Having Faith in the Market

Competition Advocacy and Regulatory Impact Assessment

Hong Kong is amongst the few places in the world where a free market in the telecommunications industry genuinely exists. In 2004, having been satisfied with the extent of competitive last-mile network rollout, the Government deregulated the mandatory Type II interconnection policy (i.e. local-loop unbundling). In 2005, the ex-ante price regulation against the fixed-line incumbent was lifted. In April 2007, OFTA announced its plan to deregulate fixed-mobile interconnection charges. Competition has been working effectively at both the infrastructure and the service levels.

Complementary to the withdrawing of ex-ante regulatory rules and prescriptive guidelines in recent years, OFTA has been counting on the ex-post provisions against anti-competitive practices in the Telecommunications Ordinance to protect competition. During the year 2006/07, there have been a handful of preliminary investigations on merger cases and alleged anti-competitive conducts, but none of them had resulted in any action taken by the TA.

At this stage of market development, and given the pace of innovation in the telecommunications industry, OFTA realises that it is not enough to preserve existing competition via the enforcement of regulation. The regulator must also promote competition by reshaping or withdrawing existing regulations that are unnecessary, inappropriate or disproportionate. Since 2005, OFTA has been taking an active role of competition advocacy through regulatory impact assessments, conducted where new regulation is contemplated or an existing regulatory regime is reviewed, to ensure that major regulatory decisions by the TA are taken in an informed, reasoned and coherent manner.

OFTA's initiative in competitive advocacy is echoed in the "Be the Smart Regulator" campaign run by the Efficiency Unit and the Economic Analysis and Business Facilitation Unit of the Government, where regulatory impact assessment becomes a specific action point for all Government departments. The objective of this campaign is to encourage investment and innovation in the private sector by cutting government red-tape, so as to maintain the competitiveness of the Hong Kong economy.

In carrying out regulatory impact assessments, OFTA puts faith in the market in serving community interest. Over the years, this market-driven philosophy has delivered positive results for the telecommunications industry in Hong Kong.

Market Surveillance

With the deregulation of the tariffs of the incumbent PCCW-HKT Telephone Limited (PCCW-HKTC) under its fixed carrier licence in 2005, PCCW-HKTC no longer needs OFTA's approval for its prices, including any discounted tariffs or other customer benefits that may be offered in response to pricing and market competition.

After the implementation of the ex-post regulatory regime, consumers enjoy a wide range of promotion programmes offered by the operators in the fixed-line market. In order to compete for customers, operators also offer a wide variety of bundled-service packages, including "triple-play" or "quadruple-play" packaged services. OFTA will continue monitoring the competitive environment in different telecommunications markets, having regard to the development of fixed-mobile convergence and new technologies (such as VoIP).

Assessment and Review of Mergers and Acquisitions

During the year, the TA conducted a preliminary ex-post review on two merger transactions in relation to carrier licensees under section 7P of the Telecommunications Ordinance. After the completion of the reviews, the TA concluded that no further investigations into potential competition issues were necessary.

The first transaction concerned change of ownership of Asia Netcom Hong Kong Limited and its potential consolidation with C2C (Hong Kong) Limited. The TA's competition impact report, published on 8 September 2006, focused on the areas of overlap in the external telecommunications facilities between the two parties, the likelihood of reduced rivalry between competitors and the increased risk of collusive behaviour. The TA concluded that there was unlikely to be any material competitive detriment in any of these areas and decided not to proceed with an investigation under section 7P(1)(a) of the Telecommunications Ordinance.

The second transaction involved the acquisition of interest in Pacific Internet (Hong Kong) Limited by the parent company of Asia Netcom Hong Kong Limited. This transaction raised issues of market overlap in the provision of external bandwidth services, the increased risk of collusive behaviour and concerns about vertical integration in the service-based Internet services market and facilities-based external bandwidth market. In the competition impact report published on 16 February 2007, the TA concluded that the transaction would not be likely to substantially lessen competition in any of the above areas and on this basis decided not to proceed with a section 7P(1)(a) investigation.

