Hong Kong sets price for 3G auction

NTT DoCoMo is first company in the world to offer 3G

The Hong Kong government has set the minimum price for third generation mobile phone (3G) licences, which are due to be auctioned in September.

Six telecom carriers are expected to compete for four licences in one of the world's most competitive mobile markets, where 80% of the population already has a mobile phone.

3G auction terms

HK$250m deposit

HK$50m minimum bid

5% of revenue in first 5 years

Increases in the next 10 years

30% of network capacity open to other operators

The operating companies will have to put up a minimum of HK$50m ($6.4m) a year for the first five years of the licence.

The price has been set at 5% of annual network turnover, and therefore could increase if services prove popular.

Annual payments will also rise during the remaining 10 years of the 15-year licence period, the government said.

Small market

But some analysts think the Hong Kong market may simply be too small to justify the cost of building 3G networks.

Many telecom companies have already taken on heavy debt burdens to pay for licences in bigger European markets.

Also telecom share prices in the sector have slipped, adding to the pressures on the companies.

I just don't detect that much interest from the global or the international players

Richard Wu
JP Morgan Chase

The Hong Kong government acknowledged these fears when devising its pricing structure.

"Recognising the recent downturn of the telecommunications market, we have introduced a royalty-based payment scheme that is intended to minimise the financial burden on operators," a government spokesman said.

Big firms cautious

Nonetheless, there may be little enthusiasm from global telecoms firms.

Telecoms analyst Richard Wu at JP Morgan Chase said he would not be surprised to see winning bids come in at the minimum level.

"I just don't detect that much interest from the global or the international players," he said.

Earlier this year, Singapore cancelled its plan to auction four licences when only three eligible bidders emerged.

In the end, the three bidders each paid S$100m (US$55.25m) for spectrum licences.

By contrast, telecoms giants poured over $75bn into two European markets - Germany raised $45.7bn in its 3G auction while the UK pulled in $32.14bn.

Japan's NTT DoCoMo is currently the only company in the world to operate third-generation mobile phone services.

Local difficulties

Five of Hong Kong's six mobile carriers lose money, according to analysts.

And plans by Hong Kong's biggest telecoms player, Pacific Century CyberWorks, to raise $2.5bn through a bond issue may have to be trimmed back, dealers said.

PCCW may also issue 10-year debt, rather than longer term 30-year bonds, because of worries about the impact of Argentina's debt crisis on the bond market, dealers said.

The bond issue is intended to fund PCCW's internet expansion, providing content for new generation mobile phones.

PCCW also owns 40% of Hong Kong mobile operator CSL, in which Australian company Telstra has a 60% stake.

The other contenders

British Telecom owns 20.37% of SmarTone, although in March SmarTone said it had been in talks with BT to find a buyer for the stake.

SmarTone's share price hovered near 52-week lows on Tuesday after the resignation of chief executive Ian Stone surprised the market.

The other carriers include Hutchison Whampoa, Sunday Communications, Peoples Telephone and New World Mobility.

Bidders in the 3G licence auction in September must pay a deposit of HK$250m and take part in a pre-qualification process. This will be followed by the spectrum auction.

Licence winners will have to open up at least 30% of their capacity to other operators, the government said.

The measure is designed to allow smaller players to provide 3G services without building their own networks.