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Mallesons Stephen Jaques 5b2dfa84-c293-4000-a95f-5beefb566549

Joint Ownership of CSL and New World Mobility - Submission to OFTA 25 January 2006

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Joint Ownership of Hong Kong CSL Limited and New

World PCS Limited

Submission to the Office of the Telecommunications Authority

in support of a joint application for

prior consent under sections 7P(6) and (7) of the Telecommunications Ordinance

PUBLIC VERSION

25 January 2006

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Contents

SSSeeeccctttiiiooonnn OOOnnneee Executive summary 3

SSSeeeccctttiiiooonnn TTTwwwooo Details of parties 7

SSSeeeccctttiiiooonnn TTThhhrrreeeeee Details of transaction 10

SSSeeeccctttiiiooonnn FFFooouuurrr Rationale and efficiencies 16

SSSeeeccctttiiiooonnn FFFiiivvveee Application of section 7P 18

SSSeeeccctttiiiooonnn SSSiiixxx Market definition 20

SSSeeeccctttiiiooonnn SSSeeevvveeennn Competitive overlap 26

SSSeeeccctttiiiooonnn EEEiiiggghhhttt Constraint from competitors 30

SSSeeeccctttiiiooonnn NNNiiinnneee Market concentration 40

SSSeeeccctttiiiooonnn TTTeeennn Scope for market entry 51

SSSeeeccctttiiiooonnn EEEllleeevvveeennn Competition analysis 54

SSSeeeccctttiiiooonnn TTTwwweeelllvvveee Public benefits 57

AAAttttttaaaccchhhmmmeeennntttsss 60

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1 Executive Summary

1.1 Proposed common ownership of CSL and NWPCS

This submission has been prepared in support of a joint application to the Telecommunications Authority (“TA”) for prior consent under sections 7P(6) and (7) of the Telecommunications Ordinance (“Ordinance”). This submission is a joint submission by Hong Kong CSL Limited (“CSL”) and New World PCS Limited (“NWPCS”) as telecommunications licensees (“Applicants”).

The proposed transaction (“Transaction”) relevantly involves the injection and transfer by New World Mobile Holdings Limited (“NWM Listco”), a listed subsidiary of New World Development Company Limited (“NWD”, together with its subsidiaries, (the “NWPCS Group”) of all of NWM Listco’s interests in New World PCS Holdings Limited (“NWPCS Holdco”) to Telstra CSL Limited (to be renamed CSL New World Mobility Limited) (“JVCo”). NWM Listco will also make a cash payment of HK$244.024 million to JVCo. In consideration for which, JVCo has agreed to issue and allot to Upper Start Holdings Limited ("NWSPV"), a wholly-owned subsidiary of NWM Listco, new shares in JVCo.

The effect of the Transaction will be that JVCo will become the common owner of CSL and NWPCS. Upon completion, Telstra Corporation Limited (“Telstra”, together with its subsidiaries, the “Telstra Group”) will be the beneficial owner of 76.4% of the issued share capital of JVCo, while NWM Listco will become the beneficial owner of the remaining 23.6% of the issued share capital of JVCo.

The businesses of CSL and NWPCS will initially be retained in separate subsidiaries of JVCo, but progressive rationalisation will occur to realise efficiencies and synergies. Ancillary restraints will apply as between the Telstra Group and the NWPCS Group.

1.2 Commercial objectives

The primary commercial objectives of the Transaction are to:

• enhance CSL’s and NWPCS’ overall competitive and strategic position in the highly competitive Hong Kong mobile market by creating a commonly-owned business with strong brand recognition across the full spectrum of customer segments;

• more specifically, enable CSL and NWPCS to compete in the Hong Kong market from a position of greater efficiency;

The annual pre-tax operating cost savings arising from the realisable synergies and efficiencies of the Transaction are estimated at approximately HK$230 million. In addition, it is estimated that HK$215 million in savings will be derived from reductions in capital spending, predominately on network infrastructure and information technology platforms. [CONFIDENTIAL]; and

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• reduce the need for duplicative capital expenditure by CSL and NWPCS, while enabling the efficient pooling of expenditure directed at service enhancement and innovation.

These commercial objectives are assisted by:

• NWPCS and CSL constituting the only mobile network operators in Hong Kong utilising Nokia core mobile network infrastructure and radio network infrastructure;

• NWPCS’ and CSL’s complementary brands and market strategies, resulting in minimal existing competitive overlap between NWPCS and CSL over the relevant market segments; and

• NWPCS’ desire to obtain optimal access to 3G spectrum so as to meet long-term 3G competition while minimising transaction costs.

1.3 Market definition

The relevant market in which the Transaction should be assessed is the Hong Kong market for the supply of mobile voice and data services. This market has a number of market segments as identified in Section 7 of this submission.

1.4 No substantial lessening of competition

The Transaction will not have, or be likely to have, the effect of substantially lessening competition in any telecommunications market for the following key reasons:

• High intensity of competition: The Hong Kong mobile market is widely recognised as one of the most competitive and least concentrated mobile markets in the world. Post-merger this situation remains. The high intensity of competition, in conjunction with the absence of any likely adverse impact of the Transaction on the intensity of that competition, should alone give OFTA sufficient comfort that no substantial lessening of competition is likely to occur.

• No additional market power: NWPCS and CSL will gain no additional market power from the Transaction. Post merger, there would still be:

• four strong, well-resourced, experienced and aggressive 3G/2G competitors (i.e., Hutchison, CSL-NWPCS, SmarTone-Vodafone and Sunday-PCCW);

• an experienced and aggressive competitor with a 2G licence (i.e., Peoples-China Mobile) with the potential ability to leverage roaming revenues and with access to 3G network capacity under the Mobile Virtual Network Operator (“MVNO”) open network access regime;

• seven licensed MVNO competitors with potential for significant further MVNO market entry; and

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• numerous unlicensed Mobile Value-Added Resellers (“MVAR”) competitors with potential for significant further MVAR market entry.

• Continuing scope for fierce competition: Fierce competition will continue after the merger, particularly in light of recent market developments:

• Hutchison is currently the largest mobile operator in Hong Kong and has the ability to bundle mobile telephony with its fixed voice business while leveraging from its brand which is one of the largest 3G mobile businesses in the world.

• SmarTone through a Partner Network Agreement with Vodafone (the world’s largest mobile operator by revenue and the world’s second largest mobile operator by subscribers) can access Vodafone’s extensive global procurement pool, global and recognised brand, global expertise and extensive global mobile content.

• PCCW via Sunday can bundle and leverage PCCW’s fixed line business, brand, and significant overall market power.

• Following China Mobile’s proposed acquisition, Peoples will be aligned with the world’s largest mobile operator by subscribers and third largest mobile operator by revenue.

• High level of market contestability: The threat of further market entry is real and present, particularly by MVNO and MVAR competitors. 3G licensees are required under the mandatory open network access requirement of their licences to offer at least 30% of their 3G network capacity to non-affiliated MVNO operators, substantially reducing any barriers to entry associated with limited spectrum.

• No material competitive constraint on each other: NWPCS and CSL are not price leaders and have complementary brands that are generally targeted at different customer demographics, resulting in minimal existing competitive overlap between NWPCS and CSL over the different market segments. They do not exercise material competitive constraints on each other and the existing brands will be retained post-acquisition. Any impact of the Transaction on competition is therefore de minimus.

• Dynamic nature of mobile market: The market is dynamic and characterised by rapid innovation. 3G is currently viewed as the future of mobile competition. The industry move to 3G is generating further significant price and non-price competition.

[CONFIDENTIAL]

• Level of HHI concentration is acceptable: International precedent indicates that the proposed post-merger level of market concentration, illustrated by the HHI figures, will still result in a highly competitive market. Mergers resulting in significantly higher levels of HHI have been approved in a range of other jurisdictions and none have been rejected at the levels of post-merger HHI that will

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occur in Hong Kong. Indeed, many commentators consider that market consolidation or exit among the mobile network operators in Hong Kong has been inevitable given the high number of mobile network operators relative to the size of the Hong Kong population and economy.

1.5 Significant potential public benefits

The Applicants do not consider that the Transaction will result in a substantial lessening of competition, but for completeness, should OFTA consider that a net public benefit analysis is necessary, the Applicants also submit that the Transaction is likely to result in material public benefits for the purposes of section 7P(7)(b)(iii) of the Ordinance.

• Greater cost efficiency: Network efficiencies, cost savings and economies of scale will provide scope for CSL and NWPCS to compete in the Hong Kong mobile market from a position of greater efficiency, to the ultimate benefit of Hong Kong consumers.

• New mobile technologies: The larger subscriber base of CSL and NWPCS will provide economies of scale in relation to the development and implementation of new mobile technologies (e.g., advanced data applications and technologies), potentially resulting in their earlier introduction to Hong Kong consumers and constraining the power of fixed line operators via fixed-mobile substitution.

• Enhanced intermodal competition as a constraint on fixed-line operators: As recognised by United States precedent, mergers of wireless carriers that lack a direct wireline affiliation are more likely to promote intermodal competition with fixed network operators. The Federal Communications Commission has viewed this as a public interest benefit.

• Higher quality services: The overall quality of both networks will be increased via progressive rationalisation around the best sites, technologies, and infrastructure, leading to increased quality of services to the benefit of Hong Kong consumers.

• Wider environmental benefits: Rationalisation will reduce unnecessary duplication of infrastructure, resulting in wider environmental benefits.

Please note: The words “[CONFIDENTIAL]” used in this submission designate instances where information has been included in the confidential version of the submission but not included in the public version of the submission.

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2 Details of Parties

2.1 Description of CSL business

CSL is a mobile telecommunications network operator and service provider in the Hong Kong market. CSL is a telecommunications licensee and the holder of a number of telecommunications licences, as identified in Attachment D of this submission.

• CSL’s background: Historically CSL (then Hong Kong Telecom CSL Limited) launched its mobile service in Hong Kong in 1993. A dualband GSM network was subsequently launched in 1998, integrating the GSM 900MHz network with a GSM 1800MHz (PCS) network acquired from Pacific Link Communications Limited. CSL was the first mobile operator in Hong Kong.

In late 2000, in the context of the takeover of Cable &Wireless HKT Limited by PCCW Limited (“PCWW”) and a subsequent joint venture with Telstra, Telstra acquired 60% of CSL and PCCW retained 40% through JVCo. Telstra subsequently acquired 100% ownership of CSL from PCCW in June 2002 by acquiring PCCW’s 40% holding in JVCo.

Telstra is Australia’s leading telecommunications and information services company. Telstra offers a full range of services and competes in telecommunications markets throughout Australia and in the Asia Pacific region.

• CSL’s networks: Today CSL operates an integrated 2G/3G world-class mobile network based on Nokia equipment.

[CONFIDENTIAL]

3G services were commercially launched in December 2004.

• CSL’s services: At the wholesale level CSL supplies mobile interconnect terminating services, MVNO services and MVAR resale services to a number of other market participants. At the retail level CSL supplies post-paid mobile services, international roaming services and pre-paid mobile services, as identified in Section 7 of this submission.

• CSL’s financial position: CSL’s financial position as at 30 June 2004 and 30 June 2005 is summarised in the following table based on the unaudited consolidated results of the Telstra CSL Group for each of the years ended 30 June 2005 and 30 June 2004: [CONFIDENTIAL]

The parties assume that OFTA is already highly familiar with CSL’s business. However, further information in relation to CSL can be found at the following URLs:

• http://www.hkcsl.com/main.html (English)

• http://www.hkcsl.com/main_c.html (Chinese)

http://www.hkcsl.com/main.html

http://www.hkcsl.com/main.html

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2.2 Description of NWPCS business

NWPCS operates as a mobile telecommunications network operator and service provider in the Hong Kong market. NWPCS is a telecommunications licensee and the holder of a number of telecommunications licences, as identified in Attachment E of this submission.

• NWPCS’ background: Historically, NWPCS launched its first mobile service, a GSM 1800MHz (PCS) system in 1997. NWPCS was initially a subsidiary of New World Telephone Holdings Limited as part of the NWPCS Group. The principal activities of the NWPCS Group are property development, property investments, hotel and infrastructure investments, services and telecommunications and technology business, primarily in Hong Kong and mainland China.

In July 2004, NWPCS was sold to NWM Listco, a company incorporated in Hong Kong with limited liability and whose shares are listed on the Hong Kong Stock Exchange stock code “0862”. As a result of the sale, NWM Listco became and still remains a subsidiary of NWD.

NWPCS is currently a wholly-owned subsidiary of NWPCS Holdco which is in turn a wholly-owned subsidiary of NWM Listco. NWPCS trades under the name “New World Mobility”.

• NWPCS’ networks: Today NWPCS operates a world-class mobile network based on Nokia equipment, comprising a GSM network providing 2G voice and 2.5G mobile data services (i.e. GPRS and EDGE) over 1800MHz spectrum.

• NWPCS’ services: At the wholesale level NWPCS supplies mobile interconnect terminating services, MVNO services and MVAR resale services to a number of other market participants. At the retail level, NWPCS supplies post-paid mobile services, international roaming services and pre-paid mobile services.

• NWPCS Group’s financial position: NWPCS Group’s financial position as at 30 June 2004 and 30 June 2005 is summarised in the following table based on the audited consolidated results of the NWPCS Group for each of the years ended 30 June 2005 and 30 June 2004:

[CONFIDENTIAL]

The parties assume that OFTA is already highly familiar with NWPCS’ business. However, further information in relation to NWPCS can be found at the following URLs:

• http://www1.nwmobility.com/html/eng/default.jsp (English)

• http://www2.nwmobility.com/html/chi/default.jsp (Chinese)

http://www1.nwmobility.com/html/eng/default.jsp

http://www2.nwmobility.com/html/chi/default.jsp

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2.3 Further correspondence

Further correspondence in relation to this joint application for prior consent should be directed to the following people.

Roger Featherston is nominated as the principal contact.

Roger Featherston Dr Martyn Taylor Partner Senior Associate Mallesons Stephen Jaques Mallesons Stephen Jaques Phone: +61 3 9643 4101 Phone: +61 2 9296 2309 Fax: +61 3 9643 5999 Fax: +61 2 9296 3999 Email: [email protected] Email: [email protected]

Copied to (for CSL):

Jillian Cordeiro Danny Kotlowitz General Counsel Lawyer Hong Kong CSL Limited Telstra Corporation Limited Phone: +852 2888 9146 Phone: +61 2 9206 0015 Fax: +852 2519 9933 Fax: +61 2 9261 2401 Email: [email protected] Email: [email protected]

Copied to (for NWPCS):

Dr Norman Wai Executive Director and CEO New World Mobility Phone: +852 2133 8365 Fax: +852 3111 9166 Email: [email protected]

mailto:[email protected]





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3 Details of Transaction

3.1 Description of Transaction

The Transaction relevantly involves the injection and transfer by NWM Listco of all of NWM Listco’s interests in NWPCS Holdco to JVCo. NWM Listco will also make a cash payment of HK$244.024 million to JVCo. In consideration for which, JVCo will issue and allot to NWSPV new shares in JVCo, which will represent 23.6% of the enlarged issued share capital of JVCo upon completion.

