section 103 of the Income Tax Ordinance and a request that the assessment arrangement dated September 15, 2016 concerning spreading the losses of DBS will also apply to the partnership with which it will be merged.

 

Wholesale services

 

Recently a wholesale market model has started being implemented in Israel, as part of which the obligation to sell wholesale services to other communications operators was imposed on owners of a country-wide fixed-line access infrastructure (Bezeq and HOT) to allow other communications operators to use Bezeq’s infrastructure at prices set out in regulations. As part of this, the Ministry of Communications established service portfolios setting out the format for provisions of the services by the infrastructure owners:

 

Wholesale BSA service

 

This service allows service providers that do not own infrastructure to offer their customers full internet services, including internet connectivity services (of the ISP) and internet infrastructure services (of Bezeq). Since launching the service, hundreds of thousands of customers have switched to receiving services through these service providers).

 

Wholesale service use of physical infrastructures

 

This service allows service suppliers without infrastructure to use Bezeq’s physical transfer communication cables infrastructure and dark fibers. Moreover, in the amendment to the Communications Law, as applied in the Economic Arrangements Law, (and separate from the wholesale service portfolio regarding use of physical infrastructures), Bezeq was required to allow other licensed domestic carriers, which are not necessarily suppliers without infrastructure, to use its passive transfer communication cable infrastructure to perform any telecommunications activity and provide any telecommunications services under their licenses. The same amendment also grants Bezeq the right to use physical infrastructure of other companies.

 

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Wholesale telephony service

 

This service allows service providers that do not own infrastructure to offer their customers telephony service at wholesale tariffs using Bezeq’s network. Until August 2018, the temporary arrangement allowed Bezeq to provide the service in a resale format, meaning a format in which the service provider purchases a line and call minutes from Bezeq and receives a range of services (such as technical services) from Bezeq. According to the Ministry of Communications’ notice, as from August 2018, Bezeq is required to provide the service in a wholesale format, meaning a service format in which the service is provided through Bezeq’s switch, but the call also goes through the service provider’s switch, both as an isolated service and as a supplementary service to the BSA service. Since August 2018, Bezeq is prepared to provide resale services at wholesale prices (without technical services), although with this service the call does not pass through the service provider’s switch. The maximum tariffs which Bezeq may charge for providing the services are laid down in regulations. The regulatory provisions regarding the wholesale market, as well as its implementation and, affect a material part of the Group’s activities

 

To the best of Bezeq’s knowledge, the sale of wholesale services on the HOT network has been launched and Bezeq believes that at this stage, the volume of wholesale subscribers on the HOT network is not high.

 

Policy document

 

The wholesale services were established pursuant to the policy document dated May 2, 2012 in which the Minister of Communications adopted the main recommendations of the committee appointed to review and revise the structure of Bezeq’s tariffs and to set wholesale service tariffs in the communications industry (the Hayek Committee). The policy document states that owners of country-wide fixed-line access infrastructures who provide retail services, including Bezeq, will be obligated to sell wholesale services to holders of telecommunication licenses on a non-discriminatory basis and with no discounts for size. The document also stipulates the terms for cancellation of the structural separation and that within six months of publication of the Shelf Offering for the sale of wholesale services by the infrastructure owners, the Minister will take action to change to a method of oversight of Bezeq’s prices by the setting of a maximum price and within nine months, the Ministry will formulate regulations aimed at increasing the investment in and upgrading fixed-line communications infrastructure in Israel.

 

Further to the policy document, the Ministry of Communications established service portfolios setting out the format for provisions of the services by the infrastructure owners. The maximum tariffs that Bezeq is permitted to charge for these services were determined by the Minister of Communications with the agreement of the Minister of Finance in the Communications (Telecommunications and Broadcasts) (Use of a Domestic Carrier’s Public Network) Regulations, 2014, or the Use Regulations. Tariffs for HOT’s wholesale services were first published on June 26, 2017. To the best of Bezeq’s knowledge, the volume of whole subscribers on HOT’s network is negligible. The volume of wholesale subscribers on HOT’s network is negligible at this stage, although Bezeq believes that is has recently increased.

 

BSA services

 

Bezeq started providing the service on February 17, 2015. This service allows service providers that do not own infrastructure to offer their customers full end-to-end internet services, including internet connectivity services and infrastructure services of Bezeq Since launching of the service, hundreds of thousands of customers have switched to receiving services through these service providers.

 

In the initial period of provision of the service, the Ministry conducted an oversight proceeding at Bezeq, which led to imposition of NIS 8.5 million in fines. Bezeq paid the amount of the fines and petitioned the court against this proceeding, which was dismissed in January 2018. On March 14, 2018, Bezeq filed an appeal against dismissal of the petition, which has not yet been decided. In addition, disputes erupted between Bezeq and the service providers regarding implementation of the service portfolio. These disputes concern the payments owing to Bezeq for the service and division of responsibility for installation and malfunctions.

 

In order to receive BSA services, it is necessary to connect to the service provider who receives the service from Bezeq to Bezeq’s network. On January 16, 2019, despite the operational difficulties indicated by Bezeq, the Ministry of Communications ordered Bezeq to immediately allow connection of the service providers to the multi-service access gateway (MSAG), in addition to its obligation to allow connection to the core and collection segment, according to the service provider’s election.

 

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The Ministry held hearings on various issues related to implementation of this service. The main hearings on the matter dealt with mechanisms for reviewing and revising the demand forecast for the purpose of updating the wholesale market tariffs (in which a decision was made regarding reduction of the tariffs of the BSA service component, and the tariff was reduced in regulations), revising the service level (SLA) requirements, the procedure for movement of customers between operators, etc. Decisions have not yet been made in all the hearings.

 

On August 29, 2017, the Ministry of Communications published a second hearing (for the hearing published on November 17, 2014), on determination of the format for reviewing a margin squeeze by fixed-line broadband network owners in marketing offerings. A market squeeze is a situation in which the infrastructure owner decreases the retail prices and the margin between the retail prices and the wholesale price of the inputs of the infrastructure purchased by the service providers to a level that erodes the profit of the service providers to the point of being economically unfeasible to continue their activity. According to the secondary hearing, the Ministry is considering allowing the infrastructure owners to conduct their own review to rule out margin squeeze, by means of inspection tools to be approved by the Ministry (in addition to the limited advance review track). As considered, the effective tariff for the reviewed service or group of reviewed services will not be lower than the minimum price level set for marketing those services examined by the license holder. In the hearing, the term the “license holder” includes Bezeq, Bezeq International, DBS, HOT Broadcasts, HOT Telecom and HOT Net. Bezeq submitted its comments on the hearing whereby there is no reason to determine a format for examining margin squeeze, although if such format is determined, the independent inspection mechanism proposed in the hearing should be expanded. Bezeq believes that if the margin squeeze review format is applied, it could affect the ability of Bezeq and Group companies to market bundles with respect to the timing of the offers and the prices they will be able to offer.

 

Wholesale service use of physical infrastructures

 

The service portfolio entered into force on July 31, 2015 and accordingly, Bezeq allows suppliers without infrastructure to use its physical available-for-transfer communication cable infrastructure and the available dark fibers out of Bezeq’s available optic cables, while in order to connect to the service provider’s infrastructure to Bezeq’s infrastructure, the service provider must set up a passive infrastructure near Bezeq’s passive infrastructure facility. The work on Bezeq’s infrastructures is performed by the service providers through contractors on their behalf, pursuant to the Ministry of Communication’s decision and dismissal of Bezeq’s petition against it. Since the service is in a format that did not exist before, differences of opinion arise from time to time.

 

On April 16, 2018, the Ministry of Communications announced that after reviewing the comments of Bezeq and an ISP, it made a decision and ordered that Bezeq must allow the service providers to insert communications cables through Bezeq’s telecom manhole which is located at the opening of the conduit leading to private land, and to perform any necessary work in the manhole for this purpose, all without derogating from the service providers’ responsibility to obtain the landowner’s permission.