Deregulating Interconnection at Telephone Exchanges

During the early phases of telecommunications market liberalisation, regulatory intervention was required to safeguard seamless and reliable communications between networks. As facilities-based competition has continued to develop over the years, the incentives for network interconnection and service access have become increasingly market-driven. In July 2004, the TA announced the decision to phase out the mandatory arrangements for Type II interconnection at telephone exchanges (i.e. local loop unbundling), with full withdrawal to take place by June 2008. The arrangements have been withdrawn gradually on a building-by-building basis in the run-up to this date, applying to buildings already connected to at least two self-built customer access networks. Mandatory Type II interconnection in these buildings was subject to a two-year transitional period followed by a one-year "grandfather" period to protect consumer interests.

After the "grandfather" period, interconnection terms including charges will be subject to commercial negotiations between the operators concerned. However, to protect consumer choice after the full withdrawal of the policy in 2008, mandatory Type II interconnection will be maintained as a safety net in buildings where it is technically unfeasible or economically unviable for operators to roll out customer access networks.

In September 2004, OFTA first published a list of buildings, which are connected by at least two self-built customer access networks provided by local fixed network operators. The list was subsequently updated in 2005 and 2006. As at October 2006, 76% of Hong Kong's households were connected by at least two self-built customer access networks and 51% of households by at least three such networks. The corresponding figures in October 2005 were 71% and 43% respectively. The increased coverage showed continual investment in telecommunications infrastructure by fixed network operators.

Building Up Territory-Wide WiFi Networks

Unlike other economies where the deployment of public WiFi networks relies mainly on backing from the Government, Hong Kong continues to adhere steadfastly to a market-led approach. During the year under review, both PCCW-HKTC Telephone Ltd and Hong Kong Broadband Network Ltd publicly announced their plans to roll out territory-wide WiFi networks. Upon receipt of their applications, OFTA amended their fixed carrier licences to include a provision for public WiFi services.

To facilitate operators' roll-out of WiFi networks and to support the Government's initiative to provide free WiFi services in Government premises, OFTA revised the "Guidance Note for Submission of Application for Installing Micro-cell Base Station on Highway Facilities or on Unleased and Unallocated Government Land" in March 2007 so that network operators can use lamp posts and other highway facilities to install WiFi access points. We have also been actively processing operator applications in relation to the establishment of WiFi networks as well as coordinating activities with the relevant Government departments.

Coordinating the Sharing of Facilities

We are keen to ensure that the development of market competition will not be hindered by any bottlenecks. Therefore, we have been coordinating the sharing of facilities, including radiocommunication sites on hilltops, rooftops, tunnels and in rural areas, between telecommunications and broadcasting operators. This sharing of facilities also serves to minimise environmental disruption and avoid the unnecessary proliferation of sites.

Gearing up for the broadcast of Digital Terrestrial Television (DTT), which is to be launched before the end of 2007, we have been liaising with existing users of selected hilltop sites to facilitate installation of DTT transmission equipment by television broadcasters. We have also been working with the Civil Aviation Department to ensure that the new DTT infrastructure and its transmissions will not affect aviation safety.

Pioneering Number Portability

Number portability allows consumers to retain their telephone numbers when they change telephone service providers. This ensures freedom of choice and fair competition in the market.

Hong Kong is one of the first economies in the world to implement both Operator Number Portability (ONP) and Mobile Number Portability (MNP). ONP, introduced in 1995, handles the porting of numbers between fixed network operators while MNP, launched in 1999, handles this activity between mobile network operators. In 2006/07, some 0.20 million ONP applications and 1.40 million MNP applications were successfully processed, representing porting rates of 5% and 15% against 3.85 million fixed-line subscribers and over 9.35 million mobile service subscribers respectively. Since the launch of MNP in 1999, more than 10 million successful MNP applications have been processed, testifying to the success of the arrangement, the importance of the service to consumers, as well as its significant contribution to competition in the market.