Being the best: An interview with William Yeung and NiQ Lai, HKBN

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RECALL No 12 – The Fiber Future
Being the best: An interview with William Yeung and NiQ Lai, HKBN
51
08 Being the best: An interview with
William Yeung and NiQ Lai, HKBN
HKBN was founded in 1992 by two entrepreneurial
incumbent, since we will always be dependent on the
cousins as an alternative long-distance call provider.
incumbent’s network and service quality. Second, if
The company’s initial capital was just HKD 1 million
we were to use the existing telecoms infrastructure in
and it employed ten people. After establishing itself as
Hong Kong, we would be limited to DSL technology –
the largest long-distance alternative around 1999, the
a technology that will most likely never be able to
founders looked at next-generation network (NGN)

accommodate down- and upload speeds of 100 Mbps
technology and its capabilities, strongly believing that
to 1 Gbps. Then, we could never provide our custom-
an advanced NGN would be crucial for Hong Kong’s
ers with an experience similar to what people in Japan
future economic development and its people’s further
or Korea enjoy today, nor could they use similar high-
development. Coupled with a thorough business case,
bandwidth applications.
this led to the vision to roll out a nationwide broadband
network. The Hong Kong Broadband Network’s name
NiQ LAI: From the beginning, we chose independence
itself reflects the ambition to become the new Hong
from the incumbent. When you share infrastructure,
Kong Telecom (now PCCW), but founded upon next-
your performance can never be better than your com-
generation technology.
petitor’s, and we need to be the best to succeed. Con-
tinuously striving to be the best is one of our core values.
William Yeung was appointed Group Executive Director One of our core purposes is to experience the emotion
and CEO in 2008, having joined the group as COO in
of competition, winning, and crushing competitors. We
2005. He looks back on over 18 years of experience in
really want to build a legacy in Hong Kong. We want to
the telecommunications industry and holds BA, MBA,
be around in 20 to 30 years from now and be the lead-
and MS degrees.
ing operator. Most new entrants around the world have
the goal of attaining a certain niche market share and
NiQ Lai is HKBN’s CFO, Company Secretary, and Head
profitability. We aspire beyond this, we want to have the
of Talent Engagement. He joined the group in 2004 and
majority share and dominate the market. This is why
has extensive experience in the telecommunications
we need the best network for the people of Hong Kong.
industry as well as in research and finance. He holds an
Leasing the incumbent’s network can’t give us that.
Executive MBA degree.
McKINSEY: Precisely how do you intend to achieve
McKINSEY: Why did you decide to roll out your own
these ambitious objectives?
network infrastructure and not use some of the existing
operators’ network?
NiQ LAI: To stick with this goal, we take on a ten-year
perspective, unlike most other corporations who have a
WILLIAM YEUNG: First of all, we can never be the best
one- to three-year plan. We do get pressure from some
when we lease capacity or network equipment from the
of our shareholders for shorter-term optimization, but