 

On January 16, 2019, the Ministry of Communications issued a decision regarding the service portfolio for mutual use of passive infrastructures, according to which pursuant to reviewing the comments received in the hearing published by the Ministry on August 9, 2018, it decided in the first stage to focus on regulating execution of the work of another domestic carrier (holder of a domestic carrier license, including an infrastructure owner, that uses the physical infrastructure of another license holder). Later, the Ministry intends to establish a uniform service portfolio, which will apply to all use situations, including mutual use, of physical infrastructures, but at the present time, it will apply to the infrastructure owners in parallel with the provisions applicable to all domestic carriers. The director’s provision and the service portfolio amendment that were attached to the decision stipulate unlike the original service portfolio, that for deployment, the operator using the infrastructure of the infrastructure owner will not be required to set up a passive infrastructure facility, even in the last manhole (the last manhole before the building). The infrastructure of another domestic carrier will be connected to the infrastructure of the infrastructure owner by the passive infrastructure component (conduit/duct pipes, etc.) to be installed between the passive infrastructure of the operator using the infrastructure (manhole, telecom cabinet, junction box, etc.) and the passive infrastructure facility of the infrastructure owner. The definition of the physical infrastructure available to an operator using infrastructure was expanded and includes communications rooms as well. The amendment and provision also anchor the right of the infrastructure owner to payment for the guidance activity to the employees of the operator using the infrastructure.

 

On December 31, 2019, the Ministry of Communications published a decision and service portfolios for completion of the regulation for implementation of the mutual use of physical infrastructures obligation. The Ministry established the service portfolio Mutual Use of Passive Infrastructures (“the Mutual Service Portfolio”) as a uniform portfolio in the licenses of all operators with a general license to provide fixed-line domestic carrier telecommunications services (including holders of a special general license). The Mutual Service Portfolio replaces the Director’s provision dated January 16, 2019 and incorporates new provisions and some of the provisions in the Original Service Portfolio and the Director’s provision.

 

The Mutual Service Portfolio does not include provisions for a dark fiber leasing service and an optic wavelength service, which remained in the Original Service Portfolio, established for the infrastructure owners (Bezeq and HOT) as part of the wholesale market regulation.

 

The dark fiber leasing service and optic wavelength service will be used only by holders of a special general domestic carrier license and will continue to apply according to the Original Service Portfolio, at the tariffs stipulated in the Use Regulations. In parallel to establishing the Mutual Service Portfolio, amendments were made to the original wholesale service portfolio, and the regulation regarding use of a dark fiber and wavelengths will remain in it. The implementation processes of both portfolios are anchored in the Mutual Use Service Portfolio and are also applicable to implementation of use of a dark fiber and wavelengths.

 

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The implementation processes in the Mutual Service Portfolio includes provisions regarding the service provision stages (access to information, planning, execution of works), service principles and components (so that an infrastructure owner that intends to establish underground infrastructure in an area where there is no physical infrastructure will offer every domestic operator in advance to share the expenses. An infrastructure owner who is obligated to provide universal service will only be required to allow a domestic operator with such obligation that refuses the offer to use the infrastructure five years after completing establishment of the infrastructure). Use of infrastructure between domestic operators will be prioritized by the FIFO (first in first out) method.

 

Use of Bezeq’s physical infrastructure by infrastructure owners

 

In the amendment to the Communications Law, as applied in the Economic Arrangements Law, the obligation of a licensed domestic carrier to allow other licensed domestic carriers (which are not necessarily license holders without infrastructure) access to its passive infrastructure (excluding the passive infrastructure of a licensed domestic carrier owned by IEC and which it requires, for the purpose of its operations as the holder of a critical service provider license) for performance of any telecommunications operation and provision of any telecommunications service under its license. This means allowing IBC to use Bezeq’s passive infrastructure and as from October 1, 2017 also HOT Telecom, at tariffs which according to the amendment to the Law are to be set by the Minister of Communications with the agreement of the Minister of Finance by April 1, 2018, whereas until these tariffs are set, the tariffs set in the Use Regulations will apply, and subsequent to setting the tariffs, retroactive settling of accounts will be carried out between Bezeq and HOT Telecom only. At present, tariffs and a special service portfolio have not yet been established.

 

On August 13, 2018, a hearing and draft regulations were published on determining the maximum payments for mutual use by infrastructure owners of access service to passive infrastructure, according to which the Minister is considering determining that the tariff will be the same as for the payments currently defined in the Use Regulations for a domestic carrier which is a special general license holder. A letter attached to the hearing dated August 9, 2018, concerning the service portfolio described above states that the Ministry is considering not setting maximum or minimum payments for service to be provided by other domestic carriers for which no payment was defined. On September 9, 2018, Bezeq submitted its comments on the hearing to determine the payments (together with an expert economic opinion), in which it argued that the distinction must be maintained between operators that do not own infrastructures and infrastructure owners, and certainly those governed by the obligation of universal service.

 

Wholesale telephony service

 

On May 18, 2017, the then Acting Minister of Communications issued a decision according to which Bezeq will provide telephony services in a resale format for one year from July 31, 2017, at prices set by the Minister (higher than the wholesale tariffs, in view of the service content). This decision is the result of a petition filed by Bezeq with the Supreme Court against the Minister of Communications’ decision of November 14, 2014 regarding provision of wholesale telephony services in the service portfolio format. The petition included claims that the service would be impossible to implement in the service portfolio format (BSA + telephony) and is unjustified. Provision of wholesale telephony services (at wholesale prices) on Bezeq’s network was postponed for the 14 months of the arrangement, when the option to extend the arrangement or turn it into a permanent arrangement will be reviewed (a recommendation on this matter will be the subject of a public hearing). On March 25, 2018 Bezeq wrote to the Ministry requesting that the Ministry extend the arrangement, at the current price and format, and that the arrangement should become permanent. Bezeq clarified that the service format in the service portfolio is impossible to implement, unjustified and contradicts the global trend. The only way that will allow Bezeq to provide the service in the service portfolio format entails switch replacement and compelling Bezeq to perform a complex, disproportionate unauthorized and unjustified procedure.

 

On June 5, 2018, the Ministry of Communications informed Bezeq that it will not extend the temporary arrangement relating to telephony service in a resale format and that accordingly, as of August 1, 2018, Bezeq must provide wholesale telephony service in the format defined in the BSA + Telephony service portfolio and that Bezeq must provide this service both as a stand-alone service and as a supplementary service to the BSA service. Upon receiving this notice, Bezeq indicated that it does not expect to meet the deadline specified in the notice, further to its previous clarifications that the service format in the service portfolio cannot be implemented technologically and that it requires the replacement of a switch which is a prolonged, complex process, and that it intends to ask the Ministry to find a solution for this problem. After discussions with the Ministry, Bezeq offered, commencing August 1, 2018, telephony call minutes service and associated wholesale services in the wholesale market on the basis of the service portfolio in a technology format which is similar to the resale arrangement and with wholesale market tariffs. Bezeq’s license was revised two months later and included this service as voluntary. Bezeq also began the process of replacing the switch which will enable compliance with the service portfolio requirements.

 

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In a letter dated January 29, 2019, Bezeq offered the Ministry of Communications another technological solution for the provision of wholesale telephony services. In view of the fact that this solution was intended to be temporary and implemented for a limited period, until replacement of the switch, and taking into account its estimation regarding the relatively low potential of customers of the service, Bezeq repeated its claim that the wholesale telephony services in the engineering outline defined in the service portfolio in a carrier preselection format on a telco-grade level was and still is impossible to implement on Bezeq’s switch.

 

On January 31, 2019, the Ministry replied that it does not intend to approve compliance with the service portfolio in advance, because after coordination with the service providers and launching of the service, the Ministry will review whether the breach has ceased, and it would not accept a solution that does not provide a full solution for the provisions of the service portfolio and is not based on the accepted engineering standards in communications networks.

 

Bezeq sent an appropriate characterization to the service providers. The negotiations with the Ministry of Communications and the service providers have not yet been finalized. In parallel, Bezeq is taking measures to complete its order for a new switch.

 

Bezeq reports that it believes that the implementation of wholesale telephony will impair its financial results. Bezeq also reports that it is unable to estimate the extent of the impact, which could be significant, given that it depends on different variables, including the volume of demand for the service, the price levels of substitute products currently available on the market (such as VoB), etc.

 

Supervisory reports and financial sanctions

 

On October 19, 2017, the Ministry of Communications sent Bezeq a final supervision report regarding implementation of a wholesale telephony service, or the Supervision Report, according to which Bezeq violated the provisions by failing to provide the wholesale telephony service on May 17, 2015. Concurrently with the Supervision Report, and after Bezeq had been found to have violated the provisions of the Use Regulations and Bezeq’s license, Bezeq was notified of the Ministry’s intention to impose a financial sanction on Bezeq in the amount of NIS 11,343,800. The Notice also stated that Bezeq must take affirmative action to comply with the instructions of the Ministry of Communications, since the Ministry is considering initiating another proceeding in the same matter. Bezeq submitted its arguments in writing against the intention to impose a financial sanction and against the amount of the financial sanction. Subsequently, on August 8, 2018 Bezeq received a “Supplementary Supervisory Report to the Final Supervisory Report Concerning Non-implementation of the Wholesale Telephony Service” as well as an “Updated Notice of its intention to apply financial sanctions concerning implementation of the broadband reform in which the Ministry of Communications announced its intention to apply financial sanctions of NIS 11,327,540 against Bezeq for the violation, as from August 1, 2018. The notice further states that the Ministry intends to take additional enforcement measures if the breach continues. On October 4, 2018, Bezeq submitted its position on the hearing whereby financial sanctions should not be imposed on it. On December 27, 2018, Bezeq received notification from the Ministry of Communications that the Director General of the Ministry decided to impose a NIS 11,163,290 sanction on Bezeq for its alleges breach of the provisions regarding implementation of wholesale telephony services. Bezeq filed a petition against the decision.

