MEGA OPERATORS: BIG FISH IN A VERY BIG POND

by Theresa Foley

As the new century approaches, the satellite industry is facing a rebirth with the dawning of the age of the global mega-operator, a phenomenon that promises to further revolutionize the 42-year-old industry.

Customers, manufacturers and smaller operators all will feel the impact of a handful of big operators-with a dozen or more satellites, global footprints and strong revenues-who will dominate the satellite industry in the next decade.

Who will be among them, how many mega-operators can the business support, and how much of the $100-billion-a-year plus in estimated future annual revenues will be subject to their influence? Intelsat, Panamsat and Loral are clearly in the front ranks of operators who should be counted among the "megas" by virtue of their large fleets, global coverages and ongoing operations. Another five or six firms have business plans in place that would put them in the ranks as well, although chances are, not all will make it.

The original mega-operator, Intelsat, has gotten smaller in the past year as it slimmed down to 17 satellites when it handed five over to the Intelsat spinoff, New Skies Satellites. At that lower number, Intelsat was forced to turn over the title of world’s largest satellite operator to Panamsat, with its 19 active satellites.

John Stanton, Intelsat vice president for sales and marketing, says consolidation and acquisition has raised the number of larger players with fleets of 10 to 20 satellites but, "we’re not looking over our shoulder; we’re looking at our customers."

"Access to global capacity strikes me as the thing that defines you as a mega-operator," says Joan Byrnes, vice president of marketing and sales for Loral Skynet. She believes there ultimately will be three or four global players. "Loral is positioning itself to be one of them. It will be difficult for smaller operators to stay outside of those arrangements. They will need to have a link to a global player to sustain a favorable business model."

The mega-operators have many advantages over smaller, regional operators. For one thing, they clearly do better with the financial community than their smaller counterparts, according to Armand Musey, senior satellite analyst at Banc of America Securities. "They can provide backup to customers, handle worldwide business and they have deeper pockets to take advantage of situations like empty orbital slots. If their satellites fall apart, they can still pay back the banks. One issue won’t bury them."

Panamsat

"When Panamsat and Hughes Galaxy were combined in 1997, it created a mega-operator and a powerhouse for the industry," says Panamsat CEO Douglas Kahn. "What has brought us to the truly great position we are in today? The company has always been innovative. To be willing to get out ahead means that you will be in a position to reap rewards when you get it right. And we have gotten it right."

Panamsat and Hughes Galaxy together have a long list of industry firsts that reflect the firm’s desire to take risks to grow. Together the companies were the first to launch a satellite dedicated to cable; the first to launch a dedicated international private satellite; a pioneer in the launch of digital video services; and the first satellite company to tap the public markets for financing.

To stay on top, Panamsat is committed to being a force of innovation, broadening its service offerings and expanding its fleet. Seven more satellites will go up in the next 18 to 24 months. This "broader, deeper" fleet will give Panamsat several competitive advantages, Kahn says, including more system reliability. "We are committed to providing uninterrupted service," which he says reflects the new thinking within the customer base. "It will be harder for smaller satellite service providers to compete. We are also providing global distribution that smaller carriers can’t. For large entertainment companies, we are better able to accomplish distribution." The alternative is to go to multiple carriers.

Kahn doesn’t like to make 10-year forecasts of revenue, but he says next year Panamsat projects 30 to 40 percent higher revenue than in 1999, and "it won’t end there." Expansion will include the development of new orbital slots, even though they are becoming more scarce; getting into new frequencies such as Ka-band and finding partners among other satellite, Internet and telecom operators.

Intelsat

Intelsat does not intend to expand beyond the 18 satellites in its fleet for the moment, but does plan to triple its revenues in the next decade, Stanton says. "During the first decade of the new millennium, we will go from a $1 billion annual turnover to close to $3 billion," he predicts.

Five Intelsat 9 satellites are on order, but those will replace the Intelsat 6 series rather than fill new positions. The organization may order Ka-band satellites as it heads toward privatization, but as of mid-summer did not have the necessary internal approval to move ahead.

