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GidaByte and ComNews Group Special Hong Kong Telecom Market Coverage: Interview with Mr. Y Ha, OFTA Deputy Director General [26.01.07]

Andrey Gidaspov: Mr. Ha, could you please elaborate on OFTA’s mission in Hong Kong (HK)? How does it help deregulate the market? How does OFTA further promote the HK telecommunication industry?

Mr. Ha: OFTA’s mission is very simple: to maintain Hong Kong’s position as a telecom hub in the region. This is our prime role. In addition, we would like foreign partners to come to HK, and for people in HK to enjoy new and innovative services at affordable prices. We have chosen a so-called “light hand approach” as our philosophy. 

You will see that we don’t actually have as much regulation here, as elsewhere in the region. Starting with year 2003, the whole telecom industry was liberalized, so there is no barrier to entry to any market except when there are constraints in resources, such as frequency spectrum.    Our policy is not to impose any additional barriers on market entry.

HK is among the most competitive markets, not only in mobile but also in the fixed sector. So for example, in a small market in HK where there are about 7 million people, we already have five mobile operators. Actually we had six, but last year two of them merged. On the fixed market we have five very active operators. Among them the one with the largest market share is PCCW, and then we have Hutchison, New World Group, Wharf Group and Hong Kong Broadband. For the Internet market we have 4 very active operators. The total number of ISP licensees is over 250. Some of them are active, but many of them small, serving a particular group of clients. And mind you, the big four are all facility based operators. In many other countries there are many operators that are service based, using the network structure of the incumbent, but here it is different. The operators here are using their own facilities. So there is intense facility based competition in Hong Kong.

In other countries, where operators use the service platform of an incumbent you see a different picture. The regulators in these countries have to be vigilant to ensure that the service operators may compete with the incumbent on a level playing field. In HK in mid-2004 we had decided to phase out the unbundling of the local loop, and the final sunset date is middle of 2008. 

AG: I understand there is a very unique situation in HK with fixed mobile interconnection charges?

YH: Yes, there is. To give you some background, before 1995, HK had a monopoly operator on the fixed services side – Hong Kong Telephone Company. HKTC is now PCCW. In 1984 when we first licensed the mobile operators, mobile services were regarded as premium services. HKTC then provided local telephone services at a loss. This loss was compensated by the profitable international IDD calls. When mobile services were first introduced, the government decided that in providing such a VAS the mobile operators had to pay to the incumbent a interconnection charge regardless of whether it was a mobile originating or a mobile termination call. Now, after more than 20 years this arrangement is still in place and mobile operators have to pay the interconnection charge to the fixed operators irrespective whether of it is a originating or termination fee. This is quite unique, because most countries have a symmetrical scheme of payments. In 2006 mobile operators had to pay the fixed operators about 600 million HKD. This may not be much money to Russian operators but in the context of HK, this represented an important source of revenues for the fixed operators. 

AG: Does something need to be changed?

YH: This has existed for more than 20 years. As a regulator OFTA does not express its opinion whether it’s fair or not, or whether it’s got to be changed. But then we have to look at the big picture. This situation may be sustainable if you could clearly differentiate that this is mobile and this is fixed, and up to now mobile and fixed are easily distinguishable. With the advent of fixed mobile convergence, we are not certain whether in a few years time it will be difficult to differentiate the two. 

We think we need to address this issue, and hence we published a Consultation Paper asking the industry and public opinion on this topic. This is a very sensitive issue right now. Of course, you can envision that the fixed operators don’t like this for obvious reasons as they will lose a lot. And you may be aware that there is a court case against us. In recent years the operators become quite litigious in HK. If they are not happy they will not hesitate to take the government to court. I don’t know if this often happens in Russia, but that’s the case here.

Background Info: According to SCMP, PCCW, Hong Kong's largest telecommunications firm, asked the High Court to invalidate a public consultation by OFTA on a plan to terminate the system under which mobile operators pay PCCW and other fixed-line service providers for access to their networks without receiving similar payments for traffic going the other way. 

AG: Well, even though Russian mobile operators do not shy away court cases, I should say that HK operators much more aggressive at this.

