40.
It is true that the development of cable television in Hong Kong requires an exceptionally large investment to be made in the development of programming. In most areas where cable television networks have been around the world, and particularly in North America, the principal investment at risk is the construction of the network itself; programming can be obtained readily by arrangement with providers of satellite-distributed channels. In the case of Hong Kong material in the Cantonese language is not widely available, Therefore investment in both networks and programming development is essential. Analysis of financial data for scenarios 1 and 2 shows that the amounts at risk in the two components of the business are comparable. The following table shows the
net amount invested in (1) network construction and, (2) programming and operations, at the points of maximum cash outlay:
41.
Programming & Operations
Scenario 1
HK$716 million
Scenario 2
HK$716 million
Network Construction
HK$507 million
HK$814 million
The points of maximum cash outlay occur at year 4/5 in the case of programming and operations, and year 5/6 in the case of network construction. We conclude that, unlike in typical cable television environments, the risk characteristics of each of these two aspects of the business are similar.
42.
In view of the large size of these investments, the argument that vertically integrated management is desirable has merit. It would not normally be good practice to divide into two separate businesses an enterprise which requires capital investments of these magnitudes in each component part, if the earning power of each part is dependent on the efficacy of the other.
43.
The cost penalty associated with the construction of a separate cable television network is equal to about 5% of the total cost (including programming costs) of provision of the service. Analysis of the sensitivity of cable television service viability to variations in provision and penetration rates suggest that this cost penalty will not be an overwhelming consideration. We conclude that, in the case of Hong Kong, the decision of a potential cable service franchisee whether or not to contract network construction and operation from HKT should be regarded as a private commercial matter not bearing on the franchise selection decision. The quality of programming and marketing are much more important determinants of success.
44.
We conclude that the Hong Kong Government would do better to choose the cable service franchisee on the basis of the quality of its overall service package than on the basis of its strategy for network construction. The very small overlap between cable television and the second telecommunications networks, shown on Exhibit 2, indicates that the second telecommunications issue should not influence significantly the choice of cable television network. The fact that the cost penalty
associated with the second network construction about 5% of total costs
is within the range which a prudent business organization might
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