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The Challenge Next Time

By | September 10, 2003

      By Maury Mechanick

      Having recently returned from the International Satellite & Communications Exchange Conference and Expo held in Long Beach, Calif., in late August, I was struck by the positive energy flowing throughout that event. For the first time in a very long time, one could feel a palpable excitement in the air regarding the future prospects for the satellite industry. There also seemed to be a renewed confidence in the industry’s effectiveness in harnessing marketplace dynamics. Most dramatic of all, the concept of satellite broadband was no longer a dirty word and once again appeared to be a credible, if still nonetheless risky, business opportunity.

      At such times one needs to be careful to avoid succumbing to near-term euphoria. But hopefully it may not be premature to herald the industry’s resurgence. Assuming for a minute that this is the case, the more pressing question concerns what, if anything, we have learned from the past three years of pain. Moreover, accepting that our industry is prone to cyclical permutations, what can we do better to meet the challenge next time, after the peaks hits and we again face a downturn?

      Actually, the satellite industry has been fairly lucky to date in terms of how it has weathered these cyclical patterns, with rebounds commensurate with if not exceeding the prior peaks. But it is by no means a given that this trend will continue indefinitely. Our long-term prognosis still contains a number of question marks.

      To this day, I still have vivid memories of an analysis done by NM Rothschild for Intelsat during the early phases of the Intelsat privatization effort (circa 1995/96). In that analysis, NM Rothschild predicted that Intelsat’s business would suffer a massive failure somewhere in the 2010-2015 timeframe. This phenomenon came to be known as the “cliff effect,” in which Intelsat’s revenues literally and dramatically were projected to fall off a cliff on an accelerated basis in that timeframe.

      To be sure, this analysis was performed based upon the then-existing Intelsat business case, predicated to a considerable degree on a telephony-oriented traffic model, a business case that has long since been abandoned by Intelsat. Moreover, the Rothschild analysis was never put forward as being reflective of possible industry-wide trends. Rather, it was formulated as an assessment of the future prospects for a single business entity, Intelsat, with the then-defining characteristic of being a bureaucratic international organization rather than a conventional commercial entity.

      These disclaimers aside, the Rothschild analysis is nonetheless still quite sobering. The timeframe in which the cliff effect was predicted to occur is certainly within the bounds of the time in which the dreaded “fiber to the premises” phenomenon may finally become a reality, at least in certain markets, as well as basic fiber connectivity having continued its spread to increasingly remote locales. Moreover, the Rothschild analysis most likely did not take full account of the wireless revolution that we are now beginning to experience.

      Does this mean that the industry is really in for just one more good run before its final death spiral? Or are we now truly here for the long haul?

      Not surprisingly, the answer to this question lies most directly in the hands of the industry itself. Some of the early indications are encouraging in this regard. Certainly, the mindset and the lingo are trending in the right direction. The word “solutions” is now preeminently visible in the name of many individual business units, particularly (and most interestingly) when dealing with governmental customers. Market-oriented concepts such as “addressability” are increasingly prominent in usage. Indeed, in Long Beach we were even treated to a new industry mantra – one size does not fit all!

      Avoiding the Cliff

      But if the cliff effect is to remain merely a theoretical construct and not a chilling reality, there are a number of specific measures that the industry must take.

      First, the satellite business can never again be an end unto itself. It must define, develop, maintain and then continually evolve an integrative role for itself in the much broader telecom infrastructure. Never again can the satellite industry treat fiber or wireless as the enemy to be thwarted at every turn, but rather must embrace these technologies as full partners in the complementary evolution of global networks.

      This also means that the satellite industry should not waste its energy attempting to thwart other technological advances, such as unlicensed technologies, ultra-wideband, ancillary terrestrial component or related means of satellite spectrum reuse, which are often seen as encroaching on our spectrum resources. These technological advances are going to occur in any event, because of the need to squeeze greater use out of all spectrum resources. They each need to be viewed as opportunities, not as threats. Energy will be much more productively expended figuring out how each of these technological developments can create new opportunities for the satellite industry, not fretting about what they may appear to take away from us.

      Second, the satellite industry needs to find ways to avoid reckless overcapacity that can come from speculative ventures conceived or launched with the primary business objective of being bought out rather than pursued as true entrepreneurial undertakings. Paper satellites, in particular, consume vast quantities of capital and regulatory resources, while frequently impeding the commercial viability and success of more credible business enterprises. Business models that ultimately are predicated on the greater fool theory or on the failure of similarly situated competitive ventures must be eschewed.

      Third, the industry needs to know what it can do best and stick to that. At the same time, we need the ability to resist chasing those avenues that satellite has no business pursuing (or at least has no business pursuing given the state of technology at a particular time), lest the folly of globally-based, hand-held satellite telephony be repeated.

      Fourth, the industry needs to know what battles are worth fighting and what battles are not. On the regulatory front, for example, the largest threat comes from measures that would significantly increase the fundamental cost structure of the industry as a whole, such as from spectrum auctions or imposition of spectrum use fees. These battles are battles worth fighting. But the day-to-day internecine warfare within the industry (which we have gotten all too good at), which attempts to use the regulatory process to block competition and innovation, must come to an end. The temptation to resort to regulatory roadblocks is not only a waste of time and effort, but is truly self-delusional.

      If these hurdles can be overcome, I am fully confident of the long-term survivability of the industry. But if resurgence brings with it a return to more slothful tendencies, the Rothschild cliff may very well loom ahead.

      Maury Mechanick is an attorney at theWashington, D.C. office of White & Case LLP, and a member of the firm’s Telecommunications Practice Group. He can be reached at e-mail:

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