The clock is ticking for Inmarsat. The mobile satellite operator faces a June 30 deadline set by the U.S. Congress in the ORBIT Act to hold an initial public offering. Yet, with market conditions still tough, it seems likely that another extension is in the cards.

In terms of its business strategy, the operator is seeing an impressive take-up of its regional BGAN broadband service, with well over a thousand subscribers already. The operator has also been in the thick of the action in the Middle East, playing a key role as demand for satellite capacity in the region, particularly from media organizations, exploded. In an exclusive interview with Interspace Senior Editor Mark Holmes, Inmarsat CEO Michael Storey talks about the possibility of an IPO, the decision to delay launch of a new generation of satellites, as well as other challenges facing the operator in the rest of 2003.

Interspace: What are your plans concerning the June 30 IPO deadline? Do you plan to hold an IPO by then or will you seek a deadline extension? What are the main issues facing the operator in making this decision before the end of June?

Storey: In terms of the IPO, we have watched with awe the performance of the market, and depending on how those market dynamics unfold we will, if appropriate, execute an IPO. It is important to understand, that even if the stock markets recover, that does not mean the IPO market simultaneously recovers. They do not necessarily go hand-in-hand. As far as ORBIT is concerned, embedding a target date to execute a commercial transaction such as an IPO does not make an awful lot of sense. It actually implies that a legislature can predict market conditions, which of course it can’t.

There is a lot of sympathy that the law is no longer appropriate, and therefore we are seeking to introduce new legislation that will be more reflective of market and commercial reality, whilst addressing the needs of Congress to ensure the holdings of existing shareholders and former signatories (from when we were an intergovernmental organisation) are diluted in some measure.

Interspace: Do you need to sort this out before the June 30 deadline?

Storey: It doesn’t have to be sorted in the definitive sense that you are asking the question. But, we are actively working on it at the moment. We don’t see it as having to be done by the end of June.

Interspace: Has there been a significant increase in demand for your service in the Middle East over the last month? Have there been any security issues in terms of the usage of Inmarsat’s services?

Storey: We anticipated, based upon our experience in Afghanistan, that there would be a surge in demand, so we deployed one of our spare satellites into the region, which is normally served by only two satellites. So, we actually increased capacity by 70 per cent about 10 days before things really started moving. I guess we earn a tick for anticipatory deployment of capacity, which is no trivial thing of course.

There has been a surge in demand, which is similar to what we experienced in Afghanistan. It is still a relatively small part of our business, because we serve many vertical markets, but essentially given the embedding of journalists into the military operations and their requirement to file reports, we saw that demand surge to a point where we are beginning to max out to be honest.

A few journalists initially had difficulty gaining access at the times they wanted, so they tended to leave their terminals on to ensure they had access. It turned from an on- demand to a cost and activation service, which didn’t help them in the long run … The vast majority of usage has come from the media sector. In terms of the volume of demand, given that the area of coverage of spot beams is really a vast area, distinguishing normal business from surge business is quite difficult. We have seen demand increase around 15 to 20 per cent.

Interspace: Could you give us an update of your regional BGAN service, which was recently launched? What levels of take-up have you seen for regional BGAN? What levels of growth do you expect to see this year?

Storey: Regional BGAN was launched in November, and it is still relatively new. But, from our experience, it has been most successful. We already have over 1,100 subscribers, and they are using the service quite intensively. It is still too early to claim success, but it has been an extremely encouraging experience in terms of the speed of the take-up, and the volume of usage. The 1,100 subscriber figure is in line with our expectations.

Interspace: What profit levels did you post in 2002? When we spoke to Michael Butler last year, he said “people will be genuinely surprised” at the numbers you would post? Did you reach the 50 per cent mark in terms of revenues generated from data services?

