Hong Kong: Rolling The Dice On Mobile Virtual Networks: The 3G Environment In Hong Kong

Last Updated: 23 October 2001
Article by Gabriela Kennedy

Since the Office of the Telecommunications Authority ("OFTA") announced the winners of 3G mobile licences in Hong Kong in late September, two of the four licensees, Hong Kong CSL Limited ("CSL") and Sunday 3G (Hong Kong) Limited ("Sunday"), have announced publicly that they are not planning any "capital expenditure" on 3G for a while.

With the recent downturn in the telecommunications sector, and the economy generally, such announcements make sense, even though the four Hong Kong 3G licensees ("the Licensees") did not have to bid for their licences in an auction and have paid considerably less for their licences than their counterparts in the UK and Germany, for example. The economic downturn, exacerbated by the events of September 11, and coupled with the significant technological hurdles associated with establishing a viable 3G network will undoubtedly have an impact on when the Licensees decide to commence the rollout of their respective 3G networks.

There will, however, be a limit on how long the Licensees can hold off network rollout as their licences, issued by OFTA on 22 October stipulate that they must ensure by the end of 2006 their 3G network and 3G services cover an area where at least 50% of the population of Hong Kong live. Once their networks have been established they will then be obliged, under the Open Network Access Regime, to offer up to 30% of their "network capacity" to Mobile Virtual Network Operators ("MVNOs") and Content or Service Providers ("CSPs") who, according to market speculation, may include New World Mobility, New T&T, Peoples and HKNet.com (Hong Kong's second largest ISP).

This article examines the Licensees’ network rollout obligations and the Open Network Access regime, the potential regulatory, commercial and technical impediments to the rollout of 3G services and with a consideration of possible reactions from OFTA, the Licensees and MVNOs and CSPs to the current situation.


On 19 September 2001, OFTA announced that 3G licences would be allocated without an auction as only four telecommunications service providers had filed applications. On 26 September 2001, OFTA announced that each of the four Licensees who had participated in the First Phase of the 3G Auction (namely, Hutchison 3G HK Limited ("Hutchison"), SmarTone 3G Limited ("SmarTone"), CSL and Sunday) had successfully completed the Third Phase of the auction process and would be granted their respective licences by the end of 2001. The licences were issued on 22 October 2001.

These announcements were met with some scepticism by industry analysts but OFTA quickly put it on record that it had used every preventive measure to avoid the potential for collusion, while at the same time admitting that it had expected to receive only four participants given the poor state of the telecommunications sector and the economy in general.

Since the OFTA announcements, the Licensees have hinted what their financial commitment to the rollout of their 3G networks might be. Hutchison has indicated that it will allocate HK$3 billion, SmarTone claims it will allocate not less than HK$2 billion whilst Sunday will allocate HK$1.5 billion. Of the Licensees, only CSL has avoided announcing any specific figures for its 3G network rollout.

What the Licensees have not done, however, is to lock themselves into specific commitments regarding their 3G rollout and/or launch dates for their 3G services. Both CSL and Sunday have indicated that they will hold off the rollout of their 3G network until the market and the technology for 3G is ready, with Sunday suggesting that it is unlikely to do so before 2004.

The Licensees’ reluctance to commit to specific dates is perhaps attributable to the uncertainties that surround 3G markets worldwide. It is still not clear what the return will be for 3G licensees on the capital invested, and nobody has yet worked out what the hyped "killer applications" will be. This is compounded by the fact that manufacturers are not delivering the equipment needed for 3G at the "speed of light", as expected.

NTT DoCoMo had to delay the launch of its 3G services last spring until this autumn due to problems with equipment. NTT DoCoMo's launch on 1 October did go relatively smoothly with more than 4,000 3G mobile phone handsets being sold on the first day of the commercial launch despite the current consumer slump in Japan.

For Hong Kong, there is the added uncertainty of whether the market is suited for the transition from a voice-traffic market, which has been highly successful (the penetration rate reached 83% in July 2001), to one dominated by mobile internet and enhanced data services.


Under Special Condition 1 of the Mobile Carrier Licences, each Licensee is required to "install, maintain and use equipment for the purposes of the network and service such that: … coverage of the network and service shall be provided by the licensee not later than 31st December, 2006, and maintained after that date, to an area where at least 50% of the population of Hong Kong live from time to time".

To promote competition in the market in terms of network coverage and quality, Licensees are required to operate separate 3G networks to meet the coverage obligations. Sharing of telecommunications infrastructure amongst Licensees will only be allowed where it is impracticable due to space or other physical limitations, or unacceptable to the management of the premises, for multiple radio stations to be installed and OFTA approves such sharing of facilities in writing.

In Europe, where the cost of 3G licences has been much higher, operators have considered sharing infrastructure in order to cut their costs and the German regulator has already been asked to consider such requests. Although the cost of 3G licences has been much lower in Hong Kong, the possibility of such requests from the Licensees of OFTA should not be discounted in the current economic climate.

