Paper for the Economic Services Panel Provisional Legislative Council

The Impact on the Development of the Telecommunications Industry in Hong Kong in the light of the Acquisition of Pacific Link by Hongkong Telecom

Introduction

On 3 December 1997, the Telecommunications Authority (TA) approved the acquisition of Pacific Link Communications Limited (Pacific Link) by Hongkong Telecom CSL Limited (CSL). This paper discussed the impact, if any, of this acquisition on the development of the telecommunications industry in Hong Kong.

2. Hong Kong has one of the most open and competitive markets in the world in the telecommunications sector. Competition in the market for Public Mobile Radiotelephone Services (PMRS) and Personal Communications Services (PCS) is particularly intense. Competition is used as a major means to achieve the policy objectives of the Government in telecommunications.

3. The approval of the acquisition of Pacific Link by CSL does not signify any change in the policy of promoting fair and effective competition in the telecommunications sector. On the contrary, Government remains firmly committed to the promotion of fair and effective competition in the telecommunications market as a vehicle to protect and enhance consumers’ interest.

Policy Objectives

4. In regulating the telecommunications industry, the TA is guided by the policy objectives of the Hong Kong SAR Government :

- that the widest range of quality telecommunications services should be available to the community at reasonable cost;

- that telecommunications services should be provided in the most economically efficient manner possible; and

- that Hong Kong should serve as the pre-eminent communications hub for the region now and into the next century.

5. In pursuance of these policy objectives, it is the duty of the TA to promote fair and effective competition to bring about a wide range of quality telecommunications services to the community at reasonable costs; to adopt a market driven approach to allow free market economics to work as much as possible to bring about economic efficiencies; to create a conducive environment to attract investments for developing telecommunications infrastructure in Hong Kong thereby enhancing Hong Kong's position as the pre-eminent communications hub for the Region.

Primary Consideration

6. Accordingly in considering proposals for acquisition (and merger where proposed) of operations for PMRS and PCS, the TA's primary considerations will be :

1. whether competition in the market would be adversely affected;

2. whether consumer interest has been adequately safeguard;

3. whether the regulatory environment has been compromised; and

4. whether economic efficiency has been reduced.

Whether Competition in the Market would be Adversely Affected

Choice to Consumers

7. Since the introduction of competition in the eighties, the market for the cellular mobile services has offered wide choice to the consumers. At present, systems conforming to a number of technical standards are available. There are three GSM 900 systems operating in the 900 MHz band, two systems (one D-AMPS system and one CDMA system) conforming to North American standards in the 800 MHz band and six PCS conforming to the GSM 1800 standard in the 1.8 GHz band.

8. The TA considers that the wide choice to consumers should be preserved. After the acquisition of Pacific Link by CSL, the same number of systems conforming to the variety of technical standards will continue to be operated in the market. Thus the acquisition would not result in any reduction of choice of systems to consumers. [Pacific Link operates a D-AMPS system in the 900 MHz band and a GSM 1800 in the 1.8 GHz band (PCS). CSL operates a GSM 900 system in the 900 MHz band.]

Number of Competing Systems

9. Apart from maintaining the choice to consumers, the TA would wish to see genuine competition among systems of the same type. This would mean that these systems would be operated by licensees without significant overlap in ownership.

10. The TA has always adopted a policy to permit a mobile phone operator to upgrade and expand its service into new technologies by allowing existing operators to bid for licences in competition with new entrants.

11. In the bidding process for PCS licences, existing PMRS operators with spectrum in the 800/900 MHz bands were permitted to bid for PCS licences in the 1.8 GHz band. Expansion into the 1.8 GHz band has been considered as a natural development of an operator of PMRS in the 800/900 MHz bands. Two operators in the 800/900 MHz bands, Hutchison and Pacific Link, were successful in obtaining PCS licences in the bidding process. As a result, Hutchison now owns three licences, one for each of the different types of technical systems - GSM 900, CDMA and GSM 1800.

12. The TA however would not wish to see competition in each type of system to be reduced through acquisition, resulting in a licensee controlling more than one system of the same type. For example, a proposal for acquisition by one GSM operator of another GSM operation would not normally be approved. Likewise, a proposal for the acquisition of one PCS operator by another PCS operator, or the acquisition of an operator of a CDMA system by the operator of the similar D-AMPS system (or vice versa), would not normally be approved. The acquisition of Pacific Link by CSL has not resulted in any licensee controlling more than one system of the same type. The number of licences and amount of spectrum which CSL has after this sale is the same as that of one of its major competitors, Hutchison.

13. If any operator of one type of system were to seek to acquire another operator of a system of the same type, the TA would consider requiring the acquiring operator to relinquish the spectrum of one of the two systems of the same type. The TA would consider inviting new applications for a licence to operate within the relinquished spectrum.

Number of Competing Operators

14. The intensity of competition in the market would depend on the number of "independent" operators (meaning operators which do not have any material overlap in the ownership or control). The TA has therefore considered the number of independent operators remaining on the market after the proposed acquisition of Pacific Link by CSL.

