The incumbent telco in Hong Kong, Hongkong Telecom, reached an
agreement with the government in January 1998 to relinquish its
monopoly on international direct dial calls on March 31 1998,
in return for a cash payment of HK$6.7 billion ($863 million).
In addition, competing international simple resale voices have
been permitted since January 1 1999. Full facilities-based
competition will be allowed as of January 1 2000.
The operator has tried to stay ahead of the competition,
building an advanced broadband network and focusing on
multi-media. Lloyd Fischer, a telecoms analyst at Salomon,
Smith & Barney, comments: "I think that they were one of
the first to realize that the markets were going to change and
that the emphasis would shift from high, monopoly margin
businesses to other areas. I don't think that many operators in
the region had thought that far ahead."
According to Fischer, the operator sees E-commerce as key to
its new strategy: "The market is focusing on this tug of war
between the fundamentals and this new wave of multi-media and
E-commerce. Hongkong Telecom is painting itself more and more
as an E-commerce play."
As competition increases at home from foreign operators, the
operator is also trying to branch out of Hong Kong and enter
other markets. In a recent branding exercise, which emphasized
the operator's close ties with majority shareholder Cable &
Wireless and its consequent international reach, Hongkong
Telecom was renamed Cable & Wireless HKT.
In an interview with Global Telecoms Business, the CEO of
Cable & Wireless HKT Linus Cheung talks about the
rebranding and restructuring of the operator, as it seeks to
become a leading force in the Asia Pacific and elsewhere.
You said recently that the company has no future if it
stays as a basic telco. How are you transforming the company
into a more integrated service provider?
Cheung: Telecoms is changing so rapidly. If we remain
as a local telco, rather than a communications company, global
prospects are ruled out. Of course, in the past telcos would
rely on the cross-subsidization of international traffic on to
local traffic. The fall in accounting rates is also going to
affect pure telcos. But I would argue that if telcos remain as
they are, growth prospects are clipped. Voice traffic margins
are dropping rapidly, again due to liberalization and the
change in accounting rates.
So we have to take advantage of the convergence of telecoms
with information technology. In our case we are providing
integrated services with our world-leading broadband network.
So we look forward well in advance. I am sure that most cities
are looking at building broadband networks one way or the
other. But we started five years ago.
So we are very well positioned to provide some very innovative
services and solutions to our customers. It is just that the
technological changes are so rapid in our sector, in our
business. We need to capitalize on those changes.
How is the company culture changing?
Cheung: The company culture is changing
substantially. But that takes a lot of effort: we were dealing
with a monopolistic culture. The cost structure was
monopolistic and the attitude was monopolistic. It is not easy
to wake people up from such a culture. So I gave them shock
therapy. I also coached them.
Last week I spoke to 3,000 staff in one day. I had eight
sessions with each lasting one hour, from 8am-6pm. We have
reduced our workforce by about 4,000 people over the past few
years. We have increased the working hours without providing
additional pay or compensation. And that is unusual these days.
We have made every member of staff a shareholder.
When you talk about culture, the values driving the culture
are very important. We have broken these values down into just
three words: simplicity, effectiveness and clarity. This is
easier said than done. It is so easy to complicate simple
things internally and externally. It is so easy to have so many
grey areas. There can be a lack of clarity and accountability.
It is so easy to just run around without real focus. We want
the organization to understand what is simplicity, clarity and
effectiveness. We have put a lot of work into educating and
coaching those values.
What kind of reaction have you received?
Cheung: The reaction was very positive. As you know,
we have rebranded Hongkong Telecom into a global brand.
Hongkong Telecom is a very strong local and regional brand.
Cable & Wireless is a very strong international brand. So
merging the two together will reposition Hongkong Telecom.
