Overview (November 2000)

Regulating Convergence
Classification of Activities to be Licensed
Confusion in the Licensing Framework
Extra-Territorial Application
Controlling Market Entry
Licence Fees
The Rights to 3G Spectrum
Tariffs
Content Regulation
Voluntary Industry Forums
Equal Access
Competition Practices
Conclusion

In anticipation of the convergence of networked communications media, the Malaysian government introduced a new legislative framework in 1998 in the form of the Communications and Multimedia Act 1998 (CMA). The legislation repealed the Telecommunications Act 1950 and Broadcasting Act 1988, which were regulated by separate regulatory authorities. The introduction of the CMA brought about the need for convergence in the regulatory framework to address the convergence in the industry, resulting in the establishment of an independent regulator - the Communications and Multimedia Commission. This commission advises the Ministry of Energy, Communications and Multimedia on regulatory and policy matters.

Regulating Convergence

Being among the first regulatory regimes to embrace convergence, Malaysia was the test bed for a new approach in regulating the telecommunications and broadcasting sectors as a converged industry. Compared to the previous licensing regime, the scope of activities requiring licence under the CMA has been enlarged to encompass applications and networked information technology.

The classification of activities within the new categories of licensing was initially unclear, and the Communications and Multimedia (Licensing) Regulations 1999 were revoked within one year of their existence. The uncertainty in the initial years of the legislative framework was quelled somewhat by the enactment of the following regulations, which came into force on April 1 2000:

• the Communication and Multimedia (Licensing) Regulations 2000 and the Communication and Multimedia (Licensing) (Exemption) Order 2000, which prescribe the classification of activities which require individual or class licences or which are altogether exempt from the licensing requirements;
  
  
• the Communication and Multimedia (Technical Standard) Regulations 2000, which prescribe for the certification of communications equipment and provide the framework for registration of certifying agencies;
  
  
• the Communication and Multimedia (Spectrum) Regulations 2000 and Communication and Multimedia (Spectrum) (Exemption) Order 2000, which regulate the use of the spectrum via spectrum assignments, apparatus assignments and class assignments; and
  
  
• the Notification of Issuance of Class Assignments by the Commission 2000.

This legislation revokes a number of prior regulations, including the Communication and Multimedia (Licensing) Regulation 1999, the Radio-Communications (Exemption) Order 1994, and the Radio-Communications (Specific Services) Order 1993. In addition, the provisions of the Radio-Communications Regulations 1995, to the extent that they relate to matters dealt with in the new regulations, have been revoked.

Licences granted pursuant to the repealed telecommunications and broadcasting acts continue to be valid, provided that they were registered with the commission prior to April 1 2000. Licensees were given the option to migrate to the new licensing regime or retain their existing licences. One of the benefits of migration is that the scope of the licence is potentially wider and no longer restricted to particular technologies.

Classification of Activities to be Licensed

The Licensing Regulations 2000 mapped out to a limited extent the categorization of the industry within four new categories. Broadly, the CMA requires the following activities to be licensed:

• ownership and provision of 'network facilities', which are defined as any element or combination of elements of physical infrastructure used principally for, or in connection with, the provision of network services, but does not include customer equipment;
  
  
• provision of 'network services', which are defined as services for carrying communications by means of guided and/or unguided electromagnetic radiation;
  
  
• provision of 'applications services', which are defined as services provided by means of, but not solely by means of, one or more network services; and
  
  
• provision of 'content applications service', which is defined as applications services providing content.

A summary of the categorization of activities to be licensed, and the various exemptions, is contained in the table below:

Confusion in the Licensing Framework

Though purportedly based upon segmentation of the industry and on the assumption that convergence between the various media has occurred, the matrix has unfortunately raised more questions than answers. In Malaysia's quest to be a communications hub, have we legislated ahead of our time?

The use of new terms, such as 'incidental network facilities' which is defined as "facilities which are subordinate and ancillary to the primary purpose of a network facility", creates even greater uncertainty. What, for example, is a 'niche connection service'? Yet again, we await clarification by way of ministerial guidelines.

