Jewel in C&W's crown loses some of its lustre

A tighter grip on Hongkong Telecom will weigh on profits, writes Stephen Vines

Developments in Hong Kong over the past few days suggest that the jewel in the Cable & Wireless crown, so eagerly sought by BT, is not glittering as once it did.

Early in the week the colony's telecommunications regulatory authority ruled that the C&W-controlled Hongkong Telecommunications will lose a valuable part of its international network monopoly as competition would be introduced on the provision of fax and data services, alongside several specialist areas such as private internal networks and video-conferencing services.

HKT put a brave face on the decision saying it welcomed "the clarification" of its role as an exclusive service provider and noted that its voice monopoly remained intact.

However, this week has also seen pressure being exerted on that monopoly from the World Trade Organisation which is discussing liberalisation of telecommunications services in Geneva.

The HKT international telecommunications monopoly, which lasts until September 2006, is by far the most lucrative part of the company's operations and is primarily responsible for the estimated 70 per cent of C&W's entire operating profit which comes from Hong Kong. HKT is 57.5 per cent-owned by C&W.

Last year HKT lost its domestic network monopoly when three other companies were given permission to establish rival networks. However, there is little money to be made from the low price domestic network. Indeed, HKT is running into a political storm as it tries to abolish the colony's cherished system of not charging for local calls, other than by way of a low monthly line rental charge.

The real money is in the international service, particularly high-growth areas such as data communications. HKT says that 17 per cent of its international traffic consists of fax and data transfer.

Data traffic is growing faster than voice traffic, so the loss of the monopoly in this sphere will impact on future profits.

Alistair Grieve, HKT's deputy chief executive, maintained that the overall impact of the change would only be "slightly negative" because increased competition "will result in increased demand for service from all players". However it is clear that HKT's margins will be cut. The company is already talking about reducing international fax charges.

BT should not be surprised by the diminution of HKT's monopoly because the colony's regulatory authorities have been considering this matter for some time.

Never the less it is unlikely that BT has allowed for any change in HKT's international voice network monopoly. The colony's government has confirmed its intention to "honour the exclusivities already granted" to HKT, but if C&W relinquishes control of the company its exclusive licences will have to be reviewed, providing an opportunity to change the rules of the game.

Although there has been much speculation over China's attitude towards BT taking a controlling stake in HKT, the government in Peking has maintained a marked silence in this matter. Past experience suggests that if the Chinese government had a strong view, it would have been forcefully expressed by now. China resumes sovereignty over Hong Kong next year and is carefully watching how the outgoing administration deals with its privately-owned utilities.

China is keen to gain admittance to the WTO and is having difficulties doing so because of its many trading practices which are viewed as anti- competitive. It does not, for example, allow foreign participation in the running of its telecommunications networks.

A concession to liberalise the Hong Kong telecommunications market may therefore figure among the gestures China would be ready to make in advancing its claim to membership.

Last night Hong Kong government officials were saying that the existing monopoly would not be broken but were giving no guarantees about what would happen if the current network fell under BT's control.