Is There A 'Magic Bullet'?

By Steve Symonds

Broadband is the “hot button” du jour in the satellite marketplace. Every trade show, seminar, and magazine these days seems to be hyping how broadband services will lead the industry to a recovery from the current weak market conditions.

The hype is typical, but there are a large number of otherwise intelligent satellite professionals who – due to the horrible market conditions – are willing to suspend critical judgment and embrace broadband as a “cure all” for what ails the satellite industry.

While broadband is a useful product for which there is a small but rapidly growing market demand, it is not going to reduce the supply “overhang” in the satellite marketplace.

But there may be an even more worrisome question lurking in the background: Is the industry’s current “nuclear winter” hiding an underlying shift in satellite-market fundamentals?

Demand for fixed satellite service (FSS) bandwidth was flat in 2002 and will contract further this year. Why? Factors include:

Slowed sales to telecom companies, which historically are large buyers of space segment, due to their own overcapacity problems;
Shifts to terrestrial/fiber alternatives driven by the financial problems of large customers such as WorldCom, Qwest Communications [NYSE: Q], Deutsche Telekom [NYSE: DT] and France Telecom [NYSE: FTE];
Downward pressure on pricing as a result of the fiber glut that is causing T-1 line service to sell for $300/month;
Slow growth of telecom-related services, including a 10 percent drop in VSAT sales last year;
Consolidation of DBS operators globally; and
Improving compression technologies that enable customers to “do more with less.”

The satellite industry increasingly has been looking to the multi-point broadcast/media business to find relief – but financial problems have spread to this sector. Examples include Kirsch, Vivendi [NYSE: V] and AOL Time Warner [NYSE: AOL].

What gives? Well, the satellite industry has matured much more quickly than anyone predicted. Long gone are the “gravy days” when a satellite operator, such as PanAmSat [Nasdaq: SPOT], could sell handfuls of transponders to the big cable networks for their linear video feeds. As is the case with other mature “utilities,” satellite bandwidth has become a commodity.

Frankly, it’s time for satellite operators to “think differently” – or risk becoming the 21st century equivalent of the railroads. The analogy is not an exaggeration, as demonstrated by the accompanying graphic that compares railroads with satellites.

What does it really mean to “think differently”? It means viewing your business through a different lens – starting with “what ails” you.

Don’t think: “What’s a satellite operator to do in this ugly market?”

Think: “What’s a distribution company to do in this ugly market?”

This is not merely a word game – it’s a frame of mind. The first statement defines the company based on its current dominant form of technology. The second statement defines it based on its market functions and capabilities.

How does a satellite operator translate this thinking into a practical business strategy? Here are three examples:

Manage distributed content networks: Whether it’s MPEG or IP traffic, there are a host of value-added, high-margin services that a satellite operator can provide to customers on either end of the satellite pipe. For those who don’t want to venture too far from core businesses, “reinvent” yourself and grasp the potential this “extended value proposition” can offer your current customers. The accompanying “Broadband Services Value Chain” graphic identifies more than a dozen such services.
Provide systems solutions: Companies increasingly are looking for vendors who will handle their “end-to-end” data/content distribution needs. A satellite operator can, and should, jump at the prospect of becoming a solutions provider for these customers. At the very least, the operator could become a prime contractor and subcontract out those elements it cannot provide (e.g., core technology provisioning, systems installation and integration) – all bundled around its space segment. The “Broadband Services Value Chain” graphic outlines the primary roles that a solutions provider needs to fill.
Aggregate/Package Broadband Solutions: For strategic players that understand “distribution is king” and have the thick skin needed to take a serious business risk, a move to become an aggregator/packager of content might be warranted. It’s not as much of a stretch as you might imagine for a manager of distributed content networks to leverage your content relationships and aggregate a broadband offering that can be licensed at wholesale and re-branded by broadband ISPs.

Which, if any, option suits your company depends on its unique circumstances. Considerations include a company’s financial condition, market position, stable of customers, and sensitivity to business risks.

What is urgently needed is for a satellite operator to embrace a strategic view of the current situation and future prospects. That perspective would include acceptance that satellite services now are commodities and that the operators do not have the fundamental advantages conferred on other telephone and cable companies as distribution utilities.

It is imperative for satellite companies to escape the commodity trap of competing on price. That would be akin to the proverbial “race to the bottom.” That would be the worst possible answer to the dilemma faced by satellite operators that want to stay in business. As the saying goes, “when you’re in a hole, stop digging.” So, drop the shovel and think about how to climb out!

Steve Symonds, formerly a satellite industry business development executive, now is managing director/partner of Symonds Associates. Comments or questions on this article should be e-mailed to symondss@aol.com.