The Chinese Puzzle
Richard Li's plans for Pacific
Century CyberWorks' interactive media juggernaut.
By Sarah Lai Stirland
As Mr. Li finishes making some vague statements on the importance of
aligning the interests of his fledgling media empire with those of the
countries in which his businesses will operate, the reporter on the other
end of the phone starts to ask him for specifics. He cuts her off midsentence
and answers the second half of her previous question on what his life
has been like in the past couple of days. But the toll of his frenetic
schedule begins to show as his sentences become increasingly abstract
and his responses zombielike. Nevertheless, he perseveres, answering the
questions like a kid who's rattling off lines in a school play, impatient
to get it over with. He doesn't make much sense. "My life has been, in the past couple of
days, since our people stretch from California to London to Hong Kong,
and during the daytime I work and at night, trying to fulfill answering
your questions, and completing this article means that sleeping time and
wake-up times have been awkward," he says, in his aristocratic Hong Kong-British
accent. It's not surprising that he's dog tired. Mr. Li, second son of the Hong
Kong property, retailing, and telecommunications billionaire Li Ka-Shing,
is the mastermind behind a plan to create Asia's first interactive media
juggernaut. STAR PLAYER If this all sounds familiar, that's because Mr. Li has covered some of
this ground before. He created his Star TV satellite television network
from scratch in three years with an initial investment of $125 million
and ended up selling it to News Corporation's Rupert Murdoch in 1993 for
just under a billion dollars. Though he founded the Pacific Century Group
-- a holding company for all of his business interests -- seven years
ago, Pacific Century CyberWorks took its current form over the course
of 1999. Last year, by acquiring Tricom Holdings, a small telecommunications
company trading on the Hong Kong Stock Exchange, Mr. Li managed to list
the CyberWorks unit on the exchange without having to meet its listing
standards. He then renamed the company Pacific Century CyberWorks. At
press time, PCCW had a market cap of $26 billion. PCCW is the parent company through which Mr. Li is building his satellite-transmitted
broadband offerings for the 130-million-home market across Asia. Explaining
his current project, Mr. Li says: "If you look at our ambition and what
we are doing now, Pacific Century CyberWorks really is a cross between
the type of service by America Online and CMGI or a Softbank, which is
investing in the building blocks, the enabling technologies provided by
Internet startups." EMPIRE OF THE SON Mr. Li plays down his relationship with his 71-year-old billionaire father.
Through his father and family, Mr. Li has extraordinary guanxi -- the
Chinese word for those private connections without which it is impossible
to do business in China. Mr. Li is listed as a co-deputy chairman along
with his brother Victor at Hutchison Whampoa. Their father is the chairman.
Hutchison runs the Hutchison Telecommunications Group, a company with
extensive telecommunications operations all over the world as well as
in Hong Kong, and also plans to build telecommunications networks throughout
China, roll out broadband in Hong Kong, and build a major Web hosting
and data center for corporations on the island as part of a joint venture
with Global Crossing. "He's just building on his family name -- people won't recognize him
as they recognize Bill Gates," says a chief investment officer of a major
global asset management company who asked that his own name not be used.
"Obviously the man has an advantage because he has the backing of the
Li family brand." A potent example of the power of the Li brand name is how the Hong Kong
stock market reacts every time new issues of securities of companies associated
with them come to market. When the Chinese portal Tom.com (in which both
PCCW and Hutchison Whampoa own stakes) had its IPO in early March, for
example, the new issue was oversubscribed by a factor of 699. And Mr.
