TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 119

The second and third columns of Exhibit 1.3 illustrate the two stages of quantification which we apply in this study. The first stage (column two) is to collect and analyze such data as can be found which confirms the premises of the arguments without, at this stage, carrying the

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argument through from premises to conclusion.

Thus in the case of the argument for monopoly supply of telecommunication networks, we collect data on the costs of constructing a second network, and compare these costs with those which would be incurred by the dominant network supplier in serving the same customers. If the difference between these costs is a small fraction of the second network's total cost, this suggests a prima facie case for the competitive scenario. However we do not draw this conclusion at this stage.

In the case of the argument favouring competition, we forecast the total demand for telecommunications services by customers which would have access to both networks in the competitive scenario. This yields a measure of the size of the telecommunications service market which would be subject to competition. If the planned second telecommunications network has the ability to provide a wide range of telecommunications services to many customers (e.g. voice services to the entire business community), we would know that a large proportion of the telephone company's existing business is being subjected to the benefit of competitive pressure. Conversely, if only a few services are provided to a narrow range of customers (e.g. leased lines for data transmission by major business users), we would know that the benefit of competitive pressure only applies to a small part of the telephone company's business. We would not, however, attempt at this stage to quantify the magnitude of benefits and compare them with costs.

The characteristic feature of data collection of the kind listed in column two of Exhibit 1.3 is that it is largely descriptive and, relative to what follows in column three, relatively uncontroversial. There is some scope for dispute in so far as it relies on forecast as well as current statistics. Some judgement must also be made concerning the allocation of common costs in a network. However there is no attempt at this stage to compare the relative strength of the pro-competition and pro-monopoly argument. It is not necessary therefore to establish a common measure of the very different benefits arising from economies of scale and from the presence of competition. In column three (Exhibit 1.3) we proceed to the second stage of the methodology, the explicit evaluation of benefits and cost associated with the pro and anti monopoly argument.

1.3.2 Detail on cost analysis

Exhibit 1.4 provides more detail on the method of quantification of the economies of scale and integration (or scope) arguments - the arguments favouring monopoly provision of telecommunications networks, and favouring provision of cable television networks by the telecommunications network operator.

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