Report on Consultancy Study on Issues Relating to the ... · Currently, parties interested in landing new submarine cables in Hong Kong have to approach various government departments

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Issues Relating to the Landing of Submarine Cables in Hong Kong

Report on Consultancy Study on Issues Relating to the Landing of Submarine Cables in Hong Kong

Developed For:

Report By: Frost & Sullivan

Public Sector & ICT Practice April 2010

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Table of Contents

1. Executive Summary ...................................................................................................2

2. Background of Study ...............................................................................................10

3. Conceptual Approach ..............................................................................................12

4. Demand and Supply for Submarine Cables..........................................................17

5. The Hong Kong Market..........................................................................................22

6. Economic Contribution of Submarine Cable Industry to Hong Kong............28

7. Strengths and Constraints of Hong Kong ............................................................41

8. Key Challenges and Opportunities for Hong Kong ...........................................47

9. Implications of Strength, Constraint, Opportunity and Challenge Analysis ....51

10. Analysis of Existing Submarine Cable Landing Stations ....................................52

11. Areas for Improvement and Recommendations..................................................62

12. Conclusions ...............................................................................................................69

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1. EXECUTIVE SUMMARY

The Government of the Hong Kong Special Administrative Region, represented by the Office of the

Telecommunications Authority (OFTA), commissioned Frost & Sullivan to conduct a study on the issues

relating to the landing of submarine cables in Hong Kong (Study). The primary objectives of the Study are

to assess the economic benefits of, and recommend measures to facilitate, the landing of new submarine

cables in Hong Kong.

Hong Kong has one of the largest international data service markets in the Asia Pacific given its premier

position as a key financial and international trading hub in the region. In addition, Hong Kong is also a

beneficiary of the many multinational companies that have chosen to establish their Asia Pacific

headquarters in Hong Kong. Cumulatively, they generate significant demand for data services linking all

offices and plants across the region and beyond.

Destinations including Shanghai, Singapore and Taiwan have also been especially focused on attracting

corporate headquarters and investments in data intensive industries such as media, information technology

services and business process outsourcing and have placed particular emphasis on developing their

telecommunications infrastructure to position themselves as the digital interconnection gateway to support

the growth of these industries. Therefore, Frost & Sullivan expects economies in the Asia-Pacific to be

increasingly competitive in attracting submarine cable investments.

In view of these developments, it is imperative that Hong Kong maintains an edge in attracting and

facilitating the landing of submarine cables. To assist OFTA in gaining an in-depth understanding of the

submarine cable industry, Frost & Sullivan adopted a research methodology to corroborate multiple

information streams including (1) primary research (discussions with telecommunications service providers

and government agencies), (2) secondary sources, and (3) Frost & Sullivan’s proprietary

telecommunications databases as well as insights from in-house industry experts. The principal purpose of

adopting this approach is to ensure that the data obtained is free from material misstatement, providing a

true and fair view of the state of the submarine cable industry in Hong Kong for analysis and development

of recommendations.

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Figure 1-1: Project Overview and Approach

To address the objectives of the Study, Frost & Sullivan developed the approach highlighted in Figure 1-1

above. The subsequent methodologies highlighted in the later parts of this report provide greater details

on the approach used at each step/stage.

1.1 Key Findings

Demand for External Bandwidth

The Asia Pacific has been one of the fastest growing regions in the submarine cable market during the last

decade driven by over-investment in capacity that resulted in a supply glut. However, the market has

stabilized in the last few years and Frost & Sullivan Research expects that the rapidly growing demand for

external bandwidth will translate into increased demand and growth in submarine cables.

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The growth in demand for submarine cables in the region is principally driven by the following factors:

• growth in external bandwidth demand from key growth markets (e.g. the Mainland and Southeast

Asia (SEA)1);

• rising demand for external connectivity between different geographies driving Intra-Asia, Europe-

Asia and Trans-Pacific traffic; and

• submarine cable network resiliency considerations.

These factors are expected to drive demand for new submarine cables and increase the available capacity of

existing ones in Hong Kong.

In Frost & Sullivan’s view, demand for external bandwidth in the region is expected to be principally

driven by the growth in the Mainland and SEA, and Hong Kong is well-poised to leverage on this growth.

In the most likely scenario (base case), Hong Kong’s demand for external bandwidth is expected to

increase at a cumulative average growth rate (CAGR) of about 28 per cent from 2009 to 2015, to reach an

estimated 2.91 Tbps.

Figure 1-2: Hong Kong’s Demand for External Bandwidth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tbps

Low

Base

High

CAGR=35.4%

CAGR=27.9%

CAGR=20.6%

Source: Frost & Sullivan, TeleGeography

1 For this consultancy study, Southeast Asia is considered as countries including Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

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Economic Contribution to Hong Kong’s Economy

The economic contribution of the submarine cable industry to Hong Kong can be sub-divided into three

categories – Direct Contribution, Indirect Contribution and Induced Contribution.

Direct Contribution: Contribution that is attributable to the operation of the submarine cable industry in

Hong Kong – the submarine cable operators and the submarine cable landing station (SCLS) operators.

Indirect Contribution: Contribution of the submarine cable industry to the operation of Hong Kong’s

telecommunications sector.

Induced Contribution: Contribution attributable to the spending of the submarine cable and other

telecommunications sectors on the non-telecommunications sectors of the economy (i.e. the linkage effect);

and contribution attributable to the consumer spending of the persons engaged in the submarine cable

industry and other telecommunications sectors.

Based on Hong Kong’s equipped submarine cable capacity, it is estimated that submarine cables in Hong

Kong directly and indirectly generated a total revenue of USD 1.8 billion in the telecommunications and

related sectors in 2008. This was equivalent to USD 810 million of value-added and 8,100 jobs,

representing 0.4% of Gross Domestic Product (GDP) and 0.23% of the total employment. Submarine

cable connections also contribute importantly to the operation of Hong Kong’s key service industries.

Figure 1-3: Economic Contribution to Hong Kong’s Economy

Source: Frost & Sullivan

2.4 Tbps (Equipped Submarine Capacity)

USD 1.8 Billion

(Revenue)

USD 810 Million (Value Added)

8,100 (Employ-

ment)

0.4% of GDP

0.23% of total employment

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Consideration Factors when Choosing Landing Points

There are several factors of consideration for submarine cable owners when choosing landing points during

the planning and design of new submarine cable systems. Through the interviews conducted during the

Study, the following factors were identified as key factors that will significantly influence the decision

making process.

From a strategic perspective, the four key factors identified are:

• regional demand for bandwidth;

• geographical location of landing point;

• presence of other submarine and overland cable systems for interconnection; and

• general business environment.

From a regulatory perspective, the following three key factors were identified:

• government policies;

• ease of administrative processes; and

• facilitating investment environment.

Strengths of Hong Kong as a Potential Landing Point for Submarine Cables

Hong Kong possesses a number of strengths in attracting the landing of new submarine cables. Firstly,

Hong Kong is located in the central part among Japan, South Korea and SEA, making it a natural

geographical hub for these economies. Secondly, Hong Kong, with its close proximity, also serves as a

gateway for the Mainland. Thirdly, any new submarine cable system which lands in Hong Kong will be

able to interconnect readily with the existing systems for exchange of transit traffic and mutual system

backup. Fourthly, Hong Kong is highly valued for its stable and pro-business environment, free market

approach, and transparent regulatory and judiciary systems. These give assurance to investors in respect of

their huge investments (amounting to a few billion Hong Kong dollars for a cable system) in the submarine

cable systems, which have a typical life span of 20 years or more. Fifthly, Hong Kong is also highly valued

for its position as a financial centre in the region, high density of regional corporate headquarters and the

confluence of key technology segments (such as data centres and content service providers) which drive the

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growth of the submarine cable industry in Hong Kong. Last but not the least, Hong Kong consumers are

at the forefront of information technology applications, driving further demand for bandwidth.

Constraints of Hong Kong as a Potential Landing Point for Submarine Cables

Currently, parties interested in landing new submarine cables in Hong Kong have to approach various

government departments for land acquisition, approvals for the laying of submarine cable, landing at an

existing SCLS or building a new SCLS. The industry has pointed out that when compared with the other

economies in the region, it takes a relatively long time for potential applicants to identify the relevant

authorities and acquaint themselves with the application processes.

Due to the geography of Hong Kong, it is more cost effective for submarine cables to land in Hong Kong

from international waters via the southeast direction. This has restricted the choice of landing sites for

submarine cables. Currently, there are three major areas for landing of submarine cables with SCLS: (1)

Tong Fuk in the southern part of Lantau Island; (2) Deep Water Bay, Cape D’Aguilar and Chung Hom

Kok in the southern part of the Hong Kong Island; and (3) Tseung Kwan O (TKO) in the eastern part of

the New Territories. The industry has raised concerns over the concentration of submarine cables in Tong

Fuk and the southern part of the Hong Kong Island. The SCLS in TKO is spacious and could offer the

necessary physical diversity. However, the existing operator is restricted by the current land lease from

subletting the vacant space in the SCLS to enable more submarine cables to be landed there.

Opportunities and Threats of Hong Kong as a Potential Landing Point for Submarine Cables

The Study reveals that there will be high growth in the demand for external bandwidth from the Mainland

and SEA as a result of the continuous development of their economies and telecommunications

infrastructure in the region. Hong Kong should therefore be in a strong position to take advantage of this

growth. Hong Kong may also benefit by the potential growth of the overland cables connecting the

Mainland, India and Europe as Hong Kong may route the transit traffic between these economies and

other countries in SEA. However, it is also noteworthy that other landing points in the region, including

those in Singapore, Taiwan and the Mainland remain the competitive alternatives to Hong Kong for

selection by owners of new submarine cables.

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1.2 Main Recommendations

Increasing the Transparency of Application Processes

At present, the industry may find it difficult to get hold of the necessary information in respect of the

application procedures and the statutory approvals for landing a new submarine cable in Hong Kong. It is

therefore recommended increasing the transparency of the application processes with a view to helping the

applicants understand the application requirements and flow of the processes, facilitating and expediting

the application processes.

Enhancing Coordination within Government to Expedite Approval Processes


government departments2. If a new SCLS is to be built, the processes involve even more departments. It

is recommended establishing an ad-hoc working group with representatives from relevant government

departments and parties to deal with such applications. This will enhance collaboration and coordination

among various parties and reduce the time required to process the applications.

Ensuring Close and Timely Collaboration to Facilitate Cable Repairs

Any submarine cable fault (which may be due to a natural disaster or unintentional damage by vessels

passing by) will adversely affect the external connectivity of Hong Kong. It is recommended that

applications for temporary licence for the cable repair vessel and employment visas for personnel on board

the repair vessel to enter Hong Kong waters should be processed as quickly as possible to enable timely

repair of the faulty cable and early restoration of the affected external telecommunications services. In

additional to providing information to help submarine cable operators understand more about the

application procedures and requirements, OFTA should strengthen the liaison with other relevant

departments with a view to dealing with any request for assistance from the industry expeditiously.

2 The government departments may include the Lands Departments, Environmental Protection Department, Marine Department, Agricultural Fisheries and Conservation Department, Home Affairs Department and Leisure and Cultural Services Department, depending on the nature and scope of the project.

