Research Paper – Spectrum Wars: Hong Kong’s re-auction of 3G spectrum






Looking between the lines at China Mobile’s controversial bandwidth bid


 An upcoming 3G spectrum re-auction is stirring controversy in Hong Kong following reports that the government’s intention is to ask local operators to vacate spectrum to potentially make way for China’s largest mobile operator.


The four current license holders are up in arms, claiming it will lead to prices going up, service disruption and will force them to curb network investment.  As various parties make their case, a key consideration must be whether the policy is consistent with Hong Kong’s market-focused, competition-led regulatory regime.


By allowing an operator to bid for a fifth 3G license, can we reasonably expect this to deliver improved service and pricing for mobile users? The participation of China Mobile in the auction will also guarantee heightened media and regulatory scrutiny and illustrates some of the public relations challenges mainland corporates face as they expand beyond their home market.


Re-auction proposal


At present the Communications Authority  (CA) has issued a consultation paper on 3G spectrum reissuance with three options: first refusal to existing operators; a full re-auction of all spectrum; and lastly a hybrid approach where one-third of existing spectrum will be re-auctioned.


The inclusion of the last option has been interpreted as an indication that authorities already favour this option. What’s more, China Mobile has already indicated it is keen to acquire spectrum in a separate consultation paper it filed last year.


This potential spectrum grab is proving contentious on a number of levels. For one, it pitches China’s giant state-owned mobile operator and its 710 million subscribers against the longstanding 3G mobile franchises of Hong Kong’s most prominent tycoons.  The profile of the protagonists involved guarantees intense media interest, both locally and across the border.


Secondly, it is also risks inflaming delicate cross-border politics. Public opinion is increasingly sensitive to encroaching mainland Chinese influence in Hong Kong due to the growing number of Chinese visitors since the introduction of individual tourist visitor permits.


Last year over 30 million mainland Chinese visited Hong Kong, which has a population of 7 million.


It is possible that local operators’ could play to fears of a Chinese takeover of Hong Kong.  But, bearing in mind the same companies have business interests on the mainland and in Hong Kong, which benefit from tourist dollars, this could be counterproductive.


Hong Kong’s government is also in a tight spot as it has to manage local expectations and maintain relationships with its ultimate sovereign. Recently, it has introduced various policies to limit mainland visitors access to maternity beds, and baby milk powder which already ratcheted up tensions.


Ultimately, the CA will come under considerable public pressure to explain its policy move, whatever the competition justification within its statutory ordinances.


The Operators


3G mobile operators include businesses run by various high profile local tycoons. These include Li Ka-shing  (Hutchison Whampoa), Thomas and Raymond Kwok (SHK Properties owns SmarTone) and Richard Li (HKT ).   Henry Cheng ( New World Development)  holds a  23.6% shareholding in CSL), which is majority-owned by Australia’s Telstra Group (76.4%).


Hong Kong’s 3G incumbents have warned that depriving them of rights  to renew their spectrum could lead to a disruption in service quality, including dropped calls. That said, their respective licenses for the 3G spectrum in the 1.9-gigahertz to 2.2GHz band do not expire until October 2016, suggesting that a lengthy lead-time exists to deal with network capacity and redundancy issues.


Policy Challenge


Hong Kong’s regulator has a number of issues to consider. It will want to demonstrate that it is not retreating from its even-handed and pro-competition approach to regulation by favouring a particular entity.  Any sign of a policy reversal here would be contentious.


The government has previously faced criticism for dragging its feet  when introducing a wider competition law due to opposition from local business interests. The CA will also need to demonstrate how its hybrid auction is based on sound competition policy and not a political imperative.


One alternative market-based approach would be for China Mobile to expand in Hong Kong by attempting to buy one of the existing license holders.  However, this may not be  given the green light on competition grounds, as it would reduce the number of operators.


The argument for China Mobile entering Hong Kong


The mainland telecoms provider  has a presence in  Hong Kong after buying People’s Phone 2G business in 2006.


China Mobile has various reasons to covet 3G spectrum. First,  there is the technology angle.  Even if China Mobile were able to buy an existing Hong Kong 3G operator, they are using a different standard from China’s indigenous 3G technology, TD-SCDMA. Hence, it is likely China Mobile would prefer to purchase spectrum rather than an existing operator. Chinese authorities are keen to promote the TD CDMA  standard which has around 100 million users in China.


Typically the CA would not express a preference to favour a particular technology standard when issuing spectrum.


Secondly, China Mobile is simply just following its customers. With  its customer base, comprising approximately about 2/3 of the mainland market the operator has an interest to serve its sizeable numbers of customers who travel through Hong Kong. The numbers using TD-SCDMA are likely to rise further by 2016 thanks to new rail and  bridge links between Hong Kong and China. Being separated by  two different mobile networks is inconvenient, particularly when factoring in penal roaming charges.


Good for Hong Kong?


One factor that  could influence the debate  would be the argument that China Mobile’s entry would boost competition substantially by lowering roaming charges.  However, China Mobile did not  cite this in its initial submission.


There is also precedent in Europe for regulators to legislate lower roaming charges. While this is likely to be hugely popular with consumers, it  could make China Mobile extremely competitive and disrupt  the existing order. It could even be a prelude to other  Hong Kong’s operators merging or allying  with China’s other mobile operators China Unicom and China Telecom.  Such change would certainly be disruptive in the short term. A case could be made that the Hong Kong mobile market also needs a wider definition to include the  sizeable number of cross-border mobile users.


One argument against letting China Mobile bid for spectrum in Hong Kong, is that the mainland does not allow similar reciprocal access in its own market. This is something mainland regulators will increasingly have to consider as more corporates seek to expand internationally.


Bottom Line


The spectrum auction is likely to be contentious and it is important to keep sight of the competition policy issues .   A bumpy ride looks inevitable without a clear articulation of the wider benefits of allowing China Mobile to enter Hong Kong’s 3G market by purchasing spectrum.


Disclaimer: Kreab Gavin Anderson does not represent any of the companies listed in this report.


Background Information

Hong Kong’s telecommunications market has an enviable track record of generating rigorous competition, consumer choice and low prices.

This has been fostered under a pro-competition regulatory regime, often at the forefront of telecom policy liberalisation and best practice internationally.

The benefits of this regime are seen in some of the world’s lowest domestic mobile tariffs and highest mobile penetration levels – at 200%.


About Kreab Gavin Anderson


Kreab Gavin Anderson is a leading communications consultancy with a global reach. We help our clients solve complicated and demanding communications issues that can have an impact on their futures.

With operations in 25 countries and over 400 experienced consultants, we provide independent and strategic advice on high-stakes financial, corporate and public affairs communications.

Compass looks to bring timely insights on prominent issues hitting the headlines. We look across a range of sectors, themes and news sources in Hong Kong and China to deliver business views  that matter today.

As one of the Four Great Inventions celebrated in Chinese culture, the compass served as a symbol of China’s lasting legacy to science and technology.

Originally invented by the ancient Chinese in the 4th Century BC, the compass greatly improved maritime trade by making travel safer and more efficient.

Today, compasses can be found in ships through to smartphones, providing direction when  people most need it.

At Kreab Gavin Anderson, our clients rely on us for direction, wherever they operate in the world.

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