Hong Kong: VoIP Services Now Regulated In Hong Kong

On 6 January 2006, following an extensive public consultation process spanning over fifteen months, the Telecommunications Authority (TA) finalised the regulatory regime for VoIP services and created a new Services-Based Operator (SBO) Licence. With the introduction of the SBO Licence, services-based operators can now enter the Hong Kong market to offer local voice telephony services employing IP-based technologies or other technologies.

The new SBO licensing regime encompasses the provision of public internal or external telecommunications services (whether or not the services are similar to conventional telephone services). This regime has the following main features:

• All service providers of IP telephony services who use telecommunication equipment located within Hong Kong are required to obtain an SBO licence. This licensing regime would not affect overseas IP telephony service providers who do not establish or maintain any telecommunication facilities in Hong Kong.
• Amongst the SBO licencees, providers of IP telephony services which are very different from the conventional voice telephone services would be subject to a relatively lighter level of regulation (namely, General Conditions 1 to 15 and Special Conditions 1 to 13 of the SBO licence). One example of such services is "Instant Messaging" for which Internet Protocol addresses are used to make and receive calls. Traditional telephone numbers are not assigned to customers for such services.
• Providers of IP telephony services which are similar to conventional voice telephone services would be subject to a relatively higher level of regulation (i.e. additional Special Conditions 14 to 21 may apply depending on whether it is a Class 1 or Class 2 licence - explained further below). Hong Kong telephone numbers are assigned to customers of such licensees. Customers can make and receive calls to and from customers of local traditional public switched telephone network (PSTN). These types of services are subject to either Class 1 or Class 2 SBO licences, both of which require compliance with additional requirements contained in the specified conditions for the SBO services, including number portability, emergency call services and backup power supply etc.

The scope of services of the SBO Licence is essentially similar to the scope of service of fixed telecommunications network services (FTNS) or fixed carrier (FC) licences; the only difference is that an SBO licensee does not have any facilities-based rights. Consequently, a SBO licensee may provide local IP telephony services as well as external telecommunication services (ETS) and international value-added network services (IVANS). Current holders of FTNS or FC licence can provide VoIP licences without the need to apply for an SBO licence.

The applicant for an SBO licence should be a company incorporated in Hong Kong. There are no foreign ownership restrictions. If the applicant is a company incorporated overseas, it may still apply provided that it has registered in Hong Kong as an overseas company.

The TA has removed the restriction proposed during the consultation process on the provision of "internal and external telecommunications services between fixed points" for the SBO Licence. The removal of the words "between fixed points" from the scope of the SBO Licence seems to suggest that mobile services might be permitted. However, the TA has made it clear that an SBO licensee may not, at least for the time being, provide local voice telephony services to mobile services customers. Such services are explicitly excluded under the SBO Licence. There is a possibility that these restrictions may be relaxed once the much talked about regulatory regime for fixed-mobile convergence has been finalised as an SBO licensee should then not be restricted from providing local voice telephone service access to mobile services customers.

As stated above, the SBO licensing regime applies to all IP telephony service operations with equipment maintained or located within Hong Kong. Where Hong Kong telephone

numbers are assigned to customers and customers are able to make and receive calls to and from customers of local traditional PSTN, the service providers would be subject to additional licensing conditions. This type of service providers are required to obtain either a Class 1 or Class 2 SBO licence.

The difference between Class 1 and Class 2 is that:-

• Class 1 services have all the attributes of conventional telephone services.

• Class 2 services have limited attributes of conventional　telephone services

Class 1 and Class 2 service licences share the following common attributes:

• they provide internal telecommunications services for carrying real-time voice communications which may be integrated with other types of communications;
• they can provide external communications services and international value-added network services;
• they are required to provide "any-to-any" connectivity and hence interconnection arrangements with FTNS/FC licencees.
• they are required to provide a call line identification service;
• they are required to provide an emergency call service;
• they are required to install a backup power supply to the IP phone and related equipment if they provide service to users who connect "lifeline devices" to the services;
• the validity period is 1 year, and is renewable on an annual basis subject to the discretion of the TA

