[Satellite News – 2-19-08] From satellite broadband to consolidation within the FSS industry, there are many hot topics within the satellite industry. The Satellite 2008 Show Daily spoke to Andrea Maleter, technical director, Futron Corp, Christopher Baugh, CEO, NSR (formerly Northern Sky Research), Hoyt Davidson, CEO, Near Earth LLC and Maury Mechanick, Counsel in the Washington, DC office of White & Case about the hot topics for the satellite industry in 2008.

Satellite News: What would you say were the highlights for the satellite industry in 2007? How important did you consider the whole C-Band issue as a whole for the industry? Were you surprised by such a favorable outcome?

Maleter: 2007 was a good year for the satellite industry across the board, despite a couple of glitches.  There were lots of new spacecraft launched and even more ordered. A wide array of new applications and markets proved themselves – from HDTV and consumer broadband to cellular and WiFi backhaul. And satellite radio in the U.S. was targeted by the NAB – a clear sign of how successful that sector has become.  As to the C-Band issue, it is incredibly important for the satellite industry. And while the outcome was positive, the issue is far from resolved, and the industry needs to continue its efforts to ensure that access to this spectrum is preserved.  

Davidson: The 50th anniversary of Sputnik was an important milestone to reflect back on all the amazing accomplishments in space, but also as a reminder of the enormous opportunities still within reach and the dreams left unfulfilled. From an economic and business point of view, the highlight was the continued significant pace of mergers and acquisitions, in particular such major transactions as BC Partners acquiring Intelsat, the GE/SES stock for assets swap, the Loral and PSP Canada acquisition of Telesat, new major shareholders buying into Eutelsat and the JSAT and SkyPerfect merger. The pace of smaller M&A transactions in the ground segment sector also seems to be accelerating and shows signs of finally bringing some much needed consolidation to a heavily fragmented industry. As for the C-band victory, I was surprised that it happened so quickly and ‘easily’, but expected the logic of incumbency and the importance of C-band to the developing world, in particular, to eventually carry the day (or at least for now).

Mechanick: Most definitely, the outcome at WRC-2007 was one of them. The resolution of the C-band issue was not only significant substantively, but it also demonstrated that the satellite industry is capable of coming together on issues of critical importance in a very effective manner, which has not always been the case in the past. A number of players deserve credit for this, but the leadership exhibited by the Global VSAT Forum was particularly impressive. The outcome was not necessarily a surprise, because of the compelling reasons for continued protection of satellite C-band operations, although absent the considerable effort that was expended, a less favourable outcome could have resulted. Other highlights included a number of transactional matters, including the successful completion of the Loral/Telesat merger (announced in late 2006), the Caprock acquisition of Arrowhead, the separation of Echostar into two companies and the most recent ownership change at Intelsat, with BP Partners buying out the Zeus consortium. And the very late-breaking development, which is the understanding reached between MSV and Inmarsat over L-band spectrum sharing in North America, may potentially have the greatest long-term significance of any development this past year.  Lastly, the year was also notable for the two things that did not happen during 2007 and the continuing uncertainty generated thereby, specifically the FCC’s failure to conclude its review of either the XM/Sirius merger or of the DirecTV/Liberty transaction. 

Satellite News: What would you say are the three hottest topics in the satellite industry? Have these significantly changed from last year?

Maleter: Mobile, Mobile, Mobile – which is what I said last year.  While the MSS/ATC opportunity is still in development, there is plenty of other action, with the recent Inmarsat/MSV agreement on spectrum allocation creating lots of new possibilities. There are plenty of issues to discuss regarding how GlobalStar will hold onto its business until the second generation spacecraft come online, how ICO will pull off a shift into broadcasting, and what Iridium NEXT will look like. In the ‘fixed’ satellite world Comms-on-the-Move continues to grow in the military environment, and the technologies are evolving into an increasingly interesting set of new consumer applications.

