OVERVIEW OF THE TELECOMMUNICATIONS INDUSTRY

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1 Certain facts, statistics and data presented in this section and elsewhere in this document have been derived, in part, from various government or official sources. Whilst the Directors have taken all reasonable care to ensure that the relevant official facts and statistics are accurately reproduced from these sources, such facts and statistics have not been independently verified by the HKT Trust, the Company, Trustee-Manager, their respective affiliates, directors and advisors or any other parties. The HKT Trust, the Company, Trustee-Manager, their respective affiliates, directors and advisors or any other parties make no representation as to the accuracy or completeness of such information, which may not be consistent with other information available and may not be accurate and should not be unduly relied upon. OVERVIEW Hong Kong s sophisticated telecommunications market has been an important factor in the city s development into a leading business and financial centre. Hong Kong has some of the highest rates of mobile, fixed-line and broadband penetration globally. Hong Kong s telecommunications regulatory regime is considered to be pro-competition and pro-consumer, as all of the sectors of its telecommunications market are liberalised and have no foreign ownership restrictions. The liberal framework, which the Hong Kong telecommunications market operates in, provides a level playing field for telecommunications service providers, and ensures that consumers get the best services available in terms of capacity, quality, speed and price. OFTA is the executive arm of the Telecommunications Authority, which is the statutory body responsible for regulating the telecommunications industry in Hong Kong. FIXED-LINE TELECOMMUNICATIONS INDUSTRY IN HONG KONG Prior to the liberalisation of the Hong Kong telecommunications industry in 1995, HKTC was the sole fixed-line telecommunications operator. HKTC was previously owned by HKTL, which in turn was majority owned by Cable & Wireless Plc of the United Kingdom, and subsequently acquired by PCCW in Since the introduction of competition in the local fixed-line market in Hong Kong in 1995, the new entrants have been actively rolling out their self-built networks to provide additional choices and new services to customers. The international services market was liberalised in 1999, while the international facilities market was liberalised in On 1 January 2003, OFTA implemented the full liberalisation of the local Fixed Telecommunications Networks Services ( FTNS ) and further opened the telecommunications sector to competition. As a result, limits were removed on the number of licences issued and no specific requirements were imposed for network rollout or investment. On 1 August 2008, OFTA introduced the Unified Carrier Licence ( UCL ), a new licensing regime that bundled the provision of any combination of fixed, mobile and converged services. After the UCL was introduced, OFTA ceased issuing new FTNS, fixed carrier, fixed carrier restricted, mobile carrier and mobile carrier restricted licences. All of the existing licences of the respective telecommunications providers remained valid until expiry. On 27 April 2009, OFTA withdrew its regulatory guidance on the fixed-mobile interconnection charge under the Mobile Party s Network Pays framework, wherein mobile network operators paid a per minute rate to the fixed operators for all minutes exchanged between networks, regardless of whether a call was 173

2 made by the mobile user to a fixed user or vice versa. Terms for fixed-mobile interconnection are now negotiated by operators without ex ante regulatory intervention. The Telecommunications Authority monitors wholesale market developments and may, at the request of a party or of its own motion, if in the public interest to do so, intervene to fix the terms and conditions of interconnection. The fixed-line telecommunications industry in Hong Kong is characterised by an incumbent operator with the largest market share and a number of smaller operators. As at 30 June 2011, there was a total of ten unified carriers with fixed-line authorisations and seven fixed carrier licences. The major fixed-line telecommunications operators in Hong Kong were: SC2.8(a)(ii) Hong Kong Telecommunications (HKT) Limited. The incumbent operator and the largest fixed-line telecommunications operator in Hong Kong, provides a wide range of telecommunications services and pay-television services; Hutchison Global Communications Limited ( HGC ). HGC was granted a FTNS licence in June 1995 and provides fixed-line telecommunications