Tale of Two Markets: Digital Duels
in Hong Kong and Taiwan

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It looks like cable history will soon be made in Hong Kong. But it's not the kind of history that cable operators like to make.

For what may well be the first time, a telco IPTV challenger stands poised to surpass an incumbent cable operator as the leading multi-channel video provider in a major global market. Specifically, several leading market research analysts think that hard-charging Pacific Cyber Century Works (PCCW) will shoot past i-Cable Communications as Hong Kong's biggest pay TV operator sometime over the next six months.

"In Hong Kong, cable faces intense competition from IPTV," says Adam Thomas, research manager for media and entertainment at Informa Telecoms & Media. "I'm expecting IPTV subscriber numbers to pass cable before the end of 2007."

Similarly, the latest Hong Kong forecast from SNL Financial's Kagan Research calls for slumping i-Cable and surging PCCW to close out the year with identical 48% market shares. SNL Kagan sees the IPTV operator seizing a 51% to 46% market share lead in 2008 and then widening its edge to a more comfortable 54% -43% margin by the end of 2012.

Furthermore, industry observers project that PCCW's "now TV" operation will increasingly outdistance i-Cable's once-dominant Hong Kong Cable Television (HKCTV) subsidiary over the next few years. With the two companies now battling head-to-head over pricing and valuable entertainment and sports programming, the researchers see PCCW continuing to lure more and more consumers to its cheaper, more flexible IPTV service.

"The heart of the forecast is that IPTV will gain majority share over an incumbent cable operator," says Ben Reneker, a senior analyst with SNL Kagan. "It would be a huge deal."

In a densely packed market that In-Stat estimates has a total of 2.3 million TV households, PCCW ended last year with 758,000 video subscribers in Hong Kong, up more than 200,000 subscribers, or 38%, from 549,000 at the close of 2005. That put it within striking range of i-Cable, which closed out 2006 with 786,000 video subscribers, up a much more modest 7% from 738,000 subscribers at the end of 2005.

Besides losing its historic market share edge, i-Cable may also start shedding net subscribers for the first time this year, researchers predict. They see PCCW, formerly known as Hong Kong Telecom, stealing away more cable customers in a highly competitive market considered one of the most mature and saturated in the world.

For instance, Reneker predicts that i-Cable, after adding 48,000 video customers in 2006, could lose more than 50,000 subscribers by January. "Potentially, i-Cable could see a [big] loss of subscribers this year," he says. "The next reporting period will be very telling."

What makes the stunning role reversal of cable and IPTV in Hong Kong even more notable is that it's happening in a market where the incumbent cable operator has offered advanced digital service for years. HKCTV, originally known as Wharf Cable, began offering digital service in January 2000 and swiftly expanded throughout the former British territory. Largely as a result, all of its 786,000 video customers now have digital.

"What's interesting is that it's occurring in a market where the cable operator is well along the path to digital," Reneker says. "It's not like it (i-Cable) was standing still in analog."

Analysts credit much of PCCW's tremendous strides in Hong Kong to the company's savvy marketing over the past few years. PCCW also has scored with its lower pricing of such offerings, even though those lower prices have cut into its profit margins.

In response to PCCW's success, i-Cable has now begun pricing its programming and services more flexibly too. But these competitive moves haven't been enough to slow down PCCW's remarkable progress so far.

"The growth so far has occurred without the crown jewel of content," Reneker says. "You have to applaud the strategy."

More recently, PCCW has gained on i-Cable by introducing interactive TV services, locking up exclusive rights to such popular movie networks as HBO and Cinemax, and launching new sports channels. In its boldest move, the IPTV operator shelled out an estimated $200 million last November to capture the exclusive live rights to English Premier League (EPL) soccer action over the next three years, starting with the upcoming 2007/2008 season.

"The dominant cable operator has lost some important programming rights, which will affect its performance over the next few years," Thomas says. "Customers are willing to churn between platforms as compelling content rights change hands."

