The Hong Kong Telecom Industry - Research Paper Example

Ericsson and Hutchison Telecom Hong Kong Table of Contents 1. The telecommunications industry in Hong Kong 1 2.1 Hutchison 8 2.2 Evaluation of Hutchison 12 2.3 Recommendations 17 Bibliography 19 List of Tables Table No. 1. Market share of new entrants 3 2. Internet penetration rate per population 4 3. Mobile/internet ranking worldwide 5 4. Hutchison’s Growth 12 Background Hong Kong has the most sophisticated, mature and competitive telecommunications markets in the world. Hong Kong has been the leader in the telecommunication and has a strong market infrastructure. The Office of Telecommunications Authority (OFTA) established in 1993 is the legislative body responsible for regulating the telecommunications industry in Hong Kong. In the fixed-line market Hong Kong is amongst the highest in the world, while in broadband it is second only to Korea. The mobile density is the highest in Hong Kong in the world. Traditionally the telecommunications industry in China (Hong Kong) has been controlled by the national government. It was shielded from foreign investment since its inception in the basic services. With the accession to the WTO, this highly protected industry has been exposed to foreign competition. The changed competitive environment has influenced policies and decision-making in the telecommunications industry. Transition from a traditional regulatory framework is rather slow and controversial. At the same time, the impact of different regulatory frameworks in Hong Kong and China has made significant implications in the telecommunications deregulations (Yan, 2001). While the pace of telecommunications liberalization would vary across nations, generally intense rivalry between powerful groups influences the policies and regulations. Different institutional factors exert pressure on the regulator to take different regulatory stances when dealing with issues such as network interconnection. The telecommunications industry as a whole is subject to various internal and external influences. Internal influences The Hong Kong government considered telecommunications to be a vital industry and believed that competition would protect the interest and ensure the best services for the consumers (Xavier & Yan, 2002). They wanted Hong Kong to be recognized as a world class telecommunications for doing business. The government also wanted to ensure that Hong Kong has high performance in telecommunications amongst the OECD economies. Competition would enable the residential consumers to have wider choice of suppliers for the fixed-line phone. Having competition in the fixed-line itself ensures better broadband or internet services as internet connectivity is better through fixed line than through cable. Hence this was a mature initiative taken by the government. Local Fixed Telecommunications Network Services (FTNS) After the Hong Kong government ended the exclusive franchise of the Hong Kong Telephone company and awarded licenses to three other telecom companies, it was with the purpose that households would have an alternative choice. This was committed by the new licensees through performance bonds but it was found that all of the new entrants targeted the businesses rather than residential users (Xavier & Yan, 2002). In the early stages of a competitive market this trend of serving the businesses has been found to be common in most countries. The table below demonstrates the share of new entrants in the residential and the business market: Table I Source: Xavier & Yan, 2002 Broadband As far as Broadband is concerned, more than the government policies or the economy, it is the social factors like the political situation, people’s mentality and the cultural context that play more significant roles (Aizu, 2002). Several broadband technologies have been introduced which include ADSL (PCCW-HKT), Ethernet (Hutchison), LMDS (Hong Kong Broadband Network) and Cable Modem (Hong Kong Cable) (Xavier & Yan, 2002). Hong Kong has a free market environment and strong competition in ICT markets even after its transition to the Chinese government even though full market liberalization did not take place until 2003. According to the table below, the internet penetration rate per population is highest in Hong Kong: Table II Source: Aizu, 2002 Mobile phones The mobile services market in Hong Kong has been equally competitive. By August 2002 the government had issued several licenses and the mobile penetration rate exceeded 85 percent – one of the highest in the world. After a series of mergers and alliances six mobile operators remained in the market with 11 licenses. These include Telstra, Hutchison, New World, Peoples, SmarTone and Sunday with Hutchison having the highest market share of thirty-two percent (Xavier & Yan, 2002). The others have a market share between 10 and 19 percent which demonstrates that none of the operators dominate the market. Besides there is a high subscriber churn and turnover as people keep switching service providers. Despite this, Hong Kong ranks first in the mobile/internet ranking worldwide as demonstrated in the table below: Table III Source: Xavier & Yan, 2002 External influences Competition in any industry benefits the consumer. There has been healthy competition in the telecommunications industry