Intelsat’s Next CEO is Hoping for Epic Wave
Profile | Stephen Spengler,
Deputy Chief Executive, Intelsat
Heavy hangs the head that loses the crown, too — which by some measures is what happened to Intelsat in 2014, when for the first time it fell to second place in revenue, behind rival SES, among fixed satellite services fleet operators.
With its government business declining sharply, Luxembourg- and Washington-based Intelsat said the company’s overall 5 percent revenue dip in 2014 likely will be repeated, or nearly so, in 2015.
U.S. government budget sequestration and troop withdrawals from Iraq and Afghanistan are the main reasons for the drop. But for the moment Intelsat cannot point to an offsetting source of a revenue upswing before mid-2016, when its first Epic high-throughput satellite will be launched. The company’s stock has dropped as a result.
It is in this context that Stephen Spengler, now Intelsat’s deputy chief executive, will take over as the company’s chief executive April 1, replacing David McGlade, who will become the company’s executive chairman.
Spengler did not seek to minimize the current difficulties but stressed the renewed dynamism of the satellite telecommunications sector as companies such as SpaceX, Facebook and Google investigate ways to provide Internet connectivity worldwide. For Intelsat itself, he said, the first Epic launch is less than a year away, ushering in the promise of renewed growth.
Spengler spoke recently with SpaceNews staff writer Peter B. de Selding.
Have you been dealt a poor hand as you take over given Intelsat’s recent financial results?
Not at all! This is an exciting time in our industry. Look at the growth in demand for Internet connectivity, for connecting the unserved parts of the world, for greater broadband services to enterprises, the growth of mobility, and the growth — over the long term — in government services and the Internet of things. It’s exciting. We’re seeing growing interest in satellites from players that had not been in this space before. That’s a good indicator.
Facebook’s Mark Zuckerberg said most people who aren’t online have access to the Internet, and could pay for it, but don’t know why they should. Do you buy that?
I don’t think that’s the case. There is still a fairly large percentage of people in the world that aren’t connected, or are underserved. That presents a real opportunity for our industry. Our approach is to drive connectivity through wireless networks, or through enterprise and government networks, by leveraging our investment in Intelsat Epic, or leveraging the ecosystem we’re building around it to deliver higher-performing services at a lower cost per bit. There are certain things that need to happen. We need cheap smartphones. We need to get down to $25 or less for a smartphone to build out those parts of the world. Facebook may have a different view of the world. What Mr. Zuckerberg may be talking about is how they expand their user base. Once that’s established, then there may be some economic benefits down the road. I don’t think he’s expecting people to build networks for him for free to enable that.
A couple of the proposed new Internet satellite constellations appear to be aimed at trunking services. Is that a threat to you?
Are they going after some of the same markets? Maybe, but there are different ways to get at that market. I don’t look at these ideas as trunking in the way O3b [with 12 high-throughput satellites in equatorial orbit] does trunking. These are more narrowband than that. But all these projects are years away from being operational and it’s too soon to tell. We’ll see. But it’s great to see the innovation and to see others coming in and confirming the demand.
It does appear that LeoSat and, to some extent, SpaceX’s announced constellations get close to what Intelsat does.
One aspect of these constellations that I wonder about is how they can be commercially successful without maximizing the fill rate of the satellites. A LEO [low Earth orbit] system needs to capture service everywhere you can. It’s an inefficient system to begin with, and if you target one application you really have to see if the business case can close with that architecture. I am sure they are all addressing these questions and there may be things we can do together with these constellations.
Your first Epic satellite is scheduled for launch in early 2016. Is it behind schedule?
It’s roughly consistent with where we expected it to be. It did slip from end 2015 to early 2016, but it’s not that far off. We are less than a year away from launch, and a year and a few months before getting it into service.
So no problems with the satellite or launch vendors?
The manufacturing at Boeing has gone very smoothly, and Boeing has maintained the schedule. There are challenges to the launch manifest across multiple vehicles and there is some fluidity to the dates because of the tight manifests for all providers — in this case, Arianespace.
Have you got the co-passenger on the Ariane 5?
My understanding is that they do, for a launch in Q1 2016.
How about the IS-33 satellite?
This is scheduled for late 2016. On the manufacturing side we are on schedule. On the launch side — this is also an Ariane 5 — we’re a bit too far out to be precise on the schedule.
The Epic satellites have large capacity — 230 equivalent incremental transponders for Epic 29 alone — with lower per-megabit prices for customers. How can you avoid cannibalization as customers roll off contracts on your current fleet and switch to the lower-cost Epic services?
