Inmarsat is expecting 2004 to be a big year as the company prepares to launch of full BGAN (Broadband Global Area Network) services.

Beginning next year, BGAN services would provide mobile data communications at 432 Kbps for Internet access, mobile multimedia and many other advanced applications. The new Inmarsat I-4 satellite system is the cornerstone of Inmarsat’s ambitious strategy. The first I-4 satellite is scheduled for launch later this year. In an exclusive interview with Satellite News, Inmarsat Managing Director Michael Butler talks to Mark Holmes about the challenges ahead for BGAN, as well as what impact he expects new shareholders Apax Partners and Permira to have on the operator’s strategy.

Satellite News: In 2003, what percentage of revenues did Inmarsat derive from data services? What are your expectations in terms of 2004? When we spoke in 2002, you said, “Seventy percent was a realistic target”. Do you stand by that?

Butler: We did 40 percent in 2001, greater than 50 percent in 2002 and, although we are still waiting for our published results, we believe it will be greater than 60 percent in 2003. So we have seen this consistent increase in the proportion of our revenues that are derived from data. And, all of our business development activities planned for this year will continue to drive those volumes. We continue to provide a wide range of voice services as well, but they tend to be augmenting our core value to end customers and distributors, which is the data services that we provide. If you look at most of the services we have launched over the last couple of years, their primary appeal has been their data rate in a mobile format, whether on land or sea or in the air.

Satellite News: You recently signed a deal with the European Space Agency that will lay the foundations for extending the scope of Inmarsat’s Broadband Global Area Network (BGAN) satellite service? Could you tell us the significance of this deal for Inmarsat?

Butler: Our BGAN (Inmarsat-4) programme is a $1.5 billion investment programme and it is specifically targeted at the world’s landmasses. The satellites and the BGAN technology are ideally suited to supporting land applications. When we launch the service, the initial terminals that are being developed are specifically focused on the land segment where we believe there is a larger demand, much stronger rate of adoption and a broader opportunity. However, what we have discovered is that these very versatile satellites that EADS Astrium is building for us can be adapted to serve maritime and aeronautical users, as well. As a result, we have received some ESA funding – which we are matching ourselves with a number of our partners – to begin the early development of terminals that support both the aeronautical and the maritime market. We had always anticipated that we would do that at some stage but the funding has given us an incentive to start that development work a little bit earlier than we would otherwise have done. It doesn’t mean we will be launching maritime and aeronautical services at the same time as the land-based services, but we have begun the process.

Satellite News: Are you still on track for the launch of BGAN in 2005? What are the major challenges ahead for the company prior to launch?

Butler: We are well advanced with our planning. Every month we are de-risking the project and achieving new milestones. A large part of the remaining project risk relates to getting the satellites up, deploying the ground segment and making sure everything works in an integrated way. We already have 25 years of experience and a nine-for-nine satellite launch success record. But I’d say that one of our biggest challenges is making sure we can realise the land-based data opportunities once the service is available. Alongside the whole technical implementation programme, we need to ensure that our distributors are trained, the commercial infrastructure is in place to support them and, importantly, that we have sufficient distribution coverage in key markets. It involves collaborating with our current distribution partners to make sure they are working with more data-capable entities in the various countries around the world where we see the biggest opportunities, while also working with new distribution partners who can get our services to market quickly. And, we have the flexibility to do that with the BGAN services. We recommitted during 2003 to only go to market through third-party organisations, and have no aspirations to directly sell to end users.

Satellite News: Could that change?

Butler: It is unlikely. Last year was a momentous year for us. We had the global events that we responded to, along with increasing competition in the voice market. We also had the completion of the private equity transaction, and we completed the negotiations with our distribution partners for commercial framework agreements to manage our commercial relationships over the next five years. It gives our major distributors continuity of service for the next five years, and access to the next generation of Inmarsat services, BGAN in particular. What we have gained is much greater commercial flexibility and a much more pragmatic arrangement than we had previously, and therefore no need or desire to ‘go direct.’

Satellite News: How successful has the Regional BGAN service been so far? Can you give us an update in terms of numbers using the services and the expectations you have in terms of the service this year?

