The Broadcasting Industry of Ernest CHU

The Broadcasting Industry of Hong Kong: Examining the Free-to-Air Television Market and the Regulatory Role of the Communications Authority

By Ernest CHU December 2012

Hong Kong, like many other countries, has a heavily regulated broadcasting industry; all broadcasters must be recognised and licensed by the Communications Authority (CA). The free-to-air television broadcasting scene is often central to discussions regarding the media of Hong Kong, as government regulation has rendered the industry uncompetitive and unsymmetrical. In recent years, the notion of increasing competitiveness within this industry has sparked debate (and protests) over whether the CA should allow more entrants into this industry. This essay will utilise a normative, empirical approach to examine the effects of CA’s regulation and explore the possibility of introducing more competition to Hong Kong’s free-to-air television broadcasting industry. In order to make some sense of this issue, the essay will first summarise briefly the history of and describe the market for free-to-air television. To follow, the essay will evaluate, from an economic perspective, the implications of regulation to both the broadcasting companies and consumers. Finally, the essay will highlight certain aspects which the CA may wish to consider when taking further action.

History

The free-to-air television broadcasting industry refers to the market for television services which are available for free (without the need to pay for subscription) and have no other associated costs, other than the cost to receive the transmission signals. According to the now-defunct Broadcasting Authority (2011), in 1965, a licence was given to Televisions Broadcast Limited (TVB) to operate the first free-to-air television service in Hong Kong, and broadcasting commenced two years later. In 1973, second licence was given to Rediffusion, now known as Limited (ATV). A third company, Commercial Television Limited, briefly emerged in 1975, but failed to survive and was closed down three years later. Hence, since 1978, the free-to-air broadcasting industry is occupied only by two broadcasting companies, ATV and TVB – essentially a duopoly. Currently, ATV and TVB have channels dedicated to Chinese and English languages, as well as special programmes catering to minority groups in Hong Kong.

The Regulatory Issue

The Broadcasting Industry of Hong Kong Ernest CHU

In 2009, three companies, City Telecom (CTI), Fantastic Television and Hong Kong Television Entertainment applied for licences to broadcast free-to-air television (Ip, 2012), renewing interests and reviving the possibility of increasing competition in the free-to-air broadcasting industry. However, three years later, there still seems to be no progress made by the CA and the three licences have been stalled by bureaucracy (Ip, 2012) and fierce opposition from the incumbents (“TVB threatens legal war”, 2012).

The reluctance of CA to issue new licenses to the three companies comes as a surprise to many. According to the CA’s website, two of the Authority’s missions are “encouraging innovation and investment in the communications market” and “promoting competition and adoption of best practices in the communications market for the benefit of the industry and consumers” (Communications Authority, 2012b), which suggests that the CA should welcome new interests into the currently stagnant free-to-air broadcasting industry. Any assessment of CA’s role should, therefore, be made in light of these objectives.

It is perfectly understandable for the CA to ensure satisfactory standards by requiring broadcasting companies to acquire licences (Communications Authority, 2012a), but if the objective of the CA is to promote competition, then the licensing procedures should not be designed as a method to barricade entry. It appears, however, that “there was no timeframe for a decision” and that the licensing could continue to be stalled, despite already having three years to consider the applications. This leads to suspicion that the CA is either inefficient, or under pressure to prevent entry; the remainder of the essay will focus on the latter as it provides more economic insights.

Understanding the Market

In a strict economic sense, it may be unreasonable to consider the free-to-air broadcasting industry a duopoly for analytical purposes, due to an implied imbalance of market power between the two incumbents. For many years, TVB has been the dominant player in the industry, as illustrated by figures 1 and 2. By revenue, TVB has earned HK$2.8 billion in 2011 from advertisements, compared with ATV’s HK$100 million (Chow & Nip, 2012). Also, TVB has an estimated viewership of 79% of the population (Yu, 2010). Questions regarding ATV’s profitability and solvency (van der Kamp, 2012) cause many to doubt ATV’s survivability, even in an enclosed, well-protected market. As such, some may consider that ATV has little or no influence over rivals TVB, creating essentially a monopolised environment and seemingly high barriers to entry. The dominance of TVB (and, to a much lesser extent, ATV), has been The Broadcasting Industry of Hong Kong Ernest CHU challenged frequently by critics, who claim that the lack of competition has led to low-quality programmes (Yu, 2010).

Another key to understanding the free-to-air broadcasting industry of Hong Kong is to consider the sources of programming. ATV and TVB are responsible for producing over 60% of the content on the Chinese channels, whereas the majority of the content on the English channels are bought from producers overseas. This implies that there is some level of vertical integration in the industry, and any decisions must be made in light of the regulatory act’s potential impact on local production. In fact, much of the ensuing debate assumes the importance of broadcasters’ ability to produce programmes and meet the demands of the market.

