With its Xtar-Eur satellite successfully launched last month by Arianespace and with in-orbit testing near completion, start-up company Xtar LLC can now focus on building business around an ambitious plan that involved targeting a specific segment of satellite users: defense and government users both in the United States and abroad. Xtar, a joint venture between Loral Space and Communications and Hisdesat, comes to the market with a unique business structure that it believes will provide a competitive advantage: it is offering services only in the X-band, a first for any commercial company in the United States.

“Right now, if you have looked at the markets, you can see that the U.S. government and its allies are going to commercial sources for a lot of their capacity because they just do not have enough capacity within their own resources,” Xtar COO Denis Curtin told Satellite News. “Those resources are mainly X-band.”

The fact that the X-band is widely used right now by government and defense customers, and has been since the late 1960s, has Xtar believing it will gain a competitive advantage over other commercial providers that are providing capacity in other such bands.

“Having the same frequency as the U.S. government and having terminals already out there in the field, we think this is a natural inclination for them to want to move using Xtar to fill in the gaps that they have,” Curtin said.

Curtin described the opportunity as “well beyond one satellite. We have a second satellite coming up at the end of this year/early next year. We think the market is such that both satellite could be filled [and there would still be a need for additional capacity]. The reason I believe that is if you look at what is out there in terms of need by the U.S. government and its allies, it is growing tremendously. They cannot supply that need with their own resources.” He noted that 80 percent of the capacity U.S. government and its allies are using are supplied by commercial satellite operators.

And with that in mind, Curtin offered an ambitious assessment of how soon Xtar would be able to fill capacity on the just launched satellite and the forthcoming one. He said his “gut feeling” is that capacity would be filled up on the two satellites “somewhere in the late 2006 timeframe.”

But while Curtin offered his thoughts on the capacity, he declined to talk about more specific financial details, including things such as the cost of the first satellite or how soon the company would be profitable if Xtar was able to meet his “gut feeling” on capacity uptake or future expansion beyond the first two satellites.

“That level of detail, I do not think anyone is going to get into,” John McCarthy, director of communications at Loral, who was present during the interview with Curtin, said. “This is the first stab at [an exclusive X-band business] that anyone is really taking. Over the coming weeks, months and years, we are going to see how this goes. If the capacity fills up and the prices are right, we will look at expansion.”

An Expected Slow Start

With its first satellite up in orbit and service ready to commence, Xtar will now be focusing on selling the service to potential government and defense customers. The company was able to get one customer, the Spanish Ministry of Defense (SMOD), to commit to using its service prior to the Xtar-Eur launch and is hoping that a positive experience by the SMOD will lead to more customers coming on board.

But the lack of commitments from customers prior to the satellite’s launch did not come as a surprise to Xtar. “There is a reason for that,” Curtin explained. “The U.S. Government was very clear to us all along that it would not commit to any capacity until the satellite was in orbit.” He said interest has picked up “dramatically” since the satellite was successfully launched.

Others Ready To Capitalize

Curtin noted that other companies are eyeing Xtar’s activities and have put plans in motion to capitalize on its offering.

“We believe we have helped motivate some companies to look at left-hand circular terminals,” Curtin said, noting that Xtar-Eur is the first X-band satellites “to have both left- and right-hand circular polarization. Also, some of the modem manufacturers are seeing a market opportunity because Xtar is there.”

And Curtin, for now, is content in letting others handle some of the details such as providing hardware and integration services while Xtar focuses on providing X-band capacity.

“I think what we will do is find out what the customer wants. I think we will find some customers, particularly in the smaller nations in Europe, that need an integrated solution,” Curtin said. “I do not think that is true in the United States.”

Shared Optimism

Phil McAlister, director of the space and telecommunications group at consultancy Futron Corp., shared Curtin’s optimism over its X-band service.

“My personal feeling is that Xtar has a very good business plan,” McAlister told Satellite News. “I think its prospects are very strong now that there is a satellite up. I am sure they would have liked to have received some more pre-orders prior to the satellite going up.”

But while McAlister shared the optimism, he noted some challenges that Xtar will face as it builds its X-band business.

“There is always a challenge of something new,” McAlister said. “They are selling something new to a government customer, which sometimes is not the best about embracing change. So that is always a challenge. However, Xtar did a lot of pre-launch marketing. They were trying to sell transponder deals way before their satellite launch. It has spent a good amount of time educating the government customer on its product offering. That is really going to help them now that they actually have a product to sell. Even though they did not ink a deal, it is not like all that time was wasted.”

McAlister noted that Xtar’s business of offering only X-band service may actually help them in some ways. “If it was not for Xtar [offering X-band service], it would not have a shot,” he said. The X-band offering “is what makes Xtar unique.” McAlister added that because the military already uses the X-band for communications, it will give Xtar a slight competitive advantage over operators offering services in other bands to the government because the X-band is “not completely new,” making it in theory an easier sale.

Dealing with exclusively government customers offers other market challenges as well, particularly in terms of how the government acquires satellite communications. “There has been a lot of activity around making the government a better customer of commercial satcom,” McAlister said. “There are regulatory barriers. There are cultural barriers. There are all kinds of things that make it difficult for the government to procure commercial satcom capacity. They do not like doing long-term leases. They like to use military owned and operated assets first and then they will look to commercial satcom. They don’t like paying termination liability.”

One challenge that Xtar will not face in the near term is another competitor in the X-band. “It is certainly a possibility” for another company to come online with an X-band offering, “if it turns out that demand outstrips the supply,” McAlister said.

The likely scenario that could develop if Xtar gains success in the market, McAlister said, is another operator with a satellite already in the manufacturing pipeline adding X- band transponders to that spacecraft.

“I am not sure how difficult it would be to add an X-band payload package onto the communications section of a satellite,” McAlister said. “I think that you could do that. I know they do C-/Ka-/Ku-band hybrid satellites all the time and I would think adding an X-band transponder package would be pretty straightforward.

But the technology side of adding an X-band transponder to a satellite is not the significant hurdle that would serve as the barrier to entry into this market, as McCarthy said it would be easy to add X-band capacity to a satellite.

Instead, the issues that would create a barrier to entry into this market are regulatory, McCarthy explained. He noted that the U.S. government does not license commercial operation in the X-band. Xtar was able to secure frequencies for operation from and X-band slot granted to the Spanish Ministry of Defense and can in turn offer its services to users in the U.S. government and its allies. But according to McCarthy, a company would have to invest a significant amount of time to get the regulatory clearances needed to offer X-band service.

–Gregory Twachtman (Phil McAlister, Futron, 301/347-3423; John McCarthy, Loral, 212/338-5345; Denis Curtin, [email protected])