Complaint about Bundling of Pay TV and Broadband Internet Access Services by Hong Kong Cable Television Limited

Transcription

1 Complaint about Bundling of Pay TV and Broadband Internet Access Services by Hong Kong Cable Television Limited Complaint against: Issue: Relevant Instruments: Hong Kong Cable Television Limited ( HKCTV ) Whether HKCTV s bundled service promotion Buy Cable Television Service, Get One Year Broadband Services Free is an anti-competitive conduct or an abuse of dominance in that it may prevent or substantially restrict competition in the retail market for residential broadband Internet access services. General Conditions ( GC ) 15 and 16 of HKCTV s Fixed Telecommunications Network Services ( FTNS ) Licence and sections 7K and 7L of the Telecommunications Ordinance. Case Opened: October 2002 Case Closed: June 2003 Decision: Outcome: No contravention of either GC 15 or 16 of HKCTV s FTNS Licence or section 7K or 7L of the Telecommunications Ordinance Case Closed Case Reference: T210/02 The Complaint 1. In October 2002, the Telecommunications Authority ( TA ) received a complaint that Hong Kong Cable Television Limited ( HKCTV ) was taking advantage of its dominant position in the supply of pay TV services to increase its market share in both the pay TV and broadband Internet access service markets by bundling its pay TV service with that of its affiliate, i-cable Webserve Limited ( iwl ) 1, in the Buy Cable Television Service, Get One Year Broadband Services Free bundled service promotion, which ran from mid-september to end-december The complainant argued that, in the long run, the abuse of a dominant position would prevent or substantially restrict new and fledgling pay TV operators and broadband Internet service providers ( ISPs ) from providing their services to 1 HKCTV and iwl are both 100% owned subsidiaries of the same holding company, i-cable Communications Limited. 1

2 consumers. It was argued that, in the absence of effective competition on a level playing field, consumer choice would be limited, prices higher and quality lower. Factual Details of the Bundled Service Promotion 3. The bundled service promotion, offered between 19 September and 31 December applied only to the first outlet of a new pay TV customer who subscribed to the service on or before 31 December The bundling was optional in that potential customers could acquire the services separately. The offer was not applicable to existing pay TV or broadband cable subscribers. Pricing details provided by HKCTV were: standard rate for basic pay TV service ($298 per month subscription fee, $30 per month decoder rental, $300 installation fee); free broadband cable Internet access service (standard fee then $248 per month); standard cable modem rental ($30 per month); and free cable modem installation (the then $600 standard installation fee was also waived for broadband cable services acquired outside of the promotion). Representations by HKCTV 4. HKCTV noted that conduct has to place a competitor at a significant disadvantage or competition has to be substantially restricted for a licensee to engage in conduct that is anti-competitive in terms of the Telecommunications Ordinance. Rather than any predatory purpose, HKCTV stated that the purpose of the bundled service promotion was to, inter alia, generate sales of both broadband and pay TV services and to acquire customers who are likely to value the service highly because they take two services rather than a single service. 5. HKCTV commented that the effect on the broadband access market of the bundled service promotion would have been very small (in terms of changes in the share of market revenue) if its sales target had been achieved. HKCTV concluded that the effect could not be considered under any yardstick to be significant or substantial. Relevant Provisions 6. The complaint was concerning the anti-competitive purpose or effect of the bundled service promotion in the relevant markets in which pay TV and residential broadband Internet access services are supplied. The Telecommunications Ordinance 2 Originally the promotion period was to end on 30 November 2002, but subsequently it was extended to 31 December

