Financial Crisis Looms Over Satellite Investment Symposium
[Satellite News 10-15-08] The discussion between financial analysts and satellite executives at the ISIS Satellite Investment Symposium was dominated by talk of the recent financial crisis on Wall Street.
Craig Moffett, managing director of Sanford Bernstein, urged his panel of mobile satellite service executives and members of the audience to readjust their business model.
"We are heading into a nuclear winter of funding," said Moffett. "$1 trillion of funding has been wiped out. $15 trillion of lending capacity has disappeared. Any business plan that your companies had four weeks ago needs to be thrown out the window. Credit is going to be tight, and in order to gain stock share, smaller players need to spend on an excess of scale. In an environment with tight credit, smaller players die. There needs to be drastic change. How will you do it?"
David Wilson, CEO of Spectrum Five, said that his company was seeking strategic partnerships and not investment partners, a tactic that many executives throughout the event would agree on as a strategy for securing capital.
John Mattingly, senior vice president of Mobile Satellite Ventures (MSV), said that his company was at the end of their funding cycle and had already acquired the funding they needed from Harbinger Capital Partners in July. Moffett and other analysts agreed that satellite companies which have already secured the funding they needed would be safe for now. "Thank god this economic collapse did not happen before private equity firms made their wave of satellite investments in 2003 or 2004, otherwise the industry would be in a completely different predicament."
Todd Mitchell, vice president of cable and satellite equity research for Kaufman Brothers joined Moffett in expressing the need for satellite companies to scale back future projects and focus on breaking even. The two urged satellite executives to weigh potential customer and subscriber acquisition against the cost of the projects.
David Drucker, CEO of ATContact Communications said that that his company, which provides broadband Internet connectivity, is not worried about customer acquisition because its services are viewed more as a utility and a necessity. "There will always be growth in connectivity services," he said. "In rural areas and in factories and mines, you need Internet connection just like you need electric and water."
Wilson said that the need for cellular backhaul and bandwidth can also be considered a necessity since it is quickly consumed by new technologies.
Mark Dankberg, CEO of ViaSat gave a presentation on how valuable Internet bandwidth will be to the satellite industry, especially in rural, unserved areas. "When asked what they would do with a broadband Internet connection, the top activities rural customers responded with were downloading movies, streaming music and watch Internet television," he said. "In downloading movies alone, these customers need 1.5 gigabytes of bandwidth per month."
On the subject of strategic partnerships and acquisitions, John Stone, a partner of Near Earth, asked the panel if Sirius and XM Satellite Radio needed to merge in order to survive.
Mattingly said that the problem was not with the merged company’s technology, but with their capital structure, a statement that one audience member took exception to and asked how applications like Pandora could kill the new combined company.
Wilson added to discussion by returning to the issue of spectrum and backhaul. "Applications like Pandora can burn through a T1 connection in no time. Apple iPhone calls were being dropped just because of Pandora. So bandwidth and spectrum use continues to be an opportunity for satellite."
Moffett stated his disbelief that Sirius XM cannot secure funding and is selling at less than $1 a share.
"They are essentially a monopoly," said Moffett. "They do not have to compete with any other company when it comes to signing deals with auto manufacturers for installation. They have no competitors for NFL and Major League Baseball coverage. They have a superior product, but are unfundable and I think it is only going to get worse. They need a sustainable business model."
Owen Kurtin, principal and founder of The Vinland Group, warned satellite companies that the U.S. government is headed into a new era of regulation. "With the political party shift in Congress and possibly the White House, we have to understand that mergers and acquisitions will be much more difficult under the magnifying glass. There will be much more regulation and the spirit of creating competition in the air," he said.
Jimmy Schaeffler, Chairman of the ISIS symposium asked each panel member how they would invest $1 million of their clients money in the hostile stock market.
Almost everyone threw out Dish Network‘s name and said that expectations were so low for the company that the stock is now a great value and has positive growth potential. However, Moffett warned of the uncertainty surrounding Dish Network’s litigation with TiVo and the recent charge of contempt filed against Dish Network for refusing to shut down its DVR recorders after it was ordered to do so by the courts.
Drucker added ViaSat to his list and said he was intrigued by what he believes is the company’s solid manufacturing base.
Mattingly had a different direction in mind. "With all of its new deals and hitting all of its milestones, I would definitely invest in Inmarsat."
Securing Non-Existent Capital
Richard Valera, managing director and senior equity analyst for Needham and Co., talked about the difficulties of financing infrastructure for hybrid satellite systems. "Infrastructure investments are going to be tough to accomplish without partnerships. Even AT&T partnered with a cellular company for roaming," he said.
A second panel focusing on the ATC sectorwas asked how they would approach finding financing for infrastructure.
Mike Cook, senior vice president of Hughes Network Systems said he would tout his company’s experience and consistency. "We’ve been in the business a long time," he said. "Long term customer base and strong engineering capabilities are qualities that investors are going to look for in the ATC market."
Cook added his thoughts on what types of companies will survive the financial crisis.
"I think ATC is a solid sector," he said. "The companies that have been around in the sector are the ones that are going to survive – the Dish Networks and the DirecTVs."
Valera added companies who find financing at the right time will also benefit. Other panel members added that the scale of a company combined with available cash flow is a clear advantage over small companies and start-ups, two business models that a majority of speakers said would take the hardest hit in the financial crisis.
Steve Osman, vice president of SES Americom said that greenfield business models, or starting from scratch, would come under scrutiny.
On the insurance end of the industry, Christopher Kunstadter, vice president of XL insurance said that while satellite companies keep claiming that they are reducing risk for the new economic climate, complex programs are problematic because each company has to purchase its own insurance.
"There are components of these satellite systems that are shared," said Kunstadter. "We have to look at the broader picture than just the technology on the rocket. As systems get more complex with more onboard systems and more processors, risk goes up. I applaud Space X for at least having the willingness to approach this issue, even though they have made the same mistakes as other companies have."
Kunstadter agreed with Osman’s view on sustainable business models. "Companies with a broad base will do better," he said. "Let’s look at some examples – Iridium took 13 years to take off from inception, but GSM took off like a rocket. The original concept of Iridium was to build it from scratch and while they have really developed and have grown since their inception, that type of model is impossible these days."
The question of customer acquisition continued to be raised from audience members. "In terms of subscriber-based services, how do you weigh the safety of your capital investment in customer acquisition beyond the idea of ‘if you build it, they will come?" asked one audience member from Intelsat.
The panel answered by stating that their companies already had core customers. They agreed that building a customer base would be difficult.
Like the first panel, the second was asked where they would invest $1 million in the satellite industry. Cook said his investments would be conservative. "I would invest in companies with existing infrastructure," he said. "I would invest 60 percent of that million in SES and 40 percent in Intelsat."
Kunstadter believes that content is not king and said he would invest in ViaSat’s core manufacturing and engineering strengths. Valera seconded Kunstadter’s decision and said he would go all the way with an investment in ViaSat. Osman picked the popular Dish Network.