In addition, the definitions of the activities enable creative structuring of the business and operational models to avoid the need for a licence. For example, 'IP telephony', which is to be subject to an individual licence, is defined as a public internet (IP) protocol telephony which is an applications service involving a multistage call set-up that involves a circuit switched to a packet switched interface. If any of these elements are missing in a particular activity, it is arguable that the activity is exempt from the licensing requirement by virtue of Section 129, which provides that any applications service which is not subject to a class licence is exempt from the need to be licensed.

Before the Licensing Regulations 2000 were published, no class licences were issued and, therefore, it was thought that applications services were not required to be licensed until class licences were granted by the minister. To add to the confusion, individual licences have now been prescribed, which do not make sense in view of Section 129 which exempts all applications services from the need to have any licence other than a class licence in the first place.

Furthermore, internet access service providers are not permitted to provide PSTN (public switch telephone network) telephony or IP telephony. It is not clear how this works in the present regime where telephone companies are also internet service providers.

Notwithstanding the detailed licensing framework, the government has exempted interactive transaction services, electronic transaction services and internet content applications services from the licensing requirements in order to facilitate e-commerce and grow a knowledge economy.

Extra-Territorial Application

The application of the CMA is extra-territorial - all facilities and service providers who "provide or will provide relevant facilities or services in a place within Malaysia" are to be licensed. As the sanctions for operating any of the above activities without a licence or applicable exemption are criminal penalties, there are practical difficulties of enforcing these requirements outside Malaysia. The problem is exacerbated by the technological ease of providing services to Malaysians from outside the country, through wireless or satellite communications, and over the Internet.

Controlling Market Entry

The Licensing Regulations 2000 provide for activities to be licensed by individual and class licences; the former is subject to closer scrutiny and regulation. The commission has announced that the grant of individual licences will be used as a means to control market entry. The Licensing Regulations 2000 prescribe classes of persons who are ineligible to apply for licences, including foreign companies. However, while the CMA expressly authorizes the provision of ineligibility criteria for individual licences, no such authorization has been made for class licences. Application of these ineligibility criteria to class licences may therefore be ultra vires.

As foreign companies are not eligible to apply for individual licences, foreign companies intending to penetrate the local market would need to incorporate a local subsidiary and adhere to the local foreign investment guidelines. These guidelines generally permit up to 30% foreign ownership, unless it is shown that there is justification for a higher level of foreign equity.

In an effort to boost the IT sector in Malaysia, the government has waived the limit on foreign ownership for eligible companies who conduct research and development in the IT field or are heavy users of information technology and locate within the Multimedia Super Corridor. NTT MSC Sdn Bhd, a subsidiary of Japan's Nippon Telegraph and Telephone, is the first foreign telephone company to provide internet access in Malaysia commencing from the middle of September 2000.

For existing operators, the implications are that entry into activities that are subject to individual licences would be limited, thus reducing the number of potential competitors. From the regulator's perspective, a balance needs to be struck between licensing sufficient operators to provide real choices to the consumers (thus increasing competition) and ensuring that the market can sustain such operators.

Licence Fees

The licence fees for individual licences are prescribed as 0.15 of the gross turnover or RM50,000, whichever is greater. The CMA has introduced eligible deductions to turnover such as research and development and local content production, and rebates for industry development. Class licences are subject to a fixed annual fee of RM2,500.

The Rights to 3G Spectrum

Malaysia will soon commence its auction or tender for the much coveted third-generation (3G) spectrum and application for a 3G spectrum assignment is by invitation only. The minister will prescribe rules for the dealing or transfer of the whole or any part of the spectrum. Unlike apparatus and class assignments, which are short term in nature, a spectrum assignment is granted for a term of 20 years. Fees for the spectrum assignment may be structured as (i) an annual fee component to contribute to the maintenance of the spectrum underlying the assignment and (ii) a component set by either auction, tender or other method within the scope of the CMA. A case has been made for the auction to be by way of a 'beauty contest' whereby there is a range of selection criteria, rather than a purely monetary bid. It is thought that the highest bidder mechanism would further cripple the already troubled telephone companies.

The commission has published a discussion paper on the concepts and proposed principles behind the implementation of IMT-2000 mobile cellular service in Malaysia, which is available for public comment at www.cmc.gov.my.

