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OCTOBER 27, 2000 VOL. 26 NO. 42 | SEARCH ASIAWEEK


Lucas Oleniuk for Asiaweek.
James says he wants more of Rupert's advice, while Richard seeks distance from Li Ka-shing.
A Tale of Two Sons
STAR's James Murdoch wants to rule Asia's Internet. He has a head start on Richard Li. But can he hold it?
By ALEXANDRA A. SENO

ALSO:
In Search of the 'Target Wallet': Young Murdoch expects you'll pay to let STAR TV entertain you
Sticks and Stones: Quotes and Profles

James Murdoch, son of Australian media mogul Rupert Murdoch, may have been hitting the complimentary coffee bar a little hard at a recent television broadcasters' festival in Scotland. "If I have to read another article about 'Threats and Opportunities,' 'Surviving in the Digital Era,' 'The New Realities of the New Economy' or some such other angst-ridden twaddle I'll just have to f***king shoot myself," Murdoch said in a speech. Certainly the sentiment is one everyone may share in these Internet-crazed days, but you'd hardly expect to hear it voiced by someone who is supposed to be leading his father's giant media conglomerate, News Corp., into the Digital Age in Asia. Yet that is just what Murdoch, as chief executive of News Corp.'s wholly-owned subsidiary STAR TV, is attempting. Over the last several months, the 27-year-old Harvard dropout has been cutting deals and arranging partnerships from his Hong Kong headquarters that will transform STAR from Asia's largest satellite-TV network into Asia's largest broadband Internet access and content delivery service.

The course set by Murdoch, a non-techie whose first major business accomplishment was setting up a hip-hop music record label later sold to his father, is risky. The broadband business — providing consumers with high-speed Internet access as well as a wide range of interactive-TV entertainment and services over high-speed communications networks — exists largely at the bleeding edge of technical practicality and very likely will be unprofitable for years to come. What's more, Murdoch is already banging fenders with Hong Kong's Pacific Century CyberWorks (PCCW) and its chief executive Richard Li, son of tycoon Li Ka-shing. PCCW has already loudly staked its claim as a pan-Asian broadband leader with Richard as the region's Alpha Geek. "STAR and PCCW are two market leaders that cover the same footprint," says Simon Twiston Davies, executive director of the Cable and Satellite Broadcasting Association of Asia. "Wherever you look, they are going to be in competition in some fashion."

The James-versus-Richard duel is irresistible in its Shakespearean overtones. Both are second sons of enormously rich and powerful fathers, and both have siblings jostling for high positions in their families' vast business empires. James is the prodigal son returned to the fold. Richard, 33, is the boardroom-reared princeling trying to make a name for himself beyond the shadow of the famous patriarch. Although the Lis and the Murdochs tend to downplay it, there are elements of a family feud, something personal in the rivalry, dating back to 1993. Starting in that year, Richard Li sold STAR to News Corp. for nearly $1 billion. According to legend in Hong Kong business circles, Li Ka-shing orchestrated the sale behind the scenes while Richard negotiated directly with Rupert aboard his luxury yacht, Morning Glory, in the Mediterranean. The Murdochs have reason to regret the purchase. Although STAR's satellite signal can reach some 300 million homes from China to Australia to India, the operation has lost an estimated $500 million over the last five-and-a-half years, not counting $400 million invested in new content and distribution.

As the new media of the Internet converges with the old media of TV, so too have the Lis and Murdochs been crossing paths more frequently — and with considerable friction. Last year, STAR made its first attempt to enter the broadband business in a content partnership with Cable & Wireless HKT, Hong Kong's dominant phone company and operator of a pioneering interactive-TV network, iTV. When Pacific Century CyberWorks last February made a bid to buy the phone company, Rupert tried to scuttle the deal by teaming with another HKT suitor, Singapore Telecom. Some have speculated that Murdoch's aim in putting up $1 billion for a competing offer was revenge: drive up the price PCCW would eventually have to pay. In the end, Richard Li's $38 billion cash and stock offer for HKT prevailed — and not long after the STAR/iTV content partnership was dead. The Murdochs would not be working with a company owned by the Lis.


