Allocation of 3G Licenses in Hong Kong May Deter Some Bidders

date: 16th February 2001

In its attempt to ensure that Hong Kong's third-generation mobile-phone market becomes a competitive one, the government ignored industry concerns and went ahead with a proposal to require 3G operators to open up 30% of their networks to other carriers.

The move may deter some potential license bidders. But since the government also opted for a license allocation method that puts less cash-rich operators on an even footing with larger players, analysts say enough companies are likely to participate in the upcoming auction for four licenses.

While some existing operators and analysts called the open-network requirement unfair and said it would reduce the value of the licenses, others were quite relaxed, arguing that operators without their own network are likely to gain a foothold anyway.

Michelle Au, spokeswoman for the mobile-communcations arm of Pacific Century CyberWorks Ltd. (PCW), toned down the company's earlier criticism and said CyberWorks supports an open-network environment since it will encourage more people to use 3G technology.

"It will be based on commercial agreements, and at the end of the day it will be up to the network operators to decide the price" for making the spectrum available, she said.

Analysts too were pleased with the fact that the industry regulator, the Office of the Telecommunications Authority, said it will step back and let the parties determine the prices themselves.

"The regulator has stressed that it will not interfere unless the market doesn't work, and we think it will work," said one telecom analyst with a Hong Kong bank.

The authority said if the parties fail to agree on a price, it will determine the interconnection fee, which will be set to allow the network operator a 20% return on its investments. It will also take into account the auction fee, and capital costs for building the networks.

Hutchison Telecom, a unit of Hutchison Whampoa Ltd. and the largest mobile- phone operator in Hong Kong, welcomed the authority's guarantee, saying it was a step in the right direction. The company added that the 30% that license holders will have to make available to so-called mobile virtual-network operators and content providers is "far too high."

Similarly, a spokeswoman for SmarTone Telecommunications Holdings Ltd. said the company had suggested a slightly lower level of 25%.

Nigel Coe, telecom analyst with Deutsche Securities, said it is likely that the network operators will have some spare capacity, however, and it is better to rent that out in return for a steady revenue stream. Also, each operator in Hong Kong will get 30 megahertz of frequency spectrum, compared with only 20 megahertz in Germany. Mr Coe added the operators should have enough frequency to operate the network even if one-third is rented out to MVNOs.

Rohit Sobti, regional head of telecom research at Salomon Smith Barney, thinks the government's decision will be much more damaging than that, though.

"The value of the licenses has fallen tremendously," he said, adding that the catalysts for consolidation are also rapidly disappearing and analysts are likely to play their cards extremely carefully.

Looking at it from a slightly different angle, Mr. Coe said the authority was likely trying to avoid forcing consolidation, and perhaps even bankruptcy, among Hong Kong's six mobile-phone operators.

At a press briefing Tuesday, Secretary for Information Technology and Broadcasting Carrie Yau stressed that the opening up of the network has a broader purpose than just allowing for more operators.

"We are asking for the network to be opened not mainly for MVNOs but rather to allow for competition in the provision of content, so that small operators will be able to use 3G networks to provide e-commerce or other high-tech services to 3G users," she said. "That is the objective."

According to Ms. Yau, there is a consensus opinion that the introduction of digital broadcasting services in Hong Kong has to be market-led and commercially driven. She stressed that this doesn't mean the government will refrain from taking action when there is a need to be more pro-active.

"We are keenly aware that our market liberalization policy will only be successful if we level the playing field so that no one player, be it an incumbent or a newcomer, enjoys an advantage over others either by design or by default," she said.

Yau said Hong Kong's liberalization policy led to new investments worth more than US$1.67 billion in the telecoms market last year. The four new pay-TV operators have committed to provide a total of more than 100 new TV channels, she said.

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