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- A CONSULTATIVE DOCUMENT 4 August 1997 | |||||||||||||||||||||||||
CONTENTS
1. INTRODUCTION
1.1 On 3 June 1997, Hong Kong Telephone
Company Ltd ("HKTC") submitted an application to the
Telecommunications Authority ("TA") seeking a declaration
of non-dominance in respect of the market which it defines as
that for the "international business call services".
1.2 As the declaration sought by HKTC
would have industry-wide implications, the TA considers it necessary
to consult the industry prior to taking a decision on HKTC's application.
This consultative document provides the basis for industry consultation
in respect of the claim by HKTC that it should be assessed as
non-dominant in the "international business call market".
OFTA is seeking information and submissions from the telecommunications
industry and interested parties on the issues raised in this paper
and any other matters relevant to OFTA's analysis.
2. BACKGROUND
2.1 Before July 1995, local public
fixed line voice telephony services were provided by HKTC by virtue
of an exclusive concession granted under the Telephone Ordinance
(Cap 269). As from July 1995 when the local Fixed Telecommunication
Network Services ("FTNS") market was opened to competition,
HKTC, by virtue of its existing market power in the market, was
categorised as being "in a dominant position". Currently
only HKTC has "dominant" status.
2.2 The framework for the regulation
of a "dominant" operator in the FTNS market has been
laid down in the FTNS licence conditions. In addition, the TA
has issued the "Guidelines To Assist The Interpretation
and Application of the Competition Provisions of The FTNS Licence"
("Competition Guidelines") in June 1995.
2.3 General Condition 16 of the FTNS
licences contains a definition for "a licensee in a dominant
position" and general prohibitions of abuse of a dominant
position. The Competition Guidelines outline the general approach
and considerations in assessing the "dominance" of an
operator in the relevant market.
2.4 In order to ensure that fair competition
can develop in the market, a "dominant" operator is
subject to more stringent regulation under the FTNS licence compared
with non-dominant operators. The FTNS licence conditions include
the tariffing rules contained in General Conditions 20 to 23 and
the rules on accounting practices contained in General Condition
17. The tariffing provisions include a requirement upon the
operator under General Conditions 21 to 23 to obtain the TA's
approval for tariffs before their introduction, and General Condition
20(4) specifically prohibits an operator from discounting against
published tariffs without prior approval from the TA. The accounting
rules in General Condition 17 include a requirement to maintain
separate accounts for individual segments of the services provided
under the FTNS licence. The TA has waived the applicability of
the afore-mentioned FTNS licence conditions to the "non-dominant"
operators.
2.5 In his paper entitled: "Enforcement
of the FTNS Tariffing Rules in a Developing Competitive Environment
- A Further Considered View ("Tariffing Paper")"
the TA states:
".......it has never been the intention of the TA to set in stone these tariffing measures in the developing competitive environment. Rather it is desirable to plan for a gradual relaxation of these tariffing rules so that HKTC could be relieved of different degrees of regulatory oversight of its tariffs as the market becomes progressively more liberal. The ultimate objective would be to abolish all tariff controls once a truly competitive market had been achieved".
2.6 In the same Tariffing Paper the
TA, further states:
"Currently the tariffing rules (i.e. G.C. 20 to 23 inclusive) are in all of the four FTNS licences issued in June 1995. However, G.C. 44 of the FTNS licences allows the TA to waive the applicability of these rules where he forms an opinion that a licensee is not in a dominant position in the relevant market. In fact the TA has waived the bulk of these tariffing rules for the three new entrants since they are clearly non-dominant. The TA has not waived these tariffing rules for HKTC because it is clearly dominant and is likely to remain so for some time into the future. At a future date HKTC may make submissions to the TA should it believe it is no longer dominant and the TA may consider such a case on its merits and in accordance with the "Guidelines to Assist the Interpretation and Application of the Competition Provisions of the FTNS Licence" issued in March 1995 .......... HKTC has not sought to be declared non-dominant and the TA does not intend to waive G.C. 20 to 23 inclusive of HKTC's licence".
