Liberalised domestic phone services get slow connection

PUBLISHED : Friday, 03 July, 1998, 12:00am
UPDATED : Friday, 03 July, 1998, 12:00am

This week may be the third anniversary of the liberalisation of Hong Kong's domestic phone call industry, but real competition hardly has arrived.

Hongkong Telecom's rivals may boast about their hundreds of kilometres of expensive fibre-optic backbones threaded through the MTR tunnels but, in truth, they lack the access network necessary to deliver services to the customer.

At the end of March, Hongkong Telecom had 3.6 million lines in operation. Its rivals have about 70,000, equivalent to about 2 per cent of the market.

Talk of competition in the domestic market was a fallacy, SBC Warburg Dillon Read telecoms analyst Jason Billings said.

Hong Kong Telecommunication Users Group chairman Simon Chan also is blunt: 'The networks are so small that we do not have a choice.' Residential customers fare worst. For example, Wharf's New T&T, which is leading the new operators in terms of installed lines, has 41,000. Of those, 37,000 are rented to business users, leaving a mere 4,000 residential connections.

New T&T marketing director Tony Cheung admits it has done little to dent Telecom's dominance in the local market. 'The biggest problem for us is delivering access,' he said.

Access means the connection between the local exchange and the customer.

The problem for the new rivals is that it is not economic to install their own lines to individual customers. Because domestic calls are free, revenues from supplying call services tend to make it not worth the effort.

Last year, for example, Telecom had a turnover of $5.1 million from its domestic network compared with nearly $17 billion from its international services.

For high-volume business customers, the economic argument is much sounder and that naturally is why the new entrants are seeking to sign up commercial rather than residential customers.

Another problem pointed to by Mr Cheung is that even when they want to put their own cables into a building, it is not always possible.

'This is largely due to insufficient space, particularly in old buildings which have room for the equipment of only one company - Hongkong Telecom,' he said.

Developers have been less than co-operative. Under Government rules, they are only advised to co-operate with the new companies, not ordered to do so, which promotes the status quo and favours companies allied with particular developers.

The answer to this should be to share Telecom's access network. This is known as type-two interconnect and in theory allows new entrants to use Telecom's network from the customer to the local exchange and then switch it to their own fibre-network at that point.

It sounds fine in theory. In practice, that is not so.

Rivals accuse Telecom of not co-operating and of using tactics to frustrate and delay engineers trying to gain access to the exchanges.

As part of last January's deal to give up its international licence, Telecom agreed to open at least half of its exchanges to rivals. So far, little public evidence has emerged of how this is to be administered.

Another thorny area is the charge levied by Telecom for this interconnection. New T&T's Mr Chung said the money Telecom was asking did not make offering the service justifiable.

Certainly there is a feeling that the phone regulator, the Office of the Telecommunications Authority (Ofta) has not been as pro-active as it could be.

'A stronger regulator would help level the playing field,' Mr Chan said.

Somewhat belatedly it seems, Ofta acted against Telecom this week in the area of unfairly bundling and targeting call packages to selected companies.

The fine was $20,000, a figure described by one analyst as a 'joke' bearing in mind that Telecom made profits of $17 billion last year, boosted by nearly $7 billion in exceptionals.

No one denies positive steps have been made towards greater competition and that the new entrants are very much in their youth, compared with Telecom's decades of history. Although they gained their licences in July 1995, they did not launch services until late 1996 or early 1997.

Hutchison Telecom's technical director Peter Wong said it would take another five years before his company's network covered Hong Kong. 'Give us time,' he said.

Hutchison, which has about 18,000 lines, plans to spend about $6 billion over the next three years building its own access network, rather than rely on type-two interconnection to customers through Telecom.

But it wants to offer much more than just simple voice services domestically. It plans to put its own fibre-optic cable into the bases of buildings, opening up the opportunities of delivering high-speed, multi-media services.

These are applications it is gambling that will deliver much higher revenues than simple domestic calls and will justify the expense.

Overshadowing the whole domestic issue is the question of whether there should be more local players.

When the three new entrants were granted licences, they were given a three-year grace period during which the Government promised not to introduce more competition. That period ended last Wednesday.

A Government review of the industry also is looking at the question of allowing more domestic competition.

It is likely that as Telecom has given up its international licence, the artificial division between local and international franchises will be abolished and a simple all-encompassing licence created.

Results of the review are expected next month.

There is considerable pressure from the new operators against allowing new competition.

'There are enough licences for now; give us time to complete our network construction,' Mr Wong said.

Many observers agree these new domestic networks are probably losing money.

A saving grace is the strong cash flow they receive by offering popular international call-back services.

Rumours persist that at least two of the new operators are up for sale.

Talk late last year was that New World had appointed Deutsche Morgan Grenfell to find a new investor for its telecoms offshoot.

More recent speculation has centred on New T&T, with Singapore Telecom often being touted as a possible buyer.

Wharf executive director John Hung attempted to quash that speculation this week, saying it had not talked to anyone about selling New T&T.

However, he then said: 'We are at the present moment examining what we should do with the company and how we should proceed.' Certainly, if Wharf were to sell, few would be surprised - given the economic climate.

As well as battered property interests, Wharf has a second loss-making enterprise in Wharf Cable.

Telecom's relinquishing of its international licence has given these companies a shot in the arm in terms of possible valuations.

At present, they are the only ones who know whether they will be able to grab some of Telecom's massive international market when deregulation starts next year.

In terms of possible outside buyers, this would make them more attractive. This may be a short-lived window of opportunity.

The Government's telecommunications review is considering this matter and could cause the whole market to be opened.

Mr Billings, of SBC Warburg Dillon Read, said new operators would give a 'new push' to services at the start of next year, because of the opening of the international call market.

Then, finally, these companies will start to resemble Telecom in the range of services they offer - although probably not in extent for a few years yet.