Mon, Mar 06, 2000 page18

• Giga tunes up for its big gig

  Loaded with IPO cash, GigaMedia is aiming to become a familar name to online Chinese. While its main focus is providing broadband access, it's also pushing into content and the Web portal business

  • By Tim Culpan / STAFF REPORTER
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  It's somewhat appropriate that Taiwan's biggest entry onto the tech-heavy NASDAQ should come from an Internet company.

  GigaMedia took off to a spectacular start in its NASDAQ IPO, with shares jumping onto the boards at US$66.50 compared to an initial offer price of US$27. In its first session, strong demand pushed it up as high as US$88.48 with turnover of 7.9 million shares before settling at US$88 on its opening day.

  Since then prices have fluctuated between the US$60 and US$90 marks.

  While US' SEC rules say that the company must keep a media silence for 40 days after the float, analysts are doing no such thing. Both in Taiwan and the US, market watchers have noticed exactly what investors already knew -- GigaMedia is on a tear.

  Some of the big business moves around the world in the past year have seen the joining of content and delivery. The world's largest merger between AOL and Time Warner was premised on the belief that substance and connection go hand in hand. Excite@Home and last week's CyberWorks-HKT deal are further pointers to the trend.

  But beneath the surface, Giga isn't just following the trend.

  The engine behind the company's future is its broadband Internet service provider business, a high speed cable network which is ready to hook Taiwan up to the Net at speeds up to 100 times faster than conventional dial ups. The company is also moving into the crowded Net portal business, with its eye firmly fixed on the greater China market.

  Big parent backing

  The still unprofitable GigaMedia began in October 1997 as the latest addition to Taiwan's Koos Group cable TV conglomerate. One of the leading cable TV providers in Taiwan, Koos and its affiliates have a web of high-speed cables already delivering cable TV to millions of subscribers throughout the nation.

  Currently, Koos associated companies own about 60 to 65 percent of Giga, which has service contracts with 23 cable operators. Nineteen of those contracts give Giga exclusive access to cable networks, while 16 of those cable partners are members of Koos Group.

  Handy friends to have when you're young and growing.

  According to the company's prospectus, GigaMedia has access to around 3.4 million, or 60 percent, of Taiwanese households, and much of that access is exclusive access, thus giving GigaMedia a big head start into the broadband access market.

  Many believe that figure is inflated, however. While the homes passed figure is legally accurate, it's misleading, industry watchers say.

  "There's a lot of double counting going on. It doesn't mean they actually have that many subscribers," said a Taipei analyst, who spoke on the condition of anonymity.

  And while GigaMedia, through Koos, is a big player in the market, it is by no means alone. Eastern Multimedia, a member of the China Rebar empire, is a major force in the cable TV business and is also getting in on the broadband game. That means Giga has not only to fight for customers, but fight off its arch rival.

  The rules are not so straight forward. Koos and Rebar have for a long time fought for territory in the cable TV business, and that war will likely spill over into broadband, meaning that the homes passed figures cited by both sides are more cosmetic than real.

  One analyst put Giga's situation bluntly: "In many parts of Taipei, there are marked territories. If they try and poach Rebar's customers they're likely to get killed."

  But, the big challenge at this stage is getting people signed up. With modem plus installation costing as much as NT$7,500, and connection rates being quite high by Taiwanese standards, the market is not exactly flush with orders.

  But the numbers are growing. According to figures released by GigaMedia prior to the public offering, 369 subscribers were connected to the company's broadband network at the start of last year, and that number grew to 10,500 by year end.

  Some estimates forecast 100,000 subscribers by the end of this year, and that's when the money will really start to flow.

  Giga's revenue sharing arrangements with its cable partners mean that it can expect to earn around NT$1,000 per connection and close to NT$5,500 per subscriber per year. That adds up to annual revenue that could reach roughly NT$500 million pro rata by year end.

  "The bulk of our focus is still in the access business. We are well-positioned to enable users at a much faster speed, so about 80 percent of our focus is with access," GigaMedia's CEO Raymond Chang was quoted as saying last month.

