Transitioning toward value

Telecom Asia, Feb, 2005 by Joseph Waring

Price pressure is nothing new to telcos--Hong Kong operators have been fighting to keep their heads above water for almost a decade. New World Telecom COO William Kwan tells group editor Joseph Waring how the operator is leveraging its new IP infrastructure to integrate applications and enhance the value of its services rather than compete on price.

Telecom Asia: Where do you see growth coming from in this market?

William Kwan: The connectivity side has become pretty much commoditized, so what will be driving growth in 2005 and beyond will be the value-added services side of the business. The whole concept of IP in the initial stage is as a cost benefit driver. But IP Internet technology, we all know, can offer more than just cost improvement. With a traditional TDM network each connectivity is attached to an individual service. Of course IP integrates all this. The first stage of integration is obviously cost savings. What we can also produce is value-added services or integrated applications through the integration of lines. The obvious thing is to integrate voice, data and multimedia together. Because of the IP capabilities, you can also integrate with IT applications--for example things like our integration with Yahoo! Instant Messaging.

Tariffs in Hong Kong appear to be in freefall. What's your near-term outlook concerning downward price pressure?

Looking back to even ten years ago, the price war has always been around. With IDD, voice and data rates continuously falling, we have been in this type of competitive environment for many years and we're starting to get used to it a bit. Over that period, some in the industry may have forgotten that there's more than one "P" in the marketing mix and have been using price as the main vehicle for marketing.

In the last couple of years, on the voice side people have focused more on price. The benefit or the attractiveness to the end-user of marginal price improvements has diminished and the performance side is starting to catch the attention of a lot of operators. Even the usual operators that have talked about costs in the past have been talking about customer benefits over the last couple of months. Things are not shifting very fast, but the mindset is changing a little bit. We will see operators use pricing as one strategy, but the trend over the next couple of years will be on the performance or value side. Ultimately, the key issue is how to increase the value delivered to the end-user, which is really a matter of price performance.

How are you competing in this environment?

We have participated in the price war in the past. But we think that pricing as a marketing factor has become less and less effective over time. In the broadband market, if you take off HK$30-40 ($3.80-$5) per month, it doesn't really mean much in terms of stimulation of volume. There are always cost leaders that go for the low-end market as well as a segment of customers who will drive for lower costs. But we believe this will gradually decline as integrated services start to appeal to more customers. While prices do have to be competitive, our strategy is to target the market segment that requires a certain service level and is willing to pay an appropriate price for that. We are focused on enhancing the value of our services rather than trying to offer the lowest prices.

How are you doing that?

This is not something we just started to focus on. Seeing the continued downward price trend in the telecom market, we forecast that IP would be the growth driver in the future. So back in 2002 we started to transform our infrastructure and invested in a Cisco-based IP backbone network as welt a Nortel NGN network, setting the stage for IP to be our growth engine. Back in 2002-2003, the VoIP capability on the retail side was not that apparent so we waited until last year to start to be aggressive in terms of VoIP services.

Without building that IP infrastructure, we would not be in a position to deliver a layer of value-added services. The way we've positioned our infrastructure we believe will enable us to move a little bit faster in offering these services.

What do you see as your biggest challenge this year?

While competition has always been intense and is a fact of life for us, the issue is, when faced with this type of market, how do we differentiate ourselves and how can we ensure we can embark on projects on the growth side of the business?

Our investment in IP infrastructure, in terms of technology as well as the people and processes, has positioned us to drive differentiation. We have seen that in 2004 in terms of trying to position ourselves a little bit differently than the other operators by moving into market segments that will boost our performance. This challenge has been with us for the last few years. Transitioning from being a traditional telco to a next-generation IP-based operator is not an easy task because it involves both infrastructure investment and a change of skills, mindset and processes. That transition is largely behind us, I think the challenge now is to realize and capitalize on the benefits.