Li proudly reminds Red Herring on the phone of his own company's
popularity with investors. "The last time we went out and raised a billion U.S., it was done in
less than one hour, and at the end of the business day it was 70 times
oversubscribed -- so $70 billion was chasing around a new issue of a billion,"
Mr. Li says. MAN OF WEAL It's all work cut out for "Superman Jr.," as Mr. Li is called by the
Hong Kong Chinese. One very telling manifestation of the sort of pressure
Mr. Li is under is his seeming obsession with his company's stock performance
and the stated conviction that his company will do fine even if there
is a global market correction in technology and Internet stocks. On the
one hand, his constant references to his company's share performance during
his conversation with Red Herring show that he's concerned by the
company's bubble currency fluctuations. On the other hand, he is convinced
that if there is a shakeout, his companies will be the ones left standing
-- despite the twin issues of a largely untested market for broadband
in Asia and the heavy debt burden the company has taken on. "The proof is in the pudding. Those that will be willing to hold their
Internet investments through a market correction will show the difference
between the men and the boys," he says. "It has been easy for Internet
companies, because it has been a rising market." Mr. Li's broadband service will be put to the test this July, when PCCW
plans to complete its initial rollout in India and China. The Network
of the World will initially be beamed to cable operators around Asia through
satellites operated by the regional satellite provider Asia Satellite
Telecommunications. A testament to Mr. Li's ambitions is the fact that
he has already prepared for an upsurge in demand for the network. He has
formed a separate company called Pacific Century Matrix, which is a joint
venture with DaimlerChrysler Aerospace. Both companies have said that
they plan on spending $1.5 billion in the next five years to build their
own satellites, which Pacific Convergence will ultimately use to transmit
its programming. Mr. Li says that C&W; HKT's management team will play a central role
in establishing this Asian broadband network. "In the U.S., you could
just talk about access agreements into established cable systems, where
in Asia a lot of times, not only do you have to get into access agreements,
you might actually need to help the cable operators of whatever conduit
it may be -- whether it is HDSL [high bit-rate DSL] or ADSL [asymmetric
DSL] -- to actually build it out," he explains. That means a lot of work and deal making will be involved, which is where
C&W; HKT comes in. "Out of any Asian company of any size, HKT's team of
engineers, project management team, and financial team are the most international
and are bilingual, making them ready to be deployed to different markets
in Asia," says Mr. Li. GREAT WALLS None of this seems to daunt Mr. Li. In fact, any questioning of the viability
of his plans is met with sharp retorts (see "Hong's
Kong.") Unlike his lower-profile father, who avoids the press and
is notorious for his frugal ways, the younger Mr. Li isn't shy with the
press and, according to the local papers, leads a lifestyle that Robin
Leach would admire. In fact, Mr. Li shows that he's very media savvy.
According to local press stories and the regional magazines, Mr. Li is
determined to succeed on his own terms, and according to his publicist,
"there's not a hope in hell" he'll ever agree to have his photograph taken
alongside his father. Meanwhile, Hong Kong legislators and editorialists
have pointed out that with C&W; HKT, the Li family now controls most of
the island's mobile phone market as well as a significant proportion of
the companies making up the Hang Seng Index. In a March 1 editorial, the
South China Morning Post wrote: "Pacific Century CyberWorks' acquisition
of Cable & Wireless HKT is another step along the road to the renaming
of Hong Kong as Li Land Incorporated." Yet, immediately after PCCW beat
out SingTel, Singapore's major telecom operator, for C&W; HKT, Mr. Li
was a local hero for saving Hong Kong from Singaporean domination. While some have criticized the $38 billion price tag, the acquisition
-- if it goes through -- delivers to PCCW its first substantial telecommunications
customer base of 90,000 paying broadband customers, an Internet backbone
to China, a Chinese language portal called Netvigator that clocks up 4.5
million page views a day, 925,000 mobile phone customers, and a new business-to-business
Chinese electronic marketplace partnership with Oracle. Mr. Li expects
the integration of C&W; HKT to take three to four months following board
approval of the merger. Meanwhile, he's driving his staff hard. The company is working diligently
to produce English-language shows in studios in London. Last December,
PCCW negotiated access to a library of sports footage. "We will be building
up assets as we go," says Mr. Li. But, "where we are strongest now is
sports. We will have more sports -- international sports, premium sports.