 

Additional regulatory aspects relevant to the entire Group or several Group companies

 

Change in interconnect tariffs. The Bezeq Group’s telecom companies (Bezeq, Pelephone and Bezeq International) pay interconnect fees to other carriers for calls that are terminated on the networks of those carriers, and some of them (Bezeq and Pelephone), receive interconnect fees for calls that are terminated on their networks and from international communications operators for outgoing calls on their networks. The interconnect fees are determined by the Ministry of Communications as the maximum tariffs in the interconnection regulations. Changes in the interconnect tariffs have an offsetting effect at the Bezeq Group’s level, in view of their impact on both the expenses and revenues of Bezeq and its subsidiaries.

 

Restriction of the exit penalty a license-holder can collect from a subscriber. Under the provisions of the Communications Law, holders of domestic carrier licenses, ITS licenses and broadcast licenses, including Bezeq, Bezeq International, DBS and B.I.P, may not collect disconnection fees from subscribers who cancel agreements if their average monthly bill is less than NIS 5,000, or deny them a benefit that they would have received had they not ended the agreement. Cellular operators, including Pelephone, may not collect disconnect fees from customers who hold up to 100 phone lines or condition a contract for cellular services on an agreement to purchase, rent or lease terminal equipment. As a rule, these restrictions make customer retention difficult for the communications operators that are subject to them.

 

Non-discrimination in the offering of benefits and special tariffs. Due to the different positions expressed by the Ministry of Communications in the past, communications companies may be restricted under certain circumstances in their ability to offer benefits and special tariffs to their new customers or to prevent a subscriber from switching to plans marketed to new customers. The Ministry of Communications announced its intention to hold a hearing regarding revision of the provisions of the licenses regarding price discrimination between subscribers in a manner that is also consistent with the changes and developments in the market.

 

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On December 9, 2019, the Tel Aviv-Jaffa District Court issued a ruling addressing the changing positions of the Ministry of Communications on the matter and believes that the Ministry’s position should not be adopted, since there are several major flaws in formulating its opinion and the manner in which it was adopted (lack of a factual foundation, lack of consultation with the Competition Authority, lack of reasoning, lack of coherence and failure to hold a hearing). The ruling dismissed the motions to certify class actions and an appeal was filed against it.

 

Amendments of licenses and additional legislation

 

Call center response times

 

The amendment to the licenses of Bezeq, Pelephone and Bezeq International prescribes provisions concerning the obligation to route calls on certain matters to a professional human responder, call waiting times as well as provisions concerning call center work hours, the recording and documenting of calls and reporting obligations.

 

The amendment came into force on date of entry into effect of the Consumer Protection Law (July 25, 2019) dealing, inter alia, with waiting time for a human response. The DBS broadcasting license was amended in the same way. The amendments led to an increase in costs for operating the call centers of the Group’s companies. It should be noted that in November 2019, the Ministry of Communications issued a demand for information as part of the oversight activity to all communications companies on the issue of waiting times for a human response at call centers. A similar demand was addressed to DBS in January 2020.

 

Bezeq is making preparations to implement the amendments, which could lead to an increase in the costs of operating the call centers of the Bezeq Group’s companies.

 

Hearing on the subject of IPv6 protocol (internet addresses)

 

On July 3, 2019, the Ministry of Communications published a decision on the hearing and the license amendment in which the transition to Ipv6 protocol will take place in accordance with the defined milestones. For Bezeq (as the holder of a domestic carrier license) and for the owners of Internet access licenses, it was determined, among other things, that within 12 months of date of the amendment of the license, the network and its component will be adapted to provide access for subscribers to the Ipv6 Internet protocol service from all terminal equipment that supports Ipv6 protocol; license holders are to voluntarily transfer existing and new subscribers with terminal equipment that supports Ipv6 to addresses on Ipv6 protocol. The subscribers will be transferred according to milestones so that up to 24 months from the date of the amendment, 50% of the subscribers will be transferred, up to 36 months - 75% and up to 48 months - 100% (excluding subscribers in possession of private terminal equipment that does not support the Ipv6 protocol and have decided not to replace it, provided that the license holder signs them on a waiver). With respect to the holders of cellular licenses (such as Pelephone), it was determined that the voluntary transfer will reach 100% within 24 months. Bezeq is preparing for the transfer, and at this stage, no material expense is expected as a result.

 

Consumer legislation and privacy protection laws

 

Changes in consumer legislation affect the operations of the Bezeq Group’s companies on a regular basis. Various amendments have been made in recent years to the Consumer Protection Law and regulations concerning the cancellation of transactions even after service has begun, disconnection from on-going services, the need for the customer to give express consent to continue transactions after the end of the specified period and sending of messages, provisions concerning a refund of charges collected from the subscribers which are not in accordance with the communication agreement plus fixed handing charges prescribed in the Law, restriction on debt collection procedures, maximum waiting time for a human response, and extension of the visiting times of technicians at the subscribers’ homes. Various bills have also been tabled in the Knesset introducing further amendments to the Consumer Protection Law which may affect the terms of the agreement and the conduct of the Bezeq Group companies towards their subscribers.

 

Likewise, the activity of the Bezeq Group companies is affected by the Privacy Protection Law and its regulations with respect to management and maintenance of databases and the information security which they contain. In May 2018, the Privacy Protection Regulations (Information Security), 2017 entered into force imposing various obligations on database owners, including obligations to establish procedures and conduct risk assessments in terms of information security and use of advanced security measures to protect information.

 

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Enforcement and financial sanctions

 

Over the last few years, the Communications Law, the Economic Competition Law, the Securities Law, the Consumer Protection Law and the Telegraph Ordinance were amended, giving the regulators powers of enforcement, supervision and imposition of substantial graded fines for violation of these laws or regulations and their provisions. A similar bill to amend the Protection of Privacy Law, 1981, which also includes changes in the penal part of the law, is in advanced stages of legislation. Likewise, the Law to Increase the Enforcement of Labor Laws was legislated. This legislation affects the way in which the Bezeq Group companies manage their affairs, in part with respect to concern for imposition of sanctions, their ability to protect themselves, etc.

 

The Ministry of Communications has recently made extensive use of the oversight powers and has issued notice of its intention to impose fines on Bezeq for ongoing regulatory matters as well as matters pertaining to implementation of the wholesale market.

 

Moreover, provisions enabling administrative enforcement by means of imposing fines or an administrative warning are anchored in an amendment to the Telegraph Ordinance under the Economic Arrangements Bill.

 

Restrictions on providing credit to business groups

 

Powers were granted to the Minister of Finance and the Governor of the Bank of Israel to promulgate regulations and provisions limiting the cumulative credit that financial institutions in Israel may give to a corporation or business group (a group of companies under joint control and their controlling shareholder).

 

Market concentration considerations in the allocation of rights - restrictions on the allocation of rights in critical infrastructures to a highly concentrated entity

 

The law prescribes a special, restrictive procedure that the regulator must apply prior to the allocation of rights (such as a license, franchise, contractual agreement with the state to operate a critical infrastructure and in certain circumstances also to extend existing licenses) in those areas that are defined as a “critical infrastructure” to entities that are defined as a “highly concentrated entity”. A list of areas was defined that will be deemed “areas of critical infrastructure”, including operations for which certain communications licenses are required (domestic carriers, excluding a specialist domestic carrier (such as VoB operators and cellular operators), broadcasting licenses, and other areas. Bezeq and the companies that it controls are included in the list published by the Competition Authority and are considered highly concentrated entities. The procedure prescribed in the law in relation to the allocation of a right to a highly concentrated entity will also apply to approval given for transferring the means of control in state-owned companies or companies that were previously government companies (Bezeq included) at the rates defined in the law, to a highly concentrated entity.

 

Hearing on millimeter waves

 

Millimeter wave technology enables substantially larger wireless broadband transmission than technologies that were available in the past. The technology can be used from point to point and from point to multiple points.

