By Cynthia Boeke

In a year of significant technical and business turmoil in some high-profile sectors of the satellite market, GE American Communications (GE Americom) represents, in many ways, the best the satellite industry has to offer.

With 12 satellites, GE Americom is one of the world’s largest commercial satellite operators. An ongoing global expansion plan is well underway. GE Americom currently has five satellites under construction; plans call for up to six more to be contracted in 2000. The company’s biggest customers cover the waterfront of satellite users, including Qualcomm, NBC-TV, Gilat Spacenet, TCI, Viacom, Fox Sports, Alascom, PBS, Turner, Skycache and the federal government.

In 1999, GE Americom continued to deliver extremely high-quality service, and maintained stability and profitability; at the same time, it executed a well-calculated plan to expand service offerings and extend GE Americom’s reach around the world. These achievements, often ignored in the midst of more turbulent industry news, could not have been made without the steady hand of John Connelly. Thanks to Connelly’s dedication, determination, and unswerving commitment to technical quality, GE Americom’s fleet is among the most stable, reliable and technically superior in the world. At the same time, Connelly has steadily advanced GE Americom’s global activities in a methodical way that virtually ensures their profitability.

In many ways 1999 was no different for Connelly than any other year. It is his continual ability to provide profit and maintain a technically superior satellite fleet that led us to select him as this year’s winner of Via Satellite’s Satellite Executive of the Year 1999 award. Diligence, rational planning, solid return on investment, commitment to quality–these are the tried and true attributes of success, particularly in times of financial and technical upheaval in the satellite industry overall.

As part of the award process, Connelly described his thoughts on the industry’s past, present and future during a wide-ranging interview with Via Satellite Editor Cynthia Boeke.

CB: What do you think were the most important events that took place in the satellite industry in 1999?

JC: In my opinion, the most important events were the failures of Iridium and ICO and the significant growth of the direct-to-home businesses. The MSS failures and the DTH successes demonstrated the critical need for a realistic market-based business plan and precise execution.

The second important event is related to satellite and launch vehicle reliability issues. From the launch vehicle standpoint, we saw the far-reaching negative impact of the Proton and Delta 3 failures. On the other hand, Ariane was rewarded for its reliability with a huge backlog. On the service side, Panamsat was first hurt by reliability problems– losing share and market cap–then rewarded when these quality problems were fixed – as they apparently have been.

Our response to the reliability issue has been to increase our testing of satellites, increase system redundancy, and create more in-orbit service overlap. One other important event in 1999 was the advent of Internet delivery via satellite. I think that broadband’s importance became very clear, and everybody feels there will be a huge role for satellite to play as a result.

CB: What are the most serious obstacles facing growth in the industry today?

JC: There is some linkage here with my previous answer. One, the quality image needs to be changed for our industry. Two, the capital markets have to be convinced this is still a good industry to invest in. I think they are generally convinced; however, they have become more and more selective after having been burnt on more than one occasion. That’s why you see market caps for Panamsat and Echostar coming back so strongly. But that’s also why you see the “field of dreams” projects not getting the same response they got before.

Other obstacles that were there in ’99 and will be there in 2000 are the ITU and country-by-country licensing processes, and U.S. export control restrictions, which, when added together, present huge problems that absolutely need to be fixed. Another obstacle is the need to ensure that the interference limits on NGSOs established by the ITU are accurately measured and strictly enforced. In a different vein, there is a need for cost effective two-way interactive communications over satellite. In light of their recent consumer announcements, Gilat is very close to solving that problem. The fourth obstacle is the education of the emerging Internet markets, to make sure they understand that satellites will provide an efficient, reliable, high-quality service. Satellites will solve many of the bandwidth problems Internet companies have–particularly those requiring streaming media distribution.

CB: What were GE Americom’s milestone achievements in 1999?

