Loral Skynet Looks To A Future Beyond Bankruptcy

Loral Skynet, a satellite-operating subsidiary of Loral Space and Communications, is hoping for an upswing in fortunes over the next few months. While its parent company has had to deal with a number of balance sheet issues that pushed it into Chapter 11 bankruptcy court protection, Loral Skynet has been focused on expanding its global reach and boosting revenues.

One potential growth driver is SkyReach, a new IP enabled service, which provides two-way broadband connectivity for secure private networks or high-speed Internet access. This service is now commercially available in the Americas. SkyReach is scheduled to roll out in Europe and Asia later in 2004 or in early 2005.

The June 28 launch of the company’s Telstar 18 satellite will play a key role in the deployment of SkyReach outside the Americas. The satellite has a total of 54 active transponders, sixteen high-power Ku-band transponders and thirty-eight C-band transponders. The satellite will join Telstar 10 in serving Asia, offering cable, broadcast and SkyReach IP service connectivity (see story, p. 1).

In an exclusive interview with Satellite News, Loral Skynet President Terry Hart talked to Mark Holmes, our international editor, about his hopes for the company and how recent events have affected his organization’s culture and aspirations.

Satellite News: How has the Intelsat deal to acquire Loral’s North American satellites affected the growth opportunities for Loral Skynet, particularly in the Americas marketplace?

Hart: There was obviously a big adjustment to our balance sheet and our revenue and the way we structure our company to support our customers around the world. All that has changed. The thing that hasn’t changed, interestingly enough, is our strategy. Between 1997 and 2002, we were on top of a very rapid peak of growth of about 50 percent per year in our FSS (fixed satellite services) business. We were growing very dramatically. It was clear to us, in order to continue that kind of growth, we would need to begin to diversify more into value-added services.

So we opened up two additional product lines, besides our space segment FSS business, which were network services and professional services. Our strategy was to begin to grow in those other dimensions globally with platforms to serve network services customers and move more into applications with professional services. So even with the dramatic changes in the business represented by the sale of the North American satellites to Intelsat, that continues to be our strategy. And, the satellites we kept, plus the ones we are launching cover the globe in a way that allows us to continue that strategy.

Satellite News: Is it true as part of the Intelsat deal you cannot re-enter the U.S market for two years? Can you still be a player in the U.S. government market?

Hart: As conditions of the agreement, we cannot sell space segment where both the uplink and downlink is in the United States. We can still do FSS from Telstar 12, where we are going from the United States to Europe or vice versa, and we can still do end-to-end network services such as our new IP-based SkyReach service.

Satellite News: Has the Loral/Intelsat deal made it more difficult for the company to win new contracts? Has there been an uncertainty among customers?

Hart: Certainly, it is an extra item that the sales team addresses, and we have been pretty effective in doing that. As Loral’s CEO Bernard Schwartz has said publicly many times, we have a very aggressive plan to reorganize the company. It is a little bit of an unusual Chapter 11 situation, in that Skynet continues to generate a good deal of EBITDA (earnings before interest, taxes, depreciation and amortization) and cash flow from the assets that we do have on orbit. All of the secured debt was paid off with the sale of the North American satellites. We have not had to borrow any cash to operate the company, which is unusual in the situation we are in.

We are confident we have a good plan to go forward. When we show that to our prospective customers, they understand the situation and there have been very few occasions where we have lost opportunities because of it.

Satellite News: What do you see as the major growth opportunities for the company, both in terms of regions and applications? If we take the Asia broadcasting market, what do you see as your competitive advantages over other satellite providers in the region?

Hart: Right now, as most are aware, there is an oversupply of transponder capacity and, as a result, we have been focusing more on growth in network and professional services. We will continue to do that to fill up a lot of the existing capacity we have around the world, with an eye in three to five years time on Ka-band opportunities as well as other FSS opportunities where we can begin to build satellites for that growth.

We see traditional broadcast applications continuing to use satellites as they always have but that is going to be a fairly limited growth opportunity with compression technologies limiting utilization of the existing capacity. We see a whole new way that people are going to use satellites in the future, and what they want is not to be concerned with teleports and all the infrastructure needed to use the satellite. What they want is an inexpensive terminal that can connect with IP open protocols to a local network. That is what we are building out with SkyReach. We see that as being a major growth opportunity in the future.

In Asia, we have just launched a second satellite for the region. Our interest in doing that was based on the success we had with Telstar 10, our first satellite in Asia, where we were able to fill that satellite up with very good market prices in about 18 months after we took control. We had sold out the C-Band and most of the Ku-band on that satellite and that continues to be a good business for us. For some time, we had wanted to launch a second satellite in the region. With the joint funding of the Telstar 18 satellite with APT, which we launched [June 28], we are on our way to creating a second neighborhood in Asia. The C-band would be used mainly for video distribution throughout the hemisphere and Ku-band would be used for more data applications in Asia.

