PCCW takes on Netflix, pirates in battle for profits

CEO Janice Lee talks about battling cable cutters and pirates while turbo-charging a regional rollout of hot new media technology OTT via M&A. Local rival TVB meanwhile gives up.

Watching TV via the internet has been slow to take off across Asia, mostly due to patchy network coverage, piracy and expensive data plans. That is changing fast.  

Netflix’s arrival in Asia early in 2016 and Amazon’s launch of Prime Video in December created a buzz around the digital delivery of entertainment, dubbed over-the-top (OTT) content because it bypasses traditional broadcasters or cable networks.

The land grab by the two US streaming giants is turbo-charging investment by local incumbents, already battling to adapt the latest OTT technology for Asian audiences and vacuuming up content.

Chinese TMT players, from ecommerce giant Alibaba to 'Netflix of China' LeEco, have been buying Hollywood studios and West Coast technology.

The results have been intense competition for content, mainland China becoming a no-go zone for foreign players and falling Pay-TV subs at a time when OTT is yet to become widely profitable.

Hong Kong’s TVB said on January 10 it had surrendered its pay-TV licence. It said its pay-TV business, TVB Network Visions, was commercially unviable and had accumulated a loss of HK$2.2 billion ($284 million) since launch in 2004.

The company, the dominant player in Hong Kong's free-to-air television market, blamed rampant piracy, the proliferation of OTT services and a downturn in the economy. 

Media and telco executives globally are grappling with the problem of how to create a profitable business model.

Hong Kong-headquartered PCCW Media is betting that offering the best content quickly will mean monetisation will follow scale.

“In the end someone has got to pay for developing and producing the content,” said Janice Lee, managing director of PCCW Media, who is in charge of the group’s business – spanning pay-TV brand, Now TV, and its OTT offering, Viu.

During 2015, PCCW Media acquired 94.8% of Vuclip, which provides mobile video on-demand in emerging markets,  using technology that can cope with low bandwidth. It paid HK$1.286 billion ($165.7 million) for the California-headquartered company.

“OTT is a space that moves very fast and it would give us faster speed to market if we built around an acquired business,” said Lee, who led the deal team.

Janice Lee up for a battle

PCCW Media also bought an equity stake in Los Angeles-based STX Filmworks, distributor of  movies Bad Moms and Free State of Jones, for $25 million on July 28.

It now has rights to distribute STX’s films and television content across its pay-TV and OTT services in Hong Kong, Southeast Asia and India.

These upfront investments came at a cost. PCCW Media’s OTT Ebitda losses widened to $14 million from $2 million in the first half of 2016 from a year earlier. Meanwhile Now TV’s Ebitda margin slipped slightly to 13%, versus 15% over the same time frame, due to intense price competition.

“Looking forward, we expect Ebitda to remain under pressure as ramp up in revenue is likely to lag the upfront investment needed,” said Varun Ahuja, a stock analyst at Credit Suisse after the results.

However, the fact Viu's users consume 1.2 to 1.8 hours of content per day and view more than 10.5 videos per week suggests people will pay eventually, say equity analysts following PCCW’s Hong Kong-listed stock.

PCCW Media’s ‘freemium’ model has been to launch free services supported by ads in new markets and then rollout a premium model, typically seven months later.

Grow first, profit later?
For now, OTT players are focused on growth. Asia Pacific’s premium OTT market looks set to undergo rapid growth by 2019 according to research by strategy consultancy MTM.

In Australia the market will expand from around $85 million in 2015 to $230 million; from $7 million to $40 million in Indonesia; and from $8 million to $45 million in Thailand, London-based MTM forecast.

Local service providers will own a significant portion of the market and will dominate in Indonesia and Thailand, while Netflix will be the dominant player in Australia, MTM predicted in a study based on more than 80 interviews and in-depth research in the region during February last year.

A key weapon in the fight for market share will be local language content, media consultants say.

Netflix believes its original content such as The Crown, Narcos and Stranger Things has multinational appeal – keeping the cost of targeted local content down. However it is starting to supplement Hollywood blockbusters with Asian language. It has teamed up with Bollywood film star, Shah Rukh Khan, to exclusively stream his new films.

PCCW Media is betting Asia’s obsession with Korean culture, from K-drama to K-pop, will appeal to a binge-viewing audience.

“Our differentiation is being very Asia relevant,” Lee said during an interview at the company’s headquarters in downtown Hong Kong.

PCCW Media can also count on support from being part of entrepreneur Richard Li’s business empire, which also owns Hong Kong telecoms provider HKT. 

Relationships with telecoms companies are key when it comes to collecting payment in regions where credit cards are thin on the ground.

“Players coming from very developed markets may miss this point,” said Lee

That has helped Viu become the largest OTT video service in the region with about 10 million subscribers. As of November, the service had 4 million unique users, , just one year after launch. 

It is present in Hong Kong, Singapore, Malaysia, India, Indonesia and launched in the Philippines during November.

The following interview has been edited for clarity and brevity:

Q. How are you competing with Netflix?

A. We coexist and try to offer different segments of service.

If you look at the way we treated Netflix, being the largest player in the market we could have said: let’s hold on to what we have.

Instead we embraced technology as media consumption behaviour is changing. We offer Netflix as an integrated service because ultimately we believe consumers don’t want to have two to five [television] boxes in their home.

This is our answer to new competition. It’s not easy to get your box into homes – why can’t we be the one to pipe in various content services?

Q. What has been the impact of LeEco’s entry into Hong Kong?

A. There are often players who will come in and invest into content, so we do share the content on BPL [Barclays Premier League football]. It’s not just about who has which piece of content, its about who has the best overall offering.

