By Julie Blondeau Samuel
In 2004, the Latin American economy began to take an upward turn as its gross domestic product (GDP) increased 5.5 percent from the previous year, reaching $1.871 billion, and inflation rates dropped to 7.7 percent. Experts expect this recovery trend to continue through 2005 with a growth of 4 percent in the regional GDP and forecasted inflation rates below 6 percent. These encouraging numbers could be a sign of better times for the satellite industry in Latin America.
With 515 million inhabitants, the satellite industry looks at Latin America as a market still having potential after its economic downturn a few years back. Brazil alone represents 35 percent of Latin America's population, with Mexico accounting for another 20 percent. Looking at the volume of potential customers, it is understandable why the satellite industry is eager to continue developing business in the region.
Vast transmission capabilities also make satellite technology particularly efficient for point-to-multipoint applications, such as video and broadband services. According to a Frost & Sullivan research report "Commercial Geostationary Satellite Transponder Markets for Latin America" published in May 2005, video and corporate networking applications accounted for almost 75 percent of the total leased transponders in Latin America in 2004.
Loral Skynet estimates that the Fixed Satellite Services (FSS) industry currently generates roughly $600 Million dollars a year in revenues from its business within the Latin American region. The operator expects that the demand for FSS will grow about 5 percent annually until 2010 and that the Ku-band supply will progress and surpass the C-band supply by 2010, currently dominating the market at 60 percent.
Latin America Today
Executives working within the Latin American market relate its business today to being where the United States was 20 years ago, although technology has progressed at a much faster rate as the region continues to increase its demand for two-way broadband. In fact, distance learning and corporate network platforms enabled by satellite technology have been successful business ventures from Mexico to Argentina.
But such ventures have not succeeded without overcoming obstacles. Industry executives and analysts working in Latin America say the market poses challenges when it comes to supply and demand, and local regulations. In fact, companies seeking business in this region cannot assume that the strategies that proved successful in North America or Europe would be as successful in Latin America. It is a capricious market, with customer demand remaining somewhat fragmented, volatile and at times unpredictable.
Near-Term Growth: Challenges Remain
One of the factors executives may want to watch closely in Latin America is the region's political climate, which could directly affect satellite-enabled services. Maria Velez de Berliner, president of Latin Trade Solutions, says, "We are following the policy-changing activities of previously disenfranchised groups, such as those in Bolivia and Ecuador." Monitoring political activity is particularly important when governments are involved in the regulation of rates, and when governments claim that telecommunications is a public good.
This would allow the governments to intervene and change rates previously agreed on by operators or service providers.
Another factor to watch closely is the influence of local economies on the capital-intensive satellite industry. Satellite services are not cheap and the acquisitive power of the Latin American population is very limited. "If you look at DirecTV in Latin America, the estimated cost is going to be $700 to $800 per person, in countries where the average salary/wages is $89 at most," Velez de Berliner says. "[This explains why] margins will continue to be low and problems with overcapacity may persist."
The overcapacity situation the satellite industry has been facing since the turn of this century is not over. This is particularly true for Ku-band, for which the market did not grow as fast as expected, despite the development of broadband, distance learning and other e-governance applications. According to data compiled by Aon Explorer, a French consulting company for the aviation, aerospace and telecommunications industries, the growth in total satellite capacity sold in Latin America from 1998 to 2004 was about 5 percent annually. Even so, the company estimates, in its report "Prospects for Satellite Services in the Latin America Telecom & TV Markets up to 2014", overall satellite fleet fill rates to be at 57 percent, whereas Ku-band fill rates are estimated at 38 percent, resulting in a revenue drop per leased transponder from $1.49 Million in 1998 to $1.18 Million in 2004. This oversupply situation creates a downward pressure and causes companies to keep cutting prices in order to make a sale. Likewise, the fact that government contracts tend to be low-bid, this results in the space segments that are purchased to support these contracts to be low-bid.
Most executives in the satellite industry would typically not shy away from competition, provided it is on the merits of the hardware and the services that are delivered. Rick Mortellaro, vice president of global sales at Loral Skynet, says, "The disappointing part is that, in many cases, it is reversed. It always almost comes down to a pricing issue and we don't want to be in that position. We have actually walked away from business that was just priced too low. It is bad for the satellite industry and for the market as a whole to commoditize the satellite and drive the pricing down. You cannot justify building satellites over a region when prices are that low."
Carmen Gonzales-Sanfeliu, vice president of Latin America operations at Panamsat, adds, "When you sell a commodity--a product that many companies sell and there is no differentiator--you sell it at a commodity price. ... It is important to stay away from that. ... Instead of moving toward commoditizing our price, we must move toward providing a service that truly is a benefit to the customer. The customer will recognize that value."
Other difficulties in successful business ventures in Latin America include high import prices and the duties cost for bringing equipment into these countries, which is a barrier for starting new businesses. Each government has its own regulatory agencies, sets of rules and trade restrictions. For instance, the importation fees to get Ku-band equipment in Latin America are high, almost prohibitive. And it is not the sole issue when it comes to Ku-band.
For some operators, the problem was to convince local customers of the benefit of Ku-band, particularly in Brazil, where it was perceived of inferior quality because of its susceptibility to atmospheric disturbances.
Brazil was one of the early adopters of satellite technology and has a C-band mentality. Mortellaro says that although the satellite Telstar 14, carrying 41 Ku-band transponders, was launched last February, Loral had been in the planning stages since 1999 when the company started a series of meetings with regulatory bodies, and training sessions to educate the market about Ku-band.
And the strategy worked. Loral managed to get Brazil to buy into the concept of Ku-band. In 2004, Brazil leased some Ku-band capacity on Telstar 12 to be used as backup for the broadcast of the soccer championship and ended up using this capacity to broadcast the final game in high definition to movie theaters around the country.
But Brazil is not the only country to pose challenges for satellite services. One challenge for the troubled Mexican operator Satelites Mexicanos S.A. de C.V. (Satmex) was dealing with a bankruptcy battle split between two countries. With Satmex filing in Mexico a voluntary concurso mercantil, which is similar to a bankruptcy filing in the United States, the future of the company had become uncertain. Satmex filed the concurso mercantil "in order to continue its efforts to achieve an equitable financial restructuring and is hopeful that a consensual restructuring can be implemented in the near future," according to a company statement. The voluntary filing came after an ad hoc committee of U.S.- based holders of certain Satmex debt filed an involuntary Chapter 11 bankruptcy proceeding for the company at the end of May in the U.S. Bankruptcy Court for the Southern District of New York.
Satmex finally reached an agreement under certain conditions, with U.S. debt holders, to file a petition under section 304 of the U.S. Bankruptcy Code in the U.S. court.