European Operators Should Focus On Core By Patrick M. French and Karim Nour

Despite the downturn in the telecommunications market, the majority of satellite operators continue to focus their attention on private network and Internet applications for satellite services. Overly optimistic expectations have been curtailed, and operators and analysts alike are taking a more realistic approach. Nevertheless, it seems that management’s emphasis on these services is disproportionate to the contribution to the bottom line.

Simply put, satellite operators must keep their “eye on the ball,” and that ball is video applications. This is especially true in the European market (see chart 1), where video applications contribute at three to four times the rate of all other applications combined. Whether it is broadcast, satellite TV services, video or occasional use, the power and strength of satellites to meet the needs of end users is unmatched by any other technology.

There is no question that satellite will continue to play a role in private networks, Internet access and Internet trunking, but here the competition with terrestrial competitors, such as fiber and wireless, will be a long-term battle. Even as satellite services develop markets where broadband did not previously exist, terrestrial players will be watching every success and failure. Where traffic is slim, terrestrial will be happy to leave the market to satellite. However, where satellite operators succeed, after having labored to open the market, terrestrial players will come in and plant their hearty seeds to sprout in the fertile field that satellite has cleared.

Our analysis within Frost & Sullivan suggests that for satellite broadband, targeting enterprises, rather than consumers, will be the best plan of action, and we believe that the market can develop well in this way. This view is reflected in our estimates of the increasing market share that will be taken by private networks and Internet access and trunking. We forecast that the number of transponder equivalents used for these two services is expected to more than double between 2002 and 2009. This compares to an approximate 35 per cent increase in number of transponder equivalents for video services. Yet in concrete terms, this 35 per cent increase in video translates to demand for nearly twice as many transponder equivalents compared to the more than 200 per cent increase in demand for private networks and Internet access and trunking.

Another aspect of the satellite transponder market relates to the trends being seen for satellite utilization. In the late 1990s, European satellite operators were elated over their high utilization rates combined with very rosy forecasts for future growth in telecommunications markets. This led to aggressive ordering and launching of satellites intended not only to replace aging birds, but also to augment on-orbit capacity. The late 1990s were the heydays of the 702’s and the dreams of launching increasingly larger satellites.

Much to the detriment of satellite operators, just as this capacity was being launched, the market began its downturn. Much like the fiber optics industry, but fortunately not to the same degree of “irrational exuberance,” many satellite operators faced a combination of a shrinking market and a shrinking share of that smaller market. This led to excess transponder capacity in orbit over Europe as demonstrated in Chart 2. In the United States, PanAmSat cut its large satellite orders and SES Americom postponed most satellite purchases.

Now that it is clear that the telecommunications market will be stagnant for the next few years, this excess capacity combined with poor market conditions will push down fill rates and transponder prices. North American operators have seen average transponder prices drop a little more than 5 per cent in the last six to nine months and several in the industry are predicting that transponder prices could erode another 10 per cent in the next year. Worst yet, the downturn has reached into core broadcasting. Improvements in video compression and consolidation in satellite pay-TV market in Europe amplify these problems.

Yet, all is not despair! In many ways, most traditional satellite operators will do well compared with other businesses in the telecommunications sector. One need only look at the United States, where tens of thousands of jobs are being lost. By comparison, European satellite operators remain quite profitable and are working hard to pare down their debt loads. An improving market combined with gradual migration to high-definition TV (HDTV) in the broadcasting industry will go a long way to reversing the downward trends. Bandwidth eating HDTV channels fall right into satellite’s sweet spot. It can be expected that this will go a long way to soaking up excess capacity. It might be difficult for the next few years, yet if satellite operators keep their focus on the core of their business, they should weather this storm relatively unscathed.

Patrick French and Karim Nour are analysts with the Satellite Communications group of Frost & Sullivan, an international consulting firm. For more information, please contact Juliette Salvati, Program Leader, Satellite Communications Group, Frost & Sullivan; [email protected]; tel:1-650-548-6721