A prodigal son who must back inspiration with substance
Scotland on Sunday; Jul 8, 2001
BY ANGELA MACKAY
RICHARD Li acts like he doesn't know whether he's coming or going. At a presentation last week to unveil Pacific Century CyberWorks' new internet services strategy, the son of Hong Kong's richest man stood up to leave after reading his "verbal statement". This caused a ruckus as the media called on him to stay - he was the main attraction. Li returned to answer "just three" questions before hurrying out a side door.
Li's new modesty contrasts with the brash confidence of a year ago when it seemed certain that he would assume the mantle of his father, Li Ka-shing, as Hong Kong's master deal maker. Richard Li, 34, set hearts racing in this cash conscious city last year when he offered 28bn dollars for Cable & Wireless HKT, the territory's premier telecommunications company. He used PCCW's outrageously-high market capitalisation to buy a business that would deliver a platform for his aspirations as well as solid cash flow to pay for them.
Since then, Li the younger has hit several obstacles - some of others' making but many of his own, such as some poor judgments regarding untimely share sales by him and his senior executives, and his sleight of hand about supposedly graduating from Stanford University.
Yet with hindsight, Li's decision to bid for C&W HKT was inspired. Unlike many technology start-ups, Li decided to use his share price to leverage him into the big time. Many companies, even high flyers such as Yahoo], failed to make this transition and are now struggling with new business models as a result.
It is time, however, for Richard Li and PCCW to make good the vision. Most shareholders have been burned by the stock which has tumbled just over 90% in value since it struck a peak of HK$28.50 (Pounds 2.61) early last year. Today it trades at HK$2.37 (21p). Compare this with the performance of Tom.com, his father's internet company whose initial public offering was more like a mass mugging than an invitation to riches.
Tom.com's business model has changed radically over the past 12 months but the shares have never dropped below the initial public offering (IPO) price in what is sagely pointed to as another sign of the father's mystical deal-making abilities.
By the end of last week's presentation on the future of PCCW's Internet Services business, and despite Richard Li's coming and going, a new corporate form appears to be taking shape. Put simply, PCCW is cutting costs by vertically integrating the group and making redundancies while leveraging HKT's powerful customer base to sell more broadband services. More job cuts look certain as PCCW sifts through HKT's 13,000 workforce. Services in China and India are also being scaled back.
As one analyst noted: "It's not rocket science, but it's a prudent and sensible step in the right direction."
In addition, the group has shelved its expensive plans to produce content for its Network of the World (NOW) platform in favour of revenue-sharing partnerships with Asian content producers. This probably means that the contracts with Transworld International to produce content for NOW at studios in Chiswick will not be renewed later this year with the loss about 350 jobs. Most of NOW's directly employed staff in London have already been cut.
PCCW realises that content is still king but acknowledges there has to be a cheaper way of producing it. Like many big telcos, PCCW-HKT has decided that they can make money out of their high-speed phone networks by using them to broadcast interactive television.
This is not such a big departure from the initial assessment of HKT's strengths. PCCW coveted HKT's well-developed, under-used broadband telephone business which extends to 85% of Hong Kong's commercial buildings as well as half a million homes. Once absorbed, this distribution, which is one of the most advanced in Asia, gave PCCW direct access to the consumer and the company wanted to use this to distribute NOW, once described as the world's first fully-converged service providing interactive digital video viewing and web access.
NOW, however, is just about no more. Instead, it will become a subscription-based local entertainment channel accessed over a PC. The company is careful not to call it a portal.
Li has promised to cap investment in the unprofitable internet business at a total of $100m for 2002 and 2003 and said that this year's target to invest $200m would be slightly reduced to $190m. This is a big reduction in expectations considering the company said last year it planned to spend $1.5bn over five years, mostly developing NOW.
Apart from the boiled-down now.com.hk service, the other main plank of the new Internet Services strategy is iTV, an intranet service that PCCW believes will be the most sophisticated in the world. The company plans to offer local content to broadband subscribers for an extra HK$30 a month.
"We want to introduce service where we already have market leadership from our existing assets," Li said on Wednesday.
The iTV business has had a couple of false starts. Before the merger, C&W HKT had set up a pay-TV and Internet joint venture with Rupert Murdoch's Star TV. However, the deal unravelled after Li's offer for HKT was accepted. (Murdoch had sided with PCCW's thwarted rival for HKT, Singapore Telecom.)
Meanwhile, Star TV has turned to Taiwan's Koos Group to make its debut in the Asian pay television market in the renegade Chinese province, leaving PCCW to press ahead alone.
According to Andrew Chetham, senior broadband analyst with Gartner, PCCW is going down the track of other major telcos, and this is putting them back on track generally.
"All incumbents in a market have control of the local loop and infrastructure and they believe if they act quickly they will get the most out of broadband by leveraging assets they already have. They just need to find content. Korea Telecom is doing something similar."
Speed is important because cable companies are trying to sell the same services across their lines. In Hong Kong, for example, London-listed iCable is trying to sell interactive services to its 520,000 customers. So far, about 60,000 have signed up.
For its part, PCCW wants to double the number of subscribers to broadband from 230,000 last year to 500,000 in 2003. This should be accomplished quite easily if the company works hard to convert 410,000 existing narrow band subscribers to broadband.
As PCCW curtails its expensive dreams and reverts to more old-fashioned business precepts, like building revenues and earnings, it has come back into favour with ratings agencies. Both Moody's Investors Service and Standard & Poor's assigned investment grade ratings to the telephone business last week, granting the company an opportunity to refinance more cheaply.
Company executives and their bankers start a road show tomorrow to try to refinance up to 2.9bn dollars of an existing $4.7bn of short and medium-term debt. As in previous forays, they should be successful - the company has never had any difficulty raising cash, partly because of the shadowy presence of Richard's father in the background. This time, however, the company is seeking 10-year paper attracting a lower coupon to give it some breathing space and free up the $400m annual free cashflow produced by the telco.
PCCW's next big test will come later this month when it wheels out plans for local content. This will be followed by half-year results in September. The combined company reported a loss of $886m in 2000 based on Hong Kong accounting standards and $1.87bn in losses if US accounting rules are applied. The company hopes to be able to pull a miracle out of the business plan and show a sharp improvement.
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