NFIDENTIAL
Furthermore, regulators have refused many of Telco's proposals for new services on the grounds that Telco, with its economies of scale, could underprice and therefore undermine potential competitors. While the Government's concern about Telco's potential predatory behavior is generally understandable, it should be applied less indiscriminately, with a careful assessment of the economics of each new proposed service. In many cases,
because of Telco's economies of scale and scope, it is the only viable service provider. Barring Telco from offering these new services simply makes them unavailable to consumers, as in the case of telex-to-fax delivery, or available only at significantly higher prices, as in the case of CT2.
To ensure that Hong Kong consumers have internationally competitive product choice and prices, the Government should consider allowing all competitors, including Telco, to offer innovative products in all categories. The Government should regularly monitor market development to prevent predatory practices by competitors, and to ensure fair competition.
This vision suggests that significant benefits can be achieved without the
introduction of a second network. Should the Government decide, however, to introduce a
second fixed-link network in Hong Kong, it must ensure that competition will be fair and will benefit all telecommunications users in Hong Kong. This implies that both networks should be permitted to compete in new areas such as radio- based or video services. Any approval procedures for adjusting tariffs should apply equally to all competitors. The two networks should be free to respond to competitive pressures by adjusting prices to accurately reflect costs. However, the Government may wish to begin a program of tariff rebalancing now to avoid price shocks to consumers.
No network should be expected to absorb the operating burden or cost involved in interconnecting with another network without fair compensation. In particular, in determining the appropriate international interconnect charges with a second network,
consideration should be given to Telco's universal service obligation, with which a second
network would presumably not be burdened.
McKinsey & Company, Inc.
CONFIDENTIAL
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