Cheung: focusing on change and innovation

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As price discounting intensifies for international telephony and mobile in Hong Kong, the former incumbent has been leveraging its advanced broadband network to derive revenues from multi-media services. In a recent rebranding exercise it was renamed Cable & Wireless HKT to reflect the operator's global ambitions. CEO Linus Cheung talks to Global Telecoms Business about this move and other developments.

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?

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?

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?

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 different scale.

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?

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 & Wireless.

How has China Telecom reacted to the development?

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?

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 portal.

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?

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 technology applications.

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 other suppliers?

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?

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 significant areas.

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?

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 services.

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 fixed-line competitors.

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 HKT?

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?

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?

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?

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?

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 five years.

And how did you use this HK$6.7 billion?

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?

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?

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?

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 Hong Kong?

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 mobile.

Do you think that wireless will account for a larger percentage of voice revenues? How many cellular subscribers do you have?

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?

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 Internet services?

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 sectors/professions?

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?

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, E-commerce.

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?

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?

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?

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 telecoms.

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 traffic.

You mentioned convergence. Virgin may move into telephony in some way, downloading music on mobile phones. Do you plan to enter the entertainment business?

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 business.

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?

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 satellite.

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 world-wide?

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.