 

On September 9, 2019, the Ministry of Communications published a hearing of the draft Ministry policy relating to millimeter waves addressing application of the use of frequencies that enable the use of millimeter technology in two key areas: (1) V-Band on 57-66 GHz frequencies - without any need for a license, and (2) E-Band which on certain frequencies will remain in place and will be licensed, in order to meet the current needs of communications providers, while for other frequencies will be under a new regime of “simple permits”, allowing the Ministry to monitor and control use in that area, without the need for a license. On September 24, 2019, Bezeq submitted its comments as well as several questions for clarification, and it stated that regulation of the use of this technology cannot be detached from the general regulations, and that it is fitting for the use of this technology will be permitted only for those who hold an appropriate license for communications service providers.

 

Hearing on asymmetry

 

On February 11, 2020, the Ministry of Communications published a hearing on information asymmetry in respect of infrastructure. According to the hearing document, due to the inherent competitive advantages of infrastructure owners over service providers and the asymmetry of the information in the possession of service providers wishing to use the physical infrastructure of the infrastructure owner compared to the information in the possession of the infrastructure owners, the Ministry is considering establishing various provision to reduce such information gaps and prevent impairment of competition. The provisions under consideration include: Extending the time periods required for the service providers to issue notices and transfer information to them; prescribing the Ministry of Communications the possibility of demanding the network engineering plans from the infrastructure owners; determining the duty to submit development plans to the Ministry of Communications in case of intentions to expand, develop or upgrade the network; and the duty to routinely update the website of the infrastructure owner in respect of the scheduled retirement plans within three consecutive months and publish statistical information in the internal interface between the operators regarding orders, malfunctions, etc. On March 8, 2020, Bezeq submitted its comments to the hearing, claiming, among other things, that for the sake of the principle of transparency and non-discrimination and if the Ministry intends to create additional mechanisms in the market that require disclosure of commercial information between the companies, the identical mechanisms must be created for Bezeq and all other market players

 

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Regulatory restrictions

 

The Communications Law, Communications Order (which applies to Bezeq) and some of the communications licenses of the Bezeq Group companies contain a restriction on granting of rights to a third party on assets used to provide the critical service or on the assets of the license, as the case may be, including the need to obtain regulatory approval to create charges on these assets. In some cases, such as Pelephone’s cellular operator’s license, and Bezeq International’s unified license, there are exceptions permitting the creation of charges in favor of banks without the need for the regulator’s advanced approval, provided that the charge agreement includes instructions to ensure that the services rendered under the license will not be affected if the bank exercises the charge. In addition, under the provisions of the law and the communications licenses, the license and the resulting rights are not transferable and they cannot be pledged or confiscated (with certain exceptions).

 

Contractual restrictions

 

Bezeq has provided undertakings to certain financing entities not to pledge its assets without simultaneously creating a charge of the same class, rank and amount (negative charge), subject to specific exceptions.

 

Bezeq

 

Control of Bezeq’s tariffs

 

The control of Bezeq’s tariffs as described below has a number of implications. Bezeq’s tariffs are subject to regulatory intervention and from time to time, Bezeq is exposed to significant changes in its tariff structure and tariff levels. The review mechanism for the controlled tariffs, as defined in the authorizing legislation and the regulations, results in a real average erosion of the tariffs over the years. Control of the tariffs could make it difficult for Bezeq to provide an appropriate and competitive response to market changes and to offer competitive prices on short notice. Furthermore, the restrictions on granting discounts on tariffs limit Bezeq in participation in certain tenders.

 

The following are the main control arrangements over Bezeq’s prices:

 

  Under the Communications Law, the Minister of Communications is entitled, with the approval of the Minister of Finance, to determine payments (including maximum payments or minimum payments) for services from a license holder. The payment can be determined on the basis of (1) the cost, according to the calculation method instructed by the Minister plus a reasonable profit; or (2) reference points deriving from: payment for services provided by the license holder; payment for comparative services; payments in other countries for such services.

 

  Tariffs fixed in regulations - the tariffs for Bezeq’s controlled services (telephony and others) which are stipulated in the regulations, were updated in accordance with a linkage formula less an efficiency factor provided in the regulations, so that on average, Bezeq’s controlled tariffs erode in real terms.  After five years without any update to the regulation tariffs, on May 23, 2018, the Ministry of Communications announced an update of Bezeq’s tariffs stipulated in the regulations, effective from June 1, 2018, based on the update formula set out in the Communications (Telecommunications and Broadcasts) (Calculation and Linkage of Payments for Telecommunications Services), 2007, so that the tariffs for the services provided by Bezeq which are stipulated in the regulations will be reduced by 11.88%, except for the fixed monthly payment for the telephone line, which will remain unchanged. According to the Ministry’s announcement and in Bezeq’s estimate, the implication of this tariff change is an annual decline of NIS 16 million in Bezeq’s revenues.

 

  The Ministers of Communications and Finance are authorized to prescribe interconnect payments or for the use by a license holder of the telecommunication facilities of another license holder, and to provide instructions.

 

  If tariffs that are neither at the maximum nor minimum levels are determined for supervised services, Bezeq may offer an alternative payments package for a bundle of telecommunication services at such fixed payments, provided that the Ministers of Communications and Finance do not oppose the package. The Gronau report states that an alternative payment package will be approved only if it is worthwhile for 30% or more of subscribers who use the services offered in the package, and that the smaller the market share of the Bezeq Group in fixed-line telephony is, the higher the maximum discount rate permitted in an alternative payment package will be.

 

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If maximum or minimum payments are determined according to Sections 5 or 15 the Communications Law, for telecommunication services provided to another license holder, Bezeq may indiscriminately offer any other license holder an alternative payments package for the bundle of services at maximum or minimum payments, and such services together with services for which payment has not been determined according to Sections 5 or 15 to the Law, provided the Ministers are not opposed or approved the package.

 

  Bezeq may request a reasonable payment for a service for which a payment is not determined according to Sections 5 or 15, or for which a maximum or minimum payment has been determined. The Minister of Communications may require Bezeq to notify him of any payment Bezeq intends to request as set out above and of any change in the payment prior to the provision of the service or the change. If the Minister of Communications determines that Bezeq intends to request an unreasonable payment, or a payment that raises suspicion of harming competition, the Minister may set (for a period not exceeding one year) the maximum payment it may request for the service or separation of the payment for the service from the payment for the bundle of services.

 

On June 27, 2017, Bezeq received a hearing letter from the Ministry of Communications that two alternative supervisory mechanisms for the current tariffs of telephony (and other services for which the tariffs are fixed in regulations):

 

 

To convert the existing supervisory method that sets fixed rates (FIX) to maximum rates; the main telephony services (telephone line - NIS 57.92 including VAT, and 1.87 agorot including VAT for calls) will be set in relation to the updated costs structure; for most of the additional services, the present tariff will become the maximum tariff and price control will be lifted for some of the services.

 

  To remove price control from the main telephony services - telephone line and calls, and from additional services that are currently supervised in the form of fixed tariffs, and to set a maximum price for a “supervised bundle” which will include a telephone line and call minutes which Bezeq will offer customers who wish to subscribe to this service, similar to the alternative payments package currently offered by Bezeq for which there is most demand.

 

Similarly, it was proposed that only existing subscribers of the alternative payments package for the “Kav Kal” (Light Line) service will be able to continue to receive it. The Ministry of Communications is also considering determining that price control will be lifted on PRI channels and the price control on their call components will be canceled. Bezeq submitted its comments on the hearing, opposing the proposed tariffs. Bezeq believes that the change in the control mechanism being considered in the hearing, insofar as this change is implemented, will negatively affect its financial results. Bezeq believes that its retail tariffs will be affected in parallel also as a result of the setting of wholesale prices for telephony services.

 

On March 18, 2019, the Ministry published a hearing to regulate the maximum payments for the wholesale services of the infrastructure owners between 2019-2022. According to the hearing, the Ministry intends to revise the prices based on the assumptions concerning the scope of demand, the equipment price trends and the effect of the costs of providing the service in the economic model. Bezeq is studying the hearing documents. Until completion of the hearing process (and after the secondary hearing on the subject), the Ministry of Communications will extend the applicability of the maximum payments for wholesale services to 2018, so as to continue to apply from 2018 onwards. Prior to extension, the Ministry published a hearing noting that the key trends in the market, including the demand trends and decrease in equipment prices, indicate that the cost of providing the wholesale services is declining over time.

