Satellite players likely will see continued strong demand in the Middle East in 2009, as demand for capacity in the region remains strong. While there may be a slowdown in growth, most players remain cautiously optimistic about their prospects in the coming months.

The different economies with dissimilar structures and market situations makes it difficult to view the Middle East as a single economic bloc, says Yousuf Al Sayed, Thuraya’s CEO. "For example, there are key oil producing and emerging markets that are integrated in the world economy which have enjoyed significant growth over the past five years and still show high potential. Such markets will experience a slowdown, but surely not a recession that might be faced by markets that had already been comparatively sluggish. It is premature to anticipate the impact of this financial crisis on the satellite industry. This will be clearer in the longer term of the coming two to three years; however, in the near term, it is obviously going to severely affect the project financing side. New satellite ventures that did not already have finance in place before the crisis could now be struggling," he says.

While the Middle East may not suffer a recession as bad as other countries or regions around the globe, analysts believe there will be a slowdown in overall economic growth. "What will happen in the Middle East is that we will see a slowdown in growth but not a recession," Jawad Abbassi, CEO of Arab Advisor, a regionally based media and telecoms consultancy, says. "But we will see many of the big investments be reduced. Also, there will be less investment. In terms of how this will impact the satellite and telecoms industry, I think the telecoms industry will be one of the least impacted sectors simply because the operators are cash rich. They have high [earnings before interest, taxes, depreciation and amortization] and net profit margins. They have good cash reserves," he says.

"The satellite industry has been resilient during economic downturns due to the long-term nature of contracts, revenue backlogs and relatively stable demand from core customers. While overall economic growth might slow down in the region, we still see positive growth rates as opposed to the recession in Europe or in the United States," says Khalid Balkheyour, CEO of Arabsat. "In our proactive monitoring of the developments in the global macroeconomic environment, we see satellite communications demand from broadcast and telecom clients to continue to grow, albeit at a slower pace."

Major Economic Factors

Northern Sky Research (NSR) analyst Patrick French believes the credit crunch that is having a major impact around the globe is not even the most important issue that could affect the Middle East, highlighting the fall in oil prices as something that could be far more of a concern in the region. "While not every country in the Middle East is dependent on oil revenues, most are, and these revenues fund many efforts, including infrastructure development. Slowed infrastructure spending could lead to less investment — or just delayed — in a number of government-backed VSAT projects for educational or rural connectivity networks. Growth in video services — both SD (standard-definition) and HD (high-definition) channels — are less impacted by the current financial situation but not 100 percent immune."

Wejdi Harzallah, vice president of the S2M Group, a new provider of media rich, mobile entertainment services to customers in the Middle East and North Africa, also highlights the potential impact a decline in oil prices can have on many plans in the region. "The Middle East economies are not immune to the global downturn. Several factors are contributing to this," he says. "Firstly, oil prices have dropped dramatically from their highs registered a few months ago, which affects budgets of Middle Eastern economies who are increasingly selective in their projects as a result. Secondly, Middle Eastern funds have invested heavily in international assets that have substantially devaluated in the past few months. Thirdly, the real estate boom has finally ended, but so far we do not see related signs affecting the satellite industry in the region."

A drop in the level of military activity in the region, particularly if U.S.-led forces begin to pull out of Iraq, also could play a role in the economy, says French. "The most important issue to watch will be what the disengagement of foreign military forces in the region will mean to capacity demand. NSR does not expect an abrupt drop in demand but a gradual decline does seem inevitable. This means this capacity will come back on the market mainly from global operators seeking to compete with the regional players. Hopefully video and growth in other segments, plus growth in Africa — note the newly announced Intelsat ‘New Dawn’ satellite as illustration of strength of African market — will be able to absorb this released capacity," he says.

Abbassi believes local operators such as Nilesat, Arabsat and even a newcomer like Yahsat will continue to do well. "They may even benefit because they are generating cash. They may even benefit from the economic slowdown, because they may be able to get better deals from vendors, given that vendors do not have much business elsewhere," he says. "… There is a good demand for satellite capacity in the region. Let’s face it. There are new players coming into the market such as Yahsat. The amount of capacity coming into the market will increase, and the demand will partly grow alongside that. There will also be downward pressure in terms of pricing. There is strong competition in the region. A lot of the capacity is government owned, so it is not susceptible to commercial pressures. The region remains a growth area in terms of the telecoms and broadcast industries."

Positive Outlook

For the operators at the center of the satellite market in the Middle East, it is very much a case of business as usual. Balkheyour says he is still "positive" about Arabsat’s prospects in 2009. "Arabsat enjoys strong cash generation, and we expect this trend to continue with our planned launches. We have secured high-value, long-term contracts that will provide us with a healthy customer portfolio through 2009 and beyond. Capacity still remains very limited in the region, and we do not see this trend fading away in 2009." Demand for capacity will remain strong, and Arabsat’s growth plan includes the launch of four new satellites in the next four years, he says, "Specifically in [the Middle East and North Africa], we still see strong demand for satellite capacity throughout 2009. Continued expansion by our telecoms and broadcast clients will drive demand for the coming year and beyond."

