merger control of the telecom industry in hong kong
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Merger Control of the Telecom Industry in Hong Kong. OCED Seminar, Jeju Korea. 27 June 2007. Herbert Fung Senior Economic Advisor Office of Telecommunications Authority. Agenda. The Legal Framework Cases Studies Further Issues and Developments. Part I: The Legal Framework. - PowerPoint PPT PresentationTRANSCRIPT
Merger Control of the Telecom Industry in Hong
Kong
27 June 2007
OCED Seminar, Jeju Korea
Herbert FungSenior Economic Advisor
Office of Telecommunications Authority
2
Agenda
1. The Legal Framework
2. Cases Studies
3. Further Issues and Developments
Part I: The Legal Framework
4
A sector-specific regime
Anti-competitive practices prohibited for the telecom & broadcasting sectors only
Merger control for the telecom sector only
No competition law for other business sectors in Hong Kong for the time being
5
Telecom Ordinance (Cap.106)
Section 7K – anti-competitive practices
Section 7L – abuse of position
Section 7P – Authority may regulate changes in relation to carrier licensees
6
Chronology 1995: licence conditions of the fixed-t
elephone incumbent prohibit anti-competitive practices & abuse of position
2000: licence conditions overridden by provisions in Telecom Ordinance
2004: Merger control enacted
7
M&A control: policy objectives
Fair competition for enhancing consumer interests
Transparent and efficient regulatory regime for M&A activities
8
Light-handed approach
Characteristics of merger control for the telecom sector in Hong Kong: applies to “carrier licensees” only safe harbours voluntary pre-notification public benefit defence
9
The TA’s Statutory Powers
To investigate an M&A involving telecom carrier licensees
to opine whether the M&A has, or is likely to have, the effect of substantially lessening competition (SLC) in a telecom market in Hong Kong
if yes, to direct remedies
10
Procedures The TA has a discretion to investigate
an M&A on an ex post basis
The parties may request the TA, on an ex ante basis, to give: an informal advice – confidential but not
binding on the TA; or a formal consent – binding on the TA but
not confidential
11
Timetable Decide whether to investigate within
2 weeks after completion of the M&A
If yes, investigation to be completed: within 1 month for simple cases within 3 months for complicated cases
An appeal, if any, must be lodged within 14 days after the TA’s decision
12
Appeal Mechanism Appeal to whom?
Telecommunications (Competition Provisions) Appeal Board
Chairman and board members appointed by the Chief Executive of the HKSAR Government
Appeal Board may refer a Question of Law to the Court of Appeal
Appeal Board’s decision final
Who may appeal? The aggrieved subject licensee, the acquirer, the ac
quired (if itself not the subject licensee) Third parties have no right to appeal
13
Triggering point: A “change”
S7P only operates where there is a “change” in relation to a licensee
when a person’s (either alone or together with any associated person) beneficial ownership or voting control of the voting shares in the licensee crosses certain specified thresholds
Three thresholds: 15%, 30% & 50%
14
Safe Harbours
2004 M&A Guidelines screening device & a rule-of-thumb
If within SH presumption of no SLC If falls outside no presumption
either way, further enquiry necessary to give transparency not intended to replace case-by-
case analysis
15
Safe Harbours
Two safe harbours :
1. CR4 Ratio test adopted in Australia & Canada
2. Herfindahl-Hirschman Index (HHI) adopted in US & EU
16
The Competition Analysis The economic test
whether or not the change has, or is likely to have, the effect of substantially lessening of competition (SLC) in a telecommunications market
The “counterfactual” a “future-with-and-without” analysis
A “teleological” approach Integrated analysis not a step-by-step, “check-list” exercise
17
The SLC test … the “effect”…
“purpose” or “intent” not sanctioned
… of “substantially”… Appeal Board: “must be at least significant
but need not be big”
… “lessening competition”… Creation or enhancement of market power Market power could be unilateral or collective A structural test
… in a “telecommunications market” No jurisdiction if the effect is not in a
telecommunications market
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Matters to be taken into account
1. Barriers to entry
2. Market concentration
3. Countervailing power
4. Potential increase in prices & profit margins
5. Dynamic characteristics (growth, innovation and product differentiation)
6. Removal of a vigorous and effective competitor
7. Extent to which effective competition remains
8. Vertical integration
9. Import competition
10. Substitutes
11. others…
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Public Benefit Defence
if the change has, or likely to have, a benefit to the public and the benefit outweighs any detriment of SLC
“Public Benefit” need to be real, likely to be realized within a reasonable period after the merger, likely to be sustainable
Examples: consumer benefits, innovation, higher capacity or better quality of services, etc.