YH: Yes, things are changing. In the old days we had difficulties with the monopolies. In a liberalized environment we face a different set of issues. The operators have a lot of tools available to them to challenge the decision of the regulator. And yet government has to operate in a very transparent and open manner. 

AG: One more thing related to this. In Russia just recently an interesting thing happened. The “Calling Party Pays” (CPP) principle was introduced in the end of 2006, and mobile operators were very upset as they estimated that they could sustain a loss of 100-150 million just from that regulation.   However, both fixed and mobile gained from that. The forecasts were that people would start to use mobile connection less actively saving money. But this did not happen. And so everyone remained happy. Fixed operators received good money from subscribers. Mobile operators increased tariffs by 10% and customized the exchange rates to make something from there. So analysts believe that mobile operators instead of losing these 10% of profits did actually gain 5%. Obviously fixed operators got a lot.

YH: In HK the market is very competitive. Penetration is very high and people use a lot of the service here. I think that any change in the price will not give any significant impetus to the traffic being carried. Maybe what has happened in Russia will not happen here.

AG: Of course, every country has its cultural and other differences. I believe that HK is quite unique as well.

YH: So, right now we issued 2 Consultation Papers (CP), and for the second CP we are studying the submissions. A lot of feedback and lots of challenges. Bear in mind that we have a court case in front of us. We also have to decide on the way forward, possibly within the second quarter of this year. 

AG: Moving to a different arena, to 3G development, as you know Russia will soon have its first 3G operators. The mobile penetration in Russia is more than 100% right now. Over 150 million subscribers used mobile services in 2006. Naturally, 3G take-up doesn’t happen overnight, and in HK as I know, 3G licenses were issued in 2001, but actual deployment took place a few years later... What's your read on 3G situation here in HK? 

YH: Yes, that’s right. The picture was quite different back then. In 2001 when we issued the licenses, the IT bubble already burst. In 2001-2005 there actually was a lot of bankruptcy in the industry … this I think accounted for the lack of investment. The 3G standard was not yet mature, and when Hutchison first launched it in 2005 worldwide, products were not quite ready. There were lots of issues with the network, the customer equipment, etc. 

But since then, the standard has matured. The equipment is now more affordable and I think that Russia now is in a much better position. 

AG: Mr. Ha, could you share how OFTA handled your own 3G license process here in HK? How was it structured? Was the process like?

YH: In 2001, we put four licenses up for auction. The auction only received four bids, so each bidder got one license at the reserve price. We adopted a unique scheme. In the UK or Germany or other countries they would bid on prices, so there will be that one price or payment by installment. Instead of this, we worked on a royalty basis. Meaning that we will look at the turnover of each licensee each year and then bidders will commit to pay a certain percentage of their turnover to the government.

AG: The same percentage for each?

YH: The base price is 5 % and after the fifth year the percentage will rise. The exact figures are available on our web site. This is a so-called a royalty based process, so we are not charging on the price but rather on the royalty. 

We are concerned that if the turnover is too low, then the government will lose. Thus, there is also a minimum annual payment – HKD 50 million. So 5% of the turnover or HKD 50 million and the minimum will also rise after the fifth year. We have published a memorandum of information on this subject, available on our web-site. We are very transparent; you can see that every decision is available on our web-site.

AG: The media puts the number of 3G subscribers in HK at about 1.5 million, is this figure correct?

YH: Last October the number was 1.3 million. The total number of mobile communication users was 9.2 million with 130-140% penetration. Of course, we have a large number of foreign visitors, and it's not unusual for people in HK to own more than 1 handset and more than one SIM card. 

AG: It is very interesting how 3G is developing across Asia, in South Korea, Japan…I think that HK in a way is in some sort friendly competition with SK and Japan in terms of technology?

YH: We always look around us. Not only what’s happening in SK and Japan but also what’s happening in mainland China, Singapore and other South East Asian countries. People always refer to the SK example, because government took a very active stance in promoting the technology. From time to time we look at what SK is doing, and we see that it is very successful in mobile and broadband markets.