[In September 2015, LeEco's LeSports HK unit won exclusive broadcasting rights in Hong Kong for the next three seasons of England's top soccer league, beating incumbent PCCW on price. PCCW has cut a deal to continue offering matches to its subcribers. LeEco revealed a cash cruch in November after rapid growth from its roots as a video streaming service into electric cars and smartphones.]

There will always be people who will bid for different pieces of content for example. We’ve had the BPL exclusively for many years.

There may be a small impact to Arpu [average revenue per user] but we manage to keep growing subscribers.

Q. Has the arrival of Netflix galvanised customers and incumbent players?

A. It’s actually good that there is higher awareness. 

We’re trying to cultivate a segment of customers who may not be full pay-TV customers, who don’t want the full bundle.

A lot of people in Hong Kong live with their family until they get married, so they may not have control of the big home screen. By offering a standalone OTT service it allows us to expand our addressable market.

Q. How do you differentiate yourself from the competition?

A. Our differentiation is being very Asia-relevant.

If you look at the players in Asia, we are the only one in 17 markets. 

Netflix is available and it has started to use some Asian content.

We’re not just about Korean content but that seems to be what people recognise Viu for, because it is the hot content that travels across the region. No one speaks Korean outside Korea but their content appeal translates, be it K-pop or K-drama.

We get the output production from the major Korean broadcasters and we can put it out as early as four hours after it is first broadcast.

We have this army of people that come in at 10.30pm at night time. It is quite a new thing for us – they are all fans.

Q. Why did you buy Vuclip?

A. Hong Kong is a very small market so our ambition has always been to leverage what we’ve learnt and grow outside. So we launched Viu about a year back and it is now present in 17 countries.

In May we bought Vuclip in Silicon Valley, which had a business in emerging markets. When we bought them they were just starting to grow in Southeast Asia.

We’ve always been a builder and grown organically. But OTT is a space that moves very fast and it would give us faster speed to market if we built around an acquired business.

Vuclip used to be more of a short-form content [service] and our newly formed business Viu offers long-form premium content in the Asian region.

Q. How do you see your partnership with STX evolving?

A. We also made a $25 million investment in STX together with Tencent and Hony.

It gets us the rights to content for the Indian market, for Southeast Asia. It is much more of a strategic investment than financial.

STX also produces new content so we could also potentially produce more together for other markets.

Expected value of the premium OTT market in 2019: Source MTM

Q. Any more acquisitions in the pipeline?

A. We are open minded but there is nothing on the horizon right now.

We are really focused on building the markets we have launched.

Q. How do you adapt to the low bandwidth across much of Asia.

A. We want to stay ahead of the game.

Vuclip has a patent on adaptive bit-rate technology that allows them to stream content even across very low bandwidth, which is very important especially in India and Indonesia, where 3G and 4G have only just been rolled out. High mobile bandwidth is not ubiquitous yet.

In places like India we can even stream to 2G phones.

That is where we can be different from some global players who have a great product but have a ‘one-price-point-for-one-product strategy’.

One product does not fit all – you can have a slick product but it might be too rich for a low-bandwidth market.

We adapt to the different markets. We also have download-to-view rights. We allow you to download overnight using fixed line or wifi. We also consider the total cost to users, download-to-view allows you to download and view offline, therefore saving on data charges.

[Netflix added an option for subscribers to download some of its content to watch later offline only in December, behind Amazon, which had introduced the service about a year previously.]

Q. How do you build a sustainable business model that is also competitive?

A. We are using a ‘fremium’ model – a free and a subscription portion.

In many of the developing markets we operate in, such as Indonesia and India and to some extent Malaysia, people have pre-paid sim cards.

So unless you have a telco-billing relationship, how do you collect payment? Because customers don’t have credit cards.

Players coming from very developed markets may miss this point. We have more than 30 telco partners.

Q. How do you deal with cable cutters and piracy?

A. Whether people stop their subscriptions depends on what is on offer.

Piracy aside, if you look at the services that we offer the premium content is still subscription.

The free model is ad-supported but if you want to download features, higher quality and less ads, you have to subscribe.

People are watching Viu between 1.2 to 1.8 hours per day in many of our markets. That’s a lot, because we offer serial products such as Korean dramas which people are binge watching.

The biggest hit amongst our K-dramas in 2016 across Asia was Descendants of the Sun.  This one really took Asia by storm. People haven’t seen 40% viewer rating in Korea in a long time.

"Descendants of the Sun takes Asia" by storm

We do see people watching more than 10.5 videos per week. Its slightly female skewed and generally between 15 and 45 years old.

We have very fast subtitling – because if we are slow people will resort to piracy.

Piracy existed before we came into this market but you get shoddy sub-titles; you can’t always find Malay bahasa.

People have been pirating Korean content because there was no legitimate service.

We’re starting to see less piracy now that the Korean broadcasters are able to monetise their product well. They are increasingly vigilant in taking down pirate sites.

The more frustrating the pirated experience and the more accessible we make our content the better for the industry. In the end someone has got to pay for developing and producing the content.

Q. What’s next in the roll-out?

A. We are launching in another market in the first quarter; we’re continuing to roll out on the region.

This high-growth business is going to be a very significant part of PCCW Media.

It is a very capex-light business because we don’t need to roll out a set top box nor invest in a fixed network, but of course content is still very key.

Q. How are you paying for the expansion?

A. It’s funded out of our media business and our investment has been quite modest.

The investment is well within the realms of the company’s investment mandate. We don’t have to go outside to fund it.

We may look at attracting strategic investors in the future.
The Viu business is a high-growth business so we’d be open to looking at strategic investment, but it’s still too early to say.

It would have to be for more than financial reasons.

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