APPLICATION FROM

HONG KONG TELEPHONE COMPANY LIMITED

FOR A DECLARATION OF NON-DOMINANCE IN THE
INTERNATIONAL CALL SERVICES MARKET

A CONSULTATIVE DOCUMENT

January 1998
Office of the Telecommunications Authority Tel : 2961 6629
29/F Wu Chung House, 213 Queen’s Road East, Wan Chai, Hong Kong Fax : 2803 5112
1. INTRODUCTION

1.1. On 3 June 1997, Hong Kong Telephone Company Limited

(“HKTC”) submitted an application to the Telecommunications Authority
(“TA”) seeking a declaration of non-dominance in the market which
HKTC defined as that for the “international business call services”.

1.2. A consultative document was issued by the TA on 4 August

1997 entitled: “Application From Hong Kong Telephone Company
Limited for a Declaration of Non-Dominance in the “International
Business-Call Market”” .

1.3. In response to the above consultative document, the following

operators submitted their views and comments:

• BT Asia Pacific Limited

• Hong Kong Telephone Company Limited
• Hong Kong Telecom International Limited
• Hutchison Telecommunications (Hong Kong) Limited
• New T&T Hong Kong Limited
• New World Telephone Limited
• WorldCom Asia Pacific Limited

1.4. On 28 November 1997, the TA issued a paper entitled:

“Application From Hong Kong Telephone Company Limited for a
Declaration of Non-Dominance in the “International Business Call
Market” - Telecommunications Authority’s Findings” (“Findings”).

1.5. In summary, the Findings concluded as follows:

• there is a distinction between the market for local access and the
market for access to international services, i.e. international call
services;

• there is no valid distinction between a market for international

residential call services and a market for international business call
services;
• the relevant market for assessing the dominance or otherwise of HKTC
is the market for international call services (“International Call
Services”) which exclude those provided by operators of mobile
services and through Self-Provided External Telecommunication
Systems (SPETS) but include “international residential call services”,
International Simple Resale (ISR) services for fax and data and
International Virtual Private Network (IVPN) services;

• HKTC’s Application was in respect of international business customers

only. It followed that HKTC had not had the opportunity to justify its
case in respect of a separate market for international residential
services. The TA therefore dismissed HKTC’s Application and invited
HKTC to resubmit its application in respect of the market for
International Call Services.

1.6. In response to the Findings paper, on 4 December 1997,

HKTC resubmitted its application for a “Declaration of Non-Dominance in
the International Call Services Market” (“New Application”).

1.7. In the Findings, the TA discussed “Factors in the Assessment

of Dominance” and “Other Factors for Consideration in the Assessment of
Dominance” in relation to the comments received in the industry
consultation. However, he also said that he would not draw any conclusion
at that stage.

1.8. This paper is a further consultation with the industry seeking

its views and comments before the TA makes a decision on HKTC’s New
Application. In this consultation, the TA is particularly interested in
receiving views on the TA’s comments in the Findings paper and any
considerations which may have material impact on the analysis and
conclusion when the market under consideration is that for International
Call Services as a whole rather than the “international business call
market” proposed in the previous application of HKTC.

- 2 -
2. HKTC’s NEW APPLICATION

2.1. HKTC’s New Application does not raise any new issues or
contain any new information apart from market share information. The
market share data now provided shows a slight increase in the market
share of HKTC for International Call Services compared with that for
international business call services.

2.2 HKTC submits:

“In HKTC’s view, there are no new matters raised in this

application. The only issue raised is the consideration of HKTC’s
market share. This market share ….is small enough to raise no
presumption that HKTC is dominant. HKTC does not have the
power to raise its prices, or to restrict supply, in that market.
Accordingly, HKTC cannot considered to be dominant in the
market for “International Call Services””.

2.3. The TA confirms that the market share provided by HKTC

falls within a range of 25% to 75% and accordingly HKTC is not subject
to any presumption of dominance.

2.4. The TA will now analyse HKTC’s Application having regard

to the Findings paper and any considerations which may have material
impact on the analysis and conclusion when the market under
consideration is that for International Call Services as a whole rather than
the “international business call market”.

- 3 -
3. DEFINITION OF DOMINANCE

3.1. The TA wishes to emphasise again the definition of

dominance as set out in General Condition 16(2) of the FTNS licences as
follows:

“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”.

