Eutelsat strategy: Heavy pressure on satellite, rocket and ground terminal providers
PARIS – Satellite fleet operator Eutelsat on June 27 unveiled a strategy to mitigate the effects of market headwinds including the free-fall in data services prices by reducing investment outlays, refocusing is government market pitch and doing away with some third-party distributors of its core European Hot Bird capacity.
A month after surprising the market with a revenue and profit warning that sent its own stock and that of much of the industry into a tailspin, Paris-based Eutelsat said it was battening down its hatches to survive a rough two- to three-year period.
Highlights of the strategy as described in a conference call by Eutelsat Chief Executive Rodolphe Belmer:
Reduced capex. Eutelsat is reducing its capital investment by 16 percent in the coming three years, to 420 million euros ($466 million) per year from 500 million euros, mainly by leaning hard on satellite builders, launch-service providers and ground-network builders to improve their offers and reduce their prices.
None of the four satellites in Eutelsat’s order book, nor any of the three satellites yet to be contracted, will be scrapped, he said. But condosat arrangements with operators at neighboring orbital slots, and hosted-payload deals will be sought to cut costs, he said.
Eutelsat will work to persuade satellite operators at neighboring orbital locations to pool their resources to purchase one large satellite together rather than each procuring its own spacecraft. Each company would retain independence on its beams and of its customer set, much as cellular network providers share towers on which each places its transmissions terminals.
TV now, TV forever. Sixty-three percent of Eutelsat’s revenue is from television broadcasting, a market that Belmer said would continue to grow, at a rate of 4 percent per year, in emerging markets. Europe will be flat.
Over time, he said, the market will be a shootout between Internet-delivered video (IPTV) and satellite networks.
Belmer said broadcasters would want to preserve two distribution platforms to encourage competition. While IPTV is becoming a major force, he said broadcasters would not rely on it because it leaves too much of the revenue potential in the hands of intermediaries – the telecommunications network providers.
Lower-cost debt. The company expects that refinancing its 850-million-euro bond due March 2017 and a transaction involving an 800-million-euro bond due in 2019, and extension of another loan, will result in lower interests rates and annual savings of 50 million euros starting in 2019.
Protecting Hot Bird. Eutelsat’s Hot Bird satellites over Europe continue to command premium pricing of 3.9 million euros per year per transponder. But some third-party distributors have been unable to sell all their capacity to free-to-air broadcasters, raising the prospect of a price war with other distributors that would undermine the Hot Bird brand.
Eutelsat will be purchasing these distributors’ contracts early so allow the company to deal directly with customers.
Among other tactics, Belmer said Eutelsat would introduce segmented pricing for Hot Bird customers so that a broadcaster from Slovenia with 1 million subscribers, for example, does not pay the same as a German broadcaster with 20 million customers.
The good news for the Hot Bird business, he said, is that 45 percent of Eutelsat’s customers already have switched to MPEG-4 video compression, while only 20 percent have made the move to high-definition television. That means Eutelsat has paid the price for the latest technology leap without yet realizing the benefits.
U.S. and other governments. Eutelsat believes most military and civil government customers do not want spot-beam coverage from high-throughput satellites – a threat to other parts of Eutelsat’s portfolio – but would prefer wide-beam capacity. The company said U.S. government – mainly military – demand is stabilizing, albeit at lower price points.
The coming completion of negotiations with the U.S. Defense Department on renewing a five-year contract will provide stability, and Eutelsat’s Quantum satellite design of flexible payloads is targeting mainly government markets.
Eutelsat sees Europe, the Middle East, North Africa and Asia as growing markets for government satellite services including government-sponsored broadband deployment.
Fixed broadband and mobility. Eutelsat sees consumer broadband, aeronautical broadband and, longer term, the connected car as growth markets. The company declined to commit to the 1-terabit-per-second ViaSat 3 satellite being designed by its joint-venture partner, ViaSat of Carlsbad, California.
But Belmer agreed with ViaSat’s market thesis that bandwidth volume, and not latency, is the key performance metric – except for certain niche markets and players of “first-person-shooter video games, because they die right away and don’t like it.”
Eutelsat will not be investing, near-term, in any low-orbiting broadband delivery constellations.
Limiting the loss. Belmer said prices for satellite data services will drop by around 50 percent in the next few years with the glut of conventional capacity and the arrival of high-throughput satellites. Eutelsat will use some of its existing capacity to offer lower prices to customers in exchange for longer-term contracts and expects it can keep the decline in its own data business to 15 percent.
Eutelsat will no longer invest in conventional data-delivery satellites.
Belmer said the company would maintain its EBITDA, or earnings before interest, taxes, depreciation and amortization, at 75 percent of revenue and also maintain its dividend.Revenue will be flat for the year ending on June 30, down between 1 percent and 3 percent in the following year and then flat the year after that before returning to growth, he said.