Telecommunications in Hong Kong

The ending of the Hong Kong Telephone Company’s (HKTC) monopoly on the provision of the domestic public switched telephone network (PSTN) marks a turning point in the history of Hong Kong’s telecommunications. From 1st July four new Fixed Telecommunications Network Services (FTNS) licences came into effect, issued to HKTC, Wharf Holding’s New T&T (Hong Kong) Ltd, Hutchison Communications Ltd and New World Telephone Ltd.

Telecommunications in Hong Kong

Until 1st July 1995 the liberalization of telecommunications services in Hong Kong had been a process rather than an event. Steadily throughout the 1980s and early 1990s telecommunications markets had been opened to competitive entry, starting with customer premises equipment and paging markets, followed in the mid-1980s by the cellular mobile telephone market, and by the early 1990s including broadcast uplinking and downlinking of satellite communications.

But with the ending of the Hong Kong Telephone Company’s (HKTC) monopoly on the provision of the domestic public switched telephone network (PSTN) and basic voice services, 1995 marks a turning point in the history of Hong Kong’s telecommunications. From 1st July four new Fixed Telecommunications Network Services (FTNS) licences came into effect, issued to HKTC, Wharf Holding’s New T&T (Hong Kong) Ltd, Hutchison Communications Ltd and New World Telephone Ltd.

All that now remains of the monopoly provision of telecommunications services is Hongkong Telecom International’s (HKTI) exclusive licence to provide the international fixed-line network and voice telephony until the year 2006, and even that is being systematically whittled away at the edges. For example, from 1995 the self-provisioning of telephone and data circuits by international companies using satellite capacity is permitted, while all forms of store-and-forward and enhanced voice services, together with data services of all kinds, are open to competitive entry.

A decisive step forward in the formulation of telecommunications policy in Hong Kong was the setting up, in 1993, of OFTA, the Office of the Telecommunications Authority (TA), and the transfer of the powers of the TA from the Postmaster General to the Director-General of OFTA. The TA is now a specialist, supported by a team of over 240 specialists – financed from licence revenues – who reports to the Secretary of the Economic Services Branch of Government, and has sufficient autonomy to regulate the industry with a transparent set of guidelines, and has sufficient authority to influence policy-making. The ultimate authority of the TA derives from the Telecommunication Ordinance which, together with the Telephone Ordinance, are statutes of the Hong Kong Legislative Council.

OFTA has continued the policy traditions of the Postmaster General’s Department in many respects. For example, to promote competition in mobile radio telecommunications services it has become policy to license as many operators as the TA thinks the market can bear and within radio spectrum available. Monopolistic competition has emerged in the paging market, with over thirty paging companies attempting to differentiate their products through innovative designs and services at low prices. Shortage of spectrum and booming demand has worked against price reductions of handsets in the mobile cellular market where initial outlays can be as high as US$2,000, so in 1994 OFTA intervened directly to shave thirty per cent or more off listed prices. OFTA also imposed specific licensing conditions on Smartone, the new entrant in 1995 offering GSM, to ensure lower-income customers would be served.

There are currently four cellular operators offering AMPS and TACS, digital AMPS, CDMA and GSM. In addition up to six personal communication network (PCN) licences and four cordless access services (CAS) licences are due to be awarded by the TA in 1995. OFTA has taken a technology-neutral stance in the awarding of these licences, leaving risk-taking to the companies concerned. OFTA commissions outside consultants to undertake market forecasts upon which it bases its decision of how many initial licences to issue. In this case the forecast was for 1.11 million CT2 and cellular users by 1998, in contrast to some less optimistic growth projections of 850,000 by that year. Inevitably there is uncertainty surrounding these forecasts and whether or not an addition of ten new licences is two or four too many, or about right. OFTA remains confident, but is prepared to see market shakeout if necessary, and has made strong assertions that consumer interests will be protected.