The following major differences exist between Class 1 and Class 2 services:

• Class 1 services licencees are required to provide to customers the convenience of number portability, free directory service and establish a service charter for ensuring service quality. No such obligations are imposed on Class 2 services licencees.
• SBO licencees providing Class 2 services will be required to declare their service as "Class 2 service" in all promotions, marketing or advertising materials. There is no such declaration requirement for Class 1 service operators.
• Class 1 services will be allocated 8-digit telephone numbers with prefix "2" and "3", the criteria is same as those currently allocated to FTNS/FC licencees. Class 2 services will be allocated 8-digit telephone numbers with the prefix "57" and "58" so that consumers will easily distinguish that such numbers are Class 2 services.

The licence fees for a SBO Licence are comprised of a fixed and variable component. The annual fixed licence fee for the provision of Class 1 and Class 2 services under the SBO Licence are HK$90,000 and HK$25,000 respectively. As for the variable component, the annual variable licence fee is the same for both classes and is calculated at HK$7 per each subscriber number allocated to the SBO licensee. The licence fee for a SBO Licence is extremely low when compared to the annual FNTS/FC licensee's fee of HK$1 million. Such a low entrance fee is a great incentive for new players to enter the Hong Kong telephony services market.

In order to fulfil the "any-to-any connectivity" requirement under Class 1 and Class 2 SBO licence and to enable calls to be made between IP telephony users and a local PSTN number or a mobile number, at least one connection to a hosting network of a FTNS/FC licensee and mobile licencees will need to be established. Interconnection charges will therefore be incurred.

The charging arrangement is such that the existing fixed-to-fixed carrier and fixed-to-mobile charging principles will apply in respect of calls that are delivered via the hosting network to or from other fixed and mobile networks respectively. The hosting network licensee will settle the interconnection charges as if the SBO licensee calls were made or received by customers who are directly connected to the hosting network. The relevant terms of the interconnection agreements will be negotiated on a commercial basis between the SBO licencees and the hosting network licencees, subject to TA's intervention in order to ensure fair access to the hosting network and ensure that consumers' long-term interest is furthered.

The LAC charging regime is another area of contention between facilities-based and services-based operators. An SBO licensee which also provides external telecom services is requires to pay interconnection charges, such as LAC for delivery of outgoing and incoming traffic to the FTNS/FC or public radio communication service or mobile carrier licencees. The TA may determine these charges under s.36A of the Telecommunications Ordinance. For the time being, the LAC charging terms will be negotiated on a commercial basis. The difficulties lie in determining which VoIP calls are charged and which are able to be charged. If the IP Telephony service provider routes an external call through a hosting PSTN network, then the hosting network licensee should receive a LAC charge. Of contention is whether LAC charges would also apply to external calls carried over an IP network and if so, how to differentiate external IP telephony traffic from internal traffic in the IP network environment. This issue will be subject to further review by the TA.

External IP telephony traffic routed through a PSTN network will continue to be subject to the existing USC regime. However, due to technical difficulties in measuring the volume of external IP telephony traffic that is entirely routed over the Internet, it is not possible to calculate the applicable USC charges and as a consequence SBO licencees will not be subject to USC charges for now.

One issue yet to be settled is the case of IP telephony traffic routed through both a PSTN network and an IP network. The TA intends to conduct in a further review to consider whether apportioning the USC charges based on the length of time for which traffic is routed over the PSTN is appropriate together. It is proposed that this review will also encompass the LAC charges for IP networks.

Whilst other jurisdictions have issued rulings and guidelines in relation to the provision of VoIP services, Hong Kong is one of the very first jurisdictions in the world to put in place a comprehensive framework regulating VoIP services. The introduction of the SBO licensing regime has clarified the regulatory uncertainties concerning the deployment of VoIP services in Hong Kong. However, difficulties in calculating the LAC and USC charges in an IP environment remain. The scope of the licensing regime is also limited to services that use Hong Kong telephone numbers. Undoubtedly, other telecom regulatory bodies will be keeping a close watch on the effectiveness of the dual class licensing regime introduced in Hong Kong.

Gabriela Kennedy and John Tai

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