Keep in mind that Epic satellites are replacing older satellites. There is a base of business that will transition to Epic from current satellites that are nearing the end of their operational lives. Epic focuses on giving customers the right economics, meaning the cost per bit, and also the total cost of ownership because the satellite’s performance will allow smaller antennas, smaller radiofrequency systems on the ground. Those attracted to Epic so far are seeking higher performance at existing sites, or better economics to expand to new sites in their network, and overall to take advantage of growth. That is the model of who will be coming over to Epic.
Won’t some customers transfer to Epic without increasing their business with you?
Yes, some will, but they will be coming over with the same competitive dynamic they have today. We have to be competitive with others in the marketplace.
So Intelsat faces a possible revenue loss short-term and then growth as these customers increase their bandwidth requirements?
We don’t see the revenue dip. Some customers are taking more services right off the bat. It’s not like they are coming over to Epic and then will decide later whether to grow. They are coming over to Epic with larger commitments. It’s not so much a transition period.
You are speaking here of more than just the three Epic anchor customers, Panasonic Avionics, Harris CapRock and MTN?
So Intelsat will see no dip in demand for its traditional satellites even as it and others add Epic-type high-throughput capacity?
Applications driven by macro factors in the marketplace lead us to conclude there will be sufficient demand in our current and expanding customer sets that we’ll be able to capitalize on with Epic. But it doesn’t mean we are replacing our entire fleet with Intelsat Epic satellites. We still have, and will continue to have, conventional satellites in our fleet. They will serve media applications and broad regions for mobility in areas of lower traffic density. There are lots of things we’ll do in a hybrid environment to get the right solution to customers.
Was there a big increase in high-definition penetration from the end of 2013 to the end of 2014?
We’re seeing some growth in HD in our video distribution neighborhoods around the world. And we will see growth in step functions as new capacity comes in. But it was not dramatic growth in 2014.
Are you capacity constrained in providing HDTV?
I wouldn’t say we are constrained. We provide several very popular video neighborhoods in Latin America, Africa, India and other regions. But Intelsat 30, for DirecTV Latin America, will enable them to add more HD channels. The same is true for MultiChoice on Intelsat 36.
Ultra-high-definition TV screen prices are coming down fast. Will we see a material effect of UHD in 2016 at Intelsat?
It’s true the cost of UHD sets have come down. But there is still work to be done on the HEVC [highly efficient video compression] encoding standard. There is technology in development right now that will be a real enabler of the transport of UHD. I wouldn’t say 2016 is the year. In our view it is a little further out before we see meaningful activity. The network is capable of it today but needs an advance in HEVC to make it more efficient and viable for broadcasters.
Do you agree that UHD will be as big as HD is becoming?
It’s hard to predict consumer behavior. But certainly anyone who has seen an Ultra-HD program can’t help but be impressed. Its growth is probably going to need a catalyst like sports. For us we are preparing the network to be ready. Intelsat 31, 34 and 36 are all [Direct-to-Home] focused.
Your government revenue was way down last year and the year before, and 2015 doesn’t look much better. Is this going to bounce back or are we in a new era that won’t return to previous levels?
I am not sure we’ll get to previous levels quickly. We still see the impact of budget cuts and sequestration, and the impact of troop withdrawal. We see more of an impact of troop withdrawal than sequestration and the budget in 2015. But there is pressure in both areas. In the government sector we are looking more long-term. We know it will level out at some point, hopefully soon. There is a very healthy dialogue going on right now between the Department of Defense and the commercial satellite sector. This is fairly new and we need to see how it develops and what the appetite is for replacement of the WGS [Wideband Global Satcom] constellation — whether that is going to happen and what form it will take. Epic should be very attractive to the military as it gives them capabilities beyond what they can do on their own satellites.
WGS is up to 10 satellites in Ka-band. Will you need to develop Ka-band capacity to complement WGS?
We will look at the right frequency for the application. We still have a number of Epic satellites to put into the factory and our plans for those satellites will of course address the question of what our government customers need, and whether we should be designing specific capacity for them, as we do for other customers.
How close is the industry to a fully software-defined satellite?
This is where we’re all headed. Each of the Epics that we build will advance the technology step by step, ultimately leading to a software definable platform. Eutelsat’s Quantum as I understand it is a demonstration of that approach.
What is the status of the new-generation flat-panel antenna that Kymeta is developing for you?
The product is not out yet, but we did a thorough assessment of Kymeta’s capabilities and its roadmap to a workable product. We are satisfied they are on the right track. They have unique technology and some great intellectual property. We think our partnership will help them because we are going to stay very much involved in that process with them as we focus on applications and how it will be incorporated into our network. We wouldn’t have made the commitment if we didn’t believe they are going to get there. This will be a key part of the Intelsat Epic ecosystem that will enable new applications.
They should produce a commercial product in 2016?
Yes, in that time frame.