Making Competition Work
The main regulatory task for OFTA currently falls, inevitably, in the area of making competition work. Several issues are involved. Interconnection between HKTC’s network and the three new FTNS licensees in one. Following the pattern set by OFTEL in the UK and AUSTEL in Australia, OFTA is allowing the parties to negotiate their own technical and commercial agreements, subject to OFTA’s approval, while retaining the powers of determination as a last resort. Since each of the new operators will have their own very specific networking requirements, and will be offering different sets of services and commercial packages, separate negotiations are inevitable. At the time of writing only one agreement had been reached, and the other two were running up to OFTA’s deadline.

Numbering is another competitive issue. To ensure an equitable distribution of numbers between operators, and number portability between operators to remove the constraint of inertia which would otherwise dissuade customers of HKTC ever moving to another operator, OFTA has taken direct control of the allocation of numbers. Geographical number portability and personal number portability are also desirable services, but as commercial decisions are left up to each operator to offer.

Revenue-sharing is another critical issue for the commercial success of the new entrants. HKTC’s dominance of the domestic market will be hard to break, especially because monthly rentals are low and, besides payphones, there are no local call charges. This implies that the major source of revenue will come from the delivery of incoming and outgoing international calls between local business and residential customers and HKTI’s gateway. The mechanism for the payment of delivery fees is, for historical reasons, closely tied to another issue, the cross-subsidy from international telecommunications revenue to the local network. This in turn can be broken down into two elements: domestic subsidy and transfer payment in respect of HKTI’s universal service obligation.

The transfer payment arose during the 1980s. An adjudication between Cable and Wireless Hong Kong Ltd (CWHK) a wholly-owned subsidiary of the British international telecoms company Cable and Wireless plc (C&W), and HKTC split revenue-sharing from 60:40 on long-haul routes (over 100 miles) and 40:60 on short-haul routes (Macau, Shenzhen and Guangdong province in China). The 1984 takeover of HKTC by C&W, and the setting up of the holding company Hongkong Telecom (HKT), was not allowed to change this revenue split arrangement. The scale of the 1980s surge in international traffic volumes had not been anticipated and brought a windfall of revenues to HKTC which, under the profits Scheme of Control scheme then operating, were used to maintain rentals at very low levels and to fund the universal service obligation or USO.

The Scheme of Control has been replaced with a Price Cap mechanism, currently the consumer price index minus 4 per cent (with sub caps of 4 per and 3 per cent respectively on installation charges and residential rentals). Under this price incentive scheme productivity gains are to be shared between the company and consumers, with a guaranteed share going to the consumer. Under monopoly conditions this makes good sense, but is tantamount to predatory pricing in a competitive environment if revenues from delivery fees are included, unless they are shared on an equitable basis with the new entrants. In 1991-92 the weighted average per-minute revenue share of HKTC from HKTI was HK$1.50 (approximately US$0.20) of which HK$0.45 was transfer payment in respect of the USO. OFTA has determined that all FTNS operators and mobile cellular and PCN operators who deliver international calls to the HKTI gateway, or terminate calls from the gateway, will receive an Access Deficit Charge (ADC) – the HK$1.50 per minute is only the weighted average – minus the HK$0.45 which will be paid to HKTC in respect of the USO.

It is entirely a commercial decision for the new operators to pass on to the subscriber part or all of their ADC in the form of reduced IDD call charges, a necessary move if they are to win market share, but HKTI cannot change its tariffs without Government approval. The delivery fees of the new operators arise from a share of the call collection rates for outgoing calls and a share of the accounting rate settlements for incoming calls. The lion’s share comes from incoming calls, and as call collection rates tumble further this will become increasingly true, unless accounting rates take an equally dramatic dive. For this reason it pays operators to arrange as many calls as incoming as possible, and this is where callback may prove significant. Callback has been declared completely acceptable in Hong Kong, including arrangements for freephone calls routed through switches located in Hong Kong, which HKTI sees as yet another whittling away of it’s licence safeguards.