services in Hong Kong; Wharf T&T Limited ( Wharf T&T ). Wharf T&T was granted a FTNS licence in June Wharf T&T provides voice, data and other telecommunications services; New World Telecommunications Limited ( NWT ). NWT was also granted a FTNS licence in June 1995 and is active in the retail IDD Market; Hong Kong Broadband Network Limited ( HKBN ). HKBN was granted a FTNS licence in HKBN s main businesses include broadband access, local voice services and pay-television services; and Hong Kong Cable Television Limited ( HKCTV ). HKCTV was granted a FTNS licence in January Its main business areas include pay-television and broadband access services. As at 30 June 2011, Hong Kong Telecommunications (HKT) Limited had a market share of 61.2% by number of exchange lines and the other operators have a combined market share of 38.8%. The following table provides details of the historical operating statistics for the Public Switched Telephone Network ( PSTN ) and IP telephony services in Hong Kong: In 000 unless otherwise stated H Population 6,838 6,910 6,953 6,989 7,034 7,102 7,108 Domestic households (2) 2,198 2,235 2,247 2,288 2,316 2,340 2,353 Total Exchange Lines and IP Telephony Services 3,793 3,836 4,089 4,108 4,188 4,260 4, % Residential line penetration (1) 30.9% 30.9% 32.8% 32.6% 33.5% 33.9% 33.9% Residential household penetration (1) 96.3% 95.5% 101.6% 99.4% 101.9% 102.9% 102.4% Source: OFTA, Hong Kong Census and Statistics Department Notes: (1) Penetration includes subscribers to both Exchange Lines and IP telephony services (2) For the years , the numbers represent the average number of domestic households from October to December for each respective year. For H the average from April 2011 to June 2011 was used. 174

3 In December 2010, there was an aggregate 4.26 million exchange lines and IP telephony services established in Hong Kong which represents a compounded annual growth of approximately 1.8% from In June 2011, the aggregated total was 4.29 million. Growth in fixed-lines can be attributed to the bundling of IP telephony services or VoIP by Internet Service Providers ( ISP ) to broadband subscriptions. VoIP lines have increased from approximately 396,000 lines in 2008 to approximately 573,000 lines in 2010, growing at a compounded annual growth rate of 20.3% for the two year period. In June 2011, the residential fixed-line penetration, which includes both PSTN and VoIP reached 102.4%, from 99.4% in BROADBAND INDUSTRY IN HONG KONG As part of the 1995 liberalisation of Hong Kong s FTNS market, the broadband market was fully opened to competition. In 2004, OFTA promoted the rollout of BWA, which are fixed and mobile radio access technologies, including digital cellular that can support a variety of wide area high-speed wireless data services to accelerate the spread of alternative self-built networks. BWA is used not only for the deployment of wireless backhaul links for fixed or mobile networks, but also is used in customer access networks, such as direct access networks for mobile customers or broadband wireless local loops for fixed customers replacing the conventional copper wire. Under the UCL framework established in 2008, OFTA began inviting existing or new fixed and mobile operators to offer BWA-based data and voice services, including WiMAX and LTE services. In 2007, OFTA released a decision to allocate a 90MHz block of spectrum in the 2.3GHz frequency band, and between 100MHz and 150MHz in the 2.5GHz-2.6GHz bands, which was subsequently trimmed to 105MHz after frequency coordination was conducted with the PRC authorities. The Hong Kong broadband market is characterised by four major players, PCCW, Hong Kong Broadband Network, i-cable Communications Limited and Hutchison Telecommunications Hong Kong Holdings Limited. As at 30 June 2011, the Group had a market share of approximately 65.4% and the other operators have a combined market share of approximately 34.6%. The fixed licensees provide broadband services through a range of access platforms that include the following: ADSL Asymmetric Digital Subscriber Line VDSL Very-high-bitrate Digital Subscriber Line FTTB Fiber-To-The-Building FTTH Fiber-To-The-Home Hybrid fiber-coaxial cabling Ethernet over copper Leased lines In March 2010, OFTA reported that 86% of households had a choice of infrastructure-based fixed-line providers and 70% of households were able to select from at least three local access networks. By June 2010, Hong Kong ranked third in the world for penetration of direct fiber connections. In the same period, the FTTH Council Asia reported that 34% of Hong Kong households subscribed to FTTx/LAN services, which included 4% that received FTTH services and 30% serviced by FTTB connections. Hong Kong ranked third in global FTTx penetration after South Korea (over 50% penetration) and Japan (over 35% 175

