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The Government announced today (February 13) the licensing framework for Third Generation Mobile Services (3G) together with several important aspects of the regulatory framework.

A spokesperson for the Information Technology and Broadcasting Bureau said, "We consulted widely in March and October 2000 for views of the public and the industry on the licensing and regulatory frameworks for 3G, followed by an industry workshop in January 2001 on the Open Network requirement. The decision we announce today is made after thorough consideration of the views from different sectors. With responses being generally supportive, we have decided to conduct a pre-qualification exercise followed by spectrum auctioning, to select four 3G licensees."

"Given the spectrum constraint, we decide to issue four 3G licences. This will provide sufficient spectrum for each operator to provide innovative, multimedia 3G services and ensure competition in the market. The pre-qualification process is intended to be relatively light, but will involve setting certain minimum criteria on investment, network rollout, service quality, financial capability, etc. This will enable us to ensure the quality of the 3G networks and services to the benefit of consumers."

"Spectrum auctioning is a fair and efficient method to allocate spectrum to the applicants with the best business cases. In considering the payment method of auctioning, we have taken into account the fast changing development in the global telecommunications market and the characteristics of the mobile services market in Hong Kong. We have therefore adopted a licensing framework which encourages market entry and keeps the financial burden to operators at a manageable level," continued the spokesperson.

The Government has chosen a royalty-based proposal which requires the bidders to pay a certain percentage of their annual 3G revenue turnover determined by the auction. The royalty payment will be subject to a guaranteed, minimum payment.

"This method will encourage market entry and allow the Government to share the upside of the future 3G services market. Above the minimum payment level, royalties paid by licensees will depend on the actual performance of each licensee. The guaranteed, minimum royalty payment requirement will minimise risks for the Government, and reduce the costs that may be passed on to consumers."

The Government is designing with our 3G consultants the details of the auctioning, which will include an efficient method to allocate the frequency bands to the four successful bidders, such as to conduct a final round of auction requiring a lump-sum cash bid.

"In conclusion, in face of the fast changing global and local telecommunications markets, we have to devise an auction method which is suitable for Hong Kong. We will issue the four 3G licences in a fair and efficient manner."

The Government has also announced a number of important regulatory conditions decided by the Telecommunications Authority (TA), including the requirement that the 3G network licencees should make available at least 30% of their network capacity for access by non-affiliated Mobile Virtual Network Operators (MVNOs) and/or content providers.

"The Open Network requirement will create a competitive and vibrant content and e-commerce market over the 3G platform. TA's decision will not only encourage competition but also preserve operators' investment incentives to roll out their network. Details of regulation will not be overly burdensome and complex. Having consulted the industry on the Open Network requirement, the TA has designed a regulatory framework which serves the interests of the operators and meets the Government's policy objectives."

The TA expects that additional spectrum for 3G services will not be available before 2005. Under the technology-neutral regime, existing operators are free to use any technology under licence conditions, regardless of whether it is 2G or 3G. The TA will conduct an industry consultation on future arrangements for renewal of 2G licences before deciding on a way forward.

"The timely issue of 3G licences will allow Hong Kong to enjoy 3G services at the same time as other advanced economies. We plan to formally invite licence applications after the enactment of the Telecommunications (Amendment) Bill 2001 and the subsidiary legislation relating to the spectrum utilization fee for 3G by the Legislative Council. Though our schedule is tight, we still plan to issue the licences in mid-2001."

Background

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Introduction

3G is the next generation of mobile telecommunications, which will allow mobile access to personalised multimedia services, anytime, anywhere. It should create enormous opportunities for both network operators and providers of content and service applicants. Small innovative enterprises should have great potential in this market.

Hong Kong remains a leader in mobile services and technology, with a highly competitive market of six network operators, and high penetration rates of 76% (November 2000). With such a market, Hong Kong is ideally placed to enjoy the full benefits of 3G.

The TA has conducted two public consultations in March and October 2000 respectively, followed by an industry workshop on the Open Network requirement. The Government has considered in full the responses received in the proposal put forward in finalising the licensing and regulatory framework.

Policy Objectives

Our policy considerations for the licensing process remain unchanged and are to (a) promote the development of the telecommunications industry; (b) protect consumers' interests; and (c) to maximize the benefits to the economy as a whole.

In order to meet its policy objectives, the Government has chosen a licensing and regulatory framework for 3G mobile services. The most important features of the framework are as follows:

Payment Method

* Bidders have to bid for a level of annual royalty by way of a percentage of turnover from their 3G services network operations and a guaranteed, minimum payment will be set for each percentage bid.

* The correlation between the percentage of royalty bid and the corresponding set of minimum payments will be pre-determined by the Government based on projected 3G network revenues. The royalty percentage and minimum payment will not have a linear relationship, and the increase in the minimum payment will be at a higher rate as the percentage royalty bid increases.

* Due to the difficulty in separating 2G and 3G revenues, particularly in the early years, licensees will pay a flat annual minimum payment of the first 5 years regardless of the actual revenues. From year 6 onwards, licensees will pay a royalty payment at the percentage bid made by the licensees at the auction on their actual turnover, or the corresponding minimum payment, whichever is higher.

* To mitigate any distortive effects that royalties may create in the 3G market, all successful bidders are subject to the same royalty percentage, which will, depending on the detailed auction design, be at or near the highest price willing to be paid by the weakest successful licensee. However, the royalty paid by each licensee should be higher than the guaranteed minimum royalty payment determined by the Government.

* Throughout the whole licence peroid, operators will have to provide a 5-year rolling guarantee by a third party for each of their guaranteed minimum royalty payment.

Open Network

* Successful 3G services bidders must open up at least 30% of their 3G network capacity for use by non-affiliated companies to operate as MVNOs and/or content providers. More capacity can be opened up if they wish to do so by commercial arrangement. However, to preserve the commercial incentive of 3G network operators to develop their networks, the TA will not intervene for a MVNO or content provider if that operator/provider already has access to capacity equivalent to 30% capacity of a network operator.

* The wholesale prices for MVNOs' access should be negotiated commercially with the 3G licensees. However, if commercial negotiation fails, the TA has the reserve power to make a determination based on fair interconnection principles. A sufficient return on cost of capital will be allowed, reflecting the higher risk of 3G services investment, when the TA makes the determination to ensure that the investment incentives are preserved.

* Content providers will buy capacity at tariffs set by the 3G licensee, reflecting all relevant costs and the above-mentioned cost of capital. The TA will only intervene on unfair, discriminatory treatment or anti-competitive grounds.

* Measurement by the TA of the capacity sold to non-affiliated companies will not be necessary unless the 3G licensees refuse to supply the requested capacity. The licensee should then provide evidence to the satisfaction of the TA that 30% of their capacity has already been opened up. The TA is prepared to accept alternative methods of measurement proposed by operators including the simplest documentary proof of the total capacity sold, e.g. in the contracts or agreements with non-affiliated companies.

End/Tuesday, February 13, 2001

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