With Intelsat slowly absorbing PanAmSat, SES Global quickly integrating New Skies into its operations, and speculation abounding as to whether or not Loral Skynet will be put up for sale, it looks like the long prophesied consolidation among major commercial satellite fleet operators is finally coming to fruition. No matter which conference one attends or industry journal one reads, the commercial satellite industry seems to be singing only one refrain recently: “bigger is better.” Being a large, global satellite operator has many important advantages. Some of the key advantages include offering truly globe-spanning, hybrid connectivity services to clients, having large in-orbit fleets that permit greater flexibility for backup and contingency planning, allowing greater access to capital and negotiating strength with satellite manufacturers and launch service providers, and achieving economies of scale that smaller, often regional, satellite operators can not match.
At of the end of 2003, Northern Skies Research (NSR) estimated that the top four satellite operators — Intelsat, SES Global, PanAmSat and Eutelsat — controlled 56 percent of the leased C- and Ku-band capacity for the global commercial satellite market. By the end of 2006, NSR’s latest research from its “Global Assessment of Satellite Demand, 5th Edition” study indicates that the top three fleet operators — Intelsat, SES Global and Eutelsat — will account for 63 percent of all leased commercial C- and Ku-band capacity in the worldwide commercial services market. Including Loral Skynet, this market share would move up to nearly two-thirds of all leased capacity. More importantly, in markets like North America and Sub-Saharan Africa or for connectivity services across the Atlantic or Pacific Oceans, the top two satellite operator’s market share will approach or exceed 80 percent by the end of 2006.
Some in the industry have raised concerns about this concentration of demand in the hands of so few companies. The normal specters of increasing prices combined with fewer choices and service options are emerging for these markets that look every day more like duopolies.
NSR does expect some transponder pricing increases in a few specific markets, but this is more simply a question of strong demand and limited supply such as for Ku-band services in North America. Nevertheless, it should not be forgotten that the inherent structure of the satellite market, especially for video services, actually helps enhance competition. Once a new video client chooses which satellite they want to use, they rarely move off of it, and satellite operators will compete fiercely for each new client because they understand that a contract win almost certainly guarantees long-term, stable revenue .
With 63 percent of the leased C-band and Ku-band capacity, and 70 percent of revenue expected to come from video services of one flavor or another in 2006, NSR’s view is that market consolidation among the global satellite operators will not adversely impact the market choices for the industry’s clients.
Possibly, the more important question to ask is: Does being a global operator really garner such an advantage that these select few will come to dominate all aspects of the industry? It is just not that simple.
The commercial satellite market in reality is a collection of many regional, even national, markets and the majority of customers for satellite services merely need to go “up and down.” In fact, important and growing markets in Australia/New Zealand, Japan, South Korea, Russia, India, Malaysia and Brazil are all dominated by one or two regional operators, and it seems unlikely this will change anytime soon in favor of the global operators.
Further, new satellite operators are emerging at a rate that is fast outpacing consolidation among existing operators. For example, Kazakhstan plans to launch a second national satellite, drawing demand away from companies like Intelsat and SES New Skies. Asia Broadcast Satellite is trying to build a business around the former LMI-1 satellite, and ProtoStar made another step forward when it secured its Series B funding. New satellites for Nigeria and Vietnam seem all but certain, and additional national operators could emerge in Venezuela, Iran, Argentina, Pakistan, Canada and Brazil, among others. Even companies like Ciel Communications and QuetzSat are technically controlled by Canadian and Mexican-based owners, and SES Global only has a minority, though admittedly important, stake in each of them.
It is important to recognize that not all of the above satellites will become reality, and market share will remain limited for those that do. But these emerging competitors, at least for those that really make it, are all too often lost in the industry’s rush to focus on “global” services and “global” operators. It appears that many in the industry are unaware or not fully cognizant of the impact these smaller regional operators could have on the overall shape of the satellite market in the coming years.
NSR’s No. 1 concern surrounding these small satellite operators is their impact on the supply of satellite capacity since many of them will be new national operators onto which their respective governments will want to push national demand that is currently served by one of the global or bigger regional fleet operators. For the end of 2005, NSR estimated that the global average fill rate for C-band payloads stood at 56 percent , while Ku-band payloads had an average fill rate of 71 percent . NSR anticipates that C- and Ku-band average global fill rates will decline somewhat because of a wave of new satellites to be launched in the next two to three years. From about 2008 onwards, fleet rationalization, one of the major promises justifying some of the bigger mergers to date, will hopefully occur, and this combined with growing capacity demand will push global average C-band fill rates back to the mid-50 percent range and Ku-band fill rates to climb up to the mid-70 percent level.
Fleet rationalization should in fact lead to a decline in the global supply of station-kept C-band transponders starting in 2009 and a slowing in the growth of Ku-band supply. Intelsat already has stated that it will not replace the IS-707, PAS-4 and PAS-2 satellites, and many other global and large regional operators are ordering replacement satellites with smaller payloads in an effort to “right-size” supply to demand at each orbital slot.
These efforts to rationalize fleets will probably not start to come to fruition until 2009 or later due to the order cycle for new satellites. Nonetheless, it cannot be overstated that the future health of the industry is largely held within the hands of satellite operators today. NSR’s assumptions on global capacity supply are based on fleet rationalization truly occurring and fewer than half of the above noted new players actually making it. NSR is confident that additional transponder capacity demand will arise for commercial services in the coming years, yet a failure to address issues of excess capacity and a return to past practices of “launch it and they will come” business models could undermine the market for all involved.
Is there anything inherently wrong with being a global satellite operator? Certainly not, and many of the intrinsic advantages are real. But the majority of commercial satellite services are regional, not global, and many markets will continue to be dominated by the regional or national incumbent.
More importantly, NSR’s concern is that the industry is being lulled into complacency because of the supposed consolidation occurring and is not adequately aware of what is unfolding in many markets around the world simply because they do not appear to be the most important at first glance.
There is a real chance that in regions like Latin America, Africa, the Middle East and parts of Asia the industry could suffer once again from the harmful impact of oversupply and the negative price spiral this engenders should too many of these small national or regional satellites actually reach orbit. Our industry all too often gets wrapped up in the hot trends of the day and forgets that many of the satellites will be around for the next 10 to 15 years and could face a completely changed market dynamic.
Patrick M. French is regional director for Europe and a senior analyst at Northern Sky Research