The Broadcasting Industry of Hong Kong Ernest CHU

The Natural Monopoly Argument

To justify the CA’s regulation of the free-to-air broadcasting industry, the primary consideration is whether or not the industry in question is a natural monopoly (Church & Ware, 2000). Natural monopolies are often found in industries where sunk investment costs are high and production by many firms is inefficient. Indeed, the required initial investments are exorbitant, with each of the three prospective entrants willing to invest up to HK$1 billion in the industry (Ip, 2012). Furthermore, CTI is reported to have already invested HK$300 million in anticipation of receiving permission to commence broadcasting. The required investment, large as it may seem, does not appear to discourage entry, which perhaps is a sign that there is potential within the free-to-air broadcasting industry.

As regards the inefficiency of production, it is difficult to gauge whether or not increased competition will result in inefficiencies due to the lack of comparable information related to the production and ongoing costs of the incumbent. However, it is not unreasonable to assume that entrants are disadvantaged due to their lack of experience, compared with the incumbents, and therefore may not be able to effectively reduce costs.

An intriguing characteristic of the free-to-air broadcasting industry is that the consumers of the market do not pay the broadcasting companies for their services, and so consumers do not directly contribute to the companies’ revenues. Furthermore, since much of the costs of production are sunk, and free-to-air broadcasting companies cannot transmit signals discriminately, the marginal cost of their services is also zero. As such, it appears that in this market, price is equal to marginal cost and, even under the assumed natural monopoly, the market is functioning optimally. The free-to-air broadcasting service is also reminiscent of a public good, as it is non-excludable to those who possess the basic equipment to receive the signals.

In fact, there is a large cross-subsidising effect present in the free-to-air broadcasting market; as broadcasters make content free to watch, the companies must recuperate revenue from other sources. The main source of revenue for free-to-air broadcasters is advertising and marketing. In 2011, revenue from advertising accounts for over 60% of total revenue (Television Broadcasts Limited [TVB], 2012). Empirically, free-to-air channels capture 81% of viewers, whilst pay televisions only capture 19% of viewers, which perhaps implies that price elasticity for television broadcasts is relatively high (although this is not for certain). Ramsey Pricing Theory dictates that, when elasticity is high, firms should charge a low price for the product (Church & Ware, 2000). The Broadcasting Industry of Hong Kong Ernest CHU

However, this means that free-to-air broadcasting companies are heavily dependent upon advertising revenue. The case for restricting competition is brought up by TVB executive Mark Lee Po-on. Lee claims that TVB is “not against having more [fishermen] join us to catch fish, but you have to create more fish in the sea first” (Chow & Nip, 2012). Lee believes that advertising revenue within the free-to-air broadcasting industry is insufficient to sustain any additional competitors, claiming that for the past 15 years, advertising revenue between TVB and ATV has remained constant at approximately HK$3 billion per year (Chow & Nip, 2012), and so Lee argues that it should be in the CA’s interest to barricade further entry to this market.

Advertising revenue for the entire TV market, however, increased from HK$3 billion to HK$8 billion over the past 15 years (“TVB threatens legal war”, 2012). Although this is a relatively small increase, it nevertheless implies that free-to-air broadcasters are, in fact, losing to competition from pay television, despite dominating viewership. This further complicates the problem, along with evidence which seems to suggest that there are problems with the quality of free-to-air television which competition may resolve.

The Consumer Perspective of the Industry

The most common problem underlying monopolies and government regulation is quality control. Given that broadcasting in Hong Kong is heavily regulated, it is the responsibility of the CA to ensure that consumers are satisfied with the quality of the broadcasting services. Although the regulator has made quality improvements over the years, such as introducing high-definition broadcasting in 2007 (Broadcasting Authority, 2011), recent studies have shown that consumers are dissatisfied with the CA’s actions. According to a survey by the University of Hong Kong, 85% have shown support of issuing new licences, whilst 71% were dissatisfied about the delayed issuance of said licences. Only 3% of polled individuals were against having new entrants enter the industry.

Empirically, it appears that the quality of free-to-air television programming is not satisfactory. According to a survey conducted by the Hong Kong Research Association in 2010, 47% of polled individuals believe that the quality is “just so-so”, and 21% feel disappointed or very disappointed about the quality of programming. Problems with quality are more heavily associated with ATV, which are showing reruns of previous programmes over 53% of the time outside of key broadcasting hours (Cheung & Nip, 2012), which is evidence that ATV lacks resources to obtain sufficient programmes to broadcast. The Broadcasting Industry of Hong Kong Ernest CHU

The problems associated with television programming content were highlighted in a panel discussion in 2009. Assistant Professor To Yiu-ming of Hong Kong Baptist University's journalism school, attributes the lack of quality to consumers’ lack of choice due to insufficient competition within the free-to-air broadcasting industry (Eng, 2009). Mak Yin-ting, chairwoman of the Journalists Association, emphasised her concern for the poor quality of the programmes’ contents, and was worried about the Chinese government’s growing influence on free-to-air broadcasters’ middle management, through regulation or otherwise (Eng, 2009).