We have to break out from Hong Kong. Hongkong Telecom is a big
fish in a small pond. This is like soccer. We are a local
champion: we have won the league and cup, but locally. So I am
going to take this local champion to the world cup. So it is a
If you are a local soccer team, you can choose whether to go
to the world cup or not. But in our case we don't have a choice
due to liberalization. The world-class players are all coming
to play in Hong Kong anyway. So we might as well respond by
entering their markets. We have rebranded Hongkong Telecom into
Cable & Wireless HKT, changing our logo into the global
Cable & Wireless logo, but keeping the Chinese name intact.
This will be effective with multinational customers which want
world-wide similar services but are also retaining the local
name - in other words the best of both worlds. So it is also
part of the cultural change.
Has this rebranding exercise affected decision-making
in any way?
Cheung: No. The same applies. After all our working
relations with Cable & Wireless are very close. And we have
a high degree of latitude. Of course we have to go through the
corporate governance of both the boards of HKT and Cable &
How has China Telecom reacted to the
Cheung: China Telecom supports this change. This
measure has been approved by the board. They understand that
competition is global and not local.
In your opinion what percentage of revenues will
Internet and multi-media services contribute in 1999?
Cheung: I don't want to disclose exact percentage
figures. Interactive television was only launched last year.
This also holds true for Internet services. But last year our
Internet services were growing at a rate of 150%. And this year
growth will approximate 100%. It is growing very rapidly from a
low base. But interactive TV is not just Internet: it is also
E-commerce. I would argue that Cable & Wireless HKT is the
leading telco that is working very hard on E-commerce. We
understand the value and our positioning. Navigator is our
We want to take advantage of a bilingual portal, being
Chinese. There are 1.6 billion Chinese all over the world. We
are very well placed between Taiwan and China and overseas
Chinese communities. So we do not aim simply to carry the
traffic. It is not just an ISP dial-up. Of course we believe
that there are more margins with the business Internet,
providing websites for companies, rather than simply browser
business. We want to capture the value: ultimately there will
be more value from the transactional aspect of things, rather
than from the actual transmission. So I personally am
championing and leading the organization in that regard in
E-commerce and IP technology.
You mentioned convergence, integrated services and the
broadband network that you have built. What new services do you
plan to offer the business sector?
Cheung: Multinationals are all benefiting from the
broadband network. They have the resources to procure the
broadband data capacity that they require. This will continue
to be the case and will prove to be even more cost effective.
On the whole, small and medium-sized businesses - Hong Kong has
over 300,000 small and medium-sized businesses - will find that
a broadband service enables them to improve their productivity
and use more IT applications.
We believe more and more that it will be a network-centric
approach: in other words the software will be installed in the
network. Data encryption is an important issue. We have entered
into partnerships with some encryption companies to meet
security concerns. Then the small and medium-sized businesses
will feel comfortable inputting data into the network and using
the software in the network, rather than the present PC
approach, as they may lack the requisite expertise: changing
software, downloading software, all the repair and maintenance
work, this is hassle. The telephone doesn't have that much
software. The PC does. You and I experience a lot of problems
with PCs: if you change one software, you have to change a
million pieces. It doesn't make sense.
I think that even the software providers and software houses
are more amenable to both a PC approach and a network-centric
approach. With a broadband systems business we will focus more
on looking at solutions for big companies, rather than simply
the transmission aspect. We will look from their point of view
and provide them with business solutions. In addition we will
help medium-sized businesses become involved in IP and IP
What is the significance of the recent agreement with
Microsoft which provides customers with access to movies and
interactive games through PCs? How does this agreement
accelerate your broadband strategy? Do you plan to team up with
Cheung: The Microsoft trials are very exciting and
are ground-breaking, but they are not exclusive. We have made
it clear that both sides can deal with other partners.
Microsoft is developing increasingly broadband software. But
this is in the laboratory. If you want to really trial it with
customers, that is a big step forward. You need to have
real-time stress tests and other tests. Hongkong Telecom had
the foresight to build a broadband network.
