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Rumor: China Telecom Faces Antitrust Investigation, 9/19/11

China Telecom (NYSE: CHA; 0728.HK) is reportedly the subject of a broadband access market antitrust probe by various Chinese government agencies, and will likely face penalties. According to an industry source, relevant authorities conducted several rounds of inquiries at China Telecom and met with industry experts, industry associations, and numerous companies, including China Unicom (NYSE: CHU; 0762.HK; 600050.SH) and China Tietong, to collect evidence as to whether China Telecom is exploiting its market dominance in providing broadband access and charging inter-network settlement fees in order to block competitors from entering the market. Chinese authorities have resolved that China Telecom did engage in monopolistic practices, and will be be subject to fines equal to 1-10% of its illegal revenues.

According to a source within one of the operators, China Telecom is taking the matter seriously, and has formed a team composed of employees from various provincial subsidiaries to address the investigation.

The investigation has its origins in an internal document released by China Telecom in August 2010 that called for all provincial level subsidiaries to "clean up" high-bandwidth and dedicated line broadband accounts, according to an industry source, and to root out and shut down all bandwidth price arbitrage involving other operators and internet companies, with the exception of core network nodes. The sweep adversely affected these other operators, and as a result affected over 10 mln internet users, the source estimates. After China's Ministry of Industry and Information Technology (MIIT) intervened, China Telecom temporarily slowed its crackdown, but the industry is concerned that unless inter-network settlement fees are revised to address the gap in pricing between different customers, the same problems will re-emerge.

China's telecommunications, petroleum, hydroelectric, and other public utility companies have always been the subject of antitrust scrutiny, but to date have not been penalized.

Editor's Note: For more background on this topic, please see "China Telecom Battles Bandwidth Price Arbitrage" MD 9/25/10 issue.

Keywords: law scandal China Telecom China Unicom China Tietong bandwidth antitrust broadband telecom MIIT broadband access 0728.HK 0762.HK CHU penalty regulation revenue

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