Hong Kong’s CA blasted for raising 900/1800-MHz spectrum prices

The players (from left): Dr. Derek Ritzmann, Senior Vice President of Compass Lexecon and former Chief Economist of the Hong Kong Competition Commission; Kip Meek, Founder of Communications Chambers, Senior Adviser to EE and former Chairman of the European Regulators Group, now BEREC; Stephen Crosswell, Partner, Baker & McKenzie; Dr. Suella Hansen, Director and Founder of Network Strategies; Noelle Jones, Principal Consultant at Network Strategies; Dr. Henry Wong, Head of Strategic Wireless Technology at HKT.

Hong Kong telecoms regulator OFCA is under fire again for overpricing spectrum as 900/1800 MHz licenses come up for renewal, with industry players, consultants and the local Chamber of Commerce slamming a proposal to raise the spectrum utilization fee (SUF) that they say will harm consumers.

OFCA (Office of the Communications Authority) initiated the first round of public consultation in February on how to go about reassigning licenses for the 900-MHz and 1800-MHz bands, which will expire between November 2020 and September 2021, and how to set pricing for them. Those spectrum bands account for 40% of the total amount of spectrum currently assigned in Hong Kong, and are critical for 4G services in terms of both capacity and indoor coverage.

At an industry forum organized by the Hong Kong General Chamber of Commerce on Monday, consultancy firm Network Strategies released a study [PDF] rating the three reference auctions proposed by the CA to set its reference spectrum prices, concluding that prices based on those auctions might not reflect benchmarks appropriate for this purpose.

“In comparison with international benchmarks, the reference prices are very high,” said Dr. Suella Hansen, Director and Founder of Network Strategies. “Use of these reference prices for setting reserve or fixed prices may lead to artificially high SUFs which may have a distortionary effect on the market. With efficient spectrum pricing and sufficient spectrum allocation, incumbent operators may minimize costs to produce retail services efficiently, continue to invest and develop innovative services and products, all of which promote social efficiency. However, consumer welfare will not be promoted if the price of spectrum does not reflect its true market value, as market distortions will likely occur, driven largely by the impact of high prices on firms’ investment.”

Incumbent telco HKT – a longtime critic of the CA’s spectrum-pricing methodologies – said that customers wouldn’t stand for the increased MTR/Tunnels/Mobile License/Administration Fees that would result from higher SUF prices.

A new study conducted by research organization Policy 21 (and commissioned by HKT) found that almost 73% of the respondents said a tunnel fee increase in the event that the government raises spectrum prices would be unacceptable. (Caveat: the study also found that over 90% of respondents had no idea that the CA planned to raise spectrum fees – and in fact, over 88% had no idea there was a public consultation about any of this.)

Meanwhile, Dr. Henry Wong, HKT’s Head of Strategic Wireless Technology urged the CA to increase spectrum supply to meet the continued growing demand for mobile data services.

“While OFCA has stated that no new spectrum will be available in Hong Kong over the next few years, the ITU has identified certain frequency bands that can be released for mobile services,” Wong said. “These include the digital dividend (694-790 MHz) and Band 42 (3400-3600 MHz). These frequency bands should be made available to the mobile operators in Hong Kong so that it does not lag behind other countries.”

Dr. Derek Ritzmann, senior vice president of Compass Lexecon and former chief economist of the Hong Kong Competition Commission, concurred that the CA needs to release new spectrum bands, and that failure to do so could damage competition and raise consumer prices unnecessarily. “The best policy approach is to release more spectrum at lower prices. As this will lead to lower costs for mobile operators and lower prices for mobile consumers, competition in the mobile market will become stronger and consumers will benefit.”

This is not the first time the CA has been criticized for its spectrum-pricing methodologies and the potential impact on the mobile sector and its customers. In September 2013, when the CA was making plans to reallocate 2.1-GHz spectrum for licenses expiring in October 2016, a study from Plum Consulting [PDF] (commissioned by all four 2.1-GHz license-holders) concluded that the CA’s pricing was not only non-transparent and out of line with international benchmarks, but also overpriced by as much as 50%.

When that auction finally took place in December 2014, the CA collected HK$2.42 billion ($3.1 billion) from SmarTone, China Mobile Hong Kong and Hutchison Telecommunications Hong Kong, and Barclays analyst Anand Ramachandran for one was pleased with the results, according to the South China Morning Post:

“We reiterate our positive stance on the Hong Kong telecommunications sector as we expect better pricing in mobile to start to be reflected in operators’ financial results this second half of the year and drive higher earnings and cash flow growth … we see upside to dividend delivery post-auction as well.”

The CA plans to have a second round of public consultation, and will make a final decision on the issue in November next year.

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