3.2. The TA stated in his Findings:

“The TA considers that in assessing whether or not HKTC is

dominant, he will bear in mind the essential question, that is, to
what extent HKTC is ‘able to act without significant competitive
restraint from its competitors and customers’”. (Paragraph 3.1.12)

- 4 -
4. THE DEFINITION OF THE RELEVANT MARKET

4.1. In the Findings paper, the TA assessed in detail the definition

of the relevant market (Paragraphs 3.2.1 to 3.2.79). The TA considered a
number of issues related to the market boundary:

• Local versus international access

• Business versus residential
• Mobile versus fixed
• Voice versus fax, data, ISR, IVPN and SPETS

Local/International Access

4.2. The Findings stated:

“Customers perceive the product they have purchased as the

ability to make an international call as opposed to simply making a
call to an international gateway. The services they purchase are
essentially for communicating with another person in a destination
outside Hong Kong. A local call service and an international call
service are for different purposes, have different price
characteristics, provided by different groups of suppliers, and are
accessed in different manners. A customer would not perceive a
local call to be a substitute for an international call.” (Paragraph
3.2.11)

4.3. The TA concluded that in the absence of further evidence the

TA is minded to conclude that given the demand and supply
substitutability of international services and local services - there is a
distinct market between the two products: (i) the market for international
access services and (ii) the market for local access services. (Paragraph
3.2.16)

- 5 -
Business/Residential

4.4. The TA stated:

“The TA has studied the tariffs of the “international call services”

in the market. Generally the tariffs do not mention a particular
class of customers - business or residential. Different classes of
tariffs are distinguished by the time of usage (peak or off-peak), the
mode of provision (whether by direct outgoing or by call-back) and
volume of usage of the customers. It may well be that certain
classes of tariffs targeting the high-volume users are not substitutes
for residential customers. However, these classes of tariffs may
also not be substitutes to the smaller business customers who do
not make a high volume of international calls.” (Paragraph 3.2.26)

4.5. Having examined the demand and supply elasticities of the

market, the TA concluded: “there is no valid distinction between a market
for “international residential call services” and a market for
“international business call services””. (Paragraph 3.2.31)

Mobile/Fixed

4.6. The TA stated:

“The general view of HKTC’s competitors is that from a demand

perspective customers perceive that they are making a mobile
telephone call in contrast to a fixed line telephone call. The TA
supports the view of HKTC’s competitors. In TA’s view, the
markets for mobile and fixed would converge in the future, but at
the current stage of the market development, the convergence is far
from complete yet.” (Paragraph 3.2.43)

4.7. The TA concluded that taking into account the current state
of market development, as far as the provision of International Call
Services is concerned, mobile services and fixed services are not yet
sufficient substitutes and therefore remain distinct markets. (Paragraph
3.2.48)

- 6 -
Voice/Fax, Data, ISR, IVPN and SPETS

4.8. In his Findings the TA stated that voice and data traffic
should not be separated. Services available from many operators on the
market do not draw a distinction between a voice and fax/data traffic. A
customer may use the same service to convey either voice or data traffic.
The same charge would apply irrespective of the type of traffic sent.
(Paragraph 3.2.64)

4.9. The TA also said that in the case of ISR fax and data, the
service did not yet exist in Hong Kong. However, the characteristics of an
ISR service for fax and data are expected to be no different from an IDD
service for fax and data. An ISR service for fax and data may be a circuit-
switched service and the technical mode of operation would be
indistinguishable from an IDD service for fax and data. The TA therefore
believes that ISR for fax and data is a potential substitute for IDD
services. (Paragraph 3.2.65)

4.10. The TA further stated that as regards IVPN, although IVPN

usage is restricted to intra-corporate or intra-organisational
communications, most customers perceive IVPN as substitutable for IDD.
The network configuration to make the telephone calls may be different
(the majority of the calls to and from the customers needs to be carried
over dedicated circuits between the customers and the IVPN service
provider according to the IVPN licence conditions), but the substance of
the calls remain the same. (Paragraph 3.2.66)

4.11. The TA also concluded that because of the cost and effort
required to set up a SPETS, in the TA’s view, a SPETS is still not a
substitute for ordinary IDD services. (Paragraph 3.2.67)

4.12. The TA was also clearly of the view that there is sufficient
empirical evidence to indicate that call-back services are sufficiently
substitutable with direct dial international access services. This is obvious
from the demand and supply price elasticity evident in the market. (
Paragraph 3.2.72)

4.13. Furthermore, the TA took the view that calling card services
clearly fall within the international access market as it is essentially a
means of payment facilitating ease of access to International Call Services.
(Paragraph 3.2.73)

- 7 -
4.14. In respect of identifying the relevant market for determining
the dominance or otherwise of HKTC, the TA concluded:

““international call services” for voice and fax/data are in the

same market;

ISR services for fax and data are in the same market as other
“international call services”;

IVPN services fall within the market for “international call

services”;

Call-back and calling card services fall within the market for
“international call services” as empirical evidence clearly
demonstrated that substitutability is very high.

