SES Global CEO Romain Bausch is confident the company will achieve double-digit revenue growth in 2005 as the operator looks to have a strong year. There are many positive aspects to the SES story at present. With strong potential growth markets such as High-Definition Television (HDTV) ready to take shape, SES could be one of the main players to reap the benefits as the demand for capacity grows.

Sarah Simon, a media equity analyst at Morgan Stanley, said in a research note, “Recent commentary from both SES and Panamsat indicate further strengthening of demand in the U.S. video market. Prices are firming and capacity is tight. European demand remains strong, with HD yet to come –this will be upside from 2006.”

As well as predicting strong revenue growth, the operator could look to diversify into one or two new areas with Mobile Satellite Services (MSS) being a potentially key focus for the company.

Bausch admitted to Satellite News that the company was “actively” looking at opportunities in the MSS arena. The satellite radio arena is one in which SES could make a strong impact.

While operators such as XM and Sirius have been very successful in the United States, being a successful pan-European satellite radio operator would be more difficult considering rights and regulatory issues from country to country. In fact, generating stronger revenues from mobile satellite services is right at the heart of the operator’s strategic thinking at the moment as it looks for new opportunities.

Bausch also added that the company is undergoing a transformation at the moment. He talked of the company moving away “from a pure satellite infrastructure provider, toward a network solutions provider using satellites, but not only satellites.” It remains to be seen how this will evolve throughout the next couple of years.

In an exclusive interview to Satellite News, Bausch talks to international editor, Mark Holmes about a number of issues ranging from satellite radio, broadband, Inmarsat, Panamsat’s IPO to the main challenges facing the company throughout the next 12 months.

Satellite News: Are you expecting revenue and profit growth in 2005 compared to 2004? What are the major challenges in terms of growing profits for the company in 2005?

Bausch: In terms of guidance for 2005, we will achieve double-digit revenue growth, with revenues being defined as recurring revenues, for example, taking out exceptional items in both 2004 and 2005. This means we are not including the additional revenues coming from acquisitions such as Verestar or DPC, which we acquired at the end of 2004. Obviously, revenues are also defined at constant exchange rates This is important because as you might be aware we have 40 percent of our revenues being dollar denominated. So, the objective is double-digit revenue growth in the way I defined it. I think there is no major threat in order to achieve the 2005 revenue targets. We have had five successful launches between February 2004 and February 2005. The last satellite was Americom-12, which was launched this year. So all satellites required in order to gain additional revenues are in orbit, and we are confident that we can achieve our revenue objectives.

Satellite News: In recent conferences at CEO roundtables, it seems as though you have been the only one with somewhat less positive views of Private Equity (PE) firm’s involvement in the FSS industry. Why is this? What competitive advantages/disadvantages does this pose for SES Global?

Bausch: I am the only CEO not working for a company owned by a PE firm. But seriously, it is very clear that the balance between the different ways to create shareholder value varies from company to company, depending on the plans and objectives of their shareholders. We have two strategic shareholders, GE and the Luxembourg State. All other shares are either quoted on the stock market or directly owned by financial shareholders. These are institutional investors who are investing and divesting securities, but they are not PE funds.

The weighting between short-term cash returns and mid- to long-term investments is different. Any investment done by a PE fund has to maximize the return to the PE firm in a period no longer than three to four years. In the case of satellite, we see that the time horizon is even shorter. Panamsat and New Skies are the extreme, with KKR and Blackstone doing a so-called “quick flip” in less than 12 months. This form of shareholder value creation is basically short-term cash returns via highly leveraging a company and then using this leveraging to take out a special dividend as well as via the positioning as a high-yield dividend company after an IPO.

While the PE firms will always be focusing on short-term cash returns, our shareholder base is looking for cash returns in combination with profitable long-term investments in growth. Thus, we are committed to a progressive dividend policy, to a share buy-back and cancellation program, as well as to the use of our significant free cash flow for investments in growth opportunities in the mid- to long-term. I am not saying that companies like Panamsat, Eutelsat and others will not invest in new satellites, but they will try to limit their investments to replacement satellites and in particular to those which are key for their revenue generation.