The effect of the Transaction will be that JVCo will become the common owner of CSL and NWPCS. Upon completion, Telstra will be the beneficial owner of 76.4% of the share capital of JVCo, while NWM Listco will become the beneficial owner of the remaining 23.6% of the share capital of JVCo.

The businesses of CSL and NWPCS will initially be retained in separate subsidiaries of JVCo, but progressive rationalisation will occur to realise efficiencies and synergies.

Ancillary restraints will apply as between the Telstra Group and the NWPCS Group pursuant to a shareholders’ agreement.

The Transaction will not occur until completion, which is, in turn, conditional on:

• the TA’s prior consent under section 7P(7) of the Ordinance;

• approval by the shareholders of NWM Listco at an extraordinary general meeting;

• the Bermuda Monetary Authority giving its approval to the transactions to the extent such approval is required; and

• no material adverse change having occurred in relation to the respective groups between the execution of the merger agreement and completion.

3.2 Pre-Transaction structure of CSL

[CONFIDENTIAL]

• The operating company and telecommunications licensee is CSL.

• Telstra is the beneficial owner of 100% of the shares in CSL. Telstra is incorporated in Australia and is listed on the Australian and New York Stock Exchanges.

• As at the date of its annual report on 18 August 2005, Telstra was owned 51.8% by the Commonwealth of Australia and 48.2% by institutional and retail investors. The Telstra (Transition to Full Private Ownership) Act 2005 enables the Commonwealth of Australia to divest its remaining shareholding in Telstra.

• Telstra holds its interest in CSL via a chain of 4 intermediate holdings companies.

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[CONFIDENTIAL]

A simplified version of the CSL pre-Transaction structure is set out in Figure 1 below:

Figure 1 : Simplified CSL pre-Transaction structure

Telstra Corporation Limited (“Telstra”)

Telstra CSL Limited (“JVCo”)

Telstra Holdings Pty Limited (“TLS Holdco 1”)

100%

Telstra currently owns 100%

of CSL

Hong Kong CSL Limited and subsidiaries (“CSL”)

Bestclass Holdings Limited

100%

100%

100%

Holding

companies

Operating company and

licensee

Telstra Holdings (Bermuda) No.2 Limited (“TLS Holdco 2”)

100%

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3.3 Pre-Transaction structure of NWPCS Group

[CONFIDENTIAL]

• The operating company and telecommunications licensee is NWPCS, trading under the name “New World Mobility”.

• NWM Listco is the beneficial owner of 100% of the shares in NWPCS. NWM Listco is incorporated in the Cayman Islands and its shares are listed on the Hong Kong Stock Exchange. NWM Listco holds its interest in NWPCS via two intermediate holding companies, as indicated by Figure 2 below.

• NWD is the indirect beneficial owner of 58.04% of the shares in NWM Listco. NWD is incorporated in Hong Kong and its shares are listed on the Hong Kong Stock Exchange.

A simplified version of the NWPCS pre-Transaction structure is set out in Figure 2 below:

Figure 2 : Simplified NWPCS Group pre-Transaction structure

NWD currently owns 58.04% of NWM Listco which in turn owns 100%

of NWPCS

New World Development Company Limited (“NWD”)

New World Mobile Holdings Limited (“NWM Listco”)

Intermediate holding companies

100%

58.04%

100%

Public 41.96%

Holding

companies

Operating company and

licensee

Listed

entity

100%

New World PCS Limited (“NWPCS”)

New World PCS Holdings Limited (“NWPCS Holdco”)

Listed

entity

Holding

companies

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3.4 Ownership structure after the Transaction

The Transaction will relevantly involve the following key elements:

• NWM Listco will inject and transfer its 100% interest in NWPCS Holdco to JVCo;

• NWM Listco will make a cash payment of HK$244.024 million to JVCo; and

• JVCo will issue and allot to NWSPV new shares in JVCo which will represent 23.6% of the enlarged issued share capital of JVCo upon completion.

[CONFIDENTIAL]

A simplified version of the ownership structure after the Transaction is set out in Figure 3 below:

• JVCo is the point of common ownership of NWPCS and CSL. JVCo will have:

• beneficial ownership of 100% of the share capital of NWPCS, as operating company and licensee, via the holding company NWPCS HoldCo; and

• beneficial ownership of 100% of the share capital of CSL, as operating company and licensee, via the holding company CSL HoldCo.

• Telstra will be the beneficial owner of 76.4% of the shares in JVCo via a series of two wholly-owned intermediate holding companies, namely TLS Holdco 1 and TLS Holdco 2.

[CONFIDENTIAL]

• NWM Listco will be the beneficial owner of 23.6% of the shares in JVCo via a wholly-owned intermediate holding company, namely NWSPV.

• NWD will be the beneficial owner of 58.04% of the shares in NWM Listco via a series of intermediate holding companies.

[CONFIDENTIAL]

NWD, NWM Listco, NWSPV, Telstra, TLS Holdco 2 and JVCo have also entered into a shareholders’ agreement in respect of JVCo which will take effect as from completion of the Transaction (“Shareholders Agreement”). The Shareholders Agreement provides:

• based on the shareholding of TLS Holdco 2 and NWSPV after completion of the Transaction, the Shareholders Agreement relevantly gives TLS Holdco 2 the right to appoint 4 directors of JVCo, including the Chairman; NWSPV has the right to appoint 2 directors of JVCo;

[CONFIDENTIAL]

• Each of TLS Holdco 2 and NWSPV also have the right in mid 2008 to call for a listing of JVCo by way of an IPO in 2009 or subsequently.

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It is intended that Mr. Hubert Ng, the current CEO of CSL, will be the CEO of JVCo.

Figure 3 : Simplified post-Transaction structure

100%

Hong Kong CSL Limited and subsidiaries (“CSL”)

Telstra Holdings Pty Limited (“TLS Holdco 1”)

Telstra Corporation Limited (“Telstra”)

Bestclass Holdings Limited

100%

New World Development Company Limited (“NWD”)

New World Mobile Holdings Limited (“NWM Listco”)

Intermediate holding companies

100%

58.04%

New World PCS Holdings Limited (“NWPCS Holdco”)

100%

New World PCS Limited (“NWPCS”)

Telstra CSL Limited (“JVCo”) to be renamed as

CSL New World Mobility Limited

100% 100%

The existing, businesses will be retained, but with

progressive rationalisation and realisation of synergies

76.4% 23.6%

Upper Start Holdings Limited (“NWSPV”)

Telstra Holdings (Bermuda) No.2 Limited (“TLS Holdco 2”)

100%

100%

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3.5 Timing of Transaction

The Transaction has two remaining phases:

• Phase 1 (Execution and announcement): The execution of formal Transaction documentation occurred on 8 December 2005 and was publicly announced on 9 December 2005 by Telstra and on 13 December 2005 by NWD and NWM Listco. As identified above, the documentation remains subject to various conditions precedent, including TA’s prior consent and an NWM Listco shareholder approval.

• Phase 2 (Completion and implementation): The Transaction completion target, as advised to the market by Telstra, is 31 March 2006. Following completion, JVCo will commence rationalising the businesses of CSL and NWPCS in order to realise efficiencies and synergies over an estimated 24 month period.

[CONFIDENTIAL]

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4 Rationale and Efficiencies

4.1 Commercial rationale

The commercial rationale for the Transaction is as follows:

• Competitive and strategic positioning: The Transaction will enhance CSL’s and NWPCS’ competitive and strategic position in the highly competitive Hong Kong mobile market. The transaction will create an entity with strong brand recognition across the full spectrum of customer segments.

• Cost-savings and efficiencies: More specifically, the Transaction will enable CSL and NWPCS to compete in the Hong Kong market from a position of greater efficiency. NWPCS and CSL will jointly realise operating cost savings via economies of scale and rationalisation of assets and activities. The Transaction will reduce the need for duplicative capital expenditure.

The pre-tax operating cost savings arising from the realisable synergies and efficiencies of the Transaction are estimated at approximately HK$230 million with a further HK$215 million in savings arising from reductions in capital spending, predominately on network infrastructure and information technology platforms. [CONFIDENTIAL]

These commercial objectives are assisted by the following features of the Transaction:

• Complementary network technologies: NWPCS and CSL are the only network operators in Hong Kong utilising both Nokia core mobile network infrastructure and radio network infrastructure. In this manner, NWPCS and CSL have complementary network assets to enable network synergies to be progressively realised and maximised at minimal overall cost.

• Complementary brands and business strategies: NWPCS and CSL have complementary brands and focus their competitive activities on different customer segments, resulting in minimal existing competitive overlap, as identified in Section 7 of this submission.

• NWPCS’ need for 3G spectrum: NWPCS does not have a 3G licence but is facing intense and sustained 3G voice and data competition from other network operators. The merger provides NWPCS with optimal access to CSL’s 3G spectrum so as to meet long-term 3G competition while minimising transaction costs. In this manner, the Transaction facilitates NWPCS developing long-term 3G capability.

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4.2 Efficiencies and synergies from the Transaction

As identified above, the Transaction will enable NWPCS and CSL to jointly realise operating cost savings via economies of scale and rationalisation of assets and activities.

NWPCS and CSL intend to progressively achieve post-transaction operating cost savings, efficiencies and synergies in the following manner:

• Rationalisation of network assets: While the NWPCS and CSL networks will initially remain separate, a major benefit of the Transaction from a cost savings perspective arises from the ability to rationalise some of NWPCS radio access network and associated transmission over a 24 month period following completion.

In particular, cost savings are expected from:

• [CONFIDENTIAL]

• [CONFIDENTIAL]

• reduced repair and maintenance costs, as the overall size of the combined networks would be reduced for the same level of mobile coverage by the removal of wasteful duplication of infrastructure;

• [CONFIDENTIAL]

• [CONFIDENTIAL]

[CONFIDENTIAL]

• [CONFIDENTIAL]

• [CONFIDENTIAL]

• Realising economies of scale: Economies of scale could be realized in content, resulting in reduced content expenses. Economies of scale can also be realised in application development.

• Customer access to 3G spectrum: NWPCS has no 3G spectrum of its own so would otherwise need to establish a separate MVNO or MVAR business in order to supply 3G services to its customers.

[CONFIDENTIAL]

Essentially, the synergies and efficiencies arise from the rationalisation of the “back end” (network and operations) of the respective businesses of CSL and NWPCS while leaving the “front end” (sales and branding) relatively unchanged.

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5 Application of section 7P

5.1 Change in carrier licensee

Sections 7P(6) and (7) of the Ordinance enable a carrier licensee or any interested person to apply in writing to the TA for consent to any proposed change in relation to a carrier licensee.

The Transaction results in a change occurring in relation to two carrier licensees for the purposes of section 7P(16) of the Ordinance, namely NWPCS and CSL:

• a change occurs in relation to NWPCS because JVCo becomes the owner of 100% of the shares in NWPCS Holdco which, in turn, owns 100% of the shares in NWPCS as licensee;

• a change occurs in relation to both CSL and NWPCS because NWSPV will subscribe for new shares in JVCo which will represent 23.6% of the enlarged issued share capital of JVCo upon completion. JVCo is the indirect beneficial owner of 100% of the shares in CSL and NWPCS (via the simultaneous change identified above).

The relevant licences of CSL and NWPCS are listed in Attachments D and E of this submission respectively (“Relevant Licences”).

5.2 Overlapping provisions (para 1.22-1.24 of Guidelines)

The Telecommunications Authority’s Guidelines Mergers and Acquisitions in Hong Kong

Telecommunications Markets (“Guidelines”), at paragraphs 1.22-1.24, indicate that, in the interests of a clear and certain merger framework, the TA will rely primarily on the provisions of section 7P of the Ordinance when considering mergers and acquisitions, hence the TA will not apply:

• sections 7K and 7L of the Ordinance; or

• equivalent provisions to sections 7K and 7L in licences issues under the Ordinance prohibiting anti-competitive conduct and abuses of dominance.

The Applicants note that some of the Relevant Licences contain a number of relevant and overlapping provisions, in this category, some of which require express TA consent1.

The Applicants therefore seek consent to the Transaction under section 7P on the basis that the TA prior consent will also cover all other consents required from the TA for the Transaction under overlapping provisions in the Relevant Licences.

1 The Applicants note that the TA has waived the requirements under Special Conditions 21.1 of CSL’s 3G

licence.

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5.3 Ancillary restraint (para 1.25-1.26 of Guidelines)

Relevantly, the Transaction includes an ancillary restraint located within the Shareholders Agreement (“Ancillary Restraint’).

The Guidelines, at paragraphs 1.25 and 1.26, indicate that where the relevant restraints are directly related and necessary to the implementation of the merger agreement, they will be treated as ancillary restraints and will be assessed as part of the merger transaction under section 7P.

The Applicants consider that the Ancillary Restraint is directly related and necessary to the implementation of the Transaction for the reasons identified below. The Applicants therefore request the TA assess the Ancillary Restraint as part of the overall Transaction, consistent with the approach contemplated by the Guidelines.

[CONFIDENTIAL]

The remainder of this submission considers the overall competitive effect of the Transaction with the Ancillary Restraint included.

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6 Market Definition

6.1 Mobile market

The relevant market in which the Transaction should be assessed is the Hong Kong market for the supply of mobile voice and data services. The market encompasses both wholesale and retail supply of mobile services.

In the TA’s Report on the Competition Impact of the Acquisition of Shares in Sunday by PCCW (“Report”), the TA relevantly reached the following conclusions in relation to the appropriate mobile market definition of Hong Kong:

• While the TA considered a combined fixed-line and mobile telephony market in that case, this approach gave effect to the general principle that the TA should begin the assessment of competition factors using a market definition that most readily highlights potential competition concerns (para 6.6 of Report).

• The transaction in that case could also have been considered in the context of distinct fixed-line and mobile telephony markets (para 6.16 of Report).

• By the time BWA services become operational in Hong Kong, identification of separate mobile and fixed services markets may no longer be justified (para 6.25 of Report).

• OFTA also referred to a mobile market in a number of paragraphs throughout the Report, implicitly indicating that it viewed the mobile market as “national” (i.e., Hong Kong territory-wide) in scope and encompassing both wholesale and retail supply of mobile voice and data services.