20
Remedies The TA gives directions to eliminate or avoi
d the effect of SLC
Structural Remedies e.g. divestiture
Behavioural Remedies e.g. merged firm be directed not to do certain a
nti-competitive act after the merger
Part II: Case Studies
22
Overview
7 cases since enactment of merger control: 2 granted with ex ante formal consent 5 ex post decisions not to commence
an investigation no formal ex post investigation yet
23
Cases
1. China Netcom acquiring PCCW shares (Apr 05)
2. PCCW acquiring Sunday (Jul 05)
3. China Mobile acquiring Peoples (Dec 05)
4. Merger of CSL & NWPCS (Mar 06)
5. Joint ownership of Asia Netcom & C2C (Aug
06)
6. Pacific Internet acquired by parent of Asia Netcom (Feb 07)
7. General Electric acquiring AsiaSat (May 07)
Case 1:China Netcom acquiring PCCW’s shareholding
25
Case 1: the transaction
50% 100%
External Cable-based FTNS
External Cable-based FTNS
Market for the Provision of External Bandwidth to
and from HK
compete Compete
Acquire 20% shares
Mainland fixed network operator buying into HK incumbent fixed network operator
Both parties are parents to “carrier licensees” A “change” to the carrier licensee under PCCW
Reach Networks & Reach Cable
China Netcom (HK) Operations
&Asia Netcom
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Case 1: the relevant market
A “teleological” approach: PCCW’s and CNC’s businesses overlap
only in external bandwidth services (EBS)
The relevant market for EBS: Route-by-route definition of market too
narrow because supply-side substitution from transit routing is strong
Cable (overland and submarine) and satellites are included
27
Case 1: competition analysis Market share analysis sensitive to
the choice of measures: Activated capacity Equipped capacity Upgradeable capacity Revenues
Excess capacity abundant Persistently falling prices
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Case 1: conclusion
No SLC
Ex post decision not to commence an investigation
Case 2:PCCW acquiring SUNDAY
30
Case 2: the transaction The incumbent fixed network operator
acquiring control of a mobile network operator A “change” to SUNDAY
2G & 3G Mobile Services
Fixed-line Services
Acquire 59.87% shares
Fixed carrier licenc
e
Mobile carrier licenc
e
31
Case 2: the relevant market A “teleological” approach:
PCCW’s and SUNDAY’s businesses overlap only if fixed & mobile telephony are in the same market
Treating fixed and mobile as a combined market can most readily identify and analyze any potential competition concern
Market definition may well be different for other cases or purposes
32
Case 2: analysis and conclusion
If fixed & mobile is a combined market: within safe harbours by CR4
If fixed & mobile are separate markets: No change in market structure for fixed o
r mobile
No SLC, therefore not to commence an ex post investigation
Case 3:Merger between CSL and New World PCS
34
Case 3: the transaction
A merger between two mobile network operators:
CSL, owned by Telstra, holds mobile carrier licences for both 2G and 3G mobile services
NWPCS holds a 2G mobile licence only, but its parent New World Group also holds a fixed carrier licence
A “change” to both CSL and NWPCS
35
Case 3: the relevant market
retail market mobile voice & data services
(complements) MNOs + MVNOs (supply substitution) both 2G and 3G networks
strong demand substitution from 2G to 3G
Separate markets for fixed and mobile One-way demand substitution from mobile
to fixed not strong
36
Case 3: competition analysis Competition effects of a reduction fro
m 6 to 5 MNOs marginal
Porting and churn statistics revealed that CSL and NWPCS had not been the most direct competitors due to business segmentation
Better prospects for the merged entity to take on the market leader, HTCL
37
Case 3: conclusion
No SLC
Formal ex ante consent granted
Case 4:China Mobile acquiring Peoples
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Case 4: the transaction
5 other HK MNOs
compete
competeOther
Mobile Operators in China
e.g. China Unicom
compete
Inbound Roaming
Outbound Roaming
compete
Acquiring 100%
shares
40
Case 4: the transaction
Mainland China’s incumbent mobile network operator to acquire all the shares of a mobile network operator in Hong Kong
A “change” to Peoples, a carrier licensee
41
Case 4: the relevant market A “teleological” approach
No horizontal overlap of businesses in HK Possible vertical effect of a speculated
preferential roaming arrangement between the parties
Convention of reciprocal arrangements between inbound and outbound roaming
Effect of any roaming arrangement should be on retail-level competition
Relevant market defined accordingly to analyze the retail effects of reciprocal roaming arrangements
42
Case 4: competition analysis Roaming arrangements is a classic case of
cross-border tacit collusion Roaming prices substantially higher than local
calls Escalated to a political controversy in Europe
“With-or-without” analysis: limited competition to date can’t get worse with a preferential arrangement Nothing to lose
43
Case 4: competition analysis The potential effects of a preferential
roaming arrangement: Does it make commercial sense for China Mobile
to reject roaming revenues from other operators? China Mobile is not the only mobile operator in
mainland China with national coverage Financial damage to competitors cannot be
simplistically regarded as damage to competition Likely to trigger other operators to break the
roaming cartel and cut prices pro-competitive!!!
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Case 4: conclusion
No SLC
Formal ex ante consent granted
Other cases
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Other cases: common themes
No ex post investigation, either because of no change in market structure or the change fell within the safe harbour
Horizontal or vertical merger of smaller firms is pro-competitive, as the merged entity takes on the leading firms
Part III: Further Issues and Development
48
Shortcomings of the present regime
Legal drafting issues:
e.g. the meaning of “indirect share ownership” and “voting control”
No power to investigate non-licensees
The anomaly of a sector-specific approach
49
The Communications Authority
A “merger” of broadcasting and telecom regulation has been proposed
Extend merger control to the broadcasting sector?
Presumption that market power comes mainly from “carrier licensees” dubious
50
A cross-sectoral approach The HKSAR government is contemplat
ing a cross-sectoral competition law
May or may not include a merger control regime
The sector-specific regime may be overridden, repealed or left unchanged
Q&A
Thank You