We would have more volume than any other Internet content provider." At the same time, Mr. Li has Johnson Chen, the 28-year-old head of his
venture capital subsidiary, racing around the globe cutting deals. At press time, CyberWorks Ventures had spent $535 million on acquiring
small stakes in Internet companies that range from Digiscents, the creators
of digitized smells that can be released through PCs, to SoftNet Systems,
a broadband equipment provider to cable companies. In addition to these
investments, PCCW has also teamed up with CMGI and Hicks, Muse, Tate &
Furst to create @Ventures Global Partners, which will run a new venture
capital fund of $1.5 billion. "Most of these investments are only a minority," acknowledges Mr. Li.
"But they are a significant strategic stake of the future revenues of
these important Internet enterprises in Asia." EGO FOR BROKE Mr. Li now acknowledges his shortcomings. Obliquely, he mentions that
his dealings with everyone around him ("internally and externally, partners,
employees") haven't necessarily been cordial. Mr. Li appears to be supremely confident about his plans. With his web
of global alliances and investments, not to mention his father's backing,
it's not hard to see why. For anyone else in a fragmented market where
governments seem schizophrenic about their regulations on commerce and
where the rule of law is sometimes almost arbitrary, that confidence might
seem odd. Mr. Li has already established his own unique mark in the world. Even
if the Nasdaq collapses and his plans fall apart, at 33, Mr. Li already
has spawned a cultural legacy. Thanks to his efforts, content ranging
from Bollywood B-movies to Fox's shockumentaries and shows like Who
Wants to Marry a Multimillionaire? are beamed all across Asia. In
fact it's remarkable that Star TV even reaches some of the living rooms
and hotels in some of Asia's most oppressive countries such as Myanmar,
which means that the only TV viewing choices in those countries are local
government propaganda programs or over-the-top Asian dramas and music
programs. Thus when Mr. Li says that he aspires to be like Sony cofounder Akio
Morita, he may, in his own curious way, have already fulfilled that goal
with his media empire and connections. If, however, his goal is to build
a profitable conglomerate of lasting importance, Mr. Li has a bigger mountain
to climb. Sidebar: Though Mr. Li founded the Pacific Century Group in 1993 with proceeds
from the sale of Star TV, much of the rest of his company's current organizational
structure only started to take shape in 1999. When the merger is complete,
rather than operating as a separate unit, Cable & Wireless HKT's assets
and staff will be integrated into Pacific Century's various subsidiaries. PIECES OF THE PIE CMGI 3.3 percent. Pacific Century Group Holding company
8.4 percent. Yatsumitsu Shigeta, CEO of Hikari Tsushin
2.5 percent. Intel 8.0 percent. Public shareholders and others 24.3
percent. PCCW COMPANIES ALLIANCES & JOINT VENTURES Global media convergence project. $1.5 billion venture capital fund. Broadband development in China. Sidebar:
Q&A with Pacific Century Cyberworks' Richard Li
As Red Herring went to press, Mr. Li's latest big strategic move
was his February 29 agreement to acquire the $4.2 billion Cable &
Wireless HKT for $38 billion. Several smaller strategic investments in
Internet infrastructure companies all over the world immediately followed.
In under a month, CyberWorks Ventures, the venture arm of PCCW, will have
bought stakes in 68 different Internet companies dotted around the globe.
Though he isn't involved in these smaller deals, Mr. Li formulated the
acquisition strategy and meanwhile has been running around arranging a
$12 billion loan to finance the C&W; HKT acquisition. The loan will be
the biggest ever in Asia and is being arranged through a consortium of
four banks. While Mr. Li constantly talks about working quickly, the truth
is that he really has no choice. In order to implement his grand vision
of operating an interactive media empire across Asia (grandly dubbed the
"Network of the World"), Mr. Li must batten down the hatches before the
potential burst of the global Internet stock bubble and the assortment
of smaller fries nibble away at PCCW's advantages. There are whole shoals
swimming in from several different directions, edging in on different
parts of Mr. Li's business plan.