6.2 International precedent on mobile market definition

International precedent indicates that 2G, 2.5G and 3G services are routinely considered to co-exist in the same product market, usually with voice and data co-existing in the same market (particularly given the relative infancy and small yet growing size of the mobile data market at this time). There is no precedent for defining separate pre-paid or post-paid markets. There is similarly no precedent for defining a market based on low, mid or high-level customer demographics. The geographic dimension is usually considered to be national in scope, particularly in a market the size of Hong Kong:

• Australia: The Australian Competition and Consumer Commission (“ACCC”) considered the appropriate market definition for mobile telephony in June 2004 in the context of its comprehensive Mobile Services Review and concluded that 2G, 2.5G, 3G and SMS services all co-exist within a national mobile market:2

“In determining the relevant product for the purposes of this inquiry, the Commission believes that, at the retail level, mobile operators sell a bundle of services to end-users that includes a range of subscription services and the ability to make outgoing calls.

2 ACCC, Mobile Services Review : Mobile Terminating Access Service, June 2004, Page 46,

http://www.accc.gov.au/content/item.phtml?itemId=708251&nodeId=file4327b89fad337&fn=Final%20report%20-%20mobile%20terminating%20access%20service%20(June%202004).pdf

http://www.accc.gov.au/content/item.phtml?itemId=708251&nodeId=file4327b89fad337&fn=Final%20report%20-%20mobile%20terminating%20access%20service%20June%202004.pdf

http://www.accc.gov.au/content/item.phtml?itemId=708251&nodeId=file4327b89fad337&fn=Final%20report%20-%20mobile%20terminating%20access%20service%20June%202004.pdf

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Accordingly, the Commission believes it is appropriate to consider these retail services as being supplied within the same ‘cluster’ market.”

“Overall, therefore, the Commission’s view is the relevant market is that in which retail mobile services are supplied. This is a national market operating at a retail functional level. It includes retail mobile services provided on 2G, 2.5G and 3G networks and SMS services, but does not include fixed-line services.”

• United Kingdom: The Office of Communications (“OFCOM”) in the United Kingdom similarly concluded that 2G and 3G services exist in the same market in June 2004: 3

“The likelihood that there would be a common pricing constraint for 2G and 3G termination suggested that it would be appropriate to put these services in the same market ... OFCOM therefore considers that, on the basis of currently available information, it would not be appropriate to define separate markets.”

• European Union: The European Commission also concluded that different types of mobile platforms exist in the same market with national scope in July 2002:4

“As regards the provision of mobile communications services, the Commission has found that, from a demand-side point of view, mobile telephony services and fixed telephony services constitute separate markets. Within the mobile market, evidence gathered from the Commission has indicated that the market for mobile communications services encompasses both GSM 900 and GSM 1800 and possibly analogue platforms.”

“The fact that mobile operators can provide services only in the areas where they have been authorised to and the fact that a network architecture reflects the geographical dimension of the mobile licences explains why mobile markets are considered to be national in scope.”

• Netherlands: The Dutch Competition Authority (“Authority”) in its approval of the KPN/Telfort merger on 30 August 2005 discussed a number of issues relating to market definition in the context of a merger of two mobile operators, reducing the number of mobile network operators from 5 to 4. The Authority relevantly concluded for the purposes of its review that:5

• mobile voice and data exist in the same product market;

• business and consumer segments exist in the same product market; and

3 OFCOM, Statement on Wholesale Mobile Voice Call Termination, 1 June 2004, para 2.21,

http://www.ofcom.org.uk/consult/condocs/mobile_call_termination/wmvct/chapter2/?a=87101 4 European Commission, Commission guidelines on market analysis and the assessment of significant

market power under the Community regulatory framework for electronic communications networks and

services, (2002/C 165/03), 11 July 2002, para 66 and footnote 44, http://europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/documents/c_16520020711en00060031.pdf 3G was not mentioned given the service had not been deployed in Europe at the time.

5 Decision of the Board of Directors of the Dutch Competition Authority as referred in article 37, first paragraph, of the Competition Law, Number 5104 /45, Regarding Case: 5104/KPN - Telfort, 30 August 2005, paras 14 to 19.

http://www.ofcom.org.uk/consult/condocs/mobile_call_termination/wmvct/chapter2/?a=87101

http://europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/documents/c_16520020711en00060031.pdf

http://europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/documents/c_16520020711en00060031.pdf

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• pre-paid and post-paid services exist in the same product market. The Authority relevantly commented, for example:6

“Given the low thresholds for switching and the similarities in product characteristics, it is plausible that a considerable proportion of end-users will change to post-paid in the case of an increase in the price of pre-paid and vice-versa. Besides, there are possibilities for supply-side substitution. Thus, for the current analysis, the retail market will not be subdivided further into post-paid and pre-paid services.”

• United States: For the purposes of its annual review of competitive market conditions in relation to commercial mobile services, the Federal Communications Commission (“FCC”) indicated on 30 September 2005 it was adopting a conservative market definition for the purposes of its report in which data and voice existed in separate product markets. However, the FCC commented that it may be inclined to adopt a view in which they both existed in the same product market in other contexts: 7

“The basic economic principle for defining the scope of the relevant product market is to include two mobile services in the same product market if they are essentially interchangeable from the perspective of most consumers – that is, if consumers view them as close substitutes. For the purposes of this report, relatively narrow product market definitions will be used, with a separate product market identified for each of the following services: interconnected mobile voice; interconnected mobile data; and mobile satellite service. However, the identification of separate markets for each service in the context of this report does not preclude the possibility that, in a different context, the Commission may find that two or more of these services belong in the same product market.”

The FCC’s approach of considering voice and data to exist in the same product market for the purposes of merger review decisions is illustrated by the Sprint-Nextel merger order. As indicated in the quote below, the FCC considered the competitive impact of a mobile industry merger within a mobile product market that comprised of both voice and data services:8

“As explained below, we find that there are separate relevant product markets for interconnected mobile voice services and mobile data services, and also for residential services and enterprise services. Nevertheless, we analyse all of these product markets under the combined market for mobile telephony. We believe, based upon consideration of factors including the nature of these services and their relationship with each other, that this approach will provide a reasonable assessment of any potential competitive harm to any of the markets as a result of the transaction….”

6 Ibid, para 16 : translated from Dutch by the Applicants. 7 Federal Communications Commission, 10th Annual Report and Analysis of Competitive Market

Conditions With Respect to Commercial Mobile Services, 30 September 2005, para 21, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-173A1.pdf

8 Ibid, para 38-42

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• Canada: The Canadian Competition Bureau (“Bureau”) considered the acquisition of Microcell Telecommunications Inc. by Rogers Wireless Communications Inc. on 12 April 2005. The Bureau concluded that the relevant product market was mobile wireless (voice and data) telecommunications services.9

On the issue whether different product markets could be defined based on the underlying technological platform (i.e., CDMA as against GSM), the Bureau’s view was that the product market included both technological platforms.

6.3 Innovation and market evolution: 3G, WiMAX, and BWA

CSL and NWPCS note that the mobile market is dynamic and characterised by rapid innovation. 3G is viewed as the future of mobile competition and the industry move to 3G is already generating further significant price and non-price competition. In the near future, 3G will be supplemented by higher bandwidth BWA services such as WiMAX10, heralding the convergence of 3G, WiFi11 and local loop fixed-line services. The evolution of mobile technology is therefore likely to lead to increasingly greater substitutability between mobile and fixed line services, eroding the market power of fixed-line operators and possibly leading eventually to a converged fixed and mobile market.

In recognition of the dynamic nature of the Hong Kong mobile market, OFTA itself commented in its Report on the Competition Impact of the Acquisition of Shares in Sunday by PCCW (at para 6.25) that:

“By the time BWA becomes operational in Hong Kong for both fixed and mobile services (which is not expected within the next several years), identification of a narrow mobile services market (or a combined fixed-line/mobile services market) may not be justified. This is because technologies like BWA could hasten the convergence of a number of telecommunications services that are presently considered distinct, so that, for instance, the pricing of mobile services becomes closely related to the prices of fixed-line, broadband and other services that through substitution possibilities constrain the pricing and output discretion of mobile operators.”

Indeed, most competition regulators around the world have recognised the importance of innovation and market evolution to mobile markets. In the Canadian Competition Bureau's assessment of the Microcell Telecommunications Inc and Rogers Wireless Communications Inc. merger, for example, the Bureau commented: “Change and innovation will, in the Bureau's view, continue to play an important, positive role in the

future evolution of competition in this market.”12

9 Canadian Competition Bureau, Acquisition of Microcell Telecommunications Inc. by Rogers Wireless

Communications Inc., 12 April 2005. 10 WiMax stands for “Worldwide Interoperability for Microwave Access”, a system which is expected to

provide high bandwidth mobile access. A WiMax enabled device will be able to be connected over large areas much like existing mobile phones. A single WiMax antenna is expected to have a range of up to 65km with speeds of 70Mbit/s or more.

11 Wi-Fi stands for “Wireless Fidelity” and identifies a consortium which aims to guarantee the interoperability of hard and software for Wireless Local Area Networks.

12 See above, n 15.

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The Applicants submit that the impact of BWA and the speed at which BWA be rolled out in Hong Kong should not be understated.13 Subject to the formulation of regulatory policy and promulgation of relevant subordinate legislation, BWA is expected to be rolled out in Hong Kong in the near future in a comparable manner as similar services are being rolled out in other jurisdictions. International experience to date suggests that such services are likely to further intensify the level of competition in the mobile market, particularly in relation to wireless data services.

The potential for the rollout of BWA services in Hong Kong further increases the likelihood that competition in the Hong Kong mobile voice and data market is likely to intensify in the near future. Furthermore, the evolution of new technology means that greenfield operators could enter the market with networks capable of transmitting higher bandwidths at significantly lower cost than the networks of existing 2G, 2.5G and possibly 3G network operators (depending on the evolution of 3G technology).

Powerful global multinationals such as Intel Corporation are already positioning themselves to take advantage of new technologies like BWA to compete in the voice and data market. Intel comments in its current Investor fact sheet that, “We are focusing on growth through

platforms that run on powerful Intel® processors and incorporate the Ethernet, WiFi and

WiMAX technologies that users want”. For example, Intel recently acquired interests in “Clearwire” in the United States and “Unwired” in Australia. With Intel as the potential leading chipset producer for WiMax devices and as an investor in WiMax carriage providers, BWA will likely be a significant competitor to existing mobile services. Intel’s acquisitions reflect the industry view that BWA will, in the near future, compete with mobile voice and data services.

Commenting on the huge potential impact of WiMAX technology on mobile and fixed telecommunications operators, Richard Eccles recently commented in a July 2005 article:14

“Now a new technology, WIMAX (worldwide interoperability for microwave access), is just around the corner, and will enable wide area wireless communication via computers, in effect mobile or fixed access to broadband. It will also mobilise VoIP because VoIP works on any broadband connection, whether cable, DSL or wireless. WIMAX and VoIP combined will result in total convergence of internet, voice telephony, data and multimedia communication via a single device whether mobile or fixed – the ultimate convergence of communications technology and facilities.”

“The commercial availability of WiMAX will ultimately affect every part of the communications industry and once WiMAX networks have been rolled out and their usage has been established, the competitive structure of the sector will change. WiMAX will have an

impact on the following areas:

• Providers of DSL and cable modem broadband services will be affected as users take

up the mobile operation offered by WiMAX.

• Incumbents that have been slow to unbundle the fixed line local loop will find that any competitive leverage that they retain in this area will be reduced by the ability of WiMAX systems to bypass the copper local loop, accessing users directly from transmitter stations.

13 For example, on 18 October 2005 Nokia announced that it completed a call over its mobile WiMax

802.16e system. Nokia further announced it was now positioned to conduct WiMax trials during 2006. 14 R Eccles “The Mobile Broadband Revolution” Telecom Finance, Issue 16, 20 July 2005.

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• 3G data services (and also SMS services on 2G networks) will face the challenge of the same types and possibly a wider range of audio-visual content, including videos, being transmitted on equipment which may well be more user-friendly, for example, as regards to the sizes of the screens on WiMAX enabled computers.

• The introduction of VoIP on WiMAX systems will provide direct competition for voice telephony with 2G and 3G mobile services and increased competition to fixed-line services.”

“Also 3G operators will need to ensure that their charging structures for the provision of audio visual content are competitive in relation to WiMAX charges. All of this will take place before the 3G operators have even fully rolled out their services and recouped their investment.”

The Applicants are aware that the Hong Kong Government and OFTA are in the process of developing the spectrum and regulatory policy regarding the evolution and deployment of BWA services in Hong Kong. Accordingly, in the interests of brevity, the Applicants have not further identified the potential scope, impact and nature of BWA services in this submission. Rather, OFTA is assumed to be highly familiar with these issues.

These developments and their impact on market definition were well summarised by the TA at the recent Fixed-Mobile Convergence Forum:15

“With the advent of the Broadband Wireless Access (BWA) and other technologies, the access network can connect fixed customers or moving customers. It would be difficult to classify whether the core network connected to such an access network constitutes a fixed or a mobile network.”

“Once the restriction that a particular service can only serve fixed or moving customers is removed, there can be plenty of scope for designing the service around the actual communications needs of the users, who can be expected to be stationary at some times and moving at other times. The result is that new and innovative services will emerge, bringing convenience to users and generating value to operators.”

“Another important aspect is that not just one class of operators, fixed or mobile, can provide such converged services. Both the existing fixed and mobile operators will be able to participate in the provision of services that satisfy all the communications needs of their customers.”

15 http://www.ofta.gov.hk/en/speech-presentation/dg_20050922_speech.pdf

http://www.ofta.gov.hk/en/speech-presentation/dg_20050922_speech.pdf

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7 Competitive Overlap

7.1 Market segmentation

This Hong Kong market for the supply of mobile telephony services has a number of market segments which can be roughly plotted on a graph, indicating a consumer trade-off between price and quality, and between voice and data, as illustrated by Figure 4 below.

Figure 4: Mobile telephony market segmentation

The market segments identified in Figure 4 have the following key characteristics:

• Prepaid market segment: Most of the pre-paid market exists at the “value-focused” segment of the market. Consumers are largely focused on voice calls and SMS messaging as the main applications. Competition in the pre-paid market is characterised by intense price competition with less scope for product differentiation. However, network operators have successfully targeted different market niches, such as youth, teenagers, tourists, and foreign domestic workers.

• Postpaid “value-focused” consumer market segment: [CONFIDENTIAL] Consumers are highly price sensitive. Consumers prefer standard voice and SMS messaging applications to innovative data applications.

• Postpaid small-medium enterprise (“SME”) and “mid-tier” consumer market

segment: [CONFIDENTIAL] Consumers have a degree of price sensitivity, but also seek enhanced value-added services with innovative technology and some 2.5G/3G data applications.

• Postpaid corporate and “high-end” consumer market segment: [CONFIDENTIAL] Consumers are less price insensitive and more focused on

2G Voice / SMS Orientated 2.5G / 3G Data Orientated

Quality

Orientated

Price

Orientated

“Mid-tier” postpaid

market segment

“Value focussed” postpaid market

Corporate market segment

Prepaid market

segment

“High-end” postpaid market

segment

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personalised service, advanced technologies and applications, quality and reliability. Consumers seek 2.5G and 3G services to support handheld mobile devices such as Blackberrys. Most large corporate consumers exist in this category as well as high usage consumers.

