Hong Kong: Unified Telecoms Licences For Hong Kong?

Last Updated: 3 February 2005
Article by Gabriela Kennedy and Katrina Partridge

Mobile and fixed-line carriers may find themselves operating in the same space under a new unified licensing system as the Hong Kong telecommunications regulator considers how to best deliver the next generation of voice and high-speed internet services.

The prospect of a unified licensing system was first mentioned in a consultation paper on 'fixed' wireless broadband services ("BWA") that the Office of the Telecommunications Authority ("OFTA") released on 20 December 2004 ("BWA Consultation Paper")1:

"[OFTA] is aware of the technology development resulting in a growing trend of fixed-mobile convergence. There are views that BWA is a candidate technology realising such a trend".2

A further nod in the direction of such a unified licensing system was given in a speech made by the Director-General of Telecommunications at OFTA ("the TA"), on 23 January 2005 on the "Blurring Boundary between fixed and mobile services"3 where the TA suggested the possibility of a unified licensing regime that would potentially allow operators to offer both fixed and mobile services.

Next Generation Network: fixed or mobile network?

The regulator's view is that potential consumer demand combined with technological advances in nomadic devices (such as laptops) means that a conflict of interest will develop between 3G networks built by mobile operators and services offered by fixed-line operators if the existing dual licensing system continues long term. What this means in practice is that if the OFTA recommendation is implemented, operators who currently offer voice and broadband services over fixed-line networks would be able to expand their services to include portable devices such as laptops, mobile phones, and PDAs. In his 23 January 2005 speech the TA in fact recognised that the boundaries between fixed and mobile services are no longer relevant in the Next Generation Network environment.

Hong Kong is not the first country to consider the convergence of fixed and mobile service licences. South Korea is expected to support its first 'merged' licence later this year when fixed-line operator KT Corp launches wireless technology with advanced data transfer capabilities.

Licensing Framework for BWA

The BWA Consultation Paper discusses the appropriate licensing framework for the deployment of BWA for fixed telecommunications services in Hong Kong. The BWA Consultation Paper provides the industry with the opportunity to debate and resolve issues that relate to standards, technology, interoperability, frequency availability and interference to ensure that the market perception of the product remains strong.

OFTA perceives a potential market for local BWA deployment due to the increasing numbers of residential and corporate clients accessing broadband services. It also believes that deployment of BWA may increase broadband penetration in Hong Kong thereby further promoting the development of VoIP technology and advanced multimedia services.4 Wireless broadband access provides broadband services to clients using radio technology in place of conventional wireline technologies (these include digital subscriber line [DSL], fibre-to-the-building, cable modem and metro Ethernet). Wireless broadband services are seen as an increasingly attractive alternative for both business and residential customers. Much of the value in BWA lies in the rare ability of the technology to combine many features and benefits including low cost; high bandwidth; easy set-ups; use of existing standards; wide equipment availability; user enthusiasm; and the provision of last mile WLAN and public hotspots that allow a unique opportunity to cost effectively distribute broadband services on a wide scale previously unknown to the industry.

The BWA Consultation Paper focuses on BWA as an alternative to the conventional wire line based fixed network service. The BWA Consultation Paper invites comments on:

i) whether BWA should be licensed in Hong Kong and the appropriate timing for inviting applications for such licences;

ii) spectrum management issues;

iii) spectrum allocation;

iv) technologies to be used in the delivery of BWA services and competition issues that may be raised by this;

v) licensing framework for BWA; and

vi) assignment of spectrum service (including method of spectrum assignment; spectrum usage period; surrendering spectrum and change of spectrum usage.

The BWA Consultation Paper suggests that BWA will prove a viable alternative for the FTNS operators relying on Type II interconnection (given the withdrawal of type II interconnection by 30 June 2008, except for buildings meeting the "essential facilities" criterion).

BWA Framework: A few Issues

Given the restriction of the BWA Consultation Paper to fixed wireless broadband services and the recent suggestion of a unified telecoms licensing system for Hong Kong, operators may be justified in thinking that the regulator appears to be sending conflicting signals to the industry.

