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SCMP Reporter

IT'S BEEN A ROUGH few weeks for PCCW. Hong Kong's beleaguered fixed-line operator seems unable to win friend or favour.

Competitors, regulators and media types have few qualms about kicking a man when he is down.

Investment analysts, too, put the boot in this week after the company reported a 10 per cent year-on-year drop in core local telephony revenues.

That made the long-awaited first dividend seem something akin to free IDD service to Vancouver - a pipe dream.

Another steel-toed blow came from China Netcom Group Corp  chairman Zhang Chunjiang,    who threw ice water on hopes of a tie-up with the debt-heavy incumbent, despite months of negotiations.

'There is the possibility of no deal at all,' he said.

Ouch.

Only few days  ago PCCW was walking tall, scooping the top industry prize at the Cable and Satellite Broadcasting Association of Asia's awards for its NOW Broadband pay-television service.

But like its counterparts the world over, the Hong Kong carrier is facing some gloomy prospects, as the days of telephony as an industry in itself appear  numbered. Switched-circuit networks that cost tens of billions to build could soon go the way of carrier pigeons.

Last week,  veteran US carrier AT&T  wrote off obsolete assets worth US$11.4 billion. PCCW has a lot of very expensive legacy copper, too.

International call rates have fallen though the floor  as voice-over-internet-protocol (VoIP) telephony takes hold. Local call tariffs are poised to plummet, too.

PCCW needs to leverage new revenue opportunities from television and broadband lines faster than legacy line rentals and interconnection fees from the 'plain old telephone system' (Pots) disappear.

But the local incumbent faces an additional burden: debts of US$3.78 billion leftover from its takeover of Cable &Wireless HKT in 2000. That means any transition to the more efficient VoIP technology must not cannibalise existing revenues. PCCW's local residential business is still significant:  it retains a 69 per cent market share and monthly tariffs stand at $110.

In context, therefore, it is easier to understand  PCCW's seemingly quixotic decision to fight the onset of this disruptive technology through the courts - which are hardly likely to sympathise - rather than accept its inevitability. But if PCCW does not switch its customers over to VoIP, the competition will simply do it for them. This week, two more operators joined Hong Kong Broadband and i-Cable with VoIP services plans priced at less than $60 a month at launch.

So, is PCCW doomed?

Perhaps not. Beneath the frail balance sheet and some bruised reputations, there is more life left in this transitional municipal telco than meets the eye. For one thing, the demise of the copper line reflects the growing importance of broadband pipe. Here, PCCW is the market leader, with 643,000 retail subscribers, up 85,000 in the quarter.

NOW Broadband was deployed largely to help protect broadband tariffs and customers. However, as it bridges the content gap with market leader i-Cable using programming like ESPN and Star Sports, the service could become much more  attractive.

PCCW  claims 367,000 customers so far, although no data on what they are paying or watching has been released. If it can make inroads into i-Cable's customers, who pay $310 a month, this business might do more than win awards.

The eventual introduction of VoIP should also not be viewed as a zero-sum game. The opportunity exists to grow broadband subscribers as Pots lines are cut. PCCW also has more scope to throw its weight around as competition hots up. Last month the regulator signalled its  intent to remove PCCW's 'dominant' status classification, allowing it to largely price and bundle services as it likes.

PCCW might be able to use this freedom to re-enter the mobile sector as new technologies promise to give fresh legs to fixed-line carriers. Spectrum for WiMAX should be up for grabs shortly in Hong Kong, offering potentially a low cost entrance into third-generation (3G) wireless services. Its scale and content could make it a tough competitor.

Still, before investors start looking at PCCW as anything more than a sickly telco, they will need more clues on what the future holds. For one, if the tango with China Netcom is still on, they will want to see the current market value of its network assets. Maybe then PCCW is likely to get its fair share of plaudits for its good work, and fewer put-downs.

In the meantime, it's worth noting that VoIP makes IDD calls to Vancouver almost free.



Roughed up a bit recently, PCCW is down but definitely not out