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Considering Relaxation of Lease Conditions of Existing SCLS in TKO Industrial Estate (TKOIE)

All the existing SCLS, except the one in TKOIE, may be shared by the equipment of new submarine cables

subject to the terms and conditions of the land grant of the SCLS and relevant statutory requirements. The

industry has raised concerns over the concentration of submarine cables in Tong Fuk and the southern part

of the Hong Kong Island. In this respect, it is recommended that the lease conditions of the SCLS in

TKOIE should be relaxed to allow shared use of the existing SCLS in TKOIE, and any new SCLS that

may be built in TKOIE, for landing new submarine cables and co-location of affiliated data centres. This

will provide for enhanced redundancy and diversity so that the risk of multiple cable failures in the event of

an accident or disaster would be minimized.

Use of the Designated Land in Chung Hom Kok Teleport for New SCLS

At the Chung Hom Kok Teleport site, nine lots have been set aside for use as external telecommunications

stations. One of which has been granted for SCLS and another for satellite earth station. The

Government should leverage on the availability of the designated land and continue to reserve the coastal

lots available there for development of submarine cable landing stations.

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2. BACKGROUND OF STUDY

2.1 Background

The Government of the Hong Kong Special Administrative Region, represented by OFTA, has

commissioned Frost & Sullivan to conduct the Study.

2.2 Objective

The primary objectives of the Study are to assess the economic benefits of landing submarine cables in

Hong Kong and to recommend measures for the facilitation of landing submarine cables in Hong Kong.

2.3 Scope

The scope of work is distributed into 2 main parts, encompassing the following 8 areas:

Part 1

1. Provide information on the recent development of the submarine cable market in the Asia/Pacific

region;

2. Gauge the needs for construction of new submarine cables connecting to Hong Kong;

3. Identify the economic contribution to Hong Kong as a whole and to the telecommunications industry

if new submarine cables land in Hong Kong;

4. Identify the factors that operators will consider when choosing the landing points for their submarine

cables;

5. Identify the strengths and constraints of Hong Kong as a major telecommunications and Internet hub

in comparison with other cities in the region;

6. Identify the challenges and opportunities for Hong Kong in attracting investments and players in the

submarine cable market;

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Part 2

7. Recommend pragmatic, efficient and effective measures to overcome the constraints, face the

challenges and grasp the opportunities as identified above; and

8. Gauge the future demand for SCLS, determine (a) whether the existing SCLS sites will be able to meet

the future demand and (b) whether additional site locations will be needed for construction of new

SCLS for the new submarine cable networks, and recommend the additional site locations, if the

answer to (b) is affirmative.

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3. CONCEPTUAL APPROACH

3.1 Overview

To achieve the project objectives, OFTA has divided the scope into 8 specific tasks to be performed. Frost

& Sullivan believes that these objectives can be met by researching the following tasks in the order shown

below. Table 3-1: Mapping of Frost & Sullivan’s Approach to the Project

3.2 Demand of Bandwidth for the Region

The demand for new submarine cables is driven by the consumer/enterprise demand for bandwidth, need

for redundancy/resilience of the physical network, need for connectivity to a particular geography, market

forces in the submarine cable industry, and specific needs of telecommunications operators such as having

a preference to own and operate their own cables.

For identifying the demand for bandwidth, Frost & Sullivan used its internal industry-specific data,

secondary sources, as well as its proprietary model for demand estimation. To identify the various

parameters which are relevant for demand estimation, Frost & Sullivan interviewed industry participants

Tasks defined by Frost & Sullivan Tasks defined by OFTA in the Request for Proposal

Demand for New Submarine Cables in the Region Task 2: Demand for New Submarine Cables

Current Supply of Submarine Cable Market and Factors for Choosing a Landing Point

Task 1: Current Development of Submarine Cable Market Task 4: Factors that Operators will Consider when

Choosing Landing Points

Economic Contribution to Hong Kong due to Landing of Submarine Cables (in Hong Kong or Otherwise)

Task 3: Economic Contribution to Hong Kong

Strengths and Constraints of Hong Kong as a Telecommunications/Internet Hub Task 5: Strengths and Constraints of Hong Kong

Challenges and Opportunities for Hong Kong Task 6 : Challenges and Opportunities facing Hong Kong

Recommendations on Measures to Position Hong Kong as the Key Telecommunications and Interconnection Hub

Task 7: Measures to Overcome Constraints and Challenges and Grasp Opportunities

Recommendations on Existing and New SCLS Task 8: Existing SCLS Sites and New Sites

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for their inputs to understand and validate the common parameters used within the industry for demand

estimation. A quantitative model was subsequently designed based on these inputs to forecast the demand

for bandwidth (classified by geographies and sources of demand).

As an example, to identify the increase in bandwidth demand due to increase in voice traffic, Frost &

Sullivan looked at parameters such as international call tariff trends, international minutes of usage-per-

subscriber trends, overall cellular/fixed telephony penetration trends from its industry data for each of the

geographies which is being served by the submarine cable hub and added its expertise of the relevant

telecommunications market to identify the increased bandwidth demand in the region. A more detailed

methodology is presented in the relevant section of the report.

3.3 Supply of Bandwidth and Factors Determining Landing Points

For a comprehensive understanding of the future bandwidth supply in the region and the factors which

will determine the choice of countries/cities for landing points from the submarine operators’ point of

view, information was collated through interviews with submarine cable operators who either manage a

SCLS or those who own or lease bandwidth on the various submarine cable systems that land in the region.

This step was critical in forming the foundation for this research study and analysis since the source of

information came directly from operators who are engaged in the business and have an in-depth awareness

of the various issues and factors that form the influencing factors.

Based on the interviews and the industry knowledge, the future supply for the region was then presented.

Factors which affected the choice of a landing point were also identified from the point of view of the

submarine cable operators. The decision parameters used in the interview process are depicted in the figure

below.

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Figure 3-1: Decision Parameters for Choice of Landing Point

3.4 Strengths and Constraints of Hong Kong as a Major Telecommunications Hub

Frost & Sullivan interviewed the various telecommunications players to identify the core strengths and

constraints of Hong Kong as (1) the regional telecommunications and Internet hub, and (2) as a gateway to

the Mainland. This includes understanding the industry dynamics of terrestrial and satellite networks as

well as the major carriers of traffic to the Mainland.

The telecommunications players interviewed belonged to one or more of the following categories of

players:

• Internet service providers

• telecommunications service providers

• submarine cable operators (or network infrastructure providers)

• data center operators

• content service providers

During the interviews, Frost & Sullivan covered the regulatory and licensing requirements, application

procedures, operational costs, government incentives, manpower availability and other qualitative factors

related to the growth of the telecommunications and submarine cable industry in Hong Kong. In addition,

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information was gathered from relevant stakeholders/regulatory bodies such as Lands Department, Marine

Department and Environmental Protection Department for their views and data on key issues, trends, and

existing/future challenges in the submarine cable industry. Inputs from the initial face-to-face discussions

with telecommunications players were used to form the baseline for the structure and approach of our

discussions with the stakeholder groups. In addition, information on the roles of the stakeholder groups,

with reference to the business activities/models of the industry, were validated.

The strengths and constraints of Hong Kong were identified based on discussions with industry

stakeholders, as well as through secondary research and comparisons made relative to key

telecommunications hubs in the region.

3.5 Challenges and Opportunities for Hong Kong

Based on the information gathered and the conclusions derived from the interviews, coupled with Frost &

Sullivan’s telecommunications industry expertise, the following four strategic questions were answered:

a. What are the challenges and opportunities facing Hong Kong?

b. What sorts of measures are required to overcome the challenges and constraints identified, without

losing out on other opportunities?

c. Will the current submarine cable infrastructure be able to meet these challenges and address the

opportunities?

d. If no, what are the steps that can be taken to cater to these issues?

Through the primary data collation process, key challenges and opportunities facing Hong Kong in

attracting more investments and players from international and regional submarine cable market,

promoting, enhancing and sustaining Hong Kong’s position as a leading telecommunications and Internet

hub in the region were identified. These included opportunities which helped sharpen the competitive

advantages of Hong Kong and enhancing and sustaining its position as a transit hub of choice in the region.

In addition, the analysis focused on the opportunities and challenges arising due to rapid growth of

external and transit traffic of the Mainland.

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In conclusion, Frost & Sullivan strongly believes that the consulting and conceptual approach used allowed

OFTA to:

• obtain a comprehensive understanding of the economic contribution of a new submarine cable

(and the bandwidth made available) to Hong Kong and the impact due to losing the landing rights

of new submarine cable systems to other cities;

• identify the current and future trends of the submarine cable market and subsequent implications

of these trends for Hong Kong and for the region;

• obtain an understanding of the competitive positioning of Hong Kong relative to other cities in

the region, with specific emphasis placed on Hong Kong’s current position as a key regional

telecommunications and interconnection hub; and

• evaluate the various options available in setting up new or facilitating the expansion of existing

SCLS in Hong Kong.

As a summary, the inputs for the Study were derived from:

• primary interviews with 23 industry participants (including submarine cable owners/operators,

SCLS operators, as well as telecommunications and content service providers) and 9 interviews

with the relevant government agencies and organization such as the Environmental Protection

Department, Immigration Department, Lands Department, Marine Department, Planning

Department, Hong Kong Science and Technology Parks Corporation (HKSTP), etc;

• secondary inputs were researched via literature review of industry research reports, news bulletins,

annual reports of industry players, etc; and

• inputs from Frost & Sullivan telecommunications industry subject matter experts were also taken

into consideration to obtain an in-depth understanding of the future trends of the

telecommunications and submarine cable industries.

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4. DEMAND AND SUPPLY FOR SUBMARINE CABLES

4.1 Economic Overview

Very high dependence on international trade and finance left Hong Kong heavily exposed to the global

economic slowdown that began in 2008. After experiencing a real GDP growth rate of over 5 per cent

from 1989 to 2007, Hong Kong suffered a sharp slowdown in the second half of 2008 and the growth rate

came down to 2.8 per cent in 2008. During the last decade, the service industry had experienced a boom

and it now accounts for 92 per cent of Hong Kong’s GDP.

The total value of international trade, including the sizable share of re-exports, was equivalent to 404 per

cent of GDP in 2007. The largest trading partner is the Mainland, accounting for nearly 50 per cent of

Hong Kong’s import or export trade by value in 2008. Increasing integration with the Mainland and the

Mainland’s easing of travel restrictions have led to an increase in the number of tourists in Hong Kong to

29 million tourists in 20083 as compared to 4.5 million in 2001.

Hong Kong has also established itself as one of the premier financial hubs in the world. The Hong Kong

stock exchange, with a combined market capitalization of USD 2.3 trillion, is the 7th largest stock exchange

in the world4. The Hong Kong government has a constant focus on developing Hong Kong’s position as a

key financial and services sector hub.

4.2 Telecommunications Sector Overview

Hong Kong has been and continues to be one of the most sophisticated telecommunications markets in

the world. It has the world’s highest penetration of mobile phones and a fixed line tele-density of over 53

per cent, which is one of the highest in Asia. By December 2009, based on OFTA’s data, there were 12.2

million mobile subscribers, representing an impressive mobile penetration of about 174 per cent.