STAR's turn as a spoiler came again in the last 30 days. First, Taiwan's GigaMedia, owned by the Koos family, bailed out of a joint venture agreement with PCCW months ago. Four weeks later GigaMedia announced it was hooking up with STAR to provide interactive broadband television access using set-top boxes in a $100 million joint venture. The press conference at which the companies announced their venture was notable mostly because a PCCW executive was slamming the deal as "just another limited service" in a conference call with journalists literally as the announcement was being made. It was another in a growing string of barbs traded by the companies in the media (see box page 47).

"This is a broadband war and these are the dueling families," says Vivek Couto, an analyst with Kagan Asia Media. James, the News Corp. point man in Asia, was not long ago considered the least likely of third-generation Murdochs to play a leading role in the family business. His sister, Elisabeth, had been touted as heir-apparent until recently, when she resigned from News Corp.'s British Sky Television to start a media company of her own. Now brother Lachlan, one year older than James, has been elevated in at least some media circles as the most likely successor.

Perhaps the tattoos are holding James back. He has two of them, including one, of a light bulb, on his arm. They are indications of a slightly rebellious streak. Born in England to Rupert and his second wife, Anna, he became an American citizen after moving to the U.S. as a toddler (his favorite spectator sport today is baseball and he stumbles on the details of cricket, a game especially popular in his father's native Australia). At Harvard, he majored in visual arts and became an editor of the Harvard Lampoon, an irreverent satirical magazine. He dropped out of school just prior to his senior year and spent several months following the Grateful Dead before setting up Rawkus, the record label he sold to the family business.

After the sale, James headed a new media venture called iGuide. But neither it nor a later computer games firm called Kesmai panned out. He was put in charge of Rupert's music and new-media operations in the U.S., but his potential big deal at the time, a $500 million purchase of software developer PointCast in 1996, unraveled (and a good thing too since PointCast's value has plummeted since then; it sold for $7 million last year.) In 1997 he spent virtually the entire year attending conferences and talking to experts about the Internet and new media. In 1999 he was put in charge of News Corp.'s new media worldwide.

This year he married long-time girlfriend and former model Kathryn Hufschmid, moved to Hong Kong and assumed control of STAR TV. "There was some initial apprehension," says Steve Smith, a former managing director at a STAR subsidiary. "One of the Murdoch family members coming over could mean wholesale changes. But that didn't happen."

Until recently, Murdoch and STAR have been moving more cautiously into broadband than Li and PCCW. STAR in some respects is an old media company fighting a defensive battle against a flashy newcomer threatening to co-opt its turf. But, notwithstanding the din of publicity accompanying Li's every move, STAR is in a much stronger position to seize the high ground. The current industry model for the ideal broadband company is represented by the pending merger between America Online and Time Warner (Asiaweek's parent company). America Online has a large Internet-access and subscription base. Time Warner controls content — print, movies, TV, music — as well as the second largest cable-TV operation in the U.S. In other words, the merger would join in one company all the ingredients considered important to a new media player: content, a paying customer base ("eyeballs," in the Net vernacular) and the distribution network ("pipes") to reach a wide audience.

On paper, STAR has many of those ingredients already in place. Although satellite networks are unproven as broadband delivery systems, the company transmits TV programs to an average of 60 million viewers across Asia every day. PCCW, in contrast, has 89,000 Hong Kong subscribers through HKT's interactive-TV network. Add about 835,000 users of Netvigator, the phone company's Internet service provider. A recently reworked deal with Telstra, Australia's big telecommunications company, gives them access to about 2.5 million Aussie homes — and the promise of more.

In content, STAR's advantage is even more clearcut. Among other assets, it holds the number one Hindi entertainment channel in India; Channel [V], an Asian version of MTV; Star Movies and TV programming in Mandarin and other Asian languages; STAR News, Sky News, Fox News; ESPN/STAR Sports and the National Geographic Channel.

PCCW through iTV has broadcasting rights to various Hollywood and Asian movies as well as pornography. Its most publicized content holding is Network of the World (NOW), which so far is little more than a broadband portal under construction. "Do Richard Li and his dad have a few billion dollars to throw at NOW?" says Peter Shorthouse, an analyst with UBS Warburg in Sydney. "Yes they do. But STAR already has an established brand. It would take Richard Li 10 years and a few billion dollars to get to where STAR is now."

