Panel on Information Technology and Broadcasting(Minutes) 4 Dec 98

LC Paper No. CB(1)716/98-99
(These minutes have been seen by the Administration)

Ref : CB1/PL/ITB

Legislative Council Panel on Information Technology and Broadcasting

Minutes of special meeting held on Friday, 4 December 1998, at 10:45 am in the Chamber of the Legislative Council Building

Members present :

Hon SIN Chung-kai (Chairman)
Hon MA Fung-kwok (Deputy Chairman)
Hon David CHU Yu-lin
Hon YEUNG Yiu-chung
Hon LAW Chi-kwong, JP

Member attending :

Hon LEE Cheuk-yan

Members absent :

Hon Kenneth TING Woo-shou, JP
Dr Hon Raymond HO Chung-tai, JP
Hon Eric LI Ka-cheung, JP
Hon Fred LI Wah-ming
Prof Hon NG Ching-fai
Hon James TO Kun-sun
Hon Howard YOUNG, JP
Hon Emily LAU Wai-hing, JP
Hon CHOY So-yuk
Hon Timothy FOK Tsun-ting, JP

Public officers attending:

Mr G F WOODHEAD: Principal Assistant Secretary for Information Technology and Broadcasting
Mr A S K WONG: Director General of Telecommunications

Attendance by invitation :

Organisations
Asia Online Limited
Mr H L CHAN: Vice President of Marketing and Sales
City Telecom (H.K.) Ltd
Mr Ricky WONG: Chairman
Miss Vivian FOK: Marketing Communications Manager
Consumer Council
Mr Ron CAMERON: Head, Trade Practices Division
Dr Victor HUNG: Chief Trade Practices Officer
Electronic News Media & Publishing Consortium
Mr LAI Chau Wah, Charles: Representative, Chairing Organisation
HanStar Asia Capital Limited
Mr Cyrus HUI Kwok Wah: Managing Director
Hong Kong Information Technology Federation
Mr Anthony AU: President
Hong Kong Internet Service Providers Association
Mr Charles MOK: Secretary
Mr LEE Kheng Joo: ExCo Member
New T&T (HK) Ltd
Mr Tony CHEUNG Tung Lan: Director, Marketing
Individual
Mr Pindar WONG

Clerk in attendance :

Miss Polly YEUNG: Chief Assistant Secretary (1)3

Staff in attendance :

Miss Connie FUNG: Assistant Legal Advisor 3
Ms Sarah YUEN: Senior Assistant Secretary (1)4

I Policy on safeguarding fair competition in the Internet services market

The Chairman explained that the purpose of this special Panel meeting was to discuss the captioned subject in the light of public concern expressed over the proposed acquisition of the Internet services-related business of Hong Kong Star Internet Limited (Star Internet) by Hong Kong Telecom (HKT) (the proposed transaction). He referred members to the additional information papers provided by the Administration and HKT tabled at the meeting.

(Post-meeting note: The tabled papers were circulated to members after the meeting vide LC Paper Nos. CB(1)580/98-99 (01) and (08).)

2 The Chairman then welcomed the deputations and invited their views on the proposed transaction and the captioned subject.

Meeting with deputations

Asia Online Limited (Asia Online)
(LC Paper Nos. CB(1)567/98-99(02) and 580/98-99(02))

3 Mr H L CHAN briefed members on Asia Online's submission, stating its objection to the proposed transaction which, in its view, would enable Hong Kong Telecom IMS Limited (HKTIMS) to secure a monopoly of 70% of the Internet services market, thus leading to unfair pricing, reduced competition and limited consumer choice to the detriment of community interest, in particular Hong Kong's electronic commerce (e-commerce) capabilities.

City Telecom (H.K.) Ltd (CTI)
(LC Paper Nos. CB(1)567/98-99(03) and 580/98-99(03))

4 Mr Ricky WONG referred members to the results of an opinion survey conducted by CTI which overwhelmingly objected to the proposed transaction and he urged the Telecommunications Authority (TA) to disapprove it for its adverse effect on consumers' choice, and on the development of the Internet services market and information technology.

Consumer Council (CC)
(LC Paper No. CB(1)580/98-99(04))

5 Mr Ron CAMERON highlighted the main points of CC's submission. CC recognised that following the proposed transaction, HKTIMS would have approximately 70% share of the Internet services market, and could presumably use its dominant position to prevent, restrict or distort competition in the market. As such, CC felt the Administration should give the proposed transaction careful consideration having regard to the points highlighted in its paper.

