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Submission to the LegCo Panel on Information Technology and Broadcasting regarding a proposed acquisition of the Internet related service business by Hong Kong Telecom IMS Ltd.

  • Consultation Papers
  • 1998.12.04

1. The Consumer Council notes that based on publicly available information on market shares held by HKTIMS and Star Internet in the Internet Service Provider market, this acquisition raises concerns as to whether Hong Kong consumers will be faced with a competitive market for Internet services, at least in the near future.

2. The Council understands that following the acquisition; HKTIMS will have approximately 70% of the share of the market for ISP services, based on the number of subscribers.

3. Whereas it can be relatively easy for governments to take action against conduct to address competition concerns, once an acquisition has been completed it can be a difficult, if not impossible task to reverse the structural factors in the market that have resulted from the acquisition and that form the basis of a competition concern.

4. Applying the tests that are used in other jurisdictions to determine whether an acquisition requires close examination to gauge whether it will have anti-competitive effects in the market, it is apparent that at the very least, this particular acquisition raises serious questions that require careful consideration. Moreover, it could be considered that a prima facie case exists that the acquisition will at least give rise to a dominant position that may be expected to prevent, restrict or distort competition in the market for ISP services.

5. Whether the acquisition should, or should not be allowed to proceed, must be decided following a thorough analysis of:

  • What currently is the actual and potential level of competition in the market?
  • What are the barriers to entry to the market?
  • Is there a degree of countervailing power in the market?
  • What are the dynamic characteristics of the market, including growth, innovation and product differentiation and how will these be affected by the acquisition?
  • What will be the effect of the acquisition on existing customers?

6. For its part, the Council is of the view that the advantages of incumbency which HKTIMS currently possesses would be difficult for existing and new entrants to overcome. The synergies of HKTIMS's association with HKT and customer inertia in changing service providers, combined with what appears to be a degree of price insensitivity on the part of HKTIMS's customers, would seem to give HKTIMS a substantial degree of market power that would be difficult for smaller competitors to overcome.

7. While there may be a suggestion that potential competition exists from large overseas ISPs, this cannot necessarily be relied on due to the small size of the Hong Kong market. Neither should the acquisition be allowed merely on an assumption that there would be efficiencies through economies of scale. It could be equally argued that a more socially, as well as economically desirable means of achieving efficiencies, particularly dynamic efficiency, in an industry that is characterised by rapidly changing technology and consumer demand patterns, is through the encouragement of small to medium enterprises to invest in the industry. In fact many leading IT companies started out as very small enterprises.

8. This is particularly important given Hong Kong's need to develop its expertise in the services sector.

9. Having regard to the preceding anti-competitive concerns, a question arises as to what would be the effect on Star Internet's customers, if the acquisition were to be blocked by OFTA? An argument might be put forward that it is only a large entity that has the means available to quickly and seamlessly transfer customers without disruption to their services. While the technical ability to service such a large number of customers might be a factor working against many smaller ISPs, the Council does not consider this would be a satisfactory argument if the effect of the acquisition were to have long term anti-competitive effects. The Council suggests that the option of other suitable buyers for Star Internet should be pursued by OFTA.

10. The Council is also concerned with the market of VOD services that another effect of the acquisition will be that one company may have a monopoly on the services. The Council would expect that if the initial decision by the Government to grant two licences to separate parties is to be preserved, another licence should be issued so as not to compromise the government's initial decision.


Merger Or Acquisition Law Threshold Tests In Foreign Jurisdictions

1. In jurisdictions that have general competition laws that prohibit anti-competitive mergers or acquisitions, bright line tests based on market concentration ratios are applied to determine whether the acquisition or merger might be at risk under the law. For example, in Australia if a merger will result in a post-merger combined market share of the four (or fewer) largest firms (CR4) of 75 per cent or more and the merged firm will supply at least 15 per cent of the relevant market, the Commission will want to give further consideration to a merger proposal before being satisfied that it will not result in a substantial lessening of competition. In any event, if the merged firm will supply 40 per cent or more of the market, the Commission will want to give the merger further consideration. The twofold thresholds reflect concerns with the potential exercise of both co-ordinated market power and unilateral market power. Below these thresholds, the Commission is unlikely to take any further interest in a merger.

2. These thresholds have been set at a more generous level than those in other jurisdictions with a similar merger law. For example, the Canadian Director of Investigation and Research, Competition Act, Merger Enforcement Guidelines (1991) employ a CR4 threshold of 65 per cent, with the merged firm's market share at 10 per cent, and a single firm market share of 35 per cent. The United States Department of Justice and Federal Trade Commission's Horizontal Merger Guidelines (1992) employ the Herfindahl-Hirschman Index (HHI) instead of the CR4, but would examine mergers where the post-merger CR4 was below 75 per cent; and the single firm market share threshold is 35 per cent. The New Zealand Commerce Commission's draft guidelines employ a 40 per cent market share threshold under a dominance test.

Source:Australian Competition and Consumer Commission, 'Merger Guidelines - A guide to the Commission's administration of the merger provisions (ss50, 50A) of the Trade Practices Act 16 July 1996.