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