Tariffs

With the introduction of competition practices under the CMA, the regulations prescribing tariffs for cellular services have been repealed with effect from August 1 2000. Although Sections 197 and 198 of the CMA (which enable service providers to set rates in accordance with market rates) have yet to come into force, the repeal of the Telecommunications (Automatic Telephone-Using Radio Services) Regulations 1986 effectively gives cellular service providers a free hand to determine the appropriate rates (including combinations of pre-paid and post-paid services to suite different target markets). The minister does, however, retain the power to intervene freely to determine rates for any competitive facilities or services for good cause or in the public interest.

Fixed-line tariffs remain prescribed by the Telephone Regulations 1996. As there are no other prescribed tariffs, services providers are free to determine competitive tariffs.

Content Regulation

The CMA prohibits the provision of content that is indecent, obscene, false, menacing or offensive in character with intent to annoy, abuse, threaten or harass any person. The CMA empowers the commission to designate any industry body to prepare a voluntary industry code to provide model procedures for dealing with offensive or indecent content. There is, however, a positive statement in the CMA that nothing therein shall be construed as permitting censorship of the Internet.

Voluntary Industry Forums

The CMA enables the industry to regulate itself, and the commission may designate industry bodies to determine industry codes for the following:

• an access code in respect of procedures for concluding access agreements and rate methodologies, protecting intellectual property and commercial information, providing facilities and sharing technical information;
  
  
• a technical code to govern provision of facilities and services by qualified providers, the approval of customer equipment and other access devices, the adoption of technical standards promulgated by international bodies and the promotion of electromagnetic immunity and compatibility;
  
  
• a consumer code to set out procedures for reasonably meeting consumer requirements and handling consumer complaints and disputes, including an inexpensive arbitration process for the compensation of customers in the event of a breach of the consumer code; and
  
  
• a content code in relation to restriction of unsuitable content, methods of classifying content, procedure for handling public complaints, and public information and education regarding filtering technologies for end-user control of content.

Compliance with these codes would be voluntary (save in respect of the consumer code which would be required as a standard licence condition), and would be encouraged as compliance would be a defence to any prosecution, action or proceeding of any nature regarding a matter dealt with in that code.

At present, the commission has not designated any industry bodies, although the industry has during the past two years met to form appropriate forums for the preparation of the codes.

Equal Access

Licensees are required to provide customer access to competing services. As of January 1 1999 equal access provisions have come into force and are applicable in respect of fixed-line operators in relation to long-distance and international communications, but not for mobile-service providers.

At present, the system requires a consumer to register for a service and to select the carrier each time such service is required. If a carrier is not selected, the carrier is pre-selected by default to the carrier to which the subscriber is directly connected. By virtue of the fact that the majority of fixed-line subscribers in Malaysia subscribe to the incumbent Telekom Malaysia Berhad, consumers are pre-selected by default to a Telekom fixed line. Pre-selection of the carrier of choice for all communications by a consumer was targeted for January 1 2000, but has been deferred.

Competition Practices

All licensees are prohibited from engaging in conduct that has the purpose of substantially lessening competition in a communications market. Competition law is new to Malaysia and requires substantial development. At present, the statute prohibits rate fixing, market sharing, boycott of suppliers of apparatus or boycott of competitors, and tying and bundling of products and services. The CMA enables the commission to determine that a licensee is in a dominant position and direct such licensee to cease conduct which has the effect of substantially lessening competition and to implement appropriate remedies.

Prior authorization may be sought for conduct that may be construed as anti-competitive, but such authorization may be subject to undertakings on the part of the licensee. So far, no complaints have been lodged of anti-competitive conduct.

Conclusion

As it is early days yet in the implementation of the CMA, it remains to be seen whether the new legislation will have a positive effect on the industry as intended by the regulators. The CMA provides for both public regulation and industry self-regulation, both of which require industry and regulator to embrace new concepts and commercial realities.

For further information on this topic please contact Sharon Suyin Tan at Zaid Ibrahim & Co by telephone (+603 257 9999) or by fax (+603 254 4888) or by email ([email protected]).