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A Tale of Three Stocks
A message for Asia's ISPs — embracing broadband is one of the few ways to make progress in these troubled times

It's been six months since the Internet stock bubble burst, but the air is still leaking from the over-inflated egos of the copycat Champagne-set dotcommers (as opposed to the garage-type operators with real proprietary technology). The once-surging river of dotcom IPOs in Hong Kong and Singapore is now a trickle as investment bankers worry about reputations rather than huge fees and bonuses. Almost every listed dotcom stock in the region is trading well below its launch price.

"Some analysts are saying Singapore's Pacific Internet is so bruised it might become difficult becoming a serious player again"
In the U.S., Internet investors have had the option of betting on large established players such as the portal Yahoo! or B2B player Ariba, or if they were too scared to plunge into pure Net plays, then there are the stocks of companies such as Cisco, which makes the equipment that routes much of the Internet traffic. But there are no giants like that in Asia. So if the Internet is here to stay, where does the investor put his or her money?

Try Internet infrastructure and the ISPs, or Internet Service Providers. In Asia, most ISPs are subsidiaries of old telcos. But in the past two years independent operators have been gaining market share — not just in the dialup market but in broadband access. Leaving aside the broadband scene, which I'll come back to another day, there are some interesting dialup players in the region. At least three of these — Pacific Internet of Singapore, Internet Initiative of Japan and Satyam Infoway of India — are listed on Nasdaq. The beauty of a Nasdaq listing is the value of its stock currency. But this strength has to be used aggressively. Cisco probably best symbolizes a Nasdaq company that employs its listed currency as forcefully as the market will allow, making an acquisition almost every few weeks — even in the worst of times. In Asia, Chinadotcom has used its currency well since its listing on Nasdaq over a year ago, though it has not been half as acquisitive as Cisco.

For growing companies, there are three basic business models. One is organic growth through expansion of market share, with odd cash acquisitions thrown in from time to time. The other is synergistic diversification — though that loose term is often abused. The third is growing by providing value-added services while sticking to a core high-end niche market. Armed with a Nasdaq listing, the three Asian ISPs have each adopted a different approach. Pacific Internet (Nasdaq symbol: PCNTF) has chosen to expand its dialup access business outside Singapore — in Australia, Thailand, the Philippines, Hong Kong and India — and has its eyes set on other parts of Asia. Internet Initiative of Japan (IIJI) has stayed faithful to its core high-end corporate users while diversifying.

Satyam Infoway (SIFY), which became the first private ISP in India to challenge the old state-owned monopoly VSNL, has focused on value-added services. It has used its currency to buy large portals such as India World. Satyam Infoway is often described as the AOL of India. It is leveraging its access business to attract crowds to its portals and using its content to boost its ISP user base.

PCNTF, which listed 18 months ago, has traded on Wall Street from $12.625 to $94. At the moment, it is fairly close to its lowest ever. At the height, when it had market capitalization of over $1 billion, its majority owner, Singapore's state-controlled SembCorp, refused to sell. Today PCNTF has market capitalization of just $150 million and SembCorp has been hawking its stake around the marketplace — but so far without without success. Pacific Internet declined to use its muscular stock currency to buy large unlisted ISPs in the region (instead it bought a few small ones for cash) or to copy the AOL model by boosting its content and buying large portals. What's more, it procrastinated on its broadband strategy, allowing competitors to roll out their own. Only recently has it woken up to the fact that it needs to do something. Little wonder that some analysts are saying PCNTF is so bruised it might have difficulty becoming a serious player again.

In contrast, despite recent downturns, SIFY, with its AOL-like strategy, is seen as more focused. Though its shares are down to about $15 — some 90% off the peak of $113 — it still has market capitalization of $1.3 billion. That's lots of Nasdaq currency for big purchases in India. IIJI, for its part, has stuck with its high-end business model. It has spent money expanding its fiber-optic Internet backbone in Japan (the country's biggest) and has diversified into web hosting, systems integration and providing advice to large Japanese corporate users of the Internet and Intranet. Among these three stocks, it has probably been the best rewarded by the market, and is the only Asian ISP stock on Nasdaq on which analysts have a "buy" recommendation even now. IIJI has the most aggressive broadband strategy of the three listed Asian ISPs on Nasdaq. Its stock is around $40 — way down from the peak of $132 earlier this year — but unlike PCNTF and SIFY, it is still clear of its all-time low of $28.50 of some weeks ago.

Clearly, the business model that works best in these difficult times is diversification and graduating from dialup to broadband. The unlisted ISPs in Asia and the telco subsidiaries who have dragged their feet on broadband might do well to take note.

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