Preliminary Enquiry Report on
Complaint against Hong Kong Cable Television
Limited about Provision of Channel A*
Complaint against
Issue
Hong Kong Cable Television Limited (HKCTV)
Relevant Provision
Section 14 of the Broadcasting Ordinance (BO)
(Cap. 562)
Case Opened
November 2005
Case Closed
January 2006
Decision
No breach of section 14 of the BO
Outcome
Unsubstantiated
Case Reference
BA 02/2005
Alleged HKCTV has abused its dominant
position in the television programme service
market in Hong Kong by engaging in predatory
and discriminatory pricing in relation to the
provision of Channel A service.
A. The Complaint
In November 2005, a member of the public lodged a complaint
of alleged anti-competitive conduct on the part of Hong Kong Cable
Television Limited (HKCTV) in breach of section 14 of the Broadcasting
Ordinance (BO)(Cap.562). The complaint concerns HKCTV’s provision of
Channel A to housing estates.
2.
The complainant alleges that HKCTV charges each housing
estate a very low subscription fee for the provision of Channel A. For
example, HKCTV charged the management office of Tsz Oi Court at a
collective subscription fee of […] on behalf of […] households (less than $2
per household) per month, with a separate deposit of […] for converter.
*
This is the non-confidential version of the Broadcasting Authority report on the complaint. Confidential
information and data has been redacted. Redactions are indicated by “[…]”.
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Meanwhile, Channel A is made available to individual subscribers as a
stand-alone premium service at $30 per month and included in a service
package (We Wet Pack) at $70 per month. According to the complainant,
the price of Channel A offered under the collective subscription scheme is
predatory and discriminatory and falls within the types of practices listed in
section 14(5)(a) and (b) of the BO as conduct which may be regarded as an
abuse of dominance under section 14 of the BO.
B. The Facts
3.
In November 1999, HKCTV started to provide Channel A, a
programme channel offering news and entertainment for general viewing, as
a stand-alone service (also known as “Pack E Service”) to certain residential
buildings, with the building management companies (BMCs) or incorporated
owners (IOs) of those buildings as account subscribers. In these buildings,
Channel A is distributed via the building’s satellite master antenna television
or communal aerial broadcast distribution systems and can be viewed on a
television set like other terrestrial free television channels without a set-top
box, regardless of whether the household has subscribed to HKCTV on an
individual basis.
4.
Channel A is a general entertainment pay television channel
consisting of news, entertainment and sports programmes that are duplicates
of those in News One and Two, Entertainment News, Cable Entertainment
and Cable Sports provided in HKCTV’s basic service.
According to
HKCTV, Channel A is intended to provide a “sample” of the quality and
range of HKCTV’s pay television programming offering. Currently,
HKCTV offers Channel A through different packages to customers:–
(a) Channel A (Pack E Service) is provided to […] residential building
accounts through a collective subscription scheme. Approximately […]
households have the right to view Channel A under the scheme;
(b) Channel A is also provided to about […] individual subscribers who
have “downgraded” from HKCTV’s basic service, at a monthly
subscription fee of $30 (if the subscriber signs up for a year, then the
monthly fee can be reduced to $24). Channel A is, according to
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HKCTV, used as a retention mechanism with the hope that the
customers will be encouraged to re-subscribe to the basic package; and
(c) Channel A is also made available as a stand-alone premium channel1 or
as part of the premium package (We Wet Pack) to basic subscribers at a
monthly subscription fee of $30 and $70 respectively.
5.
In August 2004, HKCTV entered into a non-exclusive
agreement with the BMC of Tsz Oi Court, under which the BMC paid a
collective subscription fee on behalf of their residents for the right to view
Channel A for 12 months at the fee set out in paragraph 2 above.
C. The Relevant Provisions
6.
Section 14 of the BO provides that:–
(1) A licensee in a dominant position in a television programme
service market shall not abuse its position.
(2) A licensee is in a dominant position when, in the opinion of the
Broadcasting Authority, it is able to act without significant
competitive restraint from its competitor and customers.
