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Richard Li, the entrepreneurial son of Hong Kong tycoon Li Ka-shing, had big plans in 2000 when, during the height of dotcom mania, he used the inflated stock of his Internet start-up to buy Hong Kong's dominant phone company, Hong Kong Telecom. Li's grand vision was to use the telco's network as a springboard to launch an interactive entertainment service called Network of the World (NOW), aimed at delivering TV-style content over the Internet to global subscribers. But NOW flopped when the Internet bubble popped, and a chastened Li was left with little more than a debt-ridden, old-school phone company for his $38 billion investment.

Five years later, Li's vision—or at least a less grandiose reincarnation of it—may be validated after all. Sixteen months ago, his phone company (rebranded PCCW after the purchase) started offering Hong Kong residents who subscribe to its broadband Internet access a slate of pay-TV channels delivered to their TV sets over the phone lines. Called NOW Broadband TV, the service has made surprisingly rapid inroads, reaching more than 420,000 households—35% of the Hong Kong pay-TV market—in its first year of operation. It took I Cable, Hong Kong's sole cable-TV provider, five years to reach that milestone after launching in 1993. "Two years ago, I wouldn't have predicted that our main competition would be from the phone company," says Samuel Wong, I Cable's CFO.

Indeed, this is the first time in Asia that a telephone company has used its broadband network to successfully invade turf traditionally occupied by cable- and satellite-TV providers. Although phone companies around the world have flirted since the mid-'90s with delivering TV signals to people's homes, only a handful of systems have gone into commercial operation because of the high costs of upgrading networks to carry data-intensive video. In the past few years, however, pay TV has become more alluring. According to Media Partners Asia, the industry in Asia is expected to grow by more than 14% this year to $15.5 billion. That's new business phone companies desperately need to offset declines in local and long-distance call revenues, which are under attack from competitors such as Internet-based telephony providers. Some of the fiercest rivals in this new field are cable firms like I Cable, which last week began offering a broadband-and-telephony package for a ridiculously cheap $13 a month.

Expanding into new businesses is a matter of survival for traditional phone companies. "Voice revenue is coming to an end," says Andrew Chatham, Gartner Group's Asia telco analyst. "So phone companies need to look at other areas while they still have money." Paul Berriman, PCCW's head of strategic market development, says such concerns were precisely what prompted it to relaunch NOW as a pay-TV service: "There was the danger that if we didn't act, we could have been made redundant."

NOW Broadband's quick start is partly attributable to its unusual business model. Anyone signed up for PCCW broadband Internet access is eligible for a free set-top box to also hook up the same line to his TV. Instead of selling basic cable-style packages, which often force consumers to pay for channels they don't want, PCCW opted to offer a content menu that is almost entirely à la carte. Fees for individual channels—among them BBC, HBO, the Disney Channel and MTV—start at about $2 a month. Subscribers can readily drop channels and sign up for new ones on a monthly basis with a few clicks of their remote controls. "I like the freedom," says secretary Leung Man-fung, whose pay-TV bill comes to just $10 a month. "I only wanted news, and cartoons for my children, and don't want to pay for everything else."

Can other carriers duplicate NOW Broadband's pay-TV success? Not necessarily, because PCCW (which is in talks with the parent of China's second largest fixed-line operator) has advantages other carriers lack. For one thing, Hong Kong is one of the world's most densely populated cities, so it's relatively inexpensive to reach everyone with high-speed connections. Besides, PCCW—which won't say if its TV service is profitable—did not have to spend heavily to upgrade its network for two-way TV. That's because NOW Broadband runs over an Internet and interactive TV infrastructure mostly built by Hong Kong Telecom in the 1990s. PCCW also benefited from outbidding I Cable for the exclusive rights to the popular ESPN and Star Sports channels. PCCW's Berriman acknowledges that the acquisition was "very significant for us."

Whether NOW Broadband is a role model or an aberration, it's hard to argue with the numbers. PCCW has been signing up about 70% of all new pay-TV subscribers in Hong Kong; it will be the city's top provider of pay TV by 2009, according to a recent Goldman Sachs report. "Other phone companies are watching this closely," says Media Partners' executive director Vivek Couto. If Li can revive his new-media business model, maybe others can as well.

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