Public Sector Support for New Satellite Ventures
by Jan Grøndrup-Vivanco
Paris, September 2, 2011-- It’s easy to forget that the four largest satellite commercial operators all started out with government support. Intelsat, Inmarsat and Eutelsat were inter-governmental organisations for the first 25 years of their existence and SES started out with backing from Luxemburg’s government and government-owned banks. Governments continue to play an important role in getting new commercial satellite operators off the ground in emerging markets.
Over the last couple of years we have seen a host of new satellite projects in the developing world where the large majority of these projects are essentially government-sponsored projects, despite efforts to brand them as commercial ventures. It is also interesting to observe that while there are still private promoters of non-government backed satellite projects, few of these have managed to raise finance, despite presenting business plans with good fundamentals based on market realities and achievable capacity ramp-ups and yields. Even UK-based Avanti Communications, which launched its first Hylas-1 satellite in 2010, is a private venture that successful raise non-government capital, is relying on government for subsidizing their broadband via satellite services in rural areas.
One recent notable exception is O3b Networks (“O3b” stands for “the other 3 billion” not served by broadband) who managed to get financed without a government sponsor. Interestingly enough this was not for a traditional geostationary system but for a MEO system with a Ka-band payload.
At the same time we are seeing something interesting happening where the fixed (FSS & BSS) satellite communication industry is fragmenting into a three groups; the large private satellite operators with 10 or more satellites, “the Big 5” (SES, Intelsat, Eutelsat, Sky Perfect JSAT and EchoStar); the medium sized commercial operators like Telesat, Telenor, Measat, ABS etc. with less than 10 satellites; and the government-backed programs like Chinasat, RASCOM, Nigcomsat, Insat, Vinasat, Yahsat, Venezat, to mention some, plus a number of new government-sponsored satellite projects in the pipeline.
Many of these new government-backed programs are offering aggressive terms and prices to win business, mainly because they don’t enjoy the market protection that the former inter-governmental satellite companies enjoyed for a long time, which allowed them to establish valuable franchises. For most of these new operators this is the only realistic
commercial strategy available to them as they lack the resources and historical commercial base to enable them to pursue a value-based commercial strategy.
A prime example of where this old and new competition is clashing is Africa. Here prices have plunged lately, which is due to both a number of new operators launching with coverage over Africa, as well as the established operators launching satellites with expansion capacity over Africa. What is particularly interesting is that the situation was completely opposite to only a couple of years back where demand outstripped supply.
Leaving Sky Perfect JSAT and EchoStar apart due to their captive customer base, this has some interesting strategic implications for the big operators. The big operators are all relying on growth outside their DTH strongholds, in growth markets like Central Asia, Middle East and Africa, and this is precisely where competition will increase from new operators with resulting pressure on prices and yields. At the same time the financial stakeholders backing the established satellite operators have clearly told their managers they still expect growth and that they expect them to keep the financial ratios where they are today, at a historical high, thus creating an interesting dilemma for the managers; how to grow in new markets with lower yields without sacrificing their financial ratios.
The medium sized satellite operators are in a slightly better position to compete with the government-backed programs because many do not come from a privileged commercial position and they are therefore used to being commercially more aggressive, with a shareholder base that accepts lower financial targets as a necessity to compete and grow.
Many of the established commercial operators have tried to position themselves as potential partners of the various government-backed programs with varies degrees of success. There is no overnight fix, especially for the large operators to become attractive partners for the government-backed satellite operators. This is also because there is a lot of national pride tied up in these projects to show that they can “make it” on their own without needing a partner in the form of an established satellite operator.
Before entering into a partnership discussion with a government operator it is important for the commercial operators to do their homework in terms of getting their financial stakeholders on board with the strategy which likely will imply lower yields and lower returns on such ventures, and possibly a minority interest that cannot be consolidated on a corporate group level. With an internal sign-off for partnering, the attractive propositions from commercial operators to government satellite programmes are in the areas of contributing with regulatory properties and by de-risking these projects through condo-sat type of arrangements.
Measat’s condo-sat arrangement with Azerkosmos of Azerbaijan is venture based on above model, with Azerkosmos being a government-owned entity. Intelsat’s New Dawn looks also as a note-worthy application of above, even though their joint venture partner, Convergence Partners, is relatively distanced from the South African government. SES has partnered with Yahsat for Yahlive which is a both a joint-venture for commercialising of some of the Yahsat1 capacity and a condo-sat arrangement. SES has also taken steps to partner with ICTQatar through signing a Memorandum of Understanding (MoU) with Qatar, though the details of this potential venture still need to be worked out. Similarly Eutelsat also has a joint-procurement program with ICTQatar for a satellite currently under construction. It will be interesting to see how SES balances having two ventures in the Middle East with the likelihood of head to head competition between the two and what impact this will have for Eutelsat, and how Eutelsat will react.
Government support seems to be a fact of life for new satellite ventures and governments have played a crucial role historically in developing this multi-billion dollar industry, and continues to do so. Over time governments will mature in their thinking and the relevance of having national stand-alone satellite projects will be questioned, and government’s role will fade away.
This will present obvious strategic opportunities for commercial satellite operators with long-term established partnerships. These ventures take time to develop and it therefore makes sense to actively pursue a partnership strategy for the commercial satellite operators.
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Jan Grøndrup-Vivanco is a Director in Emerald Advisors. Emerald Advisors specializes in providing business development and restructuring services for media distribution and satellite communication companies. He can be reached at: jgv@emerald-advisors.com
