TNAG-2247-FCO40-3230-Business-interests-in-Hong-Kong-Cable-&-Wireless-1991 — Page 148

CONFIDENTIAL

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While the Government should be able to intervene in the event of predatory behavior, it should otherwise allow free competition. For example, the Government should not intercede if the second network were to find it hard to establish more than a niche position. Similarly, if the second network were to threaten Telco's market dominance, the Government should not seek to enforce any preconceived notions regarding "appropriate market shares" or "permissible returns" for each network.

SUMMARY

To summarize, Hong Kong's approach to a second network is unique. No country has considered introducing competition in local telephony only. Where a second network has been allowed, competition has been limited or nonexistent. Furthermore, a second

network for Hong Kong would most likely benefit only large businesses, at the expense of

residential and small business customers.

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Introduction of a second network raises fundamental issues for Hong Kong's policymakers. How these issues are resolved will affect the quality, range, and cost of

Hong Kong's telecommunications services and thus the territory's future competitiveness as a vibrant international business center. To decide on the appropriateness of a second

network, policymakers should focus on the practical consequences for the people of Hong Kong, rather than on theoretical arguments that competition is, by definition, beneficial. Finally, policymakers need to consider not just whether a second network would produce

benefits, but also who would enjoy these benefits and who would have to pay for them.

At the same time, the Government should articulate a regulatory vision for Hong Kong's telecommunications industry. Such a vision should be consumer-oriented, seeking to ensure internationally competitive product choice and prices. Such a policy must be developed and debated as an integral part of the decision to permit a second local network.

The creation of a second fixed-link network may not be an essential element of, or a

requirement for, continued leadership by the Hong Kong telecommunications industry.

McKinsey & Company, Inc.

CONFIDENTIAL

July 15, 1991