subsidising others (in so far as such patterns of cross subsidy can be defined and identified) and less heavily on others. We consider the incidence of benefit redistribution in the discussion of cross subsidy effects in Chapter 5.
1.3.5 Benefits and costs associated with vertical integration of the cable
television business
Exhibit 1.7 illustrates how we propose to compare the revenue gains and benefits associated with vertical integration of the cable television business against the cost diseconomies consequent on construction of the cable television network separately from the main telecommunications network. Alternatively put, this Exhibit shows how we weigh up the pro monopoly and pro competition arguments 2A and 2B in Exhibit 1.3. (The option which exploits both the benefits of integrated cable television and telecommunications network construction and the benefits of vertical integration between cable service programming and cable network operation - namely operation of the cable television service in its entirety by the telephone company is ruled out on two grounds:
unsuitability from the standpoint of government policy, due to excessive control of communications by one company
lack of the relevant skills for cable programming within the telephone company.
In any event, this option has not been put forward by either party in the Hong Kong case.
As in the evaluation of benefits from telecommunications service competition, the revenue growth or benefit sides of the calculations which follow (i.e. those corresponding to argument 2B on Exhibit 1.3) are much more difficult to quantify than the cost effect (corresponding to argument 2A). We interpret the benefits of vertical integration of the cable television business as the ability to move the demand curve for cable television service outwards and upwards (see Exhibit 1.7). In other words, a company which has control of both cable programming and network development is assumed to be able to avoid the pitfalls associated with poor coordination between the marketing and physical provision of cable service, thus being able to sell to a larger number of customers at the same price, or to be able to charge a higher price to the same number of customers.
There is a good deal of evidence from around the world of the value of unified managerial control of construction and marketing in cable television (and indeed other) businesses. The great majority of cable television networks built in North America and Europe have been constructed on the basis of common ownership of the distribution network and the cable television service business, largely because companies and financial institutions, recognizing the pitfalls to which we have referred, have been reluctant to sanction investment in cable network construction when there is no direct control over programming content and marketing.
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