Hong Kong’s Partial Re-Auction of 3G Spectrum Angers Incumbents

Hong Kong’s plan to auction parts of the third-generation mobile-phone spectrum when current licenses expire has angered existing operators, who say it will lead to higher prices and worse service.

The government will auction a third of the spectrum, Communications Authority Chairman Ambrose Ho said at a briefing yesterday. The auction may clear the way for China Mobile Ltd. (941) to compete with HKT Ltd., CSL Ltd. (CSL), Hutchison Telecommunications Hong Kong Holdings Ltd. (215) and SmarTone Telecommunications Holdings Ltd. (315), whose licenses expire in 2016. The auction is expected to take place in the fourth quarter of 2014, the government said in a statement.

Existing operators will get priority to retain the rights to the rest of the airwaves, Ho said.

Mobile data usage per subscriber surged 4.3 times in the two years through June in Hong Kong as smartphones drove demand. The government decision will allow China Mobile, the world’s biggest phone company by users, to expand services in the city and force existing providers to revamp operations.

“This could increase costs for the carriers by hundreds of millions of Hong Kong dollars,” Victor Yip, an analyst at UOB-Kay Hian Ltd., said by phone before the announcement. “Operators facing such a dramatic increase in costs will try to pass on the cost directly or indirectly to customers.”

Telecommunication services generated HK$57.3 billion ($7.4 billion) of revenue in Hong Kong in 2010, according to the latest figures on the website of the Office of the Communications Authority.

A partial re-allocation of the spectrum struck the best balance between ensuring efficient use of airwaves and the need for customer service continuity, the Communications Authority said. Any degradation in service quality could be “effectively mitigated” the authority said in an e-mailed statement.

China Mobile

“The government is doing the public a disservice by opting for a solution that degrades service quality to all mobile users and, due to the high spectrum fees, essentially creates a new and regressive tax on consumers,” Alex Arena, group managing director of HKT, said in an e-mailed response. The right option would have been for incumbents to be given right of first refusal for their existing spectrum, he said.

CSL is “concerned” that the decision may disrupt services and increase operational costs, Chief Executive Officer Phil Mottram said in a press release. SmarTone said in a press release that it is “disappointed” and that the decision is against the public interest.

“The unreasonable arrangements that have been adopted suggest that they have simply gone their own way and ignored public views, as well as the voice of the telecoms industry,” Hutchison Telecom said in an e-mailed statement. The government had presented “no credible evidence” of any benefits from its decision, the carrier said.

‘Precious Resource’

Rainie Lei, a spokeswoman for China Mobile, didn’t answer a phone call and e-mail yesterday.

China Mobile has said the government should hold an auction for the spectrum so the market can set a fair price for a “precious public resource.”

The city of 7.2 million people had 16.7 million mobile service subscribers as of June, a penetration rate more than double the global average, according to data from the International Telecommunication Union.

A revamp of the spectrum would cause service degradation and increase costs, according to a Sept. 5 statement by the four current operators.

“Auctions will actually create investment uncertainty for incumbents rather than promoting investment,” the American Chamber of Commerce said in a submission to the government dated March 27. “Further impacts to reduced investment will delay the development of new services.”

Re-auctioning parts of the spectrum “will stimulate further competition in the mobile market,” the government said in a December 2012 consultation document. It is “more superior in enhancing spectral efficiency, encouraging investment and the introduction of innovative services.”

To contact the reporters on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net; Simon Lee in Hong Kong at slee936@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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