Small Market Big Ambition

January 31, 2011 World Screen
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This article originally appeared in the MIPCOM 2010 issue of TV Middle East and Africa.
 
After YES, Israel’s DBS satellite TV service, began broadcasting in 2000, the rules of the game changed. Within four years, the country’s three cable providers, Matav, Tevel and Golden Channels, had combined to form a new company, HOT, and joined the digital revolution. Since then, Israel’s television market has for the most part been a two-horse race, with HOT and YES vying for a very small base of consumers.
 
The competition has spread to other avenues as well, with HOT and YES providing telecommunications and broadband Internet—as standalone services and in triple-play packages—as well. HOT does this through its own cable infrastructure while YES provides its non-satellite-based services via an infrastructure installed by Bezeq, the Israeli telecommunications giant, which happens to hold some 49 percent of YES’s shares.
 
The same duopoly also came to define the online content battle, with YES and HOT forging partnerships with Israel’s two largest news and content sites, Walla! and Ynet, respectively. It didn’t hurt that Walla!, like YES, is controlled by Bezeq, or that Ynet’s owner, Arnon Mozes, also happens to hold a stake in HOT.
 
In such a centralized media market it comes as no surprise, then, that HOT and YES have established a cartel of sorts. Both companies offer comparable prices and channels as well as triple-play packages that require subscribers to commit to lengthy periods before they can switch providers. All told, even though there has been an ongoing trickle of customers from HOT to YES, HOT has been steadily stemming the flow, and both companies have succeeded in stabilizing a fairly solid client base. As of the end of 2009, HOT had some 910,000 subscribers as opposed to YES’s 571,000. 
 
DUELING DUOPOLY
The deadlock between these two communications giants is exacerbated by the fact that Israel is one of only a few countries in the world where the law forbids multichannel providers to run ads on channels that haven’t received a special permit. The country has only two commercial channels, and HOT and YES, which either independently produce or purchase much of their own content, do not earn the advertising revenues that would allow them to offer more competitive pricing schemes. The Council for Cable TV and Satellite Broadcasting, the government body that regulates the activities of HOT and YES, has announced its intention to allow the gradual integration of advertising content into many of the channels carried by the two providers. However, this scheme is still in the offing, like other far-reaching reforms slated to revolutionize Israel’s communications industry, and original content currently produced by HOT and YES can only earn advertising revenues when it is made available on free, web-based video-on-demand platforms.
 
It follows that although the TV market is the arena of a showdown, as it were, between YES and HOT, the fact that these two corporations must not only keep a finger in almost every piece of the communications pie, but also invest vast resources in producing and buying content, gives a potential edge to media groups that are permitted to advertise. Channel 2 and Channel 10, the country’s two main commercial channels, and the concessionaires that produce their programming, have the freedom to focus almost exclusively on content. They don’t need to divert resources towards bringing their product to the customer’s doorstep, as YES and HOT carry their broadcasts. Even when consumers choose to view Channel 10 and Channel 2 content online, they do so through high-speed Internet infrastructure provided by YES or HOT.
 
Another thorn in the side of these two conglomerates is the government’s recent standardization of DTT services for the basic package of public-broadcast and commercial channels. Israelis can now pay a one-time sum of around NIS 400 (about $100) and purchase a box that receives public-broadcast channels 1, 33 and 99 and commercial channels 2 and 10. This makes perfect sense to consumers who are either unable or unwilling to shell out upwards of NIS 200 (about $50) per month for the most basic content packages currently offered by HOT and YES. 
 
AIMING HIGH
One media group that is bringing its relative advantages to bear and is seriously jockeying to break open this two-horse race is Keshet (the Hebrew word for rainbow), one of two concessionaires that runs Channel 2 (Reshet is the other). Over the past decade, Keshet has produced several immensely popular programs, including, among many others, the Israeli versions of Idols and Big Brother and Eretz Nehederet, the country’s premier satire show. Keshet has also been behind many of the popular Israeli formats that have been sold worldwide in recent years: game show The Vault (HaKasefet in Israel) was a hit on Britain’s ITV; the third season of In Treatment (originally BeTipul) is slated to run on HBO later this year; and Mesudarim, a sitcom whose theme, appropriately enough, is the sale of an Israeli startup to an American company, has been bought by FOX.
 
Obviously, the success of Keshet’s programming has translated into a windfall in advertising revenue. According to Israeli business daily TheMarker, the first season of Big Brother alone boosted Keshet’s coffers by some NIS 76 million ($20 million). The fact that Channel 2 is carried by both HOT and YES and is also available via DTT and analogue free-to-air broadcasts means that “mega-events” such as the finale of Big Brother’s first season—borne on a tidal wave of publicity, the show had at times become almost a national fixation—can garner almost-unheard-of ratings. A whopping 34.1 percent of Israeli households tuned in to the Big Brother finale, and Keshet charged a hefty premium for commercial slots.
 
