Teleports: A Business Of Niches

By Robert Bell, World Teleport Association

There is an old joke in Washington, D.C., about the Department of Defense. The good news is that by 2010 (or another suitably distant date), the U.S. defense budget will be $1 trillion (or another astronomical number). The bad news is that, by then, it will only buy one airplane.

This joke comes to mind when one contemplates the pace of ownership changes in the satellite communications industry, particularly where ground segment is concerned. The most recent example is the April 2004 announcement by Princeton, N.J.-based satellite operator SES Americom that it would buy the assets of the bankrupt Verestar from American Tower Corporation [AMT]. Those assets include five teleports in the United States and Europe 225 employees; and service contracts with broadcasters, governments, enterprises, maritime customers and Connexion by Boeing.

This purchase made SES Americom the third global satellite carrier to become a significant teleport operator. Intelsat, which has its main operations in Washington, D.C., bought and built four teleports in 2002-03 while adding a fifth this year. Wilton, Conn.-based PanAmSat built a network of U.S. teleports as part of its original growth strategy.

Are the fabled days of the independent teleport operator – those hardy pioneers who created the commercial business starting in the 1980s – now over? Is this an industry destined for control by giants, as it was in the days of universal telecom monopolies?

Teleport Benchmarks

Insights, if not answers, to these questions are to be found in the Teleport Benchmarks 2004 report published this month by the World Teleport Association (WTA). The fourth annual survey of the teleport sector once again provides aggregate financial and operational statistics for teleport operating companies along with a survey of opinions on business conditions and industry trends based on confidential information submitted by the members of WTA. The report aims to meet the needs of executives responsible for teleport operating company finances and operations — those selling products and services to teleport operators and investors seeking to understand their financial performance.

In the term “teleport operating companies,” WTA includes not only dedicated ground segment providers but also the rising number of satellite and fiber carriers, systems integrators and specialist telecom providers that operate teleports in order to serve their customers.

The Big Get Bigger

The big are certainly getting bigger, according the report. The average “large” teleport operating company, defined as a company with more than $70 million in sales, had revenues of $267 million in the 2004 survey, compared with $115 million in the 2003 sample group.

The bigger also did better. In a period when the industry was in the early stages of recovery from prolonged recession, the average annual growth rate of the large companies in the 2004 survey was 2 percent. In comparison, the average “small” company (defined as companies with less than $20 million in sales) saw revenues decline by 16 percent.

However, the giants did not have it all their own way. The best-performing segment was the middle market — companies with between $20 million and $70 million in annual revenues. With an average of $59 million in sales, these companies grew 4 percent on average, according to the 2004 data, and 7 percent on average the year before, when their large competitors saw revenues decline by 7 percent.

These trends were borne out by an analysis of the number of companies reporting revenue increases and declines in the 2004 and 2003 samples. In the 2004 sample, 67 percent of large companies reported year-on-year revenue increases, compared to only 14 percent of small companies. This result reflected a sharp change from the 2003 sample, in which just 33 percent of large companies saw revenues rise, while 43 percent of small companies grew their year-on-year sales. Once again, the middle market was the place to be, with all of the companies in this segment experiencing revenue increases in both years.

Niche Solutions

What do these statistics tell us? First of all, in bad economic times, companies with greater scale and capitalization can outlast those that are smaller and undercapitalized. It takes great skill and a fair amount of luck to steer a small company through a prolonged recession. What has become clear to me, in conversations with teleport operators, is that it also takes devotion to a niche. The business of “plain vanilla” uplinking that marked the sector’s early days has long ceased to be a source of profitability. For most teleport operating companies, success comes from identifying one or more niches and working tirelessly to provide high-value, end-to-end solutions to those niches.

The largest companies in the business, by leveraging their scale, still may be able to afford to be all things to all customers, but mere scale is no answer, as demonstrated by the unhappy experience of Verestar in rolling up 10 independent teleport operators in a few years. Nor is a global presence necessarily critical. The middle-market companies in the Benchmarks report were strictly regional in scope, but they managed to be successful nonetheless. In fact, the emergence of a healthy middle market was one of the most positive trends revealed by the 2004 survey, reflecting increased diversification within the sector.

In addition to providing financial and operational benchmarks, the 2004 report also asked respondents to comment on these trends. In certain cases, the answers were highly revealing. For example, the survey asked if customers would increasingly demand integrated, end-to-end solutions incorporating teleports, satellite capacity and fiber or whether they would instead seek greater control and lower cost by purchasing these elements separately. In the 2003 survey, the responses were widely mixed but, by 2004, the jury was in. Fully 100 percent of respondents agreed that end-to-end solutions would be the future of the industry.

Adding Value

This unanimous vote is another reflection of an emerging consensus that this is a business of niches. It also reflects the fact that, in the distribution chain of satellite communications, teleports are the point at which it is easiest and most cost-effective to add value and to outsource functions that customers must otherwise provide themselves. One niche currently served by the industry involves media and entertainment, where operators seek to do much more than just basic transmission for program contribution and distribution by providing production and post-production. Other niches include digital archiving, hosting and origination in multiple formats for traditional and Web-based playout; translation and dubbing; and even narrowcast DTH services.

Enterprise customers are offering complete BTV and distance-education production and distribution, including integration of remote terminals and network management. Specialized industries like oilfield services and maritime are providing a complete network package, including equipment, connectivity, management and value-added services ranging from large file transfer to onboard banking. ISP are bundling system integration, wireless network construction, voice-over-IP service, network management and content offerings into the basic connectivity platform. And governments are working with leading consulting companies to fashion custom solutions supporting the needs of military and civilian agencies.

End-to-end solutions are the order of the day, but this is less a description of network topology than of a commitment to meet as many of a customer’s needs as possible. And this commitment is hardly the exclusive province of big companies. As the industry returns to growth – something verified by the statistics in Benchmarks 2004 – the most likely outcome will be a continuation of the expansion in the middle market, steady growth by the biggest players and the entry of entrepreneurial companies to serve new niches that are now arising.

Robert Bell is executive director of both the World Teleport Association and the Society of Satellite Professionals International. He can be contacted at [email protected] or [email protected]. The Benchmarks 2004 report, available free to WTA members, can be purchased by non-members from the WTA Web site at http://www.worldteleport.org.