A new business plan to position the post-privatization, "New Intelsat," for growth was written during the summer. Intelsat’s coverage may move more in the direction of landmass satellites as the broadband market heats up, but Stanton says the mandate to provide universal coverage of all countries will influence the deployment of new satellites.

Loral

"We’re amassing all the building blocks and addressing our global coverage by continuing to evaluate new partners to fill in places where we need to," says Byrnes, citing the addition of Skynet do Brasil as the latest company to join the Loral alliance.

Loral has North and South America covered, as well as much of Europe, by its Skynet, Satmex and Orion satellites. It is working toward covering more of the European landmass and connectivity beyond via its partnership with Alcatel in the Europestar company, which should be in operation with its first satellite by 2000. In Asia, Loral experienced a major setback in expanding operations when the Orion 3 satellite experienced a launch failure and was placed in a useless orbit. Loral lost customers, including Dacom, which turned to Koreasat for capacity to start its DTH business when Orion 3 was lost. However, Loral was able to find a close subistitute for Orion 3 by acquiring virtually the entire transponder payload of Apstar 2R, which is already in orbit at 76.5 degrees E. Additionally, the company has capacity on Mabuhay’s Agila 2 satellite to serve some customers. Another trans-Atlantic satellite, Orion 2, will be launched in the fall.

Customers are increasingly asking for global coverage when buying satellite services, Byrnes says. "Companies that we might not have expected in the past are multinational today. It sounds like a cliche, but the Internet is fueling it. Companies that look small in scope are on a growth curve because of the Internet, and they are in the business of transporting information from one region to another," she says. "Traditional entertainment companies also have stepped up their international efforts with liberalization" of markets around the world. The global footprint becomes increasingly important.

GE Americom

GE American Communications (GE Americom), with its 13-satellite fleet, annual revenues estimated to be in the $555 million range, according to Euroconsult, and a long history of company investment in expanding the satellite business, will quickly be among the world’s mega-operators if it isn’t already there. By virtue of partnerships and acquisitions, Americom has connectivity in most of the world’s regions and an ambitious plan to add 10 satellites by 2005 will provide it with global coverage.

Andreas Georghiou, GE Americom senior vice president for global satellite services, says staying power, industry presence and credibility are as important as global coverage in singling out who deserves recognition as a mega-operator. "Just owning a license and putting together a few satellites does not do it," he says. GE is investing in new satellites at a $500 million a year rate as it carries out a vision of achieving global coverage and reaching 90 percent of the world’s population with its satellites.

How does a company make itself into a mega-operator? GE applied for a dozen more slots through the U.K.-administered country of Gibraltar. In 1996, the company extended its reach into South America by investing in Nahuelsat; GE Americom currently owns 28 percent. Then in late 1997 in cooperation with NSAB, it established its first payload over Europe, GE 1E. At the end of 1999 the hybrid GE 4 will become operational with switchable Ku-band capacity with cross strapping capability between North and South America.

In 1998 GE Americom and Lockheed Martin formed a joint venture, Americom Asia-Pacific. Its first satellite will be GE 1A, which is to be operational in early 2000 and will provide three beams of coverage to greater China, South Asia and Northeast Asia/Philippines.

The next phase for GE will be to connect its regional satellites with international spacecraft, and the company is in final negotiations for contracts for two oceanic satellites to serve the Atlantic and Pacific regions. The Indian Ocean region will be covered by GE 1A.

Even though the industry is moving toward an era where mega-operators may control much of the business, Georghiou does not believe customers will suffer from any cartel-like attempts to keep prices up or limit competition to just a few global operators. "It will be an extremely competitive marketplace. The customers are very sophisticated buyers…who know how to negotiate big deals" with favorable terms. They also will benefit from dealing with mega-operators by getting higher reliability, better backup and more "stability and know-how," he says. Some smaller regional operators will find themselves struggling with higher marketing costs and more susceptibility to local economic problems, but those with resources and a "close to the ground" marketing advantage are more likely to survive, he adds.

New Skies

New Skies Satellite N.V. does not view itself as a mega-operator, but as a leading contender among the second tier of satellite powerhouses, says Bob Ross, CEO of the new company, spun off last year from Intelsat and headquartered in the Netherlands.

