the cases of 38% and 48% ultimate penetration, these growth patterns were pro-rated upward and downward respectively. The total cost of the cable television operation under each of the two scenarios, which is equal exactly to the heights of the columns on the left hand part of the diagram for the case of 43% penetration, is slightly higher for the case of 48% penetration and lower for 38% penetration due to the incremental marginal cost of connecting subscribers (hence the slight slope of the horizontal broken lines on the diagram). The break-even prices marked are those which are sufficient to cover the cost of debt financing at an interest rate of 6% above inflation (i.e. not sufficient to provide a profit element which would justify the risk involved in this investment).
From the six break-even prices shown, we have drawn the conclusion that the probability of success of a cable television operation in Hong Kong is much more heavily dependent on non-network related aspects of the business than on the decision to use or not to use HKT facilities for the network. The price needed to recover costs could vary by as much as HK$20 per month depending whether a high or low penetration level (within a reasonable range of 38% to 48%) were achieved, but varies only by HK$5 per month as a consequence of the choice of network.
However we do not wish to imply that vertical integration of the cable television business will determine whether penetration levels lie at the lower to upper part of the range illustrated on the exhibit. Vertically integrated management is only one of a number of factors which could cause such a change. More important are the quality of programming and marketing: the best proposal on these counts may or may not be that which relies on an HKT network.
In Chapter 1 (Exhibit 1.5) we suggested that a 5% shift in the demand curve might result from improved business management of the kind afforded by vertical integration. Were the percentage cost penalty associated with building a non-HKT network (expressed as a fraction of total expenditure including those on programming) to be either much greater or much less than this, we would tend to conclude, respectively, that network choice is either an overwhelming consideration or insignificant. The 4.8% number indicated on Exhibit 5.10 is not sufficiently different from 5% for us to be able to draw such a conclusion. It suggests that neither CTHK's decision to exploit the cost advantage of HKT's network, nor HCV's decision to develop a vertically integrated business, are commercially unreasonable. It appears that, in the case of Hong Kong, the decision by a potential cable service franchisee as to whether or not to contract network construction and operation from HKT should be regarded as essentially a private commercial decision.
(Readers will note that throughout this analysis increments in the costs incurred by the cable television service operator are equated with true economic costs and decrements in the amounts paid by consumers with economic benefits. This is, as noted in the discussion of methodology in section 1.3, a valid first order approximation. Second order effects are not taken into consideration here.)
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