Armed with fresh licences from the government, five operators in 2000 began a heated race for a slice of Hong Kong's nascent pay-television market. It was expected to be a bitter contest. The key adversary to pay-television operator Cable TV was to be TVB's offshoot, Galaxy Satellite Broadcasting. With access to the network's vast library and an investment of $5 billion, Galaxy was seen to have the cash and the killer content that would give it an effective edge over its competitors. Peers were fast to baulk at Galaxy's unfair advantage in the race to sign up subscribers. They need not have worried: the great expectations never quite materialised. Galaxy's history has been a turbulent one of failed partnerships, poor distribution, regulatory hurdles and red ink. So the news this week that businessman Charles Chan Kwok-keung was to take a stake in the loss-making pay-television operator was met with a degree of scepticism. While TVB would walk away from the deal with a profit of $149 million, Mr Chan and his 22.48 per cent-owned multimedia electronics maker Ruili Holdings would take a 51 per cent stake in a company that has been on a losing streak since its inception. Last month, TVB took a $166 million hit from Galaxy, up from a loss the previous year of $16 million. With 20,000 to 30,000 subscribers, Galaxy holds just 2 per cent of the pay-television market. Although it will be distributed from July across Hutchison Global Communications' broadband network, the viewer rate is limited by Hutchison's penetration level of about 200,000 subscribers. That is still vastly behind the two main players, PCCW's NOW Broadband and i-Cable, which dominate the market. In all, the Galaxy deal is not one that reeks of obvious merits. Yet Mr Chan has dubbed it a 'great opportunity', and his involvement alone - partly fuelled by past associations with Li Ka-shing - has triggered speculation that there is a bigger end game further down the line. This is also a possibility raised by the involvement of Lawrence Yu Kam-kee, Ruili's chairman. 'If you go through his deals historically, they have always been quite shrewd, have made the people around the transactions quite a lot of money,' noted one executive. 'Most things he is involved in, he has an angle. I would say there has to be something further down the line.' That it was a Machiavellian ploy with PCCW to sideline the No3 player was a suggestion Mr Chan was emphatic in denying. 'It's a pure investment by myself,' he said yesterday. 'It's nothing to do with Hutchison, and nothing to do with Richard Li (Tzar-kai) and PCCW.' To him, it is a turnaround challenge. 'We have set up a three-year plan, I'm very confident we will achieve the break-even point in three years,' he said. One of Galaxy's main sappers had been its licensing terms. While the government denied in 2000 that giving TVB a pay-television licence would put its competitors at a disadvantage, there were conditions. It was not allowed to own more than 50 per cent, a requirement that prompted numerous waivers from the government as it fell in and out of partnerships. A deal struck with Malaysia-based Astro Broadcasting, for example, fell apart in June 2001. Astro had agreed to invest US$150 million for a 40 per cent stake in Galaxy. Problems finding candidates for the stake at one point put Galaxy on the brink of extinction. In May 2002, the company was understood to have slashed its asking price. By February 2003, and with the broadcasting regulator breathing down its back, TVB found a buyer for the stake: Washington-based satellite services provider Intelsat. A 51 per cent stake was sold for $542 million in a deal that valued Galaxy at $1 billion. However, the company pulled the plug in September last year, seven months after Galaxy's actual launch. Once again, it was on the hunt for a partner. 'It's no secret everybody has looked at this deal,' one television executive said. Still, one of the major impediments to prospective buyers was the amount of cash Galaxy would have to pay to TVB for programming. As another condition of its licence, Galaxy had to openly bid for TVB content with other players. 'Whoever comes in is just giving TVB money,' the executive said. Last year, in exchange for five channels, Galaxy paid a fee of $173.56 million. This exclusive arrangement for content struck in 2001 spans five years, so by 2006 the channels will again be up for grabs. It is perhaps here that Mr Chan best stands a chance of making Galaxy into a leaner financial entity. As far as the content is concerned, he seems confident that it will be a one-horse race. 'I don't think the other TV operators really want it,' he explained. Asked whether he believed it would be substantially less than $173.56 million, he replied: 'I don't know. I cannot comment too much, this is a commercial secret.''The picture he painted was of a more niche-oriented Galaxy. While i-Cable and NOW boast popular soccer content, Galaxy was aiming at an entirely different target audience, he said. 'It doesn't compare with i-Cable and NOW.'' While he admits Galaxy's traditional platform - via satellite, with dishes costing at least $3,000 per building - is a 'bottleneck for the whole business', he is optimistic about the Hutchison arrangement. The trick will be to boost subscribers: when Galaxy struck the distribution deal, Hutchison's service was available to about 1.2 million households. Mr Chan has set a three-year deadline to assess Galaxy's progress. While one executive described the deal as 'let's just see if we can make something out of nothing here', Mr Chan denied he would throw the towel in if Galaxy had not turned a corner by 2008. 'It's still far away ... and who knows?'' Distant galaxy July 2000: TVB granted one of five pay-television licences for its $5 billion Galaxy Satellite Broadcasting project June 2001: Malaysian investor Astro Broadcasting pulls out to deal to invest US$150 million for a 40 per cent stake in Galaxy April 2002: Rumours rife that TVB is about to cut its losses and axe Galaxy Feb 2003: US satellite operator Intelsat becomes strategic partner in Galaxy, taking a 51 per cent stake for $413.3 million in cash and $128.7 million in transponder capacity Aug 2003: CTI's Hong Kong Broadband Network enters the pay-television market Sept 2003: PCCW's NOW Broadband TV enters the pay-television market Feb 2004: Galaxy launches its 23-channel network Aug 2004: Intelsat announces it intends to quit venture leaving TVB to seek government permission to take up 51 per cent stake Jan 2005: Hutchison Global Communications signs deal to deliver Galaxy programmes over its network April 2005: Multimedia electronics maker Ruili Holdings and Charles Chan Kwok-keung pay $350 million for 51 per cent stake in Galaxy