But there are other potential problems. At this stage it is not particularly clear how OFTA will measure network coverage. Prior to the commencement of the 3G Auction, OFTA fielded numerous questions regarding its understanding of "network coverage" and how it would be measured. In particular, OFTA was asked how the TA would determine whether the Licensees have duly complied with the rollout obligation, and whether any guidance or code of practice to standardise the procedure for measurement of coverage would be issued. OFTA replied, by quoting directly from the Information Memorandum, stating that it would inter alia take into account the coverage plot provided by the Licensee and the distribution of population provided by the Hong Kong Census and Statistics Department from time to time.

This response provides insufficient guidance on how Licensees can satisfy OFTA on their compliance with Special Condition 1. The resolution of this uncertainty will be important to them as any failure by Licensees to satisfy the network rollout obligation could lead to suspension or cancellation of their licences and the subsequent forfeiture of their performance bonds (not insubstantial sums).


Under Special Condition 12 of the Licence, each Licensee is obliged to open 30% of its network capacity to non-affiliated service providers (including both non-affiliated MVNOs and non-affiliated CSPs) and must provide access up to this threshold on a non-discriminatory basis. By "non-discriminatory", OFTA means that the non-affiliated MVNOs and CSPs should be provided with access to the same transmission and support capabilities as the Licensee makes available to serve its own customers and that traffic of MVNOs and CSPs should be treated in the same manner as the Licensee’s traffic.

The intention behind this measure is to promote competition in the market, to enable small and medium-sized content or service providers to provide more innovative content, applications and services and, most importantly, to enable those who did not have the resources to bid for a licence the opportunity to participate in the provision of 3G services.

MVNOs will offer "virtually" the same 3G services as those offered by the Licensees, but they will do so by interconnecting with a non-affiliated Licensee. They will have the same "back-end" infrastructure as the Licensees (including their own mobile switching and gateway infrastructure, their own billing support systems, be responsible for call control and issue their own SIM cards and numbers), but will not have their own radio access network as they will not have direct access to spectrum.

Access to spectrum will be achieved through commercially negotiated interconnection agreements. MVNOs will be obliged to apply for and obtain a public non-exclusive telecommunications service licence ("PNETS Licence"). OFTA has published a sample PNETS Licence for MVNOs. The Licences will be valid for a duration of 1 year, and can be renewed annually.

In contrast, it is envisaged that CSPs will provide content, applications and services to a range of clients using network capacity made available by a non-affiliated Licensee and using either their own network infrastructure or that of a non-affiliated Licensee or a non-affiliated MVNO. CSPs will not, however, require a PNETS Licence where they merely disseminate content using access to a Licensee’s spectrum or a Licensee’s or MVNO’s infrastructure. In addition, there will be less scope for negotiation on price as CSPs will purchase capacity in accordance with published tariffs set by the Licensee.

In both cases MVNOs and CSPs will obtain access to spectrum via interconnection agreements which they will enter into with non-affiliated Licensees and, in the case of CSPs, also with MVNOs. Under these arrangements, MVNOs will be obliged to commit to a minimum amount of network capacity from the relevant Licensee over a fixed period of time, which is expected to be longer than the 1 year period of the MVNO PNETS Licence.

MVNOs may be forced to negotiate interconnection agreements with Licensees for terms longer than the 1 year term of a PNETS licence. Generally, interconnection agreements have a minimum term of 3 years due to the extensive expense that is incurred by both sides in negotiating and reaching a final agreement. As the term of the PNETS Licences for MVNOs is 1 year, MVNOs will be exposed to significant liability in the event that OFTA decides not to renew their licences, as they will remain contractually bound to the Licensees to accept, and most importantly pay for, 3G network capacity.

In the event of disputes between MVNOs and Licensees over interconnection agreements, the TA has the power to intervene under s.36A of the Telecommunications Ordinance (Cap. 106) ("Ordinance"). If an MVNO and a Licensee are unable to agree upon pricing for the supply of network capacity, the TA is empowered to make a determination based on "fair interconnection principles". This will be based on an examination of the cost of the licence to the Licensee and the amount of the Licensee’s capital expenditure on the rollout of its 3G network. A sufficient return on cost of capital will be allowed, reflecting the higher risk of 3G services investment.


The intention behind the Open Network Access and the Network Service Coverage regimes is to facilitate the entry of small and medium-sized players into the market, thereby increasing competition in the market and choice for consumers and making 3G services more affordable.

The Open Network Access requirements will not apply to a Licensee who has not yet established a 3G network and who will not, as a result, be obliged to make capacity available to MVNOs or CSPs. From a competition perspective, under the current Hong Kong regime, MVNOs and CSPs have no direct or indirect right to force a Licensee to actually commence the rollout of their 3G networks and make capacity available to them.

If a MVNO or CSP sees a viable niche market for the provision of certain 3G services or content, it will be only be able to exploit that market once one (or more) of the Licensees has actually completed its network rollout and has launched its own 3G services. Further, the fewer Licensees that rollout their 3G networks, the less likely it will be that MVNOs or CSPs will be able to negotiate a competitive arrangement for the provision of such services. The lack of an obligation to actually commence network rollout by a specific date, and the lack of a right for an MVNO or CSP to force a Licensee to commence a network rollout, will be the most significant impediment to the development of the 3G market in Hong Kong.

