The Fixed Satellite Services (FSS) operators have all weathered the financial crisis and even managed to continue to grow their businesses in 2009 and are continuing to grow in the first half of 2010. However, the big question is: “What is their next act?"
Listed satellite operators are facing the issue of both growing their businesses and maintaining their financial ratios, in order to avoid being penalized by the financial markets. At the same time, bankers are starting to question the same operators to come up with new strategies based on growth outside their existing markets.
The FSS operators’ revenues surpassed US $10 Billion in 2009 growing 4.4% over 2008. This is slower growth than 2008, but still outperformed the global economy. There were worries about the satellite operators’ ability to finance new satellites, which is essential to grow and maintain their revenues, as well as refinancing existing debt. This worry has largely proven unfounded, even though the refinancing cost was been higher compared to earlier in the decade.
The satellite operators weathered the debt crisis substantially better than many other industries and in terms of satellite financing going forward. Market conditions have changed dramatically for the better from 2009 and it is generally perceived to be an favorable time to raise capital for growth and to address debt refinancing.
According to Euroconsult, the video distribution via satellite market, which is the main revenue and growth driver for most of the operators, remained robust with approximately 27,000 TV channels broadcasted at year end 2009. This represents a growth of approximately 3,000 new channels in 2009. EuroConsult expect the TV satellite broadcasting market to grow to 40,000 channels by 2019.
The average fill rate for the FSS satellite fleet reached a new high of 77% in 2009 and is expected to peak at 78% in 2010 after which a decrease is expected in several regions due to large capacity additions.
For enterprise satellite networks, these are expected to grow from approximately 2 million terminals today to over 6 million terminals in 2019. Consumer satellite broadband subscribers are expected to grow from approximately one million terminals today to almost 12 million terminals in 2019.
With above market estimates in mind, the financial markets are therefore still expecting growth from the satellite operators, but also recognise that it is an issue to both grow and maintain the current high Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margin levels. For stock market quoted operators this is an issue as some bankers expected the market to react negatively if EBITDA margin levels fall below 70-75%. On the other hand the financial community is also starting to ask “what’s going to be the next act for the satellite operators?” i.e. what new systems and revenue models will the operators be able to develop from its current operating models, which is mainly based on wholesaling C- and Ku-Band capacity.
Asia and Latin America are expected to continue to be growth regions for the operators, and again the satellite operators are between “a rock and a hard place,” because transponder yields are lower, and in some cases significantly lower, in these regions which could impact the current eye-catching financial ratios.
It’s been interesting to watch the financial community’s reaction to Inmarsat’s new Ka-band satellite system, which has received a rather cautious reception. The contradiction is that this is exactly the forward move sought by the financial community; a global Ka-Band satellite system, a new revenue model and a move towards a more FSS type of business model for Inmarsat. Possibly Ka-Band is one the “new acts” the financial industry is looking for, as all the large operators have or will launch satellites with Ka-band capacity. Ka-Band is expected to provide significant growth also for the broadband via satellite segment, though it is unclear what the successful business model will be; wholesale, B2B or B2C.
The operators have all historically done very well being in the wholesale part of the value chain, and notorious poor in the retail part of the value chain. The financial community is unforgiving, so getting the strategy right with Ka-band is crucial for the operators.
Asia has been ripe for consolidation for some time now, however this has so far only happened on a limited scale, due to unrealistic valuations often coupled with national interest and because mostly minority interest are for sale.
“Winds are changing” in Asia, making it possible to acquire interests in local operators which make financial sense. Permira’s recent private equity investment in Asia Broadcast Satellite and the privatization of Measat is confirming this. With the WTO and free trade talks within Asia, it is expected that the present nationalistic protection will diminish paving the way for further consolidation.
These strategic issues will require a rethink by the operators in terms of how they position their growth model with external investors and getting back to basics that satellite communication on the operator level requires a real long term view, however for a long term investor the satellite industry still offers plenty of opportunities, an a business that’s proven resilient in times of financial turmoil.
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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
