Telecoms giant throws down the gauntlet to pay-TV rival as struggle for top content piles on cost pressures
Competition in the pay-television market between PCCW and i-Cable Communications is becoming as heated as a match between Everton and Liverpool.
The next test between i-Cable, which holds the title to the city's pay-TV market, and challenger PCCW might be over which one has broadcast rights to English Premier League soccer in Hong Kong.
I-Cable's exclusive right to the matches ends after the 2006-07 season. When negotiations for the rights are re-opened, i-Cable could find itself outbid by an increasingly combative PCCW.
'PCCW is more aggressive and willing to pay for premium channels to keep pace with i-Cable,' one brokerage analyst said.
'I-Cable's budget for programming will come under pressure with PCCW competing for content in the market.'
The latest blow to i-Cable came last week, after PCCW's NOW Broadband pay-TV service gained long-term exclusive rights to popular western movie channels Star Movies, HBO and Cinemax. I-Cable presently offers the premium channels to its 700,000 subscribers.
It was not the first time PCCW has out-muscled i-Cable. In August last year, PCCW signed a three-year contract with Rupert Murdoch's Star Group to secure exclusive rights to ESPN and Star Sports which own the broadcasting rights to the English FA Cup and UEFA football.
Attractive content has helped PCCW sign up more than 361,000 subscribers since it launched NOW less than two years ago. It hopes to have 500,000 subscribers by the end of the year and to unveil new services such as interactive and high-definition television.
But a fight over football would be costly for both sides. I-Cable paid an estimated $700 million for its three-year exclusive English Premier League rights.
PCCW spent about US$18 million on the exclusive rights to ESPN and Star Sports, according to a market source, and also agreed to share revenue from subscribers.
What could be troublesome for i-Cable are the growing ties between PCCW and Star Group. Star will soon provide 14 channels exclusively to NOW, becoming its single largest content provider.
Industry watchers suggest that PCCW and Star might team up to bid for the English Premier League broadcast rights when they expire.
'The Star and i-Cable relationship was only so good in the past. Star has wanted a close partner in Hong Kong for a long time,' one industry source said.
The entry of PCCW into the pay-TV market has driven up its rival's programming costs. Expenses for content acquisition surged 22 per cent to $791 million last year - 33 per cent of i-Cable's total revenue.
Media Partners Asia estimated that i-Cable's programming costs would rise another 13 per cent this year to $895 million.
In addition, market observers say i-Cable's reliance on football, such as World Cup 2006, English Premier League and Italia Football Serie A, means it will struggle to sign up new subscribers.
'I-Cable's content is too focused on sports rather than movies and news and this may hinder its future growth,' one brokerage analyst said.
To reduce the pressure of programming costs, i-Cable has invested in producing its own content, including news, television entertainment and films.
'I-Cable is facing pressure to secure movie broadcasting rights, so it prefers to build up its own film archive instead of sourcing from outside,' an industry source said.
PCCW, on the other hand, clearly prefers what Hollywood has to offer.
Media Partners Asia executive director Vivek Couto said: 'NOW has differentiated itself by gaining long-term exclusivity to some of the bigger brands such as Star, thereby depriving both i-Cable and SuperSun of these channels and also strengthening NOW's own appeal to foreign residents in Hong Kong.'
But NOW's weakness has been its lack of Cantonese content. More than 70 per cent of NOW's channels have Chinese subtitles.
PCCW has jumped into content production by setting up a 24-hour Chinese-language financial news channel. This will help it compete against i-Cable and TVB's SuperSun pay-TV service, both of which have 24-hour news operations.
PCCW has also secured local content, such as the ATV 24-hour news channel and a Cantonese version of the Disney channel.
However, not all industry watchers see PCCW's dependence on overseas content as a shortcoming. Simon Dewhurst, a director and head of media and entertainment at CLSA Asia-Pacific Markets, said: 'Pay-TV should be a complement to free-to-air TV, as viewers want to have specific content that fits them - especially the foreign community.'
Whether or not SuperSun will succeed depends on the public's appetite for TVB content that has already aired for free. SuperSun, which has a customer base of about 50,000 subscribers, can rely on its parent for exclusive TVB content, but its offering lacks movies and sports programming.
'The content is much more like a re-run of free TV programmes,' Mr Dewhurst said.
Meanwhile, Hong Kong Broadband has signed up 39,000 subscribers for its Digital TV pay service. The service has a broad range of 'third-tier' content such as religion and cooking programs in addition to films.