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Andrew Chetham

Hong Kong's mobile phone industry is never going to have a year quite like it: 1997 brought the launch of six new networks, some of the globe's cheapest tariffs, and the probable start of a wave of mergers.

 If anyone ever doubted it, last year confirmed that people in Hong Kong adore the mobile phone.

 By the end of October, official figures reported nearly 1.8 million users.

 At this rate of take-up, by the end of December it is likely the figure will be around two million, meaning nearly a third of people in the SAR will have a cellular phone.

 For the operators, developing methods to sell in the market has meant trying to read changing conditions.

 Take global systems for mobile (GSM) operator SmarTone Telecommunications, Hong Kong's only pure listed mobile phone firm.

 Six months ago it was riding high.

 It had robust subscriber growth without the need to slice tariffs and dent revenues from its customer base.

 Its stock received healthy investor interest.

 But the changing dynamics of the market resulted in a rapid series of developments that battered SmarTone's share price and left investors trying to figure out what its growth strategy was.

 On December 1, SmarTone cut prices by 28 per cent to $288 per month for its basic plan of 100 minutes of free airtime.

 Two days later, Hongkong Telecom (HKT) bought the PCS and D-Amps networks of rival Pacific Link for $4.8 billion.

 Finally, on December 8, AT&T Wireless Services sold around a third of its holding in SmarTone to institutions.

 SmarTone's share price plummeted by more than 22 per cent in a week in response to these developments.

 By cutting prices, SmarTone had effectively conceded that its subscriber growth was slowing in the face of the aggressive prices charged by the new personal communication service (PCS) networks.

 These networks are targeting lower mass market and cost-conscious customers, where it is accepted that most growth will happen.

 Hutchison Telecom PCS is asking just $68 a month for unlimited airtime.

 Mandarin Communications' PCS network, called Sunday, is asking just $88.

 Other PCS networks are effectively giving away handsets and pagers.

 It was inevitable this downward price pressure would affect SmarTone.

 A year ago the company was adding about 25,000 subscribers a month.

 By earlier this year that had slowed to about 10,000.

 With the effective entry of PCS into the market, growth slowed further, to as little as 2,000 new subscribers a month, analysts said.

 SmarTone's response to this seems to be to reposition to appeal both to high-quality existing users, while having prices low enough to encourage budget-minded customers to come on board.

 However, many observers believe that SmarTone is under even more pressure after Telecom's purchase of Pacific Link.

 It gives Telecom a subscriber base in excess of 800,000 and, perhaps more importantly, it gives the firm a range of options to tackle the segmentation of Hong Kong's market.

 Telecom can keep tariffs high for premium GSM customers and also market a cheaper network, probably using D-amps, PCS, or its own cheaper GSM brand, One2Free.

 Number-two player, Hutchison Telecom, has also kept its options open.

 It too is keeping GSM prices high, while marketing its CDMA and PCS networks at the bottom end.

 SmarTone thinks it has the answer.

 'There is no doubt SmarTone will one way or another end up with a PCS network,' SmarTone executive director Bengt Nordstrom said.

 These are two of the big questions facing the mobile industry next year: which network will SmarTone buy and how much will it pay?  Now Telecom has pounced on Pacific Link, SmarTone is perhaps the only buyer around.

 It is widely accepted in industry circles that two networks are up for sale, Mandarin and P-Plus.

 Mr Nordstrom said SmarTone's strategy is not to get rushed into a purchase.

 Many believe PCS prices will fall as the commercial realities of the Hong Kong market begin to bite.

 But others believe costs will rise as operators plough more cash into capital investment and subscriber bases grow.

 Of course, a merger between two PCS operators cannot be ruled out, but it is far from clear whether the Office of the telecommunication authority would let that happen.

 Meanwhile, everyone will keep their eyes firmly on SmarTone.



SmarTone at centre of cutthroat action