Broadcasting Authority Meeting

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The following is issued on behalf of the Broadcasting Authority:

The Broadcasting Authority ("BA") at its meeting today (June 13) considered that the competition complaint against Hong Kong Cable Television ("HKCTV") for engaging in predatory pricing with a view to eliminating competition in the pay TV market was unsubstantiated.

On 19 March 2002, three new domestic pay television programme service licensees, namely, Yes TV, Galaxy, Pacific Digital Media made a joint submission to the BA, complaining against HKCTV's promotional package, "Be My Valentine", which lasted from 21 January to 14 March 2002. Specifically, the three complainants alleged that HKCTV had abused its dominant position in the pay TV market by engaging in a predatory pricing behaviour and requested the BA to conduct an investigation. The complainants made a further submission on 15 April 2002 to the BA, alleging that the "2002 World Cup" promotional package, which operates from 8 April to end of June 2002, also constituted predatory pricing.

In accordance with the procedures as laid down in the "Competition Investigation Procedures" published in February 2001, the BA, with the specialist assistance provided by the competition consultants of the Office of the Telecommunications Authority ("OFTA"), conducted a preliminary inquiry into the complaint.

At the preliminary inquiry stage, the BA sought to understand the nature of the complaint and, in particular, the impact that the behaviour under complaint may have on competitors and consumers in the relevant market.

The BA has now completed its preliminary inquiry. It has come to the conclusion that, prima facie, the promotional packages, "Be My Valentine" and "World Cup", offered by HKCTV do not appear to have involved predatory pricing or any other form of conduct, which has the purpose or effect of preventing or substantially restricting competition in a market.

In coming to this conclusion, the BA has taken into consideration the following important factors -

(a) the pay TV market in Hong Kong, distinct from the free-to-air TV market in Hong Kong, was the relevant market in which the competitive effects of HKCTV's promotional packages should be assessed; and

(b) within this pay TV market, although it appears that, prima facie, HKCTV fits the criterion of presumed dominance, there was no reason to believe that HKCTV's promotional packages have the necessary "purpose" or "effect" of preventing or restricting competition. HKCTV had offered similar promotions before the new entrants had entered the market. On the "effect" side, there was also no prima facie evidence to suggest that competition in the pay TV market was being adversely affected by the promotional packages.

On the basis of the information available, and taking into account the relevant factors in assessing the conduct in terms of the competition provisions in the Broadcasting Ordinance, the BA considered that there was no justification for proceeding to a second stage full investigation.

A copy of the BA's Preliminary Enquiry Report is attached. It is also available on the BA's website: http://www.hkba.org.hk

At the same meeting, the BA also endorsed the recommendations of its Complaints Committee.

HKCTV was given a "serious warning" for the programme "Chinese Adult Animation (Episode 11)" broadcast on Cable Channel 84 on 21.3.2002 at 2:30pm - 3:30pm. The portrayal of a male character, possessed by a demon, raping a pregnant woman in the adult animation was prolonged and explicit. It had gone beyond the acceptable limit for broadcast on a pay television service.

TVB was given an "advice" for the programme "Noon News" broadcast on Jade on 10.3.2002 at 1:00pm - 1:15pm. In reporting a news item on the conflict between Israel and Palestine, the newscaster had omitted a keyword in Cantonese, thus conveying a misleading and erroneous message that the Israeli cabinet had requested the Palestinian Government to launch a full-scale attack on Israel.

RTHK was given an "advice" for the programme "Below The Lion Rock" broadcast on ATV Home on 4.4.2002 at 8:35pm - 9:35pm. The detailed depiction of children killing a snake should warrant a "Parental Guidance Recommended" classification. As the programme did not carry any announcement that no harm was caused to the snake, the realistic depiction gave the impression that the children had inflicted cruelty on the animal.

Preliminary Enquiry Report on Complaint of Predatory Pricing by Hong Kong Cable Television Limited

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Complaint against: Hong Kong Cable Television Limited ("HKCTV")

Issue: Alleged predatory pricing by HKCTV in relation to two promotional packages, namely "Be My Valentine" and "2002 World Cup" packages

Relevant Provisions: Sections 13 and 14 of the Broadcasting Ordinance ("BO") (Cap. 562)

Case Opened: March 2002

Case Closed: June 2002

Decision: No breach of sections 13 or 14 of the BO

Outcome: Unsubstantiated

Case Reference: BA1/2002

The Complaint

The Broadcasting Authority ("BA") received a competition complaint concerning two promotional packages offered by HKCTV, namely the "Be My Valentine" and "2002 World Cup" packages. The "Be My Valentine" promotion, marketed from 21 January to 14 March 2002, reduced the monthly subscription fee of $298 to $198 until end-December 2002. The current "2002 World Cup" promotion, marketed from 8 April to the end of June, effectively reduces the fee to $166.80 per month for one year. The complaint was lodged jointly by three new pay TV licensees, viz. Yes Television (Hong Kong) Limited, Galaxy Satellite Broadcasting Limited and Pacific Digital Media (Hong Kong) Corporation (hereafter referred to as "the complainants"). The complainants alleged that the two promotional packages offered by HKCTV are a form of predatory pricing that is designed to eliminate them or weaken them as competitors or potential competitors in the pay TV market.

