As the executive director of the World Teleport Association in New York, Robert Bell has heard grumblings from WTA members over the past several years. Some are concerned about FSS operators conducting business in their backyard.

“All companies have distribution chains, which have tensions built into them,” says Bell. “Every company in that chain has a motivation to get as much value from that chain as they can. (This is) very normal stuff.” But what may not be normal, Bell adds, is the dual role that some satellite operators are playing by competing against their own vendors or teleport operators.

He compares this scenario to the 1990s, when Intel Corp. considered making computer motherboards to generate additional revenue opportunities. But doing so would have placed the chip manufacturers in direct competition with some of its own customers who also manufactured motherboards. There was a furor, he recalls, and Intel stepped back, opting not to compete against this primary segment of its customer base.

“If your vendor turns around and competes with you, that’s a bit of a shock, but it happens in this world,” says Bell. “The real issue comes down to pricing transparency and fairness.”

In the past, FSS and teleport operators each filled a specific market niche. FSS operators typically wholesaled capacity or bandwidth to teleport operators who then resold it with other bundled services to end-users. But over the last decade, this industry model has gradually changed. Some FSS operators have acquired teleports to provide vertical services to end-users. Driven by the need to increase revenues and customer demand for one-stop shopping, some FSS operators have moved into what was historically the key customer base of teleport operators. While some teleport operators are encouraging the industry to set ground rules for fair pricing and competition, others are exploring new markets, products and services to grow their business.

Co-operation versus Supply

To help grow an industry that fosters co–operation versus supply chain enemies, one suggested solution is for FSS operators to offer fair rates when selling capacity to teleport operators, says Bell. He points to FSS operators who may have a big profit margin on their space segment but a small margin on ground services.

“If (they) offer a bundled service that no teleport operator who buys capacity from them can equal, that’s a very aggressive competitive move,” says Bell, adding that the single biggest expense for a teleport business is capacity. “They’ll win the business because no one can compete with them. That becomes what is considered destructive competition.” That approach has yet another downside. If FSS operators move along this vertical path, attempting to control every piece of the supply chain, Bell says teleport operators – who have invested in global infrastructure and maintain and operate it – could be dismantled, forcing many out of business.

That would be bad news for the industry overall. Teleport operators, who are sometimes referred to as the plumbers of the communication world, handle many complex technical tasks involving overlapping standards and various data protocols and connections. They manage their own bank of servers, control systems and establish Internet access points for various markets. They have also independently invested in facilities and sales teams around the world that no satellite operator wants to replace, which are available as needed to funnel customers onto transponders.

So far, Bell says satellite services represent roughly one percent of all telecoms spending worldwide. As the industry evolves, he envisions both FSS and teleport operators delivering new services, going up the value chain in new markets because of amazing technologies. He believes that will reshape many relationships. Until then, the key question to ask FSS operators is how deep they want to get in this complex, fast-changing business that’s outside their core business.

“There’s a need for vigilance,” Bell says. “Everybody has to make sure their business model makes sense not just for their company, but for the ecosystem in which they’re a part of.”

Different Perspectives

Not every teleport operator is concerned about the industry’s changing relationships. Bill Tillson, president and COO at Atlanta-based Encompass, which delivers digital media services and owns and operates broadcast facilities throughout the United States, United Kingdom and Asia, says the real challenge is not FSS competition but that teleport operators need to expand their service offerings.

“We’re not terribly different than any other business,” Tillson says, noting that standalone teleport operators that primarily sell bandwidth will be challenged moving forward if they don’t expand their services, such as offering fiber connectivity or manipulation capabilities. “That’s just part of a maturing industry. The customer base is more sophisticated…(They’ll) go to carriers to see if they can get a better price. That leads some carriers to add a value-added service to their traditional business, which was just to sell bandwidth. “ Tillson believes FSS operators are trying to be sensitive to teleport operators, even though they may occasionally step on each other’s toes. However, five years from now, he says that may no longer be the case.

He envisions satellite becoming a diminishing area for transmission and connectivity. Right now, he says that coax, fiber connectivity and satellite are the primary video distribution highways. But wireless technologies are going to be added to the mix, which will prove extremely efficient because they’ll avoid the need for last-mile construction to connect to a location or facility. “That will be a game-changer,” says Tillson. “All of this means that the teleport operator will have multiple avenues of delivery in addition to satellite capacity.”

