03 July 2006

Now grabs the spotlight in HK battle
By JOE LEAHY
Financial Times
(c) 2006 The Financial Times Limited. All rights reserved

Subscribers to PCCW's Now broadband television service have been grumbling lately. The Hong Kong internet protocol TV service has not carried the World Cup soccer tournament, forcing viewers over the past few weeks to watch the games on a rival cable provider.

But their complaints have not stopped Now from emerging as a focal point in a takeover battle between Australia's Macquarie and US private equity firm TPG Newbridge for the core telecommunications and media business of PCCW, Hong Kong's biggest fixed-line operator controlled by tycoon Richard Li.

Rupert Murdoch, chairman of News Corporation, which is in talks with Macquarie to join its Dollars 7.3bn bid, said this week "it would be a very interesting experience" operating Now, the world's largest web-based TV operation. TPG Newbridge, which had previously lodged a separate offer for part of PCCW's controlling company, has also said it was interested in the Hong Kong group partly because of its strong presence in broadband TV.

While Now has won plaudits from industry peers and investors, despite its short history and the absence of the World Cup, some analysts are sceptical about the financial promise of the operation.

Now, short for "Network of the World", was launched in September 2003 as part of PCCW's efforts to halt erosion in its core fixed-line business. In this, it has had some success. PCCW's traditional phone business turned around in the second half of last year, maintaining an overall market share of 68 per cent.

Now has also boosted PCCW's broadband users - these rose 20 per cent last year to 953,000, and have helped the company maintain premium pricing at about HKDollars 200 (USDollars 25.7) per month, compared with the market's average of HKDollars 140, according to Media Partners Asia. Now has also become a poster-child for an industry that has yet to take off in many other advanced Asian economies, including Taiwan, Japan and Korea

By giving away set-top boxes and offering free channels to subscribers of its already well-developed broadband network, PCCW managed to sign up 269,000 users in Now's first year of service. It then added a few popular channels, such as ESPN and Star Sports, to lure more subscribers.

"PCCW has a large network and a pipeline. They just need to find the programmes to put in the pipeline," said Vivek Couto, analyst at Media Partners Asia.

Helped by heavy marketing campaigns and a weak incumbent cable operator, Now's user base grew to 549,000 last year. Of these, 71 per cent were paying users, who spent an average HKDollars 114 a month in the second half of last year, compared with HKDollars 110 in the first half.

But analysts say Now's financial contribution to PCCW is not as impressive.

With revenue of about USDollars 70m, Now accounted for only 2.3 per cent of PCCW's turnover last year, according to Mr Couto, who expects sales to reach about USDollars 200m by 2010.

The operation is also loss-making, although PCCW says the business will break even on an earnings before interest, depreciation, tax and amortisation basis by the end of this year.

Investors have also expressed concerns about Now's profitability because the company has not disclosed any key data such as cost of content acquisition.

"For investors, it may be too early to call Now a triumph," says Allan Ng, analyst at BOC International.