A plan by the Hong Kong regulator to snatch back and re-auction one third of the territory's 3G spectrum could reduce capacity by more than a quarter and cost up to HK$6.3 billion (US$806 million), a consultant's report has warned.

A study by UK-based Plum Consultancy said removal of spectrum in 2016, when the license period ends, could cause major service disruption and, in particular, cause networks in Hong Kong's heavily-used mass transit rail (MTR) system to collapse.

The study, commissioned by Hong Kong's four 3G operators -- Hong Kong CSL Ltd. , Hong Kong Telecommunications (HKT) Ltd., Hutchison Telecommunications (Hong Kong) Ltd. , and SmarTone Telecommunications Holdings Ltd. (Hong Kong: 0315) -- analyzes a proposal from the regulator, Ofca, to take back a third of the deployed spectrum in the 1.9-2.2GHz band and re-auction it.

Ofca has argued that, under a 2007 government policy decision, operators do not have the right to retain spectrum or first right of refusal. It has estimated that the spectrum take-back would reduce capacity by just 9 percent.

But according to Plum consultant Ken Pearson, that figure was based on averaging the impacts across 3G and 4G networks, rather than just the 3G network that bears the burden of the change.

The Plum analysis found that the number of 3G subscribers in Hong Kong would remain roughly the same during the next three years, but traffic would double.

Pearson said the networks were already highly congested, with "hotspots all over Hong Kong," but the biggest impact would be felt in the MTR, which carries more than 4 million passengers daily.

"Under deprival [of spectrum] there could be a complete loss of 3G communications at the busiest time of day," he noted.

SmarTone CTO Steven Chau said the only way to add capacity would be to build 4G networks in a fresh frequency band.

Plum has estimated operators would have to invest HK$708 million (US$91 million) in upgrading their 3G networks to compensate for the loss in capacity, and another HK$145 million (US$18.7 million) on building out their 4G networks to accommodate the accelerated migration of new users.

Pearson said these costs would inevitably be passed onto the consumer, while customers would also have to bear the cost of upgrading their handsets to 4G models, which would cost as much as HK$5.4 billion (US$696 million).

Pearson said Plum had not found "any identifiable benefits" from the plan.

However, one clear beneficiary would be China Mobile Ltd. (NYSE: CHL), whose Hong Kong subsidiary runs a 3G service as an MVNO, and which has expressed support for the take-back plan.

The widely held industry view is that the government is doing a favor for the Beijing-controlled operator.

In Hong Kong's current toxic political environment, where the community and the Beijing-backed local leadership are at odds over democratization, the view is shared by much of the local community as well.

Ofca is due to make its final decision on the plan in October.

— Robert Clark, contributing editor, special to Light Reading