[09/12/07 – Satellite News] Inmarsat’s announcement earlier this year that the company planned to enter the handheld market is a bold statement of intent. The company aims to be a key player in the handheld arena and its president and COO Michael Butler told Satellite News that the operator had a “compelling” offer to end users in this space. However, Inmarsat is not first to market here, so it will be interesting to see how it performs against some of the other MSS players in this market. Butler explains the operator’s strategy and why he thinks the company will have a strong impact and take market share away from some of the traditional players in the handheld space.

Satellite News: Could you tell us about the significance of the launch of IsatPhone, LandPhone and FleetPhone?

Butler: We are launching a range of low-cost services that includes, for the first time in Inmarsat’s history, a handheld satellite phone. There are two real drivers for us entering the handheld market. Firstly, we have a constellation of satellites (Inmarsat-4s), which are capable of supporting such a service. Secondly, through the collaboration arrangement we set up with AceS last September, we have actually been able to bring our own handheld to market probably a year earlier than would have been possible if we had to build the service from scratch. We have entered the market much more cost-effectively than many of our competitors who have set-up their satellite networks specifically for a voice handheld offering. The service that we launched is a handheld IsatPhone, the LandPhone (a fixed installation) and we are introducing FleetPhone, the maritime version, in Q4 of this year. The attraction of this market sector is that it is continuing to grow. We have seen our voice revenues decline over the last few years, but the worldwide wholesale handheld revenues are many times that. This is actually an opportunity for us to get into a growing market segment. It is a very cost-effective proposition. Our handsets will be amongst the cheapest on the market. The tariffs will be very competitive and probably lower than the incumbent global operators. The proposition is attractive for the customer because the service is delivered by Inmarsat, which has two decades of life still in its satellite constellation, so you don’t have to worry about your service not being around in a few years time. We were keen to get a foothold now. A lot of development work is ongoing to bring a fully global, modernized network, which will include a whole new handset as well, much more up-to-date and ready for a global rollout by the end of 2008. It fills a very important gap in our portfolio.

Satellite News: What are your expectations for the take-up of the service throughout the next 12 months?

Butler: It is the first time in our history that we have launched a service of type that we are not first to market with. We are the leader in MSS technology. We have tended to introduce things like Inmarsat-B, GAN, BGAN, and they have always been first of their type to market – indeed, some Inmarsat services are the only offering of their type.

This time around we are actually using the power and capacity of the new Inmarsat-4 satellites to get a foothold in the MSS market place. In terms of actual numbers, there are a couple of things I will say. Firstly, it is a growing market anyway. There are new users who are realising that they need to stay in touch away from terrestrial networks. So, we are confident we will be well-placed for some of the new users — but we are also know there is some migration away from some of the other systems as well. GlobalStar has some issues. Iridium has picked up on that. But, even though Iridium talks a lot about their plans, they do not have a next-generation satellite even on the drawing board at the moment. So, I think we would expect to see some migration away, particularly where the end user is a consumer of a wide range of services. I think the ability to have bundled services all from the same supplier is quite attractive.

With regards to terminal numbers, these are not really the prime driver for us, simply because it is about ARPU and regular users. You may have noticed in April this year, we passed the 10,000 mark for BGAN activated terminals after about 14 months.  I expect a more rapid take-up of the handheld service, and I think we’ll pass through the 10,000 barrier for IsatPhone more quickly than for BGAN; firstly because the type of service is familiar to users, secondly, there is demand for them, and thirdly, the proposition we have put together is a very significant one. AceS will be marketing these services to their existing customer base providing service over a wider coverage area. That does not need new handsets or terminals to be developed.

Satellite News: How many terminals would you hope to have activated after the first year?

Butler: Our aspirations, without any other competitor going out of business, is to target a 10 percent share of this MSS market segment by 2010. Others have estimated that the wholesale revenues in that market segment will be worth about a $500 million. We expect to take 10 percent of that. So, I think we have a modest aspiration, but it is difficult to put a number on it in terms of terminals. That is all incremental revenue for us. Today, we have a very low proportion of land-based voice traffic. We have focused a lot more on data. So, it is a genuine growth opportunity for us.

Satellite News: You said in the press release, “you are coming to shake-up the satellite phone market”. How are you going to do this? What is Inmarsat doing that others have not done in this space? What do you see as your competitive advantages over others in this space?

