January 31, 2000
Dow Jones Newswires
AWSJ: Pacific Century CyberWorks Casts Wide Net Over Asia
By THOM BEAL
HONG KONG - Li Ka-shing, this city's best-known multibillionaire, is one tough act to
follow. But Richard Li, his 33-year-old son, has risen to the challenge.
Last April, the younger Mr. Li bought a small telecommunications-equipment distributor
and declared that he would turn it into the world's largest high-speed Internet access
provider. Since Mr. Li announced plans to take control of the company and rename it
Pacific Century CyberWorks Ltd., believers have sent the share price soaring more than
1,400%. As a result, the younger Mr. Li runs the seventh-largest company in Hong Kong
in terms of market capitalization. Mr. Li's own net worth has risen to more than US$6.5
billion. In nine months, he has created - on paper at least - wealth that rivals what his
father accumulated over a span of 50 years.
Now he's got an even tougher act ahead: putting that money to good use, and proving
that he has a viable, long-term business plan. That won't be easy.
The younger of two sons, Mr. Li has long labored under the imposingly long shadow of
his 71-year-old father, whose businesses span real estate, telecommunications, retailing
and three or four continents. A graduate of Stanford University who speaks English with
an Oxbridge-British accent, Mr. Li earned his business credentials first by building Star
TV, a satellite-television network that he sold to Rupert Murdoch in 1995 for $950 million.
Later ventures included satellite telephony, property and insurance. Then came Pacific
Century CyberWorks, or PCCW, which has overshadowed them all.
Mr. Li's strategy for PCCW so far has been two-pronged. On the one hand, he's turned
PCCW into a giant Internet venture-capital fund. Through its CyberWorks Ventures arm,
PCCW has spent about US$600 million buying stakes in more than 30 Internet
companies. Targets include software developers, content providers and other Internet
It's not an original plan - Japan's Softbank Corp., controlled by Masayoshi Son, and the
U.S. Internet conglomerate CMGI Inc. have both pursued, successfully, similar strategies
of investing in other Internet start-up firms. In fact, PCCW' most lucrative investment so far
has been a 3.4% stake in CMGI, which it bought in September in a share-swap deal
valued at US$350 million. That stake is today valued at about US$910 million.
Last week, the two companies teamed up again to form a joint venture that will serve as
a Hong Kong-based holding and management company for 18 of CMGI's U.S.-based
Internet subsidiaries. Altogether, CyberWorks Ventures has turned a paper profit for its
parent of more than US$1 billion since July, Mr. Li says in an interview.
"Unless there's a very serious consolidation among technology stocks, we may have a
profit every year," Mr. Li says.
But the more complex and ambitious side of Mr. Li's business plan is to provide hybrid
Internet access and interactive television to millions of subscribers in India, China and
Japan. The vehicle for that plan is Pacific Convergence Corp., a PCCW subsidiary.
Mr. Li plans to develop his Internet and television services in phases. The first phase, the
Network of the World television channel, is scheduled to be rolled out this year and will
initially offer sports programming. Mr. Li intends to give the channel away through cable
operators, defray the costs through largely prepaid advertising sales, then use the
channel to promote PCCW's Internet service with more advertising.
The second phase will combine that television programming with Internet content. This
content will be accessible to subscribers through set-top boxes developed by Intel Corp.
through an agreement with PCCW.
Here's how it's supposed to work. A viewer might watch, say, a rerun of the World Cup on
his TV. Because that TV is connected to the Internet, he could access profiles of the
players, view highlights of past championships or answer questions from a soccer trivia
quiz as easily as he can flip a channel. Eventually, Mr. Li hopes that viewer can watch the
game, send e-mails and order his favorite team's jersey with a credit card.
The third step entails a revenue-sharing plan with cable operators. Under that plan,
PCCW works with cable operators to upgrade their networks to permit two-way data
access. That allows the cable companies to charge higher user fees, of which PCCW
receives a cut.
Mr. Li's plan faces a number of daunting challenges. First, no one has ever done what Mr.
Li wants to do, combining Internet content and television programming while coordinating
satellite and cable delivery. The set-top boxes are in test markets and much of the
satellite technology on which Mr. Li is banking is three to fours years away, analysts say.
Another is the critical step of upgrading cable networks in the countries he's targeting to
handle broadband Internet service and interactive television. Much of the cable in India
and China is of inferior quality, which means there will be plenty of upgrading to do. (Mr.
Li acknowledges that cable upgrades almost always have "some teething problems.")
