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3G LICENSING IN CHINA &. 3G LICENSING IN CHINA &. HONG KONGHONG KONG

Xu Yan (xuyan@ust.hk)

Hong Kong University of Science and Technology

Growth of Mobile Users in ChinaGrowth of Mobile Users in China

Growth of cellular subscribers in China (Source: The Ministry of Information Industry)

-

50,000

100,000

150,000

200,000

250,000

DigitalAnalog

Digital 0 0 0 0 1 157 1648 6387 17255 38290 82020 144800 206616

Analog 18.300 48.000 177.000 638.000 1567.0003472.0005205.0006846.0006608.0004950.000 3240 0 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2

431

366

299

221

145124

241199

87 72

0

5 0

10 0

15 0

20 0

25 0

30 0

35 0

40 0

45 0

50 0

19 96 1 997 19 98 19 99 200 0 2 001 20 02

ARPU

(Yua

n)

Blended ARPU Contract User Prepaid User

439

393366

299

233209

326 329

125103

0

50

1 00

1 50

2 00

2 50

3 00

3 50

4 00

4 50

5 00

1 99 6 19 97 19 9 8 1 99 9 2 0 00 20 01 2 00 2

MO

U (m

inut

es)

Blended MOU Contract User Prepaid User

Changes in ARPU and MOU of China Mobile (HK)Changes in ARPU and MOU of China Mobile (HK)

Source: Annual Reports of China Mobile (HK)

Explosive Growth of SMSExplosive Growth of SMS

440.1

1,590

7,930.00

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000 Million Messages

2000 2001 2002

SMS usage volume of China Mobile (HK) in 2001Source: China Mobile (HK) Annual Report

Plus 2,27 million MMS since the service was launched in

October 2002

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Model of B2B Mobile Commerce: The Model of B2B Mobile Commerce: The Case of CyberCase of Cyber--onon--AirAir

Bank

Security

��.

China is Calling for 3GChina is Calling for 3G

! Feasibility: SMS shows the demand to mobile data communication is encouraging

! Urgency: The slow speed is currently a bottleneck for the application of mobile data communications

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Spectrum Auction is not an OptionSpectrum Auction is not an Option

Global Trend of 3G Auction Price (Euro, million)

111117

2,400

7,000

8,400

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

4/2000 UK 8/2000 Germany 10/2000 Italy 11/2000 Austria 4/2001 Australia

Spectrum Occupation Fee: Spectrum Occupation Fee: US$6.06 Per Subscriber Per YearUS$6.06 Per Subscriber Per Year

Department of Radio Administration, Ministry of Information Industry

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New Initiative on Spectrum FeeNew Initiative on Spectrum Fee

! Operators are asked to pay the spectrum fee directly and spectrum occupation fee will be suspended from 1 July 2002

! Price is defined by regulator in the way of benchmarking! 7.5 million Yuan (US$0.91 million) per MHz in the

first year, 11.25 million Yuan (US$1.36 million) per MHz in the second year, and 15 million Yuan (US$1.82 million) per MHz in each of the third, fourth and fifth years.

Key Question in 3G Licensing: Key Question in 3G Licensing: Which Standard to Use?Which Standard to Use?

CDMA2000

WCDMA

TD-SCDMA

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FDI in Telecom ManufacturingFDI in Telecom Manufacturing

! No digital system before 1982! Equipment import boom after Fujian installed the

first SPC switch of Fujitsu! Policy of using market in exchange for

technology: import, digestion, absorption and creation

! joint ventures were highly encouraged with agreement on technology transference: Shanghai Bell was established in 1984

GovernmentGovernment��s Support To Domestic s Support To Domestic VendorsVendors

! assignment of research grant for R&D! low interest loans ! discounted tax rates! generous provision of land in high-tech industrial

parks! Operators are encouraged to purchase products of

domestic vendors: Supply-demand coordination conference

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Government InterventionGovernment Intervention

! �Government Guideline for Foreign Investment in Telecommunications�

! Three categories of FDI (1995):! Encouraged: Digital Cellular, SDH, ATM switching

system, satellite communications system, digital microwave system

! Restricted: analogue wireless system, PABX, non-ATM central office switches, TV and Radio Broadcasting systems, Fax machines, low speed digital microwave system

! Forbidden: Telecom operation

JuJu DaDa ZhongZhong HuaHua: : JulongJulong, , DatangDatang, , ZhongxingZhongxing (ZTE) and (ZTE) and HuaweiHuawei..

! In 1992, the first SPC of 10,000 lines was made in China with China-owned intellectual property rights

! In 1998, 98% of the newly increased switching equipment for fixed local networks and 50% of newly increased optical transmission system.

! In 1999, the market share of local vendors in switching equipment rose to over 99%.

! In 1999, the total revenues from exporting telecommunication equipment and systems reached US$ 46.6 billion

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Chinese Telecom Manufacturing Chinese Telecom Manufacturing Industry: market or competitor?Industry: market or competitor?