Butler: We have read complaints in the press from Matt Desch (Iridium’s CEO) saying that we are selling the handheld service too cheaply. We are in fact making money on it. We have a very compelling proposition for the end user. Therefore, it is also attractive for the distributor — not only is it something that the customer is going to buy and use, but the distributor knows that we are going to be here for the long haul providing that service. So, when it comes to shaking up the market, we are going to provide services as cost-effectively as the post-bankruptcy companies, but as a mainstay of our portfolio. Our services can become a pretty integral part of our users’ operations because, firstly, we have more advanced satellites, and secondly, when the third Inmarsat-4 satellite goes up next year, we will actually have global coverage for our handhelds. We will be alongside Iridium, but we will have a funded and launched network and longevity that they don’t have. We think that is pretty important for the vertical segments that we are supporting — for example military, oil and gas — because these are all organizations and market segments that have a long-term outlook, so building BGAN and handheld into their long-term communications portfolio is key.

Satellite News: When we did an interview with Thuraya’s CEO, Yousuf Al Sayed earlier this year discussing their ThurayaECO pricing strategy, he said, “Mobile Satellite Services have always been a victim of wrong perception that they are expensive. ‘ThurayaECO’ will be successful and disruptive enough to break that myth once for all.” Are we at the cusp of something new in this space?

Butler: I don’t think we are. It is definitely an expanding market. Look at our proposition: with you’re an IsatPhone, you can use it anywhere in the service footprint, and you will most likely pay less than you would if you were roaming on your cell phone. There are people taking their mobile satellite phone with them, because it is a more cost-effective proposition. I was in China last week. I was paying somewhere between $3 to $4 a minute just to make and receive calls on my cellphone. It would probably be $5 a minute in Dubai.

In terms of Thuraya, I think their new ECO tariff is a defensive move. I think they have possibly overplayed the threat we represent to them, because that is a huge cut in their revenues today. People who are investing in our business for the long-term do not need to take steps like that. On the other hand, one of things that Thuraya does very well is to establish domestic businesses in some markets. That is not really our focus. They focus on horizontal markets. They have a very big business in Iran, as well as Saudi Arabia and Pakistan. It may well be a valid strategy for them. But, I have got to believe, it is going to lead them into conflict with much more powerful cellular operators who will resent them pricing their specialised satellite phone services at domestic rates. I think it will lead to more competition for Thuraya against competitors who are far more able. But, I don’t think that will throw off the growth we are seeing. Thuraya services have a dual mode GSM and satellite capability, so I am sure they will manage it well. They have not been into bankruptcy, and they are managing their business very well.

Satellite News: Why did you accelerate your entrance into the handheld satellite phone market?

Butler: For the same reason we introduced Regional BGAN ahead of BGAN services. We like to build our own knowledge and experience concerning new markets and customers. We perceived a demand for it. In fact, when we originally put our handheld plan together, we forecast that by 2009 there would be significant gaps in the coverage of the current operators, so that would be the right time to do it.  But, following the collaboration with AceS, we were able to accelerate that. They had a need, we had a solution. So in the middle of 2007, rather than the end of 2008, we are able to get a foothold in this market. Since we floated the company and launched the Inmarsat-4s, there has been a much stronger focus on us accelerating our growth rate. As you will have seen in our interim results, we are on track with this accelerated expectation on how we can realise the benefit of that investment. We are open to all opportunities. We are keen to serve the needs of all of our customers. That is why we are on schedule to launch maritime and aeronautical BGAN services (FleetBroadband and SwiftBroadband) before the end of this year. As we enter 2008, we will have the most complete portfolio. That is what customers want. Ultimately, a lot of them are buying fixed satellite services and terrestrial mobile services. We are trying to meet a broader range of their communications requirements as we can to ensure that we can maintain our position for the long-run.

Satellite News: When do you expect these propositions to become profitable?

Butler: We don’t break numbers down on a service-by-service basis. But, what I will say, is that the reason why the handheld business is so attractive to us is that it will probably have cost us about $75 million to get into the market. You contrast that with the billions of dollars spent on a tailor-made voice LEO/MEO system. It really is incremental for us. As soon as we have subscribers on the network, we are making a positive contribution. As part of the AceS collaboration, we have inherited 10,000 customers that we have been serving since September last year. This is something that will contribute much more rapidly to our overall profits than some of our other services. It is an established market. People have certain requirements and we would expect a much faster take-up. It is an incremental investment.

