Progress Report: Hong Kong Telecom Ltd. Interactive Cable TV (iTV) Rollout.
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A while back here, I said I'd try to get some info from some associates on the progress of the Hong Kong Telecom Cable TV platform. My sources fizzled out on me, as no one stuck around long enough after the implementation there to find out how it went.
Today I found this article in the WSJ interactive section that sheds some light on the progress, or lack thereof, to date. The article points to some good historical information of failed trials that took place elsewhere, particularly the US trials by some domestic players earlier in the decade. At the present time, there appears to be many eyes in the industry focused on this rollout, for lack of any other similar undertaking of such size.
Read on, and enjoy. Frank_C.
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interactive.wsj.com
Hongkong Telecom's iTV
Struggles for an Audience
By CHRISTINA MUNGAN
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Hong Kong Telecommunications Ltd. leads the world race to sell consumers on interactive television. But one year after launching the service, the company has yet to prove it pays to be first.
Its "iTV" service -- which delivers video, music and shopping and banking services on demand -- has 80,000 customers, nearly seven times as many as the only other video-on-demand service in Asia, Singapore's Magix. But that's far below its initial goal of reaching a broad audience of at least 250,000 subscribers by now.
What's more, not even existing customers are entirely sold on the service.
Consider Dennis Leung. In many respects, he seems like the ideal
first-generation user. He numbered among the city's first few thousand
mobile-phone users a decade ago. An avid user of iTV, Mr. Leung says
his own experience has yet to persuade him that video-on-demand is a hit.
"Saturday between five and six I was trying to pick a movie, I had my
beer, my snacks in front of me, the movie all picked out -- and it took me
45 minutes to get the movie loaded," he says. Too many other customers
were watching his film of choice -- "Batman and Robin" -- and the
software that enables the navigation of the programming forced him to start
the process all over every time he hit an error message, says the marketing
manager for Star Telecom International Holding Ltd., a mobile-phone
company.
Hongkong Telecom's progress with Mr. Leung and other customers will
be closely watched by international giants such as Time-Warner Inc.,
Microsoft Corp., British Telecommunications PLC and U.S.
cable-television giant Tele-Communications Inc. So far, they have
remained largely on the sidelines.
"We're going to move very slowly; this is a massive effort," says Pat Stortz,
an official with AT&T Corp. In the wake of its US$55 billion takeover of
TCI, the company will launch a pilot test of its own broadband, or
high-speed, high-capacity network in 10 U.S. cities by year-end, starting
in Fremont, Calif.
"There is no question that we need to be able to offer customers these
services, but we don't know yet exactly which services they will want," she
added.
Until now, few companies have been willing to invest heavily in this
commercially unproven technology. In Hong Kong, considered the global
test-bed for interactive television, Star Telecom won a government license
to set up a broadband service in 1997, but quickly abandoned the project
as too risky. Other Hong Kong companies, such as Hutchison Whampoa
Ltd., never bothered to complete their license applications, though it and
some other players are now reconsidering. (In late March, a subsidiary of
The Wharf (Holdings) Ltd. announced plans to launch an interactive
broadband cable services by the end of the year).
In the U.S., Time Warner, Bell Atlantic Corp. and U S West Inc. have all
dropped trials of broadband television networks, finding the costs
prohibitive.
"Video-on-demand is history for us," says Larry Plumb, a spokesman for
Bell Atlantic in Washington, D.C. "The leader of the pack is the guy with
the arrows sticking out of him."
Bell Atlantic became the first U.S. company to conduct large-scale
video-on-demand trials. It was also the company that Hongkong Telecom
officials visited first when they began considering their own investment in
1993. The U.S. company spent three years and about US$40 million
testing such services along the U.S. East Coast from 1993 to 1996.
Bell Atlantic decided that video-on-demand alone didn't generate enough
consumer interest to justify the expense of installing fiber-optic networks,
Mr. Plumb says. Like most phone companies, Bell Atlantic is gradually
upgrading its networks to offer improved telephone and Internet access.
Some day, it may add video-on-demand as an additional service.
Hongkong Telecom drew the opposite conclusion after visiting the U.S.
video-on-demand trials. Company executives saw video-on-demand as a
way to bring in new revenue at a time when competition had shrunk profit
margins in its once-lucrative long-distance and mobile-phone businesses.
Today the broadband service, delivered over telephone lines, allows users
to start, pause, rewind and fast-forward video and news programs any
time they want. It also provides home shopping, home banking and
Internet services 30 times faster than the fastest conventional modem
allows.
In many respects, Hong Kong seemed like a logical market for an
international iTV sneak preview. The business requires a huge start-up
investment and Hongkong Telecom has nearly US$2 billion in cash on
hand. So far, it has invested US$180 million in infrastructure costs alone.
