History repeating itself?

Asian telecom regulators have the opportunity to avoid the exorbitant 3G licence fees that now burden their European counterparts. The big question is, will they?

Although it generated disappointment on the part of the Australian government, the island continent's 3G auction cost its six winners

The latest flurry of third generation uncertainty began when the authorities in Hong Kong released their 3G auction briefing document. One thing appeared certain about the process - for once, the Hong Kong government was going to ignore the wishes of big business and implement the licence format it saw fit. Local giant Hutchison Whampoa was incensed by the government's allocation of 30 per cent of the spectrum to virtual operators, and was further miffed at a new participation condition that required not only an annual fee for the 15-year licence, but also a percentage of the revenue that each licensee received from its 3G operations. The Asian Wall Street Journal reported that that percentage was seen as a minimum of five per cent of revenue, probably not exceeding seven per cent. The percentage fee is the first to be introduced in any 3G auction anywhere in the world.

Winners are required to offer coverage to half of Hong Kong's eight million people by the end of 2006, with service likely to begin at the end of 2002 or early 2003.

For a small, fiercely competitive mobile market such as Hong Kong, four operators paying a minimum of HK$50 million per year ($6.4 million) for the first five years, with fees increasing for the final ten, plus at least five per cent of overall revenue annually, suddenly makes the licence a hefty burden for the operators. It is also likely that the licence scheme will push 2G operators which fail to win a licence, or choose not to bid, into the virtual operator space. Hong Kong already has six major operators with virtual providers, including Virgin Mobile, ready to enter the market.

One analyst feels the operators' pain. "I would rather see a $300 million payment right up front than an annual cash outflow of $50 million to $100 million," says Evan Erlanson, editor of TechBuddha.com, a Hong Kong-based telecom and internet securities research firm. "It leads to a more realistic accounting of the investment. If you buy the licence outright, you can call it an asset and amortise the expense over the life of the licence.

If you pay a royalty, there is no asset, just an operating expense that detracts from operating profit, making the telcos seem less profitable on an operating basis than they actually are."

One significant difference between European and Asian telecom operators is that, with the possible exception of Hong Kong, the leading player in every market is either a state-owned company or a former state-owned enterprise that is now number one in its respective market. Although number two telcos, such as Singapore's MobileOne and China's state-owned competitor China Unicom, have gained significant ground on former monopolies, Singtel and China Telecom, they are still very much in second place with no real shot at the top slot, in 3G or otherwise.

Normally quick to learn from its northern rival's missteps, Singapore may travel down the same, errant road. When the city-state began accepting auction participation applications, only three operators bid for four available licences. Hong Kong's Sunday Communications Ltd baulked at the $60 million entry fee, and Singapore's Infocomm Development Authority (IDA) announced that it would scrap the auction and award the licences accordingly to the three that had come forward - Singtel, MobileOne, and StarHub, all Singapore-based companies.

The potentially high cost of 3G auctions raises the question of whether 3G should be viewed as a profit centre at all? Erlanson doesn't think so. "I think of 3G not as a revenue enhancer, but a revenue preserver.

i-mode in Japan has not increased DoCoMo's ARPU, merely slowed its decline.

And on a side note, if ARPUs are falling in Japan, the wealthiest nation in Asia where the market is still only at 55 per cent, it means that we haven't even plumbed the depths of the potential subscriber pool; how can they remain 'stable' in countries with 1/30th of Japan's per capita income?"

While the 3G process in Singapore went smoothly, future use of an auction-based process could be employed, to the ire of local operators. The IDA announced in late July that additional 2G and other spectrum allocations would be by auction. StarHub CEO Terry Clontz spoke out against the move, pointing out that previously spectrum had been allotted based on use, with additional bandwidth available to those with a proven need. Clontz's objection is understandable. Singapore has Southeast Asia's most developed infrastructure but its smallest population. The nation has slipped into recession and its neighbours - namely Malaysia, Indonesia, and Thailand - have never really recovered from the 1997 economic crisis which reduces opportunities for the export and expansion of services into new markets, although MobileOne has announced plans to move into Malaysia.

Erlanson believes that consolidation is inevitable among mobile providers, especially in markets where there are more than four players: "Earnings growth, however, is possible, if these companies stop beating each others' brains out and manage to lower their churn rates by offering customers useful value-added services."

Malaysia remains vague about its plans. While it reiterated in mid-July that it intends to allocate 3G licences by the end of this year, Malaysian telecom regulators have not said how many licences will be issued, or how much they will cost. Malaysian officials have expressed concern that the time is not right for the launch of 3G services and fear a lack of acceptance if the network is built out or initiated too quickly.

China's Ministry of Information Industry took a more novel approach.

China had avoided the speculation about a 3G auction process, with observers expecting that roll-out of 2G and 2.5G systems had too far to go before China could seriously contemplate a 3G network. In the midst of that prolonged silence, China became judge and jury - it announced that there would be five licences, and that the recipients of those licences would be China Telecom, China Mobile, China Unicom, China Netcom Corp, and China Satellite Communication. Although China's accession to the WTO will allow greater investment by foreign telecom companies, there will be no foreign operators, 3G or otherwise. "Foreign companies cannot own or operate telecom networks in China. Period," said Kristian Kender, an analyst in Hong Kong with IT research firm Strategic Intelligence. Some foreign players, including Hutchison Whampoa and Vodafone, have already moved to take stakes in China Unicom, but their minority positions will not change. Operators wanting a slice of what has just become the world's largest mobile market will only be getting their cake indirectly.

While China's approach seems protectionist and opaque, that nation's system is far advanced compared to that of India, which just held a transparent 2G auction for 22 licences around the country. Despite its development as an IT powerhouse and software developer, India has lagged far behind its East Asian neighbours in rolling out telecom infrastructure and overall internet adoption. With only five to ten million estimated mobile customers nationwide, 3G for India remains a generation away.

So far, only Singapore's solution seems to strike a balance between satisfactory revenue for governments and competitive rates for telecom providers. Whether burned by European auctions, shut out by protectionist policies or turned off by auction or free structures, big names, such as Vodafone AirTouch, are staying away from Asian auctions. Only Hutchison Whampoa and Singtel are actively seeking licences outside of their home markets. Australian giant Telstra will participate more indirectly, purchasing shares in Singapore's MobileOne, in deals vacated by British Telecom in ventures such as Malaysia's Maxis and Hong Kong's SmarTone, and through its continuing but questionable partnership with Hong Kong's Pacific Century CyberWorks. But the question remains: Will Asia's regulators learn from the mistakes of the Europeans, or are they doomed to repeat them?