JC: With the successful deployment of GE 4 we embarked on the most ambitious expansion program in Americom’s history. Within 15 months we plan to launch six satellites. The second milestone is our investment in Gilat. As a result of this investment, we didn’t get out of the VSAT business, we invested in someone who could do it better than we could. We own 24 percent of Gilat, which has over a $2 billion market cap. The third milestone is our pending acquisition of Columbia Communications.

But in many ways, our biggest achievement was the maturing of Six Sigma Quality at Americom. Six Sigma forces all of our employees to focus on customer needs. It has resulted in our achieving industry-leading availability ratings and introducing a number of new products. One of these products, Cable 2–the GE 4/GE 1 neighborhood that reaches 45 million cable households, is a home run for our customers, providing them with a market penetration that they would not enjoy otherwise.

CB: How has the satellite industry changed since you entered the business?

JC: Certainly a major change is globalization. In 1992, when I joined the industry, there was no one company other than Intelsat that provided a truly global service. I think that between the WTO and the needs of our customers for global expansion, many satellite service providers are now trying to become truly global. It is now possible to effectively compete at a global level and, in my opinion, the evolution will be complete with the proper privatization of Intelsat.

Another major change has been the emergence of full-service networks–where there were none in 1992. Since then, DBS in the form of Echostar and DirecTV have been great successes. We’ve started to see how Ka-band networks might play. Hopefully we will benefit from the MSS lessons of Iridium and ICO. Thus far, full service networks have emerged with a mixed degree of success.

Niche markets have also started up–the little LEO, digital radio and imaging businesses are all in different stages of startup. They clearly were just dreams in 1992.

And, finally, the whole environment for satellite communications has changed due to two things: the rapid fiber buildout, which is increasing terrestrial telecommunications’ presence, and advances in digital and compression technology. The transition from analog to digital has created great opportunities for our customers, which we must facilitate.

CB: Do you think the satellite business can provide the high margins that many investors are looking for?

JC: Absolutely; they can and do. When you look at the well-run satellite businesses– look at Panamsat or Astra–they’ve got high margins and huge backlogs. There are very few industries that have our cash generation potential and huge backlogs. What investors are consistently seeking are fair returns commensurate with risk and capital intensity, and that is what our industry offers. I think it goes back to whether the business plans are based on markets or technology. When you see the “field of dreams” projects driven by technology, the capital markets are simply no longer going to pay up for them. But overall, I think the answer is yes.

CB: Has GE Americom considered investing in an MSS project?

JC: I haven’t seen one yet that has appealed to us from a risk/reward standpoint. I definitely believe in wireless and broadband. A satellite-based network plan that combines them has a chance, if it can come to market quickly and be reasonably priced. But so far we haven’t seen one, and we haven’t figured one out ourselves. The biggest problem we have had is, that for the most part, they have been point-to-point solutions in markets that were pretty well served.

CB: For how many years has GE Americom been profitable? Was 1999 an exceptional year in terms of profitability?

JC: Americom was profitable in as much as it generated net income and cash before I arrived. I came along in ’92 and our issue was, “Could we grow the business?” Since then we increased our earnings by over 25 percent per year. Interestingly enough, in 1999 we had double digit growth; but, because of a few non-recurring events, it wasn’t up to our historical rate. This year, our net income growth should more resemble our historical rate.

CB: How would you characterize the GE corporate culture? How does it affect the way in which GE Americom does business?

JC: GE has evolved to become a global service and information-based company. When you think of that, we fit right in. We’re certainly a service company and trying to become more global. The big GE advantage is that we have great operating systems, a great culture, huge resources, and great people. And, as we globalize, it certainly helps to be part of a company with a virtually unequaled global presence.

CB: How well does Jack Welch, Chairman and Chief Executive Officer of General Electric, understand the satellite business, and what is his general view of its future potential?

JC: Very well. He’s very focused, technically oriented, and draws upon tremendous background from his responsibilities for the other diverse businesses of GE.

One GE business especially gives Jack great understanding of Americom, and that is NBC, a big customer of satellites. Jack sees the satellite business from a customer’s perspective and from an investor’s perspective, and can link all that together. I think his view of our future potential is evidenced by his willingness to continue to invest in it.