3 Source: Hong Kong Tourism Board (HKTB) 4 Source: World Federation of Exchanges - After New York Stock Exchange Euronext (US), Tokyo Stock Exchange, NASDAQ OMX, New York Stock Exchange Euronext (Europe), London Stock Exchange and Shanghai Stock Exchange. As of end 2009, Hong Kong Stock Exchange had a total estimated market capitalisation of USD 2.3 trillion.

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Since 1995, Hong Kong has been wired extensively with optical fiber. The total number of broadband

subscribers in Hong Kong has exceeded 2 million.

Hong Kong’s telecommunications success has been due to liberal licensing procedures and an absence of

restrictions on foreign investment. Since 1998, the government has taken several steps to further promote

the telecommunications sector and the government’s ‘open sky’ policy has been an example of this

proactive approach. This policy granted five licences for wireless local fixed telecommunications network

services (FTNS) and 12 licences for satellite-based External Fixed Telecommunications Network Services

(EFTNS). In addition, it also granted Hong Kong Cable TV (i-Cable) the right to transmit data through its

cable modem technology.

The large number of telecommunications service providers makes Hong Kong a very competitive

telecommunications market. For example, there are 10 wireline based local fixed network operators as of

October 2009. Even though there has been a steady decline in fixed line telephone subscription since 2007,

the mobile subscription base has steadily grown by almost 12 per cent per annum since 2007.

Frost & Sullivan estimates that mobile penetration would increase in Hong Kong at a rate of about 2.5 per

cent per annum over the next 5 years and the mobile data revenue would increase by over 18 per cent per

annum over the same period. Furthermore, Hong Kong faces a huge demand from the Mainland for

incoming and outgoing transit traffic. Considering that the Mainland has been experiencing a growth in

mobile penetration of more than 11 per cent per annum, and with a forecasted growth of mobile data

revenue of over 40 per cent per annum over the next 5 years, there is an immerse opportunity for Hong

Kong, taking on the role as a telecommunications gateway for the region.

4.3 Demand for External Bandwidth

Based on Frost & Sullivan’s estimates, the demand for external bandwidth is expected to increase from

0.52 Tbps in 2008 to 2.91 Tbps in 2015 (base case scenario).

In the high case, external bandwidth demand will increase at a CAGR of over 35 per cent from 2009 to

reach 4.34 Tbps by 2015.

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Figure 4-1: External Bandwidth Demand in Hong Kong (CAGR: 2009-2015)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tbps

Low

Base

High

CAGR=35.4%

CAGR=27.9%

CAGR=20.6%


The current demand for bandwidth in Hong Kong is driven largely by the enterprise segment, which has

resulted in a strong demand for bandwidth for Internet, voice and private networks. Hong Kong’s position

as a financial centre has also brought about a substantial number of data centre operations. This has

influenced the volume of traffic flowing in and out from Hong Kong.

As a forerunner in terms of technology adoption, Hong Kong’s future demand for bandwidth will depend

on the penetration rate of bandwidth-intensive applications. Based on Frost & Sullivan’s interactions with

industry players, the majority are optimistic that Hong Kong will retain its position as a

telecommunications hub for the region. The expected boom in demand for external bandwidth will come

from Internet applications such as Voice over Internet Protocol (VoIP) services, video streaming, peer-to-

peer (P2P), and Multi-Protocol Label Switching (MPLS) based Internet Protocol Virtual Private Network

(IP VPN), and the growth of private networks.

4.4 Supply of External Bandwidth

Hong Kong is currently served by 9 submarine cables - Thailand-Vietnam-Hong Kong (T-V-H), Asia

Pacific Cable Network (APCN), FLAG Europe-Asia (FEA), SeaMeWe-3, Asia Pacific Cable Network 2

(APCN-2), EAC-C2C, FLAG North Asia Loop/REACH North Asia Loop (FNAL/RNAL), Asia-America

Gateway (AAG) Cable System, Tata TGN-Intra Asia (TGN-IA) – with a combined lit capacity of 6.5 Tbps

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and total max capacity of 43.2 Tbps. All cables, except the EAC-C2C cable system, land at the SCLS in

Tong Fuk, South Lantau or Deep Water Bay. 5 out of 9 cables are consortium cables with REACH being a

consortium member for 4 of them and PCCW being a member for all 5 of them. Among these cables,

APCN and SeaMeWe-3 are currently being upgraded, while T-V-H is expected to be retired by 2010. The

table below shows the lit and max capacity of all 9 cable systems in Hong Kong.

Table 4-1: Submarine Cables in Hong Kong

Submarine Cable Name RFS Year Length (km) Lit Capacity (Gbps)

Max Capacity (Gbps)

T-V-H 1995 3,354 n.a. n.a. APCN 1997 12,000 10 10 FEA 1997 28,000 85 200 SeaMeWe-3 1999 39,000 90 90 APCN-2 2001 19,000 1,360 8,960 EAC-C2C 2001 36,500 1,820 20,480 FNAL/RNAL 2001 9504 2,020 7,680 AAG 2009 19,000 500 1,920 TGN-IA 2009 6,700 650 3,840 Total 6,535 43,180

Source: TeleGeography

As can be seen, besides the 2 cable systems which entered Hong Kong in 2009, there was no major

investments in the submarine cable industry in Hong Kong from 2002 to 2008. But, based on the statistics

available from OFTA, the equipped submarine and overland cable capacity had increased steadily over the

period to reach 3.96 Tbps in December 2009. One potential reason for the lack of new investments could

be an over investment in the submarine cable industry during the dot.com boom, resulting in excess

capacity.

Table 4-2: Changes in Submarine Cable Capacity in Hong Kong

2002 2003 2004 2005 2006 2007 2008

Equipped Capacity (Gbps) 446 472 478 649 877 1,454 2,384

Max Capacity (Gbps) 27,090 27,090 27,090 27,090 27,090 27,090 27,090 Percentage 1.6 % 1.7 % 1.8 % 2.4 % 3.2 % 5.4 % 8.8 %

Source: OFTA, TeleGeography

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As per the information available, 4 more cables are expected to land in Hong Kong in the near future. A

brief description of the cables is given below.

Table 4-3: New Cables Expected in Hong Kong

Submarine Cable Name RFS Year

Length (km)

Lit Capacity (Gbps)

Max Capacity (Gbps)

Submarine Cable Asia Network (SCAN) 2011* 4,300 40 1,920

Asia Pacific Gateway (APG) 2011 8,000 n.a. 4,000

South East Asia Japan Cable (SJC) 2012 8,300 n.a. 23,000

FLAG NGN-Peacock n.a. n.a. 100 2,560 Total 140 31,480

* = tentative Source: TeleGeography, International news recently released

SCAN is a privately owned cable system of Telemedia Pacific and Fangbian Iskan Corporindo and the

scheduled ready for service (RFS) date might be pushed back. FLAG NGN-Peacock, owned by Reliance

Globalcom, was expected to be ready for service in 2010 but had been put on hold due to the global

economic crisis.

New cable systems can land in Hong Kong due to other reasons such as:

• Network Resiliency – to add resiliency to a particular route or for a particular player.

• Industry Structure – due to their business strategies, existing and new players may opt to land new

cable systems rather than lease capacity on the existing ones.

• To cater to the demand from the Mainland and the region – where Hong Kong can act as an

interconnection and telecommunications hub for the region.

In anticipation of future demand and the possible scenarios above, certain steps may need to be taken to

cater for additional new cable systems. The decision formulation process will have to take into

consideration the availability of SCLS facilities. Recommendations will subsequently be provided under the

recommendation section.

22


5. THE HONG KONG MARKET

5.1 Existing and Potential Players

Some of the incumbent submarine cable owners in Hong Kong are: REACH, PCCW, Tata

Communications, Pacnet and Reliance Globalcom. Along with these players, there are many international

players in the market like AT&T, BT, Telstra and France Telecom. New players like Telemedia Pacific are

coming up with investments in Hong Kong in near future. The following section provides a brief overview

of the current investments and future plans of the major players in Hong Kong.

PCCW and REACH

PCCW being the incumbent operator in Hong Kong has had an advantage over other players in Hong

Kong. Besides owning submarine cables, PCCW also provides backhaul services for the submarine cables.

PCCW owns 50 per cent stake in REACH which builds and manages submarine cables and SCLS (in Hong

Kong – Deep Water Bay, South Lantau, Tong Fuk and Cape D’Aguilar).

Pacnet

Besides owning a SCLS in TKO, Pacnet (formerly known as Asia Netcom) has integrated the EAC

network with C2C Cable Network into a meshed intra-Asian cable network. The integrated network

provides about 20 Tbps of max capacity across the network. Pacnet also acquired regional ISP Pacific

Internet in 2007. Beside the EAC-C2C cable network, Pacnet is not planning to bring in any other cable.

They will control 2 fiber pairs on Unity (trans-pacific from Japan to the US) but no more investment in

Hong Kong is planned at the moment.

Telemedia Pacific

Telemedia Pacific is a submarine capacity wholesaler. It is currently in the process of planning its first cable

system – the Telemedia Pacific Cable Network (TPCN) – which will start operations in Singapore and the

region from 2011 (estimated). The Submarine Cable Asia Network (SCAN) cable system, that was initially

planned, was designed to provide a direct connection between Indonesia and Hong Kong. However,

SCAN has been put on hold with an initial focus on the roll-out of TPCN, linking Indonesia to Singapore

23


and inter-connecting to the South-East Asia Japan Cable (SJC) system. The landing points of SJC include

Singapore, Hong Kong, Indonesia, Japan and the Philippines.

Tata Communications

Tata Communications (formerly VSNL) is a major player in the region. The company focuses strategically

on traffic going to/from India. The relatively new TGN-IA cable system links Singapore to Japan (direct

link) with a branch to Hong Kong. The cable actually completes the loop as Tata already has good

connectivity from India to Singapore and from Japan to the US. The cable has a low latency of 63 ms and

also adds diversity to the Singapore-Japan route. Besides TGN-IA, Tata also has investments in APCN,

APCN-2 and T-V-H in Hong Kong.

Tata wants to strike a balance between leasing and owning of cables. Since customers are much more

efficient in planning their diversity by choosing different players, Tata wants to differentiate itself on the

services it offers. To compete in the services market, Tata needs to buy capacity from other players and

make their own virtual “mesh” which provides an ideal resilient network for their customers.

Reliance Globalcom/FLAG

FLAG Telecom was acquired by Reliance for USD 207 million in cash in 2003. Reliance currently owns 2

cable systems in Hong Kong, the FNAL and FEA, with a combined designed capacity of over 4 Tbps.

The FNAL cable system has a total lit capacity, for each of its Eastern leg and Western leg, of about 900

Gbps. Reliance has been upgrading its lit capacity by 60 – 80 Gbps every six months, and it is expected

that this will continue for some time.

FLAG NGN-Peacock was supposed to be ready for service in Q1 2010 but its schedule had been pushed

back due to the financial crisis. Reliance also owns the Tong Fuk SCLS in partnership with REACH, in a

50-50 joint venture, and hosts the FEA cable system.

