characteristic is summarized in Exhibits 5.7 and 5.12. As these exhibits show, there is both an argument in favour of the desirability of monopoly and one in favour of the desirability of competition (restricting attention for the purposes of these paragraphs only to the issue of cost economics):
i.
ii.
On the one hand, Exhibit 5.12 shows that the operation of an international gateway does indeed exhibit very large economies of scale: expansion of the facilities of the existing carrier to handle additional traffic would result in a cost saving of 38% by comparison with the costs incurred if the same incremental traffic were carried by a new competitive carrier. This magnitude of percentage cost saving is much greater than that exhibited by internal telecommunications networks (see Exhibit 5.4), suggesting that there may indeed be strong "natural monopoly" in this area.
On the other hand, Exhibit 5.7 shows that the total value of telecommunications traffic passing through an international gateway exceeds by many times the cost of its operation (whether by a single carrier or by two competitors). International call revenues of some HK$42,000 million (Net Present Value to the year 2007), including both the overseas and local portions of the revenue) pass through international gateway facilities costing a very small proportion of that sum. The data in Appendix A (Exhibit A.12) and in Exhibit 5.12 shows that up to 30% (by the year 2007) of international traffic can be served by facilities costing, in Net Present Value to the year 2007, only HK$383 million. This shows that, expressed as a percentage of the total business flowing over international networks, the cost penalty associated with introducing a second carrier is very small, and hence the case for allowing competition strong.
These figures illustrate that in the cost structure of international telecommunications services there is a narrow "constriction" through which all traffic flows, which comprises a small part of the total costs of facilities required to connect the call from start to finish, but which is itself subject to quite large scale economies. This constriction is the provision of the international exchange and satellite earth station facilities (or equivalent non-satellite facilities). Those responsible for formulating public policy must ask whether the (quite substantial) natural economies associated with that constriction should be exploited to save costs, or whether there is a risk that this will result in undesirable monopoly characteristics (i.e. failure to respond efficiently to customer needs) in the much larger market for international telecommunications service provision.
We do not believe that the case on either side of this argument is overwhelming, but nevertheless lean strongly towards the desirability of terminating the monopoly. If the international telecommunications carrier had to do no more than provide a technically effective gateway facility, providing on demand a well-defined range of basic carrier services (e.g. switched voice service, leased analogue voice grade lines and, say, a small number of well-defined digital services), then the extent of economies of scale associated with that technical facility would indeed suggest that a tightly price-regulated monopoly might
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