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52
we are very transparent about our objectives. Having
time soon. Thus, we believe we will keep our technologi-
founding shareholders who still own 58 percent of the
cal edge over the coming years.
company definitely helps us adhere to our objectives.
Finally, our product offering is vastly superior to that
McKINSEY: To what extent has the absence of any
of our competitors. We offer a 100 Mbps broadband
access regulation driven your decision to invest in infra-
package at USD 13/month and USD 25/month for our
structure yourself?
triple-play offer. Beyond the pricing, we also provide
an 80 percent speed guarantee. If this is not achieved,
NiQ LAI: That was a material factor. The Hong Kong
customers will be refunded. We only had to refund eight
market is basically a free market with uncapped re-
customers in 2009 and our churn hovers below 1 per-
turns. There is no mandate to provide open access to
cent a month, indicating that our customers are indeed
our infrastructure, so we are not obliged to open up
satisfied. In short, we are well on track to achieve over
our network. In other parts of the world, this is not the
50 percent market share by 2016.
case – open access is a requirement. This means, the
downside is all yours: when you build the network and
McKINSEY: How can you be profitable when you sell
nobody comes to use it, you carry all the risk. But when
100 Mbps broadband connection at USD 13/month?
everybody wants to use your network, the upside is
shared. In other markets, this asymmetric risk profile
NiQ LAI: We run our operations very lean and our
acts as a disincentive for investment.
capex is much lower compared with other countries.
Using standard off-the-shelf Cisco routers has huge
McKINSEY: HKBN is clearly a very ambitious venture.
cost advantages. A typical router sells at a list price of
Where do you stand today?
USD 1,200 and serves up to 24 customers. We have a
75 percent utilization rate on those and obviously get
WILLIAM YEUNG: Today, we are already Hong Kong’s
substantial discounts on the list rates. This means that
largest alternative broadband provider with over
the cost per user becomes very low.
20 percent subscriber market share. We are also the
only operator with net market share growth. We have
For our standard broadband product, we only need to
set ourselves a Big Hairy Audacious Goal (BHAG, see
connect the Category 5e (CAT5e) cable from the router
“Good to Great” by Jim Collins) to be the largest IP pro-
to the home, then our customers can connect to the
vider in Hong Kong by 2016. This is quite a challenge,
Internet. We don’t have the added costs of end-user
but only with a high aspiration will people leap forward.
equipment and installation is standardized – it takes
around one hour to pull the cable into the apartment,
McKINSEY: How do you plan to become Hong Kong’s
which is often done in batches. The total capex cost per
largest player?
house passed is less than USD 200 – more than a fifth
lower than other major FTTH deployments elsewhere
WILLIAM YEUNG: We have a clear edge on technol-
in the world. Those typically range from USD 1,000
ogy versus our competitors. Today, we are the only
to USD 2,000. Upgrading the equipment is also much
broadband provider in Hong Kong that offers speeds up
cheaper than in traditional telecoms networks, since we
to 1 Gbps throughout our entire network. This is down-
merely need to upgrade the end routers. This has made
stream as well as upstream. The incumbent mainly
the network future-resilient.
offers 6 to 8 Mbps, with asymmetric speeds. We have
passed 1.66 million households – about 70 percent of
We also manage our operating costs closely. For exam-
the market – and will soon have passed 90 percent.
ple, half of our 3,000 employees – mostly call center
agents – are based across the border in Guangzhou,
We know our competitors well. We are the only market
China, where labor costs are only a third of what they
player growing market share. The incumbent’s market
are in Hong Kong. This gives us a substantial cost ad-
share has dropped to about 50 percent and the other two vantage over our competitors who have a higher Hong
players – the distant numbers 3 and 4 – will most likely
Kong base mix. Even with our low retail prices, we still
be marginalized in the future. The incumbent has so
are able to generate an 80 percent gross margin and
many different technologies – ADSL, VDSL, etc. – and
achieve close to 35 percent EBITDA margin, which is
we don’t believe they are willing to abandon this any-
steadily increasing.

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RECALL No 12 – The Fiber Future
Being the best: An interview with William Yeung and NiQ Lai, HKBN
53
McKINSEY: What type of network architecture have
much higher cost base; thus, they have no incentive to
you deployed?
invest in fiber rollout at current price levels. This will
ensure that we will be a technology leader for many
NiQ LAI: As mentioned, we have deliberately chosen
years to come.
to run an off-the-shelf, computer-like network, which
works very well in high-density areas such as Hong
In other companies, this might be a difficult strategy
Kong. A typical building in Hong Kong has 30 stories
to follow, since shareholders often want to maximize
and 20 apartments per floor – i.e., 600 apartments per
short-term profitability. Our founders still own the
building. We bring fiber to the building and fiber up the
majority of the company. They are sticking to our long-
vertical. Then on approximately every 10 to 20 floors,
term goal of providing broadband services throughout
we connect the fiber to a router that serves a couple of
Hong Kong. As long as we remain independent, this goal
hundred apartments. From the router, we connect a
will not change.
CAT5e cable to the customer premises. We even bypass
the incumbent’s wall socket by providing our own. By
McKINSEY: How important is talent management in
keeping the CAT5e to within 100 meters, we can actu-
your organization?
ally provide 1 Gbps speeds. Our network is basically the
same as corporate LAN, but then taken to 1.66 million
WILLIAM YEUNG: We have a very strong corporate
homes. In less dense areas, we have complemented this
DNA where attracting talent (we do not have staff) is our
network with a G-PON fiber architecture.
biggest challenge. In the long term, it’s easy to replicate
technology, but it’s difficult to replicate talent. This
McKINSEY: What type of commercial model have you
has been translated into our organizational model. For
opted for?
example, we don’t believe in the traditional horizontal,
functional approach. That would lead to the creation of
WILLIAM YEUNG: We do the bulk of our distribution
malfunctioning silos as often seen in incumbent opera-
in-house, since we are almost paranoid about quality.
tors. We have structured the company vertically around
We like to control our product end-to-end. This is why
five geographic areas run by “mini CEOs.” They are
most of our products are sold through our own chan-
responsible for sales, network management, mainte-
nels: retail outlets, street kiosks, online channels, and
nance, and customer service – and are fully empowered
telesales. We do have some dealers, but we keep this to
to best service our customers.
a minimum. Our broadband product still represents
around 70 percent of our revenues. Cross-selling is obvi-
Furthermore, each area is benchmarked monthly
ously important for us. We are continuously improving
against every other, and improvements are continu-
our TV offer and our triple play includes free national
ous. This is the only way to ensure we’re close enough
calls. We are able to keep the costs of cross-selling low
to our customers. We have also introduced the “mini
by using our call centers and installation personnel who
CEOs” in other functions; to date, we have about 40 of
are highly incentivized to do so.
them throughout the company. All “mini CEOs” bear
full responsibility for their P&Ls and balance sheets. All
McKINSEY: Your chairman recently stated that you
of them, including back-end departments, have been
have gone on the attack to lead the market into a price
focused on customer engagement.
war, rather than wait for your competitors to initiate
one. That’s quite a remarkable strategy.
NiQ LAI: Our compensation is linked to performance at
all levels. Salaries for some functions are up to 50 per-
WILLIAM YEUNG: For us, price is an offensive weapon
cent variable, based on individual KPIs. Even the tech-
for long-term growth. We want to bring prices to a level
nicians installing the broadband at the customer prem-
where they actually do not matter anymore to consum-
ises have a variable salary component. This part is based
ers. Most operators want to avoid commoditization of
on the up-selling they can achieve and on the customer
their product. Our objective is quite the opposite: to
feedback we receive after every installation. Moreover,
turn 100 Mb service into a commodity, which plays to
the company terminates 5 percent of the total salary
our strengths. Moreover, at current price levels, HKBN
base each year based on performance reviews. HKBN
is the only operator that can operate profitably thanks
is a very unpleasant environment for underperformers,
to our lean cost structure. Incumbent operators have a
but if you’re passionate and able, it’s a great place to be.

