At a sprawling control room in an old industrial building overlooking Hong Kong's Victoria Harbor, technicians tinker with tall racks of networking equipment and a wall of TV screens blinking everything from cricket matches and cartoons to fashion shows and porn. It would be a familiar scene at the home of any cable- or satellite-TV operator. But this network belongs to a telephone company -- PCCW Ltd., Hong Kong's leading fixed-line operator. For two years, PCCW, formerly Pacific Century CyberWorks, has been delivering pay TV over its broadband telecom lines.
For telecom operators elsewhere in the world, Internet protocol television (IPTV) -- so called because it transmits TV programs in packets of data like those used to deliver Web pages -- has an uncertain future. In their search for new revenue as competition heats up in the phone-call business, most telecom companies in Asia, Europe, and the U.S. plan to use IPTV to offer hundreds of TV channels, video on demand, and TiVo (TIVO )-like recording services. An added allure for consumers and advertisers alike is that programming can be interactive. But skepticism over broadband TV's market potential and data security remains high.
PCCW is showing that IPTV can succeed. Even though its service has limited interactivity, PCCW's NOW unit has signed up more than 450,000 customers. It trails i-Cable Communications Ltd., the cable monopoly owned by Wharf (Holdings) Ltd., which has 718,000 subscribers, but the gap is closing. In fact, PCCW accounts for some 30% of all IPTV subscribers worldwide. "PCCW is definitely at the forefront" in the world in IPTV, says analyst Michelle Abraham of Scottsdale, Ariz., consultancy In-Stat.
PCCW recently scored a coup by nabbing exclusive rights to five channels belonging to HBO Asia, a Singapore-based network owned by Sony (SNE ), Paramount (VIA ), NBC Universal (GE ), and Time Warner (TWX ). HBO Asia will drop i-Cable. NOW also landed News Corp.'s 11 Star TV channels, including Fox News, and exclusive rights to ESPN and Disney (DIS ). Citigroup (C ) predicts NOW will have an operating profit by next year.
If PCCW can maintain the momentum, it could not only prove broadband TV is commercially viable. It also could become one of Asia's better corporate turnaround stories -- and finally vindicate Richard Li's vision for PCCW. The second son of Hong Kong magnate Li Ka-shing, Richard Li, 38, was often ridiculed in the 1990s for his brash style and controversial deals. He launched PCCW in 1999, intent on creating an Asian Internet powerhouse. PCCW didn't live up to the hype, but Li was able to use its stock, inflated by the dot-com euphoria, to buy Hong Kong Telecom from Britain's Cable & Wireless in 2000. PCCW stock later plunged when the Net bubble burst, and its debt soared to $12 billion. Meanwhile, PCCW's fixed-line business lost customers as Hong Kong's phone market was deregulated. Li's telecom gambit looked like a fiasco. "People were saying that the home market was a terrible place to be," says PCCW Deputy Chairman Alex Arena.
Now, PCCW seems to have righted itself. Earnings are expected to jump nearly 50% this year, to $304 million, on sales of $3.1 billion, predicts Macquarie Securities Ltd. Sales of assets, such as a cellular unit to Australia's Telstra Corp. and a 20% stake in PCCW itself to China Netcom Group Corp., have helped cut debt to a manageable $2 billion. PCCW is expanding into the China and British broadband markets and is returning to the cellular business with a recent $200 million controlling stake in Hong Kong's Sunday Communication. Plus, for the first time since Li bought Hong Kong Telecom, PCCW is gaining new fixed-line subscribers as users find it easier to buy TV and telecom service from the same company. The goal: become a leader in a diversity of broadband services. "We are transforming a telephone company [into] a true pipe that gives voice, Internet, and entertainment access," Li says.
HEAVEN IN A HIGH-RISE
Telecom operators across Asia are also launching IPTV. But nowhere has it taken hold as well as Hong Kong. A big reason is that Hong Kong's population is densely packed into high-rises, which are easy to wire with high-speed lines. Eighty-five percent of PCCW phone subscribers had access to broadband fast enough for video when it launched IPTV in 2003. What's more, PCCW has had a weak competitor in i-Cable, which has been beset by rampant pirating of its programming and limited channel capacity.
Analysts also credit PCCW with smart marketing, wooing customers with low prices, and using its growing base to attract new channels. Unlike most cable and satellite operators, which sell packages with many channels, PCCW charges $30 a month for broadband Web access plus anywhere from $1.50 to $21.50 monthly apiece for any of its 80-plus channels. If a family only wants Disney and Discovery, say, they pay only for them. NOW also offers a 20-channel package for $18. That's a big reason NOW has gone "really gangbusters," says Ross O'Brien of Hong Kong research firm Intercedent Asia. "They played it exactly right."
PCCW has also proved more adept than i-Cable at preventing piracy in Hong Kong, where some 100,000 receive illegal cable service. A pirate can get all cable channels with access to a set-top box and the encryption. But because IPTV delivers only the channel being watched at the time, theft is harder and less efficient. This has helped PCCW win over content providers. Until recently, "people have been very nervous" about IPTV, says HBO Asia CEO Jonathan Spink. "But we were very impressed with the security of this system. [PCCW executives] know exactly where the signals are going." Adds Star Group Ltd. spokesman Benson Chao: "IPTV is pretty hard to crack."
With other Asian telecom operators and Internet companies like Japan's Yahoo! BB pushing into broadband TV, competition will grow. So PCCW plans to roll out high-definition, video on demand, and interactive advertising, with Nike Inc. (NKE ) among its first clients. PCCW also has an entrée into China due to the stock purchase by China Netcom, a mainland telecom, although regulatory hurdles remain. In August, PCCW bought a 50% stake in a broadband system in the eastern cities of Hangzhou and Ningbo for $37 million. PCCW hopes the venture will offer pay TV in the future. Li says more Chinese expansion will come, but cautions against hype. "Opportunities in China occupy more than 50% of my time," he says. But right now, "we are dipping our toe in." As a young tycoon who knows the downside of hype, this time Li might be wise to let his successes do the talking.
By Bruce Einhorn in Hong Kong