That is why two-thirds of broadband access is based on fibre
optics to buildings, while one-third is based on ADSL,
switching. And this is because we are turning PCs into TVs and
TVs into webscreens. In places such as Hong Kong - and I think
that this is true of most places - you have more television
sets than PCs. In Hong Kong we may have one million PCs. But we
easily have 3-4 million TV sets out of a population of six
million. So broadband software would incite more PC and TV
usage. Internet penetration would also go up. I would argue
that we have captured the low-hanging fruit, as is the case in
all cities. It is easy to get the low-hanging fruit. But what
about the high-hanging fruit?
How do you view the potential for satellite TV
services in Hong Kong? Would you like to turn Hong Kong into a
broadcasting hub for the region? How many customers do you
provide services to?
Cheung: There is a good potential for satellite
broadcasting, particularly with digital TV. We have built
separate earth stations to cater for digital TV. This is part
of our wholesale business. So we engage in wholesale,
uplinking, downlinking. It is not just for Hong Kong: it is for
the region. The Hong Kong footprint covers China and other
We are confident that Hong Kong has a very important part to
play as a broadcasting hub. Satellite will be one of the medias
for not just voice and television, but also for data. But in a
place like Hong Kong, one would have to ask whether wireless,
satellite-transmitted broadband data would be a competitive
threat. You have to consider the terrain. In addition we have
already built a very cost-effective system.
How much do you spend annually upgrading the network?
Which suppliers do you work with? What do you perceive to be
the benefits of ATM? Which competitive advantages do you have
over other operators in Hong Kong and regionally?
Cheung: Our plan for capital expenditure this year is
about HK$5 billion ($644 million) - more than HK$2 billion will
be spent on upgrading the network. We work with all the key
suppliers in the world. Naturally, ATM switching resolves the
problem of the paucity of the copper network. But the real
benefit of a broadband network, fibre optics and ATM switching,
is that we can do all the video streaming and broadband
Our main advantage in Hong Kong over the other three
fixed-line network operators is that they did not really build
a network. We were smart enough to give them a leg-up, when
they started to compete against us. There is not much money in
local telephony. So they decided to lease our circuits.
We did not use technological, technical or legal obstacles, as
the RBOCs in the US have done to make it difficult for the
long-distance operators. In the meantime we built a world-class
broadband network. So we have a significant advantage over our
If you take Wharf Cable, the cable telco, their network is a
broadcasting network. It is not a point-to-point switching
network. Two-thirds of their network is based on LMDS. They
will have to return the spectrum to the government. Of course
they are looking at investments in their network. But if you
think about broadband Internet services, the switching network
is superior to a broadcasting network. And there is a concern
about security, as it is a broadcasting cable network,
basically involving the sharing of bandwidth. So there is an
element of security and inadequate bandwidth.
China to Hong Kong is the fourth busiest telecoms
route in the world. How will the opening of the Chinese
telecoms sector affect the operations of Cable & Wireless
Cheung: You are right. We are talking about more than
two billion minutes a year between Hong Kong and China. And
that of course will involve competition, with the break-up of
China Telecom and the competition of Unicom and China Telecom.
Unicom could be a potential partner of Cable & Wireless
HKT. You build relations over a long period of time. As China
understands the importance of telecoms infrastructure and we
witness the rapid growth of data and IP traffic, Hong Kong is
very well placed.
Will you seek to increase your international presence
to make up for lost revenues in Hong Kong? How do you view your
position as a regional hub for multinational companies?
Cheung: This relates to what I shared with you
earlier about the rebranding of Hongkong Telecom with Cable
& Wireless. Instead of being confined to Hong Kong, we will
represent more Cable & Wireless' interests in Asia. This
will also allows us to invest more actively in Asia.
Naturally we are going through a period of transformation from
a monopoly to a highly competitive environment and also from
the declining importance of voice, compared to IP. But we
planned well in advance and have obtained compensation from the
government. So it is all part of the game plan to rebalance our
reliance away from voice and increase our traffic from IP,
data, E-commerce and integrated communications. We will also
raise local tariffs and invest outside Hong Kong.
Why have you still not raised local tariffs?
