Market forces should drive 3G development

date: 17th January 2001, source: scmp.com

Trying to please all of the people all of the time has rarely made for good policy choices. That, however, seems to be the approach of the Hong Kong Government in doling out third-generation (3G) mobile-telephone licences.

Until a few months ago, the Office of the Telecommunications Authority (Ofta) wanted to give away up to six 3G licences for free. The raging success of last summer's 3G-licence auctions in Europe forced it to backtrack and promote a third way. That promised only a small payday for the Treasury but maximum consumer choice, as operators would have to make 30 per cent to 50 per cent of their network capacity available to "virtual" operators providing interactive services.

The idea was to avoid a costly bidding war that might cause capital-starved licence winners to under-invest in their networks, to the detriment of consumers. By mandating an open-access regime, the Government hoped consumers would win on the swings what, as taxpayers, they lost on the roundabouts.

Following the global sell-off in telecommunications stocks and the credit crunch in the debt market, critics are in an "I told you so" mood. Selling radio spectrum to the highest bidder represented a counter-productive money grab by mercantilist-inclined governments, they argue. Better to let consumers benefit from well-capitalised companies pumping money into productive network expansion and service innovation, as demonstrated by the roaring success of NTT DoCoMo's "I-mode" mobile-Internet service in Japan.

Ofta is scheduled to finish its lengthy consultation next month and announce shortly afterwards how licences will be distributed. Smaller operators are happy with the halfway-house proposal. If adopted, it will keep them in the 3G game, as the open-access requirement means licence fees should not be too high. But the SAR's largest mobile player, Hutchison Telecommunications, is deeply unhappy and has indicated it might not apply for a licence in a market it sees as being made unprofitable by free-loaders on the network.

Last week, Hutchison executives were said to have personally lobbied Chief Executive Tung Chee-hwa to abandon the open-access requirement and instead allow interconnect agreements between network operators and virtual service providers to be made on commercial terms alone.

Two weeks ago, Ofta held a public forum at which operators and government consultants agonised over technical issues of metering and enforcing the minimum open-access requirement. Now, however, the bigger question is whether the whole process will be derailed by Hutchison's intransigence.

On the face of it, Hutchison's threat looks hollow. Having formerly been a premium-priced provider, the company has cut prices aggressively and as a result become the dominant operator with about 1.6 million subscribers. It claims to be running its mobile operation at a loss but is hoping to migrate customers to the more lucrative data services made possible by 3G.

So, would Hutchison give up its 3G ambition in a fit of pique and, more importantly, should we care if it does?

The starting point of the Government's hybrid auction was that it would be good for companies, as they would not be stymied by huge up-front capital costs. Yet Hutchison claims that being forced to yield so much network capacity to virtual operators would be a technical nightmare and discourage network investment due to unpredictable returns.

The argument in favour of spectrum auctions is that they provide certainty. Participants pay their best guess of what they believe to be the future value of the licence. Thereafter, they can build networks secure in the knowledge that the market is theirs to chase. The Hong Kong proposal is different in that bureaucrats are deciding how much business must be - rather than can be - available for competitors to piggyback on.

Hutchison's complaint is that this negates its pricing power and its hard work in building up a loss-making subscriber base. The company might also have a bigger agenda of not wanting to establish a regulatory precedent in relatively small Hong Kong that consumer groups might then propose should be adopted in larger markets.

Self-interest aside, the most compelling thing about Hutchison's stance is that it is right: business is about the pursuit of profit and market dominance. Meanwhile, a sensible regulatory environment ensures competition and provides remedies if market power is abused.

By auctioning at least four licences, the Government is ensuring that no individual operator is able to secure an overly dominant position. All operators would have economic incentives to resell capacity to virtual operators. Network operators would have the choice of selling excess capacity or seeing the extra revenue go to a competitor.

Unlike the markets for domestic and international calls, which spawned network-interconnect arrangements designed to undermine the former Hongkong Telecom's monopoly, the 3G market has no dominant incumbent player. Yet the open-access regime mandated by Ofta seems more suitable to opening an established market than opening one that will need large sums of capital and in which returns are highly unpredictable.

A sensible regulatory environment would place an upper limit on any one company's market share and provide safeguards for fair treatment of virtual operators. Of course, taking such reasoning to its logical conclusion brings you back to a cash-based auction along European lines.

So what of the European market? Have capital-challenged licence winners closed their shutters and stopped investing in their networks, as auction critics warned? Hardly. Although company shareholders have seen the value of their holdings drop greatly, the level of investment and innovation is set to break all records. Auctions have stimulated a round of mergers and alliances driven by market forces.

What is more, the whole process was simple and clean. Decisions have been made and executives must live with the consequences. Getting the same virtuous cycle of investment going in Hong Kong - rather than extending this bureaucratic fudge - should be a priority.

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