Hong Kong as a Telecommunications Hub
Competition is therefore coming from within and without for HKTI, and already Hongkong Telecom has announced IDD cuts in anticipation of the FTNS competition. This follows three annual average reductions of 8 per cent, 2 per cent and 2 per cent insisted upon by the Government since 1993. Besides the commitment to whittle away at the scope of HKT’s exclusive licence, one of the major considerations of Government policy is to maintain Hong Kong as a competitive telecommunications regional hub, and in that sense the rivalry between Hong Kong and Singapore always remains just below the surface.

Hong Kong’s position as the entropôt to China is reflected in the rate of growth of cross-border telephone, fax and data traffic since the 1980s, averaging over twenty per cent annually. China’s open door policy after 1978, and the massive expansion in the telecommunications infrastructure in the Peoples’ Republic over the past decade, means that China traffic now dominates Hongkong Telecom’s revenues. Around fifty per cent of traffic is with China, overwhelmingly to the Shenzhen Special Economic Zone and Guangdong province, but increasingly to Beijing, Chengdu, Shanghai, Tianjin and other metropolitan centres. Thirty-four per cent of IDD revenues come from China traffic.

From 1st July 1997 Hong Kong will become a Special Administrative Region, or SAR, within China, but traffic between the two will continue to be treated as if it were international for purposes of the HKTI licence and for accounting rate purposes. Both China’s Ministry of Posts and Telecommunications and HKTI stand to benefit from this agreement of the Joint Liaison Group, or JLG, but it is unlikely to survive past 2006, and pressure will grow to declare such traffic trunk. Apparently immune from the threat of competition, IDD call charges to China have not benefitted from any of the recent reductions.

Beyond telecommunications, multi-media services in Hong Kong remain in their formative stages. Besides two terrestrial broadcasters, ATV and TVB, and the regional STAR TV satellite service, Hong Kong has territory-wide franchised cable TV network operated by Wharf Cable using MMDS until a fixed cable system has been completed. Wharf Cable’s network is also expected to be leased by New T&T, one of the FTNS operators backed by Wharf Holdings.
The three year exclusivity of Wharf Cable’s licence expires in 1996 and already Hongkong Telecom has given notice that it wishes to apply for a second licence. HKT is also launching a Video-On-Demand network this year which promises to be the first partially inter-active network in Hong Kong.

But beyond these developments Hong Kong has no plans or timetable for rolling out comprehensive broadband networks capable of offering a range of inter-active home and office services. Unlike the Singapore model of the Intelligent Island, Hong Kong follows a policy known as ‘positive non-intervention’, which simply translated means that the government provides a basic economic and social infrastructure, and leaves the rest up to the market and business sectors with the minimum of intervention. This is not quite the complete story because through quasi-autonomous non-governmental organizations (quangos) such as the Productivity Council, the Technology Centre, the Trade Development Council, the Industry and Technology Development Council, support and encouragement is offered to the private sector to invent and to innovate.

Also the universities, of which there are now five, provide seedbed environments for projects such as Hong Kong Supernet, the semi-commercial internet service provided through the Hong Kong University of Science and Technology, and The University of Hong Kong’s semi-commercial Law-on-Line Database network. But that is as far as the story goes. It is noteworthy that Hong Kong has already over twenty private commercial Internet service providers, although beyond the financial services sector, the Territory has few other online information service providers.

High-grade telecommunications at affordable prices have been vital to Hong Kong’s success as an international economy. They are regularly cited by international companies as a reason for locating in Hong Kong, and the further liberalization of the market in 1995 will strengthen Hong Kong’s position as Asia’s leading communications hub. The debate, such as it is, focuses more on the ability of the Hong Kong economy to survive as more than just a financial services centre, to strengthen its role as a centre for research and development, for design and the transformation of software into software-related business and customer products.

The future role of telecommunications as a system which integrates networked intelligence into an increasingly multi-media world is assured, but discovering what the exact nature of that role will be is full of uncertainty. Hong Kong’s approach, in contrast to other Asia dragon economies, is to leave the key underpinning technological and investment strategies to the forces of competition.

Photo by Pavan Trikutam

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