AG: I know that HK is very proud of its broadband coverage. Could you comment on that? What’s the policy?

YH: In HK the government is adopting a “hands off” policy” – we never spend any money. Of course, we invested in CyberPort and Science Park … still the government doesn’t invest directly in the service industry. So we are proud that given our “hands off” policy, we have managed to achieve high penetration of mobile and broadband services. Now the penetration rate for broadband is over 60%. The incumbent covers nearly 98% of the residential households.

AG: I talked to CSL about their Mobile TV that has been working quite successfully. People say that the next killer application will be Mobile TV, so what is your opinion on that?

YH: Well, actually Mobile TV is already in town. In addition to CSL, another operator Sunday has offered some real point-to-multipoint services. The government will soon issue a CP on MobileTV and the spectrum will be available. We let the market decide what standard they want to use for MobileTV. There are quite a number of operators which are interested, not only mobile operators, but also broadcasters. I think that there will be keen competition, and HK is producing a lot of content, especially for the Chinese speaking community.

AG: What is the standard we are talking about?

YH: For MobileTV it will be up to the industry to make its own commercial decision. This is our philosophy, which we have followed for a long time. For example in 1984 when we first issued mobile licenses, even at that time we decided that everything should be market driven. Europe decided on GSM and Japan on its own standards, but we had been quite open already.

So when you are talking about Mobile TV we will not dictate the use of a particular standard. The standard has to be either international or industry recognizable. So we let the market choose which standard will be the best.

AG: What can you say about the digital TV project, is it similar? I understand that China has recently approved its own national standard. 

YH: Yes, that’s right.  China’s national standard was announced last August. In 2004, the HK government announced that digital TV should be available this year. Within 2008 digital terrestrial (DT) service should reach 75% of overall share of TV services in HK. By 2012 we may consider to switch off the analog service altogether. Of course, we have to review the market situation and other considerations then. Then we will allow two local broadcasters to choose the standard they would like to adopt. After they have their choice they will have to come to the government and the government should consider their proposal and decide whether to adopt this standard.

In 2004 the DVB standard was already available, but we also understood that the mainland China will have its own standard. We were prepared to wait for a reasonable period of time, when they will come up with the standard. However, we were also committed to move on before it is too late. It so happens that the Mainland Chinese government announced in August 2006 about the upcoming launch of its national standard. So our two local TV broadcasting companies are evaluating the two standards. They are doing trials and comparing the performance with that of DVB standard.

AG: Then they will have to decide?

YH: After the companies have made their choice, the HK government should make a decision whether to approve this by March this year. Everything is moving very quickly. One of the concerns on adoption of the Chinese standard is the availability of customer equipment.

AG: Let’s assume that the Chinese standard shall be working fine, and there is good equipment available, so then those HK broadcasting operators can select whether they’d go with the Chinese standard or different one?

YH: They may adopt different standards, but two broadcasters decided that they will cooperate. This is a commercial decision. Such a scenario is not totally impossible given that multi-standard customer equipment is widely available in the market. But while the two broadcasters are fierce competitors, they can agree on something. 

AG: I asked this question because you said that different governments have different policies towards imposing those rules. In Russia the decision on development of DTTV has been made on a very high level. And the plans are that this project will be completed by 2015. It is quite a comprehensive task, and there is funding available. 

YH: We are concerned about what is happening elsewhere -- for example, whether the equipment will be affordable, and whether the underprivileged sector in HK will be able to afford to buy the equipment. The government will be active in consumer education, explaining how the process will evolve. We have a dedicated web-site for this service.

AG: Very interesting. I can draw a parallel here with the development of TD-SCDMA technology, I mean there is a political decision to adopt this standard, and I saw that testing area at the HKWDC and that’s the only one in HK, and all the HK operators working on that…What do you think about this standard? Will it be available in HK?

YH: At this stage we have already provided our four 3G operators with the available spectrum that enable them to launch TD-SCDMA whenever they choose. Currently TD-SCDMA is not available commercially in Hong Kong, but if China launches its services commercially, I think TD-SCDMA service will be available very quickly here.