and the consumer has enjoyed the benefits. At the same time having price regulation can affect the profit margin of the players in the industry. The profit margin also depends upon the charges that the end-user is supposed to pay. The local service charges in Hong Kong the charges are very low and the costs are high which reduces the profit margins for the telecommunications companies. If the profit margins are too low it becomes difficult for new entrants to sustain within the new environment. So the new entrants then would have to set prices below the prevailing prices or have product/service differentiation. If the profit margins are too low, some companies would have to quit the market. To sustain in the industry and to maintain a decent profit margin, the telecommunications operators in Hong Kong followed the policy that most international operators have been adopting. The incumbents usually keep the end-user charges low but increase the costs incurred by the operator. In Hong Kong there are no usage charges but only a flat monthly rental charge for local service and this too is low compared to many OECD countries. Since the monthly rental charges are low in Hong Kong, the operators try to attract the high-end customers who are willing to pay a price for advanced services. The residential users are not the advanced users nor do they have any need for such services. This has made the operators target the business users so that they can make their business profitable by offering value-added services for which they can charge a price. The price for connection in Hong Kong was set decades ago, which is a flat rate with unlimited calls. At that time the fixed line was used only for telephone conversation and the prices were set on the basis of average usage by a typical consumer. The charges for the business user were set higher than residential users. The pricing regulation made it unattractive for new incumbents to enter the market. Subsequently the price regulation was withdrawn as it was considered that competition would be sufficient to keep prices under control. As far as internet connection is concerned, there is a dominant operator and all new entrants have to use that gateway. It has been found that the dominant operator charges excessively for interconnection facilities. Besides, they do not provide sufficient point of interconnection capacity on fair and reasonable terms. In other words, the dominant existing operators take advantage of the situation and indirectly try to dissuade new entrants thereby keeping competition away. In the mobile phone market also price charged for interconnection between the fixed line and the mobile phones is very high all over Europe. In Hong Kong it is relatively low as OFTA has imposed certain regulations towards the fixed-mobile interconnection. This has resulted in the rapid growth of the mobile service in Hong Kong. It has also given choice to the consumers while keeping the costs controlled but at the same time in 2002 only one operator (CSL) made profits. When too many license are issued without any restrictions, it becomes difficult to sustain and retain profits so perhaps this decision of OFTA was not in the general interest of the operators. The growth of the broadband interconnection in Hong Kong has been impressive but here too interconnection remains a problem. The only option that licenses have is to use the PCCW-HKT’s local loop. The only exception is the Hutchison Global Crossing that has been rolling out complete optical fibre based Ethernet system directly to buildings. The new operators thus are at a disadvantage as they have to pay various interconnection charges apart from per minute interconnection charge. OFTA does not provide the details about market competition even though it has been collecting data and monitoring it. Several OECD countries publish such data on their website which demonstrates transparency to consumers and it assures them that the regulatory regime to facilitate competition is working. The regulatory framework is transparent and ensures that dominant operator does not stifle competition in the market. The regulation allows statutory right of access to land for network rollout. Customers have the right to switch service providers and any such barriers that existed have been removed (Au, 2002). Competition is fair in the telecommunications legislation and anti-competitive conduct is prohibited. Misleading, deceptive conduct in the market and dominant position is not permitted. Prices are competitive but this is not a deterrent for investment. The Hong Kong regulations do not believe that monopoly is necessary to induce investment. They have been able to attract FDI because of their liberalization process. 