The provision of “international call services” over mobile

networks for the time being constitutes a separate market.”
(Paragraph 3.2.74)

4.15. In its New Application, HKTC is of the view that the relevant
market identified by the TA is broad. However, it states:

“HKTC has, since the date of its application, regarded itself as non
dominant in both the market for international business call
services, and the market for international residential call services.
Accordingly, HKTC is not concerned by the TA’s adoption of a
market definition which includes both business and residential
services, as this will not alter the conclusion that HKTC is not
dominant in that broader market” .

- 8 -
5. FACTORS IN THE ASSESSMENT OF DOMINANCE

5.1. The following paragraphs summarize the comments from the

TA in the Findings Paper. These comments were made after consideration
of the submissions in response to the consultation paper on HKTC’s
application related to the “international business call services”. In this
consultation, the TA is particularly interested in receiving comments on
whether there is any material difference in the considerations, e.g. the
height of entry barriers, for the assessment of dominance when the relevant
market is extended to that for the entire International Call Services.

Market Shares

5.2. The TA was of the view that the declining market share of
HKTC reflects a competitive market, although this in itself neither negates
the existence of dominance nor establishes it. Further factors need to be
considered. (Paragraph 5.1.13)

5.3. In the New Application, HKTC submitted new market share

data for the International Call Services. The market share of HKTC shows
a slight increase when considered in respect of the market for International
Call Services as opposed to the market for “international business calls”.

5.4. Interested parties are invited to submit data available to them

on the market share of operators in the market. 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.

- 9 -
Power to Implement Decisions

5.5. The TA’s stated in his Findings:

“… the market for international access services is now relatively

competitive and on the basis of the information before him, it
would appear that HKTC is not able to implement decisions
without regard for the marketing activities and service offerings of
its competitors, or the wishes of its customers. The TA is of the
view that HKTC does face significant competition in the market
especially from call-back operators and the fact it has entered the
market with its own offerings and markets them aggressively but
continues to lose market share indicates that it cannot behave
independently. On the basis of the information before him, it
appears to the TA that HKTC is not able to act to a significant
extent independently of its competitors and customers.” (Paragraph
5.1.31)

5.6. The TA would welcome input from the industry on the

applicability of this finding to the International Call Services market as a
whole.

The Height of Barriers to Entry

5.7. In Section 5 to the Findings, the TA considered a number

factors which may give rise to barriers to entry in the relevant market. The
factors considered were:

• regulatory barriers;
• access to certain critical facilities;
• scale economy barriers;
• advantages of incumbency and established customer base; and
• customer inertia.

5.8. On the issue of regulatory barriers, the TA stated that a

conducive regulatory framework has been put in place in Hong Kong
which nurtures competition and that the regulatory barriers are low. The
low barrier to entry is reflected in the growth of the international services
market and the presence of an increasing number of call-back operators.
(Paragraph 5.1.39)

- 10 -
5.9. In respect of access to certain critical facilities, the TA
considered that apart from the interconnect circuits /facilities, the other
facilities such as local exchanges, exchange lines/trunk lines, ducts,
building access facilities and in-building wiring do not constitute
bottleneck facilities for the supply of international call services because of
the availability of the “indirect access” arrangement. Even for the other
facilities not considered as bottleneck facilities for international call
services, the regulatory regime has provided the means for all aggrieved
operators to obtain redress. (Paragraph 5.1.47) The TA is particularly
interested in receiving comments from the industry on whether the current
progress of Type II interconnection with HKTC would affect materially
the consideration of the TA against this factor and whether or not there is
any material difference in the considerations if the market relevant to the
question of dominance of HKTC is that for the International Call Services
as a whole rather than the “international business call market” proposed in
the previous application of HKTC. The TA would also like to receive
comments on the degree of reliance of customers on “direct access” to
International Call Services, particularly for residential customers.

5.10. On the issue of scale economy barriers, the TA was of the

view that HKTC’s competitors have not substantiated their case that this
factor is a barrier to entry. The TA stated that:

“Although the TA finds merit in the argument that HKTC has the
ability to achieve economies of scale, the TA is of the view that this
is not an unusual fact in respect of an incumbent operator, and the
fact that HKTC is able to achieve economies of scale does not
necessarily make it a dominant carrier. As stated in the revised TA
Statement issued in November 1997 on ‘carrier to carrier’
charging principles, the interconnection charges for Type I
interconnection will be determined by the TA on the basis of the
forward looking economic cost of HKTC’s network. Thus the TA
supports the argument of HKTC that the interconnection regime
helps HKTC’s competitors to benefit from the economies of scale.”
(Paragraph 5.1.58)

- 11 -
5.11. On the question of advantages of incumbency and
established customer base, the TA stated that he considered that the
apparent disparity of data availability has not stopped HKTC’s
competitors from entering the market. The TA supports the argument
raised by HKTC that a period of two years is sufficient for HKTC’s
competitors to gain information to market their services effectively.
(Paragraph 5.1.78)