Satellite News: So, do you think the PE firms are bringing in long-overdue financial discipline to the industry?

Bausch: That might be a result, but it was not the objective. The objective of the PE firms is to use the free cash flow primarily for cash returns and not for investments. The result is that less free cash flow is available for growth initiatives or even for replacing non-key satellites. It leads to more financial discipline but it would be wrong to say that this was the objective.

Having said this, we fully applaud the result. I always told my peers that their companies were over-investing, notably when they were run as intergovernmental organizations. If you look at the fill rates of the satellite fleets, SES Astra and SES Americom are among the ones with the highest fill rates. This confirms that we did not over invest in the past, and the reason is that SES (and GE) since their beginnings were companies that were privately owned and always had a rational approach toward investments.

Satellite News: Were you surprised at the results of Panamsat’s IPO?

Bausch: No. I think the valuation of the company is still a fair one. We know from experience that it is always difficult to judge whether the expectations of shareholders and banks are realistic or not. While Panamsat’s IPO might not have been a tremendous success, I believe it was also not a failure. It was a fair IPO.

Satellite News: In terms of new business opportunities for SES Global, obviously satellite radio has been very successful in the United States. Would you look to do something similar in Europe? How attractive a business opportunity is this for SES Global?

Bausch: We are actively, but also in a very diligent way, looking into the opportunities in mobile services in general, and the ensuing opportunities for the SES Group. When looking at this, we take a global approach, meaning that we are assessing market trends and market opportunities, business cases for the different mobile applications, and by doing this, we are trying to forecast market shares of satellite versus terrestrial infrastructures. We are distinguishing mobile video broadcasting and mobile broadband. Video broadcasting is our core business. Mobile broadcasting is very close to what we are currently doing.

Regarding broadband, this is a market segment where Fixed Satellite Services still have to demonstrate their competitiveness. However, we do see quite interesting mobile broadband applications emerging, for example, broadband to planes, ships, trains and other terrestrial vehicles, both for commercial and government applications.

Digital radio is part of the mobile broadcasting segment. We are looking into opportunities for digital radio in Europe and outside of Europe. In terms of satellite radio services, you cannot simply export the successful XM Satellite Radio or Sirius Satellite Radio model and roll that out in Europe. Europe is not a homogeneous market like the United States. There are different linguistic markets, many differing regulations, as well as different cultural preferences from country to country. So, you have quotas, regulations and cultural exceptions that you would have to respect in each of the markets.

Satellite News: With these different dynamics, is this still an area where you can make an impact? Is it a business area that excites you for the company?

Bausch: Definitely. There are two reasons for this. We should not forget that there is huge amount of radio content being broadcast on our satellite systems, both in the United States and in Europe. A couple of years ago, we even developed an offering called ‘Astra Digital Radio’. We thus have a long history in broadcasting radio for fixed reception.

Satellite News: Would you look to get involved with Inmarsat considering their plans in the mobile arena?

Bausch: Once you have decided that investing in Mobile Satellite Services makes sense, you have also defined the market segment, so either broadcasting, or broadband, or both. You also have to decide whether you want to go for a Greenfield approach or use an existing vehicle. Inmarsat is an existing mobile satellite service provider. With BGAN they will offer larger bandwidth, but it will still be limited because it is in a frequency band where there are bandwidth limitations. It all depends on the applications you are looking for.

We are definitely including Ku-/Ka- and even C-band satellites in our assessment of SES’ best positioning when it comes to the launch of mobile services. Operators who have access to broadband frequencies are potential partners for us. The other possibility is to use existing satellite capacity or launch additional satellite capacity that might eventually be used for both fixed and mobile applications.

Satellite News: You have increased your shareholding in SatLynx. How confident are you that the operator can build a strong business given that terrestrial networks are expanding into those underserved areas that were previously seen as the niche for satellite broadband in Europe?

