31 October 2004
CABLE TALK 2004 November Issue

A letter from Mr. Stephen Ng, Chairman, President & Chief Executive Officer of Hong Kong Cable Television Limited, to the Government of the Hong Kong SAR and the regulatory authorities

October 31, 2004

Dear Sir/Madam,

Galaxy Satellite Broadcasting Limited ('Galaxy')

Television Broadcasts Limited ('TVB') announced on September 16, 2004, inter alia, that (a) TVB had agreed to acquire on or before December 28, 2004 the 51% of Galaxy that it did not already own for considerations therein specified, and (b) TVB had applied to the Government for a waiver of an express licence condition that restricts TVB from holding 50% or more in the voting control over Galaxy for a period of 12 months from the date of the acquisition.

Hong Kong Cable Television Limited respectfully submits that the time has finally come for the Government to keep its 'visible hand' from interfering again with the 'invisible hand' of a free market economy. Market forces alone should be allowed to decide the fate of Galaxy, strictly in accordance with the law.

When the Government invited bids in 1999 to open up the Pay TV market, it wanted to give consumers more choice. Galaxy was expected to play a key role and was given repeated assistance to do so (please see Appendix). However, it failed to make much impact in four years. Others did not wait and have quickly achieved what Galaxy was expected to. Galaxy simply took too long and did too little; it has been overtaken by events. Times have changed. Hong Kong consumers today can choose from at least three service providers and over 100 programme channels (excluding Galaxy). That is a much wider choice than in almost every other market in Asia (and most markets in North America and Europe).

Galaxy's performance is apparently considered by some of its investors as a commercial failure. The Government has no role to save commercial failures. Hong Kong thrives on being a free market with minimal Government intervention. In the name of competition, the Government has already extended its 'visible hand' to the Pay Television market on a number of occasions before. There is no compelling reason to continue to do so because:

(a) There is absolutely no evidence that market economics have collapsed, or that the 'invisible hand' has failed;

(b) Television is not a sector of critical strategic interest that can afford no commercial failure; and

(c) There is no grave public interest to protect for the 'visible hand' of the Government to have to interfere with market forces once again.

TVB was reported to be confident in being able to find new investors to continue the Galaxy service. Intelsat apparently had little or no difficulty in landing TVB as the investor to take up its 51% stake and financial commitment. The appetite of other investors in that same stake will largely depend on what premium (or discount) TVB will now demand. It will also depend on whether TVB will be pricing the channels that it supplies to Galaxy at an adjusted valuation. TVB, and not the Government, will be the sole occupier of the driver's seat.

Conceivably, there should be no shortage of new investors even before December 28, 2004 if TVB's commercial offer is sufficiently attractive. The key issue is not whether new investors can be found but rather the commercial terms demanded by TVB. By asking for a 12-month waiver, TVB is actually not asking for time to find new investors per se but in effect asking the Government to give TVB a long window to maximise its capital gain, at the expense of public interest including the rule of law and a free market economy.

If its application is approved by the Government, TVB will almost certainly be throwing its entire might relentlessly behind Galaxy in the next 15 months to build an operational and financial track record to attract investors. It will be in TVB's natural interest to maximise the value of Galaxy during this period to attract new investors. TVB/Galaxy can be expected to do immense and utterly unfair damage to the competition, which damage will be irreversible.

TVB has said in its announcement that it would not rule out seeking a further extension should it fail to find new investors. It will be natural for TVB's expectation of a premium from new investors to rise as it builds a large operating base for Galaxy. The more successful Galaxy becomes in the next 15 months, the higher TVB's expectation will become. At the same time, TVB will be even more firmly installed in the driver's seat and it begs the question as to whether the Government will be more, or less, willing to wield its axe if in 12 months' time Galaxy has built up a much larger subscriber base but still not 'found' investors on TVB's terms.

