PARIS — The heads of the world’s top-four fixed satellite service operators – Intelsat, SES, Eutelsat and Telesat Canada – and the biggest mobile satellite services provider, Inmarsat, discussed a range of current industry issues Sept. 4 at the 11th World Summit for Satellite Finance, organized by Euroconsult
of Paris.
The chief executive officers (CEOs)
– Romain Bausch (SES), Giuliano Berretta (Eutelsat), Daniel Goldberg (Telesat), David McGlade (Intelsat) and Andrew Sukawaty (Inmarsat) – addressed a range of topics including
the current launcher market, the coming C-band battle with terrestrial operators at a global frequency-allocation meeting, the influence of private-equity ownership, broadband plans and whether start-up satellite operators should be given a helping hand by the established players. Excerpts:
What is your assessment of the current market for commercial launch vehicles and how do you deal with it?
Bausch:
The launch-services market is tightening up – for small satellites even more than for larger ones. For the smaller satellites in some cases there may even be a lack of launcher capability.
At SES we recently completed a bulk-buy agreement with ILS [International Launch Services] and Arianespace. We have reserved two launch vehicles for each satellite up to four months prior to launch. Then we decide which vehicle we select. Each vehicle is obligated to have two slots reserved for our satellites, meaning we have four launch slots for each satellite, giving
us a huge flexibility.
McGlade
:
It’s not necessarily the best course of action to do bulk deals and to date we have not decided to follow the same course of action as SES in making a bulk purchase of launchers. We’re adopting a more wait-and-see approach.
I would suggest to all space agencies that this is where they put their money. If we had launchers that were cheap, we would have satellites that were less expensive. NASA, [the European Space Agency]
, [the French space agency] CNES and also the Chinese: Invest in launchers and rockets. We have to propose that they put more money there.
Sukawaty
:
It’s real eye-opening to see the fluctuations in the price of launchers. That is unusual in an infrastructure industry. We were in the market twice within about a three- to four-
year interval, and we have seen a significant fluctuation in price – no doubt about it.
Berretta:
It’s bad for everyone when there is a short supply like this. We are in what is really an artisan-type market. For rockets, you can go from oversupply to no supply very quickly. And when there is an undersupply, you tend to accumulate [launch-slot] reservations, even to the point of overbooking. As the launch approaches we then find out that there are slots that were reserved, but are now available, but too late.
Are larger fleet operators getting better satellite or rocket procurement terms than smaller operators?
Goldberg:
It’s difficult to tell. At New Skies and Telesat we are in the market often enough to secure reasonable terms. At Telesat we have two satellites to be delivered in the next 18 months, and Loral Skynet [about to merge into Telesat] has one as well. Since we are in the market regularly, we are able to do a good job with satellite and launcher suppliers. I don’t see that we’ve been prejudiced by being a little bit smaller.
Sukawaty
:
I haven’t seen any signs that smaller fleets are disadvantaged. It is a boom and bust market and the more important supply issue has to do with that cyclic aspect of the industry more than with anything else.
Bausch:
You need to be flexible, to work with all the manufacturers and see what they do best. I am convinced that economies of scale are really working. In our recent contract with Orbital Sciences for up to five satellites, we achieved terms and conditions that were 20 percent better than we expected. That’s buying intelligently, and you can only do this when you have a large fleet. I think it’s obvious that as a large operator you can do things that a small operator cannot.
Have private-equity (P-E) investments in satellite-fleet operators acted differently than other owners in the same market environment?
Goldberg:
Looking back, on balance there has been some
restraint [on capital expenditures, or capex] compared to earlier years. But it’s hard to assign a reason for this. It might be because the industry went into a downturn and that the capex would have gone down with other owners. Maybe it’s wrong to assume that the same restraints wouldn’t have been there with other owners. At a minimum, the two elements – industry downturn and arrival of P-E investors – coincided.
Sukawaty
:
The arrival of P-E investors has been a good thing. There has been more of a focus on [earnings before interest and taxes, or EBIT]
rather than [Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)]. Being focused on EBITDA in this industry is ridiculous. People got caught up in the telecommunications maelstrom.
