Hong Kong: A Further Shake-Up of the Hong Kong Mobile Phone Market?

Last Updated: 28 June 2004

By Joanne Harland and Gabriela Kennedy

On 19 March 2004 the Telecommunications Authority ("TA") in Hong Kong released its second consultation paper on second generation mobile service licences ("Second Consultation Paper") sparking further controversy. The first consultation paper relating to licensing of mobile services on expiry of existing 2G licenses ("First Consultation Paper") was issued by the TA on 1 August 2003, and 23 submissions were received by the end of the consultation period, 2 October 2003. This article summarizes the policy suggested by the TA in the Second Consultation Paper and highlights the changes in the TA's position from the First Consultation Paper to the Second Consultation Paper.

The current state of play

There are currently 11 licences for 2G mobile phone services in Hong Kong held by 6 operators. All the licences are public radiocommunications licences ("PRS Licences") issued pursuant to the Telecomunnications Regulations (Cap 106A) for an initial term of 10 years, with an option to extend for 3 years (at the TA's discretion). Of the PRS Licences, five operate in the 825 - 960 MHz band and have already been extended for 3 years. They are due to expire between July 2005 and January 2006. Three of these five use the GSM 900 standard ("GSM Licences"). One uses the IS-95 CDMA standard and one uses the IS-136 TDMA standard. The remaining six PRS Licences which operate in the 1710 -1880 MHz band all use the GSM 1800 standard and are due to expire in September 2006 subject to the TA's discretion to extend them for a further 3 years ("PCS Licences"). In addition, 4 of the 6 operators which hold PRS Licences also hold Mobile Carrier Licences for third generation mobile phone services.1

The TA's policy drivers

Mobile penetration in Hong Kong is one of the highest in the world with currently over 7 million users of 2G mobile services (out of a population of 7.7 million). Understandably, the TA is keen to ensure that on the expiry of the PRS Licences disruption of services to customers should be minimal. This can only be achieved by allowing time for transitional or migration services prior to the commencement of services under the new licences. The TA's considerations for the proposals made in the two consultation papers also include:

  • ensuring a choice of services
  • providing a stable investment environment
  • ensuring efficient use of the spectrum
  • ensuring continuity to customer service
  • maintaining technology neutrality

2G Licences - right of first refusal

In the First Consultation Paper, the TA proposed that a right of first refusal for new licences in the 2G spectrum should be granted to existing licensees that had efficiently used the spectrum under their current licences. Unsurprisingly, the six incumbent 2G mobile operators all agreed with this approach, as did the Consumer Council and the Kowloon-Canton Railway Corporation. Companies that do not currently operate in the 2G mobile services market (such as PCCW-HKT, Wharf T&T Limited ("WT&T") and Hong Kong Broadband Network Limited ("HKBN")) argued that the incumbent operators would have an unfair advantage if this approach was followed and supported a bid process open to all interested parties to determine allocation of the vacated spectrum. The TA confirmed in the Second Consultation Paper that it would follow the right of first refusal approach for the GSM Licences and the PCS Licences to ensure a stable investment environment and reduce interruption to users of such services.

In the First Consultation Paper the TA identified two operators (Hutchison Telephone Company Ltd ("HTCL") and Hong Kong CSL Limited ("CSL")) which use CDMA and TDMA systems respectively in the 800 MHz band and which under-utilized the spectrum allocated to them with customer subscriptions standing at below 50,000 and 100,000 respectively, and falling numbers of installed base stations for such services. In the Second Consultation Paper, the TA confirmed that the operators of those two networks would not be offered the right of first refusal as they had not sufficiently marketed and developed their services. Since HCTL also has a GSM Licence, and CSL also has a PCS Licence and due to their small number of subscribers, the TA's view has been that HCTL and CSL would be able to arrange the orderly migration of their CDMA and TDMA subscribers to their respective PCS and GSM services.

