1,250 Channels and Nothing On: Risking it in Hong Kong's futuristic pay-TV arena
By JEREMY HANSEN
Asiaweek Pictures.
Pay-TV operators in Hong Kong don't have enough top films and shows to attract viewers
It's hard to know whether Hong Kong's 1.97 million TV-viewing households should be pitied or envied. Last July, the government announced it would open up the local pay-TV market to five new operators in hopes of vaulting the territory into New Media Nirvana. The new pay-TV licenses, four of which were awarded in December, were supposed to ignite a burst of competitive creativity. It was hoped that lively market entrants would implement cutting-edge transmission technologies and roll out new interactive content, that in turn would transform passive TV viewers into enthusiastic infotainment gluttons. With so many players jockeying to become the smart-home information hub, the Hong Kong audience could be buried in a bewildering array of digital entertainment choices — no fewer than 1,250 new channels are theoretically possible if systems are filled to capacity.
Save your envy and your pity. Reality has set in, and instead of expansion, the market is headed toward consolidation. Satellite-TV operator STAR, owned by global media giant News Corp., has already pulled its application for a license. Established interactive TV provider iTV, owned by Pacific Century CyberWorks, says it may lease its network, which passes more than 90% of Hong Kong homes, to other players, indicating it could drop out of direct competition completely.
Meanwhile, two other license-holders — Pacific Digital Media, a Taiwanese direct-to-home satellite TV operator, and Sino-I.com, a property company turned dotcom — refuse to say when they will be launching their services or if they will spend the hundreds of millions of dollars it takes to build a cable-based interactive network. Market-watchers say that Hong Kong will support no more than three pay-TV providers — not the seven players that were expected to be operating by next year. "It's a game of chicken at this early stage," says Greg Feldberg, Internet analyst at Indosuez W.I. Carr Securities.
East Asia is watching closely to see who clucks first. By opening its market, Hong Kong has made itself the region's most important testing ground for interactive TV. For the uninitiated — and that includes just about everyone, including some of the people in the business — interactive TV is a largely unproven digital entertainment network offering two-way services such as movies-on-demand, interactive shopping, broadband Internet access and telephone connections. Other countries will take their cues from what works with viewers in the territory, and, just as importantly, what does not. A lot rides on the outcome. According to a report by Accenture, there are more TV households in the Asia Pacific than in any other region in the world (more than 472 million at the end of 1999), making it one of the most promising fields for new forms of digital, set-top-box-based entertainment.
By 2005, 4.6 million Asian homes are expected to have cable access to interactive digital TV networks, Accenture estimates. China is already testing the waters — that country's first large-scale interactive TV system, capable of serving more than 10,000 viewers, started trial operation in Beijing in December, and video-on-demand service is expected to be launched in June. Singapore Telecom started its Magix video-on-demand and electronic shopping service in 1997, but it only has 12,000 customers.
If it works in Asia, interactive TV will be bucking a global trend. So far it has been a bust just about everywhere. Microsoft's WebTV has just one million subscribers, despite three years of trying to build an audience in the U.S. Still, Hong Kong's newly liberalized market is seen as potentially fertile ground in which interactive TV can finally begin to bear fruit. The territory's affluence and relative ease with which its high-rise dwelling population can be wired up are seen as big pluses.
Hong Kong "is an excellent test lab," says Feldberg. Crucible would be more like it. Hong Kong's 6.8 million residents have to date shown little enthusiasm for advanced media — they overwhelmingly prefer quaint, but free, terrestrial TV. Conventional over-the-airwaves broadcasts still command 92% of local audience eyeballs, according to ratings agency ACNielsen; a scant 7% pay for cable (satellite delivery has a 1% share). In contrast, cable reaches four out of five Taiwanese homes and garners nearly 60% of the available eyeballs.
Little wonder that Hong Kong's two existing players have found it impossible to make money. Incumbent Cable TV, owned by iCable Communications, has 500,000 subscribers but failed to turn a profit in its first seven years of operation (the pay-TV unit made a small profit last year). Hong Kong Telecom spent more than $200 million to build the city's first interactive network, a state-of-the-art system delivering services over telephone and cable lines. Subscribers to the iTV service, launched in 1998, leveled off at 90,000 — not enough to recover the investment anytime soon — and the venture's heavy losses contributed to the eventual sale of HKT to Pacific Century CyberWorks. "It's not an easy business to get into," says Samuel Wong, iCable's vice president of finance and corporate development.
In spite of those daunting hurdles, two players remain intent on entering the market. One is Galaxy Satellite Broadcasting, a subsidiary of TVB, the powerful local terrestrial TV broadcaster. The other is a newcomer: U.K.-based Yes Television, which spent more than $100 million establishing itself in Britain and is investing $32 million in Hong Kong as a testing ground for a regional rollout. Yes Television officials estimate it will take 200,000 subscribers to break even, something they don't expect to happen for at least four years.
Yes has content deals with international producers such as Disney, the BBC, England's Channel 4 and Pearson. But the company could run into one of the harshest realities of the Hong Kong market — and for all of Asia as well. In Hong Kong, English-language programming alone isn't sufficient. To succeed, pay-TV operators need a warehouse full of local-language programming to be able to fill all those channels. Yes Television's President Randall Cox estimates pay-TV companies need between 60% and 70% local content to succeed. The company has yet to announce a local-language content deal.
Why? One reason is that Cantonese content doesn't export well to markets beyond southern China, and it is therefore in relatively short supply. That's one reason STAR, part of Rupert Murdoch's media empire, reversed course and bailed out of the Hong Kong license competition. STAR has exclusive rights to buy what it claims is 70% of the current and future supply of Hong Kong movies. Rather than risk millions of dollars trying to build a delivery system (the company already reaches 449,000 Hong Kong homes via satellite), STAR instead decided a surer bet was selling that content to cable operators. Jamie Davis, STAR's senior vice president of programming, brags: "The other people are saying, 'Oh my gosh, there isn't any content!' Fortunately, we were aggressive {in signing content deals} while everyone else was asleep at the wheel."
So important is content to the success of interactive TV that the Hong Kong government is making Galaxy run the pay-TV race in leg irons. Through its TVB parent, Galaxy has access to a large library of Cantonese game shows, sitcoms and other fare. That's a big advantage over potential rivals, so regulators say that TVB must sell down its stake in Galaxy to less than 50% before they will issue a license. In addition, the company must offer rival operators the opportunity to carry its programming. Most damaging of all, Galaxy can't open for business until another licensee has been operating for a minimum of 18 months.
Even with that head start on what should be their most dangerous competitor, companies looking to enter the market are reconsidering the value of holding one of Hong Kong's pay-TV licenses. "Anyone who believed that all these companies would follow through on their plans was nuts," says Indosuez's Feldberg. As long as viewers can complain that even with 1,250 channels there's still nothing to watch on TV, interactive infotainment will remain in the test lab.
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