7.2 Business strategies and brands of CSL

[CONFIDENTIAL]

7.3 Business strategies and brands of NWPCS

[CONFIDENTIAL]

7.4 Complementary postpaid businesses of CSL and NWPCS

The above analysis of the brands and business strategies of CSL and NWPCS indicates that while they co-exist as competitors in the mobile telephony market, they target different postpaid customer segments:

• CSL’s general postpaid business strategy is to [CONFIDENTIAL]

• NWPCS’ general postpaid business strategy is to [CONFIDENTIAL]

In this manner, the postpaid brands of CSL and NWPCS exhibit a generally low degree of competitive overlap between market segments. Rather, the Transaction involves the amalgamation of two mobile operators with complementary post-paid brands and business strategies targeted at different customer demographics.

The complementary nature of the CSL and NWPCS postpaid brands evidences that any effect on competition arising from the Transaction is likely to be minimal.

In this regard, an important factor influencing the Authority’s assessment of the recent KPN/Telfort merger on 30 August 2005 was the complementary nature of the brands of the merged entities. The Authority reasoned:16

“In addition, it has been determined that the Telfort brand is complementary to the existing KPN brands because it is specifically aimed at a market segment in which KPN is traditionally not strongly present. Telfort is mainly active in the cost-aware segment of the market with high competitive prices and has relatively more pre-paid customers. The KPN Mobile brand predominantly aims at the ‘upper part’ of the market and the more conservative, traditional market segment.”

The Venn diagram in Figure 5 below illustrates, conceptually, the minimal nature of any competitive overlap between the postpaid brands of CSL and NWPCS given their focus on different customer demographics and market segments.

[CONFIDENTIAL]

16 Case: 5104/KPN-Telfort, at para 59.

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A further illustration of the different business strategies of NWPCS and CSL in relation to the overlapping “New World Mobility” and “O2F” postpaid brands is illustrated by a simple comparison of the pricing of CSL’s and NWPCS’ brands in the market relative to the other mobile competitors, as set out in Figure 6 below.

Figure 6 clearly illustrates that NWPCS’ brand competes aggressively with Peoples’ postpaid brand on the basis of price, while CSL positions its “One2 Free” brand as a “mid-market” service that is differentiated on the basis of quality and innovative content and technology.

Figure 6: 2G headline postpaid pricing summary

MOU Peoples (Revised on 26 June 2005)

New World (Revised on 2 July 2005)

3-DB (Revised on 7 July 2005)

ST-VOD (Revised on 25 June 2005)

Sunday (Revised on 9 July 2005)

One2Free (CSL)

550 mins

$35*# ($50/550c)

$35*# ($50/550c)

$50 ($50/550c)

$50 (PayGo)

$50 ($50/550c)

$68 ($68/600p+200

op)

1000 mins

$44*# ($59/1,000c)

$44*# ($59/1,000c)

$59 ($50/550c)

$59 (PayGo)

$59 ($59/1,000c)

$98 ($98/900p+400

op)

1400 mins

$60^ ($80/1,000c+4

00m)

$60^ ($80/1,000c+4

00m)

$60^ ($80/1,000c+4

00m)

$80 ($80/1,000c+4

00m)

$75.5* or $55.5*^

($88/1,100c+400m)

$118 ($118/1,100p+

900op)

m = intra-network minutes * with $300 MNP rebate ($10 x 30-mth) / ($12.5 x 24-mth) MOU = minutes of use ^ $200 Partnerline rebate applies ($20 x 10-mth) # $30 Autopay rebate ($5 x 6-mth) c = Combine mins (ie. call between any networks) p = peak hour (ie. Mon-Fri: 0800 - 2100)

op = off-peak time (ie. Mon-Fri: 2100-0800; weekends & public holiday all day)

There is a small degree of competitive overlap between the brands in postpaid services. The greatest extent of competitive overlap occurs in relation to the SME market segment. [CONFIDENTIAL]

Yet even in the SME market segment, CSL and NWPCS generally target different industries. [CONFIDENTIAL].

Figure 7: Complementary nature of industry sectors

targeted in SME/business market segment

[CONFIDENTIAL]

Industry CSL business split NWPCS business split

[CONFIDENTIAL] [CONFIDENTIAL] [CONFIDENTIAL]

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Industry CSL business split NWPCS business split






TOTALS 100% 100%

7.5 Minimal overlap of prepaid businesses of CSL and NWPCS

Given that the prepaid market segment is relatively homogeneous, there is a degree of competition between CSL and NWPCS in that market segment.

[CONFIDENTIAL]

Furthermore, CSL and NWPCS are not direct head-to-head competitors in the prepaid market segment, [CONFIDENTIAL]:

Figure 8: Complementary nature of operations in prepaid market

Feature NWPCS CSL

Price leadership [CONFIDENTIAL] [CONFIDENTIAL]

Business focus [CONFIDENTIAL] [CONFIDENTIAL]

Nature of operations [CONFIDENTIAL] [CONFIDENTIAL]

In this manner, [CONFIDENTIAL]. CSL’s business focus is largely on the postpaid, rather than prepaid market.

In contrast, [CONFIDENTIAL]. NWPCS has developed a number of products and services to assist it to gain market share, including products specifically targeted at youth end of the market.

7.6 Post Transaction brand strategy

[CONFIDENTIAL]

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8 Constraint from Competitors

8.1 Recognised intensity of competition

The Hong Kong mobile telephony market is internationally recognised as one of the most competitive mobile telephony markets in the world. The Economist Intelligence Unit published a report on Hong Kong in October 2004 which included the following independent analysis of the level of competition:17

“Hong Kong’s mobile-telephone industry is already the world’s most competitive—with six operators fighting for a stake in a population of 7m... Price competition among the six mobile operators has been intense, and by June 2004 there were 7.6m mobile service subscribers, representing a penetration rate of 111.5%”

A recent Gartner report, titled Wireless Services and Service Providers in Hong Kong, dated 13 July 2005 confirms the intensity of competition. Gartner comments:18

“The Hong Kong mobile and wireless market, with a penetration of 120 percent (December 2004) and six mobile operators, is one of the most competitive markets in the region. This means every man, woman and child, in theory, has a mobile phone. In practice, the multiple use of prepaid subscriber identity module (SIM) cards and of prepaid replacement means that the figures are inflated, but the market is still virtually as penetrated as it can get ...”

“The Hong Kong operators have long engaged in a price war, which intensified after the launch of 3G services. With the entry of a fourth operator, it will continue. This price war has lead to an increase in churn, which declined from 2000 to 2003, climbed again in 2004 and will continue to climb during the next two years. Churn will remain a problem, given the inherent volatility in the market because of competitive pressures, price war promotions and handset subsidies.”

“Competition is expected to intensify as operators with 3G networks compete for customers.”

The TA himself has acknowledged the intensity of competition in the Hong Kong mobile market. In the TA’s Report on the Competition Impact of the Acquisition of Shares in Sunday by PCCW, the TA relevantly commented (at paragraph 6.23):

“Moreover, even if PCCW were able to have entered the mobile market using a newly created licence or as an MVNO and therefore increase the number of competitors by one, it is difficult to see how its entry could significantly improve the generally acknowledged intense competition between the 6 pre-existing mobile phone operators and 7 current MVNOs.”

The level of competition in the Hong Kong market is further intensified by the following salient market characteristics:

• Mobile number portability reduces barriers to churn: Mobile number portability (“MNP”) was introduced into the Hong Kong mobile market in March 1999, further intensifying the level of mobile competition. MNP removes barriers to

17 Economist Intelligence Unit Executive Briefing: Hong Kong, 1 October 2004,

http://eb.eiu.com/index.asp?layout=oneclick&country_id=1560000156 18 Gartner Wireless Services and Service Providers in Hong Kong, ID Number G00129225, 13 July 2005,

pp 4, 8 and 9.

http://eb.eiu.com/index.asp?layout=oneclick&country_id=1560000156

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customers migrating between mobile operators associated with the inherent “stickiness” of telephone numbers. Churn is unusually high in the Hong Kong market relative to other markets. Furthermore, Hong Kong consumers tend to be more willing to adopt new technologies, respond to new consumer brands, and pro-actively take advantage of price differences.

By way of example, an estimated five million mobile customers in Hong Kong ported between March 1999 to January 2003, with the average number of ports per month being around 110,000.19

• Low barriers to entry for MVNOs and MVARs: This market characteristic is considered in greater detail in Section 10 of this submission.

• Advent of 3G services: 3G has shifted the dynamics of the market by strengthening the long-term competitive position of the operators with 3G licences (Hutchison, CSL, SmarTone-Vodafone, and Sunday-PCCW) as against those without 3G licences (NWPCS, Peoples-China Mobile). 3G services are also acting as an accelerant to mobile competition, boosting an already significantly overheated competitive market.

• Level of advertising: The significant rivalry among the mobile competitors is demonstrated by frequent media advertising blitzes and the high level of brand knowledge in the market. Consumers are keenly aware of alternative mobile operators and their ability to switch providers.

8.2 Competition from network competitors

As at December 2005, there are six network-based mobile telephony competitors in the Hong Kong market. The mobile networks are as follows:

• 2G networks: The six mobile operators hold a total of ten 2G licences. In 2004, the TA granted a “right of first refusal” that will give the licensees a further licence period of up to 15 years.20 Three operators hold both GSM 800MHz and GSM 1800MHz licences and supply dualband GSM services, namely Hutchison, CSL and SmarTone-Vodafone. NWPCS, Peoples-China Mobile and Sunday-PCCW operate GSM 1800MHz networks. There is also one CDMA 800MHz network operated by Hutchison.

• 2.5G networks: All six network operators have deployed 2.5G services.

• 3G networks: Hutchison, CSL, SmarTone-Vodafone and Sunday-PCCW each hold 3G licences. Hutchison launched Hong Kong's first 3G service in January 2004. CSL and SmarTone-Vodafone have also launched 3G services. Sunday-PCCW launched its 3G network with a data card service in June 2005. The 3G

19 Jackie Cooper and Marta Munoz Mendez-Villamil, The impact of MNP in Asia-Pacific, Ovum, June

2004. This trend continues with the average number of ports per month during the six months to October 2005 being 112,947 :http://222.ofta.gov.hk/en/mnp/mnp-statistics.html.

20 Statement of the Telecommunications Authority, “Licensing of Mobile Services on Expiry of Existing Licences for Second Generation Mobile Services”, 29 November 2004.

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market was predicted to exceed 500,000 subscribers by the end of 2005,21 but, according to statistics released by OFTA, the 3G market actually exceeded that figure in September 2005.22

8.3 Competition from Hutchison

Hutchison is currently the largest mobile operator in the Hong Kong telephony market with a market share estimated at 26.4%.23 Hutchison offers “3” brand mobile services over its dualband GSM/PCS and CDMA networks and over its 3G WCDMA network.

Hutchison is a particularly strong and spirited competitor in the mobile market at all levels. Of particular relevance:

• Multinational power and global scale of operations: As OFTA will also be aware, Hutchison Whampoa Limited is one of the largest companies listed on the Hong Kong Stock Exchange and, relevantly, it has a 70% shareholding in Hutchison Telecommunications International Limited. The company has interests in Hong Kong, Asia, Europe, Australasia, the Middle East and South America. Hutchison has the ability to leverage from its relationships in other markets to gain or retain business in Hong Kong.

• A major 3G mobile operator and economies of scope and scale: Specialising in mobile communications, Hutchison is one of the world’s largest 3G mobile operators. Hutchison has invested billions of dollars acquiring 3G licences and has built and operated 3G networks in Hong Kong, Europe, Australasia and Israel. Hutchison can use this association and learning to its advantage and can also draw from economies of scope and scale.

• Greatest number of retail outlets: Hutchinson operates the largest group of wholly-owned sales outlets in Hong Kong (equal to Peoples), giving it a strong distribution network.

• First-mover advantage and global procurement power: Given the scale of Hutchison’s global 3G operations and its extensive specialist international experience in 3G services, Hutchison is a strong competitor. Hutchison has been in a unique position to obtain a “first mover” advantage in relation to 3G content and handset arrangements, leveraging from its global procurement power.

• Aggressive 3G pricing to drive consumer take-up: Hutchison aggressively launched 3G services in the marketplace under its “3” brand in Hong Kong in January 2004. Since launch the service has been marked by heavily discounted introductory prices, very low tariffs and high handset subsidies. The 3G handsets are therefore price competitive with most 2G and 2.5G handsets, driving rapid take-up by consumers.

21 Ibid, para 4.6.2. 22 Key Statistics for Telecommunications in Hong Kong: Wireless Statistics (25 November 2005)

http:/www.ofta.gov.hk/en/datastat/eng_wireless.pdf 23 All Hong Kong mobiles market share estimates in this submission are calculated as at 30 June 2005 on

the basis identified in section 9 of this submission.

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• Distribution channel and scope for bundling: The Hutchison group owns many properties, providing a distribution channel to ensure easy access to customers. Hutchison also has considerable scope and ability to leverage from its other operations in property development and investment, ports and related services, retail and manufacturing, telecommunications, e-commerce, infrastructure and energy. Similarly, Hutchison also has the ability to bundle mobile telephony with its fixed-line communications, Internet and e-commerce services businesses.

Further information on Hutchison is set out at the following URL:

• http://www.htil.com.hk/eng/global/home.php (English)

8.4 Competition from Peoples Telephone Co and China Mobile

Peoples is currently the fourth largest mobile operator in the Hong Kong telephony market with a market share estimated at 14.4%. Peoples typically offers no-frills services with the simplest tariff structure with no monthly fee.

• Price leadership: Peoples is a very strong and aggressive competitor that competes largely on the basis of price and is often a price leader. Peoples is known for offering heavily discounted tariffs that undercut other pricing in the market in order to successfully win market share.

• Potential low cost 3G MVNO competitor: Peoples does not hold a 3G licence, so is a potential candidate to be the first MVNO offering 3G services in Hong Kong. By avoiding a costly investment in 3G infrastructure, Peoples may become a stronger and low cost competitor relative to the other 3G mobile operators. Peoples already has good cost control and a focused strategy in its 2G business.

• Greatest number of retail outlets: Peoples operates the largest group of wholly-owned sales outlets in Hong Kong (equivalent to Hutchison), giving it a strong distribution network.

• China Mobile entry: As OFTA is aware, on 20 October 2005, China Mobile (Hong Kong) Ltd (“CMHK”) and Peoples jointly announced that CMHK’s wholly-owned subsidiary, Fit Best Limited, will make voluntary conditional cash offers to acquire all the issued shares in the share capital of Peoples, and for the cancellation of outstanding employee share options of Peoples.

