RSCC is investing about $1 billion in new satellites in a campaign to boost the operator’s capacity from 283 transponders today to 680 transponders by 2015, according to CFO Dennis Pivnyuk. “The RSCC investment program will bring huge amount of new capacity to the market. Two of those eight spacecraft are direct broadcast satellites that will open the door to wider penetration of DTH services to the Russian population.”
    RSCC’s Express-AM4, AM5, AM6 and MD2 satellites are under construction, with a total manufacturing investment of $700 million. The next stage of the development program includes the Express-AM7, AM8, AT1 and AT2 satellites. RSCC has issued $270 million in contracts with Thales Alenia Space and ISS for the procurement and launch of these satellites.
    “We have sent the specifications for the Express-AM7 satellite to manufacturers and are waiting for proposals from them. It may take three or four weeks before we get any feedback from them. We see this satellite as a mid-sized one. The manufacturing costs of Express-AM7 will be between $100 million and $130 million,” said Pivnyuk.
    The Russian government has subsidized the $700 million cost for the first four spacecraft, while RSCC plans to fund the development of the second group of four spacecraft through a public tender, according to Pivnyuk. “We will take a commercial structured loan and use the guarantee we received from French export credit agency Coface. The loan will cover all three satellites. We have yet to decide how to finance the AM7 satellite, but we know the Russian government will not subsidize it. We will either sell as much capacity as we can at a pre-launch basis to gain the funding for AM7 or go for a commercial loan again or probably do both.” 
    The expected high costs of the development program likely will force RSCC to seek funding from public debt markets for the first time, which raises concerns about exchange rate volatility due to part of RSCC’s debt being held in foreign currency, Pivnyuk said. “We are constantly seeking better ways to finance. Historically, we have never addressed the public debt markets, which we will probably do in the near future. Currently our debt comes from commercial banks. As the business grows, we will have to address the public debt market, but I can’t say when at this time. Certain things need to be done to be ready to go for public debt. One needs a rating from a rating agency and a financial statement according to international standards and so on. We are doing all that, but it won’t happen immediately.”
    RSCC hopes the new satellites will help the operator capitalize on a Russian markets in desperate need of capacity. Express-AM4, AM5 and AM6 will provide 26 Ka-band transponders to cover the most populated areas of the Russian Federation. Pivnyuk said the operator would use those satellites to gauge whether the business model for broadband access in Ka-band is a viable one, though a decision on procuring a dedicated Ka-band satellite may not be made until 2013. “We need to understand the market first. The AM4, AM5 and AM6 are commercial satellites. The AM4 satellite will be launched in the third quarter of next year. We will start to use the first Ka-band transponders in the first part of 2012. It will take some time to evaluate the model.”
    A potential influence on a dedicated Ka-band satellite could come from the Russian Government and a National Broadband Access Project, introduced in summer 2009. “The government allocated $17 million to evaluate the technical feasibility of providing the Russian population with broadband services using Ka-band, but this project is more of a social program. We have to provide paperwork by the end of the year, and then some time next year, probably in the first half, the Russian Government Commission on Telecommunications and Transport should chose the optimal solution for this project. The source of financing would then be allocated,” said Pivynuk.
    DTH remains RSCC’s main driver, as pay-TV penetration is on the increase in Russia and the market remains relatively wide open. The average penetration of DTH services in North America and Europe is still much higher than in Russia, where less than 11 percent of households have access to DTH services, but this creates opportunity for RSCC to capitalize on new capacity. “We have five existing DTH platforms and a line of operators who are just waiting for additional capacity to emerge. They want this capacity right away to promote their DTH platforms. These are potentially new DTH operators, and RSCC has negotiations with all of them. NTV-Plus also needs some extra capacity to go into HD. They have already launched HD services. DTH operators have moved towards MPEG-4, but despite going to MPEG-4, they still need more capacity. It is a matter of rather short time until we see really strong growth in DTH,” he said.   
    The cellular backhaul market is another motivation for RSCC. Tthree major cellular operators in Russia are in negotiations with RSCC to lease substantial amounts of capacity on a pre-launch basis to develop 4G services, Pivynuk said. The satellites also will enable RSCC to expand its international operations. “Our Express-AM8 satellite will help us expand our global footprint, as it will be positioned at 14 degrees West. Its coverage will include the territory of Central America, Europe and Africa. These markets will become more important to us,” he said.