15. Hong Kong has by far the largest number of independent operators in the mobile phone market compared to any other place in the world. We are still in this position after the Pacific Link acquisition by having seven different operators, creating a very competitive market.

Market Concentration

16. The TA will consider the market concentration before and after the acquisition. He would not wish to see market share being too concentrated in one operator's hand particularly as a result of an acquisition. In this case, even after the acquisition of Pacific Link by CSL, the market share of CSL will be around 40% and cannot be considered to be too concentrated.

17. In addition, market share should not be equated with anti-competitive practices. It is not the objective of the TA to articifically interfere with market mechanisms to try to reduce the market share of individual operators below a certain threshold. Market share may just be an indication of the success of a particular operator to attract customers. Under the licences for PMRS and PCS, there are licence conditions prohibiting anti-competitive practices. It remain the TA's duty to monitor market behaviour and take action against anti-competitive practices.

Dominance of Operators

18. An operator is regarded as dominant in the market if it is able to take decisions in the market (for example, raising prices) without restraints from its competitors and customers. The TA does not wish to see any particular operator becoming dominant in the market by acquisition of another operator. Whether an operator would become dominant after the proposed acquisition would depend on a number of factors. Market share is only one of the factors. Other factors would include the state of competition in the market, the number of players, their readiness to compete and the existence of any entry barriers to the market. Having considered these factors, the TA is of the view that no operator in the mobile phone market would be dominant after the acquisition of Pacific Link by CSL.

Whether Consumer Interest has been Adequately Safeguarded in the Acquisition

Service to Consumers

19. The TA has considered the effect of the acquisition of Pacific Link by CSL on the customers of the services - whether there would be disruption of service, whether prices and quality of service would be maintained both in the immediate term and the long term. He has been assured that there would not be any disruption to the services to the customers of Pacific Link as a result of the acquisition.

Obligations of Licensee Acquired

20. In a competitive bidding process for licences, a successful bidder is awarded a licence based on the merits of the application. The commitments of the successful applicants are turned into obligations under the licences issued. When there is a change in the ownership of the successful bidder, or a transfer of the licence, the TA will consider whether obligations of the operator being acquired would be fully taken over by the acquiring operator. In particular, the TA will consider whether the commitments secured by performance bonds, e.g. those under the licences for PCS, would continue to be honoured by the acquiring operators.

21. The TA will consider whether the acquiring operator has the financial and technical capability to provide a satisfactory service and honour the commitments under the licences of the operator acquired.

22. In the case of the acquisition of Pacific Link by CSL, the TA is satisfied that the commitments of Pacific Link would be fully honoured by CSL which has both the financial and technical capability to honour these commitments.

Whether the Regulatory Environment has been Compromised

23. There have been some criticisms that by allowing CSL to acquire Pacific Link, the regulatory environment has been compromised because a loser in the PCS bidding exercise could simply buy a licence back. This is not the case.

24. The reason CSL did not win a PCS licence in the bidding exercise was that its offer against the selection criteria was not as favourable as the winning bids, such as Pacific Link's. Allowing CSL to take over Pacific Link's PCS licence has the important condition that CSL must operate on exactly the same terms as offered in Pacific Link's bid. It therefore will not change the status of the licence and the conditions under which the licence was granted.

25. An important factor in the regulatory environment is consistency. If under the regulatory environment one operator has been permitted to own one each of the three different types of licences (as is the case), another operator should also be allowed an equal opportunity to do the same, unless it is in conflict with some other important overriding policy considerations such as those in (a) and (b) of paragraph 6 above.

26. Another important issue in the regulatory framework is that we have created a free market economy in the telecommunications sector in Hong Kong. We allow foreign investors to freely enter into this market in Hong Kong. We must also allow foreign investors to freely exit the market if they want to do so because of commercial reasons. Prohibition of the transfer of assets, including licensing rights, should only be considered in extreme cases where the public interest is significantly undermined.

Whether Economic Efficiency has been Reduced

27. There is nothing in the CSL acquisition of Pacific Link to suggest that economic efficiency would be reduced. In fact the contrary may happen. By allowing CSL to acquire more spectrum to meet its needs to provide a better service to its customers, economic efficiency could be enhanced. The merging of the Pacific Link's network facilities with CSL's would also result in efficiency gains.

Conclusion

28. The preceding paragraphs have outlined the principal considerations of the TA in approving the acquisition of Pacific Link by CSL. The Government is of the view that the acquisition has no adverse impact at all on the future development of the telecommunications industry. The acquisition would not reduce the intensity of competition in the market. On the contrary, the intensity of competition would be maintained or enhanced through the acquisition. The interest of the consumers has been adequately protected in the acquisition process. The Government affirms its commitment to promoting fair and effective competition in the market for mobile services. Promotion of competition and protection of consumer interest will remain to be the TA's primary considerations in deciding whether or not to approve a proposal of acquisition and merger in the future. Each application will be considered on its merits based on the factors identified in this paper.

29 December 1997

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