What both lack: broadband pipes. Murdoch is moving to remedy that. The GigaMedia deal calls for the company to provide at least $200 million in financing for Taiwanese cable-TV companies affiliated with GigaMedia so they can upgrade their networks for two-way, broadband delivery. The loans will be convertible to equity, meaning STAR could wind up owning a significant share of the island's broadband capacity.

Bruce Churchill, STAR's chief operating officer, says a top priority is acquisitions and partnerships in China and India — two markets also coveted by PCCW. STAR recently acquired a 26% stake in Hathway Cable and Datacom, the second-largest cable network in India reaching 2.5 million homes. China, with its foreign investment restrictions, is tougher to break into, but Churchill says the groundwork is being laid. "We are very active in other regions," he adds. In Korea the company is bidding for the single direct-to-home satellite license. Its executives say it is also talking with SingTel and potential partners in Indonesia and the Philippines.

"Murdoch's brilliance is that he has managed to convince the market he can get a billion Chinese and a billion Indians to one day part with their money," says a Sydney securities analyst who asked not to be identified. He questions whether STAR can do anything to justify the enormous investment the parent company has put into it since 1993 — let alone the enormous expense to come. Another analyst is just as skeptical: "What's been the return on the $1.9 billion [News Corp.'s estimated sunk costs for STAR]? Nothing. How long is the payback period on $2 billion? Ten years? Twenty? Will Rupert's children see a decent return on STAR? Will James Murdoch's kids?"

Shorthouse says there can be no turning back, however. "Nobody knows whether broadband will pay for the investments made to date," he says. "What we do know is that services will ultimately be provided [through] broadband, and therefore if you are not involved in broadband you are a guaranteed loser."

Murdoch says the switch to broadband is all about bringing "a new set of services" to customers. "We can take our business to a new level and increase the revenue we get from customers," he says. "That's our business." Says Churchill: "The hardest part and the key strategic point is in getting the last mile — how to make the last connection with the consumer." STAR's COO says a debate is currently rumbling through the company about whether it needs to rebrand itself. "There is a lot of sentimental attachment [inside the company] to 'STAR TV.' But everyone is realizing we're moving far beyond television." Somewhere out there, Richard Li lies waiting.

STICK AND STONES

CEO: James Murdoch
Audience: 60 million STAR TV viewers on average per day
Employers: 2,200
Performance: 2000 Revenue, $220 million, 2000 Profit/(loss), ($60 million)

"Richard Li ... has made no secret that he would screw us out of the partnership with HKT"
News Corp. Chairman Rupert

Murdoch, Financial Times,
March 1, 2000.

"Mr. Murdoch might have been very angry [when he said that] but I choose to forget it"
Richard Li, PCCW chief, South China Morning Post,
March 3
" It's not what it is cracked up to be"
Bruce Churchill, STAR TV president, talking about HKT's iTV service,
May 30
The PCCW deals "are to make sure we create a horizontally integrated broadband Internet company from content to connectivity. When you see the NOW service, you will start to see how we [are doing it]"
Alex Arena, PCCW managing director, Asiaweek,
July 7
"I fail to understand how one can define a free-to-air, English-language rehash of circa-1980 MTV as a global, multimedia, broadband, interactive TV service."
James Murdoch on PCCW's Network of the World,
August 27
"We'll wait until someone with a successful business track record makes comments and tehn we'll respond. We don't find it very mature."
Richard Li on James
Murdoch's statement,
September 27
"I'd really rathre not focus on PCCW at all. I'm looking at [competitiors]. It's not like NOW is taking ad dollars away from us. So, no. I don't undersatnd their motives. It's weird."
James Murdoch on PCCW's disparaging comments about its deal with GigaMedia,
October 10
CEO: Richard Li
Audience: 3.7 million phone lines in Hong Kong NOW gets close to 1 million daily page views
Employees: 15,000 (14,000 HKT)
Performance: HKT 2000 Revenue
$3.6 billion
HKT 2000 Profit/(loss)
$147 million (PCCW is too young to have valid earnings results)
Source: Asiaweek Research

With reporting by Assif Shameen/Singapore and Alejandro Reyes/Hong Kong

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