A draft Telecommunications Management Act aimed at modernizing the regulatory structure has been sent to the legislature.
Despite the immense technological advances that have profoundly shifted the telecommunications industry over the past decades, Taiwan’s telecom sector continues to be regulated by a law dating back to 1958. Taiwan has long been aware of its need to revamp its regulatory framework, and the Tsai administration has responded by drafting several new laws regulating the telecoms and media sector, especially the proposed Telecommunications Management Act. That bill has now been submitted to the Legislative Yuan, though informed observers believe it may not come to a vote for at least a year.
The current Telecommunications Act was enacted at a time when telecommunications meant “the phone company,” and the business being regulated was telephone service via fixed lines to households and companies. Since then, the telecommunications business has broadened tremendously, with the advent of the internet and wireless communications by means of smartphones and other devices. Wireless technology is already impacting industries ranging from healthcare, through remote patient monitoring, to the power sector’s use of smart meters for real-time observation of power usage, while smart cities initiatives combine communications technology with advanced sensors and monitoring techniques to deliver enhanced services. According to the latest data from research consultancy IDC, more than 20 billion devices will be connected via the Internet of Things (IoT) by 2020.
All of this technology requires infrastructure ranging from fiber-optic cables to cell-phone towers that have been built by telecoms. But connectivity itself takes up ever-smaller proportions of the value chain as content, products, and services increase in value. Voice and text, once the main revenue drivers for telecoms, have increasingly been supplanted by Voice over Internet Protocol (VoIP) and Over-the-Top (OTT) internet services such as Line and WhatsApp, which utilize telecoms’ infrastructure even as they eliminate revenue streams.
This convergence challenges governments to devise regulations that allow for healthy competition and sustainable business practices within the telecom and broadcasting sectors. Regulations must also ensure that the market is free of domination by any single entity. More importantly, the regulatory structure needs to encourage innovation in technology and business models that take advantage of the opportunities created by technological advances.
Following the announcement of the draft law’s approval by the Executive Yuan, National Communications Commission (NCC) spokesman Wong Po-tsung told reporters that reasonable deregulation of the telecommunications sector is needed to develop broadband infrastructure and an innovative digital economy.
Currently, the telecoms industry is divided between the Tier 1 operators that own and operate significant communications infrastructure including line equipment, transmissions facilities and cell towers, and Tier 2 companies that provide services such as international communication using existing infrastructure. Taiwan has three major Tier 1 operators – Taiwan Mobile, Far EasTone, and Chunghwa Telecom – and two smaller ones, Taiwan Star and APT.
Tier 1 operators are the primary suppliers of telecoms networks, and as such are strictly regulated by the NCC. They must be licensed to build infrastructure and to buy and operate radio spectrum. Their business practices, including rates and services, are scrutinized by the regulators. The draft law submitted by the NCC and approved by the Executive Yuan would do away with much of this regulation, lowering the barriers to entry into the market while also providing more freedom for incumbents to operate.
The new telecom act eliminates the division into Tier 1 and Tier 2 categories and merely requires those intending to provide telecoms services to register with the NCC. “The new law aims to lower the barriers to enter the market and to create an industrial environment for fair competition,” Kelly Hsieh, market research head for Taiwanese analytics firm Trendforce, has written.
Under the proposed new law, the government would no longer limit the number of operators in the market, and smaller operators would be able to rent bandwidth after registration. In addition, abolition of the division of the telecom sector into Tier 1 and Tier 2 categories will enable operators to more freely adopt new services or merge with other operators. Prior approval from the authorities would be needed only when the market share would exceed 25%.
The draft law would also allow for greater flexibility in infrastructure construction and utilization. Although most radio-spectrum bandwidth would still need to be paid for as it is considered a national resource and falls under public resource regulations, the draft telecommunications act would permit development of a secondary market for bandwidth as is common in the United States, Europe, and other major markets.
The NCC has also asked the Executive Yuan to give it authority over spectrum allocation, which is currently managed by the Ministry of Transportation and Communications (MOTC), making the Commission the sole regulator for all communications markets involving use of radio spectrum.
“This change gives more flexibility to the telecommunications industry and encourages industry innovation” by allowing more cross-sector investment and more market entrants, noted Trendforce’s Hsieh. “By revising the regulation, the government expects to protect the rights and interests of existing telecom operators and to promote the development of innovative services.”
Vick Chien, a lawyer with the Taipei firm of Lee and Li who advises telecoms on Taiwan’s regulatory environment, notes that under the draft act, telecoms would have more flexibility to bundle their services, including offering home and mobile internet as well as cable TV or OTT media into a single service. This greater flexibility would potentially lead to lower fees and higher service levels for consumers.
“The draft act is intended to free the current telecoms players from unreasonable regulations and let them to have more liberty to compete with the currently unregulated OTT service providers,” he says.