Mega-operators can be defined by the number of satellites, the amount of revenues or by having a huge dominance in one part of the market, Ross says. New Skies, with five satellites in orbit and one more on order, does have global coverage but its market is focused on trans-oceanic traffic due to the slots and operations it inherited when it was spun off by Intelsat. The company is lacking in landmass coverage and a big revenue stream, but has strategies to overcome both those shortcomings, Ross says. Those strategies include extending its coverage with more satellites and either acquiring or partnering with an operator who can provide better landmass distribution-specifically into North America and Europe, the places where New Skies landmass footprints are weakest.

The lightly loaded satellites transferred by Intelsat to New Skies are behind many of the marketing decisions made by New Skies’ management. The fleet was operating at about a 48 percent average utilization rate when the company began, and has improved that by a few percentage points in the first six months of 1999. "The satellites Intelsat transferred were among the most lightly loaded," he says. He believes the half empty satellites are an advantage rather than a detriment: "I’ve got a huge inventory to sell and an opportunity to generate increased revenues."

Ross’s goal is to get the load factors up to the industry norm of 80 percent or higher in the next two years, meaning that his sales and marketing department has a big job ahead. Landmass satellites tend to operate with higher load factors than oceanic ones, Ross says. He believes this is because operators have an easier time quantifying traffic patterns and requirements for land services that are market specific, such as DTH, while oceanic transport satellites are designed to serve multiple functions and are more of a guessing game. "Eight years ago, who would have guessed that Internet traffic would be where it is," he says.

Intelsat’s rate-based structure also resulted in averaging of prices across markets and of load factors across the system, and little pressure to achieve a high fill factor, according to Ross. New Skies, on the other hand, will have to seek maximum efficiency in operating and filling its birds to be competitive. The New Skies staff, all 75 of whom have been hired since last fall, has spent much of their time analyzing the reasons behind each empty transponder and beam, and then looking for a way to sell it.

"We’ll be able to sell where Intelsat didn’t," by taking a different approach, Ross adds. Sometimes that will be due to lower prices than Intelsat offers, and sometimes because New Skies does not have to follow some rules that Intelsat does, for example, requiring a bank guarantee to lease a transponder which some customers may not be able to obtain. New Skies doesn’t have a published rate card, preferring instead to negotiate the correct price to match the market.

An IPO is planned for the first half of 2000, and part of those funds would be used to expand the satellite fleet.

SES Astra

Societe Europeenne des Satellites S.A. (SES Astra) may be a regional operator in terms of footprint, but from the nine satellites it operates, its 1998 revenues were $547.7 million and its EBITDA was $441.2 million, so the company can easily be counted in the top ranks of mega-operators. Astra Director General and Chairman Romain Bausch says SES continues to work toward global connectivity, with its Asian presence acquired through its 34.1 percent Asiasat stake and an ongoing search for a partner to land its signals into the Americas expected to bear fruit by year-end.

Astra’s satellites are clustered at two orbital positions, 19 degrees E and 28.2 degrees E, which give it the advantage of owning strong, marketable neighborhoods of service but has the disadvantage of limiting geographic coverage to one main region. Bausch’s strategy to overcome that is through partnerships such as the one with Asiasat.

Astra’s satellites operate at probably the highest load factors in the industry, with the one bird at 28.2 degrees E at 97 percent fully loaded and the eight at 19.2 degrees E at 95 percent full. Bausch says lower load factors are better from many respects, since a fully loaded operator has nothing to sell to new customers. To break into the Italian DTH market, for example, it would need to offer six to 10 transponders. Astra handles that problem by buying more satellites to place into its slots, and is buying another satellite, Astra 2C, to put into the 28.2 degrees E position in 2001. Astra 2D, also ordered this summer, is for 28.2 degrees E in 2000.

Backup and sparing plans are more complex for mega-operators than for systems with only a few satellites. Bausch says backup capacity is guaranteed on Astra by having more total transponders in orbit than it has authority to use frequencies for, assuring that spare capacity is always ready to be used if an emergency occurs. Besides the nine satellites in orbit, Astra has a total of four on order.

