Shanghai WebTV is Banking on Broadband

By Douglas C. McGill

(Shanghai) The gleaming glass-walled lobby of the Skycity office building is empty except for a single thing: a 36-inch television screen playing the hit American movie "Wag the Dog." Then, when you approach the wall-mounted screen for a closer look it flickers, the face of a smiling young lady suddenly materializes, and she asks: "May I help you?"

Such a welcome is only fitting in the office of Shanghai WebTV, an Internet start-up that's bringing interactive television to Shanghai on a massive scale.

The company is rolling out a service offering Shanghai citizens the equivalent of Excite@Home or AOL-Time Warner's "Road Runner." These "broadband" services turn an ordinary television set into a superfast Internet gateway that can also be used to buy stocks, send e-mails and voice-mails, play games, learn languages, and download music and movies.

"We knew this was going to be the future," said Lawrence Cheung, the company's 32-year-old CEO and co-founder, with the offhand superconfidence so typical of the new breed of young Chinese Internet entrepreneur. "We wanted to get into this area to lead the nation up."

Cheung and his two partners, Michael Nip and Chan Shao Fung, got their brainstorm more than two years ago. They realized that the city of Shanghai was sitting on a potential commercial goldmine -- a digital El Dorado -- that the city fathers themselves didn't even realize they owned.

Superrich Internet Flow

In the late 1980s and early 1990s, as part of the city's enormous construction boom, the city's monopoly telecommunications provider, Shanghai Telecom, laid under the city's streets one of the world's largest fiber optic cable networks.

The fiber optic cables contained far more "bandwidth," or information carrying capacity, than would ever be needed for simple telephone service. But fiber optic cable was chosen anyway because it was the most modern network equipment available -- and Shanghai wanted nothing but the best.

The extravagant infrastructure is the underground counterpart of the oversized marble clad office buildings, government buildings, and luxury hotels that popped up in Shanghai in the early 1990s like mushrooms after a spring rain.

What the city government didn't know at the time was that their extravagance would prove, within a decade, to be an extremely astute investment. Today, broadband distribution networks are among the most highly valued properties in the world, because they are the pipes through which tomorrow's superfast, interactive, superrich Internet will flow.

Duelling with Multinationals

Grasping this fact even before the city of Shanghai did, Cheung and his partners started Shanghai WebTV. From the beginning, they knew that forming a strong partnership with Shanghai Telecom, the company that owned the fiber optic cable system, was a make or break proposition.

Almost as soon as they got their idea, two other companies, both more than a wee bit larger than these three-guys-in-a-garage, had the same idea: Alcatel, the French Internet infrastructure company, and Shanghai Bell, a telephone equipment manufacturer. Shanghai WebTV was able to win an exclusive commitment from Shanghai Telecom to work on an interactive TV venture, but only after duelling with the two multinational giants over a period of several months.

Cheung says that while Shanghai WebTV offered not only to assemble and operate the equipment necessary for such a project, but also to create a "content factory" of young Chinese programmers, writers, and editors to create an attractive interface as well as articles and programming to attract a paying audience to the interactive TV service.

The company, which now has 150 employees, is 75 percent owned by the three founders (one American, one Hong Kongnese, and one Shanghainese), and 25 percent owned by the Shanghai government. Total investment in the company is US$10 million so far, much of which was raised by a new venture capital company run by the Shanghai government, as well as a Hong Kong-listed "Red Chip" company, Shanghai Industrial Corp.

Soft Launch

The company's business model is to act as an AOL-style Internet service provider (ISP), providing a broadband platform for individual subscribers and content providers and charging subscription fees and rents for access and services.

Despite the apparently close -- and for the time being exclusive -- relationship Shanghai WebTV enjoys with Shanghai Telecom, hooking up most of Shanghai's 12 million citizens with interactive TV will take some time.

For one thing, Shanghai Telecom is insisting on a fairly slow, stepwise approach to the project rollout. At present, only 600 people in the city are signed up for the service under a "free test" program that is unadvertised except for a link on the company's Web site, www.webtv.sh.cn.

A soft launch planned for later this year, though, would take on as many as 60,000 subscribers, possibly including hotels, intelligent buildings, residential estates, and small businesses. And for 2003, Shanghai Telecom has set a target of 2 million installed customers.

A Sure Bet in China

In the U.S., none of the prominent interactive TV services have rolled out as fast as expected. Indeed, demand for products like "video on demand" have been much weaker than forecast, and so far the mad scramble to install interactive TV has just not materialized in the U.S.

Might interactive TV in China meet a similar fate?

Cheung answers an emphatic "no," citing what he and others are betting will be the "killer app" for interactive TV in Asia: entertainment.

"Their appetite for entertainment is vast," he said. "In China, entertainment is very limited, and the television is the major source."

Indeed, more than 70 percent of Chinese own TVs. Turning those TV's into appliances that give consumers the ability to download and watch any of thousands of "video's on demand" is close to a sure bet in China, Cheung argues. He cites the runaway success of VCD's, which are far more popular than videos in China, as an indication of the demand for video-on-demand.

Digital Pipelines

Another likely source of competition for Shanghai WebTV, especially if it were to one day branch out beyond Shanghai, are other forms of broadband transmission that could one day challenge the fiber optic distribution network of Shanghai Telecom.

Satellite, an alternative "broadband platform" that is being planned by the Hong Kong company Pacific Century CyberWorks, is another possible source of competition, as are microwave broadband networks established in some parts of China. Specifically, the broadband ISP's that gradually take shape as the leading interfaces between consumers and these pipelines of digital data could all, theoretically, compete with Shanghai WebTV.

Cable television companies moving into the Internet business are another possible source of competition. That's especially true in Shanghai, where cable TV companies are exempted from a nationwide law prohibiting cable operators from branching into Internet businesses such as interactive TV.

With the whole broadband market in China still in its infancy, though, such problems are a good way down the line for Shanghai WebTV.

To reach Douglas C. McGill: dmcgill@virtualchina.net