CMHK has indicated that should it receive acceptances of more than 90% of the disinterested shares in Peoples, CMHK would exercise its compulsory acquisition rights. CMHK’s acquisition will further increase the competitive tension in the Hong Kong mobile market.

http://www.htil.com.hk/eng/global/home.php

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China Mobile is the world’s largest mobile operator by subscriber numbers and has an estimated market share of around 65.5% of the mainland Chinese mobile market, giving it an extremely powerful brand.24

The Applicants have not incorporated further information relating to Peoples into this submission given that OFTA is currently considering CMHK’s acquisition of Peoples, so will already have access to extensive information on Peoples’ current and future competitive strategies.

Further information on Peoples and China Mobile is set out at the following URLs:

• http://www.peoples.com.hk/ (English/Chinese)

• http://www.chinamobilehk.com/ (English/Chinese)

8.5 Competition from SmarTone-Vodafone

SmarTone-Vodafone is the fifth largest mobile operator in the Hong Kong telephony market with a market share estimated at 12.07%. In December 2004, SmarTone-Vodafone launched its commercial 3G service with a high-speed WCDMA/GPRS data card targeted at business executives and professionals.

• Alliance with Vodafone providing global power: SmarTone-Vodafone has formed an alliance with Vodafone, the world’s largest mobile operator by revenue. The alliance with Vodafone gives SmarTone-Vodafone a significant competitive edge in terms of offering international content to its subscribers via the powerful Vodafone Live brand and content. SmarTone-Vodafone also has access to Vodafone’s global handset procurement arrangements.

• Highly aggressive competitor and price leader: An example of the aggressiveness of SmarTone as a competitor is illustrated by SmarTone’s “we will match any offer” strategy in early 2003, triggering a large scale price war. SmarTone promised that it would match any new tariffs from its competitors under its PayGo call plan. As well as very low call plans, PayGo offered free intra-network SMS, free caller number display and free voicemail for 12 months. In a December 2003 press release, SmarTone said airtime usage had increased 40% due to the PayGo service.

More recently, in June 2005, SmarTone reduced prices at the value focussed of the market, taking the cost of 1000 minutes to $59.

• Innovative bundled 3G offering: SmarTone-Vodafone has rolled out 3G services with innovative bundled offerings. Vodafone has already rolled out numerous 3G networks throughout the world, enabling SmarTone-Vodafone to leverage from this existing experience.

Further information on SmarTone-Vodafone is set out at the following URLs:

24 XJ Wang, "China's 3G licence award: impact on the local market", Ovum 6, December 2005.

http://www.peoples.com.hk/

http://www.chinamobilehk.com/

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• http://www.smartone-vodafone.com.hk/jsp/english/index.jsp (English)

• http://www.smartone-vodafone.com.hk/jsp/tchinese/index.jsp (Chinese)

8.6 Competition from Sunday and PCCW

Sunday is the smallest mobile operator in the Hong Kong telephony market with a market share estimated at 8.33%. However, now that PCCW, the dominant domestic fixed market leader with 70% of subscribers in the fixed market, has acquired a controlling interest in Sunday, it is likely that PCCW will seek to invest in the Sunday brand and leverage PCCW’s fixed line and subscription television business.

Given this acquisition by PCCW, Sunday is a potentially powerful competitor, notwithstanding its lower market share. In the future, there is a clear potential for PCCW and Sunday to offer a bundle of services including fixed telephony, subscription television, IT services and mobile services.25 In October 2005, sources within PCCW were reported as saying that the “Sunday” brand will ultimately be replaced with the “PCCW” brand name.26 PCCW is already aggressively targeting the SME market with voice and internet packages.

In June 2005, Sunday announced the launch of its 3G network. At its launch, Sunday announced what it claimed to be Hong Kong’s fastest wireless data-card on its 3G network.

PCCW also has access to a range of content through the NOW pay-TV service. Its ability to access this content gives PCCW significant leverage during its negotiations for mobile content (both as to exclusivity and cost) and enables it to offer content synchronised across fixed and mobile platforms.

In December 2005, further price wars in the telecommunications sector were predicted in media articles, triggered by a new bundled offer launched by PCCW and Sunday. A new customer subscribing to a 21 month fixed service contract at $99/month will receive a 3 month fixed service and 18 month mobile service ($50/500 minutes) free. In addition, Sunday will provide TVB and CNN content over its 3G network.

The Applicants have not incorporated further information relating to Sunday into this submission given that OFTA has only recently completed consideration of PCCW’s acquisition of Sunday, so will already have access to extensive information on Sunday’s current and future competitive strategies.

Further information on Sunday is set out at the following URLs:

• http://www.sunday.com/portal/main/index.jsp?lang=en (English)

• http://www.sunday.com/portal/main/index.jsp?lang=ch (Chinese)

25 Z Huang, “PCCW focuses on SMEs”, Ovum, 19 August 2005. 26 Translation of Sun article on rebranding of Sunday, 15 October 2005.

http://www.smartone-vodafone.com.hk/jsp/english/index.jsp

http://www.smartone-vodafone.com.hk/jsp/tchinese/index.jsp

http://www.sunday.com/portal/main/index.jsp?lang=en

http://www.sunday.com/portal/main/index.jsp?lang=ch

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8.7 Competition from MVNOs and resellers

As OFTA will be aware, MVNOs do not own radio spectrum or their own Radio Access Network (“RAN”), but rather lease capacity in the spectrum and RAN infrastructure from a mobile network operator. Each MVNO operates its own upstream switching infrastructure as well as billing, database and IN systems. While MVNOs need to achieve a minimum efficient scale, they can potentially be very low cost operations relative to network operators.

• Differentiated brands and valued-added services: MVNOs are also able to integrate their own value added platforms into their retail offering by interfacing such platforms with their core network . These include non-core network elements such as voicemail, pre-paid platforms and WAP gateways. This enables the MVNOs to differentiate themselves in the market by providing functionality that appeals to their target demographics.

• Loss of market share to MVNOs: All players in the market have been losing market share to MVNOs, illustrating the intensity of competition in the market and the potential ease of market entry by MVNOs. This trend in Hong Kong is consistent with the worldwide mobile market trend, in which MVNOs have placed considerable pressure on market prices.27

• Entry of MVNOs without open access obligations: As OFTA will be aware, the current 2G licences contain no “open network access” obligations in relation to MVNOs. As a result, the current MVNOs have entered the market on the basis of commercial negotiation alone. As a result, there are currently seven MVNOs in operation in Hong Kong with a market share of around 6.19% by subscriber numbers.

• Open network access obligations: The 3G licences issued by the TA contain a mandatory “open network access” obligation, requiring 3G licensees to supply at least 30% of their network capacity to non-affiliated MVNOs . In this manner, 3G MVNOs will be able to compete from a potentially lower cost base than the existing 2G MVNOs. This may lead to market entry by a greater number of MVNOs than currently exist in relation to the 2G radiofrequency spectrum. Further market entry by MVNOs therefore appears imminent.

The MVNOs currently operating in the Hong Kong market have the following characteristics, clearly indicating that many of the MVNOs are powerful competitors in their own right. By way of example:

• Trident Telecom Ventures: Trident Telecom Ventures (“Trident”) was awarded an MVNO licence in 2001 and has a retail distribution partnership with the Daily Stop shops. Trident has successfully targeted niche market segments. For example, business travellers have been targeted with such features as low cost international call forwarding and text-to-speech messaging.

27 C McCarthy, “Worldwide mobile market trends 2005”, 18 February 2005.

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Further information on Trident is available at the following URL:

• http://www.tridenttelecom.com.hk/ (English)

• China Motion: China Motion (“CM”) was awarded an MVNO licence in 2001 and has key operations in Hong Kong, mainland China, Taiwan and Singapore as well as a range of other countries. CM largely targets Chinese communities around the world, leveraging from its strong branding and stored value card business, and has an extensive retail network which covers Hong Kong and Southern China.28 CM has entered into a preferred partner MVNO arrangement with Ericcson in which Ericcson provided front-end solutions and back-end support.

Further information on China Motion is available at the following URL:

• http://www.china-motion.com/eng/ (English)

• http://www.china-motion.com/big/default.htm (Chinese)

• China Unicom International Limited: China Unicom was awarded an MVNO licence in 2001. As OFTA will be aware, China Unicom is a leading mainland Chinese mobile operator with an estimated 34.5% market share in mainland China.29 It is the third largest mobile telecommunications operator in the world (behind China Mobile and Vodafone). China Unicom has been leveraging from that vast subscriber base in its operations in Hong Kong.

Further information on China Unicom is available at the following URL:

• http://www.chinaunicom.com.hk/en/aboutus/profile.html (English)

• http://www.chinaunicom.com.hk/tc/home/default.html (Chinese)

The other MVNO operators have operations of varying scales, notably China-Hong Kong Telecom (awarded an MVNO licence in 2002), CITIC Telecom 1616 (awarded an MVNO licence in 2002),30 Telecom Digital Mobile (awarded an MVNO licence in 2003) and IMC Networks (awarded an MVNO licence in 2005).

In aggregate, the seven MVNOS have an estimated market share of 6.19%. However, the competitive strength of the MVNOs and their impact on market behaviour should not be underestimated, suggesting that the proper characterisation of the Hong Kong market is a fragmented mobile telephony market containing 13 aggressive mobile competitors.

As OFTA will be aware, there are also a large number of pure mobile resellers (i.e., mobile value-added resellers or “MVARs”) in the Hong Kong market. These resellers also intensify the level of competition of the Hong Kong mobile market. By way of example, PLDT is the Philippines incumbent (controlling 58% of fixed and mobile subscribers in the

28 N Anderson, “China (Mobile Market)”, Ovum, 20 September 2004. 29 XJ Wang, "China's 3G licence award: impact on the local market", Ovum, 6 December 2005. 30 http://www.citic1616.com/

http://www.tridenttelecom.com.hk/

http://www.china-motion.com/eng/

http://www.china-motion.com/big/default.htm

http://www.chinaunicom.com.hk/en/aboutus/profile.html

http://www.chinaunicom.com.hk/tc/home/default.html

http://www.citic1616.com/

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Philippines) allowing it to leverage substantial economies of scale to target the Filipino community in Hong Kong with its “Smart 1528” brand.31

8.8 Importance of multinational affiliations

As identified above, Hutchison, Peoples, SmarTone-Vodafone and Sunday are each affiliated with large multinational operations and can leverage lower procurement costs, benefit from cross-border roaming alliances, and benefit from international service bundling. Their global affiliations will continue post-merger and continue to ensure these operators remain extremely competitive.

An important point to note is that competition in the corporate market segment is not confined only to the Hong Kong market. A large number of corporate customers have international operations and therefore undertake their mobile services procurement on a global basis. The global dimension to such procurement clearly advantages those mobile operators that have international affiliations.

The importance of multinational affiliations to the competition assessment was expressly recognised by the Dutch Competition Authority in its assessment of the KPN/Telfort merger in the following terms:32

“In particular, Vodafone and T-Mobile have built a good market position in the Netherlands. Vodafone, T-Mobile as well as Orange are part of larger international corporations. As a result they generally have good negotiating positions in relation to, for example, purchasing of handsets and technical (peripheral) equipment.

In addition, Vodafone, T-Mobile and Orange also have an advantage because cross-border roaming communication traffic can be carried on their sister networks. Because of this, incoming communication traffic on the KPN-network in the Netherlands has decreased in previous years. Since large multinational ventures put out to tender mobile services increasingly in the international market, it also gives a potential advantage in this area to Vodafone, T-Mobile and Orange.”

Commenting on the consolidation of the Hong Kong mobile market, the South China Morning Post commented, for example:33

“At the very least, Hong Kong's telecommunications sector is looking increasingly vibrant with competition among heavyweights instead of minnows fighting for scraps.”

31 http://www.pldt.com.ph/ 32 Case: 5104/KPN-Telfort, at para 54. 33 S Biggs “New World Joins Rush to Seek Partner”, www.scmp.com, 28 October 2005.

http://www.pldt.com.ph/

http://www.scmp.com/

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8.9 Competition from fixed line operators

A further source of competition to mobile operators are fixed line operators and, potentially, BWA operators. The latter are discussed later in this submission in the context of a discussion on potential market entry. Fixed line operators are increasingly developing fixed line value-added services that are intended to be substitutable for the type of applications available on mobile services, including fixed SMS services and polyphonic ring tones. By way of example:

• In November 2004, Korea Telecom launched “Ann”, a fixed line phone functioning like a mobile phone. Ann offers SMS, telephone book, caller ID detection, 24 polyphonic ring tones and a wide LCD screen, being features that were normally provided only by mobile handsets in Korea at the time.34 Similar phone functionality is available in Hong Kong.

• By way of example, PCCW currently offers a “New Generation Fixed Line” service in Hong Kong, including fixed line SMS services. Further information is available at the following URL:

http://www.pccw.com/eng/Products/ForYourHome/Residential/NewGenerationFixedLine.html

34 See, for example, http://www.textually.org/ringtonia/archives/2004/11



http://www.textually.org/ringtonia/archives/2004/11

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9 Market Concentration

9.1 Recognised need for industry consolidation

As OFTA will be aware, there has been considerable independent comment over the years from a large number of credible sources regarding a need for industry consolidation of mobile network operators in the Hong Kong mobile market.

Many commentators have identified that market consolidation of mobile network operators is inevitable as the current number of mobile network operators is unsustainable in the long-run given the size of the Hong Kong economy and population.

By way of example:

• Comments by leading industry analysts: A recent Gartner research report Wireless

Services and Service providers in Hong Kong dated 14 July 2005, comments:

“With six infrastructure-based mobile carriers - Hutchison Telecom, CSL, SmarTone-Vodafone, Peoples, New World Mobility and Sunday - the market is extremely competitive. Consolidation has been expected for many years, but failed to materialise. In June 2005, finally, some change of ownership took place, with PCCW, the incumbent fixed-line carrier, buying a majority stake in Sunday. This, however, does not lower the number of carriers and merely swaps ownership.

“Intense competition, high investments into network upgrades, falling revenue and high penetration will make consolidation inevitable. In such a market (with nearly 120 percent penetration in 2004), it is very difficult for six operators to survive profitably.”

• Comments by investment analysts: The potential for industry consolidation has been recognised for a number of years. An investor report by Worldsec TMT Research in September 2001 commented, for example:35

“We believe four mobile network operators, rather than six, is reasonable for Hong Kong’s 6.8mn population. There is now a compelling case for industry consolidation in the Hong Kong mobile industry ... We believe industry consolidation was only delayed because of uncertainty over the industry landscape in relation to 3G licensing … The benefits to the merged entity would be immense cost savings, a broadened revenue base and economies of scale. The acquirer would get the spectrum and subscribers, but its total network costs would increase only marginally with the servicing of additional customers, since mobile operators’ operating costs are mainly fixed. Duplicate network equipment could then be made redundant and sold to, for example, other Southeast Asian countries or China, to realise additional value.”