Eutelsat

Eutelsat, with 16 satellites, ranks among the largest operators by the number of spacecraft and is trying to expand its coverage regionally beyond its traditional pan-European base of Europe, North Africa and the near Middle East. At least five more satellites are due for launch by 2001. Eutelsat’s strategy in ascending the ranks of mega-operators is to expand coverage geographically, as it did in early 1999, when it positioned three satellites to reach into North America. Another strategic step toward growth will be to privatize by breaking into a limited French company and a small intergovernmental organization in early 2001.

Giuliano Berretta, who took over as director general of Eutelsat in January, says mega-operators may be defined as those organizations able to finance their new projects out of yearly cash flow, which gives their customers price and availability advantages. "Eutelsat (with $477 million in revenue in 1998) is going strongly into this direction, but has not yet reached this order of magnitude. Nevertheless we have created a non-negligible market for satellite manufacturers, launch service providers and ground infrastructure manufacturers with a total expenditure to date of over three billion Euros ($3.15 billion)," he says.

The situation for smaller operators is getting more difficult, according to Berretta. "This space capacity provision business bears risks, which customers are not willing to accept. Only large fleets like ours can handle this."

An operator the size of Eutelsat is able to reschedule satellite deployments and maneuver around launch or satellite problems to guarantee a level of service quality and security. "Small systems do not have those possibilities. This is one of the reasons why they find themselves in economically weak positions. The best solution for them to achieve good results is in the context of a larger fleet."

Eutelsat is trying to recruit smaller systems to join its fleet. Eutelsat’s shareholders, for example, agreed earlier this year to integrate France Telecom’s Telecom 2 satellite and Deutsche Telekom’s DFS-Kopernikus network into the Eutelsat system.

Load Factors

"Load factors," the term to describe what percentage of transponders on a given satellite are used or empty, largely determine how profitable a satellite operator is. As mega-operators consolidate their operations in various regions, it is becoming apparent that there is little consistency in satellite loading around the world. Some regions, such as North America, have fleets that are loaded to the brink, while places such as Asia and Latin America are served by satellites with large amounts of unused capacity and accompanying business problems.

The satellite industry has no rule of thumb as to how fully utilized a satellite ought to be in order to ensure profitability. United States’ capacity has been tight for the last few years, in part due to failures, and in part due to the practice of U.S. operators of not launching a new satellite until available capacity on other spacecraft is used, allowing the operators to keep pricing relatively stable. When a region has satellites with low load factors, prices can be driven down. Although, in most places, the quality of the technology on various satellites will dictate which operators can ask premium prices for service, by providing better power or antenna patterns on the ground.

The operators say they employ several strategies to maximize profits from their fleets, to assure sufficient excess capacity for protection under numerous failure scenarios, and to have some capacity left over to sell to emerging customers. Having a fleet that is entirely loaded can be almost as much of a headache, albeit of a different sort, to a marketing department, as is having one that is nearly empty.

"The ideal filling factor has to a be a compromise between high revenues today and the need for spare capacity in order to have the immediate flexibility to host new key projects tomorrow," Berretta says.

"You are successful if you reach a fill rate of 88 percent," Brynes says. Loral’s satellites serving the United States have very high fill rates-in the high 80s and low 90s-in part due to recent launch delays and failures. Orion 1 also has a load factor in the high 80s, she says, due to demand for transatlantic traffic.

However, Loral’s new Telstar 7 satellite was expected to start service this fall with a 50 percent load factor, according to Vijay Jayant, Bear Stearns and Co.’s managing director of satellite equity research. The Orion 2 satellite, due for launch by Loral in the fall for transatlantic services, will have a much lower rate of 25 percent at the outset, he says. The satellites over North America tend to fill quickly, as Loral has demonstrated with Telstars 5 and 6, which will have load factors of 90 and more than 80 percent, respectively.