 

On February 20, 2020, the Minister of Communications decided in a hearing to amend the Communications (Telecommunications and Broadcasts) (Use of a Domestic Carrier’s Public Network) Regulations, 2014 (“the Amendment” and “the Regulations”, respectively) as follows:

 

The Amendment includes formulas for updating the maximum payments to which Bezeq is entitled for use of its network (BSA wholesale service) on January 1 each year, between 2019 and 2022, and stipulates that on November 15 each year, the Minister of Communications will publish the demand forecast index, which is a component of the update formula. The demand indices for 2019 and 2020 were set in the Minister’s notice that was attached to his decision. The Amendment will apply retrospectively as from January 1, 2019.

 

The Amendment further stipulates that upon entry into effect of the Regulations, a reduction of certain payment components will become effective in a manner that leads to offsetting between Bezeq and another license holder that consumed services in the period between February 2017 (date of the decision to update the maximum payments) through to July 2018 (the date of update of the Regulations), until completion of the offsetting for that period.

 

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The update of the maximum payments for 2019 and 2020 is expected to lead to a non-material decrease in Bezeq’s revenues compared to the revenues that would have been received based on the current tariffs according to which the communications market operated as from July 2018.

 

On May 19, 2019, the Ministry of Communications sent Bezeq a preliminary supervisory report on the subject of price quotes for transmission services. According to the supervisory report, for which the review commenced at the beginning of 2017, Bezeq ostensibly deviated from the provisions of its license by submitting a tender offer that includes reduced tariffs for transmission lines that were not offered transparently to all its business customers. The ministry argues that it was unaware of the discount included in these tariffs, the discount did not appear in the price lists for the transmission service submitted to the ministry in recent years, and it does not comply with the test of reasonability, under the provisions of Section 17 of the Communications Law. The ministry further stated that it seems that this practice continues to the present time for other services as well, particularly in other tenders. On June 30, 2019, Bezeq submitted its comments on the supervisory report stating Bezeq did not deviate from the provisions of its license and that, among other things, this model was reviewed by the Ministry of Communications and complies with the tests of reasonability, and that the service providers were even aware of it and used it.

 

Bezeq’s Domestic Carrier license

 

Bezeq operates under a Domestic Carrier license which enumerates the services Bezeq must provide and its duty of universal service. Bezeq is required to provide its services to all on equal terms for each type of service, irrespective of location or unique cost. While the license is unlimited in time; the Minister may modify or cancel the license or make it contingent. The license and any part of it cannot be transferred, no charge can be imposed on it, nor can it be subject to attachment.

 

Bezeq is required to maintain and operate the network and provide its services at all times, including in emergencies, in an orderly and proper manner according to the technical and service quality requirements, and to work towards improving its services. The license includes a Service Standards for the Subscriber appendix, which is to be amended after Bezeq provides the Ministry with data. Bezeq submitted its proposals for amendment of the appendix to the Ministry, adapting it to the current state of affairs and the licenses of other operators, but the amendment report has not yet been published.

 

Provisions are stated for the duty of interconnect to another public switching network and the option of use by another license-holder; a duty to provide infrastructure services to another license-holder on reasonable and equal terms is also provided, as well as refraining from preferring a license-holder that is a company with an interest.

 

Provisions have been made for the operation of Bezeq’s network in times of emergency, including the obligation to operate it in a manner that prevents its collapse in emergencies. Bezeq is required to provide telecommunication services and set up and maintain the terminal equipment infrastructure for the security forces in Israel and abroad, as provided in its agreements with the security forces. Bezeq is required to appoint a security officer and to comply fully with the security instructions contained in the appendix to the license. Bezeq provides special services to the security forces. Bezeq is required to ensure that each purchase and installation of hardware in its telecommunications installations, except for terminal equipment, will be made in full compliance with instructions given to Bezeq according to Section 13 of the Communications Law.

 

Extensive reporting duties to the Ministry of Communications are imposed on Bezeq. In addition, the Director General of the Ministry of Communications has the authority to enter facilities and offices used by Bezeq and to seize documents.

 

The Domestic Carrier license includes restrictions on the acquisition, maintenance and transfer of means of control pursuant to the Communications Order and on cross-ownership, which are mainly a ban on cross-holding by entities in which those with an interest in another material Domestic Carrier as noted in the license, and restrictions on a cross-holding by entities with Domestic Carrier licenses or general licenses in the same segment of operation.

 

Bezeq submitted a bank guarantee of US$ 10 million to the Director General of the Ministry of Communications tor secure fulfillment of the terms of the license and for indemnifying the State for any loss it incurs due to their violation by Bezeq. The Director General at the Ministry of Communications is authorized to impose a fine for violation of any of the terms of the license.

 

During a calendar year, Bezeq may invest up to 25% of its annual income in activities not intended for providing its services (the income of Bezeq’s subsidiaries are not considered income for this purpose).

 

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The Communications Order

 

Bezeq was declared a provider of telecommunication services under the Communications Order. By power of that declaration, Bezeq is required to provide certain types of services and may not cease to provide them or narrow them. Among these services are basic telephone service, infrastructure service, transmission service and data communication service including interconnect, and other services listed in the schedule to the Order.

 

The main provisions of the Communications Order are these:

 

  Restrictions on the transfer and acquisition of means of control in a company, which includes a ban on holding 5% or more of means of control of a certain kind without the prior written approval of the Prime Minister and the Minister of Communications, or the Ministers.

 

  Transfer or acquisition of control in a company requires the approval of the Ministers. The Control Permit establishes the minimum holding percentage in each of the means of control in Bezeq by the holder of the Control Permit. A transfer of shares or an issuance of shares that causes the ownership percentage of the Control Permit holder to fall below the minimum percentage is prohibited without the prior approval of the Ministers, subject to permitted exceptions (among them are an issuance to the public under a prospectus or sale or private placement to institutional investors).

 

  Holdings not approved will be considered “exceptional holdings” and the Order states that exercise of a right by power of exceptional holdings will not be valid. The Order also contains provisions authorizing the Ministers and Bezeq to submit an application for the enforced sale of exceptional holdings to the courts.

 

At least 75% of the members of the Board of Directors of Bezeq must be Israeli citizens and residents who have security clearance and security compatibility as determined by the General Security Service. The Chairman of the Board, the external directors, the CEO, the Deputy CEO and other office-holders in Bezeq as listed in the Order, must be Israeli citizens and residents and have security clearance appropriate to their functions.

 

“Israeli” requirements are enumerated for the controlling shareholder in Bezeq: for an individual – he is an Israeli Entity (as defined in the Order); for a company – it is incorporated in Israel, the center of its business is in Israel, and an Israeli Entity holds at least 19% of the means of control in it.

 

The approval of the Ministers is required for granting rights in certain assets of Bezeq (switches, cable network, transmission network and data bases and banks). In addition, grant of rights in means of control in subsidiaries of Bezeq, including allotment of more than 25% of the shares in the subsidiary, requires the approval of the Ministers.

 

Certain actions of Bezeq require the approval of the Minister of Communications, including the voluntary liquidation, a settlement or arrangement between Bezeq and its creditors, a change or reorganization of the structure of Bezeq, a merger and split of Bezeq.

 

Authority with respect to real estate

 

Pursuant to the provisions of Section 4(F) of the Communications Law, the Minister of Communications granted Bezeq certain powers in connection with real estate, as set out in Chapter Six of the Law. The law distinguishes between land owned by the State, the Development Authority, the Jewish National Fund, a local authority or a company lawfully established and owned by one of them, and a road, or Public Land”), and other land, or Private Land. With regard to Public Land, Bezeq and any person authorized by it, can enter it to perform network deployment and maintenance works and to provide telecommunication services, provided that the deployment is executed according to the provisions of the Planning and Construction Law. The amendment to the Communications Law and the Planning and Construction Law in the Economic Arrangements Law cancel the duty to obtain the approval of the local Planning and Construction Committee, so certain actions do not require a building permit if performed by a license holder that was granted powers under section F of the Communications Law, if carried out according to an approved plan.

 

A network on Private Land will be deployed according to the provisions of the Planning and Construction Law and requires the consent of the landowner, the lessee in perpetuity or the protected tenant, as the case may be. Under the provisions of the Telecommunications (Installation, Operation and Maintenance) Regulations, 1985, if Bezeq is of the opinion that providing a telecommunications service to an applicant requires the installation of a telecommunications device on the applicant’s premises (or shared premises), Bezeq may request that the applicant, as a prerequisite for providing the requested service, allocate a suitable place on the premises for installation of the device, for the sole use of Bezeq, and it may use the device to provide service to other applicants as well.

