Type III Interconnection: Key to Sustainable Local Network Competition Xu Yan, HKUST Business School

Hong Kong’s Local Fixed Networks Monopoly Operation by former Hong Kong Telecom until 1995 under exclusive franchise In 1995, in addition to Hong Kong Telecom, three new licenses were issued to Hutchison, New T&T and New World In 1999, Hong Kong Telecom surrendered its exclusive IDD franchise

Hong Kong’s Local Fixed Networks In 1999, Hutchison, New T&T and New World get a moratorium with investment commitment In 1999, five wireless local fixed network licenses were issued. Hong Kong Cable also obtained license for telecom service Since 1 January 2003, local fixed network market has been fully liberalized

Market Structure of the Local Fixed Network in HK, the UK and the US (By Dec. 2003) Source: FCC ( OFTA ( Oftel ( Type of Access Hong Kong (Since 1995) United Kingdom (Since 1984) United States (Since 1996) Direct Access60.7%89.7%23% Resale0%10.3%16% Unbundled local Loops (Type II Interconnection) 39.3%0%61% Total Market Share by New Entrants 27.5%17%16.3%

Regulator’s Efforts in Facilitating Competition Operator Number Portability statutory right of access into buildings sharing of facilities (cable ducts, etc) Type I Interconnection Type II Interconnection

Type I Interconnection - Interconnection between Network Gateways Network 1Network 2 POI Gateway

Type II Interconnection - the Local Loop Unbundling Local Exchange of Network 1 MDF Distribution Point Street Building Network 1 Network 2 Block-wiring TBE Room A B C

Equipment Collocation in TBE Room

Deployment of Type II Interconnection: The Cut-over of Jumper Line 2N Collocation Room Main Distribution Frame (MDF) Incumbent’s Switching Equipment Equipment Side Line Side LAL Tie Circuits Incumbent’s Exchange MDF To 2N’s Host Exchange (Backhaul process) Customer Building Blockwiring in TBE Room Incumbent’s External Cable Cable Lead-in (4) (3) (5) 2N’s Fiber Cable

Universal Service Contribution: Subsidies from IDD HKTC HKTI International Destination New FTNS Mobile Service

Price Squeezing Retail Price Intercon nection Payment

Price Rebalancing Starting from 1/8/19961/8/19971/9/199922/1/20011/1/2002 Business$104.6$108.8 $128 No price control Residential$67$68.9$90$110 No price control

More Exchange Opened for Type II Interconnection 50% residents have choice among operators, new entrants are committed for more investment for moratorium Source:

Accelerated Market Share of New Entrants

The Case of Wharf T&T By the end of 2002: Profit: HK53 million, 5.5 times comparing to 2001 Revenue from fixed network: HK$833 million Total lines: 340,000 Market share: 9% (business 15%)

Backbone Network of Hutchison Global Communication in Hong Kong

Benefits of Competition is no Longer Just Limited to Corporate Users

Type III Interconnection? Local Exchange of Network 1 MDF Distribution Point Street Building Network 1 Network 2 Block-wiring TBE Room A B C

Reasons for Change Regulation at different points are different A: collocation, cut-over B: Rights of way C: building access Different points represent different development strategies A: Indirect access C: Direct access Bottleneck at point C may no longer be controlled by the incumbent Property developers holding class license New entrants affiliated with the property developers Experience of success: the case of Korea

Advantages of Change Explicitly structured regulatory framework Type I: any-to-any communication; Type II: deployment of cut-over; Type III: subscribers access in buildings. Flexibility in regulation: Direct access vs. Indirect access Respond to market change From overall asymmetric regulation to site-specific asymmetric regulation

Conclusions Type II interconnection (local loops unbundling) is efficient in facilitating local fixed network competition as long as there is no market distortion; It is necessary to review type II interconnection timely in order to respond to the market change; Type III interconnection is essential in guaranteeing universal choice so as to guarantee sustainable universal service

Q &. A

Thank You and welcome to Hong Kong Mobility Roundtable 2005! (