In addition to this (and the various approvals that all mobile telecommunications licensees are obliged to obtain from OFTA, the Town Planning Board, the Building Authority and the Lands Department), the lack of a statutory right in Hong Kong for mobile operators to obtain access to land to install radio communications equipment may act as a significant impediment to the rollout of 3G services. Unlike fixed network operators, who obtain a statutory right of access to land under the Ordinance, mobile operators must enter into commercial negotiations with the land owners themselves and will only receive assistance from OFTA in exceptional circumstances. This has held up the rollout of existing 2G and 2.5G mobile networks and is likely to make it difficult for Licensees to rollout their 3G networks.


With the general decline in the information technology and telecommunications sectors over the past year or so, the initial enthusiasm for the adoption of 3G has waned dramatically. This has been exacerbated by the uncertainty created by the recent terrorist attacks on the US and the US response in Afghanistan.

Many in the industry are now predicting a less than enthusiastic response to 3G services, based on the relatively lukewarm uptake of SMS services in Hong Kong, especially when compared to the success of the Japanese i-mode network. Voice is still billed to remain the main source of revenue for Hong Kong mobile operators, a trend that is unlikely to change in the near future.

The current dire state of the international economy, and of the telecommunications sector, may slow down the rollout of 3G services in Hong Kong. The regulatory framework that has been adopted by OFTA does not help either. The adoption of a hybrid licensing system (allowing the Licensees to pay for their licences over time, rather than paying a significant lump sum up-front) has meant that the economic cost associated with a failure to utilise such 3G licences will be far less than if the licences had been subject to the payment of a lump sum up-front fee.

Licensees appear to believe that the economic cost of "sitting" on the licence will be less than the losses that would be incurred by rolling out 3G services in the near future. Of course, this balance may shift if there is a significant upswing in the economy, however, most commentators (even the optimistic ones) do not see an upswing for at least another quarter.


In addition to the significant regulatory and commercial impediments there are also significant technical impediments to the rollout of 3G networks and the provision of 3G services in Hong Kong. There is doubt in the industry as to whether the Licensees, MVNOs and CSPs in Hong Kong have the technology necessary to establish and operate an efficient commercially viable 3G network.

Problems with the handsets to be used in conjunction with its 3G network forced NTT DoCoMo to delay the launch of its 3G services by 5 months and to drop some components of its initial proposed 3G offering. The provision of films and music through mobile handsets has been pushed back.

Hong Kong is likely to have the same or similar problems with the rollout of 3G networks which may only be exacerbated by Hong Kong’s lack of a telecommunications equipment manufacturing industry, unlike the situation in Japan and Korea where such an industry is well-established.


Assuming MVNOs and CSPs overcome the significant regulatory, commercial and technical hurdles outlined above, they will also need to carefully consider issues regarding billing and data privacy and security. As a practical matter, MVNOs and CSPs will have to consider how they charge for the services they offer and what new technology may need to be either acquired externally, or developed internally, to conduct billing of subscribers. Once they have done this they will then need to negotiate with the Licensees (and MVNOs in the case of CSPs) to determine how subscriber revenue will be shared between the respective parties.

Once the technical issues have been resolved and the commercial arrangements with Licensees have been finalised, MVNOs and CSPs will also need to consider the data privacy and data security issues associated with the exchange of personal information regarding subscribers. MVNOs and CSPs will need to ensure that they comply with the specific requirements of the Personal Data (Privacy) Ordinance (CAP486).


The regulatory, technical and commercial impediments to the rollout of 3G networks set out above make a fairly convincing case for the Licensees holding off on the rollout of their 3G networks. In the current economic climate, Licensees are seeking to prove to the market that they are responsible corporate citizens by downsizing their businesses (through staff cuts and by curbing expenditure). This represents a complete turnaround for companies which have, over recent years, been spending significant amounts on developing and extending networks to increase market share and subscriber bases.

If the Licensees hold off on the rollout of their 3G networks, those wishing to establish themselves as MVNOs or CSPs in Hong Kong will have one of three options. They can seek to put pressure on one of the Licensees to establish or speed up the development of their 3G network, they can lobby OFTA to bring forward the Network Coverage deadline or they can invest their money outside of Hong Kong. Faced with these options in the current economic climate, the third option may be the simplest, meaning that Hong Kong may miss the "3G boat" and fall behind its Asian neighbours in the adoption of a significant new communications technology.

A delay in the adoption of 3G would clearly be a set back for OFTA which believed that the hybrid licensing approach (requiring that licence fees be paid over time rather than up-front) would ensure the early adoption of 3G. It appears that the combination of a worsening economic climate, a regulatory environment which allows operators to sit on their licences and a dearth of equipment and services in Hong Kong will conspire to thwart OFTA’s aim.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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