3 prohibits anti-competitive practices and abuse of dominant position in a telecommunications market. The relevant market for the supply of pay TV services is not a telecommunications market and therefore investigation of complaints against anti-competitive conduct or abuse of dominance in the pay TV service market is beyond the jurisdiction of the Telecommunications Authority ( TA ) under the Telecommunications Ordinance. The TA will therefore investigate the complaint in relation to the relevant telecommunications market. 7. Both HKCTV and iwl are licensees under the Telecommunications Ordinance. HKCTV is the holder of a Fixed Telecommunications Network Services ( FTNS ) Licence for the provision of telecommunications services over the network used for the provision of subscription television broadcasting services licensed under the Broadcasting Ordinance. iwl is the holder of a Public Non-Exclusive Telecommunications Service ( PNETS ) Licence for the provision of international value-added network services which include Internet access services. 8. Section 7K of the Telecommunications Ordinance prohibits conduct of a licensee which, in the opinion of the TA, has the purpose or effect of preventing or substantially restricting competition in a telecommunications market. Section 7K(3)(c) gives an example of a conduct which may be considered to be falling within the scope of prohibition: giv[ing] an undue preference to, or receiv[ing] an unfair advantage from, an associated person, if in the opinion of the [TA], a competitor could be placed at a significant disadvantage, or competition would be prevented or substantially restricted. 9. Section 7L of the Telecommunications Ordinance prohibits abuse of position by a licensee in a dominant position in a telecommunications market. A licensee is in a dominant position where it is able to act without significant competitive constraint from its competitors and customers. A licensee in a dominant position is deemed to have abused its position if, in the opinion of the TA, the licensee has engaged in conduct which has the purpose or effect of preventing or substantially restricting competition in a telecommunications market. 10. General Conditions 15 and 16 of HKCTV s FTNS Licence contain prohibitions similar to sections 7K and 7L respectively. Market Definitions 11. The complainant complained about the impact of the bundled service promotion in the broadband Internet access service market. It is necessary to consider whether this is the relevant market in relation to which the anti-competitive purpose or effect, if any, is to be assessed. 12. Three markets are involved in the complaint, namely, the pay TV service market, the market for the supply of the broadband conveyance (network) service in which HKCTV as an FTNS operator participates and the market for the supply of broadband Internet access services in which iwl as a PNETS Licensee participates. 3

4 Only the latter two are telecommunications markets. As the bundled service promotion is targeting residential users of broadband Internet access services, the TA considers that the residential broadband Internet access services market is the relevant market for the competition analysis. 13. In relation to residential Internet access services, HKCTV argues that narrowband and broadband services are in separate markets. They note that more and more Internet applications are being developed to exploit broadband potential which in turn increases demand for broadband access services. On the other hand, the complainant argues that they are in the same market as the choice between the two is mainly on the basis of price. However, they also argue that consumers will go for broadband services eventually. 14. The TA has analysed the product market from the demand substitutability point of view and considers in this case that a narrowband Internet access service is not a viable substitute for a broadband service for a typical residential user. Accordingly, the TA concludes there is a separate market for residential broadband Internet access services which is distinguishable from the narrowband services. The main reasons for this view are as follows: High-speed access of broadband services compared to narrowband services - Broadband Internet access services provide speed much higher than that of dialup narrowband services. With increasing sophistication of content accessible over the internet, many users have found the waiting time for downloading content with large file size over narrowband services unacceptable. Furthermore, access over narrowband services to certain types of content are either technically inferior (e.g. video streaming) or impractical to use (e.g. certain real-time game applications); On-line or always-on feature of broadband service - This is unavailable over narrowband dial-up access services and increasingly users find the dial-up and log-on time for narrowband services extremely inconvenient; Non-interruption of telephone services - For narrowband services, unless the user has subscribed to a separate telephone line for the Internet access services, telephone service over the line shared between telephony and Internet access would be disrupted during the time when the line is occupied for Internet access. On the other hand, broadband services are transmitted over different part of the spectrum over same line shared with telephone services or use a different network (e.g. the subscription television broadcasting network in the case of HKCTV s services) altogther and therefore Internet acces does not disrupt telephone services; and Relatively high price of broadband compared to narrowband services - This indicates that subscribers are willing to pay extra for a broadband service because of its fundamentally different characteristics. 15. In relation to the geographic market, the TA concluded that the relevant geographic dimension to the market was the entire Hong Kong territory. Although a consumer s choice is limited to those Internet service providers that offer services in 4

