In the Asian region marred with pricing pressures and oversupply of capacity, maintaining stable revenues can be a challenge. But Asi aSat has done that and, with the help of some creative business ventures, stands poised to turn the corner and see revenues start to increase.

“When we look forward into 2005, we see the prices stabilizing on the demand side where we are seeing slow growth,” AsiaSat CEO Peter Jackson told Satellite News. “We have not seen the demand picking up a tremendous amount, but we have stopped seeing it go down. So, our feeling is that if the region’s economy keeps improving, the demand could well pick-up in the second part of this year.”

The operator could be set for a strong 2005 and face greater revenue potential in 2006, particularly due to some pricing increases in C-band.

“The trend on the pricing is definitely up,” Jackson said. “You are going to see a greater rise in C-band than Ku-band as there is still pressure on Ku-band.” He noted that AsiaSat 4’s utilization is about 20 percent, “which is ahead of where we thought it would it be.” However, Jackson said the company is selling the capacity at a “slightly lower” price than expected.

The operator announced its full year results in mid-to-late March and it reported overall revenues of just more than HK$1 billion ($128.2 million) for the full year 2004, an increase of 12 percent compared to 2003 where revenues stood at HK$896 million ($114.9 million). However, these results were distorted by a one-time lump sum receipt of HK$123 million ($15.8 million) for early termination of a transponder utilization agreement.

Despite this, Jackson believes the results were positive. “We were pretty much on track,” he said. “If we not had that one-off payment, revenue would have been flat. But that is where we thought we would be. The revenue was affected by a mixture of two things: the demand remaining slow, with a lot of new competition, and the average price for new contracts coming down, affected by the pricing pressure.”

Helen Zhu, a telecom equity analyst at ABN Amro based in Hong Kong, shared Jackson’s outlook on flat revenues for 2005 and the potential for growth in 2006. “Demand pick- up does not look likely to materialize into much top-line growth in the next six to 12 months, and DTH development in the region is still moving very slowly, so we probably will not see any major catalysts for share price performance in the near term, except if market consolidation took place or if insurance premiums across the sector fell noticeably,” she said in a research note.

However, Zhu is fairly bullish on the company’s long-term prospects even though she does not expect anything spectacular this year. “AsiaSat remains a solid longer-term holding, in our opinion,” she said. “The company’s products are non-commoditized and subject to long-term leases, which provides relatively good visibility on forward earnings. The company also boasts very reliable management. We would guess that risks are on the upside for the 2006-and-beyond market estimates, but unfortunately do not see much room for surprises in 2005.”

Tapping The DTH Market

One of the interesting elements of the AsiaSat story is its willingness to create new joint ventures and subsidiaries to boost overall revenues.

One of its latest ventures is in the field of direct-to-home (DTH) services though a subsidiary, Skywave TV. The service began commercial offering in January and covers Macau, Taiwan, Hong Kong and the very tip of China. Jackson said of the prospects for Skywave, “We see reasonable business coming from Skywave in the short term but nothing dramatic. It was operational in Hong Kong in January but it is in its early days. It is not going to pay my pension on day one. It is really low-cost with not a lot of capital expenditure involved. The main expenses for the platform at this stage are the transponders. We need more than 50,000-60,000 subscribers to cover the transponder costs.”

And one potential source for subscribers could be mainland China, providing there is a shift in the regulatory climate. “I think when China changes the law and allows DTH from Hong Kong, that will be when the opportunities will open up for Skywave,” Jackson said.

And while AsiaSat sees its DTH offering through Skywave as a potential boost for the company’s revenues, some see it as a conflict of interest with its core customers, a position that Jackson denies. “SkyWave allows us to be in the DTH market,” he said. “There is a danger of competing with one’s customers, but we are used more by the TV channels as a contribution type satellite, so we are using our customers’ channels and putting them onto another DTH package increasing their distribution.”

