HKBN sell off opens way for content push

By Tony Brown

There are some deals that you really should see coming a long way off but somehow you miss them and then when the headline lands in your inbox like a right-hook from Mike Tyson back in the 1980′s you feel a little foolish.

“City Telecom Announcement: Very Substantial Disposal” the subject line read and pretty soon I was reading that Hong Kong broadband operator City Telecom – owner of the powerful Hong Kong Broadband Network (HKBN) service – was selling its network assets to Metropolitan Light Co., owned by an Asian division of CVC Capital Partners for $644m.

Since the HKBN FTTH network – currently covering just shy of 2 million homes – was deployed for one of the lowest prices amongst all developed markets at around $200 per home passed and cost only around a reported $400m to deploy the deal will give CTI quite a decent profit – and me a reminder to have a little more foresight in future.

After all, the deal was there to be done all along, HKBN has all but completed its network and is making money on providing low-price network access to the corporate and residential markets – a scenario beloved of private equity firms – but now has itchy feet as it pursues a future as a content and applications player.

The way ahead
With its network access business now sold off to CVC HKBN will now focus on expanding on what it calls its multimedia business – with the firm particularly excited about its looming entry into the terrestrial broadcasting business if its spectrum license application to the Broadcasting Authority is successful.

The cash pile it has accrued via its FTTH network sell off – with the deal allowing HKBN to continue to have access to the network for the next 20 years – will enable the company to cover its biggest weakness in the TV market: a chronic lack of exclusive, popular content.

HKBN has watched on the sidelines whilst major market rivals PCCW and i-Cable have fought an occasionally bitter and expensive content war – especially over EPL soccer rights – and has instead pursued a far more modest and cost effective content acquisition strategy for its IPTV platform.

However, in recent months, with its entry to the terrestrial TV market looking ever more likely the firm has begun investing much more heavily in content production facilities as well as production professionals as it seeks to transform from a dumb pipe broadband provider to being a major content player both in Hong Kong and in the broader APAC region.

Execution – as ever – will be the key
Whilst CVC has acquired the relatively simple task – and one which private equity guys just love – of keeping the network access division ticking over as a well run cash-cow the prospects for HKBN’s multimedia ambitions are less straightforward.

So far you have to give CTI huge credit, they saw a gap in the market for high-speed broadband delivered at cut-price rates and executed perfectly, its hard to believe anyone could have done it any better than they did.

But, assuming they get their terrestrial license from the government, diving into the content game at this point in time is a much more complex task as they seek to expand from their relatively modest IPTV platform to being a genuine multi-channel platform operator in a small domestic market.

Sure, the TV advertising market must seem an awfully tempting prospect to HKBN but with the local terrestrial TV market about to change dramatically as the government hands out more operator licenses the advertising market will surely become much more fragmented and complex.

This market fragmentation – as we have seen in more advanced terrestrial TV markets in Europe – creates an even higher premium on being able to produce enduring, high quality popular programming, the likes of which long-time terrestrial market leader Television Broadcasts has been producing for the last couple of decades.

Content is complex
By placing its bets so firmly on becoming a major force in the free-to-air TV market HKBN is clearly backing itself to succeed in a market in which TVB’s rivals have historically largely failed to make much headway – these guys are clearly not short on confidence.

Given that HKBN has very little experience as a producer of distinguished TV content then this is quite a bet to be making and is quite unlike the bet the firm placed in the broadband access market which boiled down to the basic economics of being able to provider cheaper and better quality broadband access than PCCW.

The TV content market in Hong Kong alone – before you even consider the many vagaries of the Chinese market where HKBN also has some ambitions – will contain as many vagaries and pitfalls as any other and HKBN cannot expect to have an easy path to the summit.

For its part, HKBN would argue that their ability to offer very heavily targeted advertising via their IPTV settops and to offer advertisers a much more compelling proposition than simple one-way TV advertising opens up a new dimension in the market – and they might be right but the strategy will still rely on them producing or procuring high class, popular content.

Anyone have a phone number for Jackie Chan’s agent?