Satellite News: In recent months, we have seen the trend of private-equity firms investing in the satellite sector, including the purchases of PanAmSat [SPOT] and New Skies [NSK]. Is this a positive trend? How do you think these developments will affect Loral Skynet’s ability to pick up new international contracts?

Hart: I think it is a positive trend. It demonstrates what all the satellite operators have been saying for some time, and that is we are undervalued. The private-equity people have more latitude, and they can come in and put their stake in the ground, realizing that they are undervalued assets.

Some years from now, when supply and demand is better balanced, the businesses are going to be very healthy. I think it is a very positive thing for the industry. It will help us go forward as the economic climate improves.

Satellite News: Could you give us an update on the company’s capital expenditure plans during the next 12 months? Will the company look to aggressively invest in new satellites?

Hart: The satellite construction part of an FSS business is obviously very capital intensive, but we are not looking to make any satellite investments in the near term. As we launch more and more network services, such as SkyReach, we will not have much in the way of capital expenses other than people. As we continue to focus on growth, there is not going to be a large capital investment until we reach the point where there is a better supply and demand balance. At that point, the industry is going to be focused more towards Ka-band and spot-beam satellites and their more effective use of spectrum for the types of growth applications we are looking for, such as two-way broadband access. In the two-to- three-year timeframe, I think we will be making some decisions about our well-positioned Ka-band slots and spot beam satellites.

Satellite News: Are you seeing a recovery, in terms of demand for capacity?

Hart: In the last two or three months, we have seen a doubling in terms of service inquiries, where customers are looking for price quotes on space segment or for network services. I think other operators are also reporting similar increases in activity. That hasn’t quite materialized to an increase in revenues yet, as the sales cycle in this business tends to be long. We are on the edge of seeing that activity feeding down to our sales channels. The ones we find more interesting going forward are on the data side.

Satellite News: SkyReach recently became commercially available throughout the Americas. What are your expectations for this service? How do you view the opportunities for SkyReach in Asia and Europe?

Hart: We are benefiting from a merger we did within the company combining the Loral CyberStar business into Skynet. That brought with it the legacy data and VSAT types of services, which we are still supporting. But, more importantly, it brought with it a large number of talented people with a large amount of networking and IP experience. We at Skynet had actually been working on a parallel product, which we now have been able to bootstrap and accelerate its rollout, and that is what we are calling SkyReach. We made a decision two years ago at Skynet to pursue that product line with an open standard – DVB-RCS — which we believe to be an important attribute of the service globally. We entered into a relationship with EMS to supply those hubs, and we have installed the first two in our Mt. Jackson, Va., facility using IA-7, the former Telstar 7, and Telstar 12, which covers all the Americas and Europe.

In Europe, we want to take advantage of the east-to-east beam on Telstar 12 and also in Asia, Hong Kong and Hawaii with Telstar 18. The European and Asian hubs, when deployed towards the end of this year or early next year, will essentially complete what we think will be the first truly global satellite IP network, whereas our competitors have all done pockets of two-way IP over satellite — like SatLynx in Europe. This will be a truly global network, where all of our hubs will be connected to a fiber backbone in a way that a customer, like a multinational corporation or organization, would be able to connect all of its offices around the world on a private or public Internet network. We think that is a very powerful play right now and Skynet is working hard to be the first one to make it a truly global market for two-way IP.

Satellite News: Will that give you a significant competitive advantage?

Hart: We think so. We are watching carefully to see how this market evolves. There have been a lot of disappointments in terms of broadband efforts, and a lot of people have pulled back. It’s a fairly modest investment with just a few hubs, but it is taking advantage of our global presence and the expertise we have gained with Cyberstar and its legacy products. We think it is the right combination at the right time to accomplish something we think is unique.

Satellite News: You mention a number of disappointments in the broadband arena? Why do you think it will be different for you?

Hart: We are not going for the big play consumer-based product, which I think is where most of the ventures have been trying to hit that home run and sign up millions of subscribers for Internet access. Where you have a high concentration of subscribers in metropolitan areas, satellite has to compete against DSL and other terrestrial technologies; that is rather difficult, at least until spot beam satellites are more economical. What we are doing is looking to solve the last-mile problem globally for enterprises that have a real need for a private and secure global network service. For that niche, we are not looking to have hundred of thousands of subscribers. Our sweet spot in this market is deploying high-quality networks of between 15 and 500 sites.

Contact: John McCarthy, Loral Space and Communications, e-mail: [email protected].