Butler: It continues to go from strength to strength. We have seen good take up of the service. The number of terminals that have been activated is slightly less than we anticipated when the business plan went together, but the upside is that the average user is also using it more than we anticipated. Significantly, we have seen widespread usage in our existing market segments – media, government, oil and gas- but without any discernable cannibalisation of our existing revenue streams. So we are not seeing people transfer from our 64 Kbps GAN service to move to Regional BGAN. It is, however, taking a little bit longer to open up those new market opportunities where a real data requirement already exists. Some of the early successes have been in retail banking, central and local government, logistics and the leisure sector. We have some great examples of where we are meeting a need not being met by satcoms before. Regional BGAN is a portfolio evolution in its own right but it is also an important ‘path finder’ for BGAN services. When we launch our own Inmarsat-4 satellites we will have a captive user base of traditional and ‘next generation’ users to transfer over. Along the way, our distributors will have developed new skills and new integration capabilities which will be extremely helpful when the BGAN service is launched.

Satellite News: Geographically, where do you see the biggest opportunities for the BGAN service?

Butler: The big market in the Regional BGAN footprint is India and we are quite close to signing a distribution partner there, which is key to getting regulatory access and serving a national market. One of the differences between our existing portfolio and Regional BGAN is that the price points and the overall convenience of the Regional BGAN proposition means that we believe it will be attractive on a national basis where there is a poorly developed communications infrastructure. India falls into that category, as do some of Russia and Kazakhstan. But BGAN is exciting because some of the real underdeveloped parts of the world in terms of high-speed data communications (China, Indonesia, Brazil, and Mexico) offer a whole raft of incremental opportunities. The key to exploiting that is having national distributors in those countries, as well as our current vertical market-focused distribution partners. Back to Regional BGAN, we are beginning to pursue national opportunities in Turkey and Algeria, which offer strong potential for us. The addition of voice and circuit switched data with BGAN will over time improve the opportunity for us.

Satellite News: Many mobile operators are launching 3G services this year in Europe? What impact do you think that will have for BGAN?

Butler: For the most part, they are targeting the metropolitan areas and the ‘top-end’ consumer. But there is no real overlap with the opportunity we are pursuing. As a niche player in the global communications marketplace, I think we can benefit as these 3G offerings come to fruition and deliver real value, because it will raise the awareness among the people we are looking to sell our services to – the corporate IT managers who have different corporate communications requirements outside the metropolitan areas. So, I believe we’ll be able to ride on the back of this ‘data wave’.

Satellite News: Will the new ownership structure at Inmarsat have a positive influence in terms of your long-term plans?

Butler: As you know, when we privatised in 1999, it was anticipated we would move to some other form of ownership such as an IPO within a few years. For known reasons, the public markets weren’t ready, even for a story as strong as ours, so we embarked on the private equity process at the end of 2002. So, I guess there has to be a sense of relief that having spent much of 2003 pursuing a very competitive auction with two different private equity consortia, as well as renegotiating commercial terms with our distributors, here we are at the start of 2004 with the transaction completed. And, we have got stability in terms of our commercial relationships with our distribution partners. It is a fantastic opportunity to spend much more of our time doing something productive and realising the data and BGAN opportunity.

Satellite News: Is there a sense of relief that Inmarsat’s future has finally been sorted out?

Butler: There is relief that we can now embark on the next stage of our evolution. We have learned lots of things along the way, and here we are about to enter the BGAN era with a whole new financial structure and investor base. Although our majority owners are now Apax and Permira, it is important to note that three of our largest shareholders (Lockheed Martin [LMT], Telenor, and KDDI) are still shareholders. So, I think we have got the best of both worlds. I have no doubt we will come out of this as an even more successful company.

Satellite News: Will there be any changes in terms of how the company is run?

Butler: The positive side is that throughout the process, Apax and Permira have bought into our business strategy. They see us as a strong data play, as an organization with not only a very solid business today but with some great business potential, s well. I am confident they will support our development.

Satellite News: What are the major challenges facing the company over the next 12 months?

Butler: Internally, we have spent the last three years innovating and launching services, such as 64 kbps services into the maritime and aeronautical market. We spent a lot of time launching new service capabilities. We now have a portfolio of newly introduced services, and we have to make the most of them. Although there is no major service launch planned in 2004, we have got a lot of work to do preparing for the launch of BGAN. It is a different type of challenge this year. It is about taking a known capability, finding out what the end customers want and working with our distributors to make sure they are effectively supported. We need to go through the development cycle much more quickly and in a much more focused way. We are going to be introducing this tremendous global communications capability (up to 432 Kbps), so we need to prepare ourselves fully today so we’re able to identify and realise the new mobile data opportunities.

(Contact: John Warehand, Inmarsat, e-mail: john_warehand@inmarsat)