In the second half of 2003, Hong Kong’s dominant fixed line operator PCCW-HKT Telephone Limited (PCCW) applied to the telecommunications regulator, the Telecommunications Authority (the TA), for declarations of non-dominance in the markets for both business direct exchange line (BDEL) services and residential direct exchange line (RDEL) services. The TA has issued consultation papers seeking third party views.
Hong Kong’s fixed telecommunications industry has been gradually liberalised since 1995. A number of mechanisms exist in order to promote competition, although it has never been the TA’s intention to set these in stone in a developing competitive environment. They include a mechanism whereby certain regulatory constraints contained in licence conditions may cease to apply in respect of licensees that are declared non-dominant. PCCW has applied for its licence conditions relating to accounting separation and the approval by the TA of tariffs, and that restrict tariff discounts, to be disapplied in respect of the markets for BDEL and RDEL services. These applications are the most recent in a series of non-dominance applications submitted by PCCW in recent years. PCCW has previously been declared non-dominant in the markets for retail external (international) call services and for external bandwidth services.
As is common when it receives an application the result of which will affect or be of interest generally to the telecommunications industry, the TA has published consultation papers seeking the views of the industry and other interested parties on the matters arising from PCCW’s applications.
The bases of PCCW’s applications
PCCW cites, amongst others, the following facts in support of its non-dominant status in the BDEL and RDEL services markets:
its declining market share which, in the period before the applications, had fallen to below 75%, and increasing monthly churn rates;
the existence of multiple competing local access networks that provide alternative, sustainable customer access options for the relevant services to almost all consumers of the relevant services;
the level of excess capacity on competing networks;
the absence of legal or regulatory barriers to entry;
the establishment of efficient regimes for access to buildings, use of block wiring and road opening;
lack of customer inertia given the strong brand recognition, and the high market share for the provision of other telecommunications services, of the competing network operators;
an already high degree of price competition, and increasing product differentiation, in the relevant markets; and
a substantial, and increasing, substitutability of mobile services for fixed line services.
PCCW contends that, while dominance is unlikely with low market share, high market share does not necessarily confirm dominance. PCCW’s position is that, since its share of the relevant markets is now below 75%, those who argue that PCCW is still dominant must assume the burden of proof. PCCW adds that current churn rate data, as an indicator of the rate at which the markets are changing, must be included in the market power analysis.
The TA’s position is that market share is fundamental to the assessment of dominance, though it is not the sole determinant. The TA has previously published Competition Guidelines which specify a number of rebuttable quantitative presumptions of dominance. Specifically:
a licensee with a greater than 75% market share will be presumed to be dominant;
a licensee with a less than 25% market share will be presumed to be non-dominant; and
there will be no presumption in respect of a licensee with between 25% and 75% market share.
In the consultation papers, the TA therefore asks the following questions regarding market share: whether PCCW should be presumed dominant at a certain level of market share (in the absence of evidence to the contrary) and, if so, at what level; whether PCCW’s market share should be measured by lines (subscriptions) or by revenue (or by some other measure) and how long should the TA trace back in history in assessing PCCW’s market share.
The existence of high barriers to entry protects existing market players from the competitive pressures of new entrants. There are no legal or regulatory barriers to entry into the relevant markets in Hong Kong. However, PCCW cites high churn rates as evidence that there are no significant physical, technical or financial barriers to entry either. In the consultation papers, the TA is largely content to seek industry comment on the extent to which there are physical entry barriers and whether the level of capital intensity in fixed network investment constitutes an economic barrier to entry.
PCCW submits that its activities in the relevant markets are fully constrained by both its competitors and customers. It claims that declarations of non-dominance will enhance competition and increase consumer benefits and argues that constraining PCCW from responding to competitive price changes results in competition benefits to consumers not being fully realised. Indeed, PCCW estimates that current regulatory pricing constraints imposed on it have cost consumers tens of millions of Hong Kong dollars during the year prior to the applications. It argues that these constraints diminish PCCW’s investment and innovation incentives such that a non-dominance declaration would have important pro-investment, pro-competition and pro-consumer benefits in the relevant markets. PCCW claims these benefits include full and fair competition by PCCW in the markets, increased competition on a level playing field, incentives for PCCW to invest more in new technologies and in its networks and the accelerated integration of Hong Kong into the economy of the Pearl River Delta.
The TA is currently reviewing its policy on Type II interconnection (known elsewhere as local loop unbundling), with a decision expected by early 2004. The consultation papers acknowledge that, while it is beyond the scope of the consultations, the outcome of the Type II interconnection policy review may affect the level of physical or economic barriers to entry to the relevant markets. The TA states that its analysis and conclusions on the level of entry barriers to the relevant markets will be consistent in both the PCCW applications and the Type II interconnection policy review.
Unlike the services for which PCCW has previously been declared non-dominant, the services that are the subject of PCCW’s current non-dominance applications fall within the definition of basic services for the purposes of the existing universal service obligation (USO). As such, PCCW currently has the USO to provide the subject services in Hong Kong. The TA is concerned that a declaration of non-dominance leading to price discounts, price discrimination and service bundling by the universal service provider may adversely affect the USO policy. That said, it cannot be fair that PCCW should not be declared non-dominant solely because it has the USO if it is by other measures in fact, and if it would otherwise be declared, non-dominant. The TA acknowledges this and that he may have to address the issues by reviewing the universal service policy.
PCCW argues that a finding of non-dominance in favour of PCCW would simply reflect a shift from ex-ante regulation to ex-post regulation and clearly a non-dominance finding would not mean that PCCW is no longer subject to a prohibition on anti-competitive conduct. The TA for its part (in the consultation papers) is concerned that a finding of non-dominance would render the prohibition of certain strategic behaviour, such as predatory pricing, price discrimination and tying arrangements, under section 7L of the Telecommunications Ordinance or General Condition 16 of PCCW’s licence, inapplicable. He believes the effects of a non-dominance declaration may go beyond a simple shift from ex-ante to ex-post regulation.
The consultation periods in respect of the BDEL and RDEL applications close on 9th January 2004 and 28th February 2004 respectively. Although PCCW submits there is a market for RDEL services that is distinct from the market for BDEL services, the TA has, in the BDEL consultation paper, asked the industry whether business and residential services should be defined as combined or separate product markets. He will consider the responses and accordingly decide whether the two applications should be assessed together or separately. Although many commentators have a vested interest of some sort in the outcome of PCCW’s applications, arguably a small consensus is forming that the applications will not be successful at this time. That said, PCCW appears to expect its share of the relevant markets to continue to decline and it therefore seems inevitable that, if they don’t succeed this time, similar applications will be submitted again fairly shortly.