• Comments by academics: In 2003, John Ure, Associate Professor and Director of the Telecommunications Research Project, University of Hong Kong made the following comments in his paper “Hong Kong’s Mobile Market in Perspective”,

35 Worldsec TMT Research, Hong Kong Mobiles, Greater China, 20 September 2001,

http://www.quamnet.com/sunday/tw/investor/pdf/010920worldsecstrong.pdf#search='consolidation%20and%20hong%20kong%20and%20mobiles'

http://www.quamnet.com/sunday/tw/investor/pdf/010920worldsecstrong.pdf#search='consolidation%20and%20hong%20kong%20and%20mobiles

http://www.quamnet.com/sunday/tw/investor/pdf/010920worldsecstrong.pdf#search='consolidation%20and%20hong%20kong%20and%20mobiles

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questioning the sustainability of six mobile network operators in a market the size of Hong Kong:36

“What is the Current State of the Industry? Resilient is a word that comes to mind when describing Hong Kong’s mobile cellphone sector of the telecommunications industry. How six operators have been able to keep eleven networks running in a population of no more than 7 million is a question the financial analysts having been asking since the late 1990s.”

• Comments by potential market entrants: A submission by British Telecom (BT) to OFTA in September 2000 in the context of OFTA’s formulation of a licensing framework for 3G services also questioned the long-term sustainability of the level of network operators for the size of the Hong Kong market. BT commented:

“The Hong Kong mobile market is regarded as one of the most competitive in the world. There is little room for the existing operators to further reduce the service tariff to generate new customers. The market in Hong Kong can therefore be characterised as a mature one where market forces are fully at play … There are currently 6 mobile operators in Hong Kong running 11 networks formed from the consolidation of the market caused by too much and unsustainable competition. In the light of the current state of the market, competition level, range of services and extremely competitive prices, it is questionable whether there is any need for yet more new licensees.”37

• Comments by media: In September 2005, in a comment to Dow Jones Newswires by Alan Lau, a partner at McKinsey & Company, it was reported that Hong Kong mobile operators could prove to be attractive targets to Chinese telecommunications operators. The relevant article commented: “Chinese telecommunications companies could play a pivotal role in the long-anticipated

consolidation of Hong Kong's overcrowded mobile services market, an industry

expert says.”38

In response to the public announcement of the current Transaction, media opinion has relevantly included the following, consistent with the comments identified above:

“The scene won’t change dramatically from six to five [operators] because there are still too many.”39

“The agreement with Telstra could help boost business for New World Mobile, one of the smaller operators in Hong Kong's overcrowded mobile market. CSL is one of four operators in the city with a third-generation mobile service. ‘There could be some cost savings between the two,’ said Francis Cheung, CLSA's head of Asian Telecoms Research. ‘But I don't think the joint venture will make any differences (to Hong Kong's telecom market)’.”40

36 http://www.trp.hku.hk/papers/2003/mobile_mkt.pdf 37 http://www.ofta.gov.hk/en/3g-licensing/3G-consultation-bt.pdf 38 Total Telecom “China telcos seen behind HK consolidation”, 9 September 2005. 39 http://news.ft.com/cms/s/28682c24-5d04-11da-a749-0000779e2340.html 40 http://www.newratings.com/analyst_news/article_1115578.html

http://www.trp.hku.hk/papers/2003/mobile_mkt.pdf

http://www.ofta.gov.hk/en/3g-licensing/3G-consultation-bt.pdf

http://news.ft.com/cms/s/28682c24-5d04-11da-a749-0000779e2340.html

http://www.newratings.com/analyst_news/article_1115578.html

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“Hong Kong, which is served by six mobile companies, has one of the world's highest wireless penetration rate, with 6.9m people talking on 8.4m phones. Analysts have expected the market to rationalise following two deals in the market in the last five months.”41

“[CLSA analyst Elinor Leung] said, ‘the Hong Kong mobile market will remain intensely competitive even though the merger cuts the number of operators to five from six. The market is being driven by Hutchison, which is pricing its services very aggressively and offering users heavy handset subsidies, and not much will change as a result of the merger,’ she said.”42

9.2 Market shares

NWPCS and CSL understand that OFTA will have its own recent and precise data regarding subscriber numbers in the Hong Kong market, sourced directly from market participants that OFTA will use to determine market shares. As the Applicants do not have access to that information, the following section utilises information sourced from the public information, rather than OFTA’s confidential information.

CSL’s and NWPCS’ estimate of the market shares of the six network operators and the MVNOs in the Hong Kong market by subscriber numbers as at 30 June 2005 is set out in Figure 9 below based on estimated subscriber numbers for all mobile operators sourced from Ovum. The information recorded for MVNOs is extracted from OFTA’s Key Statistics for Telecommunications In Hong Kong : Wireless Services published monthly, in which total MVNO customers for 30 June 2005 were indicated as 522,245.

Figure 9: Market shares of 2G and 3G network operators and MVNOs

by subscriber numbers as at 30 June 2005 based on public data (Source: Ovum)

Mobile operator Subscriber numbers Market share

Hutchison 2,226,000 26.40%

CSL 1,377,345 16.34%

New World Mobile 1,372,000 16.27%

Peoples 1,214,000 14.40%

SmarTone-Vodafone 1,017,250 12.07%

Sunday 702,000 8.33%

MVNO subscribers (over 7 MVNOs)

Aggregated to 522,24543 Aggregated to 6.19%

Total subscribers 8,430,84044 100%

41 http://news.ft.com/cms/s/90aa1344-460a-11da-8880-00000e2511c8.html 42 http://thestandard.com.hk/news_print.asp?art_id=7580&sid=5855013 43 OFTA’s website records total MVNO subscribers as at September 2005 of 502,938. The figure of

522,246 reflects the data as at June 2005 to ensure consistency with the Ovum information in the table. The Applicants understand OFTA will have its own data with more recent subscriber numbers.

44 OFTA’s website records total mobile subscribers as at September 2005 of 8,382,784.

http://news.ft.com/cms/s/90aa1344-460a-11da-8880-00000e2511c8.html

http://thestandard.com.hk/news_print.asp?art_id=7580&sid=5855013

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Importantly, the subscriber numbers incorporate MVAR subscribers within the subscriber numbers attributed to each network operator or MVNO. In this manner, the market shares identified above understate the level of competition. A more accurate representation would be to split out subscribers belonging to MVARs. However, CSL and NWPCS do not have any reliable information on the level of MVAR subscribers throughout the industry.

9.3 Merger safe harbours (CR4 and HHI)

OFTA identifies two safe harbours that are applied concurrently in order to provide an initial screening device for mergers. The Transaction does not fit within either safe harbour, although the Applicants have concerns regarding the appropriate level of the HHI safe harbour used by OFTA as identified in further detail below.

The Applicants have identified how those safe harbours apply to the Transaction in the following manner:

• CR4 calculation: The Applicants have calculated a post-merger CR4 of 85.48% with the merged firm having a market share of 32.61%. This scenario falls outside both the thresholds of 75% / 40% and 75% / 15%.

• HHI calculation: The Applicants have calculated a post-merger HHI of 2189 with an HHI increment of 531. This scenario is regarded by the TA in the Merger Guidelines as moving the market from “moderately concentrated” to “highly concentrated”. OFTA indicates that where mergers produce an increase of more than 50 in the HHI, they will normally require further investigation. The HHI calculation is set out in Figure 10 below.

Figure 10: Calculation of pre-Transaction and post-Transaction HHI45

Pre-Merger Post-Merger

Mobile operator Share HHI Share HHI

Hutchison 26.40% 697 26.40% 697

CSL 16.34% 267

New World Mobile 16.27% 265 32.61% 1063

Peoples 14.40% 207 14.40% 207

SmarTone-Vodafone 12.07% 146 12.07% 146

Sunday 8.33% 69 8.33% 69

MVNO subscribers (over 7 MVNOs)

Aggregated to 6.19%

7* Aggregated to 6.19%

7*

HHI Calculation 100% 1658 100% 2189

* Assuming each of the seven MVNOs has a roughly 1% market share

45 The market shares utilise the shares calculated from Figure 9 above.

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9.4 Relevance of HHI threshold for Hong Kong mobile market

The Applicants respectfully submit that OFTA may wish to consider the HHI results identified above in context. The Applicants are concerned that the HHI threshold identified in the Merger Guidelines may significantly overstate the level of market concentration appropriate for the Hong Kong mobile market relative to international benchmarks, particularly given the “small economy” characteristics of the Hong Kong market:

• New literature on HHI threshold for small economies: Over the last few years an extensive literature has now developed on the application of competition rules to smaller economies, provoked by the publication by Michal Gal of her book Competition Policy in Small Market Economies in 2002. Hong Kong falls well within the definition of a “small economy” used in that literature.46

This literature generally concludes that a direct application of the United States’ HHI thresholds is not appropriate for smaller economies and may cause economic harm by preventing mergers that may otherwise realise significant efficiencies in those smaller economies for the benefit of consumers.

In an OECD study undertaken into Competition Policy in Small Economies in January 2003, the New Zealand Government, citing Gal’s influential work, concluded, for example:47

“Second, competition laws in small economies need to avoid adopting simple rules of thumb as indicators of market power as occurs in larger economies. For example, the US merger guidelines use the Herfindahl-Hirschman Index (HHI) to measure the level of concentration in a market based on the number of firms operating in a market and their relative market shares. The index uses a numeric methodology based on very specific assumptions. Although the HHI is only a prima facie indicator of the anti-competitive effects of a merger, its thresholds have had the effect of creating a presumption of illegality.

Gal argues that this approach is not appropriate for small economies as many if not most mergers in small economies would cross the HHI thresholds. In a small economy situation, such an approach would create unwarranted barriers to firms seeking to realise productive efficiencies from mergers.”

The New Zealand Government also concluded:

“It is well established in the literature that small economies are characterised by relatively high industrial concentration levels. As noted above, there is an inherent tension in small economies between the presence of small numbers of firms in many industries and the fact that these firms are often of sub-optimal size. Gal describes this as the ‘basic conflict created by smallness’. “In a static situation, this may entail a conflict between the achievement of allocative and productive efficiencies. In a dynamic situation, there may be a conflict between

46 Australia is also viewed as a small economy. See M Gal Competition Policy for Small Market Economies

(Harvard University Press, Cambridge, Mass., 2003), p2. 47 OECD “Competition Policy in Small Economies” CCNM/GF/COMP/WD(2003), page 29, Note

submitted by the New Zealand Government under Session III of the Global Forum on Competition held on 10- 11 February 2003, http://www.oecd.org/dataoecd/57/53/2486698.pdf.

http://www.oecd.org/dataoecd/57/53/2486698.pdf

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the achievement of static, particularly productive, efficiencies and the attainment of dynamic efficiencies. Competition authorities in small economies, therefore, are confronted by a conundrum. On the one hand, an overly aggressive approach to their role may prevent efficiency enhancing outcomes from taking place. On the other, an overly permissive approach may lead to the entrenchment of market power. Furthermore, they will often be faced by the requirement to make tradeoffs between market power and firm efficiency considerations. These judgements can be sensitive and complex and they tend to vary from case to case. For example, increased concentration should not be taken as a proxy for increased market power. The presence of small numbers of firms does not necessarily indicate a lack of competitive rivalry. Vigorous rivalry can exist with as few as two firms in a market and in the absence of barriers to entry, a monopolist may be severely constrained by potential entrants. Even if a market transaction does slightly increase market power, the benefits that accrue from improvements to efficiency might significantly outweigh the detriments.”

Michal Gal concluded:48

“In small economies, especially when fixed costs and scale economies are substantial, it is not uncommon for firms to possess [large] market shares. Accordingly, many if not most proposed mergers would cross this threshold, although they would not always increase or create market power to facilitate its exercise, and most firms would be prevented from realising scale economies. Courts and agencies in small economies have thus rightly rejected the US HHI levels as based on presumptions of market performance that lack sensitivity to the special characteristics of their markets… the choice of HHI levels and deltas is not universal but rather an attempt to create thresholds that would apply only to the US market. In the United States, which is a large economy, the threshold of severe scrutiny is based on the presumption that firms have already exhausted scale and scope economies, and thus the number of firms should be lower, or firms will not be able to achieve scale economies”

• The FCC has developed a telecommunications-specific HHI threshold: The Applicants also note that the United States itself uses a higher HHI merger safe-harbour threshold for the telecommunications industry relative to other industries. In particular, the United States adopts two sets of HHI safe-harbour thresholds for the telecommunications industry, reflecting the fact that two regulators have overlapping jurisdictions in the United States:

• a lower HHI safe harbour threshold (permitting lower levels of industry concentration) is used by the Department of Justice (“DOJ”) and is applied to all sectors of the economy on a generic basis within the DOJ’s Merger

Guidelines; and

• a higher HHI safe harbour threshold (permitting higher levels of industry concentration) is used by the Federal Communications Commission (“FCC”) for the telecommunications industry in the United States. The FCC has prepared its own Merger Guidelines but has not formally published these given concerns regarding the overlap with DoJ jurisdiction.49 However, the FCC has articulated its HHI guidelines within

48 See M Gal Competition Policy for Small Market Economies (Harvard University Press, Cambridge,

Mass., 2003), p2. 49 See B Charny "FCC scraps plans for merger guidelines", CNET News.com, 22 January 2003.

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the context of reviews of mergers in the telecommunications sector specifically.

At present, the Merger Guidelines used by OFTA have adopted the DOJ’s generic HHI from the United States, rather than the sector-specific HHI for the telecommunications industry adopted by the FCC in the United States potentially leading to more “false positives” (i.e., investigations of mergers where there is no competitive harm). In the context of reviews of mergers between mobile telecommunications operators, the FCC has commented as follows:50

“As explained below, we examined the market further if the post-transaction HHI would be greater than 2800 and the change in HHI would be 100 or greater; or if the change in HHI would be 250 or greater regardless of the level of the HHI...” “…This analysis follows the general structure of the DOJ/FTC Merger Guidelines, but we chose the concentration thresholds for this screen based on our observation of the current mobile telephony marketplace. To begin with, the Commission has found that there is generally effective competition in mobile telephony markets today, and our analysis indicates that the current average HHI in markets across the country is slightly over 2900. We chose initial thresholds of 2800 for the HHI and 100 for the change in HHI because a mobile telephony market that does not exhibit at least this combined post-merger level of concentration will be no more concentrated than the average market today and therefore, in our judgment, needs no further review. In addition, we judged that a market in which the impact of the merger is so slight that it does not cause a change of at least 100 in the HHI need not be examined further because, even if the post-transaction HHI for such a market would be greater than 2800, the loss of a competitor with such a small market share is de minimis and would not likely cause significant, merger-related anticompetitive effects. Because this initial screen was intended to eliminate from further review those markets in which there is clearly no competitive harm relative to today’s generally competitive marketplace – rather than to identify conclusively markets in which there is competitive harm – we also adopted a conservative second criterion: regardless of the HHI, we examined a market further if the merger causes a change in HHI of at least 250. Although this threshold resulted in some “false positives” – i.e., we gave further review to markets in which the concentration levels are below that of the average market today – we chose to apply this criterion in order to be confident that we gave further review to any market in which the merger may cause significant change in the competitive landscape.”

