Sukawaty: Inmarsat Looks To Build on ‘Monumental’ 2007

[Satellite News – 3-13-08] Inmarsat had a “monumental” year in 2007, posting a 40 percent increase in profits before tax, a 15 percent gain in revenues and launching six new services.
    With the rollout of the new offerings, Inmarsat hopes to position itself as one of the dominant players in the mobile satellite services market, and in particular, the handheld market, where the operator hopes to capture 10 percent of the market by 2010.
    Inmarsat CEO Andy Sukawaty spoke with Satellite News Associate Editor Mark Holmes about the company’s 2007 performance as well as developments in new markets.

Satellite News: How do you assess Inmarsat’s performance in terms of the handheld market and new services?

Sukawaty: In the grand scheme of things, I don’t think we have ever had a year like that. Having said that, BGAN (Broadband Global Area Network) was the year before. Nonetheless, we are still at an early stage. You know how our markets and customers move. We have an industrial and government base of customers. They have long decision cycles. It is not like launching a new mobile phone in the mobile phone industry, where the first six months you are out in volume because the demand is so great. For our industry, it builds over time. We have seen that with Swift 64 and our Fleet product launches in previous years. It has had gradual acceptance by the market and then a consistent long-term build of take-up.
    That has been the case with BGAN and with the additional services we have launched in 2007. There has been encouraging take-up. In fact, BGAN is the fastest growing service we have ever launched in our 29-year history. That is all very encouraging. The momentum is still building on BGAN, and we saw that in our results. To take our broadband service offering, which was land only with BGAN, and extend that to our largest market, maritime, and our fastest growing market, aeronautical services, is truly something that will create great growth for us in the future. But it will be gradual, especially in the aeronautical and maritime markets, where it is not just about buying a terminal but also the installation cycle, which has to occur when planes and ships are in for refurbishment or maintenance or the new build program. The cycle times are longer, but the foundations have now been laid and that is what we are excited about.

Satellite News: Do you expect your financial growth to remain at the same pace in the coming year?

Sukawaty: It is hard to grow profits 40 percent year-on-year, but we are in a position where our margins have been expanding. They have gone from 66 percent to 69 percent last year. Topline is growing. We will generate more operating profit and bottom-line profit over time. You may see some further shifts as we look to complete the Stratos transaction in 2009, if we choose to exercise that call option. It would be accretive to our profitability. It would be a different margin business than we have traditionally been in.

Satellite News: What would represent a good year for the company in 2008?

Sukawaty: What we have said consistently to the market is that we look to 6 [percent] to 8 percent compound annual growth at the topline to 2010. We look to our [earnings before interest, taxes, depreciation and amortization] and profitability growth to exceed that because of the high fixed-costs nature of our business. I think what you would say is as a result of 2007, we are on track to beat that. The consensus view for 2008 is a 9 [percent] to 10 percent growth rate. We think that would be a challenging but achievable growth figure for 2008.

Satellite News: Are there likely to be any new service launches in 2008?

Sukawaty: I would never say never. One of the significant things to happen this year will be the launch of our third Inmarsat-4 satellite. While technically not a service launch, it will allow us to extend some of these new services to a full global footprint. Secondly, you have the extension of our satellite phone services, which will be available globally in the fourth quarter. We signed a collaboration with Asian satellite operator AceS in 2006 to initially offer their technology on the Inmarsat-4 satellite in that region of the world. We launched our service with the handheld that they have been offering for the last few years. We did that knowing that we wanted to take it global and that we wanted to modernize the service and modernize the handset. It got us a foothold in the marketplace, and it has gone very well.
    From a competitive standpoint, I think we have been operating in a different set of markets than most of our competitors. We have had a great deal of success in Asia. You look at the likes of Thuraya, Iridium and Globalstar, they have very little business in Asia. They have not really felt the impact of us in the marketplace yet. We will roll this out globally with a new modernized handset, which will be smaller and more attractive than many handsets you see today. This will allow us to tap the markets in which we will compete directly with other operators. In North America, Iridium has been benefiting from the demise of Globalstar, and I think 70 percent of Globalstar’s business is over the Americas. It will put us into that hotly competitive market with a very attractive product with a retail price of $500, which is less than half the price that Iridium has been selling handsets for.

