Less than one year ago, Satlynx CEO Paul Heinerscheid told Satellite News talked about his Satlynx’s efforts to refocus the company’s satellite broadband product offering to tackle the small and medium enterprise (SME), small office/home office (SoHo) and consumer markets (SN, April 12, ’04). Now, about a year later, Heinerscheid took some time with Satellite News International Editor Mark Holmes to discuss the changes in the broadband market and Satlynx’s financial goals in its quest to conquer that market.

Heinerscheid hopes that the company, which was formed in April 2002 by SES Global, Alcatel Space, Gilat Satellite Networks in a 200 million euros ($265 million) joint venture, will have significant revenue growth in 2005. The company plans to be profitable this year, which would mark a significant milestone for the company. However, it has many challenges ahead. A launch of a residential two-way satellite broadband service still seems some way away.

Satellite broadband remains a key issue as satellite operators look to monetize this market. However, the satellite broadband story so far has been more about potential than profit for operators in different regions. In particular, targeting the consumer market seems a highly difficult proposition. But, with many households in rural regions of the world unable to access broadband via cable or DSL, there are clearly opportunities for satellite operators. How quickly these markets will develop and how successful operators are is still open to debate.

Maury Mechanick, counsel at White and Case, a law firm in Washington D.C. told Satellite News, “I think one of the key questions for the fixed satellite services (FSS) industry is how big is the satellite broadband opportunity and is there a major role in the broadband revolution for satellite services. You have had different approaches in different parts of the world. In the United States, you had a number of systems that emerged in the late 1990s, and almost all of those have disappeared without satellites being launched.”

Mechanick continued, “From my perspective, there are two key elements for success. First, service affordability. That is about getting the price right and being able to make money at that price. Second, and most important, is customer service. The typical satellite broadband customer is going to be more like the type of customer that the DTH service provider encounters rather than the sophisticated business customer of major VSAT businesses.”

In an exclusive interview to Satellite News, Heinerscheid talks about the changing business model that the operator is deploying and why he is confident that after a transitional period the operator is set for a better future.

Satellite News: What are the major challenges for Satlynx in 2005?

Heinerscheid: Our challenges will be to implement the changes and the structural adjustments we made in 2004. We now need to execute this plan in 2005. We do believe that we will have a sizable increase in revenues in 2005. We need to remain prudent, in part, because of the delicate adjustments and restructuring that we have undertaken and are still in the process of carrying out.

We do not want to be over-optimistic for 2005, but we have several reasons to believe that 2005 will be a better year. First, we have adjusted our distribution method. When I first talked to you 12 months ago, we basically had inherited a model that mostly was based on distribution through large telcos. Large telecoms companies like BT, France Telecom and Deutsche Telekom, even though they negotiated deals with us for Internet access, never translated these deals into an implementation plan with the needed marketing that should go with it. So, we did not see much growth from this channel. We saw some regression. But, we are realigning and working more with the corporate business divisions of these telcos, as opposed to the ISP side. Satlynx has now replaced these channels with an independent distribution system in which we are playing a supportive wholesale role to regional companies that are offering value-added services. This has really started to bear fruit and we can see positive results. Our corporate business activities are actually doing quite well. I expect that to continue.

Second, we have repositioned our products and services. They are on two new primary platforms and are now branded in a more consistent way, which is also in line with distribution methods that we are now using.

Satellite News: Do you think you will see a significant increase in revenues compared to 2004?

Heinerscheid: Yes, we are looking for double-digit revenue growth in 2005 compared to 2004.

Satellite News: When we spoke in April 2004, you said you expected residential satellite broadband products to be available in 18-24 months? Do you still believe that prediction to be correct?

Heinerscheid: We are not currently offering individual, direct-reception residential consumer services. The drivers for such direct-reception residential services will come from developments in the United States. We are watching these developments attentively. In fact, SES Americom is working quite closely with EchoStar, as an example. To date, we have not seen much movement. I predict that if we do not see implementation of a large-scale North American residential service soon, it will delay any large-scale European implementation as well. Our plans for 2005 do not incorporate a direct-reception consumer strategy. But, we still have in our drawers additional options should these developments materialize in the near future. Two things need to happen: equipment prices need to drop and higher spectrum efficiency on the transmission side needs to occur, which will reduce transponder usage.

Satellite News: When will Satlynx offer a true residential product? Is this still planned for 2006?

Heinerscheid: In terms of true residential services (individual direct-reception), we will have to see what happens in the next six months. Initially, we planned to offer residential services in the second quarter of 2006. I believe that this is now unrealistic. So, we will push this option back by at least six-to-12 months. We certainly need at least one year to introduce a service similar to the ones planned for North America. Also, we will have to decide with our shareholders what the most appropriate distribution method for such a residential service would be.