2.1 Hutchison’s Policies and decisions The telecommunications industry is Hong Kong is developing rapidly and has become increasingly competitive. The OFTA has liberalized all telecommunications sector and there are no restrictions on foreign ownership. As of 2004, there were nine fixed-line licenses provided to different organizations. The country has 56 lines per 100 people and its teledensity is the highest in Asia second only to Japan (Lowtax, 2008). In the dial-up and broadband services there were 197 licenses granted to Internet Service Providers (ISP) in Hong Kong. More than 71 percent of households have personal computers and broadband can be virtually found in every commercial and residential building ((Andersen, Tufte, Rasmussen & Chan, 2007). Hutchison Telecommunications International Limited (HTIL), the leading provider of telecommunications services globally, currently offers mobile and fixed-line telecommunication services in Hong Kong. For its mobile services in Hong Kong and Macau, the Company's strategic investor is NTT DoCoMo which owns about 24.1% stake (Three, 2006). Its shares are listed on the stock exchange of Hong Kong. Hong Kong itself is the leading telecommunications hub for Asia–Pacific Region. Competition in Hong Kong has intensified and every telecommunications company has the same technology and the same services to sell (SAS, 2008). The point of differentiation lies is customer service. HTIL has the largest share of the local mobile phone market. When Hutchison entered the Hong Kong internet industry the market was already saturated with over 130 providers. The direct competitors in iPhone 3G are AT&T as HTIL has introduced very competitive rates for subscribers. Hutchison was granted the 3G license because of the technological infrastructure it has in Hong Kong. Hong Kong does not have any competition law but Hutchison feels that there should be a competition authority to oversee mergers and consolidation in the industry. This is not really necessary as the telecommunications companies or operators have to abide by certain guidelines. As competition intensifies however, it may become necessary to add staff to monitor that operators abide by the regulations. At the same time, when competition is intense new entrants are deterred and consolidation takes place. This would again mean that competition law is not necessary. However, in the changed competitive environment how Hutchison is facing the issues would be looked at in the next section. Hutchison has been able to fight competition but in 2006 when its 3G subscriber growth was just 16 percent it blamed the stiff competition. It also found the customer churn rates higher than expected. Secondly, most consumers use the mobile phones for voice calls and short messages, thus finding no reason to change over to 3G services. The telecom industry globally had to reinvent themselves as voice traffic alone was no longer sufficient for sustenance. The profit margins for most telecommunications operators have reduced and this prompted the operators to add other services. Hutchison however has been able to register growth year on year and in July 2008, the Hutchison group completed the acquisition of a 5% stake in its 2G and 3G businesses in Hong Kong and Macau from NEC Corporation taking the group's ownership in these businesses from 70.9% to 75.9 percent (ChinaTechNews, 2008). This demonstrates the confidence that the group has in long term value and potential in Hong Kong and Macau. This potential led them to be the first operator in Hong Kong to launch Apple’s iPhone 3G. They have variable pricing strategy to be able to cater to all segments of the users of iPhone depending upon the usage that the customer requires. To ensure that customer deflection does not take place they insist on 24-month contract. Users can use the services for picture downloads and video streaming, as well as text-based content including stock quotes and news. The price range starts from $188 HKD which allows only 500 MB data transfer to $498 HKD for unlimited data transfer (Liaw, 2008). To further maintain product differentiation for long term growth and sustenance, Hutchison partnered with NTT DoCoMo to provide the technology, know-how and marketing expertise enabling them to offer i-mode services via its territory-wide networks in Hong Kong (DoCoMo, 2006). They are also considering wallet-phone on i-mode enabled handsets in Hong Kong and Macau. Through value add services, Hutchison has been trying to attract and retain the high end users as it is able to provide easy access to broad variety of internet lifestyle options, enfotainment as well as full email capabilities. This strategy has consolidated their position as the most forward looking mobile operator in Hong Kong. They continue to lead innovative developments in the mobile industry and seek to shape the future of the communications market. The i-mode technology creates an open gateway for content providers. This enabled Hutchison to tap into the vast potential of one of the largest customer bases in Hong Kong. This again has been possible as Hutchison has one of the most advanced mobile networks in the world. To keep its costs reduced and maintain decent profit margins, Hutchison entered into managed services agreement with Ericsson. Ericsson thus manages the telecom applications development and the back-end business support systems for Hutchison Telecom Hong Kong (Market Wire, 2006). This enables the company to focus on the core business of providing a convergence of communications, entertainment and information services to their customers. It also strengthens their market leadership position in Hong Kong. Hutchison has been able to maintain sustained growth in Hong Kong and its 3G customer base increased to 1,145,000 at the end of the first quarter of 2008 representing a 6.1% quarterly growth (Shiu, 2008). Seasonal factors affect the average revenue per user (ARPU) and since there were fewer working days in the first quarter, Hutchison’s postpaid ARPU dropped down but 3G ARPU remained stable which shows that consumers extensively use data the connection for data content and services. The table below demonstrates that despite competition and regulations, Hutchison has been able to register growth in the past year: Table IV: Source: Shiu (2008). 