Alignment of Date of New 2G Licences and Extension to PCS Licences

A further suggestion made by the TA in the First Consultation Paper was that new licences which would be made available to the incumbent GSM and PCS licensees under the right of first refusal should all commence at the same time. As the original PRS licences were granted on different dates and therefore have different expiration dates, this would only be achieved by some licensees agreeing to surrender their licences before their expiration. It is not surprising that this proposal received a mixed reaction from the incumbent operators. Three of the PCS licensees (HCTL, Mandarin Communications Limited ("SUNDAY"), and Peoples Telephone Company Limited ("Peoples")) asked TA to grant a 3 year extension to their current licences, CSL supported the TA's proposal, New World PCS Limited ("NWPCS") agreed to the early surrender provided the new licence was provided under the same conditions as their current PCS licence, and SmarTone Mobile Communications ("SMC") submitted that alignment should be achieved by extending the term of current licences rather than by mandating an early surrender. Some operators had dissenting views. PCCW-HKT suggested that the current licences should neither be extended nor surrendered early and HKBN submitted that alignment should be achieved by requesting the surrender of all existing 2G licences.

The TA confirmed in the Second Consultation Paper that it would not exercise its discretion to grant a 3 year extension to the PCS Licences or consider further extending the GSM, CDMA and TDMA licences as the aim of the first extension was to further align the expiry date of all licences to 2005-2006. In any event, the PRS Licences may only be extended once. The TA has abandoned the proposal to align the commencement dates of new licences and instead, in the Second Consultation Paper it has proposed that the new licences should commence immediately following the expiry of the term of existing PRS Licences.

Bandwidth rationalization

The TA commented in the First Consultation Paper that the frequency allocations of the incumbent 2G operators were fragmented with some operators occupying frequency blocks of 2 x 7.5 MHz, and others 2 x 8.3 MHz. As a result, the TA proposed the rationalization to 2 x 5 MHz frequency blocks for all operators as one solution. Five of the six incumbent operators considered the proposed rationalization would be too costly. In the Second Consultation Paper the TA commented that the incumbent operators have already been involved in the rationalization of frequency bands during the period from 1992 to 2000 and have sufficient experience of migration programmes. While acknowledging that there are no overriding policy concerns to implement rationalization at the present time, the TA commented that contiguous frequency allocations of 2 x 5 MHz for the incumbent operators may be necessary in the future.

Spectrum available for allocation to new licences

The TA's decision in the Second Consultation Paper not to offer a right of first refusal in relation to the PRS Licensees using CDMA and TDMA systems means that there will be vacated spectrum in the 800 MHz band. Many respondents, including Lucent, Nortel, Qualcomm, CDMA Development Group, HKBN, China Unicom Limited, submitted that the vacated spectrum should be used for cdma2000 services. NWPCS and Peoples suggested that extended GSM ("EGSM") services could be offered in this band and should be allocated to the PCS Licensees to allow for capacity expansion.

Noting the importance of aligning Hong Kong's spectrum allocation to current allocation in mainland China, the TA has proposed that the lower portion of the 800 MHz band (referred to by the TA as "Block A") should be licensed for cdma2000 systems, while the upper portion (referred to as "Block B") should be licensed for systems conforming to the GSM standard. Block A corresponds to the Mainland spectrum for cdma2000 and Block B has a slightly wider allocation of spectrum than the Mainland allocation for EGSM.

As the available spectrum for Block A is only 10 MHz, the TA has proposed that only one licence be issued. The TA also clarified that a new licence would be issued for Block A which would be subject to stringent conditions. As the TA has a policy of technology neutrality, the new licensee for Block A will not be required to use the cdma2000 standard, but will have to meet the conditions for mobile data service (which may be difficult if a different standard such as 850 GSM is used). The cdma2000 standard allows high bandwidth 3G-type services to be provided. The new licensee will be allocated a bandwidth of 2 x 10 MHz.

The TA's intention is for the Block A licence to be allocated by way of a hybrid royalty auction similar to that used for the allocation of the 3G spectrum in 2001. In other words, companies bidding for such licence will need to bid a percentage of their network turnover, subject to a minimum annual payment. All applicants will need to pre-qualify for the auction by submitting financial information as well as information about their technical capability to provide mobile services using Block A frequency and providing financial guarantees in relation to the capital required and a deposit or performance bond which would be forfeited if the bidder did not take up the licence after winning the auction or if the bidder violated the auction rules. Auction rules have not yet been finalised. The TA is currently proposing a simple single-round sealed bid auction. By contrast the 2001 auction for 3G licences involved a first phase sealed bid setting out the percentage of network turnover to be paid in royalties to the government, a second phase whereby connected bidders that were successful in the first phase had to agree to separate or bid against each other to remain in the auction, and a third phase when sealed bids for the spectrum frequency were placed.

