Intelsat Contends with Bandwidth Price Drop in Sub-Saharan Africa

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PARIS — Satellite fleet operator Intelsat on March 8 said prices for satellite bandwidth in sub-Saharan Africa have dropped “dramatically” in recent months and will force the company to cut deals at lower prices than it would like with customers viewed as long-term prospects.

In a conference call with investors, Intelsat Chief Executive David McGlade said the downward pressure on prices in that region is a result of two factors.

First is the arrival of several high-capacity fiber-optic cable links on the African coast, which results in a near-immediate drop in satellite prices and forces companies like Intelsat to move inland to search for cellular-backhaul and other customers.

The second problem, McGlade said, is inexperienced satellite competitors who are selling capacity at prices that Intelsat views as unsustainable. Intelsat’s response, he said, will be to withhold capacity from the market while it searches for blue-chip customers with which Intelsat wants to establish long-term relationships. For these clients, he said, Intelsat will reduce its prices.

“You have a number of competitors in the market that aren’t necessarily as disciplined in selling their inventory,” McGlade said of the market in sub-Saharan Africa, which was recently witness to some of the highest per-megahertz satellite-lease prices in the world. “That has put some pressure into the equation.”

“Potentially we could trade off price, which certainly means [we take] a hit in the short term, with good-quality backlog for the long term to weather the competitive dynamics in that market,” McGlade said.

For Luxembourg- and Washington-based Intelsat, one of the most immediate consequences of the downturn in prices in Africa is that its Intelsat 25 satellite, which it purchased in orbit for $210 million during a bankruptcy auction in late 2009, will be slower to fill than expected. Positioned at 328.5 degrees east, the former ProtoStar 1 satellite has 22 Ku-band and 28 C-band transponders.

“We’ve seen about a 12- to 18-month slip in where we thought our fill factor would be,” McGlade said of Intelsat 25, adding that, while fiber’s arrival in Central and Southern Africa has caused prices “to drop dramatically,” the region remains a good long-term bet for Intelsat. “We still believe we can price above the market because of the quality and resilience of our fleet,” he said.

With a fleet of 52 spacecraft in orbit, Intelsat is one of only three satellite-fleet operators with a presence in most of the world’s markets, even if it is still largely absent in the Middle East. What little capacity Intelsat has there, McGlade said, commands “some of the best pricing on our fleet.”

McGlade said North America is another weak spot for satellite demand, as it has been for the past couple of years. He said North America is “flat to slightly declining in demand and certainly in pricing.” This long-term trend has been accelerated by the gradual departure from the Ku-band satellite-lease market of Hughes Communications of Germantown, Md., which is letting its leases expire and placing its consumer broadband customers on Hughes’ Ka-band satellite.

McGlade said Hughes remains one of Intelsat’s biggest customers. But he said Hughes’ Intelsat capacity is increasingly aboard satellites covering markets outside North America, where Hughes does not have a major Ka-band satellite of its own — at least not yet.

Hughes has agreed to be purchased by EchoStar Corp. of Englewood, Colo., an Intelsat competitor. McGlade said the EchoStar deal is unlikely to affect the Hughes-Intelsat relationship outside North America, and that existing contracts on Intelsat’s North American fleet cannot be terminated early.

As he has before, McGlade said Intelsat is not yet convinced that satellite consumer broadband of the kind that Hughes and competitor WildBlue sell in the United States will be successful outside North America. Similarly, he said, the decision by Inmarsat of London and, on a regional scale, Telenor of Norway to deploy Ka-band satellites for maritime markets has its drawbacks.

Intelsat has announced that recent and upcoming satellite launches will give the company a global ring of coverage of the oceans, except for in the polar regions, in Ku-band.

During the call, McGlade said Intelsat’s Ku-band capacity “can get similar economics to Ka-band, but with higher quality because we can deal with rain fade and other issues in the adverse environment that is the world’s oceans. So we think we have a great solution for maritime — with Ku, not with Ka.”

Industry officials have said Intelsat was a finalist, along with a group of private-equity investors, to purchase satellite fleet operator Telesat of Canada in a transaction likely to be valued at $5 billion or more. McGlade declined to comment on Telesat during the call.

Intelsat S.A. reported 2010 revenue of $2.5 billion, up 1 percent from 2009. Earnings before interest, taxes, depreciation and amortization, at $1.7 billion, was 68 percent of revenue. The company’s backlog on Dec. 31 stood at $9.8 billion, up 4 percent from a year earlier. The Intelsat fleet was 78 full as of Dec. 31, with eight satellites under construction and scheduled for launch by the end of 2013. Intelsat expects to order one additional satellite before the end of 2013.

Intelsat Chief Financial Officer Michael McDonnell said the company’s capital spending is about to drop sharply as the current fleet-replenishment and expansion cycle passes its peak. Capital expenditures in 2011 will be between $725 million and $800 million, falling to a maximum of $650 million in 2012 and $250 million in 2013.