HKC has raised many concerns on the so-called 'firewall' on numerous occasions. The collapse of the most important pillar of the firewall, i.e. divestment of control in Galaxy by TVB, would completely erode the integrity of the regulatory regime and allow the dominant television operator and its subsidiary to attack their competitors without restraint. The Government clearly recognised the gravity of this risk when it barred Galaxy from starting to provide service for as long as TVB retained control over Galaxy. In the event TVB's latest application is granted for whatever reason, this same principle should continue to apply and Galaxy's licence and/or operation should be suspended for as long as TVB retains control over Galaxy.

Since 2000, the Government has been painstakingly, and painfully, bending all rules to force feed Galaxy:

(a) The rule is to curb cross holding and promote multiplicity in media ownership. The dominant television licensee TVB, of all media, was given the only dispensation from this rule to cross hold another domestic licensee.

(b) The rule is to uphold licence conditions and to hold licence bidders to the commitments that they themselves proposed. Galaxy has been given many more special concessions than any other licensee, which unlike Galaxy are neither backed by the dominant television licensee nor as well endowed.

(c) The rule is to leave market forces to shape the market. Galaxy has found itself in commercial trouble time and again and the Government has time and again bailed out Galaxy.

For TVB's competitors, life was never easy even when they were only competing against a dominant TVB with a 70% viewing share. That became much harder when the Government allowed TVB to establish Galaxy but restrained TVB from having control in Galaxy. It is difficult to imagine what would become of competition if the Government should now decide to remove that restraint, even if only for a 'temporary' duration as requested.

History shows that the more successful the competition against TVB/Galaxy has been in the marketplace, the more relief TVB/Galaxy would get from the Government off the marketplace. Competitors find that they are no longer competing with the most dominant commercial operator alone any more, but rather with a much more powerful force behind that dominant operator at the same time.

Since 2000, the Government's 'visible hand' has been encouraging additional competition in the Pay TV market artificially, against the 'invisible hand' of a free market. That has however proven to be ineffective. Four of the five companies offered a licence in 2000 have withdrawn from the market. The fifth, Galaxy, has been struggling both operationally and financially.

Ironically, the 'invisible hand' has spawned a thriving and competitive market during the same period, with over 300,000 Pay TV subscribers added in just one year by operators (both licensed and unlicensed) other than the five offered a licence in 2000. There are now over one million Pay TV subscribers in the market and together they represent a 50% penetration rate.

We respectfully submit that the Government should now let the market operate by itself rather than by order of the Government's 'visible hand'.

Yours sincerely,

Stephen T. H. Ng
Chairman, President and Chief Executive Officer
Hong Kong Cable Television Limited

Appendix: Chronology of Special Concessions Granted to TVB/Galaxy

July 4, 2000

The Chief Executive-in-Council approved an application by Galaxy for a domestic pay television programme service licence, despite the fact that Galaxy was a disqualified person under the Broadcasting Ordinance.

July 9, 2002

The Chief Executive-in-Council approved an application by TVB to defer the licence deadline to divest its interest in Galaxy by almost 9 months (from June 5, 2002 to February 28, 2003).

July 17, 2003

The Broadcasting Authority approved an application from Galaxy to defer 3 licence milestones by 6 months (from August 23, 2003 to February 23, 2004). These milestones require Galaxy to provide not fewer than 24 television programme service channels to not fewer than 150,000 premises and to have incurred not less than HK$122 million of capital expenditure.

May 15, 2004

The Broadcasting Authority approved an application from Galaxy to defer 2 milestones by over 7 months (from May 23, 2004 to December 31, 2004 and from November 23, 2004 to June 30, 2005). These milestones require Galaxy to provide not fewer than 34 and 40 television programme service channels, respectively.

July 31, 2004

The Broadcasting Authority approved an application from Galaxy to defer 2 milestones by 1 year (from August 23, 2004 to August 23, 2005 and from August 23, 2005 to August 23, 2006). These milestones require that the number of premises passed by its domestic pay television programme service would not be fewer than 500,000 and 800,000, respectively.