Changing the rules of the game

William Yeung, chief executive of Hong Kong Broadband Network (HKBN) is delivering a keynote speech on Day Three of the Broadband World Forum to be held at the CNIT, La Defense, Paris, France on 27-29 September 2011. We recently quizzed him on HKBN’s position on the challenges and opportunities presented by fibre.

What are your views on the excitement around fibre and what are the challenges there?

After the premature and overdone euphoria of the internet bubble in the 1990s leading to market crash in 2000, the global telecom industry, including Hong Kong, slowed its investment in fibre. However, we didn’t, and in fact sustained seven years of negative free cash flow investing between 2000-2007 to build our fibre network.

Traditional new entrants compete by leasing network elements from the incumbent, so by definition they cannot be better than the incumbent.  We changed the rules of the game by completely bypassing the incumbent’s legacy copper network and built our own end-to-end New Generation Network. Our company philosophy is that “we are in a war and we cannot win by leasing our weapon from our opponent”. Our competitive advantage today in 2011 is born from our decade of investment.

Today, the demand for fibre is real and we are seeing real internet business models around the world such as Google, Amazon, Tencent, and iTunes make the kind of profits that were just a dream in the late 1990s.

In short, the demand for fibre is real today, which is why as a 100 per cent New Generation Network, we are the fastest growing carrier in the past three years and now the second largest broadband provider in Hong Kong. With 1.93 million homes and premises covered by either FTTP and FTTH, and with approaching 600,000 subscribers connected at speeds of up to 100Mbps and above, we are now Hong Kong’s largest carrier.

We are happy to see our competitors follow us in investing in building their own fibre networks as this will accelerate the overall industry evolution from its roots in dial-up through copper based xDSL to fibre based broadband.

However, we anticipate that our hardware edge will fade over time as our competitors emulate us, so we need to execute much better with our software, and our talent (our staff), so that we can achieve our ’10-year Big Hairy Audacious Goal (BHAG)’ of becoming the largest IP Service Provider (in both revenue and number of subscribers) in Hong Kong by 2016. So far, five years in, we are well on track.

Is there a genuine demand for faster speeds such as 100Mb and beyond for consumers and how are user demands changing?

Our above result speaks for itself. According to the regulator’s figure, our net subscriber growth represented more than 70 per cent of total market’s net growth in a four player market.

Many operators get distracted by the “chicken or egg?” quandary and as such are not sure if there is demand for 1Gbps services. Hence they do not dare to invest. Conversely, in a similar fashion to how Apple creates new demand with its category defining products, we are out to create new demand with our residential 1Gbps priced at US$26/month.

In the US, it’s a case of overpricing the egg. For example, we read that the 1Gbps service is available in Chattanooga but priced at US$350/month, resulting in very limited demand. For us in Hong Kong, are taking a different approach by selling a Porsche 911 Turbo (1Gbps service) at or below the cost of a Toyota Corolla (8Mbps xDSL service). Therefore we are turning the consumer question from the legacy “Why do I need 1Gbps?” to a new age, “Why am I still using a legacy xDSL service?”

For the interim six months results to the end of February 2011, we executed 20 per cent net profit margin (three times higher than the incumbent) and 19 per cent return on equity. Namely, we make a very decent return for our shareholders by delivering disruptive value to our customers. We make money because we have structurally lower cost base. Hong Kong’s ultra-high population density enables us to build our fibre network at US$200 per home pass, which is about a seventh of the estimated cost of US$1500 for Verizon FiOS.

We love being in and investing in the Hong Kong telecom industry, as it is gives us plenty of scope for innovation to make a very decent financial return.

Conversely, over the next five years, will fixed line providers be able to meet demand from businesses and consumers for data?

Over the past 11 years, we have invested approximately US$400 million into our network, of which only 25 per cent is active equipment. The bulk of our US$400 million is for passive network, such as dark fibre and capitalised civil cost, which should last for many decades to come.

When we upgrade the network, we essentially switch out the active electronics and get a logarithmic increase in capacity, which is why we were able to increase our base throughput from 10Mbps to 100Mbps in 2005 and from 100Mbps to 1Gbps currently. You cannot do this with a legacy copper network.

Given that the bulk of our investment was during the fibre out-of-favour decade following the 2000 internet bubble burst, we believe the current replacement value of our network today, is be much higher.

In short, whilst nothing is “future proof”, we have a “very future friendly” platform for at least the foreseeable 20-30 years similar to how “copper” was good for many decades until now.

What are the challenges and opportunities for operators on the backhaul side?

The Fair Usage Policy (FUP) is one of the hottest topics in mobile data industry.  With the increase in demand bandwidth, the operators have to limit the usage because both the spectrum and backbone bandwidth are insufficient. There will be great opportunities for operators who own the fibre.

To what extent do you see other next generation technologies, including wireless ones such as LTE, as a threat or a complementary opportunity?

Fixed and wireless technologies are two types of technology addressing different needs. In terms of performance relative to cost structure, i.e. speed and stability, wireless is not a threat to fixed. Instead of competing, they complement each other, as wireless offers mobility that fixed by definition cannot. You are seeing deployments of both technologies in different parts of the world. We see a positive complimentary future for both fixed and wireless, especially in Hong Kong where the population density plays in favour of fixed.

What’s the best way to manage the conflicts of interest between network operators and Over the Top (OTT) providers?

For us, we don’t see a conflict with OTT providers and in fact, welcome them to our network to help fill our massive fibre pipes. For us, we focus on what we do best, which is building massive “dumb pipes” and then proactively open these pipes to be filled by OTT. In short, the more our customers fill their pipe, the more value they derive from our services and the more that we can charge them over time. We welcome companies such as Netflix and Hulu to come to Hong Kong.

Our role is to work with the global industry OTT leaders to bring more content to our customers in Hong Kong in the most cost effective way, such as by improving content delivery network (CDN) agreements and direct peering.

What challenges do you foresee the move to IPv6 will bring?

I think the challenge for the move to IPv6 is the upgrade of network hardware, such as core routers. Operators need to get their network ready for IPv6, be it a matter of financial input or technical knowhow on adoption and compatibility.

In Finland a broadband connection is a legal right. To what extent do you think the state should be involved in the roll-out of broadband?

Hong Kong’s success is based on free market and this is what we have embraced for the Telecom industry. Today, Hong Kong enjoys amongst the best value and highest choice in the global telecom industry, without any government subsidy.

What are the biggest challenges facing the broadband delivery market globally? And what are the key challenges you particularly expect to face in the next 12-18 months?

You will lag behind the others if you do not upgrade your network. The customer will demand more and more bandwidth. If you don’t satisfy customer needs, they will find another supplier.