5 his or her residential area, estate or building, and the coverage of broadband Internet service providers is not always ubiquitous, there is nothing to prevent a licensed Internet service provider to provide service to customers at any location throughout the territory. 16. The TA does not consider that the market for the supply of the broadband conveyance (network) service in which HKCTV participates is the relevant market for the competition analysis because the bundled service promotion would not have any impact in this market. Competition Analysis 17. Although the prohibitions under sections 7K and 7L of the Telecommunications Ordinance and GC 15 and 16 of HKCTV s FTNS Licence just apply to conduct that would have anti-competitive purpose or effect in the relevant telecommunications market which in this case is the residential broadband Internet access services market, the TA, in analysing the impact of the bundled service promotion in the relevant market, may examine whether the conduct of HKCTV in any other market would have the purpose or effect of preventing or substantially restricting competition in the relevant market. 18. Under HKCTV s FTNS Licence, there is a General Condition No. 44 under which the TA may issue a direction waiving HKCTV from the obligations of complying with certain conditions when the TA has formed the opinion that HKCTV is not dominant in any FTNS market. To date, no such direction has been issued. 19. HKCTV is also by far the largest supplier of pay TV services in Hong Kong. Although competing pay TV suppliers have entered the market, their market share is as yet insignificant. The subscription television broadcasting network of HKCTV passes over 94% of all households in Hong Kong. One concern is whether HKCTV, through the bundled service promotion, would leverage HKCTV s market power in the pay TV market into the residential broadband Internet access service market, thus giving iwl undue advantage in its competition in that market. State of Competition in the Relevant Market 20. At present, there are at least 15 active players in the market for residential broadband Internet access services. There is minimal regulatory entry barrier into this market. Operators in this market may be service-based and need to obtain a PNETS Licence which is obtainable through a straightforward procedure and only a minimal licence fee is payable. Facilities-based operators (i.e. network operators) such as Hutchison Global Communications (HGC) and Hong Kong Broadband Network Limited (HKBN) also participate in this market. Service-based operators obtain the underlying broadband conveyance service from the facilities (network) operators. 21. iwl is a service-based operator in the residential broadband Internet access services market. HKCTV is a facilities operator providing the underlying broadband conveyance service (which service is called Cable Modem Access Line Service ), but is not licensed to provide the broadband Internet access service at retail level to 5

6 the end-users. iwl obtains the underlying broadband conveyance service from HKCTV. For technical reasons, HKCTV s underlying broadband conveyance service is at present supplied only to iwl, but not to other providers in the residential broadband Internet access services markets. 22. The service-based operators in the market have to obtain the underlying broadband conveyance services from the local fixed network operators. As the conveyance services of HKCTV is at present not open to the service-based operators other than iwl, and HGC and HKBN do not supply wholesale broadband conveyance services, the choice of the service-based operators is at present limited to that supplied by PCCW-HKT Telephone Limited (PCCW-HKTC), the dominant operator in the local fixed telecommunications network services. However, the TA is not aware of any difficulty encountered by service-based operators in obtaining the underlying broadband conveyance service from PCCW-HKTC. 23. Although the residential broadband conveyance services market is participated by at least 15 active players, the four largest operators capture over 90% of the market. iwl is not the largest operator and its market share in the market is less than 25%. 24. Given the current market share figures and the low barriers to entry, the residential broadband Internet access market is a competitive market, albeit an imperfectly competitive (ie, oligopolistic) market. No operator in this market is regarded by the TA as being in a dominant position. Impact of the Bundled service promotion on Competition in the Relevant Market 25. The TA will examine whether the making of the offer would constitute any of the following conduct! Undue preference so as to place competitors at a significant disadvantage! Predatory pricing or in any other way prevent or substantially restrict competition in the relevant market. Undue Preference so as to Place Competitors at a Significant Disadvantage 26. It is not clear whether the bundled service promotion was made by iwl or HKCTV. However, it is clear that some agreement or arrangement must be made between iwl and HKCTV to enable either of them to make this offer. The TA is not aware of, and has not been given any information on, such agreement or arrangement being entered into with other Internet service providers. It appears therefore the iwl has been preferred by HKCTV in entering into the agreement or arrangement. If the offer was made by iwl, the issue is whether iwl has breached section 7K by receiving undue preference from HKCTV to place a competitor of iwl at a significant disadvantage or to prevent or substantially restrict competition in the residential broadband Internet access service market. If the offer was made by HKCTV, the issue is whether HKCTV has breached section 7K by giving undue preference to iwl to place a competitor HKCTV or iwl at a significant disadvantage or to prevent or substantially restrict competition in the residential broadband Internet 6

