3 October 2006

Foreign money floods into Taiwan's cable TV industry
Financial Times
(c) 2006 The Financial Times Limited. All rights reserved

By KATHRIN HILLE

Taiwan's cable television industry is seeing an unprecedented flood of foreign investment, with private equity funds snapping up the island's largest and third-largest multiple systems operators (MSO) earlier this year, and a deal on the second-largest player set to close within days.

A sale of China Network Services, now owned by Taiwan's Koo family and Star Group, is set to fetch at least Dollars 1.5bn with fledgling Asian private equity fund MBK Partners leading a field of potential buyers. This adds to the Dollars 1.4bn paid by Carlyle for Eastern Multimedia and the Dollars 800m paid by Macquarie for Taiwan Broadband.

Together the deals will bring the amount spent by foreign groups on Taiwan's cable sector to almost Dollars 4bn.

Meanwhile, after years of delay and partisan battles, Taiwan in March finally established its National Communication Commission (NCC), an integrated media and telecommunications regulator.

"This is a crucial moment for our industry," said Bobby Chen, head of the Taiwan Cable Broadband Institute. "On the one hand, we get an injection of capital, professional management and technology, and on the other hand we are finally moving towards deregulation."

The new commission has replaced a conservative regulatory regime that had been holding back the growth of Taiwan's cable industry in recent years. Combined with the highest cable penetration in Asia - 83 per cent - this made the sector look like a mature industry.

There are 4.6m households that pay for cable with a further 1m hooked up illegally.

Strict regulations on rates and tiering has capped top-line revenue growth in the sector at 2-3 per cent, says Vivek Couto, an executive director at Media Partners Asia (MPA), a research and consultancy firm.

Companies such as China Network Services, for example, cannot charge subscriber households more than TDollars 600 (Dollars 18) per month.

The operators can only offer their services within those of the island's 52 separate cable subscriber areas for which their regional subsidiaries have a licence, and they are not allowed to offer different packages of channels for different prices.

Mr Couto says that one impact of the strict regulations is to hold back the development of Taiwan's digital television services. MPA estimates the number of digital television subscribers in Taiwan at less than 95,000 - 2 per cent of all legal cable subscribers.

All this is bound to change. The media regulator plans to draw up a new set of draft legislation, which Mr Couto expects to be passed in 2008 at the latest.

The regulator is also winning plaudits for being in constant dialogue with the industry, having met the big operators to discuss its new framework.

"This is at last a regulator with a more beneficial vision for the industry," says Mr Couto.

But with the details still to be fleshed out, industry observers remain cautious.

The NCC wants to change the zoning system, arguing that it has given rise to local monopolies and duopolies.

The island's cable market is segmented into 52 zones, in a structure inherited from the early days when the local cable infrastructure was laid. Each zone theoretically has several operators, although the reality in many is that one controls the market through under-the-table agreements with competitors. Operators do not want that to change and want the NCC to agree to more liberal pricing and licensing rules in exchange.

"We hope that we can get a system under which it would be possible to sell a very basic package of channels for a very basic price, say TDollars 250, and then certain higher tiers on top of that," says Chao Yi, vice-chairman of the Eastern Multimedia Group, which sold its MSO to Carlyle.

The industry also wants pricing issues to rest firmly with the NCC to end local governments' imposition of additional restrictions on issues such as the price operators can demand for set-top boxes.

The debate over regulatory reform is further complicated by the fact that most operators' nine-year licences will come up for renewal in the next two years, creating additional uncertainty.

For long-term growth, experts also think consolidation is needed. More than 20 per cent of the market is serviced by 21 independent operators.

Moreover, the number of big players in Taiwan is far more than in other significant international markets, experts say.

The process is beginning with Taiwan Broadband, the market's third-largest and most profitable significant player, thought to be eyeing Pacific Broadband, a smaller peer affiliated with the Fubon Group, a local financial services and telecoms conglomerate.