While the America Online-type broadband service will be offered through
the company's Pacific Convergence Corporation subsidiary, the CMGI/Softbank-type
investments are being made by its other subsidiary, CyberWorks Ventures.
Also in the works is its $1.6 billion Cyber-Port project, a Hong Kong
real estate development that's planned to house high-tech businesses and
residential apartments.
"The way we see it is that half our value is on the venture side," explains
Mr. Li. "What we're doing with CyberWorks Ventures is building a shop
of building materials so whenever anybody needs to build a house, they
would visit us to buy the ingredients to build the house."
Although it's far from clear that he will succeed in the long term, the
scope of the undertaking, the influence of PCCW, and its CEO's formidable
track record and connections has earned the company a spot among the Red
Herring 100.
Watch it, Bill Gates. Look out, Steve Case. With his ambitions and powerful
family connections, Mr. Li is one to watch. News Corp.'s chairman, Rupert
Murdoch, danced with Mr. Li when he was just 26, and it was Mr. Li who
many say came out ahead. While Mr. Li himself made a nice profit on his
initial investment, Mr. Murdoch still has to make the Star TV network
profitable. Of course, it's still early and PCCW's progress is highly
contingent on its stock price performance, since many of its deals, including
the bid for C&W; HKT, are paid for with PCCW's inflated currency. Aware
of this, Mr. Li is driving his company forward at a merciless pace. He
also possesses one major asset that none of these would-be global media
emperors have: his dad.
"We do see each other either once a week for a meal or once every two
weeks or at least once a month," is all he says about it.
But at the very least, the young Mr. Li has a powerful business ally and
immediate access to insights that few other people have. After all, he
did grow up with a man who spent millions of dollars cultivating contacts
in Beijing, and who currently acts as an adviser to China on Hong Kong
affairs.
Hutchison Whampoa already operates a mobile communications network with
6 million subscribers in countries all over the world. In Hong Kong, Hutchison
Telecom claims a mobile phone subscriber base of 1.2 million in a population
of around 7 million. Hutchison also operates fixed-line telephone services
in Hong Kong and holds a 3 percent stake in the world's largest mobile
phone operator, Vodafone Airtouch. In other words, the young Mr. Li is
much better connected in Hong Kong than any Western tycoon could ever
be.
Though it is often said that Mr. Li is trying to make it on his own, his
powerful connections mean that in the eyes of many locals he can't be
mentioned without his father.
Clearly, the expectations and assumptions that the business community
makes about Mr. Li's dealings with his father and his father's business
interests affect PCCW whether the junior Mr. Li likes it or not.
Brand name or no brand name, Mr. Li and his team at PCCW have a lot of
hard work ahead of them if they are to fulfill Mr. Li's aspirations. In
addition to keeping investors' expectations afloat, Mr. Li's team is working
to roll out the company's broadband service in China and India by July,
digest the C&W; HKT acquisition, and integrate the numerous investments
into its network. The integration of C&W; HKT in itself will be a mammoth
task. PCCW, with a staff of 453, must take on an additional head count
of 13,767.
They have a long row to hoe. For all the talk surrounding PCCW, much of
its business plan has yet to come to fruition. Deals with cable operators
need to be struck, content must be created, infrastructure must be built,
more tenants need to be found for PCCW's Cyber-Port project, advertising
space and subscriptions need to be sold, alliances need to be inked, and
C&W; HKT needs to be transformed from a local incumbent losing market
share to cheaper telecom alternatives into a profitable strategic tool.
And perhaps most importantly, a deal between Star TV and PCCW still has
to be worked out. Last November, Star TV formed a new company with C&W;
HKT to provide residential broadband services in Hong Kong. As Red
Herring went to press, Mr. Li was still holding discussions with the
Murdochs about the joint venture.