Satellite News: Do you expect much demand for these services outside of Asia, the Middle East and Africa?

Butler: For the time being, because our early entry covers around 100 countries, we have focused the services in areas where we perceive the greatest opportunity. We have signed up eight distribution partners so far. There are two other partners who we expect will be launching the service later on in the year. We are also introducing a new prepaid platform, which will differentiate our service. The service reach is pretty broad. We have two partners in China, where we see some great opportunities, not only among our core sectors, but also in support of the Universal Service Obligation there. There is a need, not only for good quality voice communications, but also data services in many of tens of thousands of rural villages in China, where we have coverage. We have a couple of new partners such as Axiom, who are distributing our new satellite phone services, as well as a new partner in South Africa, who has got off to a fast start with both BGAN and IsatPhone. We have good coverage with our existing distribution base, targeting Africa, the Middle East and Asia to begin with, but there is a demand for these services on a global basis.

Satellite News: We spoke earlier about the perception of mobile satellite services being expensive to use and not always user-friendly. How will you market these new range of services?

Butler: Fortunately, the majority of the handsets that have been sold over the last few years have been sold by organisations that also sell Inmarsat services. So, the distribution channel is key for us. We have over 500 partners around the world that are selling our services, and they in turn have many dealers and resellers in their own network. We have embarked on a process of educating our distribution channel. What’s got their attention is the way we have priced the service. Take the maritime market: users there like the quality of Inmarsat and our reliability and coverage. But, the cheapest maritime terminal has been an F33 voice and data terminal, which costs around $8000 and which needs to be professionally installed. In a few weeks time, we will be launching FleetPhone, which means you will be able to access the Inmarsat network over a fully operational terminal that will cost $1500. Companies like Iridium have had it all their own way up to now. We are breaking down the barriers in terms of the cost of getting the service up and running. The running costs will be more cost-effective. But, once you install it on your leisurecraft or fishing vessel, it is going to be good for the next two decades. There aren’t any other companies that can say that. We don’t spend a tremendous amount of money on corporate advertising. We don’t think it is necessary for this market. However, I do think we will be a bit noisier about it when we launch our global system. That will be  streets ahead of what is currently out there.

Satellite News: What are your expectations in the maritime market with FleetPhone? Why have you decided to launch this service after the other services?

Butler: The three variants of terminal we are introducing are really based on the previous AceS technology. We have modified the antenna on the handheld IsaPhone. We have made a couple of other modifications for the fixed LandPhone. But, with the maritime version, we wanted to be much more in keeping with the kind of specification that our other maritime services have, in terms of water ingress, environmental friendliness etc. In order to do that, we had to stagger it. We didn’t need to put back the land-based service launch because we were ready to go with lots of inventory, it was proven, the distributors were ready and we launched on July 16. But, because the maritime market is so important for us, we cannot afford to have anything in there that will give people cause to question reliability or quality. It might be a conservative approach, but we think it is worth it.

FleetPhone, as well as a single installation, can be used in multiple ways. We have seen crew calling become a double-digit million dollar business. We think in the future that companies will install an F77 and a FleetPhone. So, there needs to be a similar robustness that they have come to expect with their mainstream communication. Most of the growth in maritime has been coming from data. Our Fleet services, launched around five years ago, have had some of the fastest rate of activations of any Inmarsat service. There are now over 10,000 F77 terminals activated. Every time one comes onto the network, it is generating more data traffic than our previous generation of services could support. Maritime data is driving growth. However, in the first quarter of this year, we had more minutes of maritime voice than at any other time in our history. We think there are opportunities to grow that still further in small vessels.

Many thought a few years ago, when we announced our BGAN plans, that we were moving away from our maritime heritage.  Nothing could be further from the truth. Maritime continues to be a solid part of our revenue base.

Satellite News: Finally, how do you see the MSS landscape changing throughout the next 12 months?

Butler: With the take-up of services, and the types of user who are taking the services, the industry is becoming mainstream. The services are portable and cost-effective to deploy and we are seeing a strong demand for communications on the move. Because of the portfolio we have, we think we can take the lion share of that growth. We want to make sure we have capacity required, have good distribution partnerships.  So, all in all, I am very bullish about the future.