6 Mr CAMERON further pointed out that once an acquisition had been completed, it would be a difficult, if not impossible, task to reverse the structural factors in the market resulting from that acquisition, not to mention that the advantages of incumbency which HKTIMS currently possessed were already difficult for existing and new entrants to overcome.

Electronic News Media & Publishing Consortium (ENMPC)
(LC Paper No. CB(1) 580/98-99(05) and further submissions from ENMPC's members circulated to Panel members after the meeting vide LC Paper No. CB(1)609/98-99)

7 Mr Charles LAI advised that the ENMPC had not formulated a common position on the proposed transaction. He briefed the Panel on the results of an opinion survey conducted by ENMPC and members noted that the majority of views collected were against the proposed transaction.

HanStar Asia Capital Limited (HanStar)
(LC Paper No. CB(1)567/98-99(04))

8 Mr Cyrus HUI referred members to HanStar's submission and stated its objection to the proposed transaction, pointing out that it would lead to price fixing and diminished choice for consumers, software and Web content developers and providers, business and e-commerce vendors, and give rise to the grave danger of monopoly of information. He then highlighted the importance of the information technology (IT) industry, in particular Internet and web-related business to Hong Kong's economic recovery, and urged TA to disapprove the proposed transaction so as to ensure fair competition and healthy development of the IT industry. He further advised against attaching conditions to the approval of the proposed transaction, pointing out that it would be both difficult and costly to enforce such conditions.

Hong Kong Information Technology Federation (HKITF)
(LC Paper No. CB(1)580/98-99(06))

9 Mr Anthony AU expressed HKITF's support of open, free and fair competition and stated its concern about fairness in competition between small and medium enterprises (SMEs) and organisations with inherited competitive advantages as over 90% of the companies in the IT industry were SMEs. He then emphasised the possible contribution of SMEs to Hong Kong's economic recovery and urged the Government to review and implement long-term policies that would secure a level playing field within the IT industry.

Hong Kong Internet Service Providers Association (HKISPA)
(LC Paper No. CB(1)580/98-99(07))

10 Members noted that HKISPA was opposed to the proposed transaction, with or without conditions, for its perceived adverse effect on competition, the possible increased dominance of HKT in the Internet backbone market and across the entire telecommunications market through HKTIMS, as well as the possible control of Hong Kong's information infrastructure by HKT. Mr Charles MOK was of the view that unrestricted entry into the market by internet service providers could not counter dominance. Moreover, HKISPA also felt that it would be an undesirable development for the Government to pay $6.7 billion to HKT to end its monopoly in the external telecommunications services market and subsequently enable it to establish monopoly in another market.

New T & T (HK) Ltd (New T & T)
(LC Paper No. CB(1)573/98-99(01))

11 Mr Tony CHEUNG expressed New T& T's grave concern about the adverse effects of the proposed transaction on competition and hence consumer interests and choice, in consideration of the estimated market share of over 63% which HKTIMS would be able to achieve as a result. In Mr CHEUNG's view, the proposed transaction would constitute conduct which was in breach of HKTIMS's Public Non-exclusive Telecommunications Services (PNETS) licence as under General Condition 7 and Special Condition 13 of the licence, HKTIMS was prohibited from entering into any anti-competitive agreements which would in any way revent or restrict competition". Claiming that HKTIMS was already engaging in some anti-competitive practices by taking advantage of the synergy of its association with its parent company, Mr CHEUNG also cautioned that the lack of competition safeguards in the Internet market would enable HKTIMS to abuse its dominant position effected by the proposed transaction.

12 Mr CHEUNG then urged members and the Government not to support the proposed transaction and, in the event of an approval, to subject HKTIMS to the conditions highlighted in page four of New T & T's submission.

Mr Pindar WONG
(LC Paper No. CB(1) 573/98-99(02))

13 Mr Pindar WONG presented his views on the proposed transaction from the perspective of an individual and stressed that as long as the customer's right to choose and move could be preserved and that the playing field was level, it did not matter who owned the current field. In elaborating his views, he also highlighted the need to preserve the dynamics of the Internet market.