24


5.2 Operating Environment

Global Trends

In 2001, before the infamous dot com bust, investments in the submarine cable systems were over USD

13.5 billion. However, just after the bandwidth market bubble, new cable construction slowed to a near-

halt as investors spent less than USD 2 billion in total on all submarine cables that entered service between

2004 and 2007. Cable construction has started picking up again since 2008. More cables are set to be built

between 2009 and 2011 (41 cables) than were constructed during the infamous boom of 1999-2001 (39

cables).

This resurgent growth cycle in the submarine cable industry can be attributed to the growing demand for

bandwidth from bandwidth-intensive applications, and a growing consumer base in developing markets

like the Mainland and India. Learning its lessons from the earlier supply glut, the submarine cable industry

is taking a more cautious approach this time around.

Figure 5-1: Global Spending on Submarine Cable Terminating Equipment (USD Billion)

2.72.9

3.2

2.7

0.80.5

0.30.7

11.3

0

1

2

3

4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Bubble Growth Industry Collapse Cautious Recovery


The combined effects of technological advances, market liberalization and competition forced capacity

prices to decline significantly over the past decade. However, the decline has slowed down in recent years.

On the largest trans-Pacific route, the median monthly lease prices declined 10 per cent in 2008 as

compared to 20 per cent in 2007. Similar patterns prevailed in many routes starting from Western Europe,

Latin America, to intra-Asian and trans-Atlantic submarine cable routes. There were some exceptions as

well. For example, prices of STM-1 circuits from Singapore to Bangalore (India) fell 34 per cent in 2008.

25


There is a tremendous disparity between wholesale capacity prices around the world. As the market

matures and competition grows, a lowering of prices in those routes can be seen. That is why the lowest

prices can be found in inter-city routes in highly developed and competitive markets like the US and

Western Europe. As expected, prices across the Pacific and in Asian countries tend to be higher. This is

primarily because of the monopoly of international operators in developing countries. From the buyers’

perspective, the concept of volume discounting is very much predominant. For example, in Q4 2008, the

median monthly price per Mbps of a London–New York 10 Gbps wavelength was USD 1.43, compared

with USD 21.29 for a 155 Mbps STM-1. Hence, it is also very common for network users to buy large

amount of capacity and then keep them unutilised. In addition, there is also a growing demand for high

capacity circuits. Falling prices of network connectivity, along with volume discounting, further reduce the

effective price of network capacity.

The 2001 dot.com bust of the submarine cable industry led to numerous changes in the business model of

the submarine cable industry. These fundamental changes happened in the operations model of the

submarine cable industry starting from network architecture to financing the whole submarine cable

investment.

The long time horizon of cash flow generation along with the high risk and dynamic nature of the industry

forces the incumbents to consider pragmatic investment opportunities. This has led to newer cables being

shorter in distance, with most of the cables employing a single linear span design rather than the costly ring

or mesh architecture.

Another change has been witnessed in the nature of investment. Consortium cables have made a comeback

in recent years, but the only difference is in the fewer number of members. For example, the planned

IMEWE cable has nine members, compared with the older SeaMeWe-3 cable with 34 members. The

smaller consortium sizes increase the capital investment per carrier but also add tremendous amounts of

flexibility. Flexibility is of primary importance because with newer technology, it is very easy to upgrade the

capacity of cables and decisions can be made faster with a smaller number of members.

The financial health of big network carriers like Tyco, NEC, Alcatel/Lucent, AT&T, Telstra and Reliance

is also better. It is expected that Internet traffic will show robust growth in the future. However, the

tightening of access to capital may affect how this traffic growth translates into new capacity purchases and

26


network expansion. Instead of investing in network capacity, some network operators may choose to

postpone new capacity purchases and run their networks at higher utilization levels. However, the

construction projects of new undersea cables remain largely on track despite the recession. In fact, several

contracts for new submarine cables had been announced already in 2009.

Pricing Trends

The intra-Asia route has seen a spate of activity in recent years and many more cables are expected in the

next few years. Most of the recent activities have been concentrated in South and South-East Asia and not

a lot of investment has come into the East Asian region. This has led to a stable pricing in the East Asian

region with prices not dropping significantly in 2008.

According to TeleGeography research, monthly median lease prices for STM-1s on most East Asian routes

remained stable with routes such as Hong Kong-Taipei and Hong Kong-Tokyo remaining in the USD

8,000 to USD 9,000 range, while Hong Kong-Singapore dropped 10 per cent to USD 11,400. Hong Kong

and Shanghai remained near USD 30,750, while Beijing–Hong Kong held stable at USD 13,650. For 2009,

TGN-IA is expected to cause price drops. The historical pricing trends can be seen in the figure below for

major intra-Asia routes from Hong Kong.

Figure 5-2: Pricing Trends of Routes from Hong Kong to Other Locations

(USD per month per protected STM-1)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Beijing Shanghai Tokyo Singapore Taipei Los Angeles

US $ per STM-1

2005

2006

2007

2008

Source: TeleGeography, Frost & Sullivan

27


On the trans-Pacific route as well, the prices for bandwidth have been falling and the median price per

STM-1 from Hong Kong to Los Angeles is around USD 15,000 per month.

With the current activity in the market, the price for bandwidth to Tokyo, Singapore and Taipei is expected

to fall due to competition in the market, while prices to Beijing and Shanghai will remain stable due to

huge demand of bandwidth from the Mainland.

28


6. ECONOMIC CONTRIBUTION OF SUBMARINE CABLE INDUSTRY TO HONG KONG

To identify the economic contribution of the submarine cable industry to Hong Kong, Frost & Sullivan

classified the economic contribution into three categories – direct, indirect and induced contribution.

• Direct Contribution: Contribution that is attributable to the operation of submarine cable industry

in Hong Kong – the submarine cable operators and the SCLS operators.

• Indirect Contribution: Contribution of the submarine cable industry to the operation of Hong

Kong’s telecommunications sector.

• Induced Contribution: Contribution attributable to the spending of the submarine cable and

other telecommunications sectors on the non-telecommunications sectors of the economy (i.e. the

linkage effect); and the contribution attributable to the consumer spending of the persons engaged

in the submarine cable industry and other telecommunications sectors.

Figure 6-1: Economic Contribution of Submarine Cable Industry to Hong Kong

Manufacturing

Manufacturing

Tier of influence

Telecommunications IndustryTelecommunications Industry

Submarine Cable Operators


Indirect Contribution Indirect

Contribution

DirectContributionDirect

Contribution

Induced Contribution Induced

Contribution Construction

Construction

Logistics.Logistics.Healthcare

Healthcare

Education

Education

BFSIBFSI

Contribution:

•Revenues

•Value Added

•Employment

Submarine Cable Landing Station Operators

Submarine Cable Landing Station Operators

OthersOthers

Frost & Sullivan chose 1 Gbps of equipped submarine cable capacity (equipped capacity) as the unit of

analysis, instead of choosing a cable so as to have a consistent measurable unit. In the case of a submarine

cable, the actual bandwidth in Gbps varies from cable-to-cable. Furthermore, the economic contribution

analysis is a marginal ‘as-is’ analysis, which might change due to changes in technology, business models,

revenue structures or any regulatory changes. All figures quoted here have an error margin of ±5 per cent,

unless otherwise stated.

29


Frost & Sullivan estimates that the total revenue contribution due to an additional 1 Gbps of equipped

capacity for Hong Kong will be USD 754,421. In terms of value added, the additional 1 Gbps of equipped

capacity adds USD 339,624 to Hong Kong economy. Also, 3.4 jobs are generated for every additional

Gbps of equipped capacity.

The figures below show the breakdown of direct, indirect and induced contribution of 1 Gbps of equipped

capacity to Hong Kong’s economy for 2008.

Figure 6-2: Revenue Contribution of 1 Gbps of Additional Equipped Capacity

187,978

363,492

202,951

754,421

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

Direct Indirect Induced Total

US

$/ G

bps


Figure 6-3: Value Added Contribution of 1 Gbps of Additional Equipped Capacity

66,948

129,226

143,450

339,624

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000


US

$/ G

bps


30


Figure 6-4: Employment Contribution of 1 Gbps of Additional Equipped Capacity

0.48

0.91

2.00

3.40

0

1

1

2

2

3

3

4

4


#/ G

bps


As can be seen, the overall revenue contribution is highest for the indirect contribution, but value added

and employment contribution is highest for induced contribution.

Frost & Sullivan also calculated the change in consumer surplus for telecommunication services due to an

additional Gbps of equipped capacity in Hong Kong. It is estimated that for an additional Gbps of

equipped capacity, the consumer surplus will increase by 0.17 per cent.

6.1 Direct Contribution

Direct contribution is the economic contribution of an additional Gbps of equipped capacity that is

attributable to the operation of the submarine cable industry in Hong Kong – the submarine cable

operators and the SCLS operators.

Results

Frost & Sullivan estimates the following values for direct contribution to the submarine cable industry. Table 6-1: Direct Contribution of 1 Gbps of Additional Equipped Capacity

SCLS Operators Submarine Cable Operators Revenue per Gbps (USD) 2,768.5 185,209.8 Value Added per Gbps (USD) 1,103.2 65,844.5 Employment per Gbps(#) 0.020 0.463


31

Issues Relating to the Landing of Submarine Cable

Methodology – Submarine Cable Operators

For submarine cable operators, the overall revenues were calculated based on the median bandwidth prices

(for STM-1) for different routes from Hong Kong to Japan, the Mainland, Taiwan and Singapore and the

amount of traffic flowing in these different routes from Hong Kong. The median bandwidth prices were

derived from TeleGeography research, while the traffic flowing in different directions was estimated based

on the industry interactions and Frost & Sullivan’s own research. The overall revenues were then

apportioned to Hong Kong by considering each of the 7 submarine cables and the share of revenue

attributed to its Hong Kong owners.

After calculating the revenues for the sector, the value added and

by employing the current ratio of value added-to-revenues and em

telecommunications industry, as it is assumed that the value added

will be similar to the telecommunications industry due to similar st

see the methodology in Section 6.2 for calculations of value added

to-revenues ratio.

Methodology – SCLS Operators

SCLS are not considered profit centers by the industry, as per

calculate access charges based on actual costs and small margin

revenue for SCLS operators by assuming that operating income m

for a SCLS is USD 1.1 million per annum (average cost of S

interactions). The depreciation was assumed to be a straight-line de

average life of SCLS, as per industry interactions).

5 A zero operating margin would provide the lower limit of economic contributionhave the conservative estimates of the economic contribution to the industry.

AMedian Bandwidth Prices on

different routes (USD /STM-1)

Traffic Flow on Different Routes (STM-1)

Total Revenues from cables in Hong Kong

pportioning the revenues to Hong Kong

s in Hong Kong

the employment figures were calculated

ployment number-to-revenues for the

and employment for this industry ratio

ructures and business operations. Please

-to-revenues and employment number-

the industry interactions. Most players

s. Frost & Sullivan has calculated the

argins are zero5 and the operating costs

CLS in Hong Kong, as per industry

preciation over a period of 40 years (the

. The margin was assumed to be zero so as to

Total Revenues attributable to Hong Kong

32


The employment numbers are based on actual permanent and temporary staff at the six SCLS in Hong

Kong. The temporary manpower was converted into Full-Time Equivalent (FTE). Because, the operating

income margin is assumed to be zero, the value added is essentially manpower costs less the depreciation

per year.