  While Giga's broadband business maybe the short-term hook for investors, the company's long-term strategy is to focus on online content.

  "In about four years time, we see access as a commodity and at that time we hope to see a 60-40 mix, with 40 percent going to content," Reuters quoted Chang as saying.

  So far, GigaMedia has set up six broadband Internet channels, with more planned in the future. With high-speed access, customers will be able to watch videos on demand or listen to music at CD-quality. Giga even boasts access to the artist libraries of Sony, Warner and EMI.

  But the most important name to be added to the GigaMedia a lineup is without a doubt Microsoft. In October, Microsoft paid US$35 million for a 10 percent stake in GigaMedia. One can imagine the glee on the faces of Microsoft executives when shares hit the US$88 mark on Giga's first day, garnering a paper profit of around US$300 million for the software giant

  The IPO success for Microsoft is made even greater by the fact that the company has warrants to buy a further 10 million shares at US$6 million in the next five years.

  But for Microsoft the attraction of Giga is not in share trading, but the companies' long-term alliance to expand content. Microsoft is keen to get into the Chinese-language market, which it manages to do through Giga, while Giga gets access to Microsoft's vast resources.

  As part of their deal, Giga uses Microsoft software and technology while Microsoft will use some of GigaMedia's own content on its narrowband Web sites. Future plans include a co-branded Taiwan broadband portal and various e-shopping ventures.

  Focus on Taiwan

  While many investors continue to be excited by the prospects of getting into the China market, for Giga the next few years are likely to be focused on Taiwan.

  "The focus of our company is to look at Taiwan specifically. They have a great market that could potentially serve mainland China ... We want to build a showcase; then we can duplicate [it] there," Giga's Chang was quoted as saying.

  But the Chinese market is seen by many as a myth. What appeals to the Chinese in Beijing won't necessarily appeal to those in Taipei, Singapore or Hong Kong.

  Put simply, a one-size-fits all approach won't work. That means that even if Giga does manage to capture a decent slice of Taiwan's Chinese-language traffic, it will be another thing altogether to take that into China.

  For one thing, the Chinese market and the Taiwan market are vastly different. Taiwan's cable TV penetration rate is amongst the highest in the world at around 78 percent, meaning that the ability for cable broadband providers to get into homes is quite high. According to a recent report by the Institute for Information Industry, Taiwan's broadband Internet penetration rate is 4 percent but can be expected to grow to 96 percent within four years.

  That would include not only cable broadband but the competing DSL technology which uses traditional copper wires.

  This of course means more people will be coming online, not just at the pedestrian 56kps speeds but at break-neck speeds of up to 5Mbps. That will mean live video and audio, teleconferencing and more.

  But just because a lot of that traffic will be surging through GigaMedia's cables doesn't mean Giga's portals will be the channels of choice. Certainly, in the initial stages, it will have the upper hand, but as the vast array of the current narrowband content providers move into the field, much of Giga's advantage will be diminished.

  The real value for Giga may well remain in capturing the broadband market, and keeping it.

  Giga and Eastern are not very strong in terms of their Web sites, said Eddie Chang analyst at CSFB in Taipei. "There are 100 other sites in Taiwan that are stronger and have better service and content," Chang said.

  Among the bright lights already in the Chinese market are China.com, Sina.com, SEEDNet, Kimo and more. "The online market is very competitive at the moment. It's going to be difficult for them to differentiate themselves on that basis," Chang said.

  But Giga has the backing of Koos group and is all cashed up courtesy of its NASDAQ listing.

  So what's a company to do with US$328 million (NT$1 billion)? Well, there is technology upgrades, marketing, working capital and more.

  But, the initial plan was to raise US$123.62 million from the IPO, so what to do with the change?

  "Maybe they will buyout some of the other sites with the cash they got from Wall Street," Chang suggested. "A wise move, after all, as the US experience shows; if you can't build it, buy it."
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