Hong Kong this week drops the gavel on an auction of third-generation mobile telecoms spectrum that, due to a unique bidding system, has the potential to quickly drive prices higher than other recent 3G licence sales.
The territory, among the world's most mobile-mad markets, will auction four licences in a scheme whereby bidders pledge a percentage of future network revenue, starting at five percent.
Hong Kong's top three mobile carriers, each with a million-plus customers, are seen as certain to win 3G licences in a territory with mobile penetration of some 80 percent.
They are: Hutchison Telecom, controlled by conglomerate Hutchison Whampoa Ltd; CSL, 60 percent owned by Telstra Corp and 40 percent by Pacific Century CyberWorks; and SmarTone Telecommunications.
Bids will be increased in one percent increments -- from five to six percent, for example -- with a minimum price for each 15-year licence of roughly US$59-US$67 million on a net present value basis, according to analysts' calculations.
But the auction structure makes raising a bid exponentially more costly. At nine percent, each licence would cost about US$270 million -- a haul for the Hong Kong government totalling US$160 per resident, figures Deutsche Bank analyst Nigel Coe.
All incumbents seen bidding
At least five of Hong Kong's six incumbent carriers -- all but one of which loses money -- are likely to bid, analysts said. Once completed, the auction is expected to trigger long-forecast consolidation in hypercompetitive Hong Kong.
Analysts do not foresee any other bidders vying in Hong Kong for mobile spectrum that is purported eventually to enable high-speed wireless Internet and video transmission.
"I don't expect crazy, stupid bidding," said Coe.
Still, Coe said that because Hong Kong's auction does not require a single up-front payment -- but a percentage of future revenue -- it could generate total revenue for the government topping the US$50-and-under per-person recently raised in Singapore, Australia, Greece, Switzerland and Belgium.
"It all depends on each operator's assumptions about future revenue generation," Coe said. "It's really a case of beauty is in the eye of the beholder."
Britain and Germany redux - not
Last year, carriers beheld limitless possibility for 3G and roughly spent a combined US$78 billion, or about US$600 for each resident of Britain and Germany, in two frenzied auctions that blasted through expectations.
Those sky-high bids helped trigger a selloff in telecoms stocks from which the industry has not recovered.
Other countries hoping to reap similar windfalls were quickly disappointed by their own lacklustre auctions, which have rarely seen bids above minimum levels.
Doubts about the revenue-generating potential of the unproven 3G technology, concerns over the expense of network buildouts, and the global plunge in telecoms share prices have all put a dent in the once-dreamy enthusiasm for 3G.
No carrier has yet launched 3G on a commercial scale, although Japan's NTT DoCoMo plans to roll out its delayed 3G service on October 1.
Singapore scrapped its planned 3G auction in April after only three bidders emerged for four licences. The island state sold licences to its three incumbents for US$55 million apiece.
Quick bidding seen
In Hong Kong, the bidding is expected to proceed quickly.
Carriers must submit qualifying applications on Monday or Tuesday. If more than four qualify, Hong Kong plans to hold an auction soon thereafter -- possibly this week -- although a Hong Kong regulator on Thursday declined to provide an exact date.
The final percentage paid will be the highest losing bid, plus 0.01 percent.
"I think you should get more than four (participants) in terms of initial qualification, but I think we'll have a very quick auction," said Credit Suisse First Boston analyst NiQ Lai.
Lai said he would be "very surprised" if any non-incumbents bid in the Hong Kong auction.
Among second-tier firms, JP Morgan predicts New World Mobility, a unit of New World Development, will be the most likely winner. Sunday Communications and Peoples Telephone Co, which is controlled by China Resources (Holdings), are the other incumbents.
One of the several quirks in Hong Kong's licensing process requires that each winning bidder make 30 percent of its network available for lease to so called MVNOs, or mobile virtual network operators.
Many observers say that Sunday, which had 485,000 customers as of June 30 and boasts a trendy, youth-oriented brand, may be best suited as a virtual operator.
Carriers have said it will cost roughly US$250 million to build 3G networks across Hong Kong's densely packed territory, although some observers expect it to cost much more.
Winning bidders are required to build networks covering more than half the population by the end of 2007.
If only four bidders qualify, 3G licences will be sold at the minimum royalty payment of five percent of wholesale network revenue for 15 years, with a minimum of HK$50 million (US$6.4 million) a year for the first five years and rising annual minimums thereafter.
Bidders must submit a deposit of HK$250 million (US$32 million). Licences will be granted at year-end, with service to begin around 2002-2003.
(Agencies 09/18/2001)
