High Interest, Little Payoff in Hong Kong

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A la carte pricing of video channels may someday bring in customers by the hundreds of thousands. But, if China’s most capitalistic city is any example, the amount of revenue generated from television subscribers paying per network works out to less than $15 a month: barely one-third of what U.S. cable operators are used to pulling in from their customers.

That is the experience to date of PCCW, a Hong Kong telecommunications company with the largest base of Internet protocol television subscribers — as well as the largest video-over-phone-line deployment — anywhere in the world.

To win its 549,000 IPTV subscribers, PCCW used a la carte pricing. But that doesn’t mean that’s a sure-fire path to profit. In fact, revenue per subscriber has been slow to grow; and as such, PCCW’s experience is a cautionary tale for U.S. operators of multichannel video services.

BIGGEST TELCO IN TOWN

PCCW is the largest telephone and digital subscriber line provider in Hong Kong, with 2.7 million phone and 953,000 Internet subscribers. With a cable operator and a broadband operator coming after its phone customers, PCCW launched a la carte video services over its copper-wire telephone network in May 2003.

The a la carte strategy was a gambit to pull subscribers away from incumbent cable provider I-Cable and keep them away from a new rival, Hong Kong Broadband, before its video service gained a foothold. All three companies now offer video, voice and high-speed data services to Hong Kong residents.

What it found was lots of new customers. PCCW’s 549,000 IPTV subscribers far exceeds the 109,000 subscribers Hong Kong Broadband has signed up for its own Internet protocol-delivered video service. PCCW’s total is even within shouting distance of I-Cable’s 738,000 video subscribers.

“This [a la carte] proved to be a major selling point against the traditional cable-TV proposition of basic and premium-tiered packages,” said Paul Berriman, head of strategic market development at PCCW.

What it didn’t find was a lot of revenue. Of PCCW’s 549,000 subscribers, 158,000 are taking a basic-TV package of 35 channels that costs them nothing, the company said. The true number of “paying” subscribers was 391,000 at year-end 2005.

Even rapid growth doesn’t mean overwhelming results. During 2005, PCCW saw the number of paying subscribers more than double, from 192,000 in January. Revenue per subscriber only increased 8.5%, from $13.44 per month in U.S. dollars to $14.59.

PCCW hopes to close that gap between pay-customer growth and revenue per subscriber by pushing customers into mini-packages of small handfuls of channels, and by offering price breaks for buying more than one a la carte channel.

CNN International and Headline News cost $1.54 a month separately, but $2.56 if purchased together. ESPN and Star Sports each cost $11.26 per month, but subscribers who buy both pay $21.50.

Of PCCW’s 391,000 paying subscribers, 59% are already buying more than one channel. Subscribers who buy more than one channel receive some discounts. Some groups of channels with news or children’s programming are already sold in mini-packages. And last month, PCCW launched an 84-channel Super Value Pack for $49.67 (U.S.) per month, if subscribers make an 18-month commitment.

“It’s a big opportunity for us,” said PCCW chief financial officer Alex Arena said of the 84-channel package on the company’s March 29 earnings call. “We’re getting quite significant interest. It’s not that difficult to sell and we’re fairly expectant that we can get the revenue per subscriber up.”

Although formed in 2000, PCCW has a long telecommunications history. PCCW purchased the telecommunications assets of Cable & Wireless and Hong Kong Telecom, the country’s original telephone company, in 2000. Its chairman, Richard Li, financed the purchase by selling the pan-Asian direct-to-home satellite company STAR TV to News Corp. chairman Rupert Murdoch, for $950 million.

Li is the younger son of Li Ka-Shing, a Hong Kong magnate whose nine holding companies, including Cheung Kong Ltd. and Hutchison Whampoa Ltd., are worth nearly $100 billion.

When PCCW launched video service in May 2003, it joined two other companies, I-Cable and Hong Kong Broadband, in offering telephone service, high-speed data and pay TV services to residents.

The incumbent cable company, I-Cable, counts 738,000 video subscribers, 320,000 high-speed data subscribers and 120,000 voice subscribers. PCCW counts 2.67 million telephone and 953,000 high-speed data subscribers, to go along with its 549,000 video subscribers.

The third provider, Hong Kong Broadband, counts 294,000 voice, 229,000 data and 109,000 video subscribers.

PCCW’s a la carte strategy has put a dent in I-Cable revenue per subscriber numbers, but not total subscribers. I-Cable charges about $40 a month for 80 channels of service. Video subscribers rose 5% in 2005 at I-Cable, to 738,000 from 702,000, at the same time PCCW was reporting strong growth.

But revenue per subscriber dropped 6% during 2005 for I-Cable, to $27.14 from $28.80 a month, because I-Cable began to offer new mini-packages of channels to mirror PCCW’s mini-packages.

The revenue-per-subscriber drop “was due to active marketing of lower-yield mini-packages to build market position,” I-Cable chairman Stephen Ng said during the company’s earnings call last month, For instance, I-Cable offers six Discovery Communications Inc. networks in a package for $11.52 a month. A package of Cartoon Network, Boomerang and Nickelodeon is $5.12.

