Message from the Director-General

In my final message as Director-General of Telecommunications, it gives me great pleasure to report that, in addition to the continuing growth of the telecommunications market, we have been able to see the completion of a number of policy and regulatory reviews in 2006/07. These achievements, a major focus of our activities in the past year, will help remove market uncertainties and make sure that our regulatory environment keeps up with the rapid developments both in technology and the market. At the same time, I am pleased to note that operators are increasingly focusing on the introduction of innovative and sophisticated products and services that will bring even higher value to customers.

Growing Apace – Hong Kong's Telecommunications Industry

On the local scene, fixed network operators continue to roll out customer access networks in the local fixed network market. The annual surveys showed that in October 2006, 76% of Hong Kong's households were connected to at least one alternative customer access network compared to 71% in October 2005. Hong Kong also continues to maintain its position as one of the world's leading markets with broadband access into the home. At the end of March 2007, the household broadband penetration rate had risen to 73.3% compared to the figure of 68.7% a year earlier.

As a result of the high broadband penetration rate into Hong Kong's homes, triple-play services over these broadband connections – IP telephony, IPTV services and broadband Internet access – are commonplace. The situation is set to improve yet further as higher access speeds, above 10 Mbps and up to 100Mbps, are increasingly introduced into the market. This has been brought about by the competing infrastructure reaching into consumers' premises – Hong Kong is one of the few cities in the world where facilities-based competition has been successfully developed in the domestic fixed network sector.

In the world of mobile communications, Hong Kong continues to set the pace on a global basis. With the territory's competitive pricing and diverse range of services, the penetration rate for mobile telephones rose to 136% at the end of March 2007, up from 125% in March 2006 and translating into a usage rate of some four mobile telephones, or SIM cards, for every three people in the territory. Usage is set to grow yet further as Hong Kong's four 3G network operators continue to develop content and applications to take advantage of the speed and capacity of their networks. In March 2007, 3G customers accounted for 16.1% of Hong Kong's 9,356,396 mobile users, a sharp increase from 9.7% of 8,693,368 mobile customers in March 2006.

Addressing the growing need for wireless access to the Internet as well as more demanding bandwidth applications such as video and other multimedia services, operators are introducing more affordable packages for wireless data transmission over their 3G networks while also improving service speeds with the upgrading of their networks to the HSDPA – High Speed Downlink Packet Access – technology. These initiatives, together with recent plans by industry members to launch a municipal WiFi infrastructure in public areas, will furnish our city with ubiquitous wireless Internet access.

As increasing on-line applications fuel demand for high-speed data communications, Hong Kong's external links with the rest of the world continue to grow. Equipped capacity for Hong Kong's external communications rose from 1,153 Gbps in March 2006 to 1,421 Gbps in March 2007 while activated capacity grew from 461 Gbps to 763 Gbps during the same period.

A major hiccup experienced during the year was the severe damage caused to six of the seven major submarine cable systems linking Asia with North America, by the earthquake which rocked the Luzon Strait on Boxing Day in December 2006. I am pleased to report that despite the initial massive disruption of services, service providers responded immediately, taking a number of measures and working around the clock to remedy the situation. Services were restored within days of the problem first arising with everything returning to normal in February 2007, when the affected cable systems were fully repaired.

Despite Hong Kong's competitive and leading-edge telecommunications services – in addition to the territory's highly competitive prices, Hong Kong's penetration rates, from fixed-line to mobile telephones, broadband and IP-based TV services, are amongst the highest in the world – there is no room for complacency. Looking ahead, Hong Kong must continue to keep its eye on the future and invest in the new and developing technologies such as the IP-based Next Generation Networks and new wireless access infrastructure.

Eye on the Future – Our Role and Responsibilities

Making sure that we help to facilitate these developments within the industry in Hong Kong, our aim is to apply regulatory principles and practices that provide a clear direction for the future. Having established effective market competition with the formation of the Office of the Telecommunications Authority (OFTA) in 1993, the industry has been characterised by progressive deregulation in the past three years, as market forces have been allowed to play a more dominant role in the industry. Rather than remaining in an ex-ante rule-setting environment, we have made the transition to regulation on an ex-post basis with a focus on safeguarding effective and fair competition. Only when the market cannot deliver the required policy objectives or where players fail to comply with fair competition rules will we step in with regulatory intervention.

