CONFIDENTIAL
INTRODUCTION
TO THE FULL REPORT
As indicated, Hong Kong Telephone Company's (Telco's) exclusive franchise to provide basic local telephony expires in 1995. In considering whether to allow the introduction of a second fixed-link local telephone network after 1995, the Hong Kong
Government faces a multi-faceted decision.
Proponents of a second network argue that it would provide Telco with competition, and that competition - by its very nature - would benefit Hong Kong telephone users by expanding the choice of products and services, lowering prices, and improving customer service. It is generally true that the introduction of competition, primarily in long-distance services, into markets that were receiving poor-quality or high- cost telecommunications service has produced real benefits for consumers. On the other hand, there are sound arguments that suggest a different course may be appropriate for Hong Kong. Simply put, Hong Kong already has one of the world's most advanced and efficient local telephone services; there is little room for a second network to materially improve the quality or price of these services; and competition in other local services (e.g., mobile) exists today and can be further stimulated by the Government without the
introduction of a second fixed-link local telephone network. Also, and very importantly, a second network will be viable only with some form of subsidy and/or increased tariffs, raising questions about the economic justification of a second local network.
Discussions on a second network have so far been conducted in rather abstract
terms - concerning the general benefits of competition rather than in concrete terms of what it may mean for the people of Hong Kong. The central, specific questions to be addressed are: What are the likely benefits of a second network, and what are the costs to Hong Kong of introducing such a network? A second network should be introduced only when
it can be demonstrated that the benefits clearly outweigh the costs. It is not clear such a
case has been established for Hong Kong.
In this context, Hong Kong Telecom has asked McKinsey & Company to provide an independent perspective on the arguments regarding a second fixed-link local telephone network in Hong Kong. This document summarizes our findings and conclusions in three
sections, which seek to:
McKinsey&Company, Inc.
CONFIDENTIAL
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