The third video competitor, Hong Kong Broadband, charges $16 per month for its 60-channel video service.

It stays away from carrying the more expensive sports-network product, preferring to position itself as a low-cost video provider. The lower price points helped to drive video subscribers from 39,000 to 109,000 for its fiscal year ending Aug. 31, 2005.

For fast access to the Internet, I-Cable charges $35.58 a month, while PCCW charges $31. Hong Kong Broadband only charges $15.

And it’s in the red, partly due to costs associated with upgrading its network to transfer data at 100 Megabits per second. The company reported a loss of $20 million in fiscal year 2005, after posting a profit of $6.6 million in 2004. It was the first time in the company’s 13-year history it lost money, according to company chairman Richard Wong.

While Hong Kong Broadband is banking on its 100 Mbps service to fuel future growth (the company did increase broadband subscribers from 203,000 to 229,000 in fiscal year 2005), Wong told analysts “the industry price war will worsen” in 2006.

Competition may help consumers in Hong Kong, but it does create an economic toll on broadband companies.

THE STRATEGY

PCCW’s strategy is actually a blend of a la carte pricing, packages and subscriptions.

Channels can be bought in one-month, six-month or 12-month increments, with the highest prices at the one-month rate and the cheapest prices at the 12-month commitment level (see chart).

Exactly who buys what, PCCW isn’t saying, other than that 59% of subscribers are buying at least one “mini-pack.”

Cartoon Network and Nickelodeon are available for $1.54 a month in U.S. dollars, for a 12-month commitment. On a month to month basis, those channels cost $2.56 U.S.

Disney Channel (which once was available in the U.S. as a premium a la carte service, first at $9.95 a month but in later incarnations as low as $4.95, before it was converted to a basic channel) is available to PCCW subscribers for $3.84 a month in U.S. dollars with a 12-month commitment, or $6.40 month to month.

Programmers that have fought a la carte in the U.S. have gone along with PCCW’s strategy. One reason is to help a new distributor in the market, they said.

The programmers also believe they can protect revenues by establishing pricing schemes that move subscribers towards longer-term commitments and into mini-packages.

“Turner Broadcasting [System Inc.]’s distribution strategy is to allow services to reach as many viewers as possible,” said Ringo Chan, vice president of wireless development, Asia Pacific, for Turner International Asia Pacific Ltd. “Although PCCW is adopting an a la carte model, they mainly sell their services through different bundled packages. The IPTV platform offered by PCCW enables programmers to provide more services and interactive TV in the future.”

Turner offers CNN International and Headline News, both a la carte and in packages, and Cartoon Network and Boomerang. Chan wouldn’t disclose the programmer’s penetration figures, but said “we are very satisfied with the current take-up rate.”

Chan said the disconnect rate (churn) “is relatively low. Most of our subscribers are on yearly packages and the subscriber numbers have been growing since we launched our services on PCCW.”

In theory, Turner could lose out if PCCW “steals” a full basic cable subscriber from, say I-Cable Communications but that subscriber does not take a Turner network from PCCW. Chan said that hasn’t happened yet, because Turner’s content is strong enough to drawing in PCCW subscribers.

MINI-PACKS IN PLAY

While a la carte has drawn in subscribers, building revenue has been a bit of a challenge for PCCW.

“While this unique approach with flexible pricing was a great entry strategy there was some inherent inertia in the online subscription method, where customers were slow to take up more than a few channels at a time,” Berriman acknowledged.

Several months after launch in September 2003, PCCW introduced a “high-volume discount” for subscribers who signed up for 12-month packages. Mini-packages, which combined channels, were launched in the summer of 2004.

The tactic caused mini-pack penetration to jump from zero to 58% from March 2004 to December 2004 and revenue per subscriber to jump from $7.93 a month to $13.44 (U.S.) a month, over the same period, Berriman said.

But revenue per subscriber growth slowed in 2005, increasing 8.5% from $13.44 to $14.59 per month, even while paying subscribers more than doubled in 2005, from 192,000 to 391,000. The revenue per subscriber is about half what I-Cable generates.

Last month, PCCW launched the 84-channel “Super Value Pack” for $49.67 a month. It includes HBO and ESPN, but not ESPN Star Sports Cricket, Star Plus, Star News, Channel India or the adult channels.

While a la carte slowly evolves to a more traditional packaged strategy, it’s also serving another purpose, Arena said, because it helps builds the data and phone business.

The company reported broadband subscribers jumped from 857,000 to 953,000 from June 2005 to December 2005, its best six-month period in over three years.

“Even if they don’t take any premium channels, the revenue we get from the broadband line has not gone down,” Arena said. “So they pay us something.”

Indeed, some 90% of new customers to PCCW are taking the Now TV service, Arena said. “Most new subscribers are coming to us for broadband because they want Now TV,” he said. “Now TV is driving this growth. It’s proving to be the killer application.”

PCCW added 50,000 telephone access lines in the last six months of 2005, Arena said, compared to a net loss of 53,000 lines in the first six months of 2005. It’s the first time in three years PCCW posted net additions in telephone line share, Arena said.

“For an incumbent telephone provider, this is a massive turnaround,” Arena said.

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