2.7 It is against this background that
HKTC has recently submitted an application to the TA to be declared
non-dominant in a market which it has defined as the "international
business call market" (discussed at paragraph 4.9 below).
HKTC's application among other things refers to:
2.8 HKTC declares: "HKTC is
of the view that it is non-dominant in the market for international
business call services. It has formed this opinion on the basis
of the FTNS licence and its economic analysis of the current
state of this market. Accordingly, HKTC believes that it should
be declared non-dominant in this market".
2.9 In drafting this consultative document,
the TA has had regard to the Competition Guidelines but
in certain areas he has expanded on the meaning where relevant.
2.10 The following sections of this
consultative document now raise a number of issues for consideration
in assessing whether or not HKTC is non-dominant in the relevant
market. In considering these issues the TA wishes to reiterate
his commitment to the promotion of a fair and effective competitive
telecommunications environment in Hong Kong.
3. DEFINITION OF DOMINANCE
3.1 There are several definitions of
dominance in various jurisdictions but they all essentially identify
that a dominant operator must have a significant amount of market
power so that it has the potential to hinder effective competition
in the relevant market.
3.2 General Condition 16 (2) of the
FTNS licences contains a definition of dominance which states:
"A licensee is in a dominant position when, in the opinion of the Authority, it is able to act without significant competitive restraint from its competitors and customers. In considering whether a licensee is dominant, the Authority will take into account the market share of the licensee, its power to make pricing and other decisions, the height of barriers to entry, the degree of product differentiation and sales promotion and such other relevant matters which are or may be contained in guidelines to be issued by the Authority".
3.3 If it could be established that
HKTC is not in a position to act independently of its competitors
and customers it could be argued that it no longer falls within
the definition of dominance. For example, HKTC has recently introduced
the "0060" service (based on the "call-back"
mode of operation) and the general perception was that its action
was a result of competitive pressures from the new FTNS operators
and call-back operators.
3.4 HKTC argues that a distinction
may be drawn between "dominance" and "market leadership".
A market leader, although the largest player in a market, is a
player constrained by competitive pressures to which it must respond
if it wishes to remain in the market. On the basis of this characterisation,
as a market leader experiences the discipline of market forces,
it cannot raise prices with impunity and has a market share which
is not inviolable. HKTC states "All markets are imperfect
and a new entrant in many markets will often face a large competitor
with an established business and an existing customer base. However,
this structure does not represent dominance."
3.5 The TA invites comments
on the extent to which the definition of dominance or merely market
leadership is valid in respect of HKTC.
4. DEFINITION OF THE RELEVANT
MARKET
The Importance of Market Definition
4.1 The assessment of dominance involves a complex series of interrelated issues. The first issue which arises is one of definition of the relevant market. The definition of the relevant market in both its product and geographic dimensions is one of essential significance because a dominant position cannot exist in the abstract, it has to be related to the supply of particular goods or services.
4.2 In order to determine whether HKTC
is in a dominant position so that "it is able to act without
significant competitive restraint from its competitors and customers",
it is important to ascertain which products or services compete
with each other.
Basic Principles for Market Definition
4.3 In the Competition Guidelines,
the TA states the following:
"As with the concept of competition, the TA will adopt the economic concept of "market' as has been applied in anti-trust law. That is, the TA will use the generally accepted test of "substitutability" or "cross-elasticity" in both demand and supply. Essentially, a market is an area of close competition or potential competition and defining a market involves assessing which products are close enough substitutes to be said to be competing in the same market. Thus, in the context of the operation of a licensee's FTNS, the market will be that service together with all services which the TA determines at the time are substitutes or potential substitutes. It may also be relevant to consider the geographical boundaries to the market (i.e. the territorial area in which the products or services compete) and the functional level of the market (i.e. whether it is the wholesale or the retail level).
4.4 Based on the Competition Guidelines,
the TA considers that the definition of the relevant product/service
market should employ two tests:
Each test is then judged against the
actual conditions of competition in the market. Even if a number
of products/services are interrelated but they have different
sets of supply and demand conditions they would each constitute
a separate product/service market.
