FEASIBILITY STUDY & COST BENEFIT

ANALYSIS OF NUMBER PORTABILITY

FOR MOBILE SERVICES

IN HONG KONG

Final Report for OFTA

Prepared by NERA and

Smith System

Engineering

May 1998

London

n/e/r/a
National Economic Research Associates
Economic Consultants

15 Stratford Place
London W1N 9AF
Tel: 0171 629 6787
Fax: 0171 493 5937

A Marsh & McLennan Company

EXECUTIVE SUMMARY

1. In December 1997, the Office of the Telecommunications Authority (OFTA) in Hong Kong commissioned National Economic Research Associates (NERA) and Smith System Engineering to conduct a feasibility study and a cost benefit analysis of mobile number portability (MNP). The main issues considered were:
   • technical options for MNP in Hong Kong;
   • costs of implementing MNP;
   • demand for, and estimates of, MNP;
   • options to recover the costs of portability.

2. This is the final report to OFTA. The assumptions made in this report to determine the costs and benefits follow discussions we have had with the industry and other telecommunications experts. This report also incorporates the comments received on the preliminary report which was presented to the industry in Hong Kong in February 1998.

3. The mobile market in Hong Kong is currently very competitive. By the end of 1997, seven mobile operators operated eleven digital networks with over 2 million subscribers. The market shows signs of continued growth. We forecast that the penetration rate will grow to 60 per cent in 2007.

4. OFTA believes that there is scope for future improvements. It considers the availability of number portability as essential for the further development of telecommunications in Hong Kong and for the delivery of enhanced benefits to consumers.

5. We reviewed the technical options for Hong Kong and believe that MNP could be introduced through call forwarding in 6-12 months. This would only be an interim solution.

6. In the medium to long term, MNP could be implemented through a distributed database solution with fixed network operators performing the look-up. HKTC (Hong Kong Telephone Company Limited), however, appears to be well placed to perform the look-up for all other operators as the vast majority of calls to and from mobile telephones pass through HKTC and HKTI's (Hong Kong Telecom International Limited) networks. The existing infrastructure from the introduction of number portability in the fixed network would also help to expedite the introduction of MNP. Over time, other operators could provide the number translation services for themselves or other operators.

7. The costs of implementing mobile number portability vary according to the technical option and migration path chosen. Depending on the assumptions made, however, we estimate that the NPV (Net Present Value) of costs of MNP lies between HK$512 million and HK$1,044 million over 10 years. These estimates are based on information gained from interviews with operators and users in Hong Kong, relevant industry contacts, previous international studies and our knowledge of the telecommunications industry.

8. A wide range of consumers will benefit from the MNP in Hong Kong. Mobile subscribers will be able to switch operators and avoid the costs and inconvenience associated with a number change. Competition in the industry will be heightened as a barrier to switching is removed further benefiting residential and business users. Callers to mobile phone subscribers will be able to complete calls successfully in those cases where the subscriber has changed their mobile operator. We have captured these benefits in the following categories:
   • Type 1 benefits which accrue to subscribers who retain their telephone number when switching operator, and include:
     • cost savings from not having to change mobile number; and
     • cost savings from switching to more efficient operators.

   • Type 2 benefits which are the efficiency improvements and any associated price reductions which result from increased competition;

   • Type 3 benefits which are the savings as a result of there being fewer number changes.

9. There are also considerable benefits from the introduction of MNP. In total, the net present value of benefits ranges from HK$769 million, under our most pessimistic scenario, to over HK$1,396 million under our most optimistic scenario.

10. Our cost benefit analysis shows that there will be a net benefit to Hong Kong from the introduction of MNP. The introduction of an interim call forwarding solution - while involving slightly higher costs than a solution that moves straight to a distributed database - still returns net benefits for our central cases and under all of our sensitivity tests.

11. In determining how the costs of MNP should be recovered, we have drawn on the principles developed by OFTA for fixed network portability. In short, under our medium term solution, we recommend that mobile operators pay a charge to fixed network operators to provide the look up service. The way the charge is determined will depend on the way the market develops. If none of the fixed operators were prepared to offer a look-up service to all operators, then a fixed operator may need to be encouraged to provide the service. HKTC appears to be best placed to offer the service if a competitive market could not develop. If HKTC is the only operator offering the look-up service or is requested to provide the service, then this charge would need to be reviewed by OFTA and should be based on the long run average incremental cost of the system set-up costs incurred by HKTC to upgrade its distributed database. If, however, a competitive market develops in the short term, then OFTA may consider leaving the charge to the market and commercial negotiation.

12. Our reasoning is discussed in detail in Chapter 7 but can be summarised in the Table below.
    Allocating the costs of MNP

    	Technology
    Cost	Call forwarding	Distributed database
    System set-up cost	Each operator bears its own costs	Fixed operators or HKTC to recover its costs from all mobile operators
    Additional conveyance costs	Donor network operator to recover interconnect charge from recipient network operator. Each operator to bear its own remaining costs	Fixed operators or HKTC to recover its costs from all mobile operators
    Per subscriber set-up costs	Donor network operator to recover from recipient network operator	Donor network operator to recover from recipient network operator