My worry is that the tide is now shifting back to where it was in the mid-1990s. I am hopeful that the recent market correction will get people to take a second look at some of the exuberant and irrational business plans you see out there now. Maybe these companies need more P-E help and less venture-capital help, because things like this [other mobile satellite projects] shouldn’t be funded.
Berretta:
I think I have had more different owners than anyone here. Let me say that the CEO is not an irresponsible person, a little child who needs to be looked after. If you are able to explain to your reasoning, your owners will accept new investment. In the last 18 months, when I had P-E owners, I ordered, with board approval, five satellites, including three big ones. I don’t think P-E ownership prevented Eutelsat from procuring satellites.
McGlade
:
I have not had a single case in which our directors turned down a project that we wanted. We now have seven satellites in the factory being built. Our two new investors, BC Partners and Silverlake, built their investment thesis around our planned capex program. And the fact is that when you have EBITDA margins as high as you have in this industry, there’s only so much you can improve through cost cutting.
Bausch:
If I look at the numbers, there has been a decrease in the number of satellites orders in the last two or three years. The historical data shows this clearly. Whether there is a cause-and-effect relationship between this fact and the ownership of satellite operators by P-E investors, that’s another story. We have always been disciplined – maybe because we are the only company on this panel that has been publicly listed since 1998.
What effect is the current debt-market turmoil having on your business?
Goldberg:
Obviously since our deal was announced in December interest rates have moved up. But our underwriters have committed to putting our financing into place. Borrowing costs are going to be somewhat higher, so that will have an effect. But I see no substantial change otherwise.
Sukawaty
:
The state of the markets today is driving a retreat to quality. At least on the MSS [mobile satellite services] side, this is a healthy thing. In fact, if it lasted another six to 12 months it would be even healthier, because it would drive out of the market some of the people who are in there now. So it’s probably a positive in the long term because it will wash out some of these nonsensical businesses that are in the market.
Berretta:
At Eutelsat, we are protected in our debt conditions to 2013. We feel very relaxed about this.
McGlade
:
We have some time between now and the closing of our recent transaction [the purchase of a majority stake of Intelsat by a group led by BC Partners and Silverlake]. We hope the market gets better, and we all know that several months can be an eternity. We have a fully committed financing, and we have just had a successful equity syndication even with the difficult equity and debt markets.
When you have a lot of leverage [as does Intelsat], it has to constrain you. But is that such a bad thing? It has allowed us to focus on the highest-return possibilities rather than take risks that have plagued this industry over time. We’ve thrived in this environment.
The quadrennial World Radiocommunication Conference run by the International Telecommunication Union (ITU) starts Oct. 22. What are the main issues for you there?
Bausch:
The C-band issue and whether terrestrial users will succeed in being able to use this spectrum is definitely the biggest issue for us for some of our markets – Africa, Asia and the Americas. For the time being, the situation looks not so bad from what we know about the position of the governments of these regions.
The region that has taken the least-positive action in this area, surprisingly, is Europe. So we might still have to work on the European Commission to see that they understand that sharing C-band with terrestrial users would be very detrimental, and that it is
not possible to share the band with terrestrial users. Luxembourg has not adhered to the European position and is free to take a different position at ITU to make sure these points are raised.
Berretta:
I agree with Romain. In fact the European Satellite Operators Association
has submitted a common proposal on this to European governments. In general, the satellite sector is not well represented in these governments. But I am confident that we will be able to defend our position.
McGlade
:
I am for new technologies like WiMax. But they have to be introduced in a responsible way. When you look at C-band, the fact is that in some markets without satellite communications there would be no communications. It is absolutely crucial that we protect our customers. We have spent a lot of time at the ITU, and we think we have made an impact. You need to look region by region.
This is a big threat and should be a rallying cry for every satellite operator. While we aren’t as big as some of the terrestrial companies, we have leverage through the ubiquity of the coverage that satellites offer.
Sukawaty
:
The C-band battle currently is more here in Europe than anywhere. It is discouraging to see the cavalier attitude toward this co-channel [trying to allow for terrestrial and satellite use of C-band] issue. People seem to think you can broadcast terrestrially on the same channel and it will somehow work itself out on the satellite level. It’s not that easy to do, you need a huge exclusion zone.