Specifically, the complainants claimed that it was HKCTV's intention to "eliminate or weaken" other Hong Kong pay TV licensees, and the new pay TV licensees would all be "seriously affected" by the price reductions of HKCTV's promotional packages.

The Law

Section 13(1) of the Broadcasting Ordinance ("BO") (Cap. 562) prohibits anti-competitive conduct in the following terms -

"...a licensee shall not engage in conduct which, in the opinion of the Broadcasting Authority, has the purpose or effect of preventing, distorting or substantially restricting competition in a television programme service market."

Section 14(1) prohibits a licensee in a dominant position in a television programme service market from abusing its position. Section 14(4) deems an abuse of a dominant position in the following terms -

"A licensee who is in a dominant position is deemed to have abused its position if, in the opinion of the Broadcasting Authority, the licensee has engaged in conduct which has the purpose or effect of preventing, distorting or substantially restricting competition in a television programme service market."

Section 14(5) provides that the Broadcasting Authority ("BA") may consider predatory pricing as an abuse of dominance.

Central to both prohibitions is the requirement to establish that the conduct "...has the purpose or effect of preventing, distorting or substantially restricting competition in a television programme service market." Accordingly, this paper is primarily an assessment of whether the conduct of HKCTV, specifically its offer of the two promotional packages, has the purpose or effect of preventing, distorting or substantially restricting competition in a relevant Hong Kong TV market.

The Inquiry

In conducting the preliminary inquiry into the complaint, the BA has sought to understand the following issues -

(a) the relevant market in which to assess the competitive effects of HKCTV's promotional packages;

(b) whether HKCTV is dominant in the relevant TV market, and if so, whether the promotional packages under complaint amount to an abuse of HKCTV's dominance in the relevant market; and

(c) what impact the behaviour under complaint (i.e. HKCTV's promotional packages in this case) may have on competitors and consumers in the relevant market.

An analysis of each of the above issues, taking into account the information supplied by the complainants and HKCTV, is set out below.

(a) The Relevant Market

The three complainants, in response to the BA's investigation inquiries, considered that the free-to-air ("FTA") TV represented a different kind of television service in terms of nature and characteristic as compared to pay TV. For example, FTA TV is available for public reception free of charge, but pay TV is a service which targets at viewers who are willing to pay for their choice of programming. Unlike FTA TV, which is basically advertising revenue driven, pay TV service largely depends on subscription fee as a source of revenue. Besides, the more stringent programme standards and the physical limitation in the availability of FTA TV frequencies up to now have restricted terrestrial FTA TV service providers from offering the same range and volume of programming that pay TV operators provide. The services offered by these two kinds of service providers vary substantially. Hence, the services offered by FTA TV could not be a close substitute for the services provided by the existing or planned service of the domestic pay TV licensees.

HKCTV, in response to the BA's investigation inquiry, argued that FTA TV and pay TV are in the same market and there is no separate market for pay TV. It submitted that subscribers switched to FTA TV in response to price increases in pay TV services was evidence of substitutability between FTA TV and pay TV.

After considering the different views on the relevant market, the BA concluded that FTA TV is not in the same market as pay TV in Hong Kong, for the following reasons:

(a) a pay TV service generally tends to be a multi-channel service offering a large range of specific-interest channels, whereas a FTA TV service generally tends to offer composite programming in a single channel or a few channels appealing to the widest possible audience;

(b) a significant number of pay TV subscribers willingly pay fees for pay TV services despite the availability of FTA TV services suggests that pay TV is more an additional service to FTA TV than a substitute for FTA TV;

(c) the commercial economics of a pay TV business differs significantly from that of a FTA TV business in the sense that pay TV operators generate income mainly from subscription fees whereas FTA TV operators generate income mainly from advertising;

(d) the commercial economics of a pay TV business and its multi-channel nature provide a pay TV operator with the commercial incentive and technical capacity to differentiate its pay TV service from that of a commercial dual-channel FTA TV broadcaster in Hong Kong; and

(e) the evidence of the pricing behaviour of pay TV service providers in overseas countries with competitive pay TV industries suggests that they are more closely constrained by the market behaviour of another pay TV operator than a FTA TV broadcaster.

In addition, there are overseas decisions and report findings that support the conclusion that pay TV and FTA TV are two separate markets -

(a) the European Commission has concluded in one case that pay TV constitutes a product market separate from FTA TV since pay TV is mainly financed by subscribers whereas FTA TV relies on advertising, and that the conditions of competition are accordingly different for the two types of commercial television(Note 1);

(b) the Office of Fair Trading ("OFT") released a report concluding that there is a separate pay TV market in the UK(Note 2);

(c) the Federal Communications Commission (the "FCC") in the US has concluded that the availability of single-channel FTA TV broadcast services is insufficient to constrain the market power of multi-channel pay TV service providers(Note 3);

(d) the Federal Trade Commission (the "FTC") in the US has concluded that there is a separate pay TV market(Note 4); and

(e) the Australian Competition and Consumer Commission (the "ACCC") has concluded on a number of occasions that FTA TV would not provide a sufficient constraint on the exercise of market power by pay TV operators, and thus is in a separate market(Note 5).

