Satlynx ‘Refocuses’ On The Task Ahead

Satlynx aims to be a key player on the European broadband landscape. It intends to bring two-way satellite broadband services to small-medium enterprises (SMEs) and small office/home offices (SOHOs), particularly those not served by terrestrial broadband providers. Satlynx, formed by satellite giants SES Global [SESG], Gilat Satellite Networks [GILTF] and Alcatel Space, is approaching its two-year anniversary, and it hopes to be cashflow positive next year.

In terms of attacking the residential market, this is could happen in sometime during the next 18 to 24 months. Building Satlynx into a long-term profitable business is the challenge facing CEO Paul Heinerscheid. In an exclusive interview to Satellite News, Heinerscheid talked to International Editor Mark Holmes about the challenges facing the company during the next year.

Satellite News: What are the major challenges for Satlynx in 2004? Do you think you will see a significant increase in revenues compared with 2003?

Heinerscheid: One of the challenges facing satellite broadband companies right now is that they are either subsidized by their shareholders in one fashion or another or they have to start living a commercially viable life. This means they can no longer just push revenues on the basis of pricing competitively to terrestrial DSL, and they think they can make a profit some time in the future. The main challenge we have today is the competition from terrestrial operators in the areas where the terrestrial operators are capable of competing, i.e., in territories covering around 70 percent to 75 percent of the population. Our aim should be to provide services to those areas not served by terrestrial providers, where we can make a significant contribution, and incidentally, also achieve better margins. In 2003, we already experienced a nice increase over the previous year. It wasn’t huge but we are clearly on an upslope, and I expect this will further continue, even though we are slightly refocusing the company. Revenues in themselves are kind of meaningless unless you have gross margins and profits.

Satellite News: You mentioned about the company needing to be refocused. What did you mean by that?

Heinerscheid: We are looking at our strengths and our product offering, and we are basically focusing on the home office and SMEs with one of our product ranges, which is the Gilat platform. Today, without doubt, I think it is the best-performing, cost-effective platform in the market for this low and middle market. The large enterprise and Wi-Fi segments of the market are best served by our DVB-RCS platforms.

Satellite News: When do you see the company attacking the residential market?

Heinerscheid: In the United States, you have companies like WildBlue, EchoStar [DISH] and, to some extent, StarBand talking about economies of scale. They are talking about millions of subscribers and dedicated satellites, and about an advanced standard, which is either DVB-S2 or something similar where the spectrum efficiency will be at least twice as good as it is today in terms of the return channel. If you dedicate this effort to a single purpose and make a huge investment up front, but you have a large enough market to write it off, then you can actually come out with costs that are acceptable to residential users.

On the other hand, because of the volume, they can go to the manufacturers, requesting residential products at very low prices. We expect these products are going to be available within the next 18 to 24 months here in Europe, and we should wait until that has happened.

We expect that, somewhere in 2006, Satlynx will offer a true residential service, maybe through different channels. My view on the definition of residential services is fewer than $60 per month, with equipment prices of fewer than $600. Today, we are at twice those numbers, so I don’t want us to offer residential services or consumer services yet. I want to focus on the home office and SME market in the short term. I also want to play to our high-end platform strengths, which is where we can create a residential service today by using a combination of satellite and Wi-Fi.

Satellite News: Which markets offer the most opportunities for the company this year? Are the growth opportunities still likely to come from such southern European markets as Italy, Spain and France?

Heinerscheid: Would I single out southern Europe as more fertile than northern Europe? I don’t think so. You’ve got to go into the segments of the market where people have the ability to pay for what they are going to use. I would say there is definitely a market in all of Western Europe. Telecom operators may tell you they can serve customers everywhere, but if they do, they will have to do it with dedicated lines that will cost several thousand euros. Take Scandinavia, for example. We notice the main cities in Scandinavia are highly wired but once you go out onto the islands or a little bit north of Stockholm, you are very soon in virgin territory. The only way a local business can get in touch with the commodities market is by satellite.

Satellite News: Do you believe that satellite broadband still has a perception problem in European markets? How are you looking to address that issue?

Heinerscheid: Companies like Satlynx are not going to run public-relations campaigns or embark on public-awareness campaigns, because our direct clients are not the general public but the large companies or service providers. I really don’t believe that satellite broadband is less reliable than terrestrial. Over the next few months or years, the track record of satellite providers will simply show for broadband what we already know for TV: that satellite has the highest reliability numbers.

Satellite News: What are the financial challenges facing the company? When do you expect the company to become profitable?

Heinerscheid: We have to make a number of changes. We are not a low-cost operator. Because we are a joint venture and not wholly owned, we pay for all of our services and capacity at commercial rates. Even where we receive any preferred rates, they are preferred rates based on volume, not on some kind of subsidy. We are making sure that all the economic elements of our business are reasonable and are in line with market practices.

With the growth we foresee in the SME business or large enterprise business, we foresee being cash flow positive in 2005. Yes, we are a new company, but our three shareholders were already in the business before Satlynx was formed. They all came from different perspectives but the net result is a positive one: We have gained valuable experiences from more than one side, with the challenge to blend the experiences into one consistent company philosophy. That is not necessarily an easy task to do but in the end, it is a very powerful tool because we are not a single platform company.

Being profitable is important but being cashflow positive is also important. Companies like Satlynx, which have large capital investments, have accounting losses that are important for tax purposes but not necessarily for the survivability of the business. My objective is for Satlynx to be cashflow positive in 2005 if we continue on the path we are on right now.

Satellite News: Do you think making the business plan work has proved more difficult than originally expected?

Heinerscheid: I was initially brought in as a consultant in the spring of 2003 before being asked to take this job. It is a big challenge, but not more difficult than I expected!

The original company was put together under a number of management structures that tended to mirror the management structure of SES. I think the shareholders recognized that this was not the most efficient way to run an entrepreneurial company. We abolished some of the committees and streamlined the structure. I believe the new structure has proven more efficient and effective. Any organization will from time to time make adjustments, including personnel changes; that is a normal process of growing companies. And there will be further announcements in the near future.

We also need to be more consumer- and market-focused than we have been in the past. We should not do this in a brutal way. We are going to continuously tweak and improve over time. We will become the most efficient company in the industry.

Satellite News: Finally, how do you see the satellite services landscape changing during the next 12 months? What role do you expect Satlynx to play on this changing landscape?

Heinerscheid: I hope the satellite services business is never going to forget its economic equation. The industry will have to practice reality-based pricing. We should not use ‘forward pricing’ for a price that will be economical in two years. We need to price on what the costs are today. What bothers me is that other operators essentially subsidize their home-grown satellite service unit by not charging market prices for transponders and not applying certain cost items to those companies until they have customers. We at Satlynx operate under fully transparent corporate governance rules.

Another concern that I have is that there has been too much public relations and not enough substance in the satellite services landscape. The digital divide has become a political debate where the economic substance got lost. We need people to understand that our industry offers wonderful services that are productivity tools and that make your business faster, better and more economical for a reasonable cost. As long as the cost is less than the benefit, it is a good service. That is what we need to communicate in a very consumer-friendly manner, and we also need to say this publicly and honestly.

Contact: Annemiek van ‘t Hof, Satlynx, e-mail: [email protected]