(3) In considering whether a licensee is dominant, the Broadcasting
Authority shall have regard to relevant matters including, but not
limited to–
(a) the market share of the licensee;
(b) the licensee’s power to make pricing and other decisions;
(c) any barriers to entry to competitors into the relevant
television programme service market;
(d) such other relevant matters as may be stipulated in
guidelines concerning the test of dominance issued under
section 4 by the Broadcasting Authority in consultation with
1
Because the programmes included in Channel A are also available as part of other basic channels, the take
up of the stand-alone premium Channel A is low.
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the licensees in the relevant television programme service
market.
(4) 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.
(5) The Broadcasting Authority may consider conduct to fall within
the conduct mentioned in subsection (4) as including, but not
limited to–
(a) predatory pricing;
(b) price discrimination, except to the extent that the
discrimination only makes reasonable allowance for
differences in the costs or likely costs of supplying the service
or other matter;
(c) making the conclusion of agreements subject to acceptance
by other parties of terms or conditions which are harsh or
unrelated to the subject of the agreements;
(d) discrimination in the supply of services to competitors.
D. The Investigation
7.
Section 14(4) of the BO provides that a licensee is deemed to
have abused its dominant position in breach of section 14(1) when the
Broadcasting Authority (BA) is of the opinion that 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 BA may consider predatory pricing and
price discrimination as an abuse of dominance.
8.
Under section 15(4), a breach of section 14(1) occurs when the
BA forms an opinion referred to in section 14(4) respectively.
9.
In accordance with the Guidelines to the Application of the
Competition Provisions of the Broadcasting Ordinance (Competition
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Guidelines) issued by the BA, the BA has conducted a competition analysis
in the following three stages:–
(a)
Stage 1: Defining the relevant market;
(b)
Stage 2: Assessing market power and/or the presence of
agreements or practices;
(c)
Stage 3: Assessing whether there is an abuse of a dominant
position or substantial effect on competition and, hence on
customers and viewers.
E. The Relevant Market
10.
Central to the prohibition on abuse of dominance is the
requirement to establish that the conduct of a dominant licensee has an anticompetitive purpose or effect in a television programme service market.
After considering the definition of “television programme service” in section
2 of the BO, the BA concludes that section 14 is only concerned with
conduct pertaining to the downstream market for the supply of television
programme service to viewers and customers. Accordingly, the analysis will
focus on whether the conduct in question has an anti-competitive purpose or
effect on the downstream market for the supply of television programme
service to viewers and customers.
11.
In theory, three potential television programme service markets
may be affected by HKCTV’s promotional package with regard to Channel
A. These are:–
(a) a market for all television broadcasting; or
(b) a market for free television broadcasting; or
(c) a market for pay television broadcasting.
The geographical market is Hong Kong.
assessment.
HKCTV agrees with this
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12.
HKCTV indicated in their submission that the appropriate
market, in their view, is a single television market encompassing both free
television and pay television, where the different broadcasters would
compete for viewers based on their individual programming. As explained
in the Authority’s earlier decisions on complaint cases2, the BA recognises
that there is competitive dynamics between free television and pay television
in Hong Kong.
F. Market Power
13.
The assessment of market power is relevant to the overall
competitive effects of HKCTV’s conduct.
14.
HKCTV submitted that it is clearly not dominant in the single
television market or the FTA television-only market irrespective of the
measure used − whether on viewership, service coverage and ability to
generate advertising revenues. Therefore, no case is made out for an abuse
of dominance by HKCTV in these markets.
15.
If the relevant market is regarded as pay television-only market,
there are three licensed operators, namely HKCTV, PCCW Media Limited
(PCCW) and Galaxy Satellite Broadcasting Limited (Galaxy). HKCTV
accepted that it is the largest pay television operator in the market but argued
that the market is becoming more competitive as new players such as PCCW
fights fiercely to acquire sports broadcasting rights and to gain market share.
16.
According to the BA’s figures as of November 2005, the total
number of pay television subscribers was estimated to be […]. The split of
subscribers between operators was:–
(a) Galaxy had […] subscribers ([…] of the market);
2
See the BA’s decisions in the complaint about joint acquisition of sports broadcasting rights by ATV and
TVB (Case Ref: BA 02/2002) and another complaint about acquisition of exclusive sports broadcasting
rights by HKCTV (Case Ref: BA 01/2003).