Aware of the importance of a clear and predictable regulatory environment to managing risk and promoting investment within the industry, we expended considerable effort during the year to ensure the completion of a series of regulatory and policy reviews. A major step forward was the establishment of a regulatory framework to facilitate Fixed-Mobile Convergence (FMC). Under this new framework, which aims to remove the differentials between fixed and mobile networks, we are recommending, among other things, the introduction of a Unified Carrier Licence (UCL) for Hong Kong. This move will open the way for the provision of fixed and mobile services under the same licence.

The efficient and effective management of the radio spectrum is essential for the future development of the industry, particularly as demand for this resource continues to escalate with the rapid proliferation of wireless data and video services. As such, we rendered full support to the Commerce, Industry and Technology Bureau (CITB) for a policy review on the management of radio spectrum in Hong Kong. The review was concluded in April 2007. OFTA also announced a Spectrum Release Plan in the same month. The release plan provides advance information on the radio spectrum to be released over the next three years, providing a clear road map for investment decisions into the future.

We also completed a regulatory review and issued a Telecommunications Authority (TA) Statement on the release of radio spectrum for CDMA2000. A major international mobile communications standard, CDMA2000 provides high-speed data services on par with existing 3G services in Hong Kong. Compatible with a major mobile service in Mainland China, CDMA2000 will strengthen Hong Kong's position as a world city and its strategic role as the gateway between Mainland China and the rest of the world. Rounding out our activities on the wireless front during the year, we also issued a consultation paper in May 2007, resuming public consultation on the proposed allocation of spectrum for Broadband Wireless Access (BWA) services. BWA, expected to become commonly available in the next few years, not only supports high-speed wireless access for mobile and portable terminals, it also provides an alternative to wireline access at fixed locations.

At the same time, in view of the fast-changing telecommunications landscape in Hong Kong, it was felt that the existing regulatory requirements for universal service arrangements would not be sustainable into the future. Accordingly, OFTA completed a review of the situation, issuing a TA Statement in June 2007. Among other changes, the methodology for the calculation for universal service costs has been revisited, providing a more equitable direction into the future. During the year, we also worked closely with CITB on the proposed merger of the Telecommunications Authority and the Broadcasting Authority into a unified Communications Authority, to better deal with the increasing convergence in telecommunications and broadcasting services.

These reviews, together with the IP-based services review completed in early 2006, ensure that the principal elements of the future regulatory environment are in place. With an emphasis on fair competition and the protection of consumer interests, we are keen to see industry players competing freely without regulatory intervention. Aware however that as competition intensifies, the need to cut costs may lead to sacrifices and short cuts in the services offered – in quality or sales conduct, for example – we remain ever vigilant in the effective protection of consumer interests. As such, we will not hesitate to step in with necessary regulation and the appropriate disciplinary measures if we feel such action is warranted.

In Conclusion – A Vote of Thanks

This will be my last message for the OFTA Trading Fund Report as Director-General of Telecommunications, as I will be retiring at the end of June 2007. I am proud to have witnessed and participated in the phenomenal growth and progress made in the telecommunications industry in Hong Kong in the past 14 years since OFTA was first established and honoured to have served as the territory's Telecommunications Authority for the past three years. As this latter period has been characterised by enormous change within the industry – from the increasing demand for broadband wireless networks, to the rapid migration to the Next Generation Networks and the new IP-based technologies, to convergence of the fixed and mobile networks; telecommunication and broadcasting services; and of voice, data and video services – I am particularly pleased that we have been able to pave the way forward for further development with the completion of the regulatory and policy reviews during the year.

Needless to say, none of these activities would have been possible without the support of our stakeholders – the many operators and industry members, the Consumer Council, our Advisory Committees, as well as OFTA's staff. I would therefore like to thank each and every one of them for their commitment and advice, encouragement and support, loyalty and hard work, not only in the past year but over the years. Their contribution has made the industry what it is today.

In conclusion, let me take this opportunity to wish my successor, Mrs Marion Lai, every success. As she takes over as Director-General, I have every confidence that OFTA will continue to make rapid progress and that the industry will flourish under her ongoing guidance.

M H Au
Director-General of Telecommunications and
General Manager, OFTA Trading Fund
25 June 2007