Type III Interconnection: Key to Sustainable Local Network Competition

Xu Yan, HKUST Business School

Hong Kong’s Local Fixed Networks

Monopoly Operation by former Hong Kong Telecom until 1995 under exclusive franchise

In 1995, in addition to Hong Kong Telecom, three new licenses were issued to Hutchison, New T&T and New World

In 1999, Hong Kong Telecom surrendered its exclusive IDD franchise

Hong Kong’s Local Fixed Networks

In 1999, Hutchison, New T&T and New World get a moratorium with investment commitment

In 1999, five wireless local fixed network licenses were issued. Hong Kong Cable also obtained license for telecom service

Since 1 January 2003, local fixed network market has been fully liberalized

Market Structure of the Local Fixed Network in HK, the UK and the US (By Dec. 2003)

Source: FCC (http://www.fcc.gov), OFTA (http://www.ofta.gov.hk), Oftel (http://www.ofcom.org.uk)

Type of AccessHong Kong(Since 1995)

United Kingdom(Since 1984)

United States(Since 1996)

Direct Access 60.7% 89.7% 23%

Resale 0% 10.3% 16%

Unbundled local Loops (Type II Interconnection)

39.3% 0% 61%

Total Market Share by New Entrants

27.5% 17% 16.3%

Regulator’s Efforts in Facilitating

Competition

Operator Number Portability statutory right of access into buildings sharing of facilities (cable ducts, etc) Type I Interconnection Type II Interconnection

Type I Interconnection - Interconnection between Network Gateways

Network 1 Network 2

POI

Gateway

Type II Interconnection - the Local Loop Unbundling

Local Exchange of Network 1

MDF

Distribution Point

Street Building

Network 1

Network 2

Block-wiring

TBE Room

AB

C

Equipment Collocation in TBE Room

Deployment of Type II Interconnection: The Cut-over of Jumper Line

2N Collocation Room

Main Distribution Frame (MDF)Incumbent’s

Switching Equipment

Equipment Side

Line Side

LAL Tie Circuits

Incumbent’s Exchange

MDF

To 2N’s Host Exchange (Backhaul process)

Customer Building

Blockwiring in TBE Room

Incumbent’s External Cable

Cable Lead-in

(4)

(3)(5)

2N’s Fiber Cable

Universal Service Contribution: Subsidies from IDD

HKTC HKTI International Destination

New FTNS

Mobile Service

Price Squeezing

Retail Price

Interconnection

Payment

Price Rebalancing 

Starting from

1/8/1996 1/8/1997 1/9/1999 22/1/2001 1/1/2002

Business $104.6 $108.8 $108.8 $128No price control

Residential $67 $68.9 $90 $110No price control

 

More Exchange Opened for Type II Interconnection

50% residents have choice among operators, new entrants are committed for more investment for moratorium

Source: http://www.ofta.gov.hk

Accelerated Market Share of New Entrants

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1996 1997 1998 1999 2000 2001 2002 2003

The Case of Wharf T&T

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

Backbone Network of Hutchison Global Communication in Hong Kong

Benefits of Competition is no Longer Just Limited to Corporate Users

 

  

Market Share (%)

0

5

10

15

20

25

30

1996 1997 1998 1999 2000 2001 2002 2003

Business

ResidentialMarket Share Annual Growth Rate

0%

50%

100%

150%

200%

250%

Business

Residential

Type III Interconnection?

Local Exchange of Network 1

MDF

Distribution Point

Street Building

Network 1

Network 2

Block-wiring

TBE Room

AB

C

Reasons for Change

Regulation at different points are different A: collocation, cut-over B: Rights of way C: building access

Different points represent different development strategies

A: Indirect access C: Direct access

Bottleneck at point C may no longer be controlled by the incumbent

Property developers holding class license New entrants affiliated with the property developers

Experience of success: the case of Korea

Advantages of Change

Explicitly structured regulatory framework Type I: any-to-any communication; Type II: deployment of cut-over; Type III: subscribers access in buildings.

Flexibility in regulation: Direct access vs. Indirect access

Respond to market change From overall asymmetric regulation to site-specific

asymmetric regulation

Conclusions

Type II interconnection (local loops unbundling) is efficient in facilitating local fixed network competition as long as there is no market distortion;

It is necessary to review type II interconnection timely in order to respond to the market change;

Type III interconnection is essential in guaranteeing universal choice so as to guarantee sustainable universal service

Q &. A

Thank You and welcome to Hong Kong Mobility Roundtable 2005!(http://www.hongkongmobility.ust.hk)