Cheung: Our decision not to raise rates is
attributable to our sensitivity about the economic recession in
Hong Kong. We received the requisite approval to increase these
rates in January 1999. And we are looking at increasing rates
reasonably soon. It is part of the problem of rebalancing our
reliance away from international voice. The local tariffs are
still below cost. We have delayed raising rates owing to the
economic situation. But we will have to raise them soon, as we
cannot afford the cost.
How will you improve the overall efficiency of the
company? How successful has the voluntary redundancy programme
been? Are you disappointed about the number of employees that
took the packages on offer?
Cheung: In fact it was very successful. We offered
4,000 people voluntary redundancy and achieved a 10% take-up
rate. We thought that it would only be 5%. It was targeted at
those surplus areas. So we were very pleased with a 10% take-up
rate. We were very impressed with that redundancy programme.
Over the past few years we have been relentlessly improving the
company's overall efficiency.
How are you preparing for the introduction of full
facilities-based competition in the year 2000? Do you believe
that the monopoly termination agreement was fair to Hongkong
Telecom? How will you use the HK$6.7 billion that you receive
as part of this agreement?
Cheung: The facilities-based competition is part and
parcel of the whole compensation package. We believe that it is
very fair. And we did it in a very timely manner. I doubt that
at this point in time one could strike a similar deal. Rather
than resenting competition, we embrace it and try to make the
company a better and more competitive organization. So
facilities-based competition is only part and parcel of the
whole spectrum. We have been planning and preparing for it for
And how did you use this HK$6.7 billion?
Cheung: Well the HK$6.7 billion was accounted for
last year. That is the reason for a 32% drop in net profits.
That would really increase our cash flow to something like
HK$15 billion ($1.93 billion). We are going to use it mainly
for mergers and acquisitions, as well as capital expenditure.
In January 1999, 26 ISRs (international simple
resellers) launched services with heavily discounted prices.
How will you compete against these new players that are putting
increasing pressure on pricing and margins? Hong Kong has one
of the highest rates of international usage/line in the world.
How will you maintain margins in this area?
Cheung: It is impossible to maintain margins in that
area. That is why we received this compensation from the
government. That is why we have to be realistic. Over-reliance
on international voice has no future. The volume is still
growing, but the margins are declining so quickly. So
rebalancing is a key driver. We have been preparing for five
years. Five years ago international voice accounted for 70% of
our revenues. Now it is only 40%. This figure will keep
falling. Now we are seeing a dramatic increase in IP and those
new lines of business. This also applies to mobile and mobile
data. So it is a rebalancing act. It would be impossible to
repeat the kind of volumes and margins of international voice.
But that is life. We also appreciate that data traffic margins
are fairly slim. So we really want to capture value from
transactional services, such as E-commerce.
How do you view fixed/mobile convergence? How many
cellular subscribers do you have? How do you view the demand
for wireless data in Hong Kong? Which suppliers do you work
with in cellular?
Cheung: Nokia is our main supplier in mobile. We are
much better placed in fixed and mobile convergence than our
competitors to provide those services. That would include a
whole range of value-added services. Furthermore mobile data is
an area of substantial potential. We are investing with Nokia
in GPRS. We announced a trial, which will bring the mobile data
rate from the present 14Kbps to 150Kbps. This represents a big
leap forward. In our opinion mobile has a lot of potential for
the Internet and for the video signals as well, when 3G mobile
comes into play. We are talking about 2Mbbps that would provide
one kind of image.
Which services will be applicable for 3G?
Cheung: I think that a lot of the services that we
are seeing that involve the use of a PC will be applicable. But
it will be confined to the small screen. You will go back to
the desktop for the bulk of the work. But 3G will be good for
e-mail, Internet services and browsing.
