Industry Leaders Are Right To Clash Over Strategies

The world of fixed satellite services (FSS) is evolving into one of scrappy survivors whose leaders are assessing the same marketplace but are drawing different conclusions about the best actions to take. To me, the debate is most healthy and an encouraging sign that top industry officials are treading carefully before committing hundreds of millions of dollars to build and to launch a satellite in hopes of seizing emerging opportunities. The roadway of the past is littered with financial wrecks that include Iridium, Globalstar, ICO Global, SkyBridge, Teledesic and Astrolink.

Clear differences of opinion were reflected last Wednesday in Washington, D.C., during the Satellite 2004 conference’s “Industry Leaders Roundtable” when the FSS CEOs clashed on their outlooks for consolidation, broadband and HDTV services.

Giuliano Berretta, chairman and CEO of Eutelsat S.A., said the key to the industry’s future is to tap new applications, and not the pursuit of consolidation between existing global operators. “There already is quite a lot of consolidation in this sector,” said Berretta, who pointed out the vast majority of satellite services worldwide are carried out by only about a half-dozen companies.

Conny Kullman, Intelsat’s CEO, took a different view by explaining current overcapacity in the industry could be addressed, to some extent, if certain companies combined and reconfigured their in-orbit assets. That realignment could involve moving certain satellites from regions of vast overcapacity to others in need of additional transponders.

Joe Wright, PanAmSat’s CEO, said consolidation was occurring already but not necessarily on a company-by-company basis. Consolidation makes sense when companies can take advantage of strong markets to avoid keeping capacity in weak markets just to have a presence, he added.

Berretta argued that consolidation made the most sense for satellite manufacturers, but not for operators. He contended satellite manufacturers have the capacity to build 60 commercial spacecraft a year but that only between 15 and 20 orders are expected this year. Demand for new commercial satellites is not expected to change much during the next couple of years, so capacity outstripping demand by a ratio of 4:1 or 3:1 likely will remain for awhile.

The answer for the operators is not consolidation but rather in finding new opportunities and pursuing them wisely. One example is broadband services. Fiber-optic companies chased the broadband dream by spending excessively to connect people. That overbuilding of fiber-optic cable left a situation where the capacity now can be purchased “for peanuts,” Berretta said.

The fallout in the fiber-optic industry is “much more tragic” than what has occurred with the current overcapacity occurring in the satellite business, Berretta added.

HDTV Demand?

Aside from broadband, HDTV also should be pursued with caution, particularly in Europe. HDTV acceptance in Europe will depend on broadcasters providing content, and not on consumers, Berretta said. He also warned that ADSL TV is becoming a “real competitor” to video services in Europe.

Romain Bausch, president and CEO of SES Global, took a more optimistic view of the HDTV marketplace opportunity in Europe. “HDTV will be a key development,” Bausch said. He differed with Berretta about the threat of ADSL by explaining the technology would be hamstrung by severe bandwidth limitations. SES says it will make significant investments in HDTV to drive growth, and it will not wait for the market to develop first, he added.

Berretta responded that two types of markets exist: Those that satellite operators can influence and those that the operators cannot influence. TV broadcasters need to push HDTV’s rollout, he explained, because without HDTV content and channels, consumers will have no reason to buy more expensive HDTV-compatible TV sets.

Both Bausch and Berretta defended their positions with solid reasoning and passion. From my perspective, those thoughtful responses are precisely the right approaches to take prior to wading into emerging markets that will require hundreds of millions of dollars of investments for each satellite built and launched.

The CEOs agreed the HDTV front in the United States seems to be advancing much more quickly. In fact, PanAmSat’s financially conservative CEO Wright has become a believer, and he is building spot-beam satellites to exploit the growing market opportunity. Wright recently told me he wished those satellites were further along in the production cycle because he thinks the opportunity is so promising.

Intelsat’s Kullman predicted HDTV would be successful in the United States, and he disagreed with Berretta’s view that broadcasters control the HDTV destiny. Consumers are spurring the HDTV movement in the United States, he pointed out, with the purchase of large screen TV sets that accentuate the vivid digital pictures of the programming.

Dan Goldberg, the CEO of New Skies Satellites N.V., said HDTV is inevitable. “If it catches fire in the United States, it means it will happen in Europe but it will take longer there,” Goldberg said. “At the end of the day, we have to watch demand and respond to it.

Ultimately, it will come to Europe.”

In Europe, the use of the PAL television standard leads content people to believe customers would not see the full value of HDTV, Kullman said.

Berretta took one last try at emphasizing his point that consumers will not determine the pace of HDTV’s rollout in Europe by saying, “Consumers will not vote for HDTV as if it was a presidential election.” The result likely will be that Eutelsat will go slowly in pursuit of HDTV opportunities, while SES moves aggressively to seize whatever opportunity arises. Eutelsat’s approach will aid its free-cash flow position, will curb its capital expenditures and will enhance the company’s attractiveness to investors if it ultimately pursues an initial public offering (IPO). For Eutelsat, Berretta’s cautious outlook might be the ideal strategy.

–Paul Dykewicz