There’s a new player on the block in Hong Kong’s phone wars. Well, not exactly a new player, since PCCW muscled its way back into our mobile telecommunications market - arguably the most competitive in the world - last year when it bought a majority share in Sunday.

And it came out swinging, quickly using aggressive tactics to build up its 3G subscriber base by giving clients six months’ free use of 3G phones with up to 10,000 voice minutes free per month plus unlimited text and multimedia messaging with other PCCW customers. This near-irresistible surge of generosity attracted over 300,000 would-be participants in its “3G Trial”, but there was nowhere near enough phones to fill the demand, and fewer than 20 percent actually got to take part in the programme.

While the offer grabbed the attention of consumers, Terry Graham, researcher at the Telecommunications Research Project at the University of Hong Kong, says, “It is an interesting marketing gimmick on PCCW’s part but essentially it is not introducing any new technology or service. Once the gimmick runs out we’ll just have to see what new gimmick PCCW can devise to retain the ‘stickiness’ of those customers.”

Govt role in overcapacity

Craig Ehrlich, chairman of the GSM Association, has an interesting view of the intensely competitive market situation. He says: “There is a belief within the financial industry, as well as the operator industry, that there is overcapacity, and that overcapacity has continued to be compounded by government decisions.”

It’s a good point. There are four 3G licensees: Hutchison, SmarTone-Vodafone, CSL and SUNDAY, plus other mobile operators like Peoples, which currently does not have a 3G licence. The mobile market does seem to be saturated: mobile subscriber penetration as of December 2005 was 122.6%, according the Office of the Telecommunications Authority (OFTA).

Ehrlich also believes innovation, creativity and market leadership, all of which Hong Kong was noted for in the 1980s and early 1990s, has been slowly eroding since the late 1990s.

He says bluntly of the Government’s “regulatory” role: “Basically their theory is anybody who wants a licence, and is willing to pay for it, we’ll give it to them, and let the market decide when there are enough licences. Personally, I disagree with that vehemently.

“Maybe the best way to view this a bit more objectively is to ask whether it has been successful. I will always argue that Hong Kong began to lose its leadership in innovation at the same time that it got too much capacity. In other words, there wasn’t enough money left in these companies, they weren’t making enough money to actually stay ahead of the game, and that is when Hong Kong became relatively unimportant to the rest of the world in terms of innovation. But from the standpoint of the consumer, they got very low prices.

“Where other telecom operators like Singtel and Telekom Malaysia have successful regional strategies because they were well-run and did not have the hyper-capacity issues faced by Hong Kong mobile operators, the decision by the Hong Kong regulators ‘to liberalize to the nth degree’ can be tied to the destruction of value for a lot of the mobile operators,” he says. “Furthermore they had no option to expand regionally, let alone into China - a market that adds 5 million subscribers every month.”

But researcher Terry Graham doesn’t believe that liberalization of the market has affected mobile operators as adversely as Mr Ehrlich states.

“In spite of it being a highly competitive market, all these companies have managed to make money and return a profit,” he says. “Though of course everyone’s gone through a real cost-cutting trend in the last couple of years.”

Graham believes OFTA has always been very transparent, and they’ve made their stance very clear. ‘Only come into the market,’ they say, ‘if you think you can make money’. But, as Graham adds, “Once you’ve got a licence, don’t expect OFTA to step in and protect you.”

“Competition is good”

A spokesperson for OFTA says: “It is precisely this market-driven approach that has made our telecommunications market what it is today - one of the most competitive in the world with the widest-ranging choice of services.

“In the mobile market, the competition is intense, with ten 2G networks and four 3G networks. All four 3G networks are fully operative and are aggressively launching their services in the market. In their attempts to beat the competition, the 2G and 3G mobile operators have been striving to improve their network infrastructure and their service quality, and develop all sorts of new basic, value-added incentives, as well as applications and content services that attract customers. There is not only competition in pricing but also in areas such as the quality of the network, quality of customer service, choice of innovative services etc.