In Asia and Latin America, Loral’s load factors are lower. Asia is "abnormally low," Byrnes says, but the region has turned the corner, and she expects the pent-up demand to be unleashed soon. Satmex 5, the new high-powered satellite launched last December for the Mexican satellite licensee Satmex, which is partially owned by Loral, is an example of a satellite project that has proven the "build it and they will come" theory. Satmex 5 was launched with a low load factor of 15-20 percent, but only seven months after launch, the satellite was almost fully booked, she says.

APT Satellite Ltd. of Hong Kong, which targets the Chinese market, operates with some of the lowest load factors in the industry, according to a research report from Merrill Lynch in February. The report says the take up rate on Apstar 2R will be just 33 percent in 1999 for C-band and 46 percent in 2000. The new lease by Loral of all the Apstar 2R capacity will change that loading. Ku-band usage was worse, at around 15 percent. The company’s other satellites, Apstar 1 and Apstar 1A, have higher load factors, in the 77 to 85 percent range, Merrill says. The investment community has a lack of confidence in APT’s management, which has hurt its stock price, plus the supply of transponders outstripped demand.

Neighboring operator Asiasat had higher load factors on its first two satellites, in the 80 to 90 percent range. But the yet-to-be-launched Asiasat 3S was expected to have only a 60 percent uptake for C-band and 20 percent for Ku-band when it goes into service in 2000, even after taking on the traffic currently on Asiasat 1, Merrill Lynch says.

Japan’s JCSat 5 had a 60 to 70 percent utilization rate in December 1998, with JCSats 3 and 4 loaded at 70-80 percent.

Panamsat does not release any load factors. Kahn says return on investment comes over a period of years in this business. "We look at load factors and evaluate what we can do to fill the satellites faster, but we’re committed to the industry over the long term, and we’re convinced there are many applications still in their infancy," he says. "We will put up satellites in areas with high and low load factors because we’re in this for the long haul."

GE Americom’s load factors are well over 90 percent in North America, and they are still building up in Europe and are at the early marketing stages in Asia, in preparation for the upcoming deployment of GE 1A. "We have the intention to even out the loading as we increase our presence in each region, but this is one of the advantages of being global. You don’t depend on one region or one group of satellites to make the company profitable," says Monica Morgan, GE Americom’s director of marketing communications.

Americom spends a lot of time managing its transponder inventory to provide overlap of time between the launch of a new satellite and retirement of its slot predecessor, something that its customers asked for, Georghiou says. Thus, next generation, usually higher powered satellites with greater levels of redundancy are made available a bit sooner. In conjunction, this strategy also involves making older satellites available as generic, less expensive capacity on which to grow new businesses, in hopes that the new clients then become secure, established customers. Numerous customers have followed this path, he says. Among them is a Capital Broadcasting subsidiary, Microspace, and Qualcomm, which has become a huge satellite user after starting out about 12 years ago as a small niche user of capacity.

For unexpected problems like the technical failure of a spacecraft, GE Americom manages its transponder and satellite inventory so that it can offer its customers a four-level protection plan that provides a variety of backup options in case of a satellite problem. If capacity is lost, GE moves along a four-step process: First, traffic is moved to unused transponders; then to spares onboard the affected satellite; then onto capacity used by preemptible customers, and finally to the dedicated spare satellite kept in orbit to provide service in case of a catastrophic loss of part of the fleet. GE had to implement its protection scheme on March 12 when the GE 3 satellite lost service for five hours. Only one customer with a preemptible service contract was down temporarily, Georghiou says. The other customers were smoothly transferred to backup capacity.

"It’s easier for us to manage capacity than for an operator with a smaller fleet," he says.

Intelsat operates with average load factors in the high 60 percentile rank, says Stanton. If "guaranteed reservations" for future contracts were counted, those load factors would be closer to 80. The busiest two satellites are located over the Atlantic and Asia-Pacific, where satellites operate at around 90 percent loaded. Due to the global nature of Intelsat’s fleet and the fact that generic satellites are moved from location to location, some satellites are operating at lower fill factors, in part because they often have some amount of unusable capacity, for example beams that hit the ocean instead of populations, Stanton says.

"Commercial health is not just about load factors. We don’t have a hard and fast target…but we would like to stay about at the 70 mark," Stanton says.

