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In September 2003, PCCW, Hong Kong’s incumbent fixed-line operator, became one of the first wireline operators in the world to launch an IPTV service. The operator originally conceived the service, dubbed NOW TV, to compete effectively with the country’s monopoly cable TV operator, i-Cable, and reduce customer churn by offering bundled voice, data and video services.
Since its inception, NOW TV has rapidly evolved from offering only 23 channels to incorporating premium content and growing to 74 television and radio channels by August 2005. PCCW has been able to strike a number of key exclusivity contracts for premium content with ATV, HBO, Cinemax, Star Movies, MGM and ESPN – Star Sports has helped the operator increase demand and revenues. Moreover, PCCW has localized its offerings to make them more appealing, with over 70 percent of the content provided in Chinese or with Chinese subtitles.
PCCW charges for pay TV services on an a-la-carte basis. Customers can choose the channels they would like to subscribe to and pay per channel. The operator has also introduced mini-packs which include a number of premium channels for a fixed amount per month priced strategically lower than i-Cable’s packages. Mini-packs account for approximately 58 percent of the channel subscriptions. Customers can opt for monthly, bi-annual or annual subscriptions with mini-packs or channels. On-demand programs are charged on a pay-per-view basis.
NOW TV is available for any customer with a broadband connection. To entice subscription for the broadband access service (named NETVIGATOR), PCCW waives the deposit fee, the monthly rental charges and the installation fee for the decoder that is necessary to access the broadcasting service for NETVIGATOR subscribers.
NOW TV is currently delivered on PCCW’s ADSL network. At least 4.5 Mbps of downstream speed is required for the TV signal. The operator reports 93 percent of households in Hong Kong experience 6 Mbps of downstream speed on ADSL. Moving forward, the operator plans to upgrade its network to the VDSL technology which will enable 25 Mbps of downstream speed with a high degree of QoS to manage bandwidth use.
Outcome:
PCCW has experienced strong uptake of its NOW TV service, reporting about 361,000 subscribers by YE2004. This represents 24 percent of Hong Kong’s overall broadband lines. 53 percent of NOW TV’s customers subscribed to pay TV services. This is quite impressive considering the cable operator was able to attract less than half of NOW TV’s total subscriber level over its first year of commercial deployment and, in its over 10 years of operations, it only gained approximately 700,000 subscribers in a 2.1m-household market.
PCCW deployed NOW TV to achieve two primary goals. Firstly, NOW TV was a rather defensive move; PCCW wanted to compete effectively with i-Cable upon its introduction of a bundled service including both broadband data and video. The operator reports that its consumer broadband access service, NETVIGATOR, has been growing faster than the overall consumer broadband market following the inclusion of broadcasting services. Specifically, between August 2003 and December 2004, while the market grew by 29 percent, NETVIGATOR’s subscriber base was up an impressive 39 percent. Moreover, 85 percent of the new additions to NETVIGATOR were also NOW TV paying subscribers. As intended, NOW TV has made PCCW’s broadband service more attractive. Additionally, since the introduction of NOW TV, NETVIGATOR’s churn has halved to less than 1 percent, clearly indicating increased loyalty levels.
PCCW’s second goal was creation of an additional revenue stream. NOW TV’s paying subscribers have rapidly increased the amount they spend on content, particularly after the introduction of mini-packs of channels. ARPU was about US$13.50 over the 4Q2004, up a substantial 84 percent from US$7.34 in the 4Q2003. Exclusivity arrangements have also contributed to the appeal of NOW TV and expanded the addressable market to include commercial users, such as sports bars and hotels, driving up revenues.
PCCW projects its NOW TV’s subscriber base will reach over 500,000 subscribers by YE2005. We think this is an achievable target; PCCW has invested in building exclusive relationships with content providers, marketing and lowering the barriers of entry for customers through subsidizing end-user equipment and pricing on a pay-by-channel basis. We believe NOW TV’S premium content will continue to attract customers to PCCW’s other services, including voice and broadband access. With the ARPU for bundled voice, data and video services in the range of over US$26, PCCW is likely to increase its profitability going forward.
We see two key lessons in the success of the NOW TV service:
Content is what matters most: By pulling together an impressive list of content, PCCW has become the world’s largest IPTV provider. PCCW has achieved such success by:
Providing a secure network for content delivery and thus attracting content providers: Piracy is a significant concern for content providers in Asia Pacific, however IP technology provides for a secure transmission. Many content providers, previously not present in Hong Kong, have partnered with PCCW to reach end-users via NOW TV.
Exclusive content offerings: PCCW’s exclusive offerings have forced end-users interested in such content to subscribe to NOW TV.
Localized content offerings: Instead of bringing content from abroad and delivering it as is, PCCW has taken an extra step and localized the content. Over 70 percent of programming is in Chinese or with Chinese subtitles. This certainly increases the interest level of the consumer.
Flexible access options: NOW TV has several charging schemes and is highly customizable. Customers can subscribe to as many channels as they wish which gives them a higher level of control over their video services and lessens the amount of frustration.
Lower barriers to entry: Anybody in Hong Kong with broadband service can subscribe to NOW TV and have access to a number of free channels. However, in order to have the decoder fees waived, one must become a subscriber to the operator’s broadband access service. The decoder deposit is HK$800. There is quite an incentive to adopt PCCW’s broadband service and receive immediate access to NOW TV. Once one has access to NOW TV, pay-per-channel or mini-packs, given their compelling content, encourage further adoption of pay TV service.
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