7 access service market. Both issues require an analysis of the purpose or effect of the bundled service promotion on the state of competition in this relevant market. 27. The bundled service promotion provides the customer with a significant discount in the prices for the residential broadband Internet access services. Free Internet access is provided for 12 months and the installation fee is waived. However, in order to take advantage of this offer, the customer must at the same time subscribe to the pay TV service of HKCTV. Therefore the attractiveness of the offer depends on whether the customer considers that he/she needs the pay TV service. 28. During the promotional period, the pay TV penetration was Hong Kong is around 30%. It could not be said that pay TV service is regarded as an essential service to the majority of customers. Therefore whether a potential customer would be persuaded to take up the offer would depend on his/her need for the pay TV services and the attractiveness of the other residential broadband Internet access services on the market. 29. Figures provided confidentially to the TA by HKCTV indicate that the majority of iwl s customers when purchasing broadband Internet access services, purchased those services on a stand-alone basis without purchasing the pay TV services. This further supports the fact that a purchaser of broadband Internet access services may not at the same time have the need for pay TV services. These customers are therefore potential customers of the other suppliers of broadband Internet access services without the bundling with pay TV services. 30. The bundled service promotion is available only to new subscribers to the pay TV services. The promotion period lasted 15 weeks (from 17 September 2002 to 31 December 2002). According to data published in HKCTV s annual reports, the growth of the number of pay TV subscribers averaged about 40,000 per annum in the past two years. The number of new Pay TV customers during the 15 weeks is therefore expected to be around 12,000. Only a fraction of these new Pay TV customers would have a need for broadband Internet access services. (Data provided to the TA on a confidential basis on the take-up rate of this promotion offer has confirmed this.) By way of comparison, the average growth rate of residential broadband Internet access service customers during 2002 was about 26,600 per month. The number of potential broadband access customers would be around 93,000 over the offer period of the bundled service promotion. The majority of these customers would be looking for suitable services in the market and the competitors of iwl are not excluded from competing for these customers in the market. 31. Accordingly, the competitors of iwl who only offer broadband Internet access services but not pay TV would not appear to be significantly disadvantaged competing against the bundled service promotion as such. In terms of the Telecommunications Ordinance, it is not considered that the bundled service promotion, irrespective of the discount, prevents or substantially restricts competition in either of the relevant markets. Predatory Pricing 7

8 32. To constitute predatory pricing, the standard conditions for predatory pricing would need to hold (i.e. the price is below cost, there is the predatory purpose of eliminating a competitor and there is the ability to recoup the losses from the below cost pricing). 33. In relation to iwl s broadband Internet access service, a significant discount is being offered: free monthly Internet access for 12 months and free installation. Analysed previously, the attractiveness of the offer depends on whether the customer considers that he/she needs the pay TV service. Furthermore, the bundled service promotion is available only to new subscribers to the pay TV services. The promotion period only lasted 15 weeks and, in that short time, there was no evidence of competitors exiting the market or competition being otherwise foreclosed. In particular, there was no evidence of any operator exiting the market. Furthermore, in the event that there was exit and iwl increased prices to supra-competitive levels, barriers to entry are relatively low for service-based entry. 34. In conclusion, the bundling is not considered to involve predatory pricing given the short term nature of the promotion, the lack of complaints from the majority of the industry about being forced to exit the industry and the lack of objective evidence about predatory purpose. This conclusion is reached irrespective of the fact that iwl appears to be incurring losses on those who subscribe to the bundle during the first twelve months. However, that is not the sole test for predatory pricing. Other Forms of Anti-competitive Conduct 35. As the bundled service promotion is not expected to put the competitors of iwl at a significantly disadvantageous position, the TA does not consider that it would constitute any other form of conduct that would prevent or substantially restrict competition in the relevant market. Conclusion 36. On the basis of the information available to the TA and the above analysis, the TA considers that the relevant market is the residential broadband Internet access services market in Hong Kong. The TA is of the opinion that the Buy Cable Television Service, Get One Year Broadband Services Free bundled service promotion would not place competitors in the relevant market in a significantly disadvantageous position. The TA has not found any evidence that the bundled service promotion would constitute predatory pricing or in any other way prevent or substantially restrict competition in the relevant market. Accordingly, the TA concludes that, in making the bundled service promotion in question, HKCTV did not breach GC 15 of its FTNS Licence, and neither HKCTV nor iwl has breached section 7K of the Telecommunications Ordinance. 37. As the bundled service promotion did not prevent or substantially restrict competition in the relevant market, there was no question of HKCTV breaching GC 16 of its FTNS Licence or section 7L of the Telecommunications Ordinance, irrespective of whether HKCTV is in a dominant position in the supply of the broadband conveyance service market. 8

9 38. Accordingly, the case is closed. Office of the Telecommunications Authority 19 June