The CA’s Considerations

The CA has the ultimate power to shape the free-to-air broadcasting industry, and it has the authority to issue new licences at any time. However, the CA is reluctant to take action due to fears of legal challenges which the incumbents threaten to take (Cheung & Nip, 2012; “TVB threatens legal war”, 2012).

The main concern for the CA is to firstly, determine whether the free-to-air broadcasting industry is a natural monopoly. Empirical evidence seems to suggest that currently, the industry is saturated and is unable to sustain any more competitors. However, the CA should also consider whether the new investments are able to expand the market and bring in more advertising revenue, as well as look into the potential of entering the market in China.

Even if the free-to-air industry is a natural monopoly, there is no reason to inhibit competition by considering the viability to force companies to compete for the market through a process of auctioning – a framework suggested by economist Harold Demsetz (Church & Ware, 2000). The CA already has a framework for monitoring content and reissuing licences, so the regulatory infrastructure is present. However, instead of competing with prices, it is possible for companies to compete against each other with investment opportunities instead. More research must be done in order to determine the effectiveness of such a framework, and the CA may consider changing the Broadcasting Ordinance before the current incumbents’ licences expire in 2015.

According to Nip (2012), prospective entrants have suggested that the CA should issue provisional licences whilst dealing with potential legal issues. This provides a good opportunity for the CA to test the The Broadcasting Industry of Hong Kong Ernest CHU market and to determine whether competition is beneficial. Currently, the CA lacks empirical evidence and research to make informed decisions regarding this issue, and provisional licences allow the CA the flexibility to revoke if necessary.

Conclusion

It is evident that the free-to-air broadcasting industry in Hong Kong is plagued by symptoms commonly associated with regulation and the lack of competition. The three prospective broadcasting companies provide a rare opportunity for the CA to experiment with opening up the stagnant market to more competition. It will be interesting to research the effects of the sudden increase in competition in the market, as well as being an effective mechanism to eradicate broadcasting companies which are failing to deliver high-quality programming. Whilst it is understandable that the CA is worried about rendering the industry more inefficient, the CA should consider instilling some form of competitive behaviour into the market. The Broadcasting Industry of Hong Kong Ernest CHU

References

Broadcasting Authority, Hong Kong, (2011). Annual report 2009-2010. Retrieved from website: http://ba_archives.CA.gov.hk/annual2010/eng_scene_1history.html

Cheung, T., & Nip, A. (2012, November 30). Lawmakers call for free-to-air TV licences by March Motion urges government to broaden choice for city's viewing public by issuing more permits. South China Morning Post. Retrieved from Factiva

Chow, V., & Nip, A. (2012, November 26). TVB executive says no room for new players. South China Morning Post. Retrieved from Factiva

Church, J., & Ware, R. (2000). Industrial organization: A strategic approach. (1 ed.). McGraw-Hill.

Communications Authority, Hong Kong, (2012a). Role & functions. Retrieved from website: http://www.coms-auth.hk/en/about_us/role_functions/index.html

Communications Authority, Hong Kong, (2012b). Vision & mission. Retrieved from website: http://www.coms-auth.hk/en/about_us/vision_mission/index.html

Eng, D. (2009, July 20). 'More competition' would force ATV, TVB to serve public better. South China Morning Post. Retrieved from Factiva

Ip, K. (2012, November 30). Free-for-all in TV drama. The Standard Hong Kong. Retrieved from http://www.thestandard.com.hk/news_detail.asp?we_cat=12&art_id=128816&sid=38359453&con_typ e=3&d_str=20121130&fc=7

Ng, K. (2012, November 19). Long wait ahead for Hong Kong's new TV licences. South China Morning Post. Retrieved from http://www.scmp.com/news/hong-kong/article/1085729/long-wait-ahead-hong- kongs-new-tv-licences

Nip, A. (2012, November 22). Provisional licences could solve free-TV deadlock. South China Morning Post. Retrieved from Factiva

Office of the Communications Authority, Hong Kong, (2012). Key communications statistics. Retrieved from website: http://www.CA.gov.hk/en/media_focus/data_statistics/key_stat/index.html

Television Broadcasts Limited, (2012). Announcement of 2011 Annual Results. Retrieved from http://i1.web.vip.hk1.tvb.com/www.tvb.com/affairs/faq/announce/2011/pdf/yrend2011_e.pdf

TVB threatens legal war over licenses. (2012, November 20).The Standard Hong Kong. Retrieved from Factiva

Yu, S. (2010, November 5). New entrants will test TVB, ATV duopoly. South China Morning Post. Retrieved from Factiva