However, Satlynx is already implementing other ways to address the residential market, through a combination of satellite broadband and terrestrial wireless technologies.

Satellite News: What are your views on the digital divide in Europe? What role can Satlynx play in order to bring satellite broadband services to more SMEs/SoHos/consumers?

Heinerscheid: I hear those words a lot. They have become akin to a political slogan. The fact is that the satellite industry, including, but not limited to Satlynx, have existing solutions, alternative to individual direct-reception services, to relatively quickly bridge this so-called digital divide. But there are regulatory, political and organizational obstacles. We are currently providing services to 40-50 villages in France and Spain through a combination of a single broadband terminal and Wi-Fi transmission that covers an entire village. If a mayor today wants to have broadband service in his village or small town, it could happen within a week.

The solution is here today, but organizational obstacles remain: a private company like Satlynx cannot subsidize this service. That should be done by the public sector, whether national or local. We have a very elegant solution. We have technically certified interfaces with three different Wi-Fi vendors. What we do need is a public authority (local or national) to say in a consistent way they will make subsidies available and here is the money. The budget required for such an infrastructure is also significantly lower than wiring an entire rural region with copper.

Satellite News: How difficult is it to make a satellite broadband service a success in Europe?

Heinerscheid: Unfortunately, Europe is not (yet) a single market like the United States or Canada, but a collection of 25 or more individual countries, each with different rules and customs. Make no mistake, it is quite a challenge. Success cannot be measured at the European level, but needs to be looked at on a country-by-country basis.

The obstacles are not primarily of a technical nature, nor should the cost of the infrastructure be the barrier. As I explained earlier, the option of deploying a broadband terminal coupled with a Wi-Fi distribution is a cost-effective way to address terrestrial broadband coverage gaps. This solution, incidentally, also is quite attractive for Eastern European markets, provided we can find adequate infrastructure funding coupled with an easing of the regulatory and administrative processes that currently delay a rapid deployment.

However, in the SME and corporate market segment, we are making better progress. The decision-making process is somewhat simpler, if not necessarily shorter. The challenge is to find the niches and segments where we can offer the most benefit for a customer’s money, and we are active in several such segments.

Satellite News: What are the financial challenges facing the company? When do you expect the company to become profitable? What are your targets in terms of profitability?

Heinerscheid: Our goal is to become profitable in 2005. To accelerate the effects of our internal restructuring, we have recently concluded a significant transaction with Xantic, whereby we are taking over some of their SCPC (Single Channel Per Carrier) accounts to strengthen our service portfolio in the institutional market segment. Our aim is to be profitable in each of the market segments where we are active. As you know, Satlynx, as an independent company, has to fully account for all its operational and other costs, and cannot hide or pass on some of these to its shareholders.

Satellite News: Do you believe that satellite broadband still has a perception problem in European markets? When we spoke before you said, “We need to be more consumer- and market-focused than we have been in the past”. Do you think the company has achieved these aims?

Heinerscheid: I still believe that the satellite broadband industry has a perception problem, which is not the case for the broadcast part of our industry, which actually enjoys a reputation of high reliability and quality.

We, in the broadband arena, have not yet achieved that reputation, and we need to continue working on it. We, at Satlynx, are positioning and branding ourselves to become more customer- and market-focused. We are changing the way we present our services with the new “Connect” line of services. It is unfortunate that we simply do not have the number of terminals in the field to justify a more aggressive image marketing.

Satellite News: Satlynx launched a new DVB-RCS platform in September last year. Could you tell us the significance of such a launch?

Heinerscheid: There were two significant objectives, both of which we have achieved with that new platform. Firstly, we needed less expensive terminals and the unit costs of current Ku-/Ku-bands terminals are one third of the former Ku-/Ka-bands terminals. The second significant improvement achieved is that we are now on the Hellas-Sat satellite, which gives us significantly better coverage in Eastern Europe. In combination with our existing coverage on other satellites, Satlynx now offers a true pan-European reach.

Satellite News: Finally, how do you see the satellite services landscape changing over the next 12 months? What role do you expect Satlynx to play on this changing landscape?

Heinerscheid: We see that there are ownership changes for most of our competitors, and I hope that some of these changes will result in improvements to cost accounting methods along the lines of what we have already done at Satlynx. Given that the market has been slower to develop in Western Europe, we need to work on ways to capture the EC for structural funds that are going to flow more towards Eastern European countries. We want to make satellite an instrument of improving the broadband infrastructure in countries in Eastern Europe.

(Andy Frost, Satlynx, e-mail, [email protected]; Maury Mechanick, White and Case, e-mail, [email protected])