HK's 3G spectrum proposal way overpriced: study

26 Mar 2013

ITEM: An independent spectrum consultancy has blasted a proposal by Hong Kong regulator OFCA to re-allocate a third of existing 3G spectrum in 2016 – not just because it would be detrimental to service quality and consumers, but also because it proposes unreasonably high fees for the spectrum cellcos would keep.

At issue is Hong Kong’s four 2.1 GHz licenses, which are set to expire in October 2016. OFCA has issued three proposals on how to renew the licenses. Under its preferred option – so-called Option 3 – cellcos would give up 2 x 5 MHz each for re-auction, and renew the remaining 2 x 10 MHz for a spectrum usage fee (SUF).

The new paper from UK-based firm Plum Consulting essentially backs earlier claims made by Hong Kong’s four 2.1-GHz licensees (CSL, Hong Kong Telecom, Hutchison and SmarTone, all of whom commissioned the study) that the proposal will hurt both the HK mobile industry and consumers by discouraging innovation and investment, and resulting in network congestion, slower data speeds and dropped or disrupted calls for consumers, especially as mobile data traffic continues to grow as fast as it is.

The Plum paper also dismisses OFCA’s claims that reallocating some 2.1-GHz spectrum to a new player (the most likely candidate being China Mobile Hong Kong, which currently offers 3G services via an MVNO arrangement) would make Hong Kong a more competitive mobile market when it already has five cellcos and a number of MVNOs.

However, the Plum study also takes to task OFCA’s two new methodologies for calculating the proposed SUF.

The first methodology is based on the final year SUF paid on current 2.1-GHz licenses, while the second is based on the weighted average of selected recent auctions in Hong Kong, which works out to an SUF of either $77m/MHz or $80m/MHz, respectively.

But Plum says the calculations are flawed on several levels. For a start, the final year payment is likely to overstate the value of spectrum over the current 15-year license period. Also, OFCA’s methodology doesn’t discount future values when calculating an equivalent lump sum value for the SUF in 2016 (a normal accounting and economic practice), and doesn’t take into account the fact that the 2001 licenses came with 5 MHz of TDD spectrum.

In terms of basing the SUF on past auctions, the Plum report adds, OFCA’s methodology isn't transparent on which auctions it’s using for a benchmark, and “has not taken due account of the characteristics of different frequency bands”.

“When you correct for those flaws, our own SUF calculations come to anywhere from 30% to 50% of OFCA’s results,” said Plum consultant Phillipa Marks at a press conference announcing the paper on Monday.

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