The BWA Consultation Paper also raises the issue of allocation of spectrum. There is a limited amount of spectrum that is available and generally spectrum is allocated by regulators in one of two ways: by beauty contest or by spectrum auctioning.

Over the course of the last few years OFTA has been examining the issue of spectrum allocation for mobile providers. In 2003 and 2004 it issued two consultation papers ("2G Consultation Papers") which looked at the licensing of mobile services on the expiry of existing 2G licences. The 2G Consultation Papers also discussed bandwidth rationalisation and considered making available underutilized spectrum in the 800 MHz band5.

Noting the importance of aligning Hong Kong's spectrum allocation to current allocation to current allocation in mainland China, the TA 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.

The second of the 2G Consultation Papers suggested that the Block A licence should 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 would need to bid a percentage of their network turnover, subject to a minimum annual payment. All applicants would 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. The TA proposed 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.

Given that BWA may initially be offered in Hong Kong as a wireless extension of the conventional wireline based fixed network service, the licensing of BWA services would fall within the fixed carrier licensing regime. The TA has come to the preliminary view that spectrum would be allocated by auction yet he has not provided an indication as to the type of auction that will be used, or whether a pre-qualification exercise will be necessary (e.g. evidence of turnover). There is also no indication of how spectrum would be allocated if there was a future convergence of mobile/fixed licences.

Open network access and spectrum usage fee considerations

The proposed licensing framework arguably raises another issue for mobile operators – that of how a 'merged' licensing system would synchronise with the open network access ("ONA") requirement for 3G licences. To comply with the ONA requirement, 3G operators must open access to at least 30% of their network capacity to non-affiliated mobile virtual network operators and content providers.

A further issue relates to the spectrum usage fee ("SUF"). The TA maintained in the second 2G Consultation Paper that 2G licensees should be required to pay 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.

In the BWA Consultation Paper the TA also supported a SUF approach (annually on a per MHz basis) as the preferred approach as it could be adopted by new mobile carrier licences issued on the expiry of the existing 2G mobile services licences. Again there is no indication as to what impact a merged licence system would have on this preliminary view.

Conclusion

Given the vested interests in the 2G and 3G mobile services industries and the high level of competition in what is a comparatively small market last year's second 2G Consultation Paper provoked a strong reaction. The many additional issues that have been raised by the BWA Consultation Paper (including the fact that mobile operators have for now been excluded from the potential BWA market) plus the news that there is a possibility that the regulatory framework for fixed/mobile licences may be unified some time in the future make it more than likely that the TA will receive an equally large number of submissions when the BWA Consultation period ends in February.

Incumbent operators will want to protect their investment and to cement their position in the market by securing a grandfathering of their licences or the right of first refusal for new licences. Potential new entrants will no doubt foresee great opportunities and want the spectrum to be opened up and licences made available to new bidders. Taking into account the potential growth in the wireless market, fixed service operators will no doubt also be wishing to increase their services to also cover the mobile market. Given the resultant debate over spectrum allocation issues and the proposed overhaul of the licensing framework, it is expected that the BWA proposal and the unified licensing system proposal will receive significant attention in the coming months.

Footnotes

1 Consultation on Licensing Framework for Deployment of Broadband Wireless Access, OFTA Consultation Paper. The consultation paper can be downloaded from the OFTA website: www.ofta.gov.hk. The consultation period closes on 21 February 2005.

2 Ibid para 36.

3 Mr M H Au, Director-General of Telecommunications, "Blurring Boundary between Fixed and Mobile Services", Telecom Perspectives, 23 January 2005, http://www.ofta.gov.hk

4 Licensing Framework for Deployment of Broadband Wireless Access, OFTA consultation paper, paragraph 3.

5 This is spectrum allocated to PRS licensees using CDMA and TDMA systems, namely Hutchison Telephone Co Ltd and HK CSL Ltd.

© Gabriela Kennedy and Katrina Partridge

The authors are Partner and Professional Support Lawyer respectively, working in the Technology, Media and Telecoms group of Lovells in Hong Kong. For any questions relating to issues raised in this article, please contact either author at gabriela.kennedy@lovells.com or katrina.partridge@lovells.com

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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