LICENSING CONDITIONS IN THE TELECOM SECTOR

UNCLAS SECTION 01 OF 02 TAIPEI 003195 SIPDIS STATE FOR EAP/RSP/TC AND EB/CIP FOR FINTON AND SHAFFER, STATE PASS AIT/W AND USTR, USTR FOR WINELAND, MCHALE AND AUGEROT E.O. 12958: N/A TAGS: ETRD ECPS TW SUBJECT: LICENSING CONDITIONS IN THE TELECOM SECTOR REF: A. STATE 114687 (NOT SENT TO AIT-TAIPEI) ¶B. SHAFFER/MULLINAX EMAILS 7/19/05 AND 7/22/05 ¶C. TAIPEI 1890 ¶1. Reftel requested information regarding addressees telecommunications licensing regime for fixed-line networks. Although Taiwan does not require application or administrative fees for license applicants, Taiwan's licensing regime does impose conditions on entrants in the form of capital and build-out requirements. In addition, interested parties may only apply for licenses during "open seasons" conducted twice yearly by the Taiwan Directorate General of Telecommunications (DGT) in March and September. Although telecom sector players tell AIT that these conditions constitute a barrier to entry into the market, the domination of the Taiwan fixed-network telecom market by state-owned Chunghwa Telecom (CHT) is cited as a greater disincentive to potential market entrants. ============================================= ====== The Evolution of Taiwan's Fixed-Line Telecom Market ============================================= ====== ¶2. Taiwan's fixed-line network telecommunications service market continues to be dominated by the state-owned former monopoly provider CHT. In its first modest attempt at liberalization, DGT opened the market to new service providers on a one-time basis in 2000. Three applicants were able to meet the paid-in capital requirements of NT$40 billion (apx. US$1.2 billion) and agreed to create subscriber networks capable of handling 1 million lines within six years. These requirements were imposed to prevent unqualified speculators from entering the market. These three competitors, despite investing over NT$200 billion (US$5.7 billion) in Taiwan, remain marginal players. At the end of 2004, CHT controlled 96.8% of the local call market, 78.1% of the Taiwan long distance market, and 55.5% of the international call market. In 2004, CHT's total fixed network and ADSL subscriber market share stood at 97.9% and 99%, respectively. ¶3. As part of its WTO accession commitments, Taiwan agreed to further liberalization of the fixed-line network telecommunications market. In September 2004, Taiwan announced that it had amended the administrative regulations governing fixed network telecom licensing, lowering the bar for entry by reducing paid-in capital requirements from NT$40 billion to NT$16 billion (US$500 million) and the build-out requirement from 1 million lines in 6 years to 400,000 lines in 4 years. In addition, DGT announced that it would hold biannual open seasons in September and March each year for applicants for new licenses. ====================================== Not Much Interest in the Taiwan Market ====================================== ¶4. The first open season for new licenses attracted no applicants. DGT announced further revisions to the licensing requirements in November 2004. Beginning in March 2005, paid-in capital requirements began to be figured on a proportional scale that would reflect the targeted service population. For example, a local service provider offering service just to Taipei city would be required to meet a paid-in capital requirement of just NT$1.2 billion (US$37.5 million) rather than NT$16 billion. For long-distance and international calls, the paid-in capital requirement was reduced to just NT$2 billion (US$62.5 million). Build-out requirements were also adjusted proportionally. Despite these changes, there were again no applicants for new fixed-line network licenses. ============================================= = CHT Still Finding Ways to Keep Competitors Out ============================================= = ¶5. Industry watchers have not been surprised by the lack of interest in fixed-line network licenses in Taiwan. CHT's dominance of the Taiwan market is further entrenched by its control of the "last mile" connections from the local switches into homes and businesses. In May 2004, CHT announced that it would share last mile access with the three existing competitors in specifically negotiated leasing agreements, but included restrictive requirements that not only obligated consumers to initiate the shift in service provider but also limited these leasing agreements to voice service in the three major metropolitan areas (Taipei, Taichung, and Kaohsiung). CHT plans to continue to restrict access for the increasingly lucrative data transmission services. CHT's slowness in entering into "reasonable" leasing agreements with competitors has further depressed interest in Taiwan's fixed-line network market. ¶6. One industry analyst told AIT that potential applicants may be waiting for the government to privatize CHT before considering entering the market. CHT has filed an application with the U.S. Securities and Exchange Commission to sell 15% of its stock currently held by the Ministry of Transportation and Communications on the New York Stock Exchange as American Depository Receipts (ADRs). CHT officials hope the shares can be placed by August. This sale, combined with a proposed sale of an additional 2% of CHT stock on the Taiwan Exchange, will bring the government's share in CHT below 50%, effectively "privatizing" the company according to Taiwan law. The same analyst noted that U.S. firms may still be smarting from the collapse of the telecom bubble in the U.S. but that several European firms are exploring Taiwan as a potential target as they diversify away from saturated home markets into a growing Asian market. PAAL