Davidson: Well one would have to include the much anticipated XM/Sirius merger, but that should not count for 2008 as it really should have been approved last year. For the first hot topic, I would mention the continued explosion of video content demand across existing and new platforms and especially the impact of HD. If content is king, HD became the crown prince in 2007. Video transport via satellite should prove to be a major demand driver for much of the industry this year. It has allowed the DBS operators to continue to take share away from the cable companies despite not having a good triple play alternative. It has also allowed the FSS industry to look forward to new telco, IPTV and digital signage customers and may in the future include satellite delivery of video to mobile and wireless service providers. As a second hot topic, I would include a step up in the migration of the industry to the higher performance MPEG-4 and DVB-S2 standards along with continued innovations in compression, modulation and error correction technologies. The declining cost per bit will be a two edged sword, reducing legacy demand for space segment capacity while at the same time enabling new higher bandwidth satellite services to blossom. Lastly, I think Spaceway 3 coming online with its massive amounts of Ka-band capacity and on-board processing could begin to make a case for more sophisticated (and expensive) GEO satellites and the greater use of new bands and spot beam technology.

Baugh: Broadband (Ka-band in particular), DTH growth in developing markets, and financing deals for both FSS and MSS players were very important in 2007. The rise of broadband platforms, and particularly Ka-band services, outpaced expectations and points to a promising market for satellite companies.  DTH continued to represent a huge growth engine for satellite equipment and services and will generate the largest growth rates of any commercial satellite application over the next five years.  And finally, 2007 saw a wave of financing deals in both the FSS and FSS sectors, which signifies the solid nature of the satellite sector amidst the global debt crisis.

Mechanick: Broadband, Broadband, Broadband. (Actually with a little MSS thrown into the mix as well, although that may simply be another way of saying broadband.)  Last year broadband was more of a question mark, this year it is the main game in town.

Satellite News: It seemed to be a mixed year for the satellite launch providers, with some high-profile launch failures mixed with a strong demand for services? How do you view the prospects for the various players going into 2008? Is access to space going to become even more of an issue?

Maleter: Access to space is a continuing issue – and from a number of different angles. First, all of the current players are moving forward with solid manifests, and proven abilities to deal with the occasional failure. But the manifests are tight, which means that there are incentives for new players to enter the market, and we are seeing this happening. In addition to the appearance new launch providers, we are seeing growing interest in ride-sharing, or the piggy-backing of small payloads (mostly military or scientific) on commercial launches. This reflects the limited availability of launches, the tighter budgets in some small programs, and the desire by even major operators to have that extra money to help justify their new launches. 

Davidson: It is a tough industry when you need some of your competitors to suffer failures in order to take enough supply capacity out of the market to support decent profit margins. Long term, I am not bullish on this industry, from an incumbent’s point of view, as there should be a continual stream of new launch systems entering the market as nation after nation joins the space faring community. The winners will be those that can either launch the heavier birds and provide superior service at the high end of the market or, at the opposite price sensitive end of the market, those who can provide acceptable reliability at the lowest cost.  That may mean much of the price sensitive, low end of the market shifts away from the major U.S. and European suppliers over time to the newer entrants.

Baugh: Given the large number of satellites ordered in both the FSS and MSS sectors, launch services are in demand and prices are on the rise. Launch timetables should not slip by much, but this assumes no additional failures in 2008. Additionally, SpaceX success and China Great Wall’s push in developing countries is certain to cause more issues with the other launch providers.

Mechanick: We go through periods in which multiple launch failures can adversely affect access to space, and 2007 in that regard was unfortunately a stark and timely reminder of how risky the satellite business can be, and that we should never take anything for granted. At the same time, the recovery in the case of both the Proton and the Sea Launch programs has come much faster than in the case of prior launch failures, which is a clear indication of how resilient the industry has become, even in the face of certain setbacks. 

Satellite News: In your opinion, what was the most surprising event that took place in the satellite industry in 2007? If we can look into the crystal ball, can you name me one event you think might happen in 2008 (AT&T acquiring EchoStar, for example)?

Maleter: Most surprising for me was that the Sirius/XM merger wasn’t finalized.  For 2008 I would be surprised if there is not at least one MSS merger.

Davidson: From a banker’s perspective, I would have to say the biggest surprise was the BC Partners acquisition of Intelsat. Not only was BC Partners virtually an unknown to the space community, the assumption had been that FSS leverage and multiples had peaked and would not support of deal of this magnitude. The attractiveness of the FSS industry (and a successful Intelsat/PanAmSat integration) proved otherwise. My prediction for 2008 is that Charlie Ergen (EchoStar CEO) has not split apart EchoStar just to make DISH more acquirable by a telco. He has serious interest in growing the satellite infrastructure business and is likely to make an important acquisition. This could be an acquisition of an FSS company or even a satellite manufacturing company.  A merger with Loral and/or Telesat might be particularly interesting and both are now controlled by institutional investors.

