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 fixed networks.

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 result.

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 industry player.

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 behaviour immediately.

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:

• "Since HKT is continuously upgrading its local network... this upgrading of the IMS network is only a marginal cost for the group...

• "...the IMS project is a stand-alone venture and therefore the total network cost will be borne by the project. However, internally, HKT will be splitting the costs equally between the IMS venture and HKTC...the bottom line contributions and the net present value of the project should be higher in the group context...

• "The distance between buildings and...between the interconnection outside the building and the homes in Hong Kong is short [so] the laying cost per subscriber is lower than...overseas. HKT [can] adopt the less expensive option of laying fibre optics from telephone exchanges to outside the building and use the existing copper wires [and] ducts...HKT should be able to bypass the expensive task of digging up roads for its cables...

• "The laying cost per subscriber line...is about 30% lower than its foreign counterparts, i.e. below US$1,000...and should come down further in future years. Unlike traditional telephone network and the cable network, the portion of fixed costs is much smaller...

• "A major part of the costs are variable...which the company will only incur as the subscribers join the network. This capital spending mix should lower the risks of the project substantially..."

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 industry.

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 investment.

Hong Kong Internet Service Provider Association

August 13, 1997