TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 117

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issue which does not have a parallel in the other countries which have made the transition to competition in communications networks - reflects the understanding of the Hong Kong Government of the increasing economic importance of this sector. For this reason we put forward a methodology which relies on economic analysis as the primary (though not the only) basis on which the telecommunications second network decision should be determined.

1.3.1 Methodology: basic approach to quantification of costs and benefits

This study is concerned with the analysis of two markets which are as yet relatively distinct (although, as we discuss later in this chapter, there is a longer term possibility of convergence) :

provision of two way telecommunications services

provision of television entertainment (primarily one way, although some limited feedback from consumers may be desired).

In each case we can identify from the discussion of section 1.2 above a set of arguments pointing to the desirability of a single communications network operator in Hong Kong, and a set of arguments pointing to the desirability of two operators. These arguments are summarized in the first column of Exhibit 1.3.

A monopoly can

In the case of telecommunications service provision the essential arguments for and against monopoly are very well known. exploit economies of scale arising from the provision of telecommunications services to all customers on a single network, while competitive supply has the benefit of stimulating competition in the industry.

In the case of cable television services, the main argument in favour of its provision by the telephone company is that it allows exploitation of the economies of scope due to integrated provision of narrowband and broadband networks. (Note: the term economies of scope refers to the ability of one firm to supply two different services at a lower cost than two firms operating separately. This contrasts with economies of scale, which refers to the ability of a single firm to supply the same services to two groups of buyers at a cost lower than a separate firm serving each group.) The major counter-argument is the desirability of maintaining vertical integration of service and network provision in the cable television business, to ensure effective management and commercial exploitation of the investment. It is argued that the separation of

content from conduit in the cable television business would make investment in either the programming business or in the network infrastructure unattractive because of poor control of the enterprise as a whole.

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