Bausch: At the time we invested in SatLynx along with Gilat and Alcatel, the business areas to be targeted by SatLynx were two-fold. One was the corporate networks served by VSAT services, which has always been the model business of SatLynx. The other business segment was the residential two-way broadband market. However, we experienced that the satellite solution might not yet be ready for launch and rollout in Europe to residential customers. What are the reasons? You are right about pointing out the rollout of terrestrial. Yet, what remains true today is that 10-15 percent of homes in Europe won’t be served by terrestrial broadband infrastructures.

So, the niche market is still available. But satellite has not imposed itself for three major reasons. The first one is that the costs of the satellite solutions are still high, both for the equipment and for the installation costs. These are the two main cost factors. The second reason is that it is not a plug and play solution. When you compare a two-way broadband satellite solution with DSL or WiFi, it is obvious that it is not as consumer friendly as terrestrial solutions. The third and perhaps the most important reason is that there has been a lack of distribution channels in Europe promoting and commercializing satellite solutions to the end user.

The telcos are interested in using their terrestrial solutions. Pay-TV operators are focusing on TV-type applications and they are not really targeting PC-based services. So, there are only a couple of smaller ISPs who have the ambition to focus on two-way satellite broadband. The last point is the main difference between Europe and the U.S., where you will see WildBlue, Echostar and maybe others launching two-way residential broadband using more user-friendly equipment. Echostar will use part of the satellite capacity it has contracted with SES Americom to launch their satellite broadband offering and can built on its existing distribution channel to more than 10 million pay-TV subscribers.

Satellite News: Would you look at European satellite pay-TV platforms to get involved in broadband?

Bausch: We tried to convince our customers to do so. We also tried with one-way broadband where the satellite is used for the forward path and the terrestrial phone lines for the return channel. Our customers who are focused on TV applications did not take this up. There are two points to be added here. We are developing solutions in two new areas where we believe this might be of interest to pay-TV operators and others. Firstly, when it comes to one-way satellite broadband solutions, we are adding to the current solution requiring a fixed telephone line also a return channel solution using a GPRS. In the Eastern European markets we already see an interest to offer one-way broadband using this technology. Some of our customers such as BSkyB are very advanced when it comes to interactive services. They are offering their interactivity with their solution with the cooperation of BT for the return channel. For other operators we are developing SatMode as a narrow-band return channel as well as alternative terrestrial solutions.

Satellite News: If WildBlue is successful in the United States, what implications will that have in Europe?

Bausch: If WildBlue is to be successful, it needs to find the right user-friendly equipment at the right cost point. We are working with Echostar on evaluating the solutions available for the broadband proposition to be offered by Echostar. It is clear that the ViaSat DOCSIS solution is on the shortlist. The other one is DVB-RCS. There is also Hughes Network Systems with its Direcway technology, which is progressing nicely and is using SES capacity. We see steady growth in the transponder capacity they need. In the market they are successful, despite the absence of large distribution channels. That is why I really believe that if there is a launch coupled with a powerful distribution channel reaching more than 10 million homes in the United States, the rollout could be quite successful. This obviously would also increase the interest for a large residential broadband satellite offering in Europe.

Satellite News: Finally, what can we expect to hear from Astra throughout the rest of the year?

Bausch: What you cannot expect to hear from us is an announcement on any big satellite operations acquisition. Our double-digit growth in 2005 and 2006 will be organic. In terms of services and solutions development, it is a different story. You will hear us speaking about developments in fields like the launch of HDTV channels, both in the United States and Europe, solutions boosting interactive TV services via satellite, managed network solutions in the enterprise/government services field, as well as interesting developments in the field of mobile services. It will also be a busy year with lots of news on the infrastructure side. There are still two satellite launches planned for 2005 (ASTRA 1KR and AMC-23). When you look at our announcements you will see that we are somewhat on the move from a pure satellite infrastructure provider, towards a network solutions provider using satellites, but not only satellites. We are becoming an increasingly important part of end-to-end media and telecommunications solutions offered to the market.

(Yves Feltes, SES Global, yves.feltes@ses-global.com; Sarah Simon, Morgan Stanley, Sarah.simon@morganstanley.com)