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So far in 1996 there has been a major price war on mobile phone handsets, the shutting down of analogue and CT2 networks, and huge numbers of new users entering the marketplace.

Still to come are the granting of licences for personal communications services (PCS) and cordless access service (CAS), and, say some analysts, handsets given away free as in the US.

In early March, that almost came to pass. Responding to Hongkong Telecom CSL's offer of two-phones-for-the-price-of-one, Pacific Link offered customers handsets for $1.

The catch? Pacific Link subscribers had to pay a $300 handling fee and leave a $2,880 deposit which would be deducted over two years of service.

'It's a marketing gimmick,' said Raymond Ho, telecommunications analyst with Datapro.

The price war was ignited in January when Hutchison offered discounts on it's GSM phones and unlimited usage for subscribers to it's CDMA network.

With other operators responding with their own incentives, about 50,000 people subscribed to cellular service in January, registering a seven per cent growth in a single month.

 According to OFTA figures, there were 737,606 cellular phone users in Hong Kong as of January 1996.

With it's first cellular licence granted in 1985, Hutchison is the most diversified of the Hong Kong cellular operators, with four flavours of service before it closed it's TACS service last Friday.

Hutchison completely closed it's TACS analogue network, replacing it with it's GSM digital network. The 16,000 former TACS users were ported over to GSM service.

Analogue phones are supposed to be completely phased out by June 1997, according to OFTA.

Hutchison has about 140,000 cellular subscribers, not including its 60,000 CT2 users. But it had fallen badly behind Telecom CSL, which has 210,000 users for it's GSM network. Now, Hutchison is cutting prices in order to win customers.

Hutchison may succeed at this low-price, mass-volume strategy because it owns the most unused bandwidth, said Mr Ho. Jardine Fleming Securities estimates Hutchison owns 70 per cent of open spectrum capacity.

Jardine Fleming Securities estimates that Hutchison, which has capacity for 700,000 cellular users, by 1998 will be charging users an average of $600 per month for service. Pacific Link, which has capacity for 340,000 users, will also charge about $600 per month.

By contrast, Hongkong Telecom, which has a cap of 300,000 users with current technology, will be charging users an average of $800 per month.

Hutchison is using the same strategy as it's sister company in Great Britain, Orange. Orange had been languishing as a minor cellular phone operator until it instigated a price war late last year. That strategy paid off, bringing in hundreds of thousands of new users.

According to Mr Ho, many cellular users will lament the passing of Hutchison's TACS service. TACS is the most popular standard in China, with about 200 cities offering TACS service. 'It was very convenient for Hong Kong users to get roaming service in China with TACS,' he said.

But migrating users from analogue to digital creates additional bandwidth for Hutchison. GSM is considered three to four times as bandwidth-efficient as analogue standards.

Bandwidth-efficiency is crucial because cellular operators are only allotted a certain frequency spectrum by OFTA for its users to send and receive phone calls.

As the price war continues and profit margins drop, Telecom CSL is at greatest risk. It only has network capacity for 100,000 more users - though extra technology investment could boost that by another 50,000.

SmarTone says it will invest $430 million to enhance the quality of its network and increase its user capacity of 400,000 GSM users.

Hutchison can also create extra bandwidth by porting users over to the CDMA standard, for which it has 10,000 current users. CDMA is theoretically another 10 times more bandwidth-efficient than GSM, said Mr Ho.

The price war is partially the cellular operators' attempt to build up subscribers before competing standards invade Hong Kong.

The one most anticipated and most delayed is the Personal Communication Service (PCS). PCS operates at a higher frequency range than cellular phones. It promises to be cheaper, offer better signal quality, and use less power - which means lighter batteries and phones.

The JLG has not said which of the 14 bidders will win the six PCS licences.

With enough cellular users, 'operators can lower prices to really lock in potential PCS users,' said Mr Ho.

Operators are also girding up for OFTA's awarding of four licences for Cordless Access Service (CAS). CAS is based on technology similar to CT2 because it is basically an upgraded cordless phone, rather than a true two-way mobile radio like cellular phones, said Mr Ho. But CAS is a significant advance over CT2 because it allows users to receive calls as well as originate them.

CAS technology is not as good as GSM, according to Mr Ho. For instance, the range is still limited to about 300 metres because there are no 'handoffs' between cell sites. Users cannot travel significant distances or ride the subway while using the phone.

There are six bidders - Telecom CSL, Hutchison, New World, SmarTone, Shun Hing (distributor of Panasonic cellular phones), and a Hitachi-led consortium - for the four licences, which have yet to be awarded by OFTA.

When CAS is finally adopted, providers will have to choose between two standards. Personal handy-phone system (PHS, not to be confused with PCS) is from Japan. Digital Enhanced Cordless Technology (DECT) is from Europe, and prices will be cheaper than GSM, said Mr Ho.



Ringing in the changes for mobile phones