New 2G Licences and the Block A licence - General Conditions

The new Block A licence, as well as licences offered under the right of first refusal to incumbent operators for 2G service, will be Mobile Carrier Licences as used for 3G services ("MC Licences") rather than PRS Licences and subject to the general conditions set out in the Telecommunications (Carrier Licences) Regulations including:

  • accounting separation for different services or business activities
  • anti-avoidance provisions
  • directory services
  • disposal of assets - prior written consent of the TA if a licensee disposes or more than 10% of its assets
  • emergency service
  • location service
  • metering accuracy
  • numbering plan and number portability - all licensees shall comply with the numbering plan developed by the TA and facilitate number portability.
  • requirements for interconnection - licensees shall interconnect their services and network with other telecommunications services and networks if requested by the TA
  • tariffs

The Block A licensee will have to meet additional conditions as it will be required to develop a new network in the 800 MHz band.

Block B Licences

For Block B, one option is for the TA to allocate a licence to allow a new entrant to provide EGSM services. However, as EGSM services will simply replicate the current 2G services, and will not provide advanced and innovative mobile services the TA has proposed that Block B should not be allocated to new entrants using the EGSM standard, but rather should be reserved for future expansion and frequency rationalization of the incumbent GSM and PCS operators.

Open Network Access ("ONA") requirement

Despite opposition from quite a few operators, the TA has confirmed in the Second Consultation Paper that the 30% ONA requirement which the TA included as a condition for 3G licences in 2001 will apply to all new 2G licences. To comply with the ONA requirement, operators must open access to at least 30% of their network capacity to non-affiliated mobile virtual network operators and content providers. The rationale for this requirement is that it would encourage development and innovation by small and medium sized application houses and service providers in Hong Kong. The ONA obligation will arise from the grant of the licence (in the case of new licensees) or from a specified date which the TA is currently proposing as 1 January 2010 (for current GSM and PCS licensees). Holders of current GSM and PCS licences are expected to object to the proposed commencement date.

Obligation to provide coverage to specified locations

In the First Consultation Paper, the TA suggested that in the future 2G licensees be required to expand their network coverage to specific parts of Hong Kong. This requirement does not exist in current 2G PRS Licences. The motivation behind this is to ensure coverage for the less populated parts of Hong Kong such as country parks for emergency situations, as well as in the airport and on major transport systems. Although the Consumer Council and KCRC welcomed the proposal, it met with strong opposition from the incumbent operators. PCCW-HKT, for example, considered this requirement unnecessary. The TA acknowledged the difficulties discussed in the submissions including technical issues, financial cost and the lack of statutory right of access to land. In the Second Consultation Paper the TA stated that while it was inclined to withdraw the proposal in relation to the incumbent operators, the Block A licensee would have to commit to certain minimum coverage.

Compliance with Mandatory Codes of Practice

The TA proposed some mandatory codes of practice for 2G licensees in the First Consultation Paper including codes of practice in relation to: (i) Cell Broadcast Service for the dissemination of information of public interest, (ii) Mobile Service Contracts, and (iii) Protection of Customer Information for Fixed and Mobile Service Operators. The idea of mandatory codes of practice met with resistance from operators.

In light of submissions from operators such as CSL, NWPCS, SMC and Motorola that the provision of cell broadcast service should be a commercial decision of individual operators, this proposal was abandoned in the Second Consultation Paper.

CSL and Sunday requested evidence for the necessity of mandatory codes of practice for Mobile Service Contracts and the Protection of Customer Information and suggested that legislation would be a more appropriate way of dealing with such issues. Other operators such as NWPCS submitted that the current voluntary codes for Mobile Service Contracts and the Protection of Customer Information worked well and PCCW-HKT, Peoples and SMC advised that the codes should be maintained on a voluntary basis or reviewed based on industry consultation. Only the Consumer Council welcomed the proposal.