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(b) HKCTV had 700,000 subscribers3 (55% of the market);
(c) PCCW had […] subscribers ([…] of market).
According to the Competition Guidelines4, 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 is clear that HKCTV’s market share
remains in excess of the threshold level at which dominance is presumed, as
evidenced by its share of pay television subscribers in Hong Kong,
notwithstanding the increasing competition in pay television market.
17.
It would thus appear that HKCTV has a presumed dominance in
the pay television market in Hong Kong. However, market dominance itself
is not prohibited. The test is whether the conduct of HKCTV, being a
dominant player, constitutes an abuse of its dominance, which is anticompetitive having the purpose or effect of preventing, distorting or
substantially restricting competition in the pay television market.
G. Assessment
18.
In assessing whether HKCTV’s conduct has infringed section
14 of the BO, the BA will address each of the elements of the conduct raised
by complainant.
H. Predatory and Discriminatory Pricing by HKCTV
Submission by Complainant
19.
The provision of a collective subscription scheme targeting
housing estates by HKCTV has been characterized by the complainant as
predatory and discriminatory pricing. The substance of the complaint by the
complainant has been summarised in paragraphs 1 and 2.
3
Grand total residential and commercial customers, of which […] customers subscribe to full basic service.
4
Paragraph 57(a) of the Competition Guidelines.
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Submission by HKCTV
20.
HKCTV submitted that:–
(a) Channel A is a marketing and promotion channel intending to entice
viewers to subscribe or re-subscribe to HKCTV’s service. HKCTV’s
provision of Channel A has neither the intent nor the effect of driving
out competitors from the market;
(b) it is HKCTV’s prerogative to determine the pricing of service to
different customers and there is no requirement for HKCTV to adopt an
uniform pricing policy for all customers. Low price is preferred in the
collective subscription situation. Meanwhile, by offering Channel A as
a stand-alone premium service to basic subscribers, it ascribes a
perceived value ($30) to the channel;
(c) the pricing of Channel A is not predatory because
(i)
(ii)
(iii)
Channel A has a somewhat limited impact on the Hong Kong
television market having regard to its availability (about […] of
Hong Kong households), audience size (ranging from […] to […]
viewers at peak viewing hours) and advertising revenue5
generated by the channel;
the pay television market is very competitive and HKCTV does
not have sufficient market power to act unilaterally and to engage
in predatory pricing; and
Channel A has been shown to be a cost effective marketing tool
for customer acquisition;
(d) the pricing of Channel A is not discriminatory because
(i)
5
it is a normal commercial practice to price products differently in
different markets and particularly to price products at a discount
for new customers and for bulk purchase;
It is noted that Channel A attracts very little advertising compared to terrestrial television broadcasters.
According to Nielson Media Research’s figures, from January to November 2005, the gross advertising
revenue of Channel A amounted to approximately […], representing a very small portion of television
advertising revenue (less than […]).
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(ii)
(iii)
it makes economic sense to offer Channel A as a collective
subscription scheme at a relatively low price as the channel is
mainly a subscriber acquisition tool; and
customers that do not subscribe to Channel A as a premium
service at $30 per month will not be deprived of the right to view
the same content as the programmes are also available on basic
channels.
(e) concerning the effect on competition, HKCTV points out that new pay
television operators have successfully entered the market with
increasing subscription bases since the launch of Channel A in 1999,
despite the operation of the collective subscription scheme. There is no
evidence that HKCTV’s promotional package has undermined any
competitors in the market. In fact other pay television operators have
been using more aggressive marketing and price-cutting strategies. For
example, Galaxy has offered free service for six months and PCCW has
offered a 15-channel package for a nominal fee ($5 per month), which is
at least five times cheaper than Channel A6.
Findings and Views of the Broadcasting Authority on Alleged Predatory and
Discriminatory Pricing
21.
Better services at lower prices is the fundamental objective of
competition. Discounts and price reductions are essential components of the
competitive process and do not normally cause regulatory concerns.
22.
Predatory pricing occurs where a dominant operator charges
prices so low as to eliminate competitors and threaten the competitive
process. Even when consumers are benefiting from the low prices in the
short-term, if the prices are below cost, competitors may be driven out of the
market. When the level of competition diminishes, the dominant operator
could recoup its loss by raising price again. Consumers would lose out in
the long term.