Storey: Our revenue was up 5 per cent at $463 million. On the downside, there was softness in our traditional maritime and aeronautical sectors, coupled with global recessionary conditions. On the up side, the experience people have had on using GAN in Afghanistan and elsewhere has compensated for that. So, we saw our GAN business increase dramatically. Land data revenues were up 72 per cent. EBITDA [earnings before interest, taxes, depreciation and amortisation] was up 11 per cent from last year at $314 million. Earnings per share were up a resounding 165 per cent over last year at $1.64 a share. These were above our expectations. More encouragingly, data revenues increased 25 per cent, which as you know is the space where we are positioning Inmarsat. We are not neglecting the voice business, but we are pursuing the mobile data business via satellite resolutely, which is why we are investing $1.6 billion to give us more adequate capacity in the mobile data arena. Data accounted for 54 per cent of our revenues in terms of our on-demand service. So far this year, we are seeing the same phenomena in terms of the growth in data services. For us, it is a gratifying vindication in the way we are repositioning the business, but without neglecting voice services. We recognise we will have voice competition, so we believe we are strategically distancing ourselves from the competition by pursuing this mobile data strategy.

Interspace: Are the Inmarsat I-4 satellite launches on track? Are there any insurance issues with these satellites? What impact would any kind of launch failure have on your operations?

Storey: We have decided to push back the launch date of the first satellite to the end of 2004, for service at the end of the second quarter 2005. That decision was a result of looking at our capacity requirement, the launch of the recent regional BGAN service, which goes to about 100 countries. This is about 45 per cent of the target market for the BGAN service. Looking at the state of readiness, with respect to the development of these rather elegant spacecraft, and at our cashflow, and taking all those into account, together with the capacity of our existing fleet of satellites, we have decided to change the business model to our advantage by delaying the launch essentially for one year.

In terms of insurance, we know that the rates are moving against the industry. We have taken that into account in our financial planning. We do have an historical record, with the launch and operation of our spacecraft, which is 100 per cent over nine spacecraft. The insurance industry takes all that into account, and therefore we expect to be in a position to negotiate in the range in which we have budgeted. So, we are not overly concerned about that. But, it is an issue. The insurance industry likes our risk mitigation strategy. We only need to launch two spacecraft out of the three we are building to serve 85 per cent of the market. The fact we have planned on that basis is a mitigating factor in the insurance environment. If the first two launch successfully and market demand grows, we would launch the third satellite to give us the global coverage that we are targeting for our mobile high-speed data services. If we were to lose two, we would have a serious problem.

Interspace: What was your reaction to the Federal Communications Commission’s decision to allow mobile satellite service companies to use an ancillary terrestrial component (ATC) to boost their signals in urban markets? Does it represent a threat or an opportunity?

Storey: We are on the record as having been very concerned about ATC if it in anyway disrupted service to our customers, not just inside the U.S. Our spot beams cover well beyond the coast and landmass of the U.S. The FCC was also concerned that there should be no interruption and disruption of our service capability. We think the measures proposed by the FCC have intelligently addressed that concern. The devil is in the detail, however. We continue to be in dialogue with the FCC to ensure that within the broad framework of their order, the actual operating requirements are tightly defined to ensure there is no service interruption, in the event that ATC is deployed.

On ATC itself, and this is just Michael Storey speaking now as a business person, I find it very difficult to see the business opportunity. The case that other unsuccessful mobile satellite operators made with respect to the ATC provision was that they did not have a viable satellite business without the ability to deploy terrestrial infrastructure in metropolitan areas to work in tandem with their satellite capability in non-metropolitan areas. If someone offered me the opportunity to be the sixth or seventh competitor in Manhattan, Chicago or Los Angeles in terms of offering a mobile service in those cities, I would wonder, given the scale, mass and muscle of some of the cellular operators, whether I could carve out a market there sufficiently to justify several billion dollars on a terrestrial compatible mobile satellite service. It just doesn’t make business sense to me. That is my intuitive reaction at this stage. However, we don’t stick our head in the sand either and we are currently as we speak seeing whether there is an angle there we have missed, and we will continue to pursue that. In discussions with other mobile satellite operators that were pushing for ATC, they see it as a spectrum play where they could resell their satellite spectrum to terrestrial operators. As we read the ATC ruling by the FCC, that will not be possible … My impression is that most people instinctively share my view that it is not a business within itself, and their hope to make a spectrum play out of it seems to have been frustrated.

Contact: John Warehand, Inmarsat, e:mail: [email protected]