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Speech by SCIT at AmCham luncheon

Following is a speech by the Secretary for Commerce, Industry and Technology, Mr John Tsang, at the luncheon meeting of the American Chamber of Commerce in Hong Kong (AmCham) today (July 22) on "Convergence of Fixed and Mobile Communications Services - Policy and Regulatory Challenges":

President Maisano, distinguished guests, ladies and gentlemen,

Good afternoon.

I am delighted to have the opportunity of joining you today to speak on some of the more fascinating areas under my portfolio.

I had originally intended to talk extensively on the review of the Copyright Ordinance, but since we are moving along nicely with the final phase of the consultation exercise and there has been substantial airing of views in various fora, I thought I would cover instead another subject that many of you would find interesting, telecommunications. But first of all, let me give you a brief account recapping the developments on the review of the Copyright Ordinance.

You may recall that Government completed a public consultation on the review of certain provisions of the Copyright Ordinance earlier this year. AmCham sent us useful views in this exercise. After having carefully considered the submissions received, we announced last month a huge package of preliminary proposals to further improve our copyright protection regime. These proposals cover a broad range of subjects, including business end-user criminal liability, exemption from copyright restrictions and parallel importation. I do not intend to go over them again here, but if you are interested in any one of them, they are all available on our website.

Suffice it for me to say that the subject of copyright carries wide social implications in our community, and views from owners and users of copyright works on specific issues are very often at different ends of the pole. In formulating our proposals, we have endeavoured to strike a delicate balance with the best interest of the community in mind. We will continue to discuss improving these proposals with relevant stakeholder groups.

AmCham members comprise both copyright owners and general business users, and so we look to you all for further views on the various issues covered in the proposals. In particular, we are interested in the numerical threshold for our proposed copying/distribution offence for printed works. We hope to finalise these proposals and prepare the necessary legislative amendments as soon as possible so that the Legislative Council could consider and enact them before end-July next year when our current suspension arrangement for the business end-user possession offence expires.

Another challenging task for me in the copyright field is the problem of Internet piracy. We have adopted a multi-pronged approach encompassing public education, law enforcement and industry cooperation in tackling this problem. We are also reviewing the Copyright Ordinance to see if any amendments are necessary for more effective protection of copyright in the digital environment.

In particular, we are studying whether a technologically neutral right of communication should be introduced for copyright owners, how to facilitate copyright owners to take civil actions against infringing activities on the Internet, whether statutory damages for civil infringements should be introduced and the role of Internet Service Providers in the fight against Internet piracy. We have invited copyright owners to send us their views on these four issues, and we hope to commence another public consultation exercise on this important subject towards the end of this year.

Now back to the main topic for today, telecommunications.

Several years ago, many of us talked about fixed-mobile "substitution", or more specifically in some minds, how some users might rely solely on mobile services to meet our communication needs. I suspect my son has been doing that for years because that was the reason he gave me for not answering my calls at home.

There is no denying that mobile services are now an indispensable mode of communication for us in Hong Kong. Our mobile penetration rate of some 120% speaks for itself. And indeed, some of us, particularly the younger generation, are relying entirely on mobile services to satisfy their voice telephony needs. And I suspect that many corporate users would not leave behind their Crackberries even during weekends, and even at their spouses' objections!

Fixed telecommunications services do not stand still either. They are continuing to increase transmission speed to maintain their advantage over mobile services, and find new applications and new revenue sources. We must not forget that mobile services will continue to rely on fixed services for their backbone transmissions. Other fixed operators have decided to enter, and in the case of our major telecommunication operator, re-enter the mobile market by buying a stake in an existing mobile operator and offering bundled fixed and mobile services to customers.

Today, the notion of "fixed-mobile substitution" has given way to an evolved concept of "fixed-mobile convergence". This involves more than just bundling fixed and mobile services to customers.

Let me give you an example. A fixed operator in the United Kingdom launched last month a combined fixed and mobile service. The service enables users to make telephone calls with the same mobile handset. When the user is away from home, the call is routed through the mobile network of the strategic partner of the fixed operator. However, when the user is within his home, the call will be automatically and seamlessly switched onto the fixed operator's broadband network, even during mid-call, by way of a Bluetooth or Wi-Fi connection with a wireless hub at home, taking advantage of the higher quality, enhanced stability and lower tariffs of the fixed service.

To the user, all the switching between fixed and mobile networks is done behind the scene, and he does not have to worry about whether and when to make the switch. It is painless and technology friendly. The user just continues with the telephone call as he moves around town. And his friends and clients can reach him with a single telephone number.

This example is only for voice telephony services, and, in Hong Kong's context, this may not mean a great deal of advantage to an average user given our already excellent mobile network coverage and very competitive mobile airtime packages. Nonetheless, it illustrates an important paradigm shift for the telecommunications industry.

Telecommunications operators nowadays can no longer choose whether they are in the fixed or mobile telecommunications business, and design their suite of services accordingly. They must be far more customer-centric in meeting their customers' communication needs, whether they are corporate clients or individual consumers. And they must plan ahead to take advantage of the continued development in convergence technologies and standards for both core networks and customer terminals to offer innovative, seamless communication services to customers. The demarcation between fixed and mobile telecommunications markets will blur. The structure of the telecommunications industry in the near future will be quite different from what it is today.

According to some industry predictions, the boundary between fixed and mobile technologies will largely be dissolved by 2010 or so as incumbent operators migrate to all-Internet Protocol core networks, enabling them to share the same subsystems for supporting both fixed and mobile accesses. The introduction of IP Multimedia Subsystem architecture to both mobile and next generation fixed networks will bring their capability to similar fronts. If the forecast is anything to go by, we are only several years away from a fundamental transition to seamless communications.