6
In October 2005, two pay television licensees offered promotional packages at reduced prices. PCCW
offered a 16-channel package at a 12-month contract for a low price, the lowest at $5 per month. Galaxy’s
offer was $148 plus free service for 6 months, i.e. a monthly average subscription of $98 for a 18-month
contract period.
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23.
Price discrimination occurs when an operator charges different
prices to different customers for identical products or services and is a
commonly accepted commercial practice 7. To the extent that discrimination
enhances output, by enabling an operator to sell more than it would have in
the absence of discrimination, it is potentially pro-competitive. However,
discriminatory pricing can be anti-competitive where a dominant operator
exploits its market power by charging excessively high prices to certain
categories of customers, or when it has the effect of excluding competitors
from the market.
24.
In general, the low subscription fee charged for a television
service can widen consumer choices. As the programmes in Channel A are
duplicates of those in HKCTV’s basic service, the cost of Channel A would
be correspondingly lower than that for an “ordinary” channel. Further, the
low subscription fee is collectively offered to a housing estate. It amounts to
a volume discount which can be justified in cost terms, especially for
television channels where fixed cost is high and variable cost is low. From
the economic perspective, where price differential is based on cost
efficiencies flowing from the purchases, it is not discriminatory.
25.
It is noted that the low subscription fee charged for the Channel
A may be regarded as a marketing strategy of HKCTV based on commercial
considerations. Unlike other specialized or premium channels (news,
entertainment, children, movies, sports etc.), HKCTV considers Channel A a
promotion channel with “recycled” programmes to serve as a springboard to
pay television, allowing viewers to experience the range of programmes
offered by HKCTV at a low price before deciding if they want to sign up the
service. Such a market strategy is not unique in the pay television market in
Hong Kong8.
7
In most cases, discriminatory pricing is effected through rebates and discounts. Customers who obtain a
rebate or discount for buying a large quantity of a given good will pay a lower overall price for the good
purchased than customers buying the same product but in less quantity.
8
It is noted that PCCW has offered individual customers up to 19 channels with subscription fees paid for
by its subsidiary, i.e. essentially at no cost to subscribers.
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26.
There is no evidence that competition in the pay television
market has been impeded through HKCTV’s promotional package. The
available evidence is to the contrary. PCCW and Galaxy recorded steady
subscriber growth despite the operation of HKCTV’s package9.
27.
Furthermore, it is noted that the subscription agreements
entered into between the BMCs of housing estates and HKCTV are not of
exclusive nature and none of them has duration of more than 12 months.
Competitors are not excluded from acquiring customers in the same housing
estate if these competitors can provide sufficiently compelling proposition to
encourage such take-up. Hence there is no evidence that the collective
subscription scheme targeting housing estates have substantial foreclosing
effect against competition.
28.
Since HKCTV is not dominant in the single television market
(encompassing both free and pay television) and free television-only market,
it does not give rise to competition concern and is not necessary to establish
predatory and discriminatory pricing as an abuse of dominance by HKCTV
in these markets10.
29.
Having regard to the above, the BA is of the opinion that
HKCTV’s conduct does not have the purpose or effect of preventing,
distorting or substantially restricting competition in the relevant pay
television market under section 14(4) of the BO, and HKCTV has not
abused its dominant position under section 14(1) of the BO.
I. Decision
30.
On the basis of the above assessment, the BA concludes that
there is insufficient evidence to find that the conduct relating to HKCTV’s
provision of Channel A to housing estates amounted to an abuse of a
9
PCCW’s subscriber base grew from […] in January 2005 to […] in November 2005. During the period,
Galaxy recorded an increase of subscribers from […] to […].
10
Competition law is not concerned with predatory or discriminatory pricing by operators who are not
dominant in the market, even if their prices are below their costs or excessive. If an operator is not
dominant, there are other operators with capacity in the market. It is not easy for the pricing of nondominant operator to drive these operators out of the market.
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dominant position in a television programme service market in Hong Kong
in contravention of section 14(1) of the BO.
31.
As such, there is no justification for proceeding to a second
stage for full investigation. The complaint is unsubstantiated.
Broadcasting Authority
January 2006