Government leaders need to make responsible decisions. We can’t match, dollar for dollar, the influence of the terrestrial operators. The U.K. government would like the issue to go away, or to be resolved with a statement saying it should be managed responsibly so as to avoid interference. But you will not have any country managing it if that’s the only statement that goes into the ITU ruling. It has to be much more definitive than that.
Goldberg:
It’s not just the commercial operators who are concerned. Governments also are large users of C-band for some highly strategic communications and when those users wake up to the threat represented by terrestrial use of that same band, then the issue will be taken more seriously.
All of you are involved in some way in introducing broadband to small businesses and/or consumers. What are your plans here?
Goldberg:
We are getting capacity-constrained on some of our Ka-band beams for broadband use and we are working on a plan to bring more Ka-band capacity to North America. We are optimistic that the problem we had on one of our satellites [the Ka-band payload on the new Anik F3 satellite] will be resolved and we think we will regain full use of this capacity.
Sukawaty:
Our BGAN [broadband global area network] was introduced about a year ago for land-based users and later this year we will begin rollout to our maritime and aero markets. BGAN is a terminal that’s smaller than a laptop, with a built-in WiFi hot spot for multiple users that provides just under a half a megabit per second of capacity. Terminal prices range from $1,200 to $5,000.
Berretta:
We have announced our intention to start consumer broadband immediately using Ku- and Ka-band capacity on our existing fleet with the ViaSat Corp. terminal, and we have also announced our intention to build a large Ka-band satellite.
We are getting short of frequencies. We see terrestrial networks already trying to eat our C-band and maybe some day they will come after our Ku-band as well.
The cost of the terminals we are providing with this service is about $1,000. Up to now, people selling at those prices were dumping the hardware on the market – except in the United States, where you can provide the product at that price without dumping. We saw that the ViaSat product was arriving at these prices, and that there will be other companies as well. That was the real reason we decided to make our move.
McGlade:
There is huge promise in broadband. But I’m frustrated – frustrated it hasn’t grown more quickly and I’m wondering if we have approached the market as well as we could. We are a major investor in WildBlue [a U.S. consumer-broadband service provider]. But WildBlue is just the United States – a country with a lot of fiber in place, and yet it is a success. Why aren’t we doing more in other countries around the world? We’re a 28 percent shareholder in WildBlue and we are happy with our investment.
Bausch:
We have two satellites in Europe, and two in the United States, with Ka-band beams. In Europe, the problem has been the difficulty in getting blanket licensing, and in keeping the cost of equipment down. We have launched our Astra2Connect service in Ku-band – a two-way broadband service at DSL speeds. The terminal costs less than 200 euros ($275).
Some of you have been assisting start-up operators – who will be competing with you in regional markets – to procure and operate their systems. Why?
McGlade
:
It’s really a way for us of leveraging our infrastructure. You could always get hurt as an industry if you don’t help the weakest, smallest players do as well as possible. We think it’s a good thing to help small operators that cannot compete on a regional or global basis with us to get the best possible quality they can. Their customers – and we occasionally share customers – can thus get the best possible quality.
The other reason is dollars and sense. It’s an opportunity. We make money on it. It’s financially viable or we wouldn’t do it. Look – i
f they’re going to be in the market anyway, let’s make sure we find ways to work with them and their customers.
Bausch:
We are also doing this, for Hellas Sat in Greece, and in Vietnam. But when you
[turning to McGlade] say you can help a small regional satellite operator who is not competitive: Guess who helped develop SES from the beginning from a technical perspective? It was Telesat. The technical installation of SES was built up by Telesat. So they, too, were probably also thinking they could help a small, regional satellite operator.
McGlade
:
Look, I am familiar with the cable industry in the United States and there were some players there who didn’t behave as well as they should have, and it really tainted the whole industry in the United States. We’re not philanthropic and we’re not trying to create new competitors. On the other hand, you either embrace change or you don’t.
When cheap fiber came into the market, we could have put our heads in the sand and said, ‘Our life is over.’ What did we do? We now have hybrid fiber/satellite solutions on over 28,000 miles of leased fiber because we created a business out of it. And it has been the fastest-growing part of our business and certainly supports our transponder sales.