Based on the United States precedent, the FCC is therefore generally comfortable with an HHI for the mobile telecommunications sector of around 2800.

• HHIs are less predictive in a dynamic industry: In the application of the HHI test to mergers in the telecommunications industry in the United States, the FCC has also been wary of relying too heavily on the predictive nature of HHI figures given the dynamic nature of the industry. The FCC has commented:

“We note that the mobile telephony market is a growing and dynamic industry, and therefore HHIs and changes in HHIs may be less predictive as to whether the merger could result in anticompetitive behaviour in a particular geographic market than they would if the market were stable.”

50 http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-04-255A1.pdf

http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-04-255A1.pdf

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Similarly, in the same decision the FCC indicated that the presence and ability of other firms in the market to fiercely compete was a more important consideration than a high change in the HHI. The FCC reasoned:

“For many markets where the facts of a high subscriber-based HHI and a high change in HHI might seem to suggest a potential competitive problem, there is in fact little likelihood of harm. We find that the presence and capacity of other firms matter more for future competitive conditions than do current subscriber-based market shares. In particular, current market shares understate the likely future competitive importance of [the 4 other competitors]. These firms all compete fiercely for customers; all are investing substantially in capacity and new services in this sector; and [3 competitors] have been gaining nationwide market share over recent quarters.”

9.5 International relativity of Hong Kong industry concentration

As identified in Figure 11 below and as noted above in Section 8.1 of this submission, Hong Kong already has one of the most competitive and least concentrated mobile telephony markets in the world. Notwithstanding the increase in HHI identified above, this situation will remain post-acquisition.

Figure 11 : Table indicating relative HHI of key mobile markets

0 1,000 2,000 3,000 4,000 5,000

China

New Zealand

Indonesia

Philippines

Japan

Thailand

South Korea

Australia

Malaysia

Singapore

Taiwan

Hong Kong

India

Effect of merger

See explanation for HHI in India in footnote 57 below

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HHI based on subscriber numbers in March 2005. Source: Wireless Intelligence51

Hong Kong HHI adjusted to reflect June 2005 calculation above. An explanation for the Indian HHI is provided in the footnote below.52

Further consolidation in the Hong Kong market would be entirely consistent with current international trends. As identified below, there has been an international trend favouring consolidation in mobile markets around the world as carriers seek to achieve economies of scale and increased efficiencies, particularly in the context of the rollout of advanced 3G networks and increased competition.53

In many other markets, mobile industry consolidation is continuing as mobile operators seek to lower costs to realise network efficiencies, particularly in the context of the rollout of expensive 3G networks.

• In Australia, for example, the four mobile operators have formed two infrastructure sharing joint ventures in relation to the supply of 3G mobile services.

• In the United States, as identified above, the number of carriers with a nationwide footprint has declined from six to four. In this manner, the HHIs recorded in Figure 11 are tending to increase, rather than reduce, over time.

• In Europe, for example, the importance of economies of scale has driven significant consolidation in European markets, particularly over the last two years. Consolidation has arisen not only from mergers, but also as a result of market exit as competition has intensified. The European market has consolidated to a level where there are now between two and four mobile network operators supplying each EU member state.

For the purposes of this submission, CSL requested a leading US law firm, Vinson & Elkins (Washington DC), to review recent decisions by the US Department of Justice (“DOJ”) and the US Federal Communications Commission (“FCC”) concerning the merger of major wireless carriers in the United States. The law firm concluded:

• As a result of three recent decisions by the FCC regarding the mergers of mobile carriers, most United States markets soon will have no more than four major mobile carriers.

• The DOJ rarely challenges mergers in mobile markets where:

51 Cited in Nathan Burley, “Asia Pacific: Mobile Players”, Ovum, August 2005. 52 India’s low HHI index is a legacy consequence of its controversial regulatory approach. For the purposes

of telecoms licensing, India was divided into geographic regions known as ‘Circles’ and licensing restrictions were imposed based on these Circles. As a result the Indian mobile market became extremely fragmented. More recently, licensing restrictions have been relaxed and the industry is rapidly consolidating. Industry analysts predict India’s mobile telephony market will consolidate to 4 or 5 mobile networks within the next year. See “Mobile Carriers Braced for More Mergers”, Reuters Limited, 1 July 2004, http://sify.com/finance/fullstory.php?id=13511253

53 Federal Communications Commission, 10th Annual Report and Analysis of Competitive Market

Conditions With Respect to Commercial Mobile Services, 30 September 2005, para 55. http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-173A1.pdf

http://sify.com/finance/fullstory.php?id=13511253


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(i) the post-merger HHI is below 2400, or

(ii) the post-merger HHI is below 3000 and the change in HHI is below 500.

• Over the period 1999 to 2003 the DOJ did not challenge any merger resulting in an HHI in United States mobile markets below 2400.

• Although the recent spate of mergers in the United States mobile industry has increased the average HHI from approximately 2900 to 3300, and reduced the number of carriers with a nationwide service footprint from six to four, the DOJ/FCC have not blocked any proposed merger and have only required divestiture of facilities and/or spectrum in a limited number of primarily rural markets. In these markets, absent divestitures, the post-merger company would have had a market share in excess of 50% (based on subscribers) and the HHI would have been greater than 3400.

• The HHI of the relevant mobile markets in the ten largest economic areas in the United States are set out in Attachment F to this submission, noting some of these areas are comparable in geographic size and population to Hong Kong.

The Applicants would be glad to arrange for Vinson & Elkins to provide further advice on the application of the HHI criteria in the United States if this may assist OFTA in its consideration of the Transaction.

The Applicants also note that there have been a range of other international decisions, in which regulators have considered the merger of mobile operators in circumstances where the merger has resulted in more concentrated markets than will exist in Hong Kong. Some examples of recent decisions in some key jurisdictions have included, for example:

• April 2005: Canada permits 4 to 3 mobile merger - The Canadian Competition Bureau permitted the acquisition of Microcell Telecommunications Inc. by Rogers Wireless Communications Inc. resulting in the number of Canadian network operators reducing from four to three.

The Canadian Competition Bureau permitted the merger despite a post-merger HHI of approximately 3248 with an HHI change of 510.54

• August 2005: United States permits 5 to 4 mobile merger - The DOJ and FTC permitted Sprint Corporation to acquire Nextel Communications, Inc resulting in a decline from five mobile carriers to four mobile carriers in most major US markets. On 30 September 2005, the FCC in its 10th annual report to Congress on the state of competition in the US mobile telephony markets relevantly commented:55

54 HHI calculations based on the November 2004 mobile subscriber data provided by Table 4.5.2 of the

“Report to the Governor in Council: Status of Competition in Canadian Telecommunications Market” available from http://www.crtc.gc.ca/eng/publications/reports/PolicyMonitoring/2004/gic2004.htm.

55 Federal Communications Commission, 10th Annual Report and Analysis of Competitive Market

Conditions With Respect to Commercial Mobile Services, 30 September 2005, para 2. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-173A1.pdf

http://www.crtc.gc.ca/eng/publications/reports/PolicyMonitoring/2004/gic2004.htm


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“Although consolidation during the period covered by the report has reduced the number of nationwide mobile telephone carriers, the FCC found that … the market continues to behave and perform in a competitive manner”.

• August 2005: Netherlands permits 5 to 4 mobile merger - The NMa, the Dutch competition agency, has permitted KPN to acquire mobile operator Telfort, resulting in the number of Dutch network operators reducing from five to four.

The combination of KPN and Telfort resulted in an HHI increase from more than 2200 to over 2700.56 The Dutch Independent Post and Telecommunication Authority (“OPTA”) concluded:57

“… after the merger of Telfort and KPN mobile, there will still be four independent mobile network operators. With four competitive networks, OPTA does not expect that the planned concentration in this market situation leads to the creation of a position of considerable market power. The leitmotif is that these four providers are able to mutually compete and that the new combination of KPN Mobile and Telfort will be faced with substantial competitors. These competitors have so far appeared to be able to compete effectively with KPN Mobile and Telfort, based on matters such as quality, price, and product range. The current effective competition and market dynamics give OPTA no reason to assume that this situation will be significantly changed by the merger.”

56 Case: 5104/KPN-Telfort, para 45. 57 Ibid, para 75.

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10 Scope for market entry

10.1 Scope for market entry at the network level

As indicated in section 8 of this submission, the Hong Kong mobile telephony market is currently fragmented and highly competitive. Analysts have indicated that substantial efficiencies could be realised by industry consolidation, thereby reducing the costs of supplying mobile services to the benefit of consumers. In essence, given that the market is in a state of network over-supply, market contestability at the network level is less significant.

Indeed, in the TA’s report on the competition impact of China NetCom’s acquisition of the shares in PCCW, the TA himself adopted a test of whether or not entry would improve competition to the benefit of the Hong Kong community or a segment of it.58 The TA reasoned that where markets were already highly competitive “the lack of entry… is

unlikely to have a significant effect on competition”.59

Even if this were not the case, NWPCS and CSL note that there are a number of other factors indicating that market entry at the network level is a real and credible possibility:

• TA could release further spectrum: While the need to acquire scarce radiofrequency spectrum is a matter that does impede market entry, it is also a matter entirely within the TA’s regulatory control. The TA has the ability to release additional radiofrequency spectrum to market entrants in a manner consistent with its policy objectives and regulatory functions.

Given that the Hong Kong Government is in the process of reviewing its spectrum policy issues, CSL and NWPCS do not comment on these issues further in this submission.

Subject to the promulgation of relevant subordinate legislation, the Applicants note that the TA has the ability to release spectrum suitable for market entry by BWA operators in competition with existing 2G and 3G licensees. The Applicants also understand that there is some surplus spectrum that could be released if the TA were to decide to do so.

• No greater concentration of 3G spectrum: The Applicants note that the Transaction would not lead to any greater concentration of 3G spectrum as NWPCS does not hold a 3G licence. The 30% of network capacity set aside for unaffiliated MVNOs would not be reduced.

• Greenfield entry by new operators: There have been concrete indications of competitive entry by other network operators into the mobile market. In March 2004, when the Hong Kong Government proposed the creation of a new mobile licence to exploit the under-utilised CDMA spectrum (allowing licence holders to build a full 3G network to compete with the four existing 3G licence holders)

58 Ibid, para 6.23. 59 Ibid, para 6.29.

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Wharf T&T, the fixed-line unit of conglomerate Wharf Holdings, and City Telecom both expressed interest in bidding for such a licence.

• Dynamic nature of market facilitates entry: The mobile telephony market is highly dynamic. The costs of new technologies are declining rapidly over time while the functionalities of the technologies are increasing. In this manner, market entrants can roll out superior quality networks to incumbents, utilising lower cost and more powerful technologies that are more attractive to consumers. A market entrant, for example, could roll out higher speed BWA technologies using broadband wireless access (such as WiMAX) on a greenfield basis.

The Applicants also refer to the discussion of BWA access technologies, and the significant scope for further market entry in that context, identified earlier in section 6 of this submission.

In this manner, while there are sunk costs involved in network construction and regulatory issues associated with spectrum licensing, market entry at the network level is not only economically possible, but the threat of market entry remains credible and real.

10.2 Scope for market entry at the MVNO level

The scope for market entry by MVNOs is very significant, as illustrated by the increasing number of MVNOs that have entered the Hong Kong market, now numbering at seven, identified in section 8 of this submission.60 In particular:

• MVNOs do not need to acquire radiofrequency spectrum: MVNOs can supply mobile services without owning radiofrequency spectrum. Rather, MVNOs lease capacity and access to radio access network. Therefore, spectrum does not constitute a barrier to entry for MVNOs.

• MVNOs have mandatory open access to 3G network capacity on reasonable

terms: Network operators are required by OFTA under the mandatory open network access requirement to offer at least 30% of their network capacity to unaffiliated MVNO operators, substantially further reducing any barriers to entry associated with limited 3G spectrum.61 MVNOs may also seek the TA’s intervention to determine the terms and conditions of MVNO arrangements.

• MVNOs are direct beneficiaries of mobile number portability: Provided MVNOs satisfy certain minimum criteria they are direct beneficiaries of mobile number portability arrangements.

60 The MVNO licensees are: Trident Telecom Ventures Ltd (29/11/2001); China Motion Telecom (HK) Ltd,

(03/12/2001); China Unicom International Ltd (29/12/2001); China-Hongkong Telecom Ltd (29/04/2002); CITIC Telecom 1616 Ltd (02/12/2002); Telecom Digital Mobile Ltd (28/10/2003); and IMC Networks Limited (26/04/2005).

61 Under Special Condition 12 of a mobile carrier licence for 3G services, the licensee is obliged to provide open network access to non-affiliated MVNOs and/or content or service providers for up to 30% of its network capacity.

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• MVNOs can avoid substantial sunk costs: MVNOs do not incur the same set-up costs as a network operators and they do not require large scale of capital investment to begin operations.

• MVNOs benefit from the Hong Kong regulatory arrangements: The Hong Kong regulatory regime supports MVNO entry, specifically:

• while MVNOs are required, by regulation, to obtain a Public Non-Exclusive Telecommunications Network Services (PNETS) Licence, there is no pre-set limit for numbers of licences;

• there is a simple licensing procedure;

• the cost of the licence is not significant;

• the licence is annually renewable; and

• so far as possible, licence conditions for MVNOs mirror carrier licences for network operators to ensure a level playing field.

• [CONFIDENTIAL]

• Rapid market entry is possible at low cost: Large multinationals are able to take advantage of the MVNO business model to effect quick and effective entry into a market. For example, in Canada, Virgin recently announced that Virgin Mobile Canada will commence operations in Canada as a prepaid MVNO.62 Virgin Mobile is a partnership between Richard Branson’s Virgin Group and the Bell Mobility division of Bell Canada.63

International experience suggests that MVNO operations in the Hong Kong market will continue to increase, particularly given the open network access regime in 3G licences.64 In Europe, MVNOs have appeared in almost every market and some markets have a proliferation of MVNOs. By way of example:

• Finland and Netherlands each have 20 MVNOs;

• Denmark has 13 MVNOs;

• Belgium has 11 MVNOs;

• United Kingdom, Sweden and France each have 9 MVNOs; and

• Norway has 6 MVNOs.

62 http://www.virginmobile.ca/web/pages/media_02_k.htm 63 Virgin Mobile was first launched in the United Kingdom in November 1999, in Australia in 2000 and

subsequently expanded to the U.S. in July 2002, and together the companies have attracted more than 8.5 million customers worldwide.

