Competitive environment sees scope for new cost advantages

One of the first things people from outside Hong Kong notice about the territory's telecommunications system is that local calls are free.

It is a welcome accident of history that has resulted in the public having access to something for nothing, and in Hong Kong of all places.

The consumer actually does pay for the service, but it is a cross subsidy from the lucrative international side of the Hongkong Telecom group's business.

This quirk of the system has resulted in shopkeepers installing phones for public use, confident that their only expense will be the low monthly rent. In countries with charged local calls, particularly where the charge is tied to the length of the call, finding a phone is more difficult.

The only convenience phones are likely to be pay phones set up by the phone companies. This is a particular nuisance for travellers, who are forced to either find correct change or buy the appropriate phone card.

One wonders how much of the world's wealth gets sucked into this black hole annually, as travellers return home with useless phone cards in some exotic currency they are never likely to use again.

The situation in Hong Kong is almost certainly about to change, as Hongkong Telecom adapts to its new competitive environment.

Local calls do cost something to provide - an expense that is only partly met by the low rental charge - $65 for residential lines and $98 per month for business lines.

According to an estimate by the Office of the Telecommunications Authority, it costs Telecom about $103 per month to provide a residential line and $108 per month for a business line.

The shortfall is made up by a cross subsidy from Hongkong Telecom's highly profitable international service.

When Hongkong Telecom was the only service provider, this cross subsidy did not really matter - consumers appreciated the free local calls and low rents, and were not able to identify the cross-subsidy component in their International Direct Dial (IDD) charges.

But now that there are three new providers competing with Telecom in international services, the company is under pressure to reduce the cost of IDD services.

The Office of the Telecommunications Authority recently published a consultative document on local pricing options.

Director-General of Telecommunications Alex Arena said the pace of technological change meant there were dangers in leaving the local call situation unchanged. The free-call system was open to abuse by computers plugged into the system 24 hours a day and heavy users were placing a big burden on the network, Mr Arena said.

'If we continue to allow uncontrolled use by machines free-of-charge of the public telephone network, there is a danger telephone charges could be pushed up . . . or service quality would deteriorate quickly.' Other countries were facing the same problem, he said.

Four possible pricing options were included in the report, including the status quo.

The other three were: charging for time spent on the line; expanding the flat rate charge to cover all services; and offering customers a choice between flat rate or measured tariff.

Mr Arena said there were advantages in the free call system, but there were also costs associated with maintaining it.