Kaul: SpaceWay Will ‘Pull Us Into The Mainstream’

By | August 13, 2003 | Feature

Hughes Networks Systems (HNS) is get ready for the commercial launch of SpaceWay in the next 12 months. SpaceWay is a next-generation broadband satellite system, which aims to offer two broadband applications to large businesses, telecommuters, and small office/home office users in North America. HNS has invested over $1.5 billion in SpaceWay and believes it can make a return on this investment by 2008. If the SpaceWay programme is a success in North America, it is likely that HNS could try and do something similar in Europe. In an exclusive interview with Interspace Senior Editor Mark Holmes, HNS CEO Pradman Kaul talks about the imminent launch of SpaceWay and the potential for the system to be replicated in Europe.

Interspace: Where do you see the biggest broadband opportunity for the company? You have announced a variety of deals recently from Eastern Europe, Brazil, Haiti? Which regions do you think present the most opportunity for the company?

Kaul: Clearly, the largest opportunity is North America. People think because North American terrestrial networks are well developed, that the opportunity for broadband via satellite could be rather limited. But, in reality we do more business in North America than we do in the rest of the world combined. So, it is still by far the largest market we have. In order to really capitalize on that, we are investing in a new broadband satellite system called SpaceWay, which we expect to launch into commercial service in the summer of 2004. I think the North American region offers us the most significant opportunity. Having said that, 35 to 40 per cent of our revenue comes from overseas. The regions we are focusing on internationally is first off Western Europe, which is still a significant part of our business and then countries such as Brazil, India and China. These three countries are doing very well, and depending on the political and economic climate in all of these areas, they go up and down. The SARS [severe acute respiratory syndrome] epidemic in China, for example, hurt our revenues. The economic crisis in Latin America also hurt us last year.

Interspace: Most fixed-satellite service (FSS) operators are seeing flat growth in 2003. What levels of growth does HNS hope to achieve this year? What would you say are the major growth opportunities for the company going forward?

Kaul: If you look at the market segments we deal with in the broadband area, there is clearly the enterprise and consumer part of the U.S. If you combine the two, we expect to see growth in the 10 percent range this year. Going into the next few years, as we begin to see signs of recovery in the economy, I think we will be moving forward to a 20 percent compounded annual growth rate over the next five years.

Interspace: How do you view the competition in the satellite broadband arena? What is your view on the SatLynx venture in Europe and how will this impact your ability to generate revenues from the European market?

Kaul: SatLynx has got the makings of a significant competitor for us. We actually invented VSATs almost 20 years ago, and in this timeframe, while operating in Europe and the U.S., we have seen many competitors come and go. A number of companies have been significant competitors. Yet HNS has maintained the largest market share in almost every region in the world in this segment and I expect we will continue that leadership.

We are also encouraged about SatLynx, as it demonstrates that there are companies of the eminence of SES Global and Alcatel [NYSE: ALA] investing time, energy and money in this market segment. It shows that others share our faith in the European market. I view that as a very positive sign. In terms of the market segments we are attacking, we don’t intend going after the residential market segment in Europe. At least there are no current plans to do so, which pretty much takes cable out as a competitor. Our advantage when we sell corporate networks, which is true in Europe and the U.S, is that corporations prefer uniform multicasting and broadcasting capability for services such as business video, so the same message and quality level is available at all of their branches, wherever they may be. DSL [digital subscriber line service] cannot offer that. As you know, a company may have hundreds or even thousands of branches of some kind. They may be able to use one or more DSL providers to get to some number of them, but there will likely be a significant percentage remaining that can’t be reached with high quality, terrestrial broadband connections. This means dealing with multiple providers and types of networks. We are finding that our customers are not very happy with that. This is the case in particular for pan-European corporate networks, where broadband by satellite is clearly the best networking solution.

Interspace: What impact has News Corp’s [NYSE: NWS] proposed acquisition of Hughes Electronics [NYSE: GMH] going to have on HNS? Will it make it more difficult for HNS to pursue deals due to some uncertainty on what is likely to happen to HNS in the future?

