Cheaper alternatives ready to capture share of market

PUBLISHED : Tuesday, 01 December, 1998, 12:00am
UPDATED : Tuesday, 01 December, 1998, 12:00am

The introduction of competition usually is bad news for an incumbent former monopoly, and Hongkong Telecom's position is no different, according to analysts.

The widespread uptake of callback services in the past three years already has shown how lower-priced alternatives can grab market share quickly.

Rivals have gained a substantial foothold in the international direct dial (IDD) market, taking market share of about 20-30 per cent of calls.

With the introduction of international simple resale (ISR), the call-quality advantage Telecom had over its rivals will, in some cases, disappear.

The most obvious pressure will come on Telecom's flagship 001 service, which is at the top of the price range.

On the benchmark Hong Kong-US route, Telecom charges $6.80 a minute on 001, while callback operators are asking about $2.50 for peak hours and as low as 99 cents off-peak.

Price cuts on this 001 service still have to be agreed to by the Government, but Telecom's manager of IDD marketing Thomas Leung could not say at this stage whether it had applied to cut rates.

In addition, Telecom has for the past 19 months been offering a discounted service using callback identified with the prefix 0060.

After the January 1, this clearly will be Telecom's tool to remain competitive.

Mr Leung promised that 0060 would have many 'promotions' and 'follow the market' in terms of pricing.

Although launched less than two years ago, Mr Leung said 0060 was the largest callback operator.

It will be interesting to watch how Telecom tries to position these two services after January 1.

Mr Leung said 001 still represented the 'simplest service offering coverage to all countries and bringing a host of extra benefits'.

The 0060 service was 'the most competitively priced' but offered services to only 29 countries.

The problem for Telecom is that for countries where ISR is allowed, the 001 and 0060 service will be indistinguishable in quality and leaves it trying to market a premium brand that offers no better call quality.

Despite the fact that Telecom is positioned to attack all segments of the market, analysts believe Telecom will still lose market share.

'Hongkong Telecom will not enjoy the slow and relatively painless loss of further market share that AT&T and other incumbent operators enjoyed, investment bank Salomon Smith Barney concluded recently.

'We expect the international market to become highly fragmented, with pricing based on a commodity product in ample supply.' The other side of the coin of the ISR equation for Telecom is the leasing of lines. Companies looking to offer ISR need to lease capacity from Telecom, giving it another revenue raising avenue.

The traffic also will have to pass through its international gateway, for which it also will make a charge.

Some forecasts suggest up to 200 companies may be looking to secure ISR licences.

Providing capacity would not be a problem, Mr Leung said. The standard unit of capacity is known as a T1 line, which can offer 24 channels and is capable of handling about 1.02 million minutes of uncompressed voice traffic a month.

By using digital compression, more traffic can be squeezed on to the line, but call quality falls.

Mr Leung said the highest compression ratio tolerable in terms of quality was eight-to-one.

In theory then, a T1 could handle about eight million minutes a month of call traffic.

For a T1 to San Francisco, for example, Telecom will charge $320,000 a month. But that is only for half of the circuit. To complete the call, a payment also must be made to a firm owning the second leg of the cable to its final landing point.

In total, the payment for a T1 Hong Kong to San Francisco link probably would be about $500,000 per month, Mr Leung said.

At higher compression ratios, a call to San Francisco should then cost about 6 cents a minute, compared with Telecom's $6.80 a minute on its 001 international service.

It is these economics that make ISR initially highly attractive.

Mr Leung argued this overlooked several factors which contributed to making the real cost much higher.

First, there is 'idle times' when there are no calls on the line, or between call when capacity effectively is wasted.

Secondly, there are other payments necessary including local interconnection charges and gateway costs which will serve to increase the costs well above figures calculated on ISR line rental costs.

Mr Leung predicted that many players would enter the market, bringing rigorous competition and innovative offers, but in the longer run there would be consolidation of operators as they found the business not as lucrative as they thought.

The company wants to underline the point that ISR is not the cut-price bonanza that some believe.