Meeting with the Administration
(LC Paper Nos. CB(1)567/98-99(01) and 580/98-99(01))

14 The Director-General of Telecommunications (DG Tel) briefed members on the Administration's information paper tabled at the meeting and explained the legal basis for TA's involvement in the proposed transaction, its main considerations in vetting the application, and the steps taken and contemplated by TA in handling the matter. He further assured members that although the Administration would not comment on the proposed transaction while consultation was still under way, it would consider all relevant factors, including the effect of the proposed transaction on competition in the market, consumer interest, continuity and quality of services to existing customers, etc. as well as deputations' and members' views expressed at this meeting before taking a decision. DG Tel, in reply to members, said that according to his understanding which was subject to confirmation by his legal advisor, TA was empowered to impose conditions as appropriate in giving approval to the proposed transaction. He confirmed that in the case of a conditional approval, HKTIMS and Star Internet might each retain its own PNETS licence.

General deliberations

15 In reply to the Chairman, the Assistant Legal Advisor 3 advised that under the Telecommunication Ordinance, the Legislative Council had no power to veto the proposed transaction. She however emphasised that TA was under a duty to act reasonably in making a decision on the matter, and if the decision making process was considered unreasonable, any interested party aggrieved by the decision could apply for judicial review.

16 As regards the weighting of market share in determining whether there was market domination or otherwise, DG Tel confirmed that market share was only one of the factors to be considered. The critical issue for consideration was the possession of market power that could deny consumers choice. In other words, market concentration was a more important factor to consider. He further advised members that the TA would apply public interest tests to assess the pros and cons of the proposed transaction.

17 Mr Ricky WONG of CTI highlighted the need to take note of the synergy of HKTIMS's association with its parent company HKT, which was already a dominant player in the fixed telecommunications network service (FTNS) market. He said that as HKT was in control of 98% of the FTNS market and would remain the sole supplier of external leased circuit services until facilities based competition commenced on 1 January 2000, unrestricted access to such essential facilities at presumably concessionary rates through HKT was already giving HKTIMS a decisive edge over its competitors, given that line rental constituted a large part of the costs of providing Internet services. Mr WONG supplemented that as HKTIMS would almost certainly lease HKT's lines to provide its service, higher line rental income for HKT and less such income for the other FTNS operators would result.

18 Mr Tony CHEUNG of New T & T shared Mr WONG's view, and drew members' attention to how such synergy could also work to effect cross subsidy to enable bundling of services at competitive prices. Mr Charles MOK of HKISPA further pointed out that in bundling services, HKT always chose to co-operate with its affiliated companies so that such synergy would not benefit other operators. In recognition of this and the fact that developments in one sector in the telecommunications market would implicate on another, the deputations opined that it was necessary to prevent HKT from achieving a dominant position in the Internet services market through HKTIMS on top of its market dominance in the FTNS market.

19 In response, DG Tel explained that in taking a decision on the proposed transaction, the Administration would also consider its likely effect on each of the related markets including the FTNS and the IDD markets. He further responded to the industry' s concerns as follows -

Where facilities were concerned, HKT was prohibited from denying other operators access to its external leased circuits or charging unreasonably high fees. Besides, HKT could not charge its associated companies lower fees.
As for bundling of services, although there was no specific provision in HKTIMS's PNETS licence against bundling of services, HKT's FTNS licence did impose restrictions on bundling of services which would deny consumers the right to use only one or some of the services on offer as part of the package concerned. Moreover, to guard against cross subsidy, HKT was required to submit separate accounts for its different business arms to TA every three months. HKTIMS's PNETS licence also required its accounts to be separated from those of HKT.

20 In response to members' urge for reasonable precautionary measures against market domination, DG Tel advised that the Administration was constantly on guard against market domination. He assured members that in making a decision on the proposed transaction, the Administration would carefully consider its implications on the future market scenario and subject the resultant dominant player, if any, to greater regulation including, if necessary, a requirement for it to seek TA's approval before the introduction of new services or revision of charges for existing services.

21 A member urged the Administration to take proactive steps to curb anti-competitive practices, instead of dealing with such practices only when they had emerged. In response, DG Tel assured members the Administration had already recognised that the present level of penalty was too low to achieve a deterrent effect on anti-competitive practices and would propose to introduce amendments to the Telecommunication Ordinance to increase the level of penalty. He further informed members that the Administration had verbally warned HKT of the consequences of contravention of anti-competitive safeguards under its licence conditions which might lead to suspension or revocation of licence.

22 Commenting on the proposed transaction, a member drew the Administration's attention to the concern of the staff of Star Internet about their entitlement to a thirteenth month salary in case the Internet-related business was acquired by HKTIMS.

23 The Chairman thanked the deputations for attending the meeting and invited them to submit further views, if any, to the Panel or the Administration in writing.

24 The meeting ended at 12:20 p.m.

Legislative Council Secretariat
4 January 1999