Then there's the question of how Mr. Li will make money. He's betting on revenue from
subscriptions, e-commerce and pay-as-you-go access to deeper content. If the U.S.
experience is any barometer, however, Mr. Li may have his work cut out for him.
"The Internet revolution is being driven by personal-computer users who have shown a
willingness to pay for fees and services," says an executive at Excite@Home Corp., the
U.S.-based broadband Internet cable network operator that provides another model for
Mr. Li's ambitions. (Excite@Home serves 72 million U.S. households.) "Maybe that
doesn't fit what's happening in Asia. But we've found getting customers to pay anything to
get interactive is very difficult; we've found them pretty unwilling to pay for even cable
modems, let alone installation fees."
The executive, who asked not to be named, compared PCCW's broadband project with
Microsoft Corp.'s WebTV, which has sold less than a million subscriptions in less than
four years of operation. He calls WebTV and its use of set-top box technology a
"I don't doubt that the cable upgrades CyberWorks wants to do can eventually be done,"
the executive adds. "But getting a return on your investment, it seems like a big gamble
and I think the valuations of such a project reflect the euphoria and insanity surrounding
Asia's Internet craze."
Jay Chang, an analyst with Credit Suisse First Boston in Hong Kong, calls Mr. Li's
broadband project "a huge vision fraught with risks." He adds, though, that Mr. Li's staff,
which includes many former colleagues from Mr. Li's heady days at Star TV, are
"dogged, creative and they've got money. If anyone can do it, they can."
Technical questions aside, it's unclear what Mr. Li will be allowed to do in the markets he
targets, especially China and India, which both subject broadcasters to strict regulations.
Mr. Li counters that he has concluded negotiations with regulators in India and China,
paving the way for first of 10 large cable operators to start marketing NOWTV before
June 1. However, he declined to comment on any restrictions placed on the network's
content, saying PCCW was committed to providing "allowable Web sites and allowable
programming." Still, PCCW is already facing big obstacles in China, which has the
tightest restrictions on content. According to PCCW executives, China will limit NOWTV
to initially showing only sports programming, all of which is initially in English - clearly not
an ideal situation for a country of 1.2 billion Chinese speakers.
Then there's the competition, some of it coming from a familiar source - Star TV, which
made Mr. Li his first mint. One reason Mr. Li is targeting India and China is because
that's where he built up contacts with local cable operators while launching Star TV. But
Star TV, now a unit of News Corp., has teamed up with Cable & Wireless HKT, the Hong
Kong unit of Britain's Cable & Wireless PLC, to offer a range of pay-television and
Internet-related services across Asia that eventually may compete directly with Mr. Li's
business. And unlike PCCW, Star TV has access to a vast library of content, including
Chinese-language programming, supplied by Mr. Murdoch's television networks.
In fact, content may be the most important issue facing Mr. Li. He's addressing it through
some measures: PCCW has, for instance, entered into a strategic partnership with top
sports programmer Trans World International, Sina.com, a popular Chinese-language
Internet portal, and Rediss.com, India's leading Web portal. And PCCW has taken
stakes in companies developing pet-care, agriculture, entertainment, education, and
e-commerce content. But quality is still an unknown.
Luckily, Mr. Li is sitting on a pile of cash. Of the US$1.3 billion in capital he has raised in
recent months, PCCW has earmarked US$200 million for start-up investments and as
much as US$600 million for launching his internet and television business. When Mr. Li
goes shopping again, content will likely be high on his mind.
"Compelling content is the key," says Rajeev Gupta, research analyst for Goldman Sachs
(Asia). "When investors look for clues about the progress of the convergence project,
they'll want to see a series of strategic acquisitions or alliances with excellent content
Despite all the unanswered questions, Mr. Li's plans to be a hybrid Internet-television
broadcaster may turn out to be the most attractive thing yet about PCCW. There are
more than 100 million cable television subscribers across Asia, and more than 10,000
cable operators in India and China combined.
"AOL had a market capitalization of US$169 billion and 20 million subscribers," says Mr.
Gupta. "Why couldn't CyberWorks Convergence move in that direction?"
For his part, Mr. Li argues that the two sides of his Internet strategy are part of one
coherent master plan that will eventually win over the market.
"When people focus on only one piece of what we are they just don't get it," Mr. Li says,
adding, "We're operators, but we're also a totally integrated Internet play, with an
infrastructure side, a service platform and an incubator, all of which converge to make
each other more valuable."