Kaul: Quite frankly, I don’t think we have had problems with any deal anywhere in the world because of the pending arrangement with News Corp. I don’t see any negative downside. Unlike General Motors [NYSE: GMH], News Corp is in a related business to us, so there is much more synergy and I expect some of that synergy will translate into business for us. For example, about 30 percent of our business is selling set-top boxes to DirecTV in the U.S. Certainly, BSkyB and other News Corp DTH [direct-to- home] entities all over the world will become at least potential customers for us. Furthermore, all these DTH companies can address the possibility of also providing broadband Internet access to their TV customers. We could potentially drive that. I emphasize the word ‘potentially’ here. But, these are all market segments that we are not in today internationally, that we can look at seriously once the deal is consummated, hopefully by the end of the year.

Interspace: What are the major financial challenges facing the company going forward?

Kaul: I think we are through the major challenges at this stage. Over the last two years, we have invested over $1.5 billion in SpaceWay. That clearly was a significant challenge, involving the cash to fund it and convincing our parent that, despite the setbacks of major satellite system players such as Iridium, AstroLink and Globalstar, it still made sense to invest a large amount of money in a new satellite system. I have spent a lot of my time over the last two years defending our position and our business plan for SpaceWay. We have now successfully cleared the major technical hurdles pretty much on budget and so I think the peak of the challenge has passed, and we are now on the slope downwards in terms of the financial challenge. SpaceWay goes into commercial service next year and will start to generate revenues and profits. This year, we hope to become EBITDA positive, which is significant when you consider the investments we have made over the last three years. I think the worst is behind us.

Interspace: When we asked SES Americom CEO Dean Olmstead about SpaceWay, he said, “The question is do you really need to spend [that much] to build a satellite [system], and what is the added value proposition that you get for that investment?” What is your answer to this?

Kaul: The answer is very straightforward. Obviously, we would rather have spent a lot less on SpaceWay. But the reality is – that is what it cost. If we could have done it for half of that money, it would have been wonderful. The reason we did it, and the reason we are convinced it is a damn good idea, is that SpaceWay unlocks new markets that cannot be addressed with today’s bent pipe satellites. We estimate the telecoms market we will address with SpaceWay is 10 times greater than the market that is addressable with today’s bent pipe satellites. So from today’s satellite market in the U.S., which is about $3.5 billion, we think the addressable market for SpaceWay will be $35 billion. That is really the value proposition. Satellites will always remain a niche unless you can really address the mainstream broadband/data market. That is what we expect to do with SpaceWay. It will pull us into the mainstream.

Interspace: What are your expectations for SpaceWay next year? When do you hope to make a return on your investment?

Kaul: We expect to launch the satellites in February 2004 and to begin commercial service sometime in the summer of next year. Once we reach a steady state, we think we can recover the investment in about three to four years of commercial service.

Interspace: What about SpaceWay in Europe?

Kaul: SatLynx and ourselves are constrained using bent pipe satellites. It limits the market you can address in Europe. We obviously are very hopeful that if we demonstrate the success of our business plans and ideas in the U.S., that a few years down the road, we will be able to have a SpaceWay system in Europe. Clearly if SpaceWay does what we expect it to do in North America, it should be much easier to raise the funding to launch it in Europe and possibly globally. In terms of timing, there are a number of scenarios possible, but I would say that we can forecast a European SpaceWay in the 2006-2007 timeframe. I am very hopeful we would be able to do that.

Interspace: What was your view on Intelsat agreeing to buy Loral’s North American satellite assets?

Kaul: I think the deal was good for the industry because clearly having assets like satellites for a company that is in financial trouble is not good for the industry. This is obviously part of the consolidation process in the FSS industry, which will likely continue. I don’t think we are done yet. On the other hand, it is sad to see a first-class company like Loral and some good people there go into Chapter 11.

Interspace: Finally, what are the major challenges facing your company over the next 12 months?

Kaul: We are going to be transitioning to a new owner, so that is always a challenge. We have to understand their desires and objectives. We will go through a period of getting to know and understand one another. From our initial contact, they seem to be people who are supportive of our business and objectives. We don’t expect that to be a problem. Secondly, we need to get SpaceWay done. It will be a very important time for the company. We will have our hands full.

–Mark Holmes

(Contact: Stacey Kerans, e:mail: keranss@fleishman.com)

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