4.5 The relevant product/service market
should then be defined as comprising all those products and/or
services which are regarded as interchangeable or substitutable
by the consumers, by reason of the products/services' characteristics,
their prices and their intended use.
4.6 The relevant geographic market
should be defined as essentially the geographic area within which
participants in the market are involved in the supply and demand
of products or services with sufficiently homogenous conditions
of competition to allow it to be distinguishable from neighbouring
areas.
HKTC's Perspective of the Relevant
Market
4.7 HKTC argues that the international
services should be separated from the domestic fixed network services
for the purpose of market definition. It advances the following
arguments to support this approach in market definition:
"In Hong Kong there is no local call charge and no need for a national long distance call service. The Hong Kong regulatory regime also adopts the delivery fee settlement mechanism which creates a significant distinction between access for IDD and other services. The distinction between local and international call services is also emphasised in Hong Kong by the lack of local call charges and therefore service provider bills are typically for international services (with a small component involving local premium information services). International services are therefore quite distinct from local services. Accordingly it is necessary to separate international services from domestic fixed network services for the purpose of market definition."
4.8 HKTC further argues that "the
market for international business call services is distinct from
the market for ordinary residential IDD". The argument
advanced in support of this view includes the following:
"All of the FTNS operators market special volume discounts to these customers that often involve sophisticated pricing arrangement.
4.9 Accordingly, HKTC is of the view
that the market relevant to the declaration of non-dominance being
sought is the "international business call market".
The relevant geographic market is that for Hong Kong. This
market would include "international switched calls that are
billed in Hong Kong". It would include the following traffic
streams:
(a) International calls using the HKTI gateway (including ordinary outbound and call-back technologies and both fixed and mobile calls and whether used for voice or data);
4.10 In justifying the inclusion of
the services stated in the preceding paragraph in the "international
business calls market", HKTC states:
"In defining the international services market regulators have .... noted the substitutability of international leased circuits, ISDN and IVPN, Country Direct and call back services. The most sophisticated call back systems in the world are now deployed in Hong Kong. This has led to any previous distinction between call back and outbound calling technologies being minimal such that they are very close substitutes. In a similar manner, calling cards have proliferated both for use within Hong Kong and outside Hong Kong by Hong Kong consumers.
4.11 The TA invites comments
as to whether international business calls (defined as above)
constitute a distinct market.
Different Perspectives of the
Relevant Market
4.12 The TA is considering whether
the market defined by HKTC is too narrow since it confines the
market to business customers and international services.
4.13 An FTNS operator provides (and
is only licensed to provide) facilities for local communication
services between fixed points within Hong Kong. These fixed points
may be customers or service providers connected to the network
of an FTNS operator, or an interconnection gateway. The "international"
call services provided by an FTNS operator are essentially local
access services to allow the customers to access the HKTI's international
gateway at a fixed point within Hong Kong. Services involving
connectivity beyond the HKTI international gateway are either
within the exclusive preserve of HKTI or are subject to separate
PNETS licensing requirements (e.g. under PNETS licence for VPN
services). Thus the international call services provided by an
FTNS operator may be in the same market as for other local communication
services provided by the FTNS operator.
4.14 The market defined by HKTC includes
only the services for the business customers. There is doubt
as to whether it is practicable to draw a distinction between
services targeting the residential customers and those targeting
commercial customers. In any case, to the business customers,
if the services targeting the residential customers are of the
right price and quality, they could also be satisfactory substitutes
for the services targeting the business customers.
4.15 The market defined by HKTC also
includes international calls from mobile phones which is contrary
to present practices in regarding fixed telephony and mobile markets
as distinct markets (notwithstanding the emergence of converging
technologies argument). At the current stage of development, fixed
and mobile systems are not yet effective substitutes. The differences
in functionality and price levels would suggest that they are
separate markets.