4 penetration). The Company believes that the growth of Hong Kong s FTTH market was brought about by the increase in demand for advanced multimedia and data services. FTTH demand is expected to further increase moving forward due to requirements of HD Television and other enhanced multimedia applications. The Hong Kong government has been very proactive in encouraging the expansion of public Wi-Fi networks. OFTA reported in June 2011 that there were up to 9,077 public Wi-Fi access points, both commercial and state-funded, while there were up to 5,019 registered Wi-Fi zones with public Wi-Fi services. The following table provides details of the historical operating statistics for broadband services in Hong Kong: In 000 unless otherwise stated H Broadband Internet Access Customer Accounts Households 1,507 1,566 1,690 1,754 1,858 1,931 1, % Others (including offices) % Total 1,648 1,717 1,853 1,921 2,033 2,127 2, % Broadband traffic volume (Terabytes, actual) 674, ,254 1,196,601 1,289,080 1,435,691 1,652, , % Residential household penetration 68.6% 70.1% 75.2% 76.7% 80.2% 82.5% 84.9% Source: OFTA, Hong Kong Census and Statistics Department From 2008, residential household broadband penetration in Hong Kong has been gradually rising to its current high level of approximately 84.9%, but is still continuously growing in terms of number of subscribers and data carriage. As at 31 December 2010, the total number of broadband subscribers has increased to 2.13 million from 1.92 million in 2008, growing at a compounded annual growth rate of 5.2% for the two year period. As of 30 June 2011, the total number of broadband subscribers amounted to 2.20 million. On the other hand, total broadband traffic volume grew at a compounded annual growth rate of 13.2%, increasing from 1.29 million Terabytes in 2008 to 1.65 million Terabytes in MOBILE TELECOMMUNICATIONS INDUSTRY IN HONG KONG Mobile telecommunication services in Hong Kong were first launched in Under the Government s pro-competition and pro-consumer market-driven policy, the mobile telecommunications industry in Hong Kong is dynamic, highly competitive and fully liberalised. In June 2011, the city s mobile penetration rate reached 199.6% with million mobile subscribers (including inactive subscribers), of which 7.47 million were 2.5G and 3G subscribers. This reflected Hong Kong s high number of customers with multiple subscriptions as well as business and tourist customers. The mobile telecommunications market of Hong Kong is characterised by intense competition, with five mobile telecommunications operators serving a population of approximately seven million. Specifically, the operators are PCCW Mobile HK Limited ( PCCW Mobile ), Hutchison Telephone Company Limited and Hutchison 3G HK Limited (collectively, Hutchison Telecom ), CSL Limited ( CSL ), and SmarTone Mobile Communications Limited ( SmarTone ), which all run on both 2G and 3G systems, while China Mobile Hong Kong Company Limited ( China Mobile HK ) only runs on a 2G system. SC2.8(a)(ii) 176

5 As at 30 June 2011, PCCW Mobile had a market share of approximately 12.1% by number of subscribers and the other four operators have a combined market share of approximately 87.9%. Since the launch of 3G mobile telecommunications services in 2004, the take-up rate has continued to grow rapidly, mainly driven by competitive tariffs, innovative multimedia services and high functionality mobile devices and tablets offered by service providers. The introduction of the High-Speed Downlink Packet Access ( HSDPA ) over 3G networks, resulted in higher data transmission speeds and enabled Hong Kong s mobile operators to develop a wide range of content-rich Value-Added-Services ( VAS ), which included SMS/MMS, mobile internet, downloadable content, multimedia services, video calling and video-related websites. The number of 2.5G and 3G data services users continued to increase and there has also been a surge in the interest of local mobile phone subscribers to the broad range of VAS offered. In January 2009, China Mobile HK, CSL and a jointly controlled company of the Group succeeded in bidding for the BWA Spectrum, which can be used to deploy high-speed mobile broadband access services. It is expected that the deployment in the BWA Spectrum may lead to a new wave of technological innovation within the industry. The following table provides details of the historical operating statistics for mobile telecommunications services in Hong Kong: In 000 unless otherwise stated H Mobile Subscribers Prepaid (active) 3,001 3,393 3,934 4,252 4,543 5,127 5, % Postpaid 4,754 5,153 5,698 6,090 6,377 6,816 6, % Total 7,755 8,546 9,632 10,342 10,920 11,943 12, % Population Penetration 113.4% 123.7% 138.5% 148.0% 155.3% 168.2% 175.7% 3G subscribers 636 1,332 2,005 2,812 3,819 5,254 6, % % of total 8.2% 15.6% 20.8% 27.2% 35.0% 44.0% 53.5% Mobile data usage (Gigabytes) (1) 4,604 9,077 32, , ,389 1,847,526 2,765, % Source: OFTA, Hong Kong Census and Statistics Department Note: (1) For the last month of each period. In December 2010, the total number of prepaid and post-paid mobile service subscribers increased to million reflecting a compounded annual growth rate of 7.5% from 2008 to 2010, and representing one of the highest mobile penetration rates in the world at 168.2%. Among the million subscribers, 5.25 million were 3G/3.5G service customers, accounting for 44.0% of total mobile subscribers. In June 2011, the total number of prepaid and post-paid mobile service subscribers increased to million, amongst which 6.68 million were 3G/3.5G service customers, accounting for 53.5% of total mobile subscribers. The number of 3G/3.5G subscribers increased significantly from 2.81 million subscribers in 2008 to 5.25 million subscribers in 2010, growing at a compounded annual growth rate of approximately 36.7% from 2008 to For the month of December 2010, local mobile data usage reached up to 1.85 million Gigabytes. This represents approximately 3 times the mobile data usage over the same period in 2009 and 14 times over the same period in

6 EXTERNAL TELECOMMUNICATIONS INDUSTRY IN HONG KONG In April 2011, there were 131 licensees authorised to provide ETS in Hong Kong. IDD service to most countries and regions of the world is also available. In April 2011, there were 40 licensees permitted to operate either external cable or non-cable based facilities for the provision of ETS. In addition, 10 fixed carriers have been licensed to operate both local and external telecommunications facilities. Hong Kong adopts an open sky policy in regulating the provision of satellite services. Satellite-based telecommunications and television broadcasting services are provided via a multitude of satellites in the region with more than 160 satellite earth station antennas operated by Reach Networks Hong Kong Limited, Reach Cable Network Limited and Telstra International Limited (formerly known as Reach Global Services Limited), Asia Satellite Telecommunications Company Limited, APT Telecom Services Limited, and a number of fixed carriers and broadcasters. Competition has resulted in a substantial reduction in IDD call rates and improved quality of services. SC2.8(a)(ii) The following table provides details on the historical operating statistics for ETS services in Hong Kong: H Outgoing international minutes ( million minutes) (1) 5,638 6,542 7,239 7,657 7,758 7,727 3, % Incoming international minutes ( million minutes) (1) 2,168 2,233 2,262 2,344 2,271 2,582 1, % Equipped capacity (Gbps) (2)(3) 979 1,272 1,846 3,475 3,964 4,378 5, % Activated capacity (Gbps) (2)(4) ,324 1,962 2,673 3,346 4, % % of equipped capacity activated 43.7% 54.9% 71.7% 56.5% 67.4% 76.4% 81.8% Source: OFTA Notes: (1) Includes outgoing and incoming traffic of the following types of licensees: a. Fixed Network Operator (FNO) b. Mobile Network Operator (MNO) c. Services-Based Operator (SBO) d. External Telecommunications Service (ETS) e. Virtual Private Network (VPN) Service (2) Includes cable and satellite. Cable includes submarine cable systems and overland cable systems. Satellite includes satellite uplink/downlink systems, microwave link systems and satellite uplink systems at Hong Kong end for broadcasting traffic. (3) Equipped capacity refers to the capacity of the external circuits, which are equipped with the necessary termination equipment so that the capacity is readily available to customers in Hong Kong upon request. (4) Activated capacity refers to the capacity of the external circuits, which are being used by the customers. For the year ended 31 December 2010, the volume of outgoing and incoming traffic for telephone calls was 7.73 billion minutes and 2.58 billion minutes respectively, while the volume of activated capacity as at 31 December 2010 reached 3,346 Gbps, which is a 30.6% compounded annual growth since 2008 when it was 1,962 Gbps. For the six months ended 30 June 2011, the volume of outgoing and incoming traffic for telephone calls was 3.77 billion minutes and 1.43 billion minutes, respectively, while the volume of activated capacity as at 30 June 2011 reached 4,232 Gbps. As at 30 June 2011, the Group had a market share of approximately 16.4% by number of retail IDD minutes. 178