Assumptions


Frost & Sullivan has assumed that the ratio of value added-to-revenues and employment number-to-

revenues for this segment is the same as that for the overall telecommunications industry in Hong Kong.

SCLS Operators

Frost & Sullivan made the following assumptions for estimating the direct contribution of this segment.

• The operating income margin of the segment is zero per cent. This is justified as the industry does

not view SCLS as profit centers. The access charges are also essentially cost-based (with a small

margin). In addition, it provides the lower limit on the direct economic contribution.

• The operating costs (power, maintenance, and wages) for an average SCLS is approximately USD

1.1 million per annum.

• The depreciation of the SCLS building is a straight-line depreciation over a time period of 40 years.

• The capital expenditure in setting up an average SCLS is USD 10 to 15 million.

References

• Industry Interactions

• TeleGeography

• Frost & Sullivan’s internal estimates

33


6.2 Indirect Contribution

Indirect contribution is the economic contribution of an additional Gbps of equipped capacity to the

operation of the telecommunications sector in Hong Kong.

Results

Frost & Sullivan estimates the following values for indirect contribution on the telecommunications

industry due to an additional 1 Gbps of equipped capacity.

Table 6-2: Indirect Contribution of 1 Gbps of Additional Equipped Capacity

Revenue per Gbps (USD)

Value Added per Gbps (USD)

Employment per Gbps (#)

Hong Kong Indirect Contribution 363,491.7 129,226.0 0.91 Source: Frost & Sullivan

As can be seen, Hong Kong is generating USD 363,492 of revenue per Gbps of additional equipped

capacity, and has USD 129,226 of value added. The same 1 Gbps of additional equipped capacity has

employment generating potential of 0.91 jobs.

Methodology

Based on the data from the Census and Statistics Department of Hong Kong, Frost & Sullivan calculated

the historical revenues, value added and employment numbers for telecommunications industry in Hong

Kong. These numbers did not include their revenues from operations as submarine cable operators.

For the telecommunications sector, the historical value added-to-revenues ratio and employment number-

to-revenues ratio were calculated 6 . The historical revenues were analyzed with other macro factors,

including equipped capacity in Hong Kong over the period, disposable income of Hong Kong, subscriber

base for telecommunications services and total trade value in Hong Kong. This provides a per-equipped

Gbps revenue multiplier for telecommunications sector. This multiplier was used to calculate the revenue

per Gbps of equipped capacity and the ratio of value added-to-revenues and employment number-to-

6 The value added-to-revenues ratio and employment number-to-revenues ratio were calculated based on average of actual value in telecommunications sector from 2004 to 2008 (to smoothen out any peaks or troughs in the ratio)

34


revenues was used to calculate the relevant value-added and employment figures for the indirect

contribution.

Assumptions

Frost & Sullivan has made the following assumptions for estimating the indirect contribution

• It is assumed that the historical trend is reliable indicator of current performance. Therefore, the

historical data is used to calculate the contribution of an additional Gbps of equipped capacity to

the revenues of the telecommunications sector.

• The ratio of value added-to-revenues and employment number-to-revenues used has been

maintained constant over the years as it is assumed that the cost structure of the industry has not

changed significantly in the last 3-5 years.

References

• Census and Statistics Department, Hong Kong

• Office of the Telecommunications Authority, Hong Kong


6.3 Induced Contribution

Induced contribution is the economic contribution of an additional Gbps equipped capacity attributable to

the spending of the submarine cable and other telecommunications sectors on the non-

telecommunications sectors of the economy of Hong Kong (i.e. the linkage effect) as well as to the

consumer spending of the persons engaged in the submarine cable industry and other telecommunications

sectors. The total economy has been categorized into 7 segments that are impacted by the

telecommunications sector – manufacturing, construction, banking and financial service and insurance

(BFSI), logistics, healthcare, education and other services.

Results

Frost & Sullivan estimated the following values for the induced contribution to the non-

telecommunications sectors of Hong Kong’s economy that is due to an additional Gbps of equipped

capacity.

35


Table 6-3: Induced Contribution of 1 Gbps of Additional Equipped Capacity

Revenues (USD) Value Added (USD)

Employment (#)

Induced Contribution 202,951 143,450 2.0 Source: Frost & Sullivan

The components of induced contribution are: (i) spending by the telecommunications and submarine cable

industries on the other economic sectors; (ii) spending by these other economic sectors after receiving the

revenue from the telecommunications and submarine cable industries; and (iii) spending by persons

engaged in the telecommunications and submarine cable industries. It is observed that just 12 per cent of

the induced revenue is generated by (iii) above, as shown in figure below.

Figure 6-5: Distribution of Induced Contribution


Methodology

The induced contribution is due to two types of effects:

• Contribution due to spending of the submarine cable industry (direct contribution) and the

telecommunications industry (indirect contribution) to the said seven segments of Hong Kong

economy.

Spending by Persons Engaged, 11.8%

Spending of Telecommunications and Submarine Cable Industries, 30.8%

Spending of Other Sectors, 57.4%

36


• Contribution due to consumer spending of persons engaged in the submarine cable industry (direct

contribution) and in the telecommunications industry (indirect contribution) to the said seven

segments of Hong Kong economy.

The induced contribution creates a cascading effect. For example, the telecommunications industry spends

on banking, and financial service and insurance sector, which in turn spend on telecommunications, and

this cycle continues. This trend is assumed to be converging in nature.

The total spending and manpower costs of the telecommunications and the submarine cable industries are

initially calculated. This data is used for further calculation of induced contribution. Since Hong Kong does

not track data for spending of the telecommunications industry on different sectors of the economy, Frost

& Sullivan has used the data available for Singapore (from SingStat) and calibrated it for Hong Kong. This

spending on different sectors will also create its own contribution to the economy (because of the

cascading effect) and Frost & Sullivan has used the calibrated industry revenue contribution multipliers for

this purpose. For the contribution of submarine cable operators and SCLS operators to other industries,

the spending information across different sectors is based on interactions with the industry players.

Based on the data from the Census and Statistics Department of Hong Kong, the consumer spending for

an average person engaged in the telecommunications and submarine cable industries to the said seven

segments of the economy can be calculated. This spending on different segments will again have its

contribution to the economy – e.g. if a person engaged in the telecommunications and submarine cable

industries spends USD 100 on healthcare, the USD 100 generates about USD 48.30 for the economy. Due

to the smaller values, the second and higher order effects have been ignored.

Assumptions

Frost & Sullivan has made the following assumptions for estimating the induced contribution

• It is assumed that at an overall level, the cost structure of the Singapore firms in a particular sector

is similar to that of the Hong Kong firms in the same sector, e.g. the cost structure of healthcare

industry in Singapore is similar to that of the healthcare industry in Hong Kong. Thus, the

Singapore multipliers and spending ratios can be re-calibrated for Hong Kong.

37


• The cascading of spending on telecommunications sector by other sectors is negligible after first

order effect and can be ignored without affecting the final numbers.

References

• Interviews with the telecommunications and the submarine industry players

• Census and Statistics Department, Hong Kong

• SingStat (Department of Statistics), Singapore


6.4 Total Economic Contribution

The analysis above calculates the marginal contribution of an additional unit of equipped submarine

capacity. Frost & Sullivan calculated the total economic contribution of the equipped submarine bandwidth

at the end of 20087.

According to Frost & Sullivan’s estimate, the total economic contribution of the equipped submarine

capacity as of 2008 was USD 1.8 billion of revenue to Hong Kong economy.

Results

Based on the equipped submarine capacity at the end of 2008, the total economic contribution to revenue

due to equipped submarine cable capacity was USD 1.8 billion. In terms of value added, the total economic

contribution was USD 810 million. The equipped submarine cable capacity in Hong Kong generated about

8,110 jobs in Hong Kong.

Methodology

Frost & Sullivan had calculated the marginal economic contribution of one additional Gbps of equipped

capacity. Due to limitations of historical data, Frost & Sullivan made an assumption that the returns to

scale for the industry are constant as of now. Thus, the average economic contribution for each Gbps of

equipped capacity would be equal to the marginal economic contribution.

7 As most of the data is available only till 2008, the total economic contribution can be calculated reliably only as of 2008.

38


By multiplying the total submarine equipped capacity of 2,384 Gbps at the end of 2008 with the average

economic contribution per Gbps gives the total economic contribution of the submarine industry to Hong

Kong economy.

References



6.5 Consumer Surplus

Consumer surplus, in simple terms, is the difference between what consumers are willing to pay for a

service, and what they are currently paying for the service. For this Study, consumer surplus has been

calculated for telecommunications services (voice and data services). Hong Kong has already had one of

the lowest tariffs for voice and Internet usage in the region. Hence, consumers are already enjoying huge

consumer surplus – e.g. currently, the marginal consumer surplus for a single unit of voice services is

around twice that of the actual effective tariffs for the same single service. Thus, calculating consumer

surplus due to 1 Gbps of additional equipped capacity would not be unreasonable to estimate.

Results

Frost & Sullivan estimated that for every additional Gbps equipped capacity, the consumer surplus for

telecommunications services will increase by 0.17 per cent, which is approximately 59.4 cents per

subscriber per Tbps of additional equipped capacity (at the total equipped capacity at current level).

Methodology

Frost & Sullivan has used the tariffs in similar8 markets and normalized them based on the disposable

income differentials between these markets and that of Hong Kong to estimate what consumers are

‘willing to pay’ for telecommunications services. Similar markets used are Singapore and Taiwan (with

similar level of max/equipped capacity and similar penetration rates). This difference in voice and Internet

tariffs provides the current consumer surplus for Hong Kong.

8 Similar markets are defined by similar level of penetration and same level of bandwidth availability

39


The increase in equipped capacity will not only lead to reduced tariffs (due to availability of higher

bandwidth), but also contribute the average usage, which will increase due to lower tariffs. Hence, the

historical impact on tariffs and usage due to increases in equipped capacity is calculated and this provides

the increase per Gbps on consumer surplus. The percentage change is calculated based on this gain in

consumer surplus and the current consumer surplus.

Assumptions

Frost & Sullivan has assumed that the amount consumers are willing to pay can be calculated by estimating

what consumers in similar markets are paying for the same services.

References



6.6 Implications on Hong Kong

The overall contribution of an additional Gbps equipped capacity to Hong Kong economy is USD 754,421

in terms of revenue, USD 339,624 in terms of value added and 3.4 jobs in the economy.

Figure 6-6: Overall Marginal Economic Contribution on Hong Kong Economy


40


This analysis is an ‘as-is’ analysis of an additional Gbps bandwidth which takes into account only the

situation of the industry ‘as’ it stands at end of 2008. The total economic contribution as of end of 2008 of

equipped capacity in Hong Kong was approximately USD 1.8 billion in revenue, USD 810 million in value

added to the economy and 8,100 jobs added to the economy.