AG: I believe that the biggest treasure to regulate is the spectrum. In the case of the Russian mobile operators, they will have to clear the frequency resource and it is going to be their major expense, costing spending up to approximately USD 20 million. What is the frequency situation in HK and how does OFTA regulate it? What are the future openings of the spectrum?

YH: So far the HK government has been using a so-called “command and control approach. But then we look at what the EU, the UK, the USA and Australia have been doing, and we are studying whether we should inject some market driven principles into the spectrum management policy.   Let’s use the analogy of selling a piece of land. If the piece of land is cleared it is one price, but if it’s not, then the price is different. If you have a lot of farms and buildings on your land, you have to pay other people to clear the land. Then you create difficulties for the client, and then you have to make sure for this client that you state clearly what the conditions for this lot are.

AG: The total disruption to telecom services in Asia due to the December earthquake in Taiwan was pretty shocking. It seems the dependence on the undersea cable is dangerous and we need to explore alternative ways of connections. I understand that OFTA made it a priority to figure out solutions to emergency situations like this in the future. Could you please elaborate on this?

YH: As you know, the Chinese word for “crisis” (weiji) means both problem and opportunity. We should look at the opportunities. After this crisis I know that all the surrounding countries in the region will be looking at opportunities to secure backup and have better diversity.   Now we are dependent on the cables from HK to Singapore, SMW3 Cable to Indian sub-continent, and further to EU… but this is a single route, and in case of a natural disaster we might be cut out from Europe at once. So we should explore a land cable from China to Russia.   I understand that Russia had just opened up the long distance market; I think that there might be many opportunities we can think of.

AG: In fact, two major nationwide carriers have their pipes right to your door. Both of them established POP in HK...

YH: Wow, Russia is right here…I’ve got to check whether they have a license or not?! So when we look at this we see many good opportunities.

AG: From my perspective as an Internet user, I think that they did a good job, given that there was such a tremendous challenge imposed on them, or…perhaps, Russians are more patient, and less spoiled with speed of connection?

YH: You should say that publicly, as we received so many complaints. You are correct in identifying the scope of the problem. We actually lost some 90% of the capacity. And it took us a week to recover.  China helped a lot and we used a lot of overland capacity from HK to Shanghai. That’s why I am saying that a China – Russia cable is very interesting. Our operators have to look at it --- actually there is not that much information about Russia, and Russia seems to be so far away.

AG: Well, if you look at that enormous border we have with China, and the territory past the Urals, which is officially Asia, it is larger than the European part…

YH: We regard Russia as a European country. Generally speaking, I think that yes, we should seek to collaborate more.

AG: Finally, the only issue we haven’t covered is WiMax. What are your views on this hot topic? Do you believe that WiMax is the supplementary or competing to 3G?

YH: In 2005 we issued two Consultation Papers. And that time we proposed to open up 3.4 GHz band, which was the primary choice made by the WiMax Forum (WMF). However, we did not recognize that this would create interference to the satellite services which operate in the adjacent band. We received feedback from the industry players, especially our local satellite operators, and we conducted detailed technical analyses. Subsequently we provided this information to the WMF and they had quietly acknowledged our findings. 

Now we plan to another CP, because other than 3.5 GHz, there are other frequencies which can be considered. So we are still very much interested, otherwise we will be behind other countries.

Regarding WiMax being in competition with 3G question, we don’t want to pass any judgment on that …actually there are a lot of arguments and this is a major concern. 2.5GHz is also earmarked for the extension of the 3G service. So for the 3G operators, they are naturally quite concerned if the administration will release new spectrum. 

AG: Thank you very much, Mr. Ha. My traditional final question is what is your secret for success?

YH: My success? I am very humble. I am a career bureaucrat who has been working with the HK government for thirty years. And, of course, I work hard. I hold an engineering degree. But what I should say is that without curiosity and constant self improvement and education, success in the telecom sphere is not possible. And I will tell you why. The sector is changing so rapidly, so that if you don’t follow the latest market trends and technology advancements, you simply cannot discharge properly your duty. And also you should like what you do. I do like my job. That’s all.

AG: Mr. Ha, thank you very much for this interview!