It is our business in Government to ensure that the migration towards fixed-mobile convergence will not be hampered by outdated policies or regulations better suited to the old paradigm of telecommunications services. From a policy perspective, our challenge is to remove policy and regulatory uncertainties so that existing players or potential entrants could make informed investment decisions in the midst of potentially significant changes in the era of fixed-mobile convergence. We cannot influence technological development in this fast moving industry, and it only makes sense for us to maintain our technology neutral approach and allow market forces to decide on the most suitable technologies and standards to meet customer needs. Availability of radio spectrum for these new wireless technologies is another important policy issue. And we will cover this aspect in our spectrum policy review.

On the regulatory front, the Office of the Telecommunications Authority (OFTA) will shortly engage experts to assist in a review of the issues pertinent to fixed-mobile convergence. I wish to share with you three issues that will be covered in this review.

The first issue is licensing arrangements for carriers. Our current licensing regime is based on a clear demarcation between fixed and mobile carriers, with corresponding rights and obligations. For example, the fixed carriers have the right to lay cables and access buildings to reach customers, while mobile carriers are assigned radio spectrum and are allowed to provide services which are not limited to specific locations. Under fixed-mobile convergence, some services may fall somewhere between fixed and mobile services. Our earlier proposal for licensing Broadband Wireless Access (BWA) services is a case in point.

There are mobility standards being developed under the WiMAX family, commercialisation of which could be made possible in a couple of years' time. Some industry players are already arguing that BWA is not a fixed service, perhaps not now but definitely so a few years down the road. On the other hand, unlike current mobile services, some of the better known BWA standards do not, as yet, provide for seamless hand-off from hub to hub. Therefore, BWA service is not as "mobile" to users as second or third-generation mobile services are today.

We need to consider whether we should create a new type of carrier licence such as a "unified" carrier licence. We need to consider what specific rights and obligations should be attached to this "unified" carrier licence. We also need to consider whether existing fixed or mobile carrier licensees should be allowed to migrate to this new "unified" carrier licence, and if so, what are the appropriate transition arrangements.

The second issue to be studied is interconnection charging arrangement between fixed and mobile carriers. Consumers are not well aware of the complexity of the charging arrangements, but this is an issue raised repeatedly by mobile operators.

Under the circuit-switching networks, there is a need to make an interconnection between networks so that a call from a caller on a network could be delivered to a recipient on another network. With a network using the other network's resources to complete the connection, the calling network, or the originating network, may need to provide some compensation to the receiving network, or the terminating network.

Hong Kong adopts the so-called "mobile-party-pays" customer charging arrangement. Because the mobile customer pays for calls made and received by him, the mobile network pays the interconnection charge to the fixed network, irrespective of the direction of the call. This arrangement has been in place since the early 1980s when cellular service was introduced.

Another customer charging arrangement is the so-called "calling-party-pays". Because the customer only pays for the calls he makes, and what he pays covers the cost of delivering the call all the way to the receiving party, the calling network pays interconnection charge to the receiving network. Other economies adopt this approach for fixed-to-mobile interconnection. In Hong Kong, only fixed-to-fixed network interconnection adopts this arrangement.

There is a third arrangement, called "sender-keeps-all", where the interconnecting networks do not pay any compensation to each other for the use of the recipient operators' networks and could keep all the revenue they receive from the sending customers. Mobile operators in Hong Kong adopt this arrangement when interconnecting to each other.

While this interconnection charging arrangement may seem esoteric, it is high on the agenda of the industry, because quite a substantial amount of money is involved. For instance, under the current asymmetric interconnection charging regime, depending on the mobile traffic terminating on its network, a fixed operator in Hong Kong could receive hundreds of million of dollars of interconnection charge a year.

There are no "right" or "wrong" interconnection charging arrangements, because players in the same market are subject to the same arrangement. The important thing is that they are competing on a level playing field.

Some mobile operators have alleged that the mobile-party-pays and the associated asymmetric interconnection charging regime has contributed to the problem of unsolicited marketing calls to mobile phones in Hong Kong because the more such calls are made from the fixed networks, the more interconnection charges from mobile operators the fixed operators would receive.

I have not seen sufficient hard evidence to pass my judgment on this claim. But it is clear that the current interconnection charging arrangement needs to be reviewed to prepare for fixed-mobile convergence and we are looking into this particular aspect further in the context of our basket of measures to combat spamming.

The third issue to be studied is the portability of telephone numbers between fixed and mobile networks. Putting aside special access numbers, telephone numbers for fixed services in Hong Kong currently start with "2" or "3", while telephone numbers for mobile services start with "6" or "9".

With blurred boundaries between fixed and mobile services in the era of fixed-mobile convergence, it would no longer be possible to simply use a telephone number to identify whether it is connected to a fixed or a mobile network. However, allowing the telephone numbers to be ported between fixed and mobile networks could create problems for current arrangements which are dependent on the telephone numbers to identify the characteristics of a caller. The interconnection charging arrangement is a prime example. We need to deal with this issue of portability.

Ladies and gentlemen, we are standing at a fascinating juncture in telecommunications. After seeing the successful liberalisation of the telecommunications market in Hong Kong in the past decade with the entry of new players and substantially lowered prices for end-users, we are close to witnessing another major development in the telecommunications industry. We need to do our part in preparing our policy and regulatory framework to welcome such a development.

OFTA will shortly commission a consultancy study for the detailed economic efficiency and cost-benefit analysis for the issues related to the regulatory framework. The study will benchmark our regulatory framework against others, assess the market situation in Hong Kong, collect and analyse views from stakeholders, and recommend the appropriate changes with support from cost-benefit analyses. We hope that the consultancy study will be able to provide us with a solid foundation for public consultation on fixed-mobile convergence later on in the year.

So stay tuned. Thank you.

Friday, July 22, 2005