In 1999, the total revenues from exporting telecommunication equipment and systems reached US$ 46.6 billion

0%2%

10%

0%

3%

10%

15%

24%

0%

4%

12%

0%

5%

10%

15%

20%

25%

30%

1998 1999 2000 2001 2002

Base Station

Handset

Switching System

Growth of market share of Chinese domestic Growth of market share of Chinese domestic vendors in mobile equipment supply vendors in mobile equipment supply Source: Ministry of Information Industry of ChinaSource: Ministry of Information Industry of China

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Strategies of Local Handset Strategies of Local Handset ManufacturersManufacturers

! Good after-sale service quality! Low price! Target the urban area from country-side! High class: diamond handset of TCL999D

! However, billions were paid for IPR

CDMA: A ShortCDMA: A Short--cut?cut?

! Unicom Horizon: a CDMA network of China Unicom

! ZTE: 7.5% market share.! Future CDMA2000: avoid the opportunity

cost! Local CDMA handsets: 18 licenses to local

venders (but all have foreign partners) except MOTOROLA

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TDTD--SCDMA: Can a Dream become SCDMA: Can a Dream become True?True?

! What is TD-SCDMA! Proposed by Datang! One of the three 3G standards of ITU! First ITU standard proposed by China! Asymmetric transmission! Software-defined radio! Efficient spectrum usage! Smart antenna! Smooth migration from 2G to 3G

! Close cooperation with Siemens

Implications of 3G Licensing in ChinaImplications of 3G Licensing in China

"TD-SCDMA is a chance for domestic manufacturers

"Government is supportive in the way of favorable spectrum allocation

"However, it remains to see if it will turn out to be a mature technology for commercial application

"Time is important

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Policy Objectives of Hong Kong Policy Objectives of Hong Kong Government in 3G LicensingGovernment in 3G Licensing

"To promote the development of telecommunications industry;

"To protect consumers� interests; and "To maximise the benefits to the

economy as a whole

Key Issues in DebateKey Issues in Debate

"Choice of technical standards,"Allocation of radio spectrum"Licensing options"Open network requirement

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Choice of Technical StandardsChoice of Technical Standards

"Technology neutral"various technical standards are

compatible with each other from the user�s point of view

"Smooth deployment of number portability

"maximise the ease and practicality of roaming services without having to change mobile terminals

PCCW: Guard band issue

Competitive 2G Mobile Market in Hong Competitive 2G Mobile Market in Hong Kong (January 2001)Kong (January 2001)

O p e r a t o r

C S L

H u t c h is o n

S m a r t o n e

M a n d r in e ( S u n d a y )

N e w

W o r ld

P e o p le � s

P h o n e

M a rk e t S h a re

1 8 %

3 0 %

1 7 %

7 %

1 4 %

1 4 %

T e c h n o lo g y

G S M

D A M P P C S

G S M

C D M A P C S

G S M P C S

P C S

P C S

P C S

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Allocation of Radio SpectrumAllocation of Radio Spectrum

"2G licensee can use current spectrum for 3G services: technology neutral"Guaranteed 3G license?"High spectrum fee for 3G but low

spectrum fee for 2G?

Licensing OptionsLicensing Options

" Traditional 2G licensing in HK:

" Concerns over 2G licensing" License fee may be

undertaken by users finally" Increase licensee's burden

" Solutions:" Setting Milestones" Using Performance Bond

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3G Licensing3G Licensing

"Argument"Who can set the most appropriate milestone for

3G?"User should pay for public resource?"Capitalism should at work?"Auction but under different condition?"Cross subsidization?"Government share the risk with investor?

Royalty PaymentRoyalty Payment

Annual Minimum Defined Payment

$1x

$2x

$3x

12x

0 5 Year

R1%

R2%

R3%

R10%

15

Royalty Payment SchemeRoyalty Payment Scheme

0 5 Year

Actual Payment over Time Actual royalty

payment

Minimum defined payments

Open NetworkOpen Network

! Successful 3G service bidders must open up at least 30% of their 3G network capacity for use by unaffiliated companies to operate Mobile Virtue Network and/or content providers.

! Argument:! Speculation?! How to measure the capacity?

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Results of 3G Auction in Hong KongResults of 3G Auction in Hong Kong

! Winners of Mobile Carrier Licenses in Hong Kong! Hong Kong CSL! Hutchison ! Smartone! Sunday

! Minimum Payment in first five years: ! HK$50,000,000 per year.

! Percentage of revenue for licenses! 5%

�Xu Yan (2001) 3G Licensing Policy in China and Hong Kong SAR: Research Report for ITU,http://www.itu.int/3g

�Xu Yan, Douglas Pitt (2002) Chinese Telecommunications Policy, Artech House Books: Boston, London

For more details:

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Thank You!