Its latest joint venture is Beijing Asia Sky Telecommunications Technology Co. (the company did not disclose who it formed the joint venture with), which began operation last October. AsiaSat holds a 49 percent interest in Beijing Asia and invested HK$13 million ($887,000) in it by the end of 2004.

AsiaSat also has its SpeedCast operation, which provides two-way and backbone and broadband access. In terms of its aspirations here, Jackson commented, “The Beijing joint venture and SpeedCast allow us to get into the VSAT market. The big advantage of VSAT is that they can provide a complete network over a huge geographic area all at one price. So for many countries in Asia, VSAT is an ideal distribution system for many applications.”

But while joint ventures such as Beijing Asia help boost revenues for AsiaSat, do not look for the company to be involved in a significant number of joint ventures in the near term.

“We have always had a plan to be involved in a limited number of joint ventures and we were looking for those types of ventures that utilize the real strengths of satellites,” Jackson said. “These include DTH, VSAT and video content distribution. We are very happy with the three that we have now but if a really good opportunity presented itself we would certainly look at it. Our existing JVs are growing businesses that are not expected to make significant contributions in the short-term but have significant potential.”

HDTV

While AsiaSat will look to progress with these joint ventures, it hopes the DTH market as a whole in the region will pick-up. One of the potential catalysts for growth could be HDTV, which could be set to boost digital TV markets in Asia. Jackson thinks there could well be some different dynamics for HDTV in Asia, compared to Europe and the United States.

“It is not a question of ‘if’ HDTV will be available in Asia; it is a question of ‘when,'” Jackson said. “If you look at what happened in the United States and Europe, the channel providers are using HD to differentiate their products. I think that is also going to happen in Asia. But I also think there will be another dynamic, which is that people in some countries are buying HD capable televisions. In Hong Kong for example, it is difficult to buy anything other than a flat screen television. Therefore, what you might find in Asia is that it is the customer demand that promotes HD.”

In terms of what provisions AsiaSat is making for HDTV, Jackson commented, “I have heard people saying that they will develop HD satellites or HD satellite slots. I think that is wrong. I think that as all television programming will ultimately be HD and no special satellites will be needed. The requirement will be similar to the change over to digital from analog. As far as timescale for the introduction of HD in Asia, it will start slowly and then momentum will build. It is already in Japan and it will be led by the overseas broadcasters bringing their HD programming but then everyone will be planning its introduction. However, it is a diverse region and standard definition will be around for some time.”

In terms of the possibilities in the broadband arena, Jackson commented, “In the United States and Canada, WildBlue seems to have a market in the rural areas but they are charging about $50 per month for the service. In Asia I think the challenge will be to find customers in the rural areas that can afford that level of charges. If the price can be significantly reduced or governments are willing to subsidize the service, then it could be a good business. In the urban areas then I do not think satellites can compete with ADSL pricing.”

Stable Operating Environment

So, with a number of joint ventures beginning to take shape as well as new growth opportunities, the future looks promising for AsiaSat, although the optimism is more in the medium term than the short term. Jackson is also hoping for a more stable operating environment where satellite operators have more realistic pricing strategies and try not to compete with fiber alternatives.

“We are starting to see some more realistic pricing for C-band transponders,” Jackson said. “I would like to see that extend to Ku-band. One of the biggest problems with pricing in Asia is not the demand and supply situation; it is that satellites are being used to compete with fiber for point-to-point links. In some cases satellite operators are going below cost and that will put them in a difficult position when [the time comes] replace their satellite, if they maintain that pricing for too long. Video customers realize the difficulties they will face if they build up their ground segment which is looking at a satellite that is not going to be replaced but point-to-point customers do not care as it is simple for them to move to the next cheap satellite.”

–Mark Holmes

(Winnie Pang, AsiaSat, Wpang@asiasat.com; Helen Zhu, ABN Amro, Helen.zhu@hk.abnamro.com)