City Telecom (Hong Kong) sets the good example for FTTH operators

Thursday 24 February 2011 | 13:59 CET | Market Commentary

City Telecom has grown its business into the number two player on the Hong Kong fixed market, behind incumbent PCCW. In 2010 the operator took 93 percent of net additions on the market. This takes the company closer to its goal announced in 2006, to be the market leader within ten years. City Telecom's strategy is centred on the roll-out of a new network (a combination of FTTB and FTTH), very high bandwidth (1 Gbps) and very low prices (around EUR 18.75 per month). The penetration of subscribers versus homes passed has reached 63 percent. The CFO, NiQ Lai, and CTO, Ivan Tam, recently outlined the strategy in an interview with a local publication.


Central to the strategy is the offering of very high bandwidth for very low prices. City Telecom has chosen the path of abundance, rather than the usual scarcity employed by telecom operators. “We’re out to commoditise bandwidth," according to the CFO. Thinking in terms of abundance is linked directly to the fact that a new network benefits from a high utilisation ratio. Offering 1Gbps also clearly drives demand: a film is downloaded in no time, anyone downloading video can directly start with fast forward, YouTube is available in much higher quality, etc. This also feeds the explosion in connected devices, which all need powering. In addition, City Telecom has 1,000 Wi-Fi hotspots, spread across Hong Kong.


The question is why don't more telecom operators do this? Two reasons: they can't and they don't want to. The ability is limited by the technology; xDSL has reached its limits and TV is taking up much of the bandiwdth on cable networks. If Ziggo wants to add more digital channels, first it needs to eliminate some analogue channels (see our commentary ‘Ziggo feels the heat'). That operators don't want to try this model has to do with their focus on scarcity. ‘Commoditisation’ is a taboo in the sector. Price declines are unavoidable (and can always be linked to Moore's Law), but they need to be avoided as long as possible. ‘Sweat your assets’, is the standard advice. But then, not at City Telecom.


The company can serve as an example for newcomers on the fibre market. When aiming for a high capacity utilisation, low prices are essential, as price is always the key differentiator. Low prices are also in line with the low cost base for maintenance and repairs (opex) that FTTH brings. All that remains is a deep breath to get through the period of high capex (and as a result negative free cash flow). At City Telecom, it took seven years to reach cash flow positive. At the same time, the EBITDA margin has reached the healthy level of 30 percent.

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