64 Carrie Pawsey, Michele Mackenzie, Eden Zoller, Pauline Trotter, Marta Munoz Mendez-Villamil, “Ovum forecasts global wireless markets: 2004-2008”, Ovum, 20 December 2004.

http://www.virginmobile.ca/web/pages/media_02_k.htm

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10.3 Scope for market entry at the MVAR (reseller) level

The barriers to entry by resellers are even lower. Resellers do not need to invest in any telecommunications infrastructure, but can rather operate as a rebilling operation, competing on the basis of a resale margin. That resale margin is determined by competition between network operators as they seek to secure the wholesale revenue associated with a resale operation.

Indeed, the Canadian Competition Bureau, in approving the acquisition of Microcell Telecommunications Inc. by Rogers Wireless Communications Inc. on 12 April 2005, reasoned that while barriers to entry for facilities-based mobile wireless operators were very high, barriers to entry for MVNOs and resellers were low. The Bureau considered that MVNO and resale competition alone provided sufficient competitive constraints on the network operators.

The Canadian Competition Bureau’s acceptance of the constraints provided by MVNOs and resellers is borne out in the Canadian market. For example Loblaws (the largest Canadian food retailer) announced on 17 August 2005 its introduction of a wireless phone service leveraging off its well-known in-house brand, “Presidents Choice”. Loblaws pay-as-you-go service, dubbed “PC Mobile,” uses the Bell Mobility network.65

65 http://www.presidentschoice.ca/PCTelecom/PCMobile/Default.aspx

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11 Competition Analysis

11.1 Conclusions from “with and without” analysis

Paragraph 4.26 of the TA’s Merger Guidelines indicates that to assess whether competition has been substantially lessened by a merger, the TA will employ a “with-and-without” test. That is, the level of competition that exists and would be likely to exist in a market without the merger will be assessed and compared with the likely level of competition in the future were the merger to proceed.

The Applicants submit that it is important in this regard that OFTA take into consideration the likelihood that the further consolidation of the mobile telephony market is generally regarded by industry analysts as inevitable, as identified in section 9 of this submission.

Bearing this in mind, the Applicants submit that the future counterfactual against which the current merger should be assessed is not necessarily a market in which six mobile operators continue in existence, but may well be a market in which six mobile operators decline to five in any event (whether by another merger or by the exit of one of the existing mobile operators). If that analysis is correct, the current merger results in a situation little different than may occur via industry attrition or consolidation in any event.

11.2 Factors indicating no substantial lessening of competition

Summarising the various issues identified earlier in this submission, the Applicants submit that the Transaction will not have, or be likely to have, the likely effect of substantially lessening competition in any telecommunications market for the following key reasons:

• High intensity of competition: The Hong Kong mobile market is widely recognised as one of the most competitive and least concentrated mobile markets in the world. Post-merger this situation remains. The high intensity of competition, in conjunction with the absence of any likely material adverse impact of the Transaction on the intensity of that competition, should alone give OFTA sufficient comfort that no substantial lessening of competition is likely to occur.

• No additional market power: NWPCS and CSL will gain no additional market power from the Transaction. Post merger, there would still be:

• four strong, well-resourced, experienced and aggressive 3G/2G competitors (i.e., Hutchison, CSL-NWPCS, SmarTone-Vodafone, and Sunday-PCCW);

• an experienced and aggressive competitor with a 2G licence (i.e., Peoples-China Mobile) and the ability to leverage roaming revenues and with access to 3G network capacity under the MVNO open network access regime;

• seven licensed MVNO competitors with potential for significant further MVNO market entry; and

• numerous unlicensed MVAR competitors with potential for significant further MVAR market entry.

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• Continuing scope for fierce competition: Fierce competition will continue after the merger, particularly in light of recent market developments:

• Hutchison is currently the largest mobile operator in Hong Kong and has the ability to bundle mobile telephony with its fixed voice business while leveraging from its brand and one of the largest 3G mobile businesses in the world.

• SmarTone-Vodafone through a Partner Network Agreement with Vodafone (the world’s largest mobile operator by revenue and second largest mobile operator by subscribers) can access Vodafone’s extensive global procurement pool, global and recognised brand, global expertise and extensive global mobile content.

• PCCW via Sunday can bundle and leverage PCCW’s fixed line business, brand, and significant overall market power.

• Following China Mobile’s proposed acquisition of Peoples, Peoples will be aligned with the world’s largest mobile operator by subscribers and second largest mobile operator by revenue.

• High level of market contestability: The threat of further market entry is real and present, particularly by MVNO and MVAR competitors. 3G licensees are required under the mandatory open network access requirement of their licences to offer at least 30% of their network capacity to unaffiliated MVNO operators, substantially reducing any barriers to entry associated with limited spectrum.

• No material competitive constraint on each other: NWPCS and CSL are not price leaders and have complementary brands that are generally targeted at different customer demographics, resulting in minimal existing competitive overlap between NWPCS and CSL between different market segments. They do not exercise material competitive constraints on each other. Any impact of the Transaction on competition is therefore de minimus.

• Dynamic nature of mobile market: The market is dynamic and characterised by rapid innovation. 3G is currently viewed as the future of mobile competition. The industry move to 3G is generating further significant price and non-price competition.

[CONFIDENTIAL]

• Level of HHI concentration is acceptable: International precedent indicates that the proposed post-merger level of market concentration illustrated by the HHI figures will still result in a highly competitive market. Mergers resulting in significantly higher levels of HHI have been approved in a range of other jurisdictions and none have been rejected at the levels of HHI that will occur in Hong Kong. Indeed, many commentators consider that market consolidation or exit among the mobile network operators in Hong Kong has been inevitable given the excessive number of mobile network operators relative to the size of the Hong Kong economy and population.

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12 Public Benefits

The Applicants do not consider that the Transaction will result in a substantial lessening of competition, but for completeness, should OFTA consider that a net public benefit analysis is necessary, the Applicants also submit that the Transaction is likely to result in material public benefits for the purposes of section 7P(7)(b)(iii) of the Ordinance. These public benefits are identified below.

The Applicants have sought to quantify the public benefits where possible below to assist OFTA with any cost-benefit analysis.

12.1 Lower cost services

Network efficiencies, cost savings and economies of scale will provide scope for CSL and NWPCS to compete in the Hong Kong mobile market from a lower overall cost base. Section 4 of this submission has already referred to the annual pre-tax operating costs savings and the NPV of the synergies and efficiencies arising from the Transaction.

• Quantification: The Applicants submit that the estimated annual pre-tax operating costs savings of the productive efficiency gains arising from the merger are in the order of magnitude of approximately HK$230 million with an additional HK$215 million in savings arising from reductions in capital spending, predominantly on network infrastructure and information technology platforms. [CONFIDENTIAL]

12.2 Innovative new mobile technologies

The larger subscriber base of CSL and NWPCS will provide economies of scale in relation to the development and implementation of new mobile technologies (particularly, for example, advanced data applications and technologies), potentially resulting in their earlier introduction to Hong Kong consumers and constraining the power of fixed line operators such as PCCW via fixed-mobile substitution.

[CONFIDENTIAL]

• Quantification: The Applicants submit that dynamic efficiency gains will arise from the merger. The Applicants have been unable to quantify these gains for the purposes of this submission but believe they are likely to flow from the productive efficiency gains.

12.3 Enhanced intermodal competition as a constraint on fixed-line operators

The potential for a merger of mobile operators to act as a constraint on the market power of fixed-line operators has been recognised by international precedent. In the United States, for example, the FCC has considered that: “mergers of wireless carriers that lack a wireline affiliation are more likely to promote intermodal competition”, which the FCC views as a public interest benefit. In the Sprint-Nextel Order, the FCC expressly commented (at paragraph 142) that “the proposed acquisition is likely to result in greater

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intermodal competition based on the fact that the applicants are independent wireless

carriers”.

A recent Gartner report, titled Wireless Services and Service Providers in Hong Kong, dated 13 July 2005 confirms the potential of mobile to act as a constraint on the market power of fixed-line operators, particularly with the rollout of advanced data services. Gartner relevantly comments:

“Low price and ubiquity of cellular services are driving fixed-to-cellular substitution, although fixed broadband services have provided some insulation against fixed-line attrition.”

[CONFIDENTIAL]

While NWPCS has a very indirect affiliation to the fixed network business of the NWPCS Group, that affiliation is not likely to influence the business operations or strategy of NWPCS, particularly as Telstra will have majority control over NWPCS and the interest of the NWPCS Group will be diluted via listing on the Hong Kong Stock Exchange. All commercial relationships between NWPCS and the fixed line business of the NWPCS Group are at arms length and services procured by NWPCS from the fixed line business are subject to competitive tendering. No preferential arrangements exist.

• Quantification: The Applicants submit that allocative efficiency gains may arise from the merger in fixed-line markets via enhanced intermodal competition. The Applicants have been unable to quantify these benefits for the purposes of this submission but believe they are material.

12.4 Higher quality services

The overall quality of both networks will be increased via rationalisation around the best sites, technologies, and infrastructure, leading to increased quality of services to the benefit of Hong Kong consumers.

As identified earlier in this submission, the integration plan between CSL and NWPCS is generally focused on retaining the best equipment where there is duplication. Quality of service is difficult to quantify for the purposes of any analysis of public benefits, but will generally result in improved call quality, greater mobile coverage, reduced network outages, reduced network congestion, reduced call drop-outs, scope for higher quality data services, and generally increased consumer satisfaction.

• Quantification: The Applicants submit that consumers will realise long-term gains in utility arising from enhanced quality of service. The Applicants have been unable to quantify these benefits for the purposes of this submission but believe they are material.

12.5 Wider environmental benefits

Rationalisation of base stations will reduce unnecessary duplication of infrastructure.

[CONFIDENTIAL]

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The closure of such cell sites will have wider environmental benefits.

• Quantification: The Applicants submit that the removal of mobile towers and infrastructure is likely to remove an economic externality cost associated with the existence of that infrastructure. The Applicants have been unable to quantify the benefits of removing that externality for the purposes of this submission but believe they may be material.

12.6 Cost-benefit analysis

The Applicants submit that there are likely to be few, if any, reductions in allocative efficiency arising from the Transaction. The continued existence of fierce competition and competitive constraints ensure that the Applicants will have no market power to enable them to raise prices above efficient levels.

In contrast, there are very significant productive efficiency gains arising from the Transaction, and these are estimated at approximately HK$230 million in annual pre-tax operating cost savings with an additional HK$215 million in savings arising from reductions in capital spending, predominantly on network infrastructure and information technology platforms.

[CONFIDENTIAL]

These gains are supplemented by likely increases in dynamic efficiency, consumer utility, and allocative efficiency in fixed-line markets. Furthermore, there will be reductions in externality costs.

Overall, the Transaction would lead to a net increase in economic welfare.

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ATTACHMENTS

AAAttttttaaaccchhhmmmeeennnttt DDD Table of telecommunications licences held by CSL 61

AAAttttttaaaccchhhmmmeeennnttt EEE Table of telecommunications licences held by NWPCS 62

AAAttttttaaaccchhhmmmeeennnttt FFF Table of 2003-2004 HHI Comparison of Mobile Markets in Ten Largest Economic Areas in the United States

63

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AAAttttttaaaccchhhmmmeeennnttt DDD

TTTaaabbbllleee ooofff ttteeellleeecccooommmmmmuuunnniiicccaaatttiiiooonnnsss llliiiccceeennnccceeesss hhheeelllddd bbbyyy CCCSSSLLL

LLLiiiccceeennnssseeeeee LLLiiiccceeennnccceee NNNuuummmbbbeeerrr DDDaaattteee ooofff FFFiiirrrsssttt IIIssssssuuueee

Hong Kong CSL Limited

Public Radiocommunication Service Licence

GSM band

012 12 January 1993



PCS band

060 30 September 1996


Mobile Carrier Licence

3G services

077 22 October 2001


Public Non-Exclusive Telecommunications

Service Licence

External Telecommunications Services

875 14 August 2001



Service Licence

International Value-Added Network Services

1127 15 March 2004


Wide Band Link and Relay Station Licence 171 23 May 2000


Wide Band Link and Relay Station Licence 172 23 May 2000


Demonstration Licence

To possess, establish and maintain transmitting and receiving stations at approved locations and mobile stations for radiocommunications, for the purpose of transmitting and receiving test messages.

000836 19 February 2000 (backdated to 20 December 1999)


Radio Dealers Licence (Unrestricted)

Licence to possess and deal in the course of trade or business in apparatus or material for radiocommunications or in any component parts thereof.

007560 19 February 2000 (backdated to 20 December 1999)


Wireless Local Area Network Services (Class

Licence)

Registration for class licence for the provision of public wireless local area network services

Not applicable

25 February 2004

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AAAttttttaaaccchhhmmmeeennnttt EEE

TTTaaabbbllleee ooofff ttteeellleeecccooommmmmmuuunnniiicccaaatttiiiooonnnsss llliiiccceeennnccceeesss hhheeelllddd bbbyyy NNNWWWPPPCCCSSS

LLLiiiccceeennnssseeeeee LLLiiiccceeennnccceee NNNuuummmbbbeeerrr DDDaaattteee ooofff FFFiiirrrsssttt IIIssssssuuueee

New World PCS Limited


PCS band

057 30 September 1996



Service Licence

International Value-Added Network Services

657 26 April 200266



Service Licence

External Telecommunications Services

1048 21 March 2003



Licence to possess and deal in the course or trade or business in apparatus or material for radiocommunications or in any component parts thereof.

007640 21 March 2000



Licence to possess and deal in the course or trade or business in apparatus or material for radiocommunications or in any component parts thereof.

007694 2 May 2000

66 This is the new form of the licence, the old form of licence was issued on 26 April 2000.

PUBLIC VERSION



63

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Ten Largest Economic

Areas67

Economic Area

Population

2003

HHI68

2004

HHI69

HHI

Change

New York, N.Y. 25,712,577 2091 2326 +235

Los Angeles, CA. 18,003,420 1971 2433 +462

Chicago, IL. 10,328,854 1538 1884 +346

San Francisco, CA. 9,111,806 1990 2598 +608

Washington, D.C 8,403,130 1881 2283 +402

Boston, MA. 7,954,554 2083 2319 +236

Dallas/Ft. Worth, TX. 7,645,530 1743 2708 +965

Philadelphia, PA. 7,309,792 2009 2409 +400

Detroit, MI. 6,963,637 1830 2118 +288

Houston, TX. 5,632,853 1953 2313 +360

NOTE: Further industry consolidation in the United States during 2005 has increased the

HHI in these economic areas by an estimated further 300 points on average.

67 Economic Areas are defined by the Department of Commerce’s Bureau of Economic Analysis. 68 Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, Annual Report

and Analysis of Competitive Market Conditions with Respect to Commercial Mobile Services, Ninth Report, 19 FCC Rcd 20597 (2004).

69 Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, Annual Report and Analysis of Competitive Market Conditions with Respect to Commercial Mobile Services, Tenth Report, (2005).

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