Intelsat’s Hong Kong Venture

By | June 18, 2003 | Feature

Intelsat is confident its entrance into the satellite pay-TV market in Hong Kong will be a success through its joint venture with Television Broadcasts (TVB). The venture, called Galaxy Satellite Broadcasting (Galaxy), will soft launch services in November. It aims to put the heat on Hong Kong’s biggest pay-TV player i-Cable Communications.

Jon Romm, president of Intelsat’s media and entertainment unit, told Interspace that everything was on target for launch. “We want to be available for Christmas and the Chinese New Year. The vendor selection process for the encryption, encoding, conditional access, the SMS, interactivity and middleware has all been done. The orders are in and the vendors have a responsibility together in terms of integration and delivery of packages. Those processes will be ongoing until the end of the summer. We are shifting a satellite to the 85 degrees East slot to support this service, where we see Galaxy as an anchor tenant for this new video location.”

The venture with TVB is arguably one of Intelsat’s boldest strategic moves to date. While the acquisition of WildBlue Communications in the United States seems a natural fit, pay-TV in Asia seems less so. Romm, however, underlined the importance of playing a bigger role in the region for the company. “It is important to note that Intelsat has been serving Asia since the 1960s, and have several offices in the region to enhance our relationships with our customers. Asia is one of the markets we recognised was growing, and we want to be a part of that growth mechanism. There are aspects of our business where we are part of this growth through normal organic opportunities, but when the Galaxy opportunity presented itself, we found it very attractive for several reasons, and we went for it.”

If the venture goes well, it could lead to similar projects for Intelsat in Asia. Opportunities in India’s direct-to-home (DTH) market could be next on the list.

“While we took advantage of the opportunity in Hong Kong, we are also moving towards the opportunities that are presenting themselves in India based upon conditional access systems. On July 14, all television in India will be provided in a pay-per-view manner. Those opportunities are really very attractive to us,” Romm said.

“We are getting C-band content distribution opportunities from a cable standpoint, and high-powered Ku-band opportunities for DTH. In India and other key markets around the world, we will continue to look for very similar opportunities that allow us to create substantial distribution mechanisms through either cable or DTH,” he added.

The move in Hong Kong, from a geographical and strategic perspective, is different from anything the operator has done previously. Romm acknowledged this, but he believes the move makes a lot of sense for the operator. “For us to really create a value and be able to grow our product line within the marketplace, we felt we needed to increase the distribution, point-to-multipoint part of our business. We currently have seven distribution platforms globally, and Galaxy will be the eighth, and the first one where we will take ownership.”

While no-one can doubt the boldness of the move, many believe Intelsat may find it difficult to make it in Hong Kong because it is a relatively small market with an entrenched incumbent already there. Many question whether there is room for a second pay-TV player.

Timothy Sun, a Hong Kong-based media equity analyst at BNP Paribas, told Interspace: “I never really believed in having a second pay-TV player in Hong Kong. The market is too small. There are only about two million households here and at the same time, the incumbent operator, I-Cable has already established a good foundation in the pay-TV market. They have about 600,000 subscribers. I don’t know how the second player can come in and compete with them.”

Galaxy is betting it can sign up 300,000 subscribers in the first three years. There are only around two million households in Hong Kong, which means Galaxy is going to have to execute effectively to be successful. It also faces critical disadvantages in terms of content.

Danie Schutte, a Hong Kong based media equity analyst at CLSA, told Interspace: “i-Cable already has the English football Premier League rights tied up until next August so they are going to have to launch without the soccer. That is a big negative for the Galaxy joint venture. When they initially announced the launch, the Discovery Channel and CNN were broadcast by i-Cable but on a non-exclusive basis, and Galaxy planned to add these channels to their system. i-Cable has now tied them up exclusively. That is a major negative. You can go for a local type offering but I think it would have been a lot easier with these international channels.”

Schutte said that Galaxy will have to be very aggressive in pricing in order to have a chance to succeed, particularly given the potential content disadvantages. I think [Galaxy is] going to be extremely aggressive on price, because of the cost benefits. They are going to come in substantially below the HK$220 (US$28) a month level which i-Cable is operating at. You could be looking at around HK$150 (US$19.2) and I get the impression it could be lower than that. If they plan to get 300,000 subscribers in three years, aggressive pricing will be a key factor.”

Sun agrees that pricing will be key. “When the Intelsat/TVB JV launches, I think they are going to focus on pricing. They are going to knock down the price and hope that people will convert.”

The key for Intelsat will be getting the right mix. TVB will have to produce the right local programming that the market place likes, and Intelsat will have to secure international programming on top of that. In terms of programming, Romm admits that it “will take time” to get the right programming in place, but he is confident the venture can come up with a proposition to attract consumers in Hong Kong. “I believe that the exclusive programming of local content that TVB will provide to the Galaxy platform is critical. The understanding I have from the local marketplace is that there needs to be more Cantonese programming, which this package will include. And for those of us who have been there and seen it, we recognise the quality of programming that TVB offers through its pay-TV services in Malaysia and Australia, and we are extremely confident about the quality that TVB will provide through the Galaxy offering.”

Romm is aware that the venture is fraught with difficulties. The European pay-TV arena is littered with hard luck stories. A number of players have entered into bankruptcy or in some cases have literally disappeared.

Romm commented: “We think the differentiator is that you need to keep your technology fairly simple for the consumer base in order to attract all generations. There are generational issues where features like interactivity are important, as well as the transfer of programming for educational purposes. It is just a question of finding out who the right programmers are, providing the right mix of local and international content and getting the technology correct so that fits within the structure of the region.”

–Mark Holmes

(Contact: Susan Gordon, Intelsat, e-mail: Susan.Gordon@intelsat.com; Timothy Sun, BNP Paribas Peregrine, e-mail: timothy.sun@peregrine.bnpparibas.com)

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