Hong Kong also boasts a unique population of prosperous, media-savvy,
and snobbish consumers, eager to show off the very newest and latest
technology. It already enjoys the highest rate of mobile-phone penetration
in the world outside Scandinavia, where the most widely used form of the
technology was invented. And Hong Kong's densely packed apartment
blocks make the cost of wiring up individual homes as much as 40%
cheaper than in the U.S.
"We have clear advantages," says Hongkong Telecom Chief Executive
Linus Cheung.
But from the beginning, the venture was dogged by problems. Delays in
licensing and infrastructure work delayed its launch by two years -- to
March 1998. And since then, Hong Kong Telecom hasn't found a way to
make the financials add up. Steep discounting means that Hongkong
Telecom loses money with each new customer it signs up, owing to the
cost of providing set-top boxes and buying video content. It charges
subscribers at most $35 a month for services that the company expects
would be profitable at about $50 a month.
There have been technological hurdles as well: The slow programming
software is the main cause of customer complaints and has prompted
Hongkong Telecom to promise an upgrade by midyear.
Customers say that for all the service's drawbacks, it offers one great
advantage. "To be able to watch what you want when you want, this is the
way of the future," says Peter Wong, an accountant with Ernst & Young.
Still, iTV has a way to go before it delivers on that promise.
Because interactive television is so new, it has suffered in every market
where it has been introduced from a lack of jazzy and enticing online
services and applications to complement the movie offerings.
Hongkong Telecom officials are reluctant to comment on the numbers, but
they say that four-fifths of the time, the system is still used for movies. And
of the 350 films in iTV's library, about a third are pornography flicks.
Indeed, its biggest customers seem to be such soft-porn aficionados,
including housewives watching blue movies in the late afternoon, according
to iTV's founder, William Lo, who has since left Hongkong Telecom for
Citigroup.
The hope is that new "killer applications," to be developed in collaboration
with Microsoft, will help spur lagging consumer demand.
Earlier this month, the company dazzled Hong Kong investors -- causing a
16% jump in its stock price -- when Microsoft Chairman Bill Gates came
to town to announce a joint effort to develop Internet shopping and
entertainment products for the broadband network. To succeed, however,
the company must impress an even more important audience: the average
consumer.
"It's too much money to spend for something so frivolous," sniffs Winnie
Chu, a Hong Kong travel agent who has so far resisted the temptation to
sign up her family of four.
Hong Kong's recession is making more residents think like Ms. Chu. New
customers were signing up at the rate of 15,000 a month when Hongkong
Telecom started the service a year ago, then total subscriptions stalled at
around 70,000 for much of late 1998 until the company embarked on an
aggressive advertising campaign in January that added another 10,000
customers in one month, says Hongkong Telecom multimedia chief Allen
Ma.
At the same time, Hongkong Telecom may have to work harder to hang
on to existing customers.
Mr. Leung, the marketing manager, who is divorced and often works until
10 at night, watches iTV movies once or twice a week and plays back the
TV news every night, paying about US$40 a month for the service. "For
that kind of money I can afford it whether it's a good service or bad
service," he says. "But if they raise the price, even if it's only by HK$10
[US$1.30], tell them I'm going to cancel it. I don't feel like paying anything
extra."
As Hongkong Telecom struggles to develop new services that would
justify raising fees, its executives haven't developed a clear strategy.
Executives hope to win government permission by midyear to launch a
pay-TV service using its broadband network. But Mr. Ma says the
company is still conducting market studies to figure out how to launch it
without siphoning off movie-viewers from its video-on-demand service.
There's also the question of whether to sell on snob appeal or keep prices
low to reach a mass audience. The company's ad campaigns tell part of
that story. Initially Hongkong Telecom tried to sell iTV as a product for the
unconventional elite. These days, with a recession slowing consumer
spending on all nonessentials, its advertising campaign focuses on
persuading viewers that iTV is a cheaper form of entertainment than going
out to movie theaters and karaoke bars.
The company's next big push will be into educational programs tied to
school curricula. Mr. Ma sees potential in the Hong Kong parents who
often pay thousands of dollars a month for crammers and coaches for their
children. But as he describes Hongkong Telecom's initial foray into that
field with Chinese University of Hong Kong, he adds that "the objective is
not really to make money; the objective is (Hongkong Telecom Chief
Executive) Linus (Cheung)'s crusade to bring up educational standards in
Hong Kong."
All those uncertainties make analysts anxious.
Interactive television "may make Linus Cheung's reputation," says Peter
Milliken, a financial analyst at DBS Investment Research, "but it's probably
not going to be funding his pension."
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