Position Paper -- Broadband Information Infrastructure
Hong Kong Internet Service Providers Association
1.0 Special Regulation of the Broadband
Services Network is not justified.
1.1 Broadband services and capacity will grow
because of innovation and network upgrades. Hong Kong Telecom
(HKT) wants a special definition of a broadband service network
to avoid the issue of their dominance as provider of all local
1.2 A broadband network supports two-way multimedia
transmission over distance, with several streams of data transmitted
at the same time. This is strikingly similar to the Internet,
where the data are also transmitted in packets.
1.3 One approach to broadband delivery services
is ADSL (Asymmetric Digital Subscriber Line). ADSL technology
was developed to transmit compressed digital video and audio over
regular (twisted-pair) telephone lines with the use of special
modems. There is one high-speed data channel in one direction,
and a low-speed control channel in both directions.
1.4 This approach is a development of the
existing network--not a new network. The need to regulate for
fair competition--and avoiding abuse of dominance--in the telecommunications
market is therefore the same.
2.0 Slow development of interactive broadband
services has been because consumers are not convinced, and because
of technology--not regulatory--limitations.
2.1 Hongkong Telephone Company Limited (HKTC)
wants widespread optical cable to the home, but argues that uncertain
demand, high costs and slow payback go with investing in a "broadband
services network." They then ask for a regulatory policy
to help protect their own risky investment. This is inconsistent
with Hong Kong's free market principles.
2.2 HKTC claims the cancellations or scaling
back of broadband projects in the United States is because of
lack of "appropriate" regulation. Not so. These high-profile
projects failed for market and technical reasons.
2.3 Orlando, Florida, USA: Time Warner Cable's
Full Service Network was launched in December 1994, and closed
in April 1997 with only 4,000 customers. Original estimates were
for 11.5 million homes nationwide. Time Warner decided to continue
to expand offering movies on demand using traditional cable TV
technology instead--not their new technology. (Source: Cowles/SIMBA
Media Daily, May 1, 1997)
2.4 Omaha, Nebraska, USA: In March 1996,
US West canceled its interactive television trial, citing high
costs and immature VOD technology. US West refocused on tests
to transmit cable TV services over telephone lines. (Source:
Cowles/SIMBA Media Daily, March 8, 1996)
2.5 The Hong Kong Government wants Hong Kong
to be at the leading edge of information infrastructure in the
world. HKT wants favourable treatment in the name of this objective,
and is holding the regulators hostage. The Government uncritically
accepts that the HKT approach to interactive services, Internet
access, and VOD is at the cutting edge of technology. We believe
there is high risk these technologies are impractical and technically
immature, and that consumers and the industry may suffer as a
3.0 The Internet already supports interactive
multimedia services world-wide. It will be even more important
as the end-to-end broadband physical network grows.
3.1 "Internet access is beginning to
demonstrate the value of broadband to consumers, establishing
a level of expectation and acceptance that will ease the introduction
of other new broadband services." (Source: Business Research
Group, "Residential Broadband: The Status of Interactive
Network," June 1997)
3.2 The Internet already provides real-time
audio and video services over a packetized network, from narrowband
connection to middleband like ISDN.
3.3 We believe the Internet is the
"broadband services network," in terms of both technology
and applications. The network should continue to develop through
progressive evolution, not sudden unilateral creation by one dominant
4.0 HKT dominance of other Internet Service
Providers (ISPS)will extend to broadband Internet service provision
if Hongkong Telecom IMS (IMS) is allowed to "bundle"
broadband Internet and VOD services for its customers.
4.1 The customer cannot access the Internet
without using the residential telephone network system, which
HKT dominates. Hence, ISPs are dependent on HKT's fixed network.
HKT, which is also in the ISP business itself through IMS, therefore
has advantages over its competitors -- who are also HKT clients
(for the network) and competitors (for customers).
4.2 Since its launch in April 1996, IMS
claimed 39% of the market, the highest of all ISPs, in less than
a year. (Source: Survey Research Hong Kong, l997.) Such rapid
buildup of market share from a zero base in less than a year in
a fiercely competitive market can be attributed in part to IMS
leveraging on the power, dominance, and economic concentration
of its parent, HKT.
4.3 ISPs must pay a PNETS surcharge to the
telecommunications carrier that provides their network. IMS pays
this charge to its own parent company at the corporate level --
an accounting transaction. But IMS competitors have to pay real
money to a competitor.
4.4 In theory, ISPs can use services from
other telecommunications providers such as Hutchison, New T&T,
and New World. Few do. What they charge is dictated by the interconnect
fees they have to pay to each other. These new operators have
limited geographic coverage (especially in residential areas,
where the customers are) because their negotiations with the dominant
HKTC network have been largely unsuccessful. In reality, most
ISPs have no choice but to use HKTC.