In the Second Consultation Paper the TA has continued to maintain the view that codes of practice in relation to Mobile Service Contracts and Protection of Customer Information should be mandatory. In order to make the obligation even stronger the TA is inclined to impose a special condition on the new licensees that they comply with certain codes of practice as prescribed by the TA from time to time. The TA also identified quality of service as a further area where a mandatory code of practice may be applicable, and invited proposals on this.

Spectrum Utilization Fee ("SUF")

Mixed views were received in relation to the TA's invitation in the First Consultation Paper for comments on whether a SUF for 2G services should be imposed and if so in what circumstances, the level of the SUF and whether a performance bond is needed to guarantee payment of the SUF. Current 2G operators were against the introduction of a SUF for 2G services, and generally wanted any SUF to be imposed later (CSL suggested 2009) or imposed only when 3G services were offered. PCCW-HKT and HKBN submitted that SUF should not be linked to any specific technology or usage and therefore should not be imposed on 2G services.

The TA maintained in the Second Consultation Paper that 2G licensees should be required to pay a SUF as they make use of a limited spectrum which is a scarce public resource for business purposes in the same way as 3G licensees. In the short term, the TA proposes to have any 2G SUF set on a different structure to the 3G SUF to minimise the financial burden on 2G licensees and prevent cost increases being passed on to consumers or a decrease in investment in 2G services. However, in the long term the TA proposes convergence of the 2G and 3G SUF, for parity reasons as well as to encourage 2G licensees to migrate to higher network capacity and value added services. The TA also believes that in the future the differences in capability between 2G and 3G will diminish.

Industry reaction

Given the vested interests in the 2G mobile services industry and the high level of competition in what is a comparatively small market, there has been a strong reaction to the Second Consultation Paper. Incumbent operators want to protect their investment in 2G infrastructure and to cement their position in the market by securing an extension of their current licences or the right of first refusal for new licences with minimal changes to their current licence conditions. Potential new entrants foresee great opportunities and want the spectrum to be opened up and licences made available to new bidders.

HTCL has threatened to sue the government if the TA carries out its proposal not to renew its PRS licence, or offer it right of first refusal in relation to its current CDMA licence. HTCL has described the TA's policy as the "worst in the world" and harmful to Hong Kong's reputation in the eyes of overseas investors. CSL and Sunday have opposed the proposed Block A licence saying that it would create too much competition in an already crowded market.

China Unicom has already expressed an interest in acquiring the Block A licence which would allow the carrier to extend its mainland CDMA network into Hong Kong and has been in discussions with WT&T and City Telecom about a possible joint bid for the licence. CSL, which can draw on the CDMA experience of parent company Telstra has yet to decide whether it will take part in the Block A licence auction. Strong interest is expected from the incumbent 2G mobile phone operators that do not have a 3G licence, such as People and New World Mobility as well as from fixed line operators such as PCCW-HKT, WT&T and CTL.

What next?

The consultation period for the Second Consultation Paper closed on 19 June 2004. It is difficult to see how many parties, including the TA will change their views from this stage onwards, although some issues, such as the structure of the SUF for 2G licensees are yet to be decided. A similar number of submissions to that for the First Consultation Paper are to the Second Consultation Paper, and key industry players will likely continue their lobbying.

The authors are Registered Foreign Lawyer and Partner respectively in the TMT Group of Lovells, Hong Kong.

Footnote

1 See table below summarizing the current licences for mobile phone services in Hong Kong.

Current licences for mobile phone services in Hong Kong

Licensee

System

Licence Expiry Date

Hong Kong CSL Limited

(CSL)

TDMA

22 July 2005

GSM900

11 January 2006

DCS1800

29 September 2006

3G

21 October 2016

Hutchison Telephone Company Limited

(HTCL)

GSM900

19 November 2005

CDMA

19 November 2005

DCS1800

29 September 2006

3G

21 October 2016

SmarTone Mobile Communications Limited

(SMC)

GSM900

3 January 2006

DCS1800

29 September 2006

3G

21 October 2016

New World PCS Limited

(NWPCS)

DCS1800

29 September 2006

Peoples Telephone Company Limited

(People)

DCS1800

29 September 2006

Mandarin Communications Limited

(Sunday)

DCS1800

29 September 2006

3G

21 October 2016

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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