5.12. On the question of customer inertia, the TA stated that in his

opinion customer inertia is not an entry barrier. The TA acknowledged that
it would take more time for HKTC’s competitors to acquire the efficiency
and expertise of HKTC, but the recognition that the incumbent operator
has certain advantages should not be defined as a barrier to entry.
(Paragraph 5.1.89)

Product Differentiation and Sales Promotion

5.13. On the question of product differentiation and sales

promotion, the TA stated that:

“he sees no evidence to suggest that HKTC is not seriously

promoting or differentiating its products in the market. The market
clearly evidences aggressive service promotion by all operators by
means of various packaging of services and price competition”.
(Paragraph 5.1.95)

5.14. He further stated that the intensity of sales promotion in the

market has indicated the absence of dominance in the market. (Paragraph
5.1.96)

Nature of Corporate Relationships

5.15. On the question of the nature of corporate relationships, the

TA stated:

“The TA considers the competitive nature of the marketplace not

only from the perspective of HKTC’s competitors but also from the
perspective of the consumer. He notes that consumers have a
variety of choices as regards the choice of suppliers, range of
products and services, quality, and price. He sees no evidence that
the mere fact of HKTC’s vertical integration restricts these choices

- 12 -
 or is preventing HKTC’s competitors from obtaining access to
consumers or offering competing products and services.”
(Paragraph 5.1.111)

5.16. The TA further stated that in the absence of substantial

evidence of an actual anti-competitive effect arising out of vertical
integration, he supports HKTC’s view that the competitive safeguards in
place are sufficient to guard against any anti-competitive conduct.
(Paragraph 5.1.115) However, the TA would welcome inputs from the
industry on observations or actual evidence on HKTC’s behaviour in this
regard.

- 13 -
6. OTHER FACTORS FOR CONSIDERATION IN THE
ASSESSMENT OF DOMINANCE

6.1. In section 5.2 of his Findings, the TA also considered other

factors in assessing HKTC’s dominance or otherwise, such as:

• HKTC/HKTI affiliation;
• linkage - local/international access; and
• profitability.

6.2. On the issue of the affiliation of HKTC and HKTI, the TA

stated:

“The fundamental question is whether this affiliation has

reinforced HKTC’s market power in the relevant market. HKTC
and HKTI are two separate legal entities. HKTI is required to treat
the local network operators on a non-discriminatory basis. All
local network operators are entitled to direct interconnection with
HKTI’s external gateway. The delivery fees payable by HKTI to the
local network operators are determined by the TA, published and
completely transparent. HKTC’s competitors have not provided
evidence in their submissions on the advantages HKTC is enjoying
as a result of this affiliation. The appropriate test should be, if
HKTI were controlled by a shareholder other than the shareholder
which controls HKTC, whether HKTC’s market power would be in
any way diminished. The TA is of the view that HKTC’s market
power would not be affected by the divorce of HKTI from HKTC”.
(Paragraph 5.2.6)

6.3. On the issue of linkage between the local and international

access markets, the TA stated that the basic question was whether
dominance in the “local access” market would enable HKTC to act
without competitive restraints from its competitors and customers in the
International Call Services market. (Paragraph 5.2.17)

6.4. He further stated that he agreed with HKTC that empirical

data from the market showed that an operator could gain considerable
market share in the International Call Services market without
corresponding market share in the “local access” market. Some operators
in the International Call Services market did not even have an FTNS
licence. (Paragraph 5.2.18)

- 14 -
6.5. The TA was of the view that HKTC’s control over the local
access network did not appear to be a significant factor in the assessment
of dominance in the provision of international call services. (Paragraph
5.2.20)

6.6. On the question of profitability, the TA stated that there was

little evidence to suggest that HKTC’s profitability was a consequence of
its dominance. It might simply be the result of increased efficiency.
(Paragraph 5.2.28)

6.7. The TA would welcome comments on these issues and the

views of the TA stated in the Findings paper, particularly on their
application to the International Call Services market as a whole.

- 15 -
7. INVITATION TO COMMENT

7.1. Interested parties are invited to submit their comments in

respect of this paper no later than 6 February 1998.

7.2. Your views or comments on this consultation paper should be

given in writing and should be submitted to OFTA at the following
address:

Office of the Telecommunications Authority

29/F, Wu Chung House
213 Queen’s Road East
Wanchai
Hong Kong

(For the attention of Administrative Officer (Regulatory))

Telephone: 2961 6629

Facsimile: 2803 5112
E-mail: shsho@ofta.gov.hk

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

you consider to be commercially sensitive.

Office of the Telecommunications Authority

5 January 1998

50:dom-con.doc

- 16 -