What happened to Tom's dotcom?
2001-07-13
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Like other dotcoms, Tom.com is struggling. Since the Internet bubble burst, the Hong Kong start-up -- which epitomized Asia's Net mania with its wildly popular stock-market flotation last year -- has seen its share price tank and its books covered in red ink. And like many of its new-economy contemporaries, the company is scrambling to produce revenue while distancing itself from dotcom taint. Officials have even dropped the ".com" from the name. On the cover of its 2000 annual report, the company is referred to as simply "Tom."
But this is one sinking start-up that may actually manage to survive and prosper. Tom's biggest shareholder is Hong Kong dealmaker and business whiz Li Ka-shing, Asia's wealthiest man and chairman of conglomerate Hutchison Whampoa. Rather than simply write the company off as another misguided Internet play, the 73-year-old tycoon appears determined to build Tom into something really big: a diversified Chinese-language media company the likes of which Asia has never seen. Says JP Morgan Internet analyst Victor Lai: "Li Ka-shing wants to become the Rupert Murdoch of China."
Tom officials admit only to more modest aspirations, but the company is already busy acquiring old-media assets in Hong Kong, Taiwan and China (see table). Some of the purchases are cheap dotcoms that will be used to enhance the company's website. But there are also magazines, billboard companies and a sporting-events firm. The offline acquisitions appear only vaguely related, yet they have several things in common. One is solid revenues, which have largely eluded Tom's own portal business. Another is that they are established outlets for advertisers. Tom executives say they plan to make similar purchases. The aim is to transform the firm into "a total advertising solution provider" for Greater China, according to CEO Sing Wang. For Li himself, observers note, this could mean he might someday control more Chinese-language media assets than anyone.
Whatever Li's personal goal, the man doing the heavy lifting at Tom for now is Wang, an Oxford-educated former head of China high-tech investment at Goldman Sachs. Since moving into the top job in July last year, the 37-year-old mainlander has leveraged his boss's formidable reputation and his own intimate knowledge of the country to try to position Tom as a media player. Wang's first move was to beef up Tom's Internet content, buying 163.net, a popular free e-mail service (of which he was also the chairman), and sports portal Shawei.com. In October, he moved on to offline businesses, purchasing 70% of YC Companies, a Guangdong-based sports-event organizer and marketer. This was soon followed by the acquisitions of two outdoor billboard operators: Fench Star in the southwestern city of Kunming and Shanghai Maya Cultural.
The clearest evidence of Tom's ambitions in traditional media is in print publishing. That tack first came to light in December, when the company bought a 50% stake in Hong Kong news magazine Yazhou Zhoukan (formerly ASIAWEEK's sister publication). Five months later, Tom extended its reach to Taiwan when it agreed to set up a joint venture with the island's biggest magazine and book publishers, PC Home and Cite. The deal effectively gives Tom a 49% stake in both firms. But there's more to the plan than Tom helping itself to a cut of a lucrative Taiwanese publishing empire.
The real target is China. The new partners aim to take the technology and business titles of PC Home and Cite to the mainland. They will also look for takeover targets among established mainland publications, including newspapers. One market rumor -- which Tom doesn't deny -- is that Li's people are already negotiating to buy San Lian Shenghuo, a popular Beijing biweekly newsmagazine. Although fragmented and underdeveloped today, China's advertising market -- including print, billboards, broadcast and Internet -- is about $ 10 billion annually. Wang estimates the country's total ad spending will reach $ 12 billion in three years.
Tom's strategy is not mere empire-building. It's a matter of survival. Company executives admit their smorgasbord expansion beyond the initial portal business was necessary to generate revenues that could assure the business's long-term viability. Jimmy Lai, head of Hong Kong's Next Media group and a one-time rival of Li's in the grocery business, says Tom is doing the right thing by retooling what he calls its "shattered Internet vision." Tom's leadership quickly realized one way of doing that was to put together a diverse lineup of online and offline media outlets that could offer advertisers something no one else provides in China today: a cross-selling opportunity.
Take a Western sneaker maker that wants to target Chinese urban teenagers who surf the Net for hours, bike to school and watch live basketball games on TV. Tom can help its client reach them all through its portal, billboards and courtside ad placements. "We're basically tackling the largest ad block outside of broadcasting," says Wang. "In China, to develop a total marketing strategy is difficult to execute. But we're integrating the first of these [channels]." He sums up the approach as "grand vision, baby steps."
So far Wang hasn't tripped on his shoelaces. "He is trying to diminish the image of Tom as a portal," says Wallace Cheung of DBS Securities in Hong Kong. "He has done a great job at least to make sure that revenues from traditional media are more than those from new media." In the first quarter of this year, revenue rose 10% from the previous quarter to $ 9.9 million, with $ 7.2 million of that generated by offline assets. Meanwhile, Tom's quarter-on-quarter operational loss fell from $ 8.9 million to $ 7.1 million (the company lost $ 49 million in 2000).
Wang says costs are now under control, thanks to swift action. One of the first things he did after becoming CEO was to lay off 80 of the 500 employees the company had at the time. Tom's "burn rate" is about $ 3.5 million a month and falling, he says. The company's cash position stands at just below $ 100 million, down from the $ 174 million it raised through two share issuances. Wang is confident profits will come. He recently signed up some 120 new advertisers, and cross-selling to them accounted for about 10% of Tom's first-quarter advertising revenue. DBS Securities analyst Cheung says Tom could break even by 2003. "I'm not less stressed," Wang says, "but am more confident now."
With substantial stock options, Wang stands to reap big rewards himself if Tom succeeds. He has the right to exercise his 30 million share grants at 68 cents. Tom's stock currently trades at less than half that level. Until Wang delivers profits, the price isn't likely to rise much. Besides being a bummer for option-holders, depressed shares act as a drag on the company's acquisition strategy because buyout targets won't accept cheap stock as currency -- sellers want cash.
There are plenty of other obstacles to China purchases, as well. Beijing bans foreign ownership of publishers and broadcasters. It's unclear how the government, which rigidly controls and censors the media, would view takeover bids even from someone with the considerable connections of Li. Tom officials admit they have no expertise as publishers, nor any interest in content outside of the advertising it attracts. "In most cases we might not go for controlling stakes," Wang says, thus adhering to the letter of the law.
Tom's work-in-progress status and uncertain prospects may be why Li has so far stayed in the background. He has not said anything publicly in support of Wang's new direction, nor have Li's associates officially declared Tom the media branch of his business empire, which includes retailing, ports, telecommunications and property. In Tom's annual report, there's only a name card-sized picture of Li shaking hands with a business partner. Wang nevertheless says Li plays a central role, adding that he devotes "disproportionate time and attention" to following the company's progress.
Others agree Li's influence -- even if behind the scenes -- is key. "Li is one of the few people who have the power and ability to turn that [media] dream into reality," says Liana Yung, an Internet analyst at ABN AMRO Asia in Hong Kong. "No one is doing what Tom is doing. It has no competitors for now." Next Media founder Lai doesn't think Li wants to be China's Murdoch -- yet. But he agrees that "with the clout he carries, anything Li does in a big way will pose serious competition to people in the business."
Time may be on Tom's side. Unlike most dotcoms, the company has enough cash on hand, combined now with revenue from its old-media assets, to pursue its plan for the next couple of years. In the meantime, China is soon expected to join the World Trade Organization and may relax its media regulations, making life easier for foreign companies like Tom. It sure looks as if Li Ka-shing, arguably Hong Kong's most astute businessman, is fast turning a new-economy disaster into his next major opportunity.
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