In terms of where he sees the operator’s growth coming from, Balkheyour says, "The [free-to-air] and pay-TV segments, including HDTV, are expected to drive additional future growth on the broadcast side. In addition, we see growing demand from our telecom clients as they continue growing their subscriber base and expanding their networks across the Middle East and Africa. The addition of capacity from our new satellites will enable us to continue serving the satellite communications needs of our clients."

Thuraya, a well established player in the mobile satellite services arena, also hopes for a strong 2009 despite global conditions. "The approved budget and business plan for year 2009 shows that Thuraya will be making a profit," says Al Sayed. "This will be supported by a promising expansion in the Asia Pacific markets — where we launched Thuraya-3 last year — and a faster rollout of our new service offerings, namely ThurayaIP and ThurayaMarine." In terms of what impact the credit crunch may have on Thuraya, Al Sayed says, "We are not yet at a stage where we substantially depend on business revenues from vertical markets, although this is a new strategy that we have started to pursue."

Al Sayed believes the operator will be able to keep hold of its strong position in the region. "We are already the leading [mobile satellite services] operator in the region, especially in voice handhelds. In the face of the current financial crisis, we aim to be proactive — rather than reactive — to minimize any negative impact and make the best out of any arising opportunities. We are reinforcing Thuraya’s position as a prominent [mobile satellite services] operator for both horizontal and vertical markets. Our products, services and commercial strategies and structures have been realigned to achieve this strategic goal," he says. Al Sayed believes, however, that other players could struggle in the region. "The market is there for satellite business and actually growing in many segments. The only challenge posed by this crisis will clearly be project funding. In the medium to long term, broadcast satellites will be able to sustain their business growth; others may find it necessary to collaborate," Al Sayed says.

New Players

While established players such as Arabsat and Nilesat already have strong businesses bases, new satellite players see even more need for services in the region. Yahsat, a new operator based in the United Arab Emirates, is spending $1.6 billion on a dual satellite system. The satellites (Yahsat 1A is scheduled for launch in the fourth quarter of 2010 with Yahsat 1B to follow in mid-2011) are intended to fulfill the satellite communication requirements of government and commercial customers in the Middle East, Africa, Europe and Southwest Asia. With Yahsat still a distance away from launching services, the company is not likely to feel any strong impact from an economic slowdown. "Yahsat is already funded and services don’t start until 2010/2011 at the point when the market will probably be picking back up," French says.

S2M Group, which plans to offer mobile services via a hybrid satellite and terrestrial platform, intends to launch commercial services this year. Harzallah is confident about the operator’s prospects. "So far we do not see signs affecting the expected demand for S2M services or for telecommunications and media broadcasting services in general," he says. Harzallah believes the Middle East represents a very attractive region for mobile television services and is convinced the operator can be successful. "The region is characterized by a predominantly young population that tends to be early adopters of new entertainment technologies, attractive income demographics despite significant disparities in certain countries, and high consumption of media (minutes of TV consumption/day in several countries exceed that of major European countries). The appetite for mobile TV as a mobile, personalized and interactive extension of traditional television is further confirmed by a market research conducted by Ipsos on behalf of S2M and based on 24 focus groups and 5,000 interviews in the region. S2M remains very cautious with its expectations of the potential market and recognizes the challenges and key success factors for mobile TV. S2M is, however, strongly positioned to best capitalize on the opportunity."

"While not every country in the Middle East is dependent on oil revenues, most are, and these revenues fund many efforts, including infrastructure development. Slowed infrastructure spending could lead to less investment — or just delayed — in a number of government-backed VSAT projects for educational or rural connectivity networks." — French, NSR

The hybrid terrestrial-satellite infrastructure also is key to the operator’s plans. "The company’s hybrid satellite-terrestrial platform delivers the highest quality video and audio broadcasts and provides the widest coverage at the most efficient economic model for mobile operators. We have demonstrated recently live broadcasting of top TV channels on 15 various devices covering a wide selection of brands and price ranges. The demonstration successfully illustrated the power of S2M’s ecosystem and of its future services," Harzallah says. "S2M is uniquely positioned in the Middle East satellite landscape since it will be the first system capable of delivering digital broadcasts of TV and radio programs for direct reception by mobile devices such as mobile phones, portable media players and vehicles, reaching a population of more than 350 million people and more than 200 million mobile subscribers.

Bottom Line

The Middle East likely will remain a vibrant market for satellite communications. With players such as Arabsat and Nilesat still well positioned and exciting newcomers such as Yahsat and S2M, the region may not see the economic fallout being felt in other regions around the globe, says French. "The Middle East will probably weather the current economic situation relatively well and video will continue to generate the most new demand and best growth prospects. The emergence of HD will also be important, though the dynamic is different in the region since the HD channels tend more often to be part of the free-to-air segment as opposed to DTH/cable pay-TV services that account for such strong HD demand in North America and Europe."