2.2 Evaluation of Hutchison through Porter’s Five Forces Model To what extent Hutchison can sustain growth and register profits in the highly competitive telecommunications market in Hong Kong can be analyzed through Porter’s Five Forces Model. This model provides a simple perspective for assessing and analyzing the competitive strength and position of an organization. When competition is very high, new entrants are deterred from entering because the prices would be low and profit margins would be reduced. New market entrants: Hong Kong has the best regulatory framework in the world that conforms to the best practices and which is attractive to new entrants. The Hong Kong telecommunications market is fully liberalized and open to new entrants. The facilities are immense and the sector is attractive to operators who would like to enter Hong Kong. Already there are several facilities-based and service-based operators in Hong Kong. There are no foreign ownership restrictions in Hong Kong. It has a clean government, simple and low tax regime. Since there are no foreign ownership restrictions, companies have no barriers to entry. Because of intense competition, mergers and acquisitions have been taking place in the Hong Kong telecommunications market. Hong Kong is located on the seacoast and there has been rapid development in the undersea cable technology which has increased the importance of Hong Kong in the information age. Under sea cables fare better than satellites in longevity and security dimensions (PTC, 2002). Hong Kong being a densely populated tiny island is much easier to wire than giants like mainland China and India, which partly explains the growth of internet in Hong Kong. Hong Kong has numerous major corporations, is a major port and hence information exchange and communications is of vital importance. Supplier power Hutchison Telecommunications International Limited is a leading global provider of mobile services. It has a strong brad name and reputation globally. Hutchison offers mobile and fixed-line telecommunication services in Hong Kong and Israel, and operates mobile telecommunications services in Macau, Indonesia, Vietnam, Sri Lanka and Thailand. Hutchison maintains excellent service quality and this is the reason that its customer base has been increasing despite tough competition. It focuses on customer relations and knows this is the best way to sustain in the market. Product and technology development Hutchison can introduce innovation and creativity to the services to have competitive edge. Hutchison is offering very attractive prices in the iPhone segment which is very fierce competition for AT&T. For merely $188 HKD, they are offering 500 wireless minutes, 500 heart-to-hear minutes, 25 multimedia messages, 15 SMS text messages, 500 MB of data usage and unlimited Intra 3 iPhone SMS messages (Will, 2008). The consumers are prepared to embrace new technology and the infrastructure already set in Hong Kong is ready to deliver high value-added services, content and application to the consumers (Au, 2002). Buyer power Prices are competitive but this should not deter Hutchison from penetrating further in the market. If Hutchison is able to offer value-added benefits to the consumers, they would be willing to pay a price for that. Effective competition is only to keep costs controlled and keep the prices reasonable for the consumers. More than 3.8 million out of a total of 6.8 million people have fixed telephone lines and there are 8.2 million mobile phone subscribers, thereby having the highest teledensity in the world (Andersen, Tufte, Rasmussen & Chan, 2007). The consumers have the ability to pay for the services provided the services meet their needs. There is an increasing demand for telecommunications services as Hong Kong moves towards a knowledge-based and high-value added economy (Au, 2002). Customers are keen users or multimedia mobile internet content Competitive rivalry In the field of mobile services, four 3G licenses were awarded by OFTA - Hong Kong CSL Limited, Hutchison 3G (HK) Limited, SmartTone 3G Limited and Sunday 3G (HK) Limited. These service providers along with New World Mobility and Peoples Telephone Company Limited operate a total of eleven GSM networks. Hong Kong depends on the exchange of high volume of information over the telecommunications infrastructure. The mobile technology that it deploys in Hong Kong include 1G AMPS/TACS, 2G GSM/CDMA/PCS, 2.5G GPRS/IS95B and 3G UMTS video mobile communication services. Their 3G technology offers video mobile communication services, including video calling, video streaming, video messaging, news, financial updates, sports and football highlights, remote surveillance, traffic condition viewing, weather reports, movie previews, music and location-based services (Three, 2006). To commence i-mode™ services in Hong Kong, Hutchison has tied up