City Telecom is now the second biggest operator in Hong Kong, offering speeds and prices that no incumbent can dream of. It’s pushing fibre to the home, but even the existing ethernet wiring delivers a gigabit to customers
NiQ Lai, CFO of City Telecom: Why aren’t other companies
following City Telecom? It took seven years to hit positive free
cash flow. It’s a very, very long cycle
Hong Kong’s City Telecom is on track on its mission to commoditise bandwidth in the Chinese region.
The company, which claims to be the number two operator in Hong Kong, and the fastest growing broadband provider, is now offering one gigabit connections — that is symmetric, one gig each way — for just HK$199 a month, equivalent to about US $25.
“Three years ago we were the smallest operator in town. Today we’re the second largest. We’re bigger than the next two combined,” says NiQ Lai, the former Credit Suisse banker who is the chief financial officer of City Telecom. “Last year we took 93% of the market growth.”
The company is second to the incumbent, PCCW, “but we’re chasing them down”, says Lai. “They are double our size at the moment — but they used to be five times our size. In 2006 we set a big hairy audacious goal, to be the largest Hong Kong broadband provider by 2016 — and four years into that game plan we’re on track. Are there other examples where a fixed-line new entrant has overtaken the incumbent? We’re trying to do that.”
The company “thinks differently”, he adds. “We are out to commoditise bandwidth — and we’ve done that. Our whole way of thinking is very different from that of an incumbent. We embrace over-the-top content and love people to burn it up. We want to make one gig to the home the industry norm in Hong Kong.”
Hong Kong, a densely packed city of 7 million people on the southern coast of China, is about the most competitive market for fixed and mobile communications on earth: there are about 4 million landlines and 12 million mobile phones in use. The city is a short drive away from Shenzhen, the huge newly built high-technology city inside the people’s republic where Huawei, ZTE and other equipment makers have their homes.
An estimated 80% of the people of Hong Kong — a special administrative region of China, with its own laws on business and competition — have broadband “and 34% of households have fibre to the home”, says Lai — Lai Ni Quiaque in Chinese. “Of that 34%, we dominate. There are 800,000 fibre-to-the-home households and we have 500,000 of them, so we are the market leader.”
City Telecom’s chief technology officer, Ivan Tam, points out that the company has focused since it started on building and running its own separate infrastructure. “That is our biggest asset,” he notes.
“When we started we decided not to wholesale from the incumbent, because that is a dangerous proposition. What we have done is meticulously laid our own infrastructure within residential buildings — we laid our own last mile.”
Right from the earliest days the company used technology that is normally regarded as designed for office networks —category 5e cable.
The right cable
“Early on we recognized the importance of having the right cable,” says Tam. Cat 5e “allows us to support speeds of 100 meg up to one gig”.
Today “cat 5e is our major asset” — it has taken a lot of investment and time — but two years ago City Telecom started its programme to deploy fibre to the home. Now about one third of the homes passed by the company’s network are capable of being directly connected to fibre. “Our infrastructure makes a lot of difference,” says Tam.
The company uses two main vendors in its infrastructure — Cisco for the cat 5e-based copper network, mainly Cisco switches, and Alcatel-Lucent for the fibre network, which uses GPON — gigabit passive optical network — technology. City Telecom continues to look at other vendors, in order to keep Alcatel-Lucent and Cisco on their toes, “but we’ve been working with them for a while”.
“The network is our major asset,” says Tam. “It takes a lot of time to deploy, building by building and household by household. It’s the access infrastructure that makes a lot of difference to us. It’s the infrastructure that gives us the advantage over the twisted copper pair that the telephone network uses.”
Phone networks have been able to squeeze more and more out of DSL technology, which they use to transmit broadband over wire originally laid to carry low-bandwidth voice. “Telephone companies have to go through a periodic upgrade,” says Tam, in order to push DSL bandwidth higher and higher. But City Telecom started out by laying copper ethernet cable that can work at one gigabit, 100 times the speed of many DSL networks in use today.
Equipment can be upgraded. But equipment is placed in a limited number of installations and engineers can get at it easily. Wiring goes everywhere and upgrading that is more of a challenge. “At City Telecom we don’t need to upgrade our wiring infrastructure,” says Tam. “Passive infrastructure is a telco’s biggest asset.” The company will keep cat 5e throughout its network until it is time to upgrade to fibre.
Early on the company took another decision that allows it to offer an integrated service at competitive rates: everything is delivered using IP — voice, video and data. “That means we only need to build one core IP network,” he says.
In a world where 100 megabits is regarded as the minimum speed, wide screen, high definition TV is one of the applications that City Telecom promotes heavily. One streaming TV signal, either of a cable-TV-like service or of internet TV, “easily consumes tens of megabits a second from that alone”, says Tam. “It is quite possible to use more than 100 megabits if not one gigabit.”
