Industry leaders on 22 October gathered at the Taiwan Cable Summit in Taipei (organized by Media Partners Asia: MPA) to evaluate the potential of two-way digital cable platforms in Taiwan. The intense discussion that ruled the day's panels and keynote presentations, stemmed from the acceptance of a harsh reality: cable's broadband and digital interactive designs in Taiwan remain hampered by oppressive regulation. As a result, cable platforms are rapidly losing out to rival ADSL players in the broadband battlefield while cash flow for both operators and programmers remains choked by restrictions on pricing, non-addressable cable homes, under-reporting and illegally inserted advertising.

Leading systems still plan to rollout digital services and pay channels in selected areas during the next 6-12 months. The prospects however of large-scale digital deployments next year (previously conceivable when News Corp. inked a US$240 million deal with the Koos Group in April) are bleak. Instead, there will likely be trials and small-scale digital rollouts (utilizing thin-client set tops) from cable MSO's such as the Koos Group, Taiwan Broadband Communications, Pacific Broadband and Eastern Multimedia. MPA forecasts up to 200,000 thin-client digital boxes in the field by year-end 2002 with related set-top investment projected to reach up to US$30 mil.

News Corp. and the Koos (one mil. subs reported from majority-owned systems) are working on rolling out low-end digital set-tops by end of Q1 2002. Eastern Multimedia (870,000 subs from majority owned systems, 48% penetration of 1.8 mil. homes passed) will also follow through with digital trials and small-scale rollouts next year prior to large-scale deployment over the long-term. Taiwan Broadband Communications (backed by the Carlyle Group and various local institutions, with 540,000 subs, 67% penetration of 800,000 homes passed) has already launched a broadband "Showcase" consisting of 60,000 homes passed. This test area currently offers high-speed Internet access and will include digital video services by the end of the year. Pacific Broadband (backed by the Pacific Construction Group, with 560,000 subs, 40% penetration of 1.4 mil. homes passed) is focused on its Intelligent Broadband Network (IBN) services, which includes digital pay channels and interactive TV. The company plans to launch IBN services in one of its systems next month and is currently working with Microsoft on conditional access systems and an electronic programming guide, critical elements of its IBN package.

Taiwan's cable TV industry, equipped with a broadband HFC cable plant (over 5 mil. homes passed at 750 MHz) and high penetration (80% of TV homes, derived from an estimated 4.9 mil. subs versus the under reported 3.6 mil. subs from cable operators), continues to hold significance for potential media investors, distributors and technology vendors. There were over 120 delegates in attendance at the Oct. 22 event, which was sponsored by News Corp. subsidiary STAR, CSG Systems International, NDS, Motorola, OpenTV, Liberate Technologies and Seagate. The endemic problem in Taiwan however is value - the type of value created by increases in monthly subscriber fees, by the introduction of digital set-tops into subscriber homes and the creation of an addressable infrastructure on an industry-wide basis. By sector, the attendance breakdown ran as follows: 65% from the broadband cable operator community; 12% from the technology vendor space; 10% from the programmer and content provider sector; 7% from the investment banks; and 6% from regulatory and legal associations

THE TAIWAN CABLE TV SUMMIT
MSO's plan to work around the regulatory trap

Daniel Cheung, executive director, STAR & chief operating officer, China Network Systems (CNS)

Cheung however said that CNS would supervise the small scale rollout of digital services in selected areas during 2002, adding that "you cannot ask the government to deregulate to accommodate your future business. Operators have to pursue digital services from the outset and deregulation will then likely follow in the long term. That's how business gets done in Taiwan." "We plan to use cost-effective, low end set-tops at the outset, to educate the audience," said Cheung. "We could then migrate to advanced set tops, which would benefit consumers, provide more bandwidth and capacity for pay channels and basic interactive applications such as home shopping, stock trading and infotainment."

"There remain major regulatory barriers to long term growth in the cable TV industry. That's a shame, because there is major cable TV consumer demand and global investors are attracted to the market," said David Dea, chief executive at Taiwan Broadband Communications.