Baugh: The high level of Ka-band success was most surprising and will continue to represent a large growth engine for satellite players in 2008 and beyond.
We suspect something significant will happen in the U.S. DTH sector in 2008 with AT&T acquiring EchoStar (retail) as a possibility. Alternatively, DirecTV and EchoStar could intend to merge again. The changing competitive environment might now result in better odds for this and less antitrust concerns. U.S. DTH operators are seriously exploring ways to diversify their business and become more efficient and need to be actively involved in hybrid triple play offerings. Their ‘HDTV advantage’ is not sufficient in the long term, and the participation of EchoStar in the 700MHz spectrum auction is an example of this.

Mechanick: Surprising things include (1) the BP Partners acquisition of Intelsat, showing that the appetite of private equity for at least one more big deal has not yet dissipated; and (2) Viasat’s apparent willingness to transform itself into a satellite operator. Actually, however, for the most part, the most surprising thing is that there were not more surprising things. As to 2008, the key question in my mind remains whether this is the year that the inevitably obvious Loral/Telesat/Eutelsat merger will finally take place.

Satellite News: Finally, can you give me three reasons why the satellite industry should be optimistic going into 2008, and three reasons why things might be more difficult than before?

Maleter: Reasons for optimism: 1) the development and deployment of new, innovative technologies continues on both the ground and space sides of the industry, driving new applications and new efficiencies;  2) there seems to be ever-evolving desire of people everywhere for more services in more places, especially video, which drives demand for satellite capacity in multiple parts of the distribution chain – the Beijing Olympics will push this demand even more; 3) the continued reliance of governments, including military, on satellites for communications as well as different types of sensors – in particular imagery – will continue to drive new developments in this sector as well.
    Reasons things might be more difficult: 1) the global economy is not looking good, which will challenge all markets; 2) the high capital at risk in a large number of new, and as yet unproven, systems such as MSS/ATC, may test the resolve of some financial investors; 3) the industry has not yet developed a well-integrated and clear role in serving disaster recovery needs, and if a major requirement develops in 2007 for which satellite services are not deployed on an effective basis, interest in funding satellite systems for such needs may be diverted to other alternatives.

Davidson: The clearest reason for optimism is that we are still in the early stages of the broadband revolution, by which I mean the desire by individuals, companies and governments to receive, transmit and share rich content anywhere, anytime and to anyone. This can not be achieved globally and economically without a heavy reliance on satellite technology. Second, innovations in space and ground segment technologies continue to power new services and make older services more efficient and affordable. Lastly, a good reason to be optimistic is that the industry is becoming less dependent upon the economic health and demand from U.S. and Western European customers. In 2008 and onward, growth in space related expenditures and revenues should be higher outside of these traditional Western markets as the developing world leaps into the 21st century.
    The first area of concern is the maturing of some of the industry’s driving forces, DBS and DARS. Subscriber growth is certainly far from over for these companies, but gains are at a slower rate. The emphasis is shifting from subscriber growth at any cost to ARPU and churn maintenance. This can be good for the participants and their investors as hopefully it leads to higher cash flow and profitability, but the industry needs new killer applications to serve as the engines for future growth. Perhaps it is time for satellite broadband to step up and play that role, or the MSS/ATC industry or even the geospatial firms like GeoEye and DigitalGlobe. Second, from a capital markets perspective, the credit crisis should dampen leveraged acquisition and refinancing activity at least for the first half of the year. The increase of risk premiums across the board will also raise the cost of capital for companies trying to finance satellite industry projects. Finally, and primarily for those of us participating in the U.S. market, one of the key reasons 2008 may be more difficult is the Presidential election cycle. Uncertainties in the direction and priorities of a new administration will make planning far more difficult for companies affected by military and NASA space expenditures. 

Baugh: The satellite industry should be more optimistic going into 2008 because of a) greater demand for bandwidth and higher transponder prices, b) more mobility requirements across the globe for commercial and government users, and c) video doing what it does best: increasing the thirst for new equipment and more communication infrastructure.

Mechanick: Reasons to be optimistic include: the public’s continued insatiable demand for bandwidth intensive products and services; the public’s insatiable demand for mobile delivery of content; and the continued willingness of financing sources to commit to the industry.
    Reasons to be pessimistic include: the possible near-term consequences of the general economic downturn on the satellite industry and the potential self-destructive impulse of the MSS industry.