SES Global Ready For Broadband Challenge

Luxembourg-based satellite operator SES Global [Luxembourg: SESG] expects to see significant revenue growth from 2005 onwards. On the other hand, the company anticipates tough market conditions in 2004. The operator started the year on a positive note, by announcing the formation of Worldsat and the signing of a long-term agreement to provide satellite capacity to Connexion by Boeing on Worldsat-3. Worldsat, a subsidiary of Princeton, N.J.-based SES Americom, will provide customers with applications such as mobile communications, broadcasting, Internet connections and data networks.

In an exclusive interview with SATELLITE NEWS International Editor Mark Holmes, SES Global President and CEO Romain Bausch talks about the operator’s growth strategies for 2004 and beyond.

SN: Could you tell us the thinking behind the Worldsat initiative and the significance of the deal with Connexion by Boeing?

Bausch: The aim is to establish Worldsat, while accommodating existing demand from customers who may seek specific satellite services. We have always been adamant about the fact that international, i.e. trans-oceanic, satellite communications are a difficult market segment, and that is why we felt that Worldsat would have to offer tailor made solutions to potential customer demand. The reconfiguration of the AMC-13 payload, now called Worldsat-3, from C-band into a hybrid C/Ku-band payload – illustrated by the recent contract announcement with Connexion by Boeing – is one example of this very customer orientated approach by SES. We hope to announce, in the near future, other important deals with other partners.

SN: In your year-end results in 2003, you announced that revenues suffered a double-digit loss compare to 2002? Are you looking for revenue growth in this current financial year? Do you expect your profits to increase?

Bausch: Our guidance to the investor community and analysts for 2003 continues to be that our revenues, at constant exchange rates and looking at recurring revenues, will be ‘stable.’ In terms of ongoing business, 2003 will remain flat compared to 2002. When we look forward to 2004, I believe we will not need to fundamentally change this guidance. At this time, I think it is fair to say that we believe that in 2004 the recurring revenues at constant exchange rates will be flat for another year. But we also see very clear signs for significant growth in terms of revenues in 2005 and beyond, based on very concrete projects and notably based on growth in contract backlog. We announced for the first half of 2003 significant growth in our contract backlog and we will be able to demonstrate in the second half of 2003 contract backlog growing again significantly. We are quite confident that this will continue into 2004 as well.

SN: In terms of your U.S. strategy, do you still have plans to enter the direct broadcast satellite (DBS) market? Do you have any plans to emerge as a competitor in the DBS space to DirecTV and EchoStar [Nasdaq: DISH]? What is happening with Americom2Home?

Bausch: It has never been our intention to become a DBS operator competing with EchoStar and DirecTV for subscriber acquisitions like Rainbow/ Voom does. Our plans were always to position Americom2Home as an open platform by using FSS [fixed satellite service], and hopefully BSS [broadcast satellite service}, frequencies in the CONUS [continental U.S.] arc and to offer it to whoever might be interested to use it. This could have been a newcomer to start a DBS pay-TV business or an incumbent like DirecTV or EchoStar who would use the additional capacity in order to enhance their service offering. That has been the concept as of day one. Because of the fact that EchoStar was not allowed to acquire DirecTV, the two DBS players now have to enhance their offering in order to keep up competition, and in that context EchoStar has committed to the AMC-15 satellite, as we announced. We are strongly convinced that we will have other deals of that nature finalized soon, be it with EchoStar or others, be it with established players or newcomers to the market.

SN: So, the goals of Americom2Home have not changed then?

Bausch: No, Americom2Home was really about taking advantage of the skills and know-how built up in Europe with Astra in the field of DTH [direct-to-home] television and to export ‘the Astra concept’ to the U.S., fully acknowledging that the marketplace is different as you have two vertically integrated DBS players, whereas in Europe, none of the pay-TV operators own and operate their own satellites. The additional capacity, prime orbital real estate by the way, will be used by EchoStar, and hopefully by others, for enhancing their offering with new services like HDTV [high-definition television] programs, local TV channels and satellite broadband applications. It was never the intention to compete with DirecTV or EchoStar or others who may offer such services in terms of subscriber acquisition.

SN: Do you have any plans to enter the U.S. broadband satellite market?

Bausch: In our discussions with EchoStar, one potential application via the AMC-15 satellite is broadband. So, we are working with EchoStar on exploring potential opportunities. It might also be interesting to mention in this respect that in Europe we are working with Alcatel [NYSE: ALA] in order to develop the next generation of DVB-RCS two-way broadband technology. Alcatel is calling this DVB-S2, and in their minds DVB-S2 will be a technology with a higher throughput than DVB RCS technology today. It will obviously focus on SMEs [small to medium-sized enterprises], SOHOs [small office/home office users], but also on the residential market. At SES Global, we will continue to take advantage of our involvement in broadband developments on both sides of the Atlantic.

