Revenue growth among the biggest fixed satellite services (FSS) fleet operators has slowed in the past couple of years, raising the question of whether the glory days are over.
The total satellite telecommunications market continues to expand, but startup operators, many funded by national governments, now take an increasing share of the pie. And Ka-band satellites, which began with commercial and military broadband, are now moving into FSS strongholds.
One countermeasure: Intelsat’s Epic project, which will use Ku- and C-band capacity to provide high-throughput links for fixed and mobile users that otherwise might be tempted by Ka-band.
Luxembourg- and Washington-based Intelsat, which has maintained its place as the world’s biggest commercial fleet operator by revenue, is counting on Epic and other factors in the telecommunications industry worldwide to generate new growth.
Intelsat Chief Commercial Officer Steve Spengler talked to SpaceNews staff writer Peter B. de Selding about Intelsat’s sales strategy.
Is the high growth period finished for established FSS operators like Intelsat?
Over the long term there should be growth opportunities. In fact, we could be at an inflection point rather soon in terms of growth. The development of global broadband infrastructure will be the driver.
Infrastructure is not just broadband access networks for consumers, it’s the entire network: for 4G mobile communications, 4K video, connectivity for enterprise broadband — there is a lot of potential, not forgetting mobility in the seas and in the air, which is really just starting.
Intelsat has been offering large prepayment options to customers — discounts to those who agree to make large deposits as a satellite is being built rather than waiting until its launch. Does this force you to surrender the revenue upside that would come when the satellites are placed into orbit?
It is a way of offsetting capital expenditures in the near term. But it also ties to very, very large commitments that customers may be making, and to their desire to lock in large amounts of capacity for the future. It’s strategic for them and for us. A good example of this is the hosted payload we are providing for the Australian Defence Force. We don’t believe it’s a discount. It’s factoring in normal economics for such large deals. We recently updated our guidance to reflect only those prepayments that are contracted to date. It doesn’t mean we won’t be looking at them in the future.
So this is not a way of giving a big discount compared with what customers would pay at the time of the satellite’s launch?
Some customers that have the cash balances to do it like the idea of locking in a long-term supply for their infrastructure. It’s not a desire to reduce overall pricing. They are getting value commensurate with the size of their commitment.
But wouldn’t a customer coming in with a big, long-term order for bandwidth on a just-launched satellite get a discount anyway?
Yes, and this may be a slightly larger one, but it’s not substantial.
So there is no issue with customers getting used to these deals and resisting future commitments when you take away the prepayment option?
No, that is not an issue.
Let’s look at regional markets. First South America – big growth recently. Is it slowing down?
It’s pretty solid growth still and it is stable from a price standpoint. It’s still a very strong market and a place where we’ve had a lot of success in media and network services.
You have seen no softening with Brazil’s slowing economy and the new satellite capacity coming into the region?
That’s right, we have not.
Does Eutelsat’s purchase of Satmex change the equation there?
We have a strong position there historically across video segments, network services, cellular backhaul and so on. Satmex was a competitor and will continue to be. What may change is the kind of investments they can make now. We’re making investments as well. Our first Epic satellite, Intelsat 29e, to be launched in late 2015, will provide service into Latin America.
Governments in Mexico, Brazil, Australia, Azerbaijan and elsewhere are investing in their own satellite telecom capacity. Is that a threat to a piece of your business?
The Ka-band systems being launched — government or private — are mainly for consumer broadband. This often requires some government impetus. That’s not a market we’re focused on. Second, these are regional or national networks for particular markets — government or government-sponsored broadband access. Our focus is global coverage, wide-ranging applications across multiple sectors. While there may be some impact on the edges in certain markets, our customers are large, multiple-nation service providers to government, corporate, media and other applications.
What about the Middle East and Africa?
Africa has had pressure from a price standpoint. There is still good demand, but there is a lot of supply, so there is pressure. The Middle East has been influenced by the government business, which has slowed a bit. This has stabilized pricing and maybe resulted in some reduction.
And Europe?
For us Europe is mainly a connectivity market into Africa. In Eastern Europe, there is solid demand, and in Russia too. But there is also a lot of competition. Pricing is stable, but there is still a lot of demand.
How about the continental United States, where one big Ku-band customer, Hughes, is moving its business to its own Ka-band satellites?
Our Ku-band in the United States has held on OK. Hughes is switching its consumer users, but Ku-band enterprise is hanging on OK and C-band for video distribution is OK. But it is a market that has been flat for a while now.
Is anything on the immediate horizon that could change that? The United States is still your second-largest market, after Latin America.