As a result, analysts project that the cable operator's revenues and once hefty profit margins will fall over the next few years as well. For instance, SNL Kagan predicts that i-Cable's market share of pay TV revenue will slip from a still commanding 57% this year to 48% next year, 43% in 2009 and just 38% by 2012. At the same time, the research firm sees PCCW's market share climbing from 39% this year to 48% next year, 53% in 2009 and 59% by 2012.

Needless to say, i-Cable is a not a happy camper about these latest developments. In its yearend financial report in March, the company complained that "not only did it [PCCW] pull out all stops to acquire customers, it has also been aggressive in content acquisition to erode the Group's programming platform. Instead of engaging in endless bidding wars for overpriced acquired contents, the Group has chosen to develop further its production and its already established news and entertainment platforms, as well as to pursue more balanced development of its sports platform to maintain its leading position."

Digital Seeks Footing in Taiwan

While the Hong Kong focus is on the struggle between cable and IPTV, Taiwan is quite another story. On that still independent island not far from Hong Kong off the Chinese coast, the big issue is whether the cable industry, with the national government's help, can entice many subscribers to upgrade to digital service. Although cable operators have been trying to do so for nearly five years, the uptake rate has been very sluggish because of strict government price regulations on cable, the reluctance of key programmers to move their popular channels from analog to digital and the resulting lack of compelling digital content.

"It's a very different market," Reneker says. "The digitization of cable has essentially not occurred."

Indeed, in the latest SNL Kagan figures, cable accounts for more than 5.7 million, or an impressive 80%, of the estimated 7.2 million TV households in Taiwan. That gives the island one of the highest cable penetration rates on the planet. But no more than 136,000 homes, or fewer than 3% of the cable total, have moved up to digital cable set-top boxes. The vast majority still just have analog service.

"In Taiwan, the conversion to digital has until now been held back by customer disinterest," Thomas says. "They are generally pretty happy with their analog services and have yet to be convinced of the benefits of digital."

Yet this may all be about to change, thanks in large part to an aggressive, new push for digital TV upgrades by national authorities. Under its Challenge 2008 initiative, Thomas notes, the Taiwanese government has set an ambitious target of achieving 85% DTV penetration by the end of next year and 100% penetration by the close of 2010. With cable in about 80% of TV homes, that means switching most analog cable subscribers over to digital pretty quickly.

The other key digital driver is a recent wave of Taiwan MSO takeovers by large international media companies and buyout funds. Amid indications that the National Communications Commission of Taiwan will likely ease rules that hamper cable operators' ability to raise prices and launch new services, foreign firms have snared controlling stakes in the island's three biggest providers - Eastern Multimedia, China Network Systems (CNS) and Taiwan Broadband Communications - over the past 15 months.

In the latest example last October, MBK Partners, a private equity fund created by former executives of large U.S. buyout fund Carlyle Group, shelled out $932 million for a 60% stake in CNS. The move came after the Carlyle Group gained a controlling stake in Eastern Multimedia for a reported $1.3 billion and Macquarie Media Group, Australia's biggest commercial radio operator, acquired Taiwan Broadband for $890 million earlier in the year.

"That's the kind of activity that would eventually lead to digitization," Reneker says. ""We're watching very closely how the new regulators will work with the cable industry."

Citing these two sets of developments, industry analysts believe that digital cable signup rates will soar over the next five years. SNL Kagan sees the number of digital cable subscribers jumping from 136,000 this year to more than 4.6 million by 2012. Such a surge would boost the digital penetration rate to 77% of all cable homes.

Similarly, Informa predicts that the number of digital cable customers will leap from 182,000 at the end of last year to 4.4 million by the close of 2012. "Taiwan is on the cusp of a major increase," Thomas says. "I'm expecting significant progress over the next few years."

Unlike the situation in Hong Kong, analysts don't see IPTV emerging as a serious threat to cable in Taiwan, at least not for the foreseeable future. With cable already entrenched in the overwhelming majority of homes and IPTV a newcomer in the market, they believe that cable will remain dominant for years to come.