4.5 ISPs have complained to OFTA previously
when HKT companies "bundled" their services in special
customer offers to maximize the benefits of HKT group dominance.
One example was offering free phone lines with personal computers
and Internet accounts at heavy discounts, and bundling between
IMS and Hongkong CSL services. By the time OFTA got around to
declaring such special offers "inappropriate," the
offers were already over and the damage done. In other countries,
the ISPs would not have needed to complain to get regulator action,
or to have waited so long--the regulator would have stopped such
4.6 If HKT is allowed to own and operate the
"broadband network," offer broadband VOD television
services, and offer broadband Internet connectivity--all through
its own companies--it will continue to abuse this "bundling"
advantage. There is no sign that the regulator will prevent it
from happening at the outset, or quickly stop it when it occurs.
The result will be an end to an open and competitive broadband
Internet service market before it even gets started.
5.0 HKT claims about high investments cost
for the broadband network contradict their previous statements.
Are they trying to impress their shareholders, suppliers, and
the Government that such risky investment is in the Hong Kong
interest? That their investment is so great they deserve a VOD
licence anyway? That their anti-competitive practices towards
ISPs are justified?
5.1 The tariffs for HKTC broadband transmission
services, agreed by OFTA, are deeply disturbing. ISPs doubt the
basis of these charges since no supporting data has been presented
to the consumers and the industry.
5.2 HKT claims of "high initial investment"
contradicts what they said when promoting IMS to the financial
community and their shareholders. For example, Wheelock NatWest
prepared a "strategic assessment" (April 11, 1996),
based on HKT's own data. They concluded:
5.3 All this is extremely perplexing to consumers
and service providers. HKT tells its investors one story (the
broadband network is low cost and low risk), while telling consumers
and service providers the opposite. The regulator accepts the
"high cost/high risk" story, then seeks to assist HKT
by continuing to let it abuse its dominant position.
5.4 It will cost an ISP or VOD operator more
than HK$500 per month to access each customer on HKTC's broadband
network even after substantial commitment on volume. IMS will
charge a base price of $200 and have already publicly stated that
it will "subsidize" the network provider (its common
group company, HKTC), even though for everyone else (including
Wheelock NatWest's analysts) this is an "internal cost."
This is nothing less than a prohibitive and exclusionary tariff
by HKTC, matched at the same time by predatory pricing from IMS.
5.5 The consumer wants more bandwidth and
services, but the anti-competitive barriers set by HKT for broadband
transmission services means that the Hong Kong Internet Service
Provider Association is deeply concerned that all major ISPs will
be out of business within two years, with the notable exception
of HKT IMS. This will do nothing for consumer choice, business
confidence, or the Hong Kong Government's repeated assertions
that there is a level playing field for the telecommunications
6.0 To ensure fair competition and open
market access, HKISPA recommends the regulator adopted the following
measures for telecommunications and broadcasting.
6.1 The best alternative is the complete divestiture
of IMS from the HKT group. We agree with Professor Joseph Hui
(Chinese University of Hong Kong) that "divestiture of dominant
firms and opening exclusive licenses are proven methods for spurring
NII [National Information Infrastructure] development and usage."
6.2 All broadband service network operators,
including HKTC and Wharf Cable, must guarantee open network access
and fair business practices for all licensed ISPs or program service
providers. This should include all technical and economic details
being made available at the same time to interested providers,
with no preferential treatment for affiliate companies. ISPs should
be remedially presented with the technical, economic and operational
information that IMS has already received from HKTC.
6.3 The present pricing of broadband transmission services will lead to domination by IMS. The data justifying OFTA's approval for this tariff should be released, and the tariffs for broadband Internet and VOD markets reviewed.
6.4 OFTA should arbitrate to complete the
interconnect negotiations between all FTNS licensees within a
short and specified time so that real choices will be available
to ISPs, and FTNS providers can compete fairly with each other.
This should deal with all levels of services from narrowband
to ISDN to broadband services. Any party delaying an agreement
or not adhering to it should be financially penalised.
6.5 IMS "bundling" of Internet access
service with ITV/VOD will result in collusion and anti-competitive
practices. Separation between broadband program services and Internet
access services is necessary for companies intending to offer
both services. This should include an open standard on equipment
(including set top boxes and cable modems).
6.6 The number of program service network
(VOD) licenses should not be limited. This would create a larger
market to justify what HKT claims is a substantial broadband network
Hong Kong Internet Service Provider Association
August 13, 1997