CB: Why did GE Americom exit the little LEO business?

JC: We looked at little LEOs. They’re probably right for some people. But when we looked at how long it takes to get a financial return, we decided it was not for us. Little LEOs serve small splintered markets; there are competing technologies that will threaten them in their second life. When we were looking at them, we realized we weren’t going to get a return on the first round of satellites until they were almost ready to be replaced–we didn’t like that. They also have limited message throughput. We like wireless broadband; little LEOs are wireless but not broadband.

CB: What is the status of your Ka-band satellite contract with Harris Corp.?

JC: We have worked with Harris a great deal in the last 12-15 months to really define the payload and again, link it to the marketplace. They and we have gone through a number of design changes to ensure that we will be able to meet customer requirements. In the meantime, we have asked the FCC for approval to include intersatellite links in our Ka fleet. It continues on.

We find that Harris does a terrific job in payload design and it’s really the reason we chose to work with them in the first place. And we have not been disappointed.

CB: There is a general perception among some satellite industry quarters that GE Americom has been slow to seize market opportunities compared to Panamsat, Loral Skynet, SES Astra and others. Is there any truth to this? How would you counter it?

JC: I would say, we were first to seize market opportunities but we have done it on our own terms. Let me respond specifically on two fronts: acquisitions and serving new markets. We did our first major acquisition when we bought GTE Spacenet. And we have looked at every investment along the way since then– Panamsat, Satmex, Orion–but they just didn’t pass our screen. We thought they were worthwhile properties, but we didn’t think we’d get the returns our investors would want.

In the final analysis, we’ve gone about it our way–in a couple years, after developing Columbia, we’ll have a fully built-out, global network that will be as robust, if not more so, than any — without significant goodwill and/or earnings dilution.

Second, it is true that we have been less visible on the new markets front, indeed; we have been conservative with our investments, especially in unproven markets and technologies. However, we believe that we actually have the lead in the definition of some next generation streaming Internet services, in particular, on the services to support DSL.

CB: What is your overall philosophy of global expansion?

JC: It’s to develop global broadband networks and concentrate on in-country distribution and local strategic partners. It’s played out with Nahuelsat in Latin America and NSAB in Europe. Our slot strategy with Gibraltar has been a key factor in helping us get closer to global markets.

CB: How does the purchase of Columbia Communications further GE Americom’s strategic plan of global expansion?

JC: We have a global presence now, but Columbia will allow us to expand it in every region over the next several years. Columbia was one of two alternatives we had to link these regions together in the AOR and POR to complete our network. We looked at Columbia and partnering with people with similar capabilities, and concluded that Columbia was the best alternative.

CB: What plans do you have to expand over the next year or so?

JC: The big things are there and in place. We don’t need acquisitions to complete our strategy, but we won’t ignore those opportunities either should they arise. We will be launching three or four satellites in 2000– that will take a lot of our time and focus. The plans that you’ll see involve the emergence of new value-added services. We are focused on the whole notion of responding to customer needs in today’s Internet market while continuing to serve our existing customer base.

CB: What market sectors do you think show the most potential?

JC: We think Internet is the market sector that has the most potential for satellite. One reason we haven’t been a big proponent of MSS is that, while telephony works over satellite, it’s not the best medium when terrestrial point-to-point alternatives are available at reasonable price levels; but, if you take 256 kbps or more and want to multicast, there is nothing better than satellite. We’re trying to look for those markets where we can really differentiate ourselves, invest in those heavily, and become the provider of choice.

CB: What will GE Americom look like five years from now?

JC: Five years from now, we’ll continue to be a business-to-business global satellite service provider. We’ll focus on market needs and on customer satisfaction through quality. We will have an efficient global broadband network. We’ll concentrate on in-country distribution and have strong, local partners. Where we’ll look different from today is we’ll have a much wider range of product offerings. We really have to develop value-added services that not only differentiate us but serve as a growth vehicle as well.

Cynthia Boeke is the editor of Via Satellite.

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