Satellite News: What are your plans in the United States and becoming more of a player in the mobile market there?

Sukawaty: Contrary to some reports you may have read, our position has not changed and I’ve not said anything different than I have for the last two years. Yes, in discussing ATC (ancillary terrestrial components) and its development, we have talked to strategic partners. We have talked to just about every mobile operator you can name, and we have talked to every cable TV company and even aspiring wireless operators. We have even spoken to [direct-to-home] players. There is no secret to that. At the moment, we are not in detailed negotiations with the three mobile phone operators that some have reported.

Satellite News: Do you think that will change this year?

Sukawaty: I would be cautious about ATC and its timing. It was finalized in 2003. We are talking about four to five years since the ruling, and so far nothing has happened. I think the auctions have helped and gave people another outlet to acquire spectrum to meet their needs. I think the demand for spectrum is evidenced by the auctions. It is growing and the values are growing with them. I think there will come a time, now that the auction process for the foreseeable future has come to an end, people will look to this spectrum for a unique set of applications and some very attractive spectrum: low in the band, national coverage and in nice, clean blocks.
    Coming from the mobile phone business, where I spent most of my career, I think there will come a time when this gets interesting. Whether this is immediately after this set of auctions or in the years ahead is a big question. You have to consider how fast the 4G technologies will take shape.  If you look at LTE, which looks as though it is becoming the defacto standard for 4G, and if you look at WiMax and you look at other more speculative technology proposals around 4G, almost without exception they require channelization, which is much larger than the historic systems. If you compare to 3G, CDMA, GSM, we are talking about 10-megahertz channels on LTE or WiMax. In the case of our cooperation with MSV, we set up a roadmap for a potential partner to have 40 megahertz and that is a unique position, and even through an auction process, people would have a hard time achieving that. We have set ourselves up in a position with MSV that when the parties that use this spectrum in a big way terrestrially see the need, this will be the place to go.

Satellite News: What is the significance of the deal with MSV?

Sukawaty: For MSV and ourselves, this made clear and common sense. It brought us together. I don’t think those same factors apply with some of the other players. You could possible argue with someone like Thuraya, but we don’t have anything going with them right now. But when you are in the same band with people cooperation can make sense.

Satellite News: What role do you think satellite can play in the mobile industry?

Sukawaty: I think particularly as mobile markets move to wireless data, and that is everything from Blackberrys to laptop connectivity, satellite can play a larger complementary role. I think extending those services to more remote environments and providing a level of ubiquity and universality to those services is something that is going to be competitively attractive to the large mobile operators. That is a global development, not just in the [United States]. As you see maturity in the market, and as people clamour for a competitive advantage, they will look to satellite as one element of a competitive portfolio. Those who are focused on business and government customers will see satellite as a necessary complement in the future.

Satellite News: Do you expect the MSS market to be crowded in 2009?

Sukawaty: I would expect not. I don’t think people have fully absorbed the current state of the markets. At least I didn’t detect it at [SATELLITE 2008]. Let me put it this way: Business plans far less speculative than people were talking about on that panel are not being funded as we speak. The debt markets are closed. The equity markets for an [initial public offering] are closed. It is not clear how long this situation will exist. Even if we come out of this, I think it will be a while before the kind of funding that is required becomes available.  If you add up all those players, and their funding needs over the next 24 months, I don’t see how it will get done.  But there are ways to survive in a down market, and entrepreneurs can come up with ways of doing that. Globalstar has very little debt, for instance, so they can sit there for a long time without bankruptcy. Others do have debt and will have to deal with that.

Satellite News: Do you expect to see consolidation or do you expect to see certain players not get the funding they need?

Sukawaty: I have said before that there needs to be consolidation. Some people took that as an implication that we were going to be involved in some of the consolidating, but we have no additional needs for spectrum or satellite constellations. We have just put up a new one. We have plenty of capacity. The difficulty right now is that everyone has inflated values, but as we hit the liquidity crunch, the values will come into line and combinations will sensibly occur.
    In terms of us getting involved, you never say never. But we feel very good about our position, both in terms of our new satellite constellation and where we sit competitively. There is nothing we could acquire that I think would greatly enhance our position.

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