 

Under the provisions of the Planning and Construction (Application for a Permit, its Terms and Tees) Regulations, 1970, an applicant for a permit to construct a residential building is required to install infrastructures for telephone, radio, television and Internet services so that the customer can choose whichever provider it prefers. In commercial buildings, if preparations for communications are installed, an underground infrastructure must be laid. At the same time, Bezeq’s license was amended (as were the licenses of HOT Telecom and DBS), so that if Bezeq uses the internal wiring (part of the access network installed in residences and in apartments intended to be used by those residences only) for provision of its services, it is obliged to provide maintenance services for that wiring installed by the permit applicant, without this granting it any proprietary rights in the internal wiring.

 

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Immunity and exceptions to liability

 

The Minister of Communications granted Bezeq immunity from certain liabilities for damages listed in Chapter Nine of the Communications Law, in accordance with his authority to grant immunity to a general license-holder. In addition, Section 13 of the Communications Law contains exceptions to criminal and civil liability for an act done in fulfillment of a directive to provide services to the security forces in that section.

 

Regulations and rules under the Communications Law

 

Regulations in three additional and important areas currently apply to Bezeq: (1) cessation, delay or restriction of telecommunications actions and services; (2) installation, operation and maintenance; and (3) ways of supervising the actions of the license-holder.

 

Economic competition laws

 

The Competition Commissioner (formerly, the Antitrust Commissioner) declared Bezeq a monopoly in the following areas:

 

Basic telephone services, provision of communications infrastructure services, and transfer and transmission of broadcasting services to the public.
   
Provision of high-speed access services through the access network to the subscriber.

 

Provision of high-speed access services for ISPs through a central public telecommunications network.

 

The Commissioner’s declaration of Bezeq as a monopoly constitutes prima facie evidence of its content in any legal proceeding, including criminal proceedings. Bezeq has adopted an internal compliance procedure containing internal rules, guidelines and an internal reporting and control system, the purpose of which is to ensure that the activities of Bezeq and its employees are carried out in accordance with the provisions of the Economic Competition Law.

 

According to the conditions of the Competition Authority’s approval dated March 26, 2014 of the merger (as defined in the Economic Competition Law) between Bezeq and DBS, the following restrictions apply to Bezeq and DBS:

 

Bezeq and any person authorized by it (in this section: “Bezeq”) will not impose any restriction on consumption of fixed-line Internet infrastructure services stemming from the accumulated browsing volume of the customer, and will not cause the option granted to a customer to use any service or application provided over the internet to be restricted or blocked.

 

Bezeq will deduct amounts for provision of multi-channel television services from the Internet provider payments for connection to Bezeq’s network.

 

Bezeq will sell and provide internet infrastructure services and television services under equal terms to all Bezeq customers (the sale of Internet infrastructure services as part of a service bundle will not be considered sale under unequal terms).

 

Bezeq and DBS will cancel all exclusive arrangement regarding non-original productions and will not be party to such exclusive arrangements (except with regard to a third party who is the broadcast license owner at the date of the decision). In addition, for two years from approval of the merger (which have passed in the meanwhile), Bezeq will not prevent any entity (other than anybody who is a broadcast license owner at the date of the decision) from purchasing rights in original productions (does not apply to new productions).

 

As part of the approval of the merger of Bezeq and Pelephone on August 26, 2004 (as subsequently amended), restrictive terms were imposed, mainly prohibiting discrimination in favor of Pelephone in the supply of a product in which Bezeq is a monopoly, prohibiting the bundling of the supply of certain products by any of the companies when purchasing products or services from the other, and restrictions on certain joint activities.

 

As part of the merger approval of Walla and Bezeq of September 12, 2010, terms were imposed restricting discrimination in favor of Walla vis-à-vis its competitors.

 

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On November 16, 2014, Bezeq received the decision of the Deputy Commissioner of the Competition Authority pursuant to Section 43(A)(5) of the Economic Competition Law, to the effect that Bezeq had abused its position as a monopoly and determined unfair purchase and sale prices of a service in a monopoly, in contravention of the provisions of Section 29A to the Economic Competition Law in setting a negative margin by determining lower prices for Internet and telephony services than for internet infrastructure only, in a campaign. The decision states that these prices places competitors who wish to offer this service at a disadvantage. On March 20, 2018, pursuant to the agreed application of the parties, a ruling was issued by the Competition Tribunal in the appeal filed by Bezeq against the decision, according to which the earlier decision was null and void, i.e. as though it was never handed.

 

On March 7, 2018, Bezeq received notification from the Competition Authority that in accordance with the authority under section 43(A)(5) of the Economic Competition Law, the Competition Commissioner is considering determining that Bezeq abused its position in contravention of section 29A(a) and Section 29A(b)(3) of the Law, and imposing financial sanctions on Bezeq and its CEO for an alleged breach of the provisions of Section 29 of the Law and the foregoing sections. According to the notice, the evidence in its possession indicates that Bezeq allegedly made use of its market strength as a result of its control of the passive infrastructure and has placed obstacles in the way of new players who wish to use Bezeq’s passive infrastructure to install communications networks that will be used to compete with Bezeq in providing communications services to consumers, such that this was likely to deter them and prevent them from setting up an independent fixed-line communications network or at least to delay them and limit the scope of the network. According to the notice, Bezeq’s actions raise concerns of harm to the end consumer. The alleged violative acts by Bezeq are blocking access to private areas and demanding the cutting of fibers. In the light of the foregoing, the Competition Commissioner is considering whether in respect of the two violations Bezeq abused its monopoly position, contrary to the provisions of the Law, and is considering imposing an overall fine of NIS 30,953,000 on Bezeq and NIS 736,800 on Bezeq’s CEO. On August 5, 2018, an oral hearing took place at the Competition Authority prior to which Bezeq and its CEO submitted their position in writing. The position submitted to the hearing included arguments and evidence that there had been no fault in Bezeq’s actions and it had not breached the Economic Competition Law, and there is therefore no reason to apply any enforcement powers by virtue of the law (including sanctions) and that the determination being considered should not be published. In this context, Bezeq and its CEO pointed out factual errors that were included in the Competition Authority’s notice with respect to the methods of inserting cables in the conduits. Since the hearing commenced, Bezeq has received additional requests for information from the Competition Authority, and Bezeq replied to them. Subsequently, on March 12, 2019, the Authority notified that the errors raised and the findings of other tests conducted did not change her intention to exercise the powers as set out above. Bezeq and its former CEO were granted the right to present their arguments to the Commissioner about the additional findings by May 12, 2019.

 

On January 10, 2019, an amendment to the Economic Competition Law entered into force (in this amendment, the name of the law was changed from the Antitrust Law to the Economic Competition Law), the main points of which are:

 

Imposition of an independent and increased obligation on officers to oversee and prevent breaches of the Law.

 

Exacerbation of criminal punishment for a cartel - five years’ imprisonment without requiring aggravating circumstances.

 

Increasing the maximum amount for imposition of financial sanctions up to NIS 100 million (for each breach).

 

Another definition of a monopoly based on a market power test (in addition to the alternative of anybody that holds a market share of over 50%).

 

Increasing the aggregate sales turnover that requires merger notices to NIS 360 million.

 

The Telegraph Ordinance

 

The Telegraph Ordinance regulates the use of the electromagnetic spectrum and applies to Bezeq’s use of radio frequencies as part of its infrastructure. The set-up and operation of a system that uses radio frequencies is subject, under the Telegraph Ordinance, to grant of a license, and the use of radio frequencies is subject to the designation and allocation of a suitable frequency. The Telegraph Ordinance imposes license fees and fees for the designation and allocation of frequencies. The Government deals with the shortage of radio frequencies for public use in Israel (partly due to the allocation of a large number of frequencies for security purposes), by limiting the number of licenses granted for the use of frequencies and providing incentives for efficient use of frequencies.

 

On March 22, 2018, the Economic Arrangements Bill (Amendments for Implementation of the Economic Policy for the 2019 Fiscal Year) 2018, was published, which includes an amendment to the Wireless Telegraph Ordinance. The amendment regulates a series of powers (some of which already exist in legislation or secondary legislation) with regard to wireless devices or base stations that are subject to the Ordinance and licensing, the power to grant licenses, power to determine that import and production of devices that comply with the conditions prescribed will not be subject to a license, but rather confirmation of conformity in a short track, powers to exempt from application of the Order, and power to apply the provisions of the Ordinance to devices for transmission of communication signals by electric wire. The powers of the frequencies committee and the supreme frequencies committee, and administrative enforcement are also regulated in the amendment (monetary sanctions).