Do you see a big market for mobile video phones in
Cheung: I think that digital television might prove
popular. The handset could also be used as a TV set. That might
be bigger. Video phones have not really taken off in the
fixed-line environment. I doubt whether they will take off in
Do you think that wireless will account for a larger
percentage of voice revenues? How many cellular subscribers do
Cheung: The rate of growth in wireless is higher than
fixed. It may one day overtake the wireline voice business. But
we are also seeing pressure on the margins from mobile, owing
to the presence of six cellular operators and 11 networks. We
still account for 98% of Hong Kong's fixed line market share
after four years of liberalization. We have close to 1 million
cellular subscribers, equivalent to a 29-30% market share.
Do you think that wireless will eventually cannibalize
fixed line revenues?
Cheung: I think that they will complement each other.
We are seeing growth in the installation of fixed lines.
Clearly mobile is growing at a faster rate. But they complement
each other. Take 3rd generation mobile: we talk about 2Mbps. In
fixed we are talking about 25Mbps.
How do view the potential for E-commerce in the
region? Bill Gates recently suggested that Hong Kong's
bilingual portal was a big advantage. How do you view this
statement? How do you view the market for Chinese language
Cheung: Bill Gates is right. We have significant
potential. I have mentioned our efforts in this area. We are
working on the Chinese language portal and E-commerce
transactions. We hope that we will be able to announce various
deals fairly soon. It would be wrong, almost unthinkable for
people to have to learn English for the Internet. That would be
a big hurdle. It takes a long time to learn English. If you
look at China, 1.2 billion people, English literacy is still
quite low. So all the complications related to a Chinese
language portal have been overcome. I have seen operators
keying in Chinese characters through the keyboard at a rate of
60 Chinese words a minute. And that is very efficient. We have
to go for the high-hanging fruit. I agree with Bill Gates.
There is substantial potential for a Chinese portal, for
Chinese language-based E-commerce transactions.
Could you tell us about Cable & Wireless HKT's
E-business plan? How are you expanding your broadband network?
When will you launch Internet platforms to cater for different
Cheung: We are doing this already. And we are very
keen to provide Internet business not just to dial-up
customers, but also to business operators. We also plan to
develop websites and make Hong Kong into an E-commerce hub. We
have announced our E-vision, our ambitions. We are investing a
lot of resources in this area. We understand that we have to do
this with partners, rather than on our own. We are involved in
talks about close partnerships with quite a few leading
American companies that know E-commerce very well. When they
look to Asia for a partner, we come first. There are a number
of areas, such as stock trading, for example, maybe even
gaming. We believe that what we are doing is cost effective.
How do you view the Cyberport project launched by the
Hong Kong government? What role will Cable & Wireless HKT
play in this project? What will the demand be for such
applications as remote learning and tele-medicine?
Cheung: Cyberport is a project confined to one area
in Hong Kong. But I would argue that we are developing Hong
Kong into a cyber city, rather than a cyberport. Of course
applications are important. We understand this. We are working
with a lot of partners to develop those new applications,
whether it is for interactive television, broadband games,
So Hong Kong has to rely less on property for economic growth.
Property is more for domestic consumption. Hong Kong has to
attack the high technology market: this is easier said than
done. Cable & Wireless HKT is a key player. So Cyberport is
one of those initiatives to go high tech. It is necessary, but
it is not adequate.
Which other initiatives are you involved in?
Cheung: The broadband network is the hardware
infrastructure. You have the applications that we are
developing by ourselves and with partners: this is related to
my comments about using the broadband network to provide
services to small and medium-sized businesses. Then you have
the bilingual channel portal and E-commerce initiatives.
Interactive television is in itself a very innovative
application for the broadband network.
So we hope that we can encourage businesses, industries and
commerce to apply more IP technology in their planning, design
and cost-control productivity improvements. We are providing
more and more of those solutions to customers, rather than just
transmission. So it goes hand in hand. Cyberport is just one
area. I am proposing a cyber city for Hong Kong, cyber country
for China and a cyber region.
How is the company going to increase shareholder value
over the next two-three years?
