Ultra-HD TV’s Sudden Adoption: Blessing and Curse for RRSat

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PARIS — Satellite video services provider RRSat Global Communications on March 11 said the global transition from high-definition television(HDTV) to ultra-high-definition (ultra-HD) television appears to be occurring faster than expected, a development that presents good and bad news for RRSat, which leases bandwidth on more than 40 satellites worldwide.

Ultra-HD TV gobbles up four times the bandwidth of HDTV, meaning broadcasters will need to lease more satellite capacity to broadcast the same number of channels in ultra-HD as they now distribute in HDTV format. That is undiluted good news for satellite fleet operators.

For Airport City, Israel-based RRSat, however, the quick market adoption of ultra-HD could mean at least a temporary dip in the amount of bandwidth that fleet owners have available for lease to RRSat and other big purchasers of bandwidth.

As of Dec. 31, RRSat was leasing bandwidth on 43 satellites. About two-thirds of its satellite bandwidth comes from 10 fleet operators covering Europe and North America, which are RRSat’s two largest markets.

In a March 11 filing with the U.S. Securities and Exchange Commission, RRSat said 13 percent of its satellite bandwidth is comprised of long-term pre-emptible leases, meaning that the satellite owners can replace RRSat at any time with a higher-paying, nonpre-emptible customer.

RRSat further said that the fast growth of HDTV, combined with the retirement of certain satellites that were not replaced, has caused “a decrease in the level of satellite capacity on satellites.”

RRSat’s overall network operations costs, including satellite lease payments, did not substantially increase in 2012, suggesting that the in-orbit-capacity issue is not yet having a material effect on the company’s operations. The company reported higher profit margins in 2012 than in 2011 on a flat revenue base.

RRSat’s satellite leases are typically for between three and five years, which means it pays a lower rate per transponder than it would on the shorter-term spot market, but a higher rate than broadcasters taking out 10- and 15-year leases.

In a conference call with investors, RRSat Chief Executive Avi Cohen said ultra-HD is arriving on a not-too-distant horizon, with television manufacturers expected to put 20 ultra-HD, also called 4K, models on the market by the end of this year. How quickly ultra-HD programming will follow is not yet clear, but Cohen said the transition to ultra-HD will occur more quickly than the transition from standard-digital to HDTV.

“We expect to begin seeing 4K content towards the end of this year, and we will look to increase our market presence to capture market share as this transition accelerates,” Cohen said.

As it prepares for ultra-HD, RRSat is putting more effort into occasional-use programming of sports or other special events, for which broadcasters demand short-term capacity just for the event’s duration.

Cohen said occasional use is only about 5 percent of RRSat’s current revenue, but that this should rise in 2013 following the company’s November purchase of S2M Sports & Media Solutions, which specializes in HDTV broadcasts of sporting events through contracts with the U.S. National Football League and ESPN International, among others.

“SM2 is the first major step in this direction,” Cohen said of the company’s plans to expand its occasional-use business. He said RRSat has enough cash available to proceed with acquisitions, whether the purchases be of teleports or broadcast content preparation facilities, called playout centers.

RRSat currently distributes 630 television channels in 150 nations, and provides enhanced program-preparation to 130 channels.

For the 12 months ending Dec. 31, RRSat reported revenue of $113.4 million, flat from 2011. But operating income was up nearly 10 percent, to $9.7 million.

In addition to its television focus, RRSat has a small mobile satellite services business that distributes L-band capacity for voice and data links on the satellite network owned by Inmarsat of London.

In 2012, this business totaled $9 million, up 7.5 percent from 2011.