"We are caught in a regulatory trap," Dea emphasized. "It's difficult for companies to offer new products, services and technologies under the current constraints. Investors look at the business model and become very concerned by localized, politically driven rate caps. Because of the inability of cable operators to offer new tiers of services and technology, we see ADSL companies grabbing first mover advantage with offerings such as video-on-demand or media-on-demand. Cable investors are eager to create a level playing field to curb ADSL strategies of cross subsidization and predatory pricing."

David Dea, chief executive, Taiwan Broadband Communications

"There are new broadband interactive technologies and services beating at cable's door," added Dea. "But the parlous state of local rate regulation, means that we must look for liberalization before we can capitalize on digital services. Otherwise, technology will outpace the regulatory environment and operators such as myself will see new and creative ways in stepping around regulations. That's just a matter of fact, because we are pressed by our investors and shareholders to reach a world-class cable TV standard. We need the freedom to serve consumer demand."

THE TAIWAN CABLE TV SUMMIT
Delivering on an interactive-capable network

The urgency of cable's plea for deregulation cannot be overstated particularly as the majority of Taiwan's cable plant has been built at a 750 MHz-broadband HFC standard, to enable leading operators to rollout future digital interactive services. "In 1998, we found Taiwan to be amongst Asia's leading broadband cable markets with major digital interactive potential, benefiting from a near broadband infrastructure, and a very advanced consumer entertainment market," said Dr Joanna Lei, chief executive of Pacific Broadband.

"As an operator however, I face major regulatory constraints," added Dr Lei. "The cable industry is supposed to be regulated like a utility and required to service 100% homes passed. But, in practice, it has never been given utility status. Instead, it has been denied universal access and unlike water, power and telecommunication industries, cable's pricing and competitive strategies are continually challenged. The proposal I would like to make is that basic cable must be regulated as a utility, giving it a level playing field to compete with telecom services (broadband carrier status)."

"Taiwan continues to trail leaders like Korea in terms of broadband penetration with about 650,000 subs versus Korea's 4 mil." warned Dr Lei. "We (cable and ADSL operators) must work together to push the government to make our market more competitive in order to ensure that consumer demand is served. We can deliver the future to consumers but it must have an economic viability; without a sound economic model, we are forced to slowdown digital deployment and Taiwan will be unable to attract the high levels of international technology, capital and content it deserves."

THE TAIWAN CABLE TV SUMMIT
Building broadband cable - a regional comparison

Competing in Taiwan's broadband market has been a tough proposition for operators like Koos-controlled GigaMedia and Eastern-owned ET Webs Inc. Press reports of a possible merger between the two companies carries strong economic weight at a time when Chunghwa continues to increase its lead in the market. Panelist Jack Lai, chief technology officer at ETWebs, reported that his company has 120,000 subs (70% two-way) with e-commerce revenues rising in recent months from home shopping applications. At the end of June this year, NASDAQ-listed Gigamedia (GIGM) reported 82,200 subs, which are projected to have reached approximately 95,000 at the end of September (51,000 one-way; 14,500 two-way; 29,500 ADSL).

"Taiwan's broadband market is about a year and half behind Korea, " said Raymond Chang, chief executive at Koos-controlled GigaMedia, a local broadband content and access provider. "Cable operators had an early lead in Taiwan but because of the absence of two-way infrastructure, ADSL has emerged as a viable alternative and has driven broadband growth, with the total number of subs projected to rise from about 100,000 at end-2000 to more than one mil. at the end of this year."

"Previously, GigaMedia focused on aggressive sub acquisitions and subsidizing cable modems, but we soon realized that subs without compelling content or packages, could be easily churned away," added Chang. "This year, we have adopted a technology agnostic approach, utilizing both cable and ADSL platforms. We are also focusing on online gaming, music and online education, applications that proved strong catalysts for broadband growth in markets like Korea and North America. Most ISPs make the mistake of taking what's popular on TV and streaming it to a PC device. It simply doesn't work - consumers want a different type of experience - online streaming has not worked in either Korea or North America."