Meanwhile, Guido Neumann, managing director and co-founder of Central European Telecom Services (CETel), a Germany-based teleport operator for corporations, governments, carriers and service providers, says his company will diversify its services and evolve into a service provider. Currently, the company is exploring new opportunities in different countries and industry sectors, such as maritime. It’s seeking partners who can conduct business in remote markets in Africa, negotiate with local authorities about licensing issues and regulations, offer customer support and build new antennas or facilities.

But for now, he hopes FSS operators can become more flexible and share some of the business risk with teleport operators. Neumann explains that the cost of satellite capacity typically represents between 70 and 80 percent of a service or project budget that involves Internet or data communications. So if a customer closes up shop, moves and disappears, or goes bankrupt, the teleport operator ends up sitting on that capacity with a hefty bill and no income in sight.

“Satellite operators have an advantage,” he says. “They mainly work with big clients like PTTs and teleport operators that buy big bundles of capacity. But teleport operators work with many small clients, such as system integrators and end-customers. So if teleport operators lose a bigger bundle of capacity because a big customer goes bankrupt, satellite operators should support them by delaying the invoice, or allow them to prolong the sale of the capacity or return some of it.”

Melting Pot

Considering the fast pace growth of technology, satellite and teleport operators will become even more entwined with each other in the near future, says Mike Noon, senior vice president of ground infrastructure at SES,. Unlike in the past when satellite and teleport operators each performed specific functions, he predicts the type of services they will offer won’t be driven by their position on the supply chain but their geographic location and end-user expectations. “It’s not going to be necessarily us in their business or them in our business, but it’s really going to be us working together,” says Noon.

In today’s environment, he believes SES operates fairly with teleport operators, by not springing surprises, informing them where SES is heading and explaining how it may impact their future business. “We don’t inhibit their ability to compete in the marketplace based on the way we price transponders,” he adds. “We want to be fair with them and want them to be fair with us.”

However, in this fast-growth industry, he adds that the responsibilities of both satellite and teleport operators will continue to change as technology evolves and be driven by the business needs of end-users. “Every company has different relationships with different entities or teleport operators,” says Noon. “We add services and more services as business needs dictate. Teleport operators understand that and we understand what they need to move us from facility to facility or antenna to antenna because of their business reasons.”

Due to marketplace and consumer demands and recent changes in technology, both FSS and teleport operators experienced some confusion regarding their supply chain strategies, adds Kurt Riegelman, senior vice president of global sales at Intelsat. Many have asked themselves the following questions: What is our company’s core strength? How can we maximize returns on our capital expenditures for sustainable revenue growth? How can we maximize the return on our operating dollars?

According to Riegelman, teleport operators and service providers are moving closer to customers by exploring new services to offer like video origination and video manipulation, whether linear or file-based video. “They want to take that video, move it, groom it, change it, give people global distribution and services that end–users can’t do today,” he says.

Still, there is some friction in the marketplace. Riegelman says that the days of teleport operators just flipping bandwidth are numbered. End-users are becoming much smarter, purchasing bandwidth directly from FSS operators at cheaper rates. Some even develop the expertise to manage applications or projects themselves and are disengaging with teleport operators or service providers, which places FSS and teleport operators at odds with each other.

“End user communities are becoming more intelligent about everything – procurement, technology, communication,” he says. “They’re really looking to debundle services and get under the bundle hood to understand the price points.”

Riegelman says Intelsat’s decision to accommodate end-users who bypass a teleport operator and solicit direct quotes for capacity is based on the perceived value of that teleport operator and how much transparency it provides.

“If teleport operators are not telling us what their final solution is going to be composed of, we have to protect ourselves and will make a direct bid or bid with multiple teleport providers,” he says. “If we’re working hand-in-hand in a transparent way, many times, we don’t even do a direct bid and only support our channel partners.”

To succeed and help grow the industry, FSS and teleport operators will need to develop open relationships, decide what value they individually offer in this ecosystem, continue to innovate and piggyback off each other’s technologies or services.

“We know we can’t do everything ourselves,” says Riegelman. “Players in our sector can’t be stuck in the 1990s. We’re going to be completely married to each other. We have to keep evolving to continue delivering more value to clients and remain relevant.”