I don’t see anything that would change this in the near term. But a lot of business is generated out of North America for services in other parts of the world. I know we’re talking here about downlink regions but it is a very positive commercial market for us given that customers in North America and Europe are expanding their presence in other regions.
What about the Asia-Pacific market?
It’s a crowded, fragmented market. Pricing and demand are stable overall.
Let me give you a different take on supply and demand. We do look region by region, but we also look at customer sets — media, broadband, mobility, government. As we have refreshed the fleet in recent years and developed the Epic service for the future, we’re focused as much on applications and customer sets as on regions.
Pricing and demand may be flat in various regions, but we see strength across our core application segments, and stability across that business. Outside of those core segments, there is more competition, as this segment is where customers are less concerned about having a resilient, global fleet like ours, and are looking for pure capacity for a stand-alone local requirement.
What is your perspective on India, with its fast-growing direct-to-home market but also tax and regulatory issues?
India is a market we’ve been active in for a long time. It’s not well known, but we’re the largest provider of C-band cable distribution services across the Indian subcontinent. We do quite a bit of business there domestically in that segment.
We do work in and out of India for international programmers’ video distribution. But it is a challenging market with regulatory constraints. We have been encouraging liberalization. India has tax uncertainties too. But it has enormous potential.
Are you involved in the Indian tax and royalty issue as other operators are?
We’re not engaged in a consortium with other operators to deal with this. We’re all dealing with our own issues there. But the Global VSAT Forum and others are focused on some of these challenges to try to open up the market.
And for China, where it is difficult to assess domestic demand relative to current supply?
It is clearly one of the most closed markets in the world. It’s very controlled and focused on domestic service providers. It is hard to get concrete statistics on unmet demand, but given the high-level numbers on the market’s size, and the amount of satellite coverage relative to that size, you have to believe there is a lot of potential for more satellite services to deliver broadband, video and other applications. It doesn’t appear to be liberalizing anytime soon.
The number of satellite operators providing C- and Ku-band capacity continues to grow with the proliferation of one- and two-satellite companies, many sponsored by governments. How do you approach this?
Those operators are typically operating very few, small satellites that are focused on the domestic market and domestic entities. So there is some impact. But our customers are interested in pan-regional, global networks offering a lot of flexibility, capacity portability, resiliency for backup and even access to our terrestrial network via IntelsatOne. We believe these new operators are less able to serve our more global customer base. The economics of operating a single satellite over the long term doesn’t point to viability, but these operators often have other than commercial reasons for getting into the business. And we’re also seeing regional operators occasionally putting themselves up for sale.
You have announced more than $500 million in advance orders for your Epic high-throughput offering for corporate networking, aeronautical and maritime broadband services. What’s happened since?
We are working with key customers to understand their requirements over the next five to 10 years as we design the next four Intelsat Epic satellites. We have extensive engagements to incorporate their requirements into our design.
Second, we are active with other technology partners to develop Epic-optimized possibilities. That may mean working with Boeing on the spacecraft, or with ground manufacturers that our customers use. It’s tracking the way we expected it to, so stay tuned. We’re still about two years from launch.
Do you still need to explain C- and Ku-band versus Ka-band when you pitch the Epic high-throughput service to prospective customers?
Ka-band certainly had a head start in the high-throughput satellite conversation. But since we announced Epic in June 2012, the marketplace and our customers now understand that high-throughput satellites are not just Ka-band. It’s Ku- and it could be C- and it could be combinations of the above.
Would it be difficult for a competing operator to adopt an Epic-style program of its own? In other words, do intellectual property rights make a copycat program difficult, for example?
We are doing some unique things on the satellite, which we don’t talk about too much.
We are taking approaches on the spacecraft itself to allow innovative approaches on the ground to provide differentiation for Intelsat.
Are these Intelsat’s intellectual property rights, or Boeing’s, or both?
Both.
DirecTV Latin America will be using frequencies on two satellites being built for you by Space Systems/Loral. DirecTV’s partner, Sky Mexico, has recently ordered two smaller satellites. What is the frequency situation there in terms of Ku-band overlap?
Intelsat 30 and Intelsat 31 for DirecTV Latin America are Intelsat satellites using our spectrum across the region, primarily with a DirecTV payload, but there is a small Intelsat payload on those satellites as well.
In Mexico, DirecTV and its partner, Sky Mexico, had to look at the best way for them to build out their expansion. Their conclusion was that our spectrum wasn’t sufficient to do that with Intelsat 21, which we are currently serving them with, so they have taken a different course. We will continue to work on projects together when it makes sense for both companies.
