Can operators really live on access fees alone?

There is little doubt that City Telecom-owned broadband operator Hong Kong Broadband Network (HKBN) is one of the most remarkable operators in Asia Pacific. What the operator has achieved on a modest budget and against some tough competition has been extraordinary.

However, having recently looked at the company in some detail, I am beginning to have some concerns about the long-term wisdom of its stated operating ethos of being “a big fat-pipe provider” and “commoditizing bandwidth.”

To set the scene, HKBN entered the market in 2002 as the greenest of greenfield operators, clutching only its fixed-telephony-network-services license and a fledgling local telephony service but with big ambitions to become the leading broadband player in the market.

Fast-forward nine years and HKBN is still nowhere near toppling PCCW for the title of market leader, though it reckons it will do so by end-2016. Still, there is little doubt that the firm’s arrival changed the dynamics of the market significantly.

The network is the differenceThe key to HKBN’s success is that it has deployed an FTTB network that already covers 1.7 million households – with the company aiming to reach 2 million by year-end – and delivers to subscribers speeds up to 1Gbps, all for a relatively modest investment of HK$3bn ($385m).
By rolling out such a powerful network in such a cost-efficient manner, HKBN has enabled itself to operate as an aggressive price-cutter as it bids to win market share away from the likes of PCCW, i-Cable Communications and Hutchison, all of which had built up solid broadband subscription bases before HKBN even launched.

It is little surprise that with HKBN offering a 1Gbps unlimited-data offering for just HK$199 a month, the operator is dominating the market in terms of net additions, even claiming that it is ahead of schedule in its plan to overtake PCCW.

In the 12 months to end-September, HKBN took 138,000 net additions, compared with just 25,000 for PCCW, in a market where broadband penetration is already close to saturation – meaning HKBN has been taking subs from rival operators.

HKBN’s subscription surge has already cemented it as the joint leader in the FTTB access market, with the operator having 530,000 FTTB subs at end-September, only marginally behind PCCW’s 550,000.
That’s all well and good, but …Having established itself as the second-largest broadband player in Hong Kong, HKBN is not about to change strategy and is proudly proclaiming that it will carry on chasing its “big, hairy, audacious goal” of being market leader by 2016 by being aggressive on price and basically by “commoditizing bandwidth.”

Although HKBN offers a no-frills IPTV service, the company has shown little interest in following PCCW or i-Cable down the route of paying big bucks for exclusive content deals. In February HKBN CFO NiQ Lai told one publication: “We embrace over-the-top content and love people to burn it up.” That’s not the sort of thing you hear from many of the world’s broadband-network CFOs.

Most broadband-operator executives I know – not least those at PCCW – regard OTT content providers with the same level of warmth that they regard a visit to their proctologist. So to hear a company such as HKBN offer such a warm embrace to the OTT players genuinely runs against the industry grain.

Of course, HKBN is confident that having rolled out its network at such a low cost and with the company running on far lower overheads than its rivals, it can make a nice business from primarily being an access provider rather aggregating and producing content, as PCCW does.

As things stand, HKBN parent City Telecom is already in the black – though it took seven years for it to become cash-positive – with the company recording net profits of HK$217 million in FY10, up marginally from HK$213 million in FY09. Its revenues increased from HK$1.47 billion to HK$1.57 billion over the same period.

There is little doubt that HKBN has carved out a niche for itself in the broadband market for the long term as a destination for value-seekers. But the real question is not only whether it can overhaul PCCW – for the record, I would be surprised if it did – but whether it can afford to retain such a priority on access provision in preference to generating new content revenues.

Of course, HKBN does try to generate content revenues over its IPTV platform with a VOD offering running alongside its far-from-spectacular lineup of linear channels. But the company’s content offerings are not in the same league as PCCW’s or even those of much maligned cable operator Hong Kong Cable TV.

PCCW generated monthly ARPU of about HK$170 in 1H-FY10 from its Now TV IPTV service – though that figure will most likely decline now that it has lost the English Premier League soccer rights to HKCTV – and the company has established itself as a skilled and serious player in the content-aggregation market.

The ARPU quandaryHKBN is already clearly operating a business on relatively low margins. Its price-cutting strategies reduced its monthly broadband ARPU to just HK$135 in 2H-FY10 – from just under HK$200 in 1H-FY09 – though the company says that ARPU will rise now that it has abandoned the highly popular HK$99-a-month offer for its 100Mbps service.

As a result, with even PCCW’s IPTV ARPU – leaving aside its broadband ARPU – already in excess of the ARPU HKBN is generating from broadband, it seems a courageous move by HKBN to be so welcoming toward OTT players, since these players will be extracting content revenues from subscribers that HKBN itself could be tapping into.

I guess the question really centers on whether advanced-market broadband operators can afford to run a model in which they offer primarily cut-price high-speed access rather than transforming themselves – as PCCW has done – into dual-mode access/content providers.

There will always be demand from subscribers for the type of high-quality, cut-price broadband access HKBN offers. The problem is that this approach will lock operators into low-ARPU operating models that will be hard to break – though HKBN says it makes “decent margins” on its subscription charges.

By contrast, although the PCCW approach of becoming a full-fledged pay TV provider has proved expensive, because of the high cost of content rights, there is little doubt that with Now TV the company has created a high-quality content destination that adds real value to the company.

The ultimate answer will come, as it always does, from subscribers themselves. Do they want a cut-price high-speed connection on which they can find their own content and applications, or do they want to pay more for a broadband connection that comes with high-quality exclusive content?


Leave a comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Do you agree public funding should be used to support mobile operators to more broadly deploy Open RAN?

Loading ... Loading ...