Cheung: You have seen how we have increased
shareholder value over the past four months: the share price
has risen by 60%. And we have achieved this goal, despite the
increasing pressure on our profits. The financial analysts
understand the transformation. They appreciate a few things:
firstly management competence. They appreciate the way in which
we pro-actively manage the transformation, rather than fighting
fires. We do things ahead of time. So there is revenue
enhancement or cost control, rebalancing, new investments, new
initiatives and substantial productivity improvement through
cost controls. They understand that we are well positioned to
take advantage of China's opening. They rate our regional play.
They also appreciate that Hong Kong is well positioned for IP,
data and E-commerce. So we are no longer confined to Hong Kong
and we are no longer confined to telecoms. We have been
pro-actively managing ahead of time.
As you mentioned, the economic climate is still weak,
while competition is increasing. How are you going to maintain
your dominant position?
Cheung: Through aggressive transformation. We have
been losing market share since liberalization. This is natural,
as we previously had a 100% share. But the cake is expanding.
And we are also in a growth industry. I would argue that IT
companies don't really go into telecoms. I would also claim
that entertainment and multi-media companies don't go into
But telcos can enter both areas. Convergence is happening
through the network. We can go into multi-media, entertainment,
such as interactive television, and into the IT business. So
that is the platform. Despite the weak economy of Hong Kong and
Asia as a whole, we are fortunate to be in a growth business,
to be the gateway to China at the heart of Asia. And we are
fortunate that our accounting rates with many countries are the
lowest in the region, so that we can be a natural hub for
You mentioned convergence. Virgin may move into
telephony in some way, downloading music on mobile phones. Do
you plan to enter the entertainment business?
Cheung: We can download music on mobile phones today.
But we have no plans to go into content production. That is not
our business. We will work with partners. It is dangerous to
try and do too many things. Focus is very important. So if we
diversify, we do so in a way that is consistent with our core
Finally, what trends do you see emerging in Asian and
world telecoms over the next five years? Where will Cable &
Wireless HKT be on that landscape?
Cheung: First and foremost the broadband network is
the key. It is unthinkable, even ridiculous, that the PC's
capacity, memory and speed are growing exponentially - and the
same applies for fibre optics - and yet the two don't converge.
In a conventional copper wire network, when they converge wire
to wire, there is a modem constraint. So we demonstrate to the
world that we overlay the traditional copper line network with
fibre optics and ATM switching. Then it converges. It would be
more costly for other cities and countries to build a similar
broadband network to the one in Hong Kong, as the terrain is so
concentrated here. We have this leading advantage for a period
of time. You must understand that the window will close,
because sooner or later all countries will have broadband
networks, whether through a cable television network or
So we are determined to take advantage of this window of
opportunity over the next two-three years and capitalize on
this network and work with partners, so that our partners can
use Hong Kong as a launching pad for their products elsewhere.
Telecoms will never be the same with broadband, video,
broadband data, mobile data and mobile Internet.
So the customer will enjoy more and more convenience. In the
end the customer doesn't care about the technology, but simply
about the service. Technology is our business. We want to make
it simple for customers. Engineers used to think that the world
is all based on engineers. Then a lot of engineers thought that
if they understood it, customers would as well. This is quite
incorrect. Customers are very smart in their own way. In the
end it is really about making the product simple,
customer-friendly and user-friendly.
Do you think that there will be a lot more
consolidation in the industry in Hong Kong and
Cheung: I think so. It is happening globally. Some
consolidation occurred in Hong Kong. There were eight mobile
operators with 11 networks: there are now six. But integrated
communications is very exciting, once again from the customer
viewpoint. Let me provide an example. My vision is to bundle
interactive television with digital television. For example,
you can retrieve with one channel, while the other 50 channels
simply broadcast. And we will have broadband Internet, with
2Mbps or more speed. We are the leading provider, with mobile
and fixed integration, mobile data, the mobile handset,
delivery of broadband Internet services, as well as data and
voice. AT&T is spending over $100 billion to achieve what
we are achieving, of course on a wider scale.