Under the current regulations, voice and texting services delivered via the internet are not considered telecom business and so remain free of regulation. The previous administration had proposed its own version of a new telecom law, the Communications Convergence Act, but it differed markedly from the version approved by the Tsai government in restructuring the existing telecom sector and drawing OTT service providers under the regulatory umbrella.
The Act, pushed by former NCC Commissioner Howard S.H. Shyr, would have replaced or repealed Taiwan’s telecom and broadcasting regulatory framework but the effort failed to clear the Executive Yuan. “Shyr’s idea was to put everything into the regulation; that’s his approach. But Nicole Chan (the current head of the NCC) seems to admit to the reality that everyone is doing a telecom business no matter whether they officially applied for a license or not,” says telecommunications attorney Arthur Shay. “Chan would like to keep everyone in the same box, saying I encourage you to do productive things as long as you can benefit the general consumer.”
While the draft telecoms law is largely aimed at promoting market liberalization, it includes special provisions to ensure that “significant market players” do not abuse their position. Taiwan’s telecom sector is dominated by the “Big Three” incumbents. Chunghwa Telecom (CHT), the former government-owed monopoly, is the biggest, with nearly 11 million local fixed-line subscribers for a 93.4% market share, 10.6 million mobile subscribers (36.9%), and 37.3% of market revenue, according to third-quarter data from NCC and MOTC sources.
CHT was the commercial unit of the MOTC’s Directorate General of Telecommunications (DGT) until it was spun off in 1996 as part of the government’s effort to privatize and liberalize telecommunications (private competitors Far EasTone and Taiwan Mobile were allowed to enter the market at around the same time).
In August 2005, the government sold most of its ownership stake in CHT, now retaining only around 33% of the shares, but it retains a tight grip on the company’s management through the board of directors. Listed on both the Taiwan Stock Exchange and New York Stock Exchange, CHT as of late of October had a market cap of US$26.17 billion according to Bloomberg. It earned NT$166.63 billion (about US$5.6 billion) in the first three quarters of 2017.
CHT’s obvious domination in the market put it squarely in the crosshairs of the new law. “Although the overall level of regulation in the telecommunications market is reduced, the Company may assume special market-controlled obligations,” said Chunghwa Telecom in an email response to Taiwan Business TOPICS.
The fixed-line issue
In the mobile era, when fixed-line telephones are a legacy of a bygone era and entire swathes of the developing world are skipping fixed-line telephony entirely, CHT’s overwhelming share of the fixed-line market is potentially the most problematic aspect of its business. While the company holds over 90% of the fixed-line market, that market today is only half the size of the mobile market and continues to slide.
CHT has shored up this breach with its fixed-line broadband network, which holds a 73.8% share of the market by subscribers (some 4.47 million), but it is the “backhaul” side of the mobile market where Chunghwa enjoys its main advantage.
Mobile phones pick up radio waves transmitted by cell towers, but these towers are connected through fiber-optic fixed lines to achieve higher data transmission and high quality over long distances. Though the other big market players all build and operate their own cell towers, they still rely on CHT’s backhaul business of fixed lines. [see the accompanying story]
Arthur Shay notes that former NCC chairman Shyr “had the intention of reforming and separating the fixed-line business but had no support from the government.” The lawyer says his “personal interpretation is that the NCC has no intent to regulate any of them save Chunghwa,” because of CHT’s size and influence over the market.
In addition, the draft telecommunications act would expand the role of the NCC from simply being a regulator to also taking on responsibility for business promotion of the telecom sector. In particular, Article 94 of the draft law calls on the Commission to promote innovation and R&D in the telecom industry, and to help telecom enterprises navigate the business environment.
But doubts persist as to whether the new law will have the intended effect of stimulating business activity and innovation as well as providing better service for consumers.
First, it is unclear how the proposed new business would be offered. Would the new law actually create space for start-up telecoms to rent bandwidth and offer their own services to their own customers? This option would be possible under the new law, but many observers doubt that the Taiwan market is big enough to support multiple new players. They note that the two existing junior players, Taiwan Star and APT, have gained only small market shares.
“The number of mobile telecoms won’t change, as the market is already full,” says Vick Chien, but he suggests that foreign players might see an opportunity to provide telecom services over existing infrastructure networks. “In theory this new law should substantially change the market, but in reality I can’t forecast at this early stage.”
To jumpstart growth in the telecom and media sectors, Taiwan’s government is planning to invest US$1.5 billion by 2025 in the nation’s digital infrastructure as part of the “Forward-looking Infrastructure Construction Project.” The project will improve rural access to broadband internet, as well as develop a 5G mobile services network by 2020 and an IoT network.
As is customary with legislation in Taiwan, the text of the Telecommunications Management Act itself is sparse and rather vague, with specific rules to be established only after the mother law is passed. As the scope of the bill is so wide, many in the legal community are urging the government to begin tackling these regulatory issues while the draft is still being considered in the legislature.
“If the NCC is really ambitious, it should prepare the draft regulations right now,” says Shay. “So many policies must be decided before anyone can make any business moves.”