Intelsat has a long history of using its empty capacity for free demonstrations and testing of new services. It tested ATM networking protocols over satellites and high-speed Internet backbone links, both of which have begun to generate new customers and uses. Today, the organization is running tests of wireless local loop rural telephony, interactive Ku-band, Internet caching and multicasting, and broadband VSAT applications on otherwise unused capacity as it demonstrates one of the benefits of having some spare capacity and a large, global fleet.

Eutelsat offers lower prices for new capacity over places like Africa and India when load factors are low, and also uses the capacity to develop services such as Skyplex, which allow digital carriers to directly uplink to a satellite.

Wall Street analysts track each operator’s load factors as one of the many tools they use to place a value on a company’s satellite operations, but Musey admits that much of the loading analysis is guess work, as it is not based on firm loading data, which the operators do not like to release.

But load factors will be only one of several indicators to watch as the mega-operators compete for the top ranking positions in the global satellite business in the years ahead. Quality of service, pricing and efficient management of their fleets also will determine who holds the top spots in the satellite industry after the current round of consolidation and fleet buildout is completed.

The End Of An Era?

Just how worried should the smaller operators be by the trend toward huge global operators, and away from regional operations?

"I don’t share the view that all the business is going to the mega-operators," says Ross. "It ignores the idiosyncratic nature, and the depth and breadth of the industry with its multiplicity of users."

New Skies’ position in the second tier of operators has forced it to create innovative marketing approaches to win business despite its smaller size, a strategy that Ross says other smaller operators will be able to use in the future to survive. He cites the New Skies 806 satellite, a cable distribution bird for South America, as an example of a satellite that is loaded with customers who have 10-year contracts. Neither Loral nor Panamsat will be able to displace New Skies’ business there, he believes. "We are doing well and can beat them on getting business," Ross says.

Smaller operators also can design specialized capacity on their satellites to serve niche markets. Ross says the New Skies 803 satellite has two transponders that perform Ku-/C-band cross-strapping out of the Middle East, making them perfect for some broadcast and video operations out of Baghdad, a place of frequent interest to TV companies who are heavy satellite users. New Skies has no trouble selling that capacity. Creative marketing also helps, as does the ability to drop prices when a satellite isn’t selling out. New Skies has come up with a strategy to sell capacity on its 513 satellite in the Pacific Ocean, which was a fully depreciated, inclined orbit satellite that Intelsat had used for cable restoration services, but had much unused capacity when turned over to New Skies. Transponder sales for the 513 have been achieved by using it for Internet services and dropping the prices low enough to be competitive with undersea cable, Ross says.

Theresa Foley is Via Satellite’s Senior Contributing Writer.

Mega Satellite Operators At A Glance

Company: Eutelsat
Existing Satellites: 16
Planned Satellites: 5
Coverage: "Europe, N. America, Asia Pacific, Africa"
1998 Annual Revenue: 455 million Euros ($481 million)

Company: SES Astra
Existing Satellites: 9
Planned Satellites: 4
Coverage: Europe
1998 Annual Revenue: 516.9 million Euros ($546.6 million)

Company: New Skies
Existing Satellites: 5
Planned Satellites: 3
Coverage: "Asia Pacific, N. America, S. America, Europe, Africa"
1998 Annual Revenue: $116.7 million

Company: Panamsat
Existing Satellites: 19
Planned Satellites: 7
Coverage: "Atlantic Ocean region, Pacific Ocean region, Indian Ocean region, North America"

1998 Annual Revenue: $767.3 million

Company: GE Americom
Existing Satellites: 13
Planned Satellites: 4
Coverage: "North America, Europe"
1998 Annual Revenue: $555 million

Company: Intelsat
Existing Satellites: 18
Planned Satellites: 5
Coverage: "Indian Ocean region, Atlantic Ocean region, Pacific Ocean region, Asia Pacific"
1998 Annual Revenue: more than $1 billion

Company: Loral
Existing Satellites: 9
Planned Satellites: 3
Coverage: "Americas, Europe, Africa, Middle East, Asia Pacific"
1998 Annual Revenue: $254.2 million

Source: Via Satellite, *Euroconsult