THE TAIWAN CABLE TV SUMMIT
Building multiple broadband products

"The basic concept is to create a retail-wholesale relationship with our suppliers," said Chamberlin. "That means establishing a wholesale relationship with content providers and ISPs to create a retail product environment for the consumer. It remains critical for cable operators to offer multiple products such as video, voice and data. Cable operators have an inherent investment in plant which passes 100% of the homes within their franchise area and if you confine your business to providing only one product, then you're not taking full advantage of the infrastructure you've invested in and secondarily, if you look at the consumer market, you'll find that there is a major need for information, entertainment and communication."

Vernon A. Chamberlin, president & chief operating officer, Jupiter Telecommunications (J-COM)

The results have been impressive. As Chamberlin confirmed, monthly revenue/sub has increased from US$37 to US$46 over the past 12 months. Meanwhile Jupiter's Q3 2001 results showed video (cable TV) subs at 1,097,000 (up 48% year-on-year, 20% penetration of 5.5 mil. homes passed), 137,400 telephony customers (+133%) and 175,000 high-speed Internet/data users (+177%). In terms of competing with the fast emerging ADSL threat, Chamberlin remained confident. "Competition has intensified with the emergence of new ADSL companies. Foremost is Yahoo Broadband (Yahoo BB, a JV between Softbank and Yahoo Japan), which is coming in at a low price, at approximately US$25/mo. That has caused major concern in the marketplace particularly as in the US, many ADSL companies have shut down with price points at US$50/mo. So we're yet to see whether Yahoo BB can prove sustainable in the long term. We've offered bundling discounts, driving our access prices down to US$50 and we're now in US$35-US$40 range."

Chamberlin was encouraged by the sound economies of scale afforded by build out costs in Japan but warned that cash flow breakeven could not be specified due to further acquisitions of local cable systems. "In Japan, we're spending approximately US$200/home passed (HP) to build a 750 MHz network. So, from an infrastructure perspective, we have an economic build because 99% of the construction is above ground and we have very high density in the franchises we're building. In the UK, it's approximately US$800/HP and US$1,000/HP in the US, so there is a significant difference in relation to build out efficiency and cost. We have the opportunity to do more things in the Japanese market than we do in the UK or US - we can connect all franchises and regions - this creates an opportunity to install one digital headend and serve 2 mil. HP. At the same time, as we continue to acquire other systems and increase our footprint, it means we take on additional losses at new systems. So while the journey to cash flow breakeven may on paper typically take five years, our intention to build a nationwide broadband link may stretch that time frame."

THE TAIWAN CABLE TV SUMMIT
Cable program networks suffer advertising woes

David Dea warned of the pitfalls that arise with the current system of programming cartels (owned largely by the Koos and Eastern) that control cable program distribution (including the bulk of international channels) in Taiwan. "The development of program distribution has been singularly channeled through a small group of programming cartels in Taiwan, " said Dea. "Big MSOs find it advantageous to own these businesses as content producing affiliates to join their cable distribution infrastructure. But other operators (particularly independent systems) view that as a less-than-favorable position for them in negotiating pricing and product carriage throughout the country. I believe that there needs to be more competitiveness between program suppliers and that the operators should have greater flexibility and choice in selecting programs and allowing audience viewership to dictate the pricing of program services."

International programmers have suffered greatly in recent years as operators illegally insert ads during airtime and keep the accrued revenues. Regulatory intervention has meant that these practices are being punished but as Dea indicated, the fundamental root of the problem has yet to be solved: cable operators are compelled to carry 80-100 channels by local programming cartels - double the amount of channels they want to carry. Such distribution means that costs increase for local systems, and while programmers secure initial distribution to more than 4.9 mil. cable homes, they are subject to being dropped by systems and/or having their advertising cancelled.

"Cable systems have seen their bottom line squeezed in numerous ways in their bid to create revenue and cash flow opportunities. One of the ways to compensate was to look at inserting unauthorized local ads," said Dea. "However, as we make local acquisitions, we take immediate steps to eliminate piracy. It does not to do us justice. Operators should however have the capability to deal with program suppliers, without coercion, forced carriage or packaging. At the same time, the programmers should be assured that their content would be carried in entirety so that they secure an ad revenue stream, which greatly impacts their bottom line in this market."

