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NSR EXECUTIVE BRIEFING
MSS And Financing — Weathering The Oncoming Storm

by Claude Rousseau, NSR

As we hear more and more that the global economic crisis could drag on various industrial segments in general and the satellite industry in particular, it is worth looking at how the mobile satellite services operators have faired over the last 12 months and what lies ahead for them in terms of settling their high capital expenses. Most of the operators have released results from the last year with different levels of success and the admission by all is that they have been hit but much less so than what was expected.

With less than two million subscribers, the six main MSS players are holding their own for the most part, as three constellations totaling 128 satellites in Low Earth Orbit and another 23 satellites in MEO and GEO could be launched in the next six years. This is a lot of capacity for what many believe is too many operators vying for the same business, in a market that is very small compared to the telecom industry, where giants today battle for hundred of millions of new subscribers every years.

Furthermore, two other operators, namely ICO Global Communications and Terrestar Networks, will enter the market and have satellites whose power and transmission capabilities dwarf current satellites in orbit, such that the game is likely to get tougher in the corners. Nonetheless, the market has seen the total number of subscribers grow by 21 percent in one year, to reach above 1.9 million subscribers at the end of December 2008.

The riskiest part in the life of a these operators, the launch of its satellites, will peak for the entire industry in 2010-2011, with an estimated 82 birds set to lift off aboard a variety of rockets, some with multiple satellites launched at the same time. This represents a significant element of hazard for businesses, but it is part and parcel of what makes the satellite communications industry unique, and is a well-known parameter in providing the benefits of ubiquitous or extended reach from well above the Earth.

As far as revenues goes, the six operators combined for revenues of $1.25 billion last year, a 12.5 percent increase over the previous year. Over the last three years, the compound annual growth rate (CAGR) of this group of operators is a very respectable 9.5 percent, a performance to be taken in the context of dwindling revenues for Globalstar (minus 20 percent over the same period) and increased competition and expansion from wireless operators. At 23 percent CAGR, it is Iridium that is showing the highest revenues growth rate, driven in large part by defection from Globalstar voice users to its service and a booming data modem business.

But is the past a measure of future success? Not necessarily. Simply because more satellites will be up in space will the market demand equation strongly tilt towards the supply side and this causes more issues for the operator that are sometimes independent of its market position.

A Wave of Satellites
When Inmarsat completed its new fleet of satellite it started launching in 2007 with a launch of its I4-F3 spacecraft on August 19, 2008. This reaffirmed its lead in the MSS market, with this first set of new generation satellites providing very wide coverage across the planet in the coming decade. The repositioning of its fleet in early 2009 settled the U.K.-based company’s operations for the next fifteen years, unlocking access to a new family of broadband L-band products for land-mobile, maritime and aeronautical markets with BGAN, Fleet Broadband and Swift Broadband, respectively. The operator success has continued when it received partial funding from the European Space Agency to build and launch an L-band satellite called Alphasat, to extend spectrum and capacity for BGAN over Europe, the Middle-East, and parts of Africa.

More good news for the operator came from the European Commission, which decided to give 15 MHz of bandwidth in the 2 GHz band of spectrum over Europe to Inmarsat. However, this also means that it will need to find new money to build and launch an S-band satellite by the end of 2011 but it is well-positioned to find avenues for this new venture.

In the Middle-East, the competition was not sitting idle. Earlier in 2008, Thuraya Satellite Telecommunications also launched a satellite that is positioned over Asia, a new region of interest to them and the market as a whole. This was the enabler to increase handset service revenues and tap into the broadband and maritime markets so as to make a dent in the Inmarsat BGAN user base with an IP-based solution, the ThurