Six years ago this August, Pacific Century CyberWorks - now known as PCCW - completed an extraordinary takeover of Hong Kong Telecom, and in one fell swoop become the SAR’s largest provider of telecommunications services. Since then, the company has weathered major controversies, complaints and slumps in share prices, and steadily emerged as a credible leader in one of the world’s most competitive telecoms markets.

Alex Arena, Executive Director and Group Chief Financial Officer, has played a major role in the recent successes of PCCW, and is helping lay the foundations for an even more successful future. As all of Hong Kong witnessed recently - when PCCW made its startling charge back into the world of mobile phones - this is a company that is still willing to take big risks, and very capable of sending shockwaves through the industry. And as always, the activities of PCCW raise a host questions. Why did they get out of mobile telephony after the takeover, and then jump back in? Is 3G really going to take off? How can they reconcile being the biggest fixed line operator in Hong Kong and, at the same time, the champions of wireless broadband? And what is the company’s relationship with China? Alex Arena explains . . .

“We got out of mobile not because we particularly wanted to, but because certain things had developed and we needed to take care of them. We always want to be number one when we do something, and back then we had a few other things to deal with. One of those was a stretched balance sheet. We brought onboard US$12 billion of debt (the financing of the Hong Kong Telecom takeover), but I’m pleased to say that after five years of hard work we have disposed of 70 percent of that debt. Today we are not a heavily-indebted phone company. But one way we achieved that was selling off some of our assets - so we got out of the mobile business.”

CSL Hong Kong Telecom’s mobile phone subsidiary, was sold into a joint venture because, he said, they were hoping to become part of ‘something bigger’, in terms of being a regional player in mobile communications, but that vision was simply not realised. “So we sold the remaining piece to Telstra and used that money for more debt reduction.

But as it turned out, it wasn’t a bad time to be out of mobile.

“During that period,” says Arena, “3G was considered an investment risk and analysts were concerned about it. Was it a black hole into which money was poured? How much more cash would we have to put down? So we sat on the sidelines,” he said.

Well, not quite, it turned out.

“Actually, we didn’t sit on the sidelines. We discovered the emerging wireless broadband movement - which is why, in the UK, we bought the spectrum and a national licence. In the meantime, as the froth came off the cellular market, evaluations became more reasonable. 3G became better known and better understood, and real 3G handsets started to become available. We could see that the wheel had turned,” he said.

That, of course, prompted the buying of Sunday - a holder of 2G and 3G licences in PCCW’s home market, Hong Kong.

“We had a great opportunity to buy in at about 10 percent of what we’d sold CSL for, so we believed it was time to make the company what it should be: an integrated telecoms player. That’s the short story of why we got out of mobile and got back in,” he said.

An engineer by training, Mr Arena is well aware of the ups and downs of new technologies. Some take off immediately and can been seen to be useful from the beginning; others take a little more time. Then, of course, there are the duds. After watching 3G and broadband for a few years, PCCW began to realise that the speed and access that was available in the home and office via broadband would soon be wanted on mobile. He freely admits that 3G is not yet the answer, but it is a move in the right direction.

“You look at 2G, and you see that people want more than voice calls. People have been trying to squeeze more and more down that thin radio link between the handset and the base station. The whole 3G movement is based on ‘Can’t we have a fatter pipe?’ At that time the engineers were looking at the idea that people would want to do a lot of video calling, send photographs around, stream news clippings, etc. So people spent a lot of money building that technology.”

While this approach is understandable, Alex Arena is quick to point out that consumer demand and expectation have already moved beyond that.

“The transition to 3G has been measured and steady - as was the transition from 1G to 2G. But what was happening in the meantime was this phenomenal development in fixed line services. The whole penetration of broadband through fixed line took off. And it was partly because fixed line companies like ourselves had such severe competition to deal with (from other technologies and new extranet competitors), that we were constantly forced to be innovative,” he said.

Consequently, PCCW came up with powerful - and extremely successful - initiatives, such as widespread broadband connectivity and readily accessible Internet Protocol Television (IPTV), which everyone in Hong Kong knows as NOW Broadband TV.

But just as the explosion and rapid development of mobile communications devices forced the fixed line operators like PCCW to be more innovative and aggressive, so has the development of broadband forced wireless towards new and more powerful types of technology.