Mr. Li is modest about the accomplishment. He calls allegations that Beijing
was somehow involved in the deal "baloney," and says that the acquisition
decision was based on price.
"At the end of the day, the most difficult time was to decide what price
to pay and under what terms. After I put the bid in, you put the best
foot forward. And then, you should be happy to lose it if they demand
a higher price," he says.
In the third week of March, for example, Mr. Chen bounced from Hong Kong
to Chicago to Los Angeles to San Francisco, back to Hong Kong and then
to Singapore. "We're run more like a trading desk than a venture capital
outfit," says Mr. Chen. He actually says that Mr. Li has mellowed in this
most recent venture, but confirms that he lived up to the reputation as
a tough taskmaster that he developed when he ran Star TV. Mr. Chen worked
for Mr. Li at Star TV, developing the company's video-on-demand services.
"It was very stressful and it was a very intense time of my life," recalls
Mr. Chen. "Wherever we were in the world, we would have to call in at
8 a.m., his time, and he would quiz us about the competition and the valuations."
For now, and for a few years hence, observers are just going to have to
sit back and watch Mr. Li assemble and build his telecommunications empire.
There are a significant number of people out there who would like to see
him fail. Some members of the Hong Kong business community have described
Mr. Li as arrogant and egotistical.
"When I was building a firm and pushing things in a very fast manner,
one could be tempted to do it like a bull in a china shop. So I have previously
had bad experiences doing things that way. Although we do have to move
at Internet speed today, at the same time, we have to make sure that we're
not behaving like that," he says. "That is the biggest lesson I learned
during the Star days."
He isn't relaxing. Back in his Beijing hotel room, after dropping the
not-so-subtle hint about needing some sleep, he says good-bye to this
Red Herring reporter and apologizes for having woken her up the
previous night with a phone call. He's got to get up "first thing" the
next day, he says, to return to Hong Kong.
Anatomy of a conglomerate
Deciphering PCCW's shareholder structure.
Pacific Century Regional Developments 53.5 percent -- Holding company
whose subsidiaries, other than PCCW, are involved in life insurance, property
investment, development, and hotels.
Pacific Convergence
Will run PCCW's pan-Asian broadband network. The network will use technology
from the companies in which the CyberWorks Ventures unit has invested.
Cyberworks Ventures
Invests in enabling-technology startups across the globe. Some of the
companies include TurboLinux, makers of software tools and server operating
systems, with versions in Chinese; Data Access India, an ISP in India;
iMerchants, an e-commerce consulting firm in Hong Kong; Intelligenesis,
an artificial intelligence software firm based in New York City; Magically,
an application service provider based in Silicon Valley; and Digiscents,
a developer of digital scent technology based in Oakland, California.
Cyber-port
A $1.6 billion property development for residential apartments and high-tech
companies to be completed in phases by 2007. The project will eventually
house PCCW as well as many of its funded startups.
High-speed data transmission company that uses its own satellites. Last
September, PCCW formed a joint venture with DaimlerChrysler Aerospace
to build satellites for high-speed data transmission in Asia. The venture
is called Pacific Century Matrix and will lease space to Pacific Century
Convergence for its broadband network.
PCCW formed an alliance in March with CMGI and the leveraged buyout firm
Hicks, Muse, Tate & Furst to work on this. The trio of companies has
said that it may buy a traditional media company and use it to integrate
Hicks's traditional media holdings with CMGI and PCCW's new-media and
infrastructure assets.
PCCW, CMGI, and Hicks, Muse, Tate & Furst have also teamed up to form
@Ventures Global Partners, a venture partnership that will take stakes
in Internet companies in Asia, Europe, and the Americas.
Alliance with Legend Holdings, China's largest manufacturer of PCs, servers,
and TV set-top boxes. The two will work on a variety of hardware and Internet
access initiatives to enable consumer broadband access in China. 