The above assessment quantifies only the direct, indirect and induced economic contribution of the

submarine cable industry. The submarine cable industry, nevertheless, has also contributed enormously to

the operation of other sectors of the Hong Kong economy. These include the trading and logistics,

financial services and tourism industries, which rely heavily on good telecommunications connections with

parties outside Hong Kong. They are all key industries of the Hong Kong economy, taken together

accounting for 45% of Hong Kong’s GDP and 35% of total employment. Yet due to the limitation of data,

it has not been possible to quantify the contribution of the submarine cable industry to these industries.

41


Impact On Industry

High

Stakeholders

� Submarine Cable Operators

� SCLS Operators

� Telecom Service Providers

� Content Service Providers

7. STRENGTHS AND CONSTRAINTS OF HONG KONG

7.1 Consideration Factors When Choosing Landing Points

There are several factors that submarine cable owners and consortium will consider when choosing landing

points during the planning and design of new submarine cable systems. Through the interviews conducted

during the Study, the following factors were identified as key, that will significantly influence the decision

making process: (a) strategic factors, including regional demand for bandwidth, geographical location of

the landing point, presence of other submarine and overland cable systems for interconnection, and

general business environment; and (b) regulatory factors, including government policies, ease of

administrative processes, and facilitating investment environment.

7.2 Strengths

Close Geographical Proximity to the Mainland / Interconnection Hub for

Region

Among the competing locations, industry players consider that Hong Kong is in

a good position to retain its role as the key interconnection hub for the Mainland.

Although there are some submarine cables bypassing Hong Kong, industry

players do not perceive this trend to be a medium term threat to Hong Kong as

it has a natural geographical advantage over other competing locations due to its

central location as a gateway between the Mainland, Japan, South Korea, and

SEA. Furthermore, due to the substantial investment cost of submarine cables,

there is a high switching cost if submarine cable owners chose to focus on other

landing points versus what has already been invested for Hong Kong.

42


JapanChina

India

South-East Asia Region

Intra Asia Traffic Flows

Hong Kong

Singapore

JapanChina

India

South-East Asia Region

Intra Asia Traffic Flows

Hong Kong

Singapore

Impact On Industry

High

Stakeholders


� SCLS Operators



One of the key deciding factors in determining landing

points for a submarine cable system is the potential of

interconnection with other overland and submarine cable

systems. Due to its smaller domestic market, Hong Kong is

viewed as a transit point rather than a terminating point.

Hence, given Hong Kong’s existing position as an

interconnection hub for the region and the numerous

overland and submarine cable systems that are currently

connected, it will be difficult for potential competitors to

displace Hong Kong’s current status.

Free Market Approach and Transparent Regulations

Hong Kong has traditionally adopted a free market approach to regulating its

industries, preferring to minimize regulations and allow market forces to dictate

the direction of industry development and growth. Hence, many industry

stakeholders are appreciative of the fact that they have a greater leeway to grow

their businesses. De-regulation has also contributed significantly to increased

competition, resulting in relatively competitive bandwidth prices.

Furthermore, the transparency of Hong Kong’s regulatory and judiciary systems

is a plus point for many investors. Building a submarine cable system is a long-

term undertaking as the typical life span of a cable system is of 20 years or more.

Providing a stable and pro-business environment reassures cable system owners

and related telecommunications service providers that there is minimal

possibility of any controversial changes such as regulatory policy that may negatively affect their

investments. Based on the recent World Economic Forum 2009 Global Competitiveness report, Hong

Kong’s competitiveness index was ranked (11#), one of the highest in the world, reflecting industry

stakeholders’ perception of Hong Kong as a leading venue for business, technological and financial

exchange.

43


Stakeholders


� SCLS Operators



Impact on Industry

Medium

Relationship between Development of Key Industry Clusters and the

Submarine Cable Industry / Hong Kong Consumers at the Forefront of

Information Technology Applications

Industry stakeholders have highlighted that Hong Kong’s position as a key

financial hub for the region, with its high density of regional corporate

headquarters, as well as the confluence of key technology segments such as data

centres and content service providers (e.g. Google and Yahoo), is also an

important determinant that drives the growth of the submarine cable industry in

Hong Kong. In addition, Hong Kong consumers are at the forefront of

information technology applications, driving further demand for bandwidth.

Content service providers are placing an increasing level of importance on

availability of bandwidth, competitive pricing and quality infrastructure. Hence,

locating their key data centres and services operations within an existing

interconnection hub will provide the competitive edge they need to drive the growth of their business.

Vice versa, telecommunications companies and cable operators are drawn to providing services to these

industry clusters due to the higher value transactions and margins provided. In the long term, the

development of industry clusters and the submarine cable industry is complementary and will help Hong

Kong secure its position as both a services and interconnection hub for the region.

Summary

Hong Kong has several key strengths that have helped it develop as an interconnection hub for the region

and the gateway for the Mainland. Other than offering a stable environment for businesses and its

proximity to the Mainland, the approach taken in regulating the various industries in the market is

recognised as a key strength that is appreciated by industry stakeholders.

44


45


7.3 Constraints

Time for Obtaining Approvals from Various Government Departments

Industry players pointed out that various government departments had to be

approached on issues such as land acquisition, approvals for laying submarine

cables through the waters of Hong Kong, landing at an existing SCLS, building a

new SCLS and carrying out other cable-related work such as cable repairs. When

compared with the other economies in the region, it takes relatively long time for

potential applicants to identify the relevant authorities and acquaint themselves

with the application processes.

High Concentration of Submarine Cables in the Southern Parts of Lantau

Island and Hong Kong Island

Some industry players raised concerns over the high concentration of submarine

cables in the southern parts of Lantau Island (i.e. Tong Fuk area) and Hong

Kong Island (i.e. Deep Water Bay/Chung Hom Kok area). They were of the

view that the government should explore the feasibility of de-concentrating the

cables. There is a relatively high risk of multiple cable failures in the event of an

accident or disaster. They suggested that shared use of the existing SCLS in

TKOIE, and any new SCLS that may be built in TKOIE, should be permitted

for landing additional cables to provide for enhanced redundancy and diversity

so that the said risk would be minimized.

Stakeholders


� SCLS Operators



Impact On Industry

High

Stakeholders


� SCLS Operators



Impact on Industry

Medium

46


Summary

Hong Kong is viewed by industry as a dynamic place for business. This is evidenced by the results that

Hong Kong achieved in a recent global competitiveness study. However, there are several issues that are

viewed as constraints that the government should address to prevent them from hindering the

development of the telecommunications industry. The most common issue raised by industry is the need

to spend time and efforts in order to obtain necessary approvals from various government departments

on issues such as land acquisition, approvals for laying submarine cables through the waters of Hong

Kong, landing at an existing SCLS, building a new SCLS and carrying out other cable-related work such as

cable repairs.

Due to the recent cable outages/cuts in Asia and other parts of the world, network/cable resiliency is

increasingly viewed as a critical factor in the provision of bandwidth services. In addition, resiliency is a

key consideration in the planning of service providers’ daily operations as well as a key factor to consider

in the planning of any new cable system. In view of the high concentration of cable systems landing in the

southern parts of Lantau Island and Hong Kong Island, a long term plan may be required from OFTA to

assist the operators in diversifying this potential risk.

47


Impact On Industry

High

Stakeholders


� SCLS Operators



8. KEY CHALLENGES AND OPPORTUNITIES FOR HONG KONG

8.1 Opportunities

Potential Growth of the Mainland’s Demand for External Bandwidth

Based on historical data 9 , the Mainland’s growth in demand for external

bandwidth increased at an astounding CAGR of 79 per cent between 2002 and

2008. This growth trend is expected to continue for the next few years in

consideration of the Mainland’s low broadband penetration of only about 20 per

cent. As a result, Hong Kong is in a strong position to leverage on this growth

due to its current position as a gateway for the Mainland and the region.

Potential Growth of SEA’s Demand for External Bandwidth

In recent years, SEA has emerged as a region with a strong growth of demand for

external bandwidth. This is largely driven by those less developed but highly

populous countries where consumers in both the urban and rural areas have

increasing access to the Internet, and a demand for international content and

bandwidth intensive media. This trend is expected to continue in the short and medium term as countries

with low broadband and Internet penetration increase their uptake of these services.

Potential Growth of Overland Cables Connecting the Mainland, India and Europe

Telecommunications players are increasingly looking into the feasibility of using overland cables to

connect the Mainland, India and Europe. Hong Kong may benefit by the potential growth of these

overland cables as Hong Kong may route the transit traffic between the Mainland, India, Europe and

other countries in Southeast Asia.

9 Source: TeleGeography –The Mainland’s Demand for International Bandwidth (2002 – 2008)

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Summary

Due to its position as a gateway for the Mainland and the region, Hong Kong is in a strong position to

leverage on the potential growth in the demand for external bandwidth of the Mainland and SEA as well

as the overland cables connecting the Mainland, India and Europe.

49


Impact On Industry

High

Stakeholders


� SCLS Operators



8.2 Challenges

Potential Growth of Overland Cables Connecting the Mainland, India and

Europe, and Competitive Alternatives to Hong Kong

As mentioned earlier, Hong Kong may benefit by the potential growth of

overland cables between the Mainland, India and Europe. However, Hong

Kong’s current position as a hub for the region may be compromised as the

traffic between the Mainland, India and Europe originally routed through Hong

Kong using submarine cables may be diverted to the overland cables. It is also

noteworthy that other landing points in the region, including those in Singapore,

Taiwan and the Mainland remain the competitive alternatives to Hong Kong for

selection by owners of new submarine cables. Hence, in anticipation of the

overland cables that may negatively affect Hong Kong and the competitive

alternatives to Hong Kong, the challenge would be to provide a conducive

environment to further promote the growth of the cable industry in Hong Kong.

Resolving Regulatory Issues Encountered by Industry

Due to the different jurisdictions as well as objectives of stakeholders, the

industry has encountered numerous issues working with the various departments

in respect of landing submarine cables in Hong Kong. Going forward, this may

become more complex due to the changing demands of consumers, service

providers as well as stakeholders. Hence, industry feels that OFTA needs to

position itself as the leading coordinator and facilitator for the industry. Possible

directions that can be taken to anticipate and resolve future issues would be the

identification of subject matter experts from OFTA, as well as the setting up of

working groups comprising of representatives from all stakeholder groups to

drive the initiatives necessary to facilitate the development and growth of the

industry.

Stakeholders


� SCLS Operators



Impact On Industry

High

50


Summary

Hong Kong is viewed by industry as the key interconnection hub for the region. Hence, its development

may be stifled by the challenges highlighted below.

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9. IMPLICATIONS OF STRENGTH, CONSTRAINT, OPPORTUNITY AND CHALLENGE ANALYSIS

The telecommunications industry in Hong Kong has traditionally been one of the fastest growing and

dynamic in Asia. Numerous factors have contributed to this development and growth. Through the

course of the Study, these factors were identified and analyzed according to the framework developed,

resulting in classification of these factors into Strengths, Constraints, Opportunities and Challenges.