 

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Setting up communications facilities

 

The National Outline Plan for communications, NOP 36 (within the Green Line) and NOP 56 (in the Administered Territories), were designed to regulate the deployment and manner of set-up of communication facilities in a way that would ensure coverage for transmitting and receiving radio, television and wireless communications, while avoiding radiation hazards and minimizing the damage to the environment and the landscape, and also to simplify and increase the efficiency of the processes involved in setting up the facilities.

 

The classification of the facilities according to their technical variables and physical dimensions, which affect the determination of safety ranges for protection against the effects of radiation and the extent to which they protrude on the landscape, determine which facilities will be included in Part A of the NOP 36 and which in Part B of the Plan.

 

Bezeq has erected and is erecting broadcasting facilities and wireless communication facilities for providing broadcasting services to its customers, and uses such communication facilities, mainly for providing services to areas that are not connected to the fixed-line communications infrastructure (remote areas or new towns).

 

NOP 36A. Part A of NOP 36 deals with guidelines for erecting small and miniature broadcasting installations. Bezeq has obtained building permits for most of the small broadcast installations in accordance with NOP 36A. From time to time, a need arises to add broadcast installations which require that building permits be obtained in accordance with NOP 36A. Given the exemption granted under the orders of the Planning and Construction Law and of the Communications Law, Bezeq believes that it is not obliged to obtain building permits for miniature broadcasting installations, which are “wireless access facilities” under those laws.

 

In 2008, a draft amendment to NOP 36A (NOP 36/A/1) was tabled. The draft amendment mainly deals with changing the guidelines for the licensing of small and miniature broadcast installations, including determination of different licensing tracks (fast and standard) depending on the location and the public safety range of each installation, and indemnification arrangements for compensation claims under Section 197 of the Planning and Construction Law was submitted to the government. No decision has been made on the subject since then. If adopted, the draft amendment may give rise to practical difficulties which could impede Bezeq’s ability to provide the public with some of the services it is required by law to provide.

 

NOP 36B. Part B of NOP 36 contains guidelines for setting up large broadcasting facilities. In the January 2008 draft plan (which was presented to the government for approval in August 2010, but is yet to be approved), the definition of a large broadcast facility was changed so that the licensing of broadcast facilities which prior to the proposed amendment were classified as large, would be according to NOP 36/A/1 (if and when approved). The change in definition for small and large broadcasting facilities may give rise to practical difficulties which could impede Bezeq’s ability to provide the public with the services it is required by law to provide.

 

The January 2008 draft contains a transition provision which is expected to allow the grant of a license for existing broadcast installations even if they do not meet the requirements of NOP 36B, subject to certain terms and restrictions, provided that they are in compliance with the safety restrictions described in the Plan. The January 2008 draft also proposes to include a provision requiring the permit applicant (including for existing sites) to provide the local committee with a deed of indemnity for compensation under Section 197 of the Planning and Construction Law, if a court rules against the committee.

 

NOP 36B has not yet been approved by the government and there is no certainty as whether it will be approved.

 

NOP 56. NOP 56 came into force in June 2008, and regulates the manner of erection and licensing of communications facilities in the Administered Territories. The Plan contains transition provisions for facilities erected with a permit for small installations. The Plan also includes a requirement for production of a communications license and receipt of the consent of the Commissioner of Government Property at the Civil Administration.

 

Bezeq has obtained the licensing for 71 installations in the Administered Territories (a few other sites have not been organized). Moreover, in November 2016, Bezeq received a notice from the Civil Administration (Communications Staff Officer) that it must also organize the licensing of the facilities on the customer’s premises (as opposed to the foregoing facilities in Bezeq’s possession). Bezeq estimates that there are dozens of sites and it has started organizing the licensing according to the requirements of the Communications Staff Officer.

 

Exemption from a permit to add antennas to existing lawful broadcasting facilities. The addition of an antenna to an existing, lawful broadcasting facility is exempt from a permit, subject to meeting a combination of conditions and exclusions, which are set out in the Planning and Building (Works and Buildings that are Exempt from a Permit) Regulations, 2014. Bezeq is taking the required steps to add antennas to its broadcast facilities according to the mechanism set out in these regulations.

 

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Pelephone

 

Statutory provisions relating to the environment applicable to Pelephone’s operations. The broadcast sites used by Pelephone are “radiation sources” as defined in the Non-Ionizing Radiation Law. The erection and operation of these sites, excluding those listed in the addendum to the law, requires a radiation permit.

 

The law prescribes a two-step licensing mechanism for obtaining a radiation source operating permit under which the applicant first applies for a permit to construct a radiation source, or the Erection Permit, which may be in effect for no more than three months and may be extended by the Commissioner for up to nine months, then for a permit to operate the radiation source, or the Operating Permit, which has term of five years or as otherwise determined by the Minister for Environmental Protection.

 

The issuance of an Erection Permit is contingent upon the assessment of the maximum radiation levels to which human beings and the environment are expected to be exposed from the radiation source when in operation, including in the event of a malfunction, and the required measures for limiting the levels of exposure of human beings and the environment to the expected radiation from the radiation source when operating, including implementation of technological means that are in use, or the Limiting Measures.

 

The issuance of an Operating Permit is contingent upon application of the Limiting Measures and to measuring the levels of exposure of human beings and the environment to the radiation generated while the radiation source is operating. The law further provides that the Operating Permit is contingent upon presentation of a license under the Communications Law and in certain cases, a construction permit pursuant to the Building and Planning Law. The Ministry of Environmental Protection supervises and monitors broadcast sites to check that they comply with the provisions of the Law. The law includes a punitive chapter under which the construction or operation of a source of radiation in contravention of the provisions of the permit and the construction or operation of a source of radiation without a permit, after having been warned in writing by the Commissioner, are strict liability offenses.

 

The regulation of the maximum permissible human exposure levels to radiation from a source of radiation and the safety ranges from communication broadcasting installations, including a limit on the placing of radiation masts on roof terraces, is pending in the Knesset’s Interior Committee for Environmental Quality, as part of a proposed amendment to the regulations under the Non-Ionizing Radiation Law.

 

In January 2009, the Radiation Supervisor at the Ministry of Environmental Protection published guidelines regarding safety ranges and maximum permitted exposure levels with respect to radio frequency radiation, including from cellular antennas. Discussions are underway regarding these ranges following the World Health Organization’s International Agency for Research on Cancer (IARC) announcement to the effect that radio frequency electromagnetic fields associated with the use of mobile phones may be carcinogenic to humans.

 

Cellular phones also emit non-ionizing radiation (also known as electromagnetic radiation). Consumer Protection Regulations (Information regarding Non-Ionizing Radiation from a Cellular Telephone) 2002, specify the maximum permitted radiation level for a cellular phone which is measured in units of Specific Absorption Rate (SAR) and requires that Pelephone informs its customers of such measurements. All the cellular phones that it markets comply with the relevant SAR standards.

 

Pelephone’s environmental risk management policy. Pelephone conducts periodic radiation tests to ascertain its compliance with permitted operating and international standards. These tests are outsourced and carried out by companies authorized by the Ministry of Environmental Protection. Pelephone applies an internal enforcement procedure for monitoring implementation of the provisions of the Non-Ionizing Radiation Law, under the supervision of a senior manager.

 

Transparency for consumers. Pelephone is required to publicize and inform customers about the radiation sources that it operates and the mobile handsets that it supplies. The Radiation Supervisor of the Ministry of Environmental Protection publishes information on the Ministry’s website concerning active cellular broadcast facilities and Pelephone publishes information on its website regarding the SAR levels emitted from cellular phones and Ministry of Health regulations regarding preventive steps to be taken when using cellular phones.

 

Communications Law. The cellular services provided by Pelephone are subject to the provisions of the Communications Law and its regulations. The law authorizes the Director General of the Ministry of Communications to impose financial sanctions for violations of the provisions of the law and of orders and directives issued thereunder, and for violations of the terms of the license.

 

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Wireless Telegraph Ordinance. The Telegraphy Ordinance regulates the use of the electromagnetic spectrum, including Pelephone’s use of radio frequencies as part of its infrastructure. Setting up and operating a system using radio frequencies requires a license and the use of radio frequencies is subject to designation and allocation of a suitable frequency. The Telegraph Ordinance imposes license fees and fees for designation and allocation of frequencies. 

 

Pelephone’s mobile telephony licenses. Pelephone’s mobile telephony license and its general license for providing cellular services in Judea and Samaria are valid through September 2022. The primary provisions of Pelephone’s mobile telephony license include:

 

  Under certain circumstances, the Minister may modify the terms of the license, restrict or suspend it, and in certain instances revoke it.
     
  The license is non-transferable and contains restrictions on the acquisition or transfer (including by way of a charge), directly or indirectly, of control or of 10% or more of any means of control in Pelephone, including a pledge on said means of control, unless the Minister has given prior consent.
     