“The role of the regulator is to ensure that all market players operate on a level playing field so that they can develop their potential to the full with little risk of being unfairly ousted by anti-competitive behaviour. The rest should be left to the market itself to take care of. The consolidations that have recently been taking place in the mobile market are good examples of the operation of market power.”

“Bring prices down, period!”

However, GSMA Chairman Craig Ehrlich strongly questions that that the regulator has actually protected the interests of the investors. He elaborates: “A good regulator has multiple groups to deal with: they are there to protect the consumer as well as to advance the investment prospects of their local industry. But I think that as of the mid-1990s the regulators viewed their responsibility as being solely to look after consumers - which amounted to a policy of “Bring prices down, period!”

But new technologies coming into the market now - such as the high-speed downlink packet access (HSDPA), which has been dubbed 3.5G - could see revenues rising further. Mr Ehrlich expects revenues to go up after the introduction of 3.5G because customers will use their phones for more purposes. He adds: “The best way to think of it is that it will bring broadband functions to the mobile phone community.”

HSDPA is to be introduced across the board later this year and early next year, but Mr Graham is doubtful that 3G operators in Hong Kong are ready for it.

“My impression is that Hong Kong is not as aggressive in rolling out HSDPA as places like South Korea.” Graham points out that our 3G operators have their hands full just building up and trying to make a success of their present 3G business.

Statistically, he has a valid point: As of December 2005, of the 8,544,255 mobile subscribers, only 635,965 were 3G customers.

Mr Graham believes there are good reasons why 3G operators have such a niggardly subscriber base, including technical glitches such as dropped calls and unavailable services; confusing marketing campaigns; different pricing strategies, data applications and even billing methods, all of which have had a negative effect.

“The 3G products that have been hyped are multimedia message services, video-chatting and mobile TV, but whether Hong Kong consumers have actually shown any interest in these products is debatable, since either they don’t work well, are too expensive or aren’t available here,” he says.

The Wimax quotient

Lurking in the background and promising much in terms of a service revolution is WiMax, or Worldwide Interoperability for Microwave Access.

According to Intel, which is working with the wireless industry to deploy WiMax networks, the technology will provide high-throughput broadband connections over great distances and can be used for a number of applications like “last mile” connectivity, hotspots and cellular backhaul, and high-speed enterprise connectivity for business. However, it is new and much needs to be finalized. But, says Mr Graham, eventually WiMax could be used to offer a mobile service. Currently, it only supports fixed line services, with mobile services expected to come online by 2008, he added.

Mr Ehrlich is less enthusiastic: “WiMax is barely a stable technology. What I mean by that is the standard itself. There is no economy of scale. There are relatively few handsets available so the prices are not low, the infrastructure prices are not low. My question about WiMax is never ‘will the technology work’ - it definitely will work - but whether there is a business model for it.

“And the mobile industry is already in place to move from WCDMA, which is what 3G is, to reach HSDPA and then even beyond that in the next few years to something called HSUPA (high speed uplink packet access, considered 3.75G). There is a road map that allows you to continue to go faster and faster. How does WiMax differentiate itself?”

WiMax seems to have had OFTA in go-stop mode. According to Mr Graham, “OFTA originally planned to hand out 6 licences but in an unprecedented move, the entire industry (with one/two exceptions) fought this and asked OFTA to delay that decision. PCCW, with its foray into wireless, naturally would not want to see a new competitive venue opened up that might possibly substitute for what it’s offering.”

OFTA’s spokesperson explained: “We conducted two rounds of consultation on the licensing framework for deployment of broadband wireless access in Hong Kong, one in December 2004 and the other in August 2005. Twenty-two responses to the second consultation paper were received. We will continue our dialogue with the stakeholders and will make a final decision when the regulatory environment for fixed-mobile convergence and spectrum policy has been clarified.”