PanAmSat Shifts To Cautious Growth From Bold Innovation

The bold move by PanAmSat Founder Rene Anselmo to risk tens of millions of dollars of his own money to buy a satellite and then to launch it, uninsured, on the maiden flight of the Ariane 4 rocket broke the monopoly control on international satellite services held by the world’s governments 20 years ago last week.

“A lot of people talk the talk but they aren’t willing to put their entire fortune at risk,” said Joseph Wright, Wilton, Conn.-based PanAmSat’s president and chief executive officer. Despite his financial conservatism, Wright said PanAmSat shares the same entrepreneurial spirit now that it did in its infancy with Anselmo at the helm.

Anselmo, a blunt-spoken visionary, died in 1995 but he succeeded first in creating the private sector commercial satellite services business. PanAmSat is one of several global satellite operators that emerged to compete with Intelsat, a former intergovernmental satellite organization that privatized during 2001.

“PanAmSat’s anniversary is truly remarkable, if one looks back to the company’s origins,” said Tim Logue, a telecommunications consultant with the Coudert Brothers law firm. “It was one of several proposed satellite systems born around the same time, but Rene Anselmo was the most unique of the entrepreneurs who jumped into the satellite business at that time. No one gave PanAmSat or any of its fellow new systems much chance of survival, but Rene fought from way behind to be the first to launch a satellite and build a global system. For better or worse, today’s market challenges will require executives with just as much vision and determination as Rene Anselmo in order to survive and prosper.”

The creation of PanAmSat is a “classic example” of an entrepreneur assuming enormous risk with his own funds, fighting governments around the world that opposed creating a private sector competitor to themselves and launching his first satellite on a fledgling launch vehicle’s inaugural flight, said D.K. Sachdev, president of the SpaceTel Consultancy, of Vienna, Va. Sachdev worked at Intelsat when Anselmo took his calculated risk that led to the creation of the private sector satellite industry.

Now, the world’s global satellite operators are all privatized. Luxembourg-based SES Global [SES] has ridden acquisitions to become the world’s largest satellite operating company. Eutelsat, a Paris-based former intergovernmental satellite organization that also privatized, is another global operator. New Skies Satellites [NWS], a spinoff of Intelsat that operated independently from its base in The Netherlands, is a small global satellite operator.

The origin of all the private sector international satellite companies began with the launch of the first PanAmSat satellite in 1984 that targeted service to Latin America for video and very small aperture services (VSAT). The company now has more than two dozen satellites, and it is strategically looking to launch additional spacecraft to top opportunities for high-definition television (HDTV) and government services.

PanAmSat matured three or four years ago when it slowed the fast-paced growth of its satellite fleet amid slackening demand, said Wright, who became its CEO in August 2001 when the company was in a spending spree. At the time, all the world’s satellite operators seemed to be competing to put up as many spacecraft as they could 22,000 miles above the Earth with the assumption they could sell the capacity at a big profit, said Wright.

The companies seemed to give limited focus to “return on investment,” Wright said. The private sector made decisions as if demand was almost unquenchable, he added, saying decisions about launching new satellites now are made on a “market-based approach.”

J. Armand Musey, president of Near Earth LLC, a boutique satellite investment bank, said 20 years after PanAmSat’s creation as a monopoly-breaking startup, the industry now is reaching maturity.

“Going forward, good service, reliability, and aggressive entrepreneurship, while still necessary, will no longer be sufficient,” Musey said. “Strong, disciplined operating and financial management expertise will become increasingly important differentiators in the market.”

With private-equity investors led by Kohlberg, Kravis Roberts & Co. buying PanAmSat last month (SN, April 26), the company will be playing it safe and focusing on cash flow.

The keys to growth for PanAmSat now are HDTV, government services and ultimately global connectivity to developing countries, Wright said. The first two opportunities are immediate, while the connectivity thrust is going to be developed over a period of many years.

“With HD, I think we hit the timing just right,” Wright said. The company’s Galaxy 13, launched a year ago, is dedicated to HD, and it is “pretty much leased out,” he added.

PanAmSat’s HDTV neighborhood in North America is located at 127 degrees W longitude, and it will be enhanced with the launch of Galaxy 14 either late this year or early 2005 as well as by the launch of the Galaxy 15 next summer.

“We need the capacity and our customers want the ability to go in through the cable neighborhood,” Wright said. “This is like a new product offering.”

Government Courtship

The U.S. government is a second area Wright is targeting for growth. He boasted that two acquisitions made by PanAmSat to improve its access to that market cost the company a combined $13 million. The companies acquired were Hughes Government Services and Esatel. Those acquisitions, in turn, have helped boost the annual revenue contribution from those businesses from $15 million to $100 million.

“More importantly, it gave us access to the GSA (General Services Administration) and the State Department,” Wright said. “We already were reasonably established with DISA (Defense Information Systems Agency).”

The government market for satellite services appears on track to grow two or three times as fast as the commercial market, Wright said.

PanAmSat traditionally has looked at the government as the enemy because it had tried to block Anselmo from starting his company. Then, the government was viewed internally as “the regulator,” Wright said. “Three years ago, we recognized it as a customer and one that has special needs. We don’t just lease transponders.”

PanAmSat provides ground equipment and other services to aid the government, Wright said. The reward of working with the feds is “fairly steady revenues” in a down market, he added.

Longer-term, providing connectivity to developing countries is an area of opportunity, Wright said. The company’s Spotbytes service links ISPs in developing countries by offering a bundled capability that includes satellite space segment, teleport uplink and downlink, and direct connectivity to Internet backbone providers.

(Joseph Wright, PanAmSat, 203/210-8606; Tim Logue, Coudert Brothers, 202/736-1816; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; J. Armand Musey, Near Earth LLC, 646/452-9931)