In the short and medium term, Hong Kong is seen to retain its position as the Internet gateway for the

Mainland and interconnection hub for the region. In addition to those factors mentioned in the previous

sections, there are also several other reasons that may substantiate this scenario going forward: (1) a key

consideration for deciding landing points for a new submarine cable system is interconnection availability.

Hence, submarine cable operators are prone to choose locations where there are existing cable systems for

interconnection; and (2) submarine cable systems are high cost investments that can cost more than USD

200 million and have a life span of at least 20 years. Hence, it is challenging to displace incumbent hubs by

new locations due to the long investment lifecycle (which acts as a competitive barrier), unless there is an

attractive value proposition for these submarine cable owners.

Nevertheless, the time and efforts spent on procedures for obtaining approvals from various government

departments such as land acquisition, approvals for laying submarine cables through the waters of Hong

Kong, landing at an existing SCLS, building a new SCLS and carrying out other cable-related work such as

cable repairs may have a significant impact and may affect Hong Kong’s reputation as a pro-business

economy. Industry players may get frustrated in the long term and choose to invest and land their cables

in other favorable locations that can offer an attractive value proposition for the operators. Other landing

points in the region, including those in Singapore, Taiwan and the Mainland remain the competitive

alternatives to Hong Kong for selection by owners of new submarine cables.

Taking these points into consideration, Hong Kong may retain its position in the short to medium term.

However, there are several risk factors and issues that should be mitigated and resolved in anticipation of

potential long term developments in the industry and region.

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10. ANALYSIS OF EXISTING SUBMARINE CABLE LANDING STATIONS

SCLS form a key component in the landing of cable systems in a location. Factors such as suitability,

space availability and geographic location determine if a new cable system is able to land at a specific

SCLS. These aspects determine the ability of a country and/or location to support new cable systems.

From another perspective, owners of new cable systems will evaluate these factors – in addition to others,

such as the existence of other overland and submarine cable systems for interconnection, co-location

pricing and access, and backhaul tariffs – as a preference for specific SCLS.

Hence, this section of the report seeks to examine the various influencing factors considered so as to

answer the following questions:

• Whether existing SCLS and their corresponding facilities are able to support new cable

systems that land in Hong Kong in future.

• If existing SCLS are not able to support new cable systems, should these facilities be

expanded or is there a need to identify additional sites for building new SCLS in future.

10.1 Methodology

Based on our discussions with industry stakeholders, the choice of SCLS for landing of cable systems

depends on several factors. We have segmented our analysis into the following components and

corresponding factors under each component will be segregated into the following two key categories: (1)

Ability to host new cable systems, and (2) Preferences of cable system owners for a SCLS location. The

four components that will be analysed for each SCLS location are:

• General approach/corridor for Submarine Cable

• General environment of the cable Landing Point (area)

• Submarine Cable Landing Station

• Availability of Backhaul

Submarine Cable Landing Point Cable Station Backhaul

A 1 P 5 A 3 P 5 A 2 P 5 P 5

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As mentioned previously, factors under each of the four components will be segregated into the following

two categories: (1) Ability and (2) Preference, and rated using the scale indicated below.

Scale 1 2 3 4 5

Descriptor Low Fairly Low Neutral Fairly High High

For example, a SCLS location that is lacking in space has a low ability to host new cable systems. Hence,

it may receive a rating of 1 under ‘Ability’. On the other hand, if the SCLS location has multiple cable

systems in place which provides ease of interconnection, new cable system owners will have a preference

for the location relative to other SCLS. Hence, it may receive a rating of 5 under ‘Preference’.

Note: Analysis for the ‘Availability of Backhaul’ component will only encompass the ‘Preference’ category

since it is assumed that existing backhaul infrastructure for any SCLS site will be able to support all

bandwidth requirements.

To obtain the overall Ability and Preference score for each SCLS, we used a weighted average approach.

Due to the high emphasis that cable owners place on interconnection opportunities with existing cable

systems at a SCLS, the weight that is assigned to the Preference category under the SCLS component is

twice that of the Preference category for other components. Hence, the weights assigned are as follows:

• General approach/corridor for Submarine Cable 0.2

• General environment of the cable Landing Point (area) 0.2

• Submarine Cable Landing Station 0.4

• Availability of Backhaul 0.2

Note that there are no weights assigned when computing the overall average Ability score for each SCLS.

The factors under each component, where applicable, encompass areas such as regulatory requirements,

environmental concerns, impact on residential/commercial areas, cost implications for submarine cable

owners, etc.

Once the overall Preference and Ability scores are computed for each SCLS, we plot the results into an

Action Matrix to evaluate the different course of action that OFTA could take for individual locations as

54


well as the strategic approach for Hong Kong at an overall level. The following chart provides a template

and short description.

Figure 10-1: Action Matrix for Analysis of SCLS

Description of Action Matrix

• Nurture. Identifies SCLS where they have the ability to host new cable systems and are deemed

attractive to potential cable owners. Actions can be taken to create a greater awareness of these

stations.

• Remedy. Indicates SCLS where they are either operating at full capacity or have existing barriers

where new cables cannot be sited at the SCLS (e.g. leasing constraints). Actions can be taken to

expand the SCLS or remove the constraints.

• Promote. Identifies SCLS where there is excess capacity in terms of taking on additional cable systems.

However, they may not be viewed positively by cable owners due to either low interconnection

opportunities or affiliation issues (e.g. cable owners have a higher preference for neutral SCLS versus

privately-owned SCLS).

• Status Quo. Such SCLS may still be in operations in the short to medium term. However, due to

changing external factors (e.g. environmental regulations), they may lose their long term attractiveness

from the cable owners’ point of view.

PR

EF

ER

EN

CE

FO

R S

CL

SP

RE

FE

RE

NC

E F

OR

SC

LS

Low

High

Neu

tral

Neutral HighLow

ABILITY TO HOST NEW CABLE SYSTEMSABILITY TO HOST NEW CABLE SYSTEMS

PromoteStatus Quo

Remedy Nurture

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10.2 Analysis Result of Existing SCLS and Relative Positions of Existing SCLS in the Action

Matrix

The landing options available for new cable system owners are currently limited due to factors such as

environmental concerns as well as geographical, business-related and regulatory constraints. Of the six

SCLS in Hong Kong, some may have the ability to host additional cable systems. However, certain

limitations (e.g. leasing constraints at the TKOIE) become major barriers that prevent prospective cable

system owners from considering these locations. On the other hand, SCLS locations where cable owners

have a higher preference for (due to interconnection opportunities) are currently operating at full capacity

with little or no option for expansion due to issues such as physical, environmental and regulatory

constraints. A summary of the current situation of the SCLS is given below.

56


Figure 10-2: Relative Positioning of Existing SCLS in the Action Matrix

From the chart above, Chung Hom Kok SCLS has been identified as a location where there may be some

level of attraction for cable owners and has the capacity to accommodate new cable systems. A key

restraint on cable owners from landing at the station could likely be due to the limited interconnection

opportunity as there is only one cable system at the station. Due to greater opportunities for

interconnection, SCLS such as Deep Water Bay SCLS and South Lantau SCLS are deemed to be more

attractive for cable owners. However, their scope for expansion is limited due to land availability and

construction restrictions due to regulatory requirements. Furthermore, existing hurdles/barriers such as

the Marine Reserve at Cape D’Aguilar and the leasing constraints imposed at TKOIE are key issues that

preclude these SCLS from taking on new cable systems.

10.3 Remedial Actions for Existing SCLS

A point to note is that the previous assessment was carried out in an ‘as is’ situation to reflect the current

positioning of each SCLS location relative to one another. However, for some SCLS, initiatives or actions

taken by both the government and/or industry can potentially shift the ‘Ability’ or ‘Preference’

positioning of the SCLS. The following provides a brief outline of the potential initiatives that can be

taken and how each initiative may affect the relative positioning of the specific SCLS.

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Expansion of Existing SCLS/Facilities

Based on the analysis of the following SCLS depicted in the chart below, there are potential options for

site/facility expansion at the respective sites to increase the ability of these sites to host additional cable

systems:

• South Lantau – Expanding the existing building on the available plot of land within the current

compound may be possible.

• Tong Fuk – Some vacant space of the existing building can be utilised for additional cable system

network terminating equipment if the necessary heat, ventilation, and air-conditioning (HVAC)

and support systems are put in place and additional cable conduits are built.

Taking into consideration the actions that can be taken to expand the SCLS/facilities indicated above, the

relative positioning of each SCLS can be shifted as follows:

However, there may be some regulatory hurdles due to the construction required for the expansion and

building of additional cable conduits for the South Lantau SCLS. In addition, the industry has raised

concern over the high concentration of submarine cables in the Tong Fuk area.

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Relaxation of Lease Conditions of Existing SCLS in TKOIE

One of the major issues restricting the development of the TKO SCLS is the lease conditions which do

not allow the shared use of the SCLS. OFTA is currently working to resolve this issue. Removing the

restrictions will allow new cable systems to land at the SCLS and hence, potentially increasing the Ability

positioning of the SCLS relative to other SCLS. In addition, as the number of cable systems hosted within

the SCLS increases, this may also potentially increase the Preference value of the SCLS, resulting in the

following movements illustrated in the following Action Matrix.

Retire Some of the Old Systems to Make Space for New Systems

Based on the current life span of some of the older systems, they are due to be retired. Hence, the

existing space used by these systems in South Lantau SCLS and Deep Water Bay SCLS can be released to

host the new cable systems to be landed in Hong Kong.

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Attracting New Systems to Land at Non-congested Sites to Increase Availability of Other Systems for

Interconnection

The current SCLS in TKOIE and Chung Hom Kok have space available for landing of new cable systems.

Resolving the existing restrictions on the SCLS in TKOIE and collaborating with the SCLS

owners/operators to attract new systems to land at the respective locations will increase the attractiveness

of these SCLS due to the increase in opportunity for interconnection.

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Validating the Viability of the Proposed Landing Point at Cape D’Aguilar

One of the main reason why Cape D’Aguilar SCLS is not able to function effectively as a SCLS is due to

the location of the current landing point within the Marine Reserve. Hence, assessing and validating the

viability of the proposed new landing point may potentially help to reposition Cape D’Aguilar SCLS as an

attractive SCLS.

Summary

There are several potential options for development at some SCLS sites. Taking up any of these options

may help to increase the attractiveness and/or ability of the respective SCLS to host new cable systems.

In view of potential increase in external bandwidth and the landing of new cable systems in future,

adopting these measures may help facilitate the landing of new cable systems in Hong Kong:

• relaxing the lease conditions for shared use of SCLS;

• retiring some of the old submarine cable systems to vacate space for new systems; where

applicable, upgrading system technology which requires less space;

• expanding the existing buildings/facilities for SCLS;

• attracting more new systems to land at non-congested sites to increase the availability of other

systems for interconnection; and

• finding new landing point for existing site to bypass areas of environmental concerns.

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11. AREAS FOR IMPROVEMENT AND RECOMMENDATIONS

A summary of issues in this report is catalogued and highlighted in this section. The implications

corresponding to each issue are examined and strategic recommendations with various alternatives are

provided for consideration by the relevant stakeholders. The overview provided below sets the context

for the presentation of the final recommendations.