SN: What are your views on the News Corp [NYSE: NWS]/Hughes [NYSE: HS] deal? Do you expect News Corp to retain ownership in PanAmSat [Nasdaq: SPOT]?

Bausch: It is obvious that News Corp has done this transaction because of DirecTV, not because of PanAmSat. However, in this acquisition, there are other assets such as Hughes Network Systems (HNS), including SpaceWay, and PanAmSat. HNS has a very close relationship with DirecTV, from the terminal manufacturing perspective, and maybe also because of the DirecWay program. So, there seems to be some good business reasons to have those relationships going. As far as I know, SpaceWay is about to be reconfigured in order to become a Ka-band satellite [project] that can serve the residential market, probably with local TV and maybe broadband. Regarding PanAmSat, which is obviously the closest to our business, it is not really part of the core of what News Corp has done so far and what News Corp has declared its interest to do in the future. I continue to believe PanAmSat will not become part of the core business of News Corp in the U.S. This means to me, whatever they do with PanAmSat will not be driven so much by strategic objectives but by financial considerations. PanAmSat is in a phase where they have accomplished their satellite renewal program, and it will take another year or two before they have to enter into another major replacement cycle. This means for another year or two, PanAmSat might continue to be a relatively cash rich company showing a strong cash flow. If you look at PanAmSat from a purely financial perspective, it might make sense for News Corp to own PanAmSat at least in the very near future and to take advantage of the cash flow potential.

SN: Apart from the replacement satellite market, what are SES Global’s plans in terms of investing in new satellites over the next two years? What are your capital expenditure plans for 2004?

Bausch: SES currently has a number of satellites under construction. We have two spacecraft under construction within Astra [1KR and 1L], and these will be launched in 2005 and 2006. We furthermore currently have six satellites under construction with Americom. AMC-10 and AMC-11 will be launched in February and May this year. Then there is AMC-15, where we sold the capacity to EchoStar, as well as the AMC-16, which could also act as a back up to AMC-15. There are two others, AMC-12 which is being renamed Worldsat-2, and AMC-13, which is being renamed Worldsat-3. They are two international satellites. If you look at the capacity perspective, AMC-10 and AMC-11 are replacing the satellites currently used in the Cable One neighborhood over the U.S. AMC-15 and 16 will be satellites opening new orbital positions, and obviously being used by EchoStar. It will allow Americom to provide capacity for new services such as HDTV, local TV channels and potentially residential broadband. Worldsat-2 and 3 are two international satellites adding a lot of new capacity compared to the existing satellites within Worldsat. We are adapting the business concept and the payloads on these satellites in order to ensure that these satellites respond to an existing market demand. The contract with Connexion by Boeing is the first prominent example of this.

SN: Could you give us an update on Satlynx? You said that you hoped Satlynx would contribute 25 percent to 33 percent of broadband revenues at the end of 2005? Are you still on course to reach this target?

Bausch: The target you refer to was set for the total revenues stemming from broadband activities, not only from Satlynx. Currently 15 percent of our revenues are coming from the broadband business. We still have to do the substantial jump of 10 percent, which is not nothing … We are working hard on this. In this context, we should not forget that even if, in general, satellite broadband will be two-way, in Europe, we believe there is a good opportunity for SES Astra to position itself in the one-way broadband market with a terrestrial return channel. Astra is in the process of developing, respectively finalizing, a more structured approach to the one-way high-speed Internet market in Europe, based on the Astra-Net platform.

From a technology perspective, everything is in place. We have to acknowledge, however, that many of the customers of Astra for one-way broadband delivery in Europe, notably smaller ISPs, are lacking financial, marketing and logistical resources and we try within Astra to see if we can put together a package that we make available to them. The intention is to not only offer satellite capacity and technical platform services, but also a franchise approach with all kinds of services to enhance the prospects of success of these operators in the marketplace.

SN: What are the major challenges facing SES in 2004?

Bausch: The main challenge will be to demonstrate that we remain the frontrunner in the FSS satellite industry. We need to showcase our commitment and our innovation skills in the area of new applications. There we can look at a couple of things. For example, if you look at Europe, we will launch two-way interactive services at the end of the year with SATMODE. This will mean the satellite industry will be able to offer for the first time interactive services based on the TV device by using satellite only. I believe this is a huge step forward in the field of DTH television. Then there is HDTV, where we anticipate a growing demand not only in the U.S., but also in Europe and subsequently in some Asian markets. In terms of two-way broadband, I believe we can demonstrate the quality of the product through Satlynx and Americom2Home with partners like Alcatel and others. We believe we can prove it will be attractive to the residential market. I am not saying that 2004 will be the year of large-scale residential satellite broadband, but I believe that towards the end of the year, different players will have developed the technology and we will be ready to launch residential broadband services in 2005 on a large scale.

(Yves Feltes, SES Global, e-mail: [email protected])