As regards HKCTV's argument that certain subscribers have switched to FTA TV in response to an increase in price for pay TV, the BA is of the view that this does not necessarily mean that FTA TV is a substitute for pay TV. The fact that subscribers actually pay for pay TV despite the availability of FTA TV would tend to indicate that these subscribers do not consider FTA TV to be a close substitute. Although ex-subscribers may choose to watch FTA TV rather than pay increased prices for pay TV, this is more an indication that subscribers are relatively sensitive to price increases for pay TV (in economic terms, known as having a high price elasticity), rather than that FTA TV and pay TV are close substitutes in terms of market definition.

In view of the foregoing, the BA does not accept HKCTV's arguments for a TV market in HK that encompasses both FTA TV and pay TV, but considers that the pay TV market in Hong Kong is the relevant market in this case.

(b) Market Dominance

Having determined that the pay TV market in Hong Kong is the relevant market in analysing this complaint case, the BA noted that, until February 1998, HKCTV was the only provider of pay TV services in Hong Kong. At present, the aggregate number of pay TV subscribers in Hong Kong is estimated to be below 600,000. HKCTV submitted that it had over 560,000 subscribers. According to the "Guidelines to the Application of the Competition Provisions of the BO" (paragraph 57(a) refers), there will be a presumption of dominance, in the absence of evidence to the contrary, if a licensee has a market share persistently above 50%. It would thus appear that, prima facie, HKCTV is in a dominant position in the pay TV market in Hong Kong as evidenced by its market share in terms of pay TV subscribers.

However, dominance itself is not prohibited. The critical test is whether the promotional packages offered by HKCTV, being a dominant player in the pay TV market, constitute an abuse of its dominance; or are anti-competitive conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in the pay TV market.

The conduct in question has been characterised by the complainants as predatory pricing. They claim that it is HKCTV's intention to "eliminate or weaken" them, that they will all be "seriously affected" by the price reductions and that there is a good chance of future "recoupment" of profit by HKCTV once they are "driven out or weakened".

The BA considers that in assessing the effect of HKCTV's promotional offers, it is important to establish that they are a direct cause of competitive injury to the complainants. As part of the inquiry, each of the complainants was asked to provide evidence for their assertions that they would be "eliminated or weakened" such that competition is prevented, distorted or substantially restricted.

In response to the BA's inquiry, one complainant asserted that HKCTV's promotional packages would attract away 50% of its potential subscribers, without providing any further supporting evidence. Another complainant responded that, since it was only at the initial stage of a commercial soft launch of its pay TV service, the impact had yet to be determined. The third complainant did not provide any documentation, but re-asserted that HKCTV's promotion had materially affected its business for the start up period.

On the information provided by the complainants, the BA is of the view that there is no prima facie evidence that the HKCTV's promotional packages had, or are having, any material adverse effect on the complainants' businesses.

Having formed the view that there is no requisite effect, there may nonetheless be the requisite purpose to prevent, distort or substantially restrict competition. In this respect, HKCTV submitted that the 2002 "Be My Valentine" package was the second of two similar promotions. The first promotion was offered in 2001, well before the complainants launched their services. The discounts then were higher - the monthly subscription fee was $149 as compared to the normal subscription of $298, representing a 43% discount. Under the 2002 "Be My Valentine" promotion, the monthly subscription fee of $198 represents only a 34% discount.

Given the previous promotional offer and the lack of any prima facie evidence to the contrary, the BA came to the view that HKCTV's promotional offers did not have the requisite anti-competition purpose.

Conclusion

On the basis of the information available, and taking into account relevant factors in assessing the conduct in terms of the competition provisions in the BO, the BA concluded that there is no reason to believe that there is a breach of the prohibitions on anti-competitive conduct and abuse of dominance. There is therefore no justification for proceeding to a second stage full investigation.

Notes:

(1) Decision of the Commission of the European Communities, published in the Official Journal, L.364/1, 31 December 1994 (IV/M.469 - MSG Media Service).

(2) Review of BskyB's Position in the Wholesale Pay TV Market, OFT, December 1996.

(3) The First Annual Report of the FCC in the matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, CS Docket No.94-48, 28 September 1994 at paragraph 101.

(4) In the matter of Time Warner Inc, Turner Broadcasting System Inc, Telecommunications Inc, Liberty Media Corporation, Docket No. C-3709.

(5) For example, Declaration of an analogue subscription television broadcast carriage service, ACCC, October 1999 and Australia Media/Foxtel Merger Statement of Claim, NG581 of 1997, Federal Court of Australia, 27 October 1997.

End/Thursday, June 13, 2002

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