“As the terrestrial lines have become thicker and fatter,” says Arena, “customers are now sending torrents of information. And consumers are beginning to ask: why can’t I get similar stuff on my handheld? That has led to the movement called ‘wireless broadband’ and its suite of technologies. Various companies have sprung up a bit like in the early days of the Internet boom. Some of these are very real. So much so that big companies like our friends at Intel have propelled the WiMax forum. To some extent this has been seen as an extension of WiFi, with bigger cells, ultimately allowing people to roam from cell to cell. So I can see why some people would perceive this as a kind of ‘Clash of the Titans’. They see this as a new, disruptive technology: WiMax clashing with the established order of 3G. I don’t see it that way. And as a company that has both, PCCW sees them as potentially complementary technologies. People will be doing different things with different devices and there will be dual-mode devices - so there is no reason for a clash between these two technologies.”

But at the same time Mr Arena offers glimpses of a wireless future that will soon be very different from the 3G world that we’re only now starting to move into.

“Undoubtedly the original specifications for 3G will allow people to do a lot more, but it is still not going to be utopia. Consumers will want more and that can’t be pushed through 3G, so you can see the merging of technologies. Wireless broadband is only one solution and it will provide only one of many wireless options. I think you are seeing just the very tip of the iceberg now with the excitement and the talk about TV on wireless. That is not possible in any long-term sustainable way on 3G. It will require more technology,” he said.

Hong Kong is a small place and there are certain restrictions on what can be done here in terms of Research and Development, which is why PCCW had relatively few people working in R&D.

“We don’t have a huge research centre with a 200 acre campus and a few thousand people in white coats and PhDs. We have talented people - more in the dozens than the tens of thousands - but they are people who are prepared to think and anticipate developments. Whilst we have three thousand engineers and technical people in our technology subsidiary called Cascade, they are focussed on developing and operating our networks. We have a small, strategic team tasked with coming up with ideas about where we think the market is going and what consumers would like. Then we work hard on these ideas. This is the difference between us as a monopoly and us now in a competitive environment. Now we work harder at anticipating and developing what the market tells us it needs,” he said.

One big difference between the ‘old’ company and this new one, he said, is the greater willingness to talk to customers.

“We actually do talk to consumers a lot more about what they want, and we absorb that. We look at the technology trends, and then we do our localised innovation around that,” he said.

Naturally, China is important in many ways to PCCW. Not only does it represent a great pool of technical talent, it has one thing Hong Kong doesn’t have: a large and growing consumer population. Mr Arena said PCCW was already involved in broadband systems in Hangzhou and Ningbo.

“Just two cities, but that is a good start,” he said.

“There are about six million people in each of those cities and there are about a hundred more cities in China with a population similar to Hong Kong. We are happy to have a little piece of that pie. The relationship between China and Hong Kong is a very good and healthy one and it can become even better,” he said. “Hong Kong is a great place to test new technologies and ‘iron out the bugs’, as it were, and then China could be the market. This relationship could well help China as well, because they save some of the costs of development and they can choose something that is commercially proven.”

There is no doubt that PCCW has had its ups and downs and has been a target for regular criticism. Mr Arena is well aware of this, but he believes the attitude towards the company has changed over the past few years.

”Not long ago, I think a lot of people believed what our competitors were saying about us. But the last two years have completely changed consumer attitudes in the market. Yes, we do charge a premium for our services but there is a reason we charge a premium and that is because we actually do have a better value proposition. Our services are reliable; they stay up even when the power fails during rainstorms and typhoons, etc; we provide secure and trusted services with solid customer support though help-desks, call-centres and hotlines. People are starting to understand that all of that is valuable and worth paying for. In addition, we have been very innovative with our service offerings,” he said.

It can be difficult for Hong Kong companies to prove to the world that such a small ‘city state’ - for that is what we are - can be so innovative, at least in some areas. The world leader at the moment in IPTV is Hong Kong, with half a million subscribers. No other nation is even close now.

“There is a credibility gap when people around the world don’t understand how a company in a city like Hong Kong can be leading the world in IPTV. This credibility gap extends further for example, people abroad ask: How can an incumbent telco in Hong Kong have stabilised its line loss when mine hasn’t, and is still suffering significant losses? People who have taken the time to research this -- for example some analysts and investors -- and are now a bit more knowledgeable understand what we have done and that is why the fortunes of the company have improved dramatically recently,” he said.