But why, when the video signal itself, takes 10 megabits or so, does a network need 10 or 100 times that? “Our content servers take advantage of the high-speed core network,” says Tam. “It means we are able to stream video at 200 megabits and above — so the whole movie is buffered before you watch much. That means you can fast-forward at will.” Or a customer can just download it to their system and watch it at will.
Another reason why City Telecom offers speeds up to one gigabit is to challenge the legacy network in Hong Kong. At $25 a month the question customers ask when comparing services is: “Why not one gig?”, says Lai. “That price is cheaper than DSL in Singapore. That’s why we’re offering one gig for $25. It’s like having Verizon’s FiOS at one seventh the cost. It’s in the mindset — we’ve built it from day one.”
Tam smiles: “The incumbent’s mindset is to sweat the assets.” Conventional operators the world over are trying their hardest to push DSL speeds, using new technology and reducing line lengths, as fast as possible, avoiding wherever possible the thought of replacing that old copper that runs into every customer’s home.
Is it financially successful after such a short period of fast growth? “We have 30% ebitda, with positive free cash flow after capex,” says Lai. “We’re net debt free. We are profitable”
According to the company’s figures for its year ending August 2010, turnover was up 6.5% to just over US $202 million, with ebitda $60 million. The profit attributable to shareholders was $27 million.
The Nasdaq-listed company had 1.11 million customers at the end of the financial year, out of 1.77 million homes passed — a penetration rate that companies in many parts of the world can only dream of. The number of customers went up by more than 17% during the year, while network coverage in terms of homes passed went up 8.5%.
“We’re in a virtuous cycle now,” says Lai. People on slow networks on Hong Kong can’t communicate at full speed with those on City Telecom. “We are running a very aggressive member-get-member campaign.”
And he is confident that the company will overtake PCCW my 2016. “Our message is consistent, still 2016,” he adds.
As 2011 starts the company has turned a corner in its performance, he believes. Because of the amount of network it has already built, “the capex halves” and that leaves the team to focus on ramping up subscriber numbers over the next five years.
Meanwhile the argument is getting more and more in favour of high speeds, he adds. While wide-screen high-definition TVs are coming down in price, internet-enabled TVs are becoming more common, and 3D sets are appearing. Netflix, the rent-a-DVD service in the US, is switching to streaming (and since our interview Amazon is stepping up its move into movie rental and streaming).
And the Apple TV is Netflix-enabled, notes Lai. “All this is content for fat dumb pipes.”
Now the term “fat dumb pipe” is something that most top executives of telecoms operators would wince at. The last thing they want to be is the operator of a fat dumb pipe. They see their future as integrated media and content companies — and the Hollywood parties are reputedly better than those at Broadband World Forum.
“We’re good at doing dumb pipes and we do it intelligently,” adds Lai. “Ivan [Tam] is good at doing the pipes and filling them.”
Fat dumb pipe
Tam responds: “If its economic to be a fat dumb pipe then people don’t mind.” Customers see the benefit, even in ordinary YouTube downloads, he adds. The global average speed for a YouTube stream is 3.8 megabits a second; watch it on City Telecom in Hong Kong, and the speed is 27 megabits. “That gives you a phenomenal YouTube experience. You don’t need one gigabit all the time but if you can burst to more than 100 megs periodically for the end user it’s a massive experience. And we charge market rates for it.”
The average family’s use of broadband has increased hugely over the past few years, notes Lai. “A few years ago a family would share one desktop PC. Now there are several laptops, and a Wii, and smartphones, and HD TV sets.”
And iPads, of course. If your tablet is connected to standard DSL “you’re not getting full use out of your iPad”, he says. City Telecom is starting to bundle the Samsung Galaxy tablet, with wifi not 3G, that connects directly to the approved router in customers’ homes — and to the 1,000 hotspots around Hong Kong. “But the key is the home experience,” says Lai. “Stay and enjoy our movies.
Tam notes that for all this, reliability is key, and “we have paid a lot of attention to the reliability of the network”, he says. Equipment, software and outside plant all have to be suitable for triple-play services.
Lai adds: “Hong Kong is rated second in the world in terms of quality of service.” It’s exceeded by South Korea where there was “lots of government intervention”. But City Telecom is entirely funded through private means. “We own 52%, the primary founders. I sold my home to buy equity.”
Over the past decade the company has spent $400 million. “It took us seven years to hit positive free cash flow.”
So why aren’t others following City Telecom’s example? Are many willing to invest for seven years without a return, he wonders. “It’s a very, very long cycle.” GTB