Overview

The Mainland is currently the fastest growing Internet market in Asia. In 2008, the Mainland had about

300 million people using the Internet with an Internet penetration of only 22.6 per cent. It is expected that

the Mainland will retain its position as the economy with the highest number of broadband users in the

world. With a low broadband household penetration of only about 20 per cent, and keeping in mind the

low Internet and personal computer penetration, it is expected that there is tremendous opportunities for

growth ahead. Frost & Sullivan estimates that the Mainland’s demand for external bandwidth will grow at

a CAGR of 43.8 per cent, from 0.95 Tbps in 2008 to 12.08 Tbps in 2015.

In view of future changes in the industry landscape and external factors that may have a significant impact

on the growth of the submarine cable industry in Hong Kong, it is imperative that government

stakeholders collaborate with incumbent and potential new industry players to address existing issues and

take the appropriate course of actions so as to secure Hong Kong’s position as the Internet gateway for

the Mainland and interconnection hub for the region.

11.1 Regulatory Environment and Issues

Industry players have highlighted several concerns with the administrative procedures/regulations. For

analysis purpose, they have been categorised under the following areas and regulatory processes:

• regulatory requirements related to the landing of new submarine cable systems;

• regulatory requirements related to the repair of damaged submarine cables; and

• leasing constraints on the SCLS in TKOIE.

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Facilitating the Landing of New Submarine Cable Systems (Impact on Industry Players: High)


government departments and parties on issues such as land acquisition, approvals for the laying of

submarine cables through the waters of Hong Kong, landing at an existing SCLS or building a new SCLS.

• Implications: Operators highlighted that when compared with the other economies in the region,

it takes a relatively long time for potential applicants to identify the relevant authorities and

acquaint themselves with the application processes.

• Recommendations: At present, the industry may find it difficult to get hold of the necessary

information in respect of the application procedures and the statutory approvals for landing of

new submarine cables in Hong Kong. It is recommended increasing the transparency of the

application processes with a view to promoting the understanding of the application processes.

OFTA has taken a proactive lead to set up a single-point-of-contact service whereby applicants

may submit their applications together with the necessary information to OFTA which will then

coordinate with the relevant government departments and parties and, if necessary, line up

meetings with them to expedite the vetting processes. It is also recommended establishing an ad-

hoc working group comprising of representatives from relevant government departments and

parties, who will be involved for all submarine cable related applications. In addition, there should

be a proper ‘succession planning’ and hand-over process for representatives who are rotated out

of this informal working group. These steps will help to reduce the time and effort required to re-

educate different group members who are directly involved in providing the necessary approvals

for applications. Furthermore, as part of the knowledge sharing process, industry players would be

in a better position to educate this group of experts about the economic benefits that cables bring

to the economy and clarifying misconceptions such as the resulting impact on the environment or

marine life. Independent consultants could also be brought in as an advisory role to help facilitate

the process.

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Close and Timely Collaboration to Facilitate Cable Repairs (Impact on Industry Players: High)

In today’s digital world, submarine cables form the lifeline of a country’s economy to the outside world.

Hence, a severe reduction in network connectivity due to a cable break may result in substantial impact on

industries which are heavily reliant on external telecommunications services.

• Implications: Feedback from the industry players have highlighted that Hong Kong cannot afford

to have a long down time in view of the high opportunity cost for cable operators. In addition, the

economic ramifications of a major cable cut could be significant as a number of carriers that lease

cable capacity from these cables provide telecommunications services to critical industries such as

the banking and financial services and data centre players.

• Recommendations: OFTA could facilitate by being the first point of contact for submarine cable

operators and strengthening the liaison with the relevant government departments including the

Immigration Department and Marine Department with a view to dealing with any request for

assistance from the industry expeditiously. The applications for temporary licence for the cable

repair vessel and employment visas for personnel on board the repair vessel to enter Hong Kong

waters should be processed as quickly as possible to enable timely repair of faulty cables and early

restoration of the affected external telecommunications services.

Relaxation of Lease Conditions of Existing SCLS in TKOIE (Impact on Industry Players: Moderate)

At present, shared use of the SCLS in TKOIE is not allowed. Although the existing operator of the SCLS

in TKOIE is allowed to use its excess capacity to provide co-location access to the cable systems that it

owns, the operator is not allowed to sublet its space to other data centre or to other submarine cable

operators. Moreover, under the existing agreement, shared use of the underground duct system and beach

manhole of the existing SCLS in TKOIE is not permitted.

• Implications: In view that shared use of the SCLS in TKOIE is not allowed, the feasibility of

obtaining industrial land from the HKSTP for future landing sites becomes debatable as the

restriction imposed effectively reduces a SCLS operator’s ability to land cables for third parties.

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The other option for SCLS operators would be to apply for government land from the Lands

Department. However, much more effort, cost and time will be required for land acquisition and

obtaining the necessary statutory approvals for landing the new submarine cables and building the

new SCLS.

All in all, the above factors would reduce Hong Kong’s competitiveness in attracting more players

to provide landing facilities and its ability to attract new cable systems to land in Hong Kong.

• Recommendation: The issue of allowing shared use of the SCLS in TKOIE should be resolved as

soon as possible.

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11.2 Merits and Demerits of Setting up New SCLS Compared to Using Existing SCLS

There are several points of consideration when deciding between the alternatives available for SCLS and

whether focus should be emphasized on enhancing/expanding existing SCLS sites and/or developing new

sites. The table below provides a relative comparison to set the stage for specific SCLS recommendations.

Merits Demerits

Using Existing SCLS

• Investment costs required for using existing SCLS will be comparatively lower since the infrastructure is already in place.

• As compared to setting up of new SCLS, regulatory requirements and the time taken for approval may be lesser.

• Existing SCLS typically will have at least one cable system in operation10. This provides opportunities for interconnection for new cable systems.

• There are also economies of scale and positive network externalities for co-location.

• Limitations exist in existing SCLS in hosting new cable systems (e.g. insufficient cable conduits).

• Due to changes in environment, existing SCLS may not be as appealing to cable system owners as before (e.g. due to new environmental regulations or barriers)

• Existing regulations may not permit the expansion or enhancement of current SCLS to accommodate new cable systems.

• Owners/operators of existing SCLS may not be receptive to hosting cable systems where they do not have a share.

Setting Up New SCLS

• Setting up new SCLS may potentially introduce new players and hence, increase competition in the industry.

• ‘Preferred’ SCLS currently in operation are operating at almost full capacity (e.g. insufficient space or cable conduits) and hence, may not be able to accommodate new cable systems.

• Due to the changing environment and preferences of cable system owners, careful selection of new locations may provide sites that better suit the needs of new cable system owners.

• Initial investments for geotechnical surveys need to be made to ensure that potential sites are suitable.

• Investment costs required for a new SCLS may be prohibitively expensive, discouraging potential investors.

• Land acquisition may be a time consuming and difficult process.

• Suitable land may not be available.

• New SCLS may not be as appealing due to limited opportunities for interconnection with other cable systems.

• Relative to using existing SCLS, the regulatory process and stakeholders involved for approval of building a new SCLS is likely to be more time consuming and complex.

10 Cape D’Aguilar SCLS is currently dormant.

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11.3 Remedy

Reviewing Viability of Cape D’Aguilar as a SCLS (Impact on Industry Players: Moderate)

Cape D’Aguilar SCLS is currently no longer viable as a SCLS for new cable systems due to the location of

the landing point within the Marine Reserve. However, the SCLS operator has pointed out that a

potential landing point can be built at ‘Rubbish Bay’ that is sited north-west of the SCLS, on the opposite

coast of the Marine Reserve.

• Implications: As a result of the location of the landing point, the Cape D’Aguilar SCLS has

become dormant and is not able to host new cable systems. Taking into consideration a possible

need for space in future as well as operators’ preference for greater diversity in the choice of

landing stations, the unusable Cape D’Aguilar facility would not be able to contribute to the

development of the submarine cable industry in Hong Kong.

• Recommendations: OFTA can assist the operator concerned in exploring the feasibility of the

proposed landing point.

11.4 Promote

Leverage on Availability of Designated Land in Chung Hom Kok (Impact on Industry Players: High)

Based on the previous SCLS analysis, the current Chung Hom Kok SCLS has been rated relatively high in

terms of its: (1) Ability to host new cable systems as well as, (2) being potentially attractive to cable system

owners due to its location on the southern tip of Hong Kong Island. However, there is currently only

one cable system in that location and does not offer ample opportunities for interconnection for new

cable systems. This may affect cable owners’ Preference for the location.

• Implications: Chung Hom Kok area is one of the potential locations for the building of new SCLS.

However, the 7 lots allocated have not been fully utilised for its intended purpose since the C2C

cable system was built in 2001.

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• Recommendations: In view of potential demand in future, at least 2 lots of the 7 available in

Chung Hom Kok should remain status quo and be retained specifically for building of submarine

cable landing station(s) in future. OFTA should assist operators in building their own new SCLS

in Chung Hom Kok or other new green field sites to be identified.

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12. CONCLUSIONS

In conclusion, there is potential for strong growth in the industry, primarily due to developments in the

Mainland and SEA driving the demand for external bandwidth. Taking into consideration Hong Kong’s

current position and existing submarine cable and telecommunications infrastructure, the territory is

poised to benefit from this growth.

The submarine cable industry is also critical for Hong Kong from an economic point of view as

highlighted by the significant direct, indirect and induced contribution it has to the entire economy of

Hong Kong. Based on our analysis for 2008, the contribution from the submarine cable industry to Hong

Kong’s economy was USD 1.8 billion in revenue, USD 810 million in value added to the economy and

8,100 jobs added to the economy.

However, several challenges and threats would need to be addressed to realize this opportunity. These

include collaborative effort to overcome the constraints identified, sub-optimal utilization of existing

SCLS, and other landing points in the region (including those in Singapore, Taiwan and the Mainland)

remaining the competitive alternatives to Hong Kong for selection by owners of new submarine cables.

Therefore, there exist areas where the government should focus on to ensure the sustainability of Hong

Kong’s position as an Internet gateway and telecommunications hub in the region. A summary of

recommendations is provided below for consideration:

• to increase the transparency of application processes to promote understanding of the application

processes;

• to enhance collaboration and coordination among relevant government departments and parties

by establishing an ad-hoc working group with representatives from them to expedite the approval

processes;

• to ensure close and timely collaboration to facilitate cable repairs;

• to consider the relaxation of lease conditions of existing SCLS in TKOIE to allow shared use of

the SCLS for landing new submarine cables and co-location of affiliated data centres, facilitating

the efficient use of the valuable scarce land resources and provision of the redundancy and

diversity as preferred by the telecommunications industry;

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• to leverage on the use of the designated land in Chung Hom Kok Teleport for building new SCLS;

and

• to facilitate interested parties in finding new sites and new landing points for SCLS.

0

Issues Relating to the Landing

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econometrics, and demographics.

of Submarine Cables in Hong Kong

Documents

Report on Consultancy Study on Issues Relating to the ... · Currently, parties interested in landing new submarine cables in Hong Kong have to approach various government departments