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54
We do invest a lot in our people. For example, we spon-
WILLIAM YEUNG: Consolidation opportunities could
sor MBAs for our executives – 70 percent of our top
arise in the Hong Kong market, but these will most
management have postgraduate degrees. We also have
likely only emerge with a change in the other operators’
a management trainee program for our future leaders,

shareholders. At that point, the competitive setting in
known as “CXO of the Future.” The bar is high though:
Hong Kong could shift, since incumbent players may
for example, we expect our CXOs of the Future to pass
start investing heavily in next-generation technology.
the CFA Level 1, run half of a marathon, and read at least
In the long term, the market will most likely only have
one management book every two weeks during their
room for two serious infrastructure players.
18-month program.
In the meantime, there is always the possibility for part-
McKINSEY: What have been the biggest hurdles on the
nerships between mobile-only players and fixed-only
way to where you are today?
players. Again, that will only happen with changes in
shareholder structures. Currently, it seems unlikely.
WILLIAM YEUNG: As in many other markets, getting
Fixed players entering the mobile space may not take
access to the individual buildings has not always been
place, since mobile competition is fierce in Hong Kong
easy, and often very time-consuming. We have good
and prices are among the world’s lowest. Thus, from a
legislation in Hong Kong that treats telecoms provid-
financial point of view, it’s not very attractive anymore.
ers as a utility with mandated access to the buildings
without needing to pay any rent to the building owners.
McKINSEY: What advice would you give other opera-
In reality, however, there are practical roadblocks, espe-
tors who are thinking about investing in fiber?
cially in buildings that are owned by larger groups with
telecoms shareholdings. These have taken a lot of time
WILLIAM YEUNG: Understand the market you are in.
to resolve.
No two markets are the same. Understand what will be
the technology that will lead the future – e.g., mobile
NiQ LAI: Looking back, it has not always been easy. It
versus fixed, copper versus fiber – and what will be the
is very difficult for a new fixed-infrastructure player to
cost structure, among other factors. Next, if you see that
make money. It has taken us seven years to reach free
there will be demand for those services, go ahead, but
cash flow breakeven, and we have faced substantial
you have to realize, it’s a very long-term game.
restructuring phases in which we had to let many people
go. Without our lean cost structure, we would not have
NiQ LAI: Do your own thing – if there had been two
been able to survive.
identical HKBNs, we would have both been dead by now.
McKINSEY: Where do you see Hong Kong’s telecoms
William Yeung and NiQ Lai were interviewed by
industry going from here?
Wim Torfs, a Principal in McKinsey’s Dubai office.

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