5.7
2.
Despite much discussion in the telecommunications industry of the future integration of broadband and narrowband networks using optical technology, both parties to the present decision have put forward technical plans which separate one way broadband distribution from two way narrowband telecommunications services. Their judgement on this point, which we do not dispute, reflects the discount rate considerations which we have just noted.
These apply
as much to private commercial decisions as to the economic evaluations we are undertaking.
Nevertheless the fact that major advances in telecommunications network technology are imminent cannot be overlooked in connection with any decisions on telecommunications policy. Since future generations of technology may combine narrowband and broadband services on a single network, it may be that the cable television system will in due course compete in residential areas with the telephone network (both having been upgraded to have the capability of carrying both types of signal). Bearing in mind our revenue and demand forecasts, we do not expect to see such a development in residential areas until after the period covered by this study (1987-2007).
In business districts, by contrast, it is quite likely that the market will in due course be able to support two broadband carriers. If the extent of economies of scale are as for narrowband networks, the second carrier would face cost penalties of some 15-20% by comparison with the first (and we have insufficient information on which to base any different estimates). With such relatively modest scale economies, a second carrier is likely to find niches for profitable service provision if a single carrier finds sufficient demand to make its broadband network viable.
One way of maximizing the opportunity for both networks to thrive in a competitive environment with uncertainty as to technological developments is to limit the market to two suppliers. This has been the policy in the United Kingdom (at least for the first seven years of Mercury's licence, and possibly thereafter), though not in the United States or Japan. Such a two-carrier policy has been assumed in all our calculations in this study; we would consider it prudent to limit the number of competitors in this way, certainly for the early years of competitive development. Such a duopoly policy also implies that, if separate licences are issued for a cable television network and a second telecommunications network, the cable television franchisee should not be permitted to offer telecommunications services to businesses. If it did so, there would be three networks, not two, serving the business community.
IMPACT ON TARIFFS AND THE CROSS SUBSIDY ISSUE
Along with most telecommunications monopolies around the world, the companies providing Hong Kong's domestic and international telecommunication services pursue a policy of subsidising certain aspects of telecommunication use at the expense of others. The major subsidy
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