In 2008, Keshet went beyond its original mandate as a Channel 2 concessionaire, purchasing Channel 24, an Israeli music channel that is carried by HOT and YES. This has caused Channel 2 to express its displeasure with Keshet on more than one occasion, most recently after Channel 24 screened premium content during prime-time hours, opposite programming produced by Reshet, the channel’s other concessionaire. Reshet’s response: “We’re positive that the regulating bodies…won’t turn a blind eye to [Keshet’s] repeated violations, whose goal is to dismantle Channel 2.”
 
During the seasons of Big Brother, Keshet also produces a companion channel, accessible only to subscribers of YES and HOT, that broadcasts from the Big Brother house 24 hours a day. This channel, like Channel 24, is allowed to run ads. It’s telling that despite the Big Brother channel’s solid viewership, HOT has yet to renew its contract to run it for the coming season. Another case in point of where the relationship between HOT and Keshet is headed is Bip. The humor channel is produced by Keshet, but owned by HOT, which has recently announced that it will be discontinuing Bip in favor of American import Comedy Central.
 
In order to get to the root of this rising friction, though, it is important to emphasize that Keshet is banking its true ambitions on an entirely different platform—the Internet. Launched in 2008, Keshet’s website and content portal, Mako, directly challenges the dominance of industry leaders Ynet and Walla! and the HOT and YES content they promote. There is a sense that Keshet’s ambitious CEO, Avi Nir, is waiting on the sidelines until Israel’s Internet bandwidth—ironically, provided by his competitors—constitutes an information superhighway broad enough for Keshet to waltz in on a red carpet of web-based high-definition content.
 
LAW AND ORDER
As is often the case, the flip side of a highly centralized industry is weak, fragmented state regulation. There are several ministries with a say in what goes on in the TV industry, foremost among them the Ministry of Communications, which over the years has installed two central regulatory bodies: the Second Authority for Television and Radio, which is tasked with overseeing the commercial channels, and the Council for Cable and Satellite Broadcasting, which supervises the activities of HOT and YES. Another powerful government body is the Israel Broadcast Authority (IBA), which is in charge of all public broadcasting, including several television channels. The current situation makes it very difficult for the state to overcome strong lobbying and pass much-needed reforms.
 
A recent example is the way the government has been fumbling an initiative to force HOT and YES to offer à la carte options and lower-priced basic channel packages. HOT and YES have said they’ll only support the move if the government allows them to run ads, but on the other side of the fence are Keshet, Reshet and Channel 10, which have no interest in sharing the advertising pie with additional parties. In this and other cases, the various state regulators often represent conflicting interests.
 
The Council for Cable and Satellite Broadcasting’s chairman, Nitzan Chen, has been a vocal opponent of some of the methods practiced by HOT and YES vis-à-vis their subscribers. They “thumb their noses at consumers,” Chen says, referring specifically to the satellite and cable companies removing channels from their various packages, seemingly haphazardly, without offering worthy alternatives. “I’m sorry that they don’t understand what the public wants, and I’m just as sorry that the law does not permit me to get involved when it comes to content.”
 
In a recent interview, Chen stated that he wished to focus on the shape of the entire TV market. “Technological innovation will change the rules of the game,” he said, “and within five to ten years there won’t be only HOT and YES, but rather a long line of multichannel broadcasts that will provide television content via other methods and technologies.”
 
Although Chen may never get the chance to impose his own vision on the industry, the prospect of a powerful regulatory body with the mandate to effect real change may be on its way to becoming reality. In July 2010, Israel’s minister of communications, Moshe Kahlon, announced the establishment of a National Communications Authority—most countries have such an agency, the equivalent of the American Federal Communications Commission (FCC)—that will ultimately replace his own ministry and regulate all communications in Israel. The need to assemble a professional, independent body that will take the place of the current inefficient agglomeration of regulatory authorities has been raised by a succession of governments since 1996 to no avail, and is long overdue. In terms of current regulators of the television industry, the new authority will comprise the Second Authority of Television and Radio and the Cable and Satellite Broadcasting Council. It is unclear whether the IBA, which is currently under the auspices of the prime minister’s office, will also be subsumed in the new body. Only time will tell if the National Communications Authority will be better suited to address the unique challenges posed by Israel’s volatile, rapidly evolving communications industry.   
 
Elie Leshem is a writer for the Jerusalem Post.