Ivan Yuan, general manager STAR Taiwan	Furthermore, with the economy bruised by the global downturn and battered by a series of typhoons, advertising has suffered at leading cable program networks. "Cable TV advertising revenues for the industry will come in at around NT$8 bil. (US$230 mil.) this year, versus NT$10 bil. in 2000," said Jeff Ko, vice president at ERA, a joint venture partner for Television Broadcasts Ltd in Hong Kong,	Jeff Ko, vice president ERA
to promote TVBS's channels in Taiwan. "For TVBS's 5 channels, each has seen revenues plummet by about 30%. Last year, they made NT$3 bil. in advertising but this year, we'll likely record NT$1.8 bil. in revenues."

"Historically, cable TV has taken market share away from free-to-air broadcasters and print media," said Ivan Yuan, general manager at STAR Taiwan. "STAR's overall revenues have grown by 20% this year. But, because of the typhoons in September, where we lost almost two weeks, advertising revenues have dropped significantly over the past month."

THE TAIWAN CABLE TV SUMMIT
Digital interactive vendors search for killer apps in thin client set-tops

Jeffery Brown, managing director OpenTV (Asia Pacific)

Global interactive TV software and conditional access providers remain eager to work with local MSOs to rollout thin-client digital set-tops. "We're looking at our software being incorporated into very thin client boxes in Taiwan. We may be able to work on more advanced models by 2004-2005," said Jeffery Brown, managing director at OpenTV (Asia Pacific). He added that interactive applications poised for success in Taiwan included gaming, stock and financial services, home banking, weather channels, t-banking and e-mail. Sue Taylor, vice president at NDS (Asia), said that the electronic programming guide (which NDS is working on with CCTV in China), would remain a critical ingredient of interactivity. "We want to help cable operators adopt our conditional access (CA) systems but it's not just about CA. The key motivator for operators in Taiwan and Asia to move to digital is first to introduce basic addressability but also more significantly, to bring interactivity to the consumer and reduce subscriber churn rates."

Sue Taylor, vice president NDS (Asia)

"We're working very closely with Guandong Cable in China on a set-top box costing well under US$100 with interactive applications such as home banking and distance learning," said Tom Stitt, vice president at Liberate Technologies. "Our goals in Taiwan are to find entry level platforms and applications to produce benefits that are becoming evident in Europe and North America. Our cost target is US$100/box - gaming, music, sports and gambling (pending regulatory approval) are the applications." Investment bankers provide bleak outlook

The closing panel, featuring speakers from major global investment banks, provided the bleakest counterpoint to a positive long-term view on the cable sector in Taiwan. "Since the early 1990s, we've heard lots about potential digital cable services in Taiwan and Asia. Nothing ever happens however because of regulations that prevent cable systems increasing their ARPU, leaving most unable to fund new services and tiers," said Peter Schloss, managing director of the media & technology group at ING Barings. "A digital cable revenue stream has yet to be proven in Asia. And, the current state of capital markets means that the doors have been shut. Even cable operators, backed by long-term investors, will not be able to justify increases in capital expenditure. Long-term cable investment in North America and Europe has yet to pay off; it's paid off in satellite but it has yet to work in the cable environment."

"While I am impressed by the quality of services from leading MSOs in Taiwan, the regulatory constraints of the industry, combined with the poor technology-driven economy makes cable-led investment in Taiwan a low priority for global investors," said Norman Waite, vice president of regional media equity research at Salomon Smith Barney. According to Suberna Shringla, director of multimedia & technology investment at SG Securities (Asia), investors have significant cash but until the cable TV industry can provide a clear and transparent business model, the sector would attract little capital.

David Dea of Taiwan Broadband concluded with a more positive outlook. "The US cable industry experienced the same attitude from bankers in the early 1980s because of local rate regulation and restrictions concerning tiering. But there was a significant push for the industry to increase penetration and to grow revenues. It was achieved with success, presaging a period of major investment. I believe that cable TV in Taiwan has a big upside. Whether the industry cash flow multiple is below 8x or whether it can reach up to as high as 15x, is not significant at present - what remains important is that MSO's remain on the digital path, rollout new services and wait for gradual deregulation."

CONTACT: Patrick Chung, Marketing Manager, Media Partners Asia Ltd. ([email protected] or 852 2815 8321)