with NEC Corporation (NEC) for its Mobile Internet Platform (NEC, 2007). This platform can provide one-touch, easy, high-speed access to abundant, attractive contents and services. Differentiation/strategy It was the first to introduce 3G mobile services in Hong Kong. They are the leaders in introducing technical and service excellence into the 3G era (Three, 2006). Very recently, along with Apple, they have also introduced iPhone 3G which combines all the revolutionary features of iPhone with 3G networking that is twice as fast as the first generation iPhone. This will enable the users from multimedia mobile Internet content and have unsurpassed communications and infotainment experience (Smartbrief, 2008). Besides, their 3G phones are equipped with Chinese language support in Hong Kong. Globalization has forced deregulation in the telecom industry everywhere and Hong Kong was amongst the first movers to derive benefit from this. Since liberalization too many service providers entered the market which definitely brought the costs down for the consumers but also affected the profit margins of the operators. This ultimately led to some exiting the industry and consolidation, mergers and acquisitions taking place as well. This led to the merger of New World Mobility and CSL in 2007 and this deal created the largest carrier in the market (O’Shea, 2007). They are now aiming to set up the largest and most efficient service-oriented architecture in the industry. Competition in the market is fierce and this merger is a threat to Hutchison as the new company CSL New World Mobility is focused on transforming legacy service development and delivery processes. The CSL New World Mobility caters to the business, consumers and the youth market. The company is concentrating on customer relationship management and this is something that Hutchison needs to be cognizant of. 2.3 Recommendations Hutchison Hong Kong is undoubtedly the market leader and has been able to sustain growth while retaining profits. They come up with products/service from time to time and have demonstrated their customer focused attitude. The free economy and the free market environment have supported the growth of the company in Hong Kong. Consolidation in the industry has also enabled it to have edge over many companies. To concentrate on the core business they have outsourced the back-end operations to third party. They have the latest technology and offer the most advanced services. Nevertheless, Hutchison can still further add value to its customer-service. Globally telecoms have been forced to reinvent themselves. Hutchison should take precautions before it arrives at the stage where it finds difficult to sustain because Hong Kong is after a tiny island. The biggest telecoms in Europe, North America and Asia have started investing in building television services. The delivery of television and entertainment services over broadband internet networks (also known as Internet Protocol Television, or IPTV) is a major growth area (Curtis, 2006). IPTV is a major challenge area to cable, digital terrestrial and satellite as an alternative broadcast delivery platform. France already had 470,000 IPTV users and Italy had about 324,000 IPTV subscribers at the end of 2005. Research suggests that by 2010, 49 million households will subscribe to IPTV services. The revenue generated from subscriptions and video on demand via IPTV is expected to reach $12.2 billion by 2011. In most mature markets the telecommunications operators are considering this diversification seriously. In the US, AT&T is investing $4.6 billion building a fibre-optic network so as to reach 19 million homes by the end of 2008. Deutsche Telekom and British Telecom are also investing heavily in the new IP-based system still using the existing copper based networks. IPTV may not fetch immediate returns but it will help Hutchison grow their revenues. No doubt there will be stiff competition from stiff competition from cable, satellite and digital terrestrial pay-TV businesses but if Hutchison is able to offer bundled services, this will be a powerful tool to retain customers. Hutchison already has a very good network and excellent customer base and hence introducing this additional service would not be very cumbersome for them. The customers too would benefit because when they take all services bundled from a single service provider, they derive price benefits while the operators increases its loyal customer base. Customer churning would reduce as this is a growth strategy if they can offer triple services of mobile phones, television and broadband at the same time. This can help them to increase their average revenue per customer. Nevertheless, Hutchison should bear in mind that this cannot fetch them overnight profits but it would help to increase revenues, enhance their loyal customer base and increase their services platform. References: Aizu, I. (2002). A Comparative Study of Broadband in Asia: Deployment and Policy. [Online] Available at: http://www.rieti.go.jp/jp/events/02042201/aizu_1.pdf [accessed 26 August 2008] Andersen, L. P. Tufte, B. T. Rasmussen, J. & Chan, K. (2007). Tweens and new media in Denmark and Hong Kong. Journal of Consumer Marketing 24/6 (2007) 340–350 Au, M. H. (2002). 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