  Pelephone is obliged to provide interconnect services to all other operators on equal terms and it must refrain from any discrimination in carrying out such interconnect service.
     
  Pelephone is required to refrain from granting infrastructure service priority to an affiliate licensee company (as defined in the license) over another licensee.
     
  Pelephone may not sell, lease or mortgage any of the assets used for the implementation of the license without the consent of the Minister of Communications, other than certain exceptions as set out in the license.

 

  In times of emergency, whoever is statutorily competent shall have the authority to issue instructions on Pelephone’s mode of operation and/or manner of provision of services.

 

  The license stipulates the types of payments Pelephone may bill its subscribers for cellular services and the reports that it is required to submit to the Ministry of Communications. The license also determines the Minister’s power to intervene in tariffs, in certain cases.

 

  The license obligates Pelephone to provide services at a minimum standard of service.

 

  To secure Pelephone’s undertakings and to compensate and indemnify the State of Israel for any damage that may be caused by Pelephone’s acts, Pelephone is required to furnish NIS 84 million of bank guarantees to the Ministry of Communications.

 

Ministry of Communications’ decision regarding amendments to the license. In January 2017, the Ministry of Communications issued new guidelines that include dozens of changes to the cellular operators’ license regarding various issues relating to their ongoing handling of customers (including the way billing data is presented, method for joining services, pro rata charges, options for cancelling services, etc.). The applicability dates range from immediate applicability and up to six months from the date of issuance of the guidelines. Pelephone is reviewing these amendments and is preparing to apply them. Implementing the guidelines will require substantial preparation from operational, mechanical and other aspects.

 

Site construction licensing. Pelephone’s cellular service is provided through cellular sites deployed throughout Israel in accordance with engineering requirements. The constant need to upgrade and improve the quality of cellular services necessitates setting up cellular sites, configuration changes and changes in existing deployment of antennae.

 

Pelephone uses two main types of broadcasting sites and with two tracks: macro sites that require a building permit from planning and construction committees (see reference to NOP 36A) and wireless access devices which are exempt from a building permit under the Communications Law and the Building and Planning Law.

 

Building permits for erecting a cellular broadcasting facility under NOP 36A. Licensing for the construction of cellular broadcasting sites that require building permits is governed under NOP 36A, which came into force in 2002. The licensing procedure under NOP 36A requires that the following permits be obtained: a. An erection and operating permit from the Ministry of Environmental Protection; b. approval of the Civilian Aviation Administration in certain cases; c) IDF approval.

 

In addition, by law, as a condition for obtaining a permit for erecting a cellular communications broadcasting facility a deed of indemnity must be submitted to the local committee for impairment compensation claims. As at Reporting Date, Pelephone has deposited 650 such indemnity notes with various local councils.

 

Notwithstanding the current format of NOP 36A, Pelephone (and to the best of its knowledge, also its competitors) encounter difficulties in obtaining some of the required permits, and in particular permits from planning and construction authorities.

 

In view of the criticism against NOP 36A by various entities, a proposed amendment of NOP 36A was published about ten years ago (“Proposed New NOP 36/A”), which is more stringent and onerous that the current version, and could make the options for obtaining construction permits for cellular sites using this track more difficult. The amendment to NOP 36A has not progressed in recent years, however the need and desire to amend NOP 36A remains.

 

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In two administrative petitions filed against cellular companies, including Pelephone, with the Haifa District Court, the legality of building permits granted under NOP 36A for cellular broadcasting installations are being questioned. The petitioners’ main arguments, in both petitions, were that the frequencies used by the cellular companies do not match the frequencies stipulated in NOP 36A. On April 12, 2018, a judgment was handed in one of the petitions accepting the arguments of the cellular companies and of the appeals committee, that was represented by the Haifa District Prosecutor’s Office, and which determined that notwithstanding the use of frequencies that were changed during the development of the cellular infrastructure, the building permits are valid. On October 17, 2018, a judgment was handed in the other petition relating to the same matter, under which a contradictory ruling was made regarding the interpretation of the NOP and the alleged invalidity of the building permits granted (however, no demolition orders were issued). Appeals were filed with the Supreme Court against both judgments, and as yet they have not been heard.

 

As part of the “pergola reform” - Amendment 101 to the Planning and Building Law, 1965, on August 1, 2014, the Planning and Building (Works and Buildings that are Exempt from a Permit) Regulations, 2014, entered into force. Regulation 34 provides that the addition of an antenna to an existing, lawful broadcasting facility is exempt from a permit, subject to compliance with a combination of conditions and exclusions, including consistency with the plans and the applicable spatial instructions, to be determined by the local planning committees. This exemption regulation is not practical due to one of the conditions therein, and has not been used.

 

Access devices exempt from building permits. The second track under which Pelephone sets up broadcasting sites is the access installation track. The access installations are subject to obtaining specific radiation permits, but are exempt from obtaining a construction permit provided that they are erected under the conditions that are set out in the exemption provision (section 266C to the Law).

 

Some local authorities have disputed the applicability of the exemption provision on cellular network access installations and their use. Pelephone’s position on the applicability of the exemption was accepted in a number of rulings and decisions by local affairs courts and the use of such facilities and the supporting equipment was approved. Appeals have been filed against some of these rulings and decisions, with the Supreme Court.

 

Furthermore, a judgement was handed by the Supreme Court in the petition regarding this exemption and other matters relating to granting of permits for access installations tracks. Due to this petition and the opinions of various people, in 2010 a draft Planning and Building Regulations (Construction of a Cellular Wireless Communication Access Installation) 2010 was published.

 

On October 24, 2018, the Planning and Building Regulations (Installation of Wireless Access Facility for Cellular Communications) 2018, were published. The Regulations restrict and provide additional contingent conditions on the establishment of a wireless access facility that is exempt from building permit. Among other conditions, the Regulations stipulate that the safety horizontal range for public health will not exceed 4 meters, or 6 meters in the event of combining wireless access facilities of more than one license holder or combining wireless access facilities of the same license holder that transmit over two separate technologies, if one of them is a new generation technology. The regulations also allow modifications to an existing facility, replacement of an existing facility with another facility or relocation of an existing facility, provided that afterwards, the same facility remains on the same roof, or that the replacement of the facility does not change the number of installations on the same roof. Furthermore, the regulations allow, under a shortened licensing process, for the relocation of up to two existing facilities to the roof of another building, and the erection of up to ten new facilities by the same license holder in one calendar year. The regulations further stipulate that a facility may not be relocated to the roof of a building that has seven or more broadcasting installations, and that no new installation may be erected on a roof with several broadcasting facilities, unless the roof area exceeds 500 square meters.

 

On December 23, 2018, the High Court of Justice issued a ruling regarding the exemption for a wireless access facility. The judgment states that in view of the significant changes that have been made in the regulatory foundation and factual basis since the petitions were filed, it appears that the petitions are no longer applicable and are to be dismissed, while the Petitioners’ fundamental arguments are reserved. The Access Installation Regulations as published, severely restrict the option of using the building permit exemption track for erecting cellular access installations.

 

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Pelephone currently operates 446 wireless access installations.

 

In specific enforcement proceedings, that are adopted from time to time, additional arguments arise as to the manner in which the exemption may be used, including compliance with the regulating standards. If Pelephone facilities fail to comply with the conditions set out in the Regulations, there will be exposure, with regard to those facilities, for the need to dismantle or adjust the installations.

 

On March 27, 2018, an exemption provision was added to the building and planning (Exemption of Permit) regulations for a micro broadcasting facility, as defined in the regulations. The regulations further stipulate that the installation of a micro- broadcasting facility and its external components on an existing building or facility is exempt from a building permit, subject to compliance with cumulative conditions.

 

Pelephone’s ability to maintain and preserve the quality of its cellular services as well as its coverage is based partly on its ability to construct cellular sites and install information equipment, including broadcasting sites. The difficulties encountered by Pelephone in obtaining the permits and approvals required may have an adverse effect on the existing infrastructure, network performance and on the construction of the additional cellular sites required by the network. There are also deployment difficulties in Judea and Samaria, where a special system of laws applies.

 

The inability to resolve these issues in a timely manner is liable to prevent the achievement of the service quality targets laid down in the mobile telephony license. A few sites constructed years ago still lack approvals from the Civil Aviation Administration and the IDF, even though applications for such approvals were submitted a long time ago. Furthermore, there are administrative or other delays in some of the building and planning committees for issuing building permits for sites. Consequently, Pelephone operates several broadcasting sites that have not yet been granted the requisite building permits.