4.16 In these circumstances the
TA invites comments on the following:
(a) whether local access services for local or international calls constitute one or separate markets;
5. FACTORS IN THE ASSESSMENT OF DOMINANCE
5.1 Having identified the relevant
market, the next step is to assess dominance within the context
of the existing market conditions and against a set of objective
criteria. The Competition Guidelines list a number of these factors
as follows:
The Degree of Market Concentration
and Market Shares of Licensees
5.2 The Competition Guidelines
state: "Market share is an important, but not a sole determinant,
of a licensee's dominance in a market. Whilst a very large market
share will ordinarily be given a high weighting, the TA will not
presume that it alone indicates a position of dominance. The TA
will look at the market share of the competitors (collectively
and individually) and at other behavioural and conduct factors
in making his determination of whether a licensee is dominant,
for example, whether it is constrained in its decisions as to
pricing".
5.3 The TA also stated that he would
presume certain thresholds for dominance:
5.4 The TA will bear in mind that these
are rebuttable presumptions and he will analyse the overall market
shares and relative market shares of the participants in the relevant
market. It is necessary to consider the importance of relative
market shares. For example, competitive conditions are likely
to differ as between a market where the leading supplier has 40%
and two other suppliers have 30% each, and a market in which one
supplier has 40% and no other supplier has more than 10%. A dominant
position can exist in the latter case but is much less likely
in the former.
5.5 HKTC has argued that its level
of market share in the "international business call market"
is now in the category where the TA will not presume that it is
dominant. HKTC therefore considers that it should be regarded
as "market leader for international business services
in the absence of potential material sources of dominance".
5.6 The TA invites comments on how the market concentration should affect the assessment of the "dominance" of HKTC in the market. The TA expects the members of the industry to provide details of their market share figures. This should be presented in terms of market shares in the total market and broken down into each specific sub-market, e.g., the specific market share for call-back service. The TA intends to treat such information as commercially sensitive information and would not publish individual figures if so requested by the operator supplying the information. The TA may however publish global figures if necessary to support his conclusions.
The Power to Implement Decisions
5.7 The Competition Guidelines state:
"The TA will look at the extent to which a licensee must
take into account the reactions of its competitors or customers
in making decisions as to pricing or other strategic matters.
Power to act independently, or power over price, is an important
indicator of dominance, because if a licensee is able to raise
its price without expecting a reaction from its competitors or
customers which forces it to lower its price, then it is able
to increase its price in order to increase its profits. The effectiveness
or otherwise of regulatory mechanisms applying to the licensee
may also be a factor which affects the power to act independently".
5.8 HKTC argues that unlike an operator
who is in a dominant position, it does not have the power to implement
its decisions on the market. Instead, it is only a market leader
and as such lacks the market power to implement decisions. HKTC
seeks to substantiate its case by putting forward the following
arguments relating to demand side substitution and supply side
substitution:
Demand Side Substitution
5.9 The TA invites comments
on the extent to which HKTC's activities and its implementation
of decisions affect their ability to compete in the relevant
market.
The Height of Barriers to Entry
5.10 The Competition Guidelines state:
"The existence of high barriers to entry protects existing
market players from the competitive pressures of new entrants.
Barriers to entry may be constituted in a number of forms, including:
5.11 An entry barrier allows an incumbent
firm such as HKTC to earn additional profit as a sole consequence
of being established in an industry. If entry barriers are low
or non-existent, then the possibility that new competitors may
enter may provide an effective constraint on behaviour. A firm
is unlikely to possess market power if entry barriers are low.
5.12 HKTC has argued that the existing
regulatory framework in Hong Kong is such that there are no significant
entry barriers:
Regulatory Barriers
5.13 The TA invites comments
as to what extent:
(a) the Hong Kong interconnection regime allows new FTNS operators to access the economies of scale achieved in HKTC's local access network;
Product Differentiation and Sales
Promotion
5.14 The Competition Guidelines state:
"A licensee which dominates a market may be less inclined
to differentiate its product from a competitor's or to engage
in serious sales promotions to inform its customers. It has an
established customer base which requires a new entrant to incur
higher advertising costs. A licensee in a competitive market must
be responsive to consumer requirements which stimulate other licensees
to respond to changes by supplying increasingly differentiated
products".
5.15 On product differentiation, HKTC
states:
"Product differentiation has been a feature of the Hong Kong market. For example, all of the resellers and new entrant FTNS operators launched call back or "value" IDD services that sharply differentiated their services from HKTC's outbound calling technology. HKTC has more recently launched an equivalent service but long after its competitors. All of the other FTNS operators have been able to participate in the traffic types included in the business call market."
5.16 The TA invites comments
on the extent of product/service differentiation in the relevant
market and whether the intensity of sales promotion in the market
has indicated the presence or otherwise of dominance in the market.
Nature of Corporate Relationships
5.17 The nature of corporate relationships
is an additional factor in the assessment of dominance. The Competition
Guidelines states: "This factor looks at the extent
to which a licensee is vertically integrated. A licensee which
controls all aspects of the production and distribution process
is more likely to be unconstrained by its competitors and to be
able to operate independently of its competitors".
5.18 Competitive safeguards include,
for example, anti-competitive conduct, abuse of dominant position,
restrictions upon cross-subsidisation, the conferring of undue
preference or receipt of unfair advantage as between affiliated
companies (with relevant effect on competition) and a requirement
upon HKTC to make available its services to resellers upon tariff
terms.
5.19 The TA invites comments
on whether or not:
(a) HKTI's obligation to treat all FTNS operators on a non- discriminatory basis; and
5.20 The TA invites comments
from the industry regarding the extent to which HKTC is vertically
integrated and to what extent this is a barrier to entry and therefore
enhances a position of dominance.
HKTI - an Affiliated Company
6.1 It has been suggested that the
mere fact that HKTI is an affiliated company to HKTC necessarily
enhances the dominance of HKTC. It may be argued that in circumstances
where HKTI is an affiliated company to HKTC as the monopoly provider
of international gateway services, a declaration of non-dominance
in respect of HKTC in the international access services market
would in reality be a reflection of a distortion of the competitive
regulatory environment in Hong Kong.
6.2 The TA invites comments
on this issue.
The Linkage Between HKTC's Control
of the Local Access Network and the International Services Market.
6.3 The lack of call duration charges
or even measurement in respect of local calls to some extent restricts
marketing activity in respect of purely local telephony. The
TA invites comments as to whether this is relevant as to the
existence or extent of any linkage between local telephony and
international call access services to the extent (if any) to which
they constitute separate markets.
6.4 The TA invites comments
as to whether international business calls services and the local
access network services are separate markets. One issue is, if
these services constitute separate markets, whether the linkage
between the two is so substantial that they cannot be dealt with
separately. Another issue is since HKTC's dominance of local
telephony services is clearly something which forms the foundation
of its business in international call access services, whether
it follows that for the purpose of regulation, the two services/markets
should be dealt with as the same.
6.5 The TA invites comments
on the extent to which HKTC's dominance in the local access market
is a significant factor in the assessment of dominance in the
international services market.
Profitability
6.6 It has been argued that the profitability
of HKTC is also a relevant factor to be taken into account in
the assessment of dominance. If HKTC shows consistently very high
profits whilst its competitors are making a small or "non"
return, then this would be an indication of significant market
power. Sustained excess profit would therefore create a barrier
to entry and thus prevents competition from new entrants in the
relevant market.
6.7 The TA invites comments
on this view.
7. CONSULTATION
7.1 This consultation paper
has been drafted with a view to facilitating industry discussion
only. It should not be regarded as an exhaustive discussion of
the subject or principles to be applied.
7.2 Your views or comments on
this consultation paper should be given in writing and should
be submitted to OFTA by 4 September 1997 at the following
address:
Office of the Telecommunications Authority 7.3 The TA reserves the right to publish all comments received and the identity of the source. 7.4 You are advised to mark confidential any information which is commercially sensitive. Office of the Telecommunications Authority 4 August 1997 |