2010 has been another bumper year for the satellite operators, including the European operators. This is all good news in times where many other sectors are still struggling. However, there is a risk that good times breed complacency.
I used to have a colleague who enjoyed long lunches with a glass of wine and sometimes a good cigar with his coffee. “Life is good” he kept telling me when we strolled back to the office and I could only agree. I also kept reminding him that if you are a bicycle you can only coast downhill and even if the road is straight you have to keep paddling not to fall off.
The satellite operators weathered the financial crisis substantially better than many other industries. Market conditions has changed dramatically for the better in 2010 in terms of satellite financing, and it is generally perceived to be a favourable time to raise capital for growth and to address debt refinancing.
Operators in Europe enjoyed another year of some of the highest fill rates ever and some of the highest yields in the world. However, it is also becoming increasingly clear there are only very few expansion possibilities left in the C and Ku-band. The only realistic expansion path is Ka-band and it will be interesting to see how the Avanti’s HYLAS and Eutelsat’s Ka-sat services will do. As I have pointed out previously, most satellite operators have a dismal record of addressing B2B2C markets and have produced much better results being wholesalers targeting B2B markets. Inmarsat’s bold move with their upcoming Global Xpress Ka-band system seems a safer bet as it will rely on their existing distribution channels, plus new channels for new applications, thus staying a B2B wholesaler.
Another big question going forward is how much the easing of the capacity situation in Middle East, Africa and Central Asia is going to rub off on the European markets. The operators typically have satellites operating over several or all of these regions. My take is that we will see some fall in fill rates and prices, especially in Africa where supply has and will continue to ease. And there is always a risk that new operators hit the “panic button” and start to sell off capacity cheaply, when sales are ramping up slower than planned and shareholders are getting itchy. This is what happened in the first half of the previous decade when a lot of new operators emerged. Most of these operators have since been taken over by larger operators, remember Stellat, EuropeStar, Mabuhay...
The good news is that we should expect to see demand for video to remain strong, partly due to the increase in the number of HD channels. HD will continue to be a strong driver for growth in the coming years and will help to keep fill rates and yields high over Europe.
2010 has been buzzing with talk of 3D television as the next growth driver. However, it is difficult to see that the number of 3D television sets in itself would drive channels to broadcast in 3D, especially bearing in mind that few channels have managed to monetize shifting to HD. Shifting to HD broadcasting is increasingly seen as a hygiene factor, despite the increased bandwidth cost and we should expect a continuously increase in channels broadcasting in HD, which is all good news for the operators. I would not be surprised if 3D broadcasting turns out to be a flop like analogue HD (and mobile TV) was when it first appeared many years ago.
A more likely near term opportunity would be for operators to dedicate an orbital slot and satellite to HD-only broadcasting. This would require “ice in the stomach” to build such an HD-only position which only accepts HD channels. The long term benefits and value for such a proposition is enormous, as this cannot be copied by the very popular European slots like Hotbird and Astra due to their lack of capacity.
There has been a lot of talk about consolidation in Asia and this is still possible scenario. Though lately another scenario is starting to take form with Asian and Middle Eastern operators becoming more active outside their home regions. ABS now has a new owner with experience in the satellite arena and who could back a more aggressive expansion into Middle East, Africa and Europe. It will also be interesting to see what Measat will do, now that it has been privatised with a single owner. It wouldn’t be surprising if we see a bold move in the Middle East or Europe from either of them. Yahsat will be Middle East’s newest player with their upcoming 2011 launches and they will also have coverage over Europe. These are examples of operators with aggressive management teams and who are not “burdened” with high yield and fill rates. From their overall lower cost base they will be able to be more assertive in the European market. SES Global is hedging its bets by their participation in Yahlive, a JV between Yahsat and SES Astra, and O3b, and Eutelsat with its JV in Qatar.
The issue for the established operators is that their fill rates, yields and financial ratios are high. The financial markets will punish these operators if they see their ratios slipping, due to new initiatives and acquisitions that dilute their financials. This is what happened to Inmarsat after they announced their Global Xpress project, which instead of exciting the financial markets, have seen their share price drop.
It will be interesting to see what institutional shareholders will do with their shareholdings in 2011.From a purely financial perspective it is not clear if the expansion plans by the large operators into non-premium orbital slots, are providing increasing or diminishing returns, and if non-core orbital assets should be kept or divested, as inter-fleet synergies starts to tail off once an operator reach a certain number of satellites, typically around 15.
We are on or near the top of the cycle in the satellite industry, where it could be financial advantageous to divest non-core orbital assets and return the money to the shareholders. If such a new strategy is demanded by the large operators’ shareholders, then we should expect Asian and Middle Eastern operators to be waiting in the wings as potential acquirers.
It is time for the operators to take an unemotional look at their expansion and portfolio strategy and decide in which configuration their shareholders are best served. Is it as an operator developing new geographical markets, as an operator creating premium video slots, as an vertically integrated operator or as an operator leading through new technologies like Ka-band? These choices are not obvious and might involve some counter-intuitive options and go against conventional corporate wisdom. However, operators who proactively engage in such a process will emerge stronger, better focused and more credible with their shareholders, going into the coming cycle.
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Jan Grøndrup-Vivanco is a Director in Emerald Advisors, a strategy & business development advisory firm to the satellite communication industry. He can be reached at jgv@emerald-advisors.com
