Managing Transponder Resources

by Jan Grøndrup-Vivanco

Paris, France, March 5, 2013--For most satellite service providers and teleports, satellite capacity is the single largest Operating Expense (OPEX) cost item and is therefore key to their profitability. This is traditionally also one of the most difficult cost elements to manage, especially for service providers who provide data services for VSAT and trunking.

One of the main difficulties for the service providers is that the contracts they have with their end customers seldom goes “back-to-back” with the capacity agreements they have with the satellite operators. Start and end times are staggered and that makes the renewal process complex. Generally the satellite operator offloads the yield management to the service providers once they have sold the capacity, and use this advantage, implicitly or explicitly, during the renewal negotiations.

The satellite operator’s argument is, rightly, that their risk is related to building, launching and selling the capacity and therefore cannot also share the risk with their sales channels.

This puts two important participants in the value chain at odds which each other.

We recently finished a capacity restructuring assignment with a European telecom service provider that uses both satellite and fiber to deliver its voice and IP services in Africa and the Middle East. The client is a fairly large user of satellite capacity, however satellite communication is not their core business, as it “just” one of their delivery mechanisms as the majority of their traffic runs on their own fiber network.

The client is one of the world’s leading telecom wholesalers and is serving more than 500 local telecom and cellular operators globally and in particular for a number of their African clients they are still reliant on satellite for backhaul to their European teleport and POPs.

The last time they renegotiated their capacity agreements was in 2008, when the market was characterized by important supply constraints in Africa and the Middle East. In the meantime the supply situation has completely changed due to the arrival of 

fiber and due to new satellites with new or additional capacities being launched. The client did not have deliberate supply strategy with respect to satellite capacity, partly due to satellite being “non-core” to their business and partly due to signing capacity agreements in an incremental fashion, as their business has be growing and contracting in an unpredictable fashion over the years.

However, since the client is in an extremely competitive business environment for their core business, the company felt that the satellite communication area was ripe for optimization.

The Process

In addition to the renegotiating their satellite capacity, we decided to use the occasion to review if more bandwidth efficiencies could be applied, especially the “carrier-in-carrier” technology which has matured in the intervening period.

Since the incumbent supplier of satellite capacity had been unchallenged for a long time, we felt that the best and most objective way forward was through a formal evaluation process where we invited relevant satellite operators to present their proposition, based on a detailed Request for Information (RFI).

Another consideration to go for an RFI was the client’s desire to move to a deliberate dual supplier strategy.

Unsurprisingly the incumbent supplier argued that an RFI process was not necessary and they suggested renegotiating on a bilateral basis. This actually made the client and us more certain that an open process was the better way to go.

This “beauty pageant” approach immediately showed that there were double-digit bandwidth savings opportunities, both with the incumbent as well as with the challenging suppliers.

We quickly knew that in terms of pure cost savings on the capacity we would be within the desired cost saving target, and our evaluation process therefore turned to evaluating and negotiating the non-price related terms.

While cost was the driver behind the restructuring initiative, we also identified that flexibility to manage varied staggered end-user dates was so important, that we from the outset were willing to “leave some money on the table” to obtain an agreement in this area. Because cost is such an important element it is tempting to put a disproportionate amount of focus on the “price-per-Megahertz” part of the negotiations. Many inexperienced capacity buyers often fall into this trap.

As we were renegotiating in a favorable supply environment, we suspected that both the incumbent and competing suppliers would provide “aggressive” terms to win this contract. However, we also expected that when this contract would be up for renewal and the capacity situation might have changed to be more constrained, that the supplier would then seek to raise their prices. We knew that this in turn would put our client in problems with their end-users, because they would have difficulty in raising prices towards their end-customers.

We also felt it was important that this capacity restructuring initiative should have a longevity beyond the current 1-3 year contract periods to avoid having to go through a renegotiation every time a contract was up for renewal. We therefore requested short listed suppliers to agree to Frame Agreement applicable for 7-10 years, where contracts could be renewed at the terms agreed during the RFI.

Initially the satellite operators barked in the concept of the Frame Agreement and it was one of the more difficult points to agree on.

By agreeing a long term Frame Agreement, we provided the client with  “call option” to renew at the same terms for as long as the Frame Agreement was in place.

Further, due to the above mentioned uncertainty on the demand and predictability of the end customer demand we decided to focus on the following non-price related elements:

-Portability; whereby the client would be able to transfer capacities between various end-users on a revenue and backlog neutral basis.

-Ramp-down; providing early termination concessions without restrictions.

Key Lessons

This commercial restructuring process provided some interesting lessons: 

-One of the key lessons from starting such an evaluation process is to have a very clear understanding of the underlying demand from the end-customers, a statement that may sound obvious. However, to get an accurate forecast was time consuming and proved to be a challenge through-out the process and made the negotiations with the suppliers difficult.

-As capacity supplier be proactive. The incumbent supplier could probably have avoided the full RFI process if they much earlier had faced up to the reality of the capacity situation and new price reality, and proactively had gone to the customer with updated terms. Unfortunately we see this happening frequently, were the satellite operators spend a lot of energy on winning over a new customer with aggressive terms, and then do not spend enough energy on their existing customers. This tendency is probably also amplified through corporate sales cultures, where it in some places would be “organizational suicide” for a salesman to go to his management and ask for lower prices on a proactive basis. This short-sightedness is exactly that and can be detrimental in the longer term, by making the field wide open for competing suppliers to come in. 

-Don’t let time pressure work against you. As a capacity buyer it is really important to start the capacity renewal process at least 6 months and preferably longer before the renewal date to avoid having a situation that your capacity supplier, explicitly or implicitly, uses the deadline against you. Most capacity suppliers actually also appreciate not to negotiate in a pressured environment, as they also need time to internally negotiate any concessions they would like to provide.

-Ask. Many times our client said: “Can we really ask for this.” Of course you will not always get what you ask for, however we often got interesting new proposal from the suppliers where the two parties could align their interest.

-Know the competitive environment you are in, both as a supplier and buyer. The capacity situation in Middle East and Africa has changed dramatically in the last years, making it a buyer’s market. If you are a buyer of satellite capacity in these two regions, then now is the right time to be proactive and renegotiate your terms.

-Lastly as a capacity buyer, know you network constraints especially in terms of antenna availability with your end customers, as repointing may not be easy or all together impossible. Don’t overplay your hand, as the satellite operators will call you bluff. At the same time, use this constraint to your advantage and as competing suppliers to provide equipment subsidies in exchange for capacity commitments.

As with many other matters being proactive and preparation will also bring about large benefits for both buyers and sellers of capacity.

Conclusion

The overall key issues and learning points from this restructuring and procurement initiative were to be really well prepared in terms of knowing your own demand situation from the end customers, which proved much more difficult than originally thought. Also make “time” your friend and not your enemy, by starting the process well in advance of the end of contract term, to avoid being de-facto obliged into renewing with the existing supplier in order to avoid short term penalty-type charges. This is particularly important if you want to change capacity supplier and need time to install or repoint remote end antennas, because your existing supplier will apply premium charges at the end of the contract if they know you are moving away from them.

We succeeded in helping the client to conclude a new capacity agreement that resulted in significant annual cost savings plus the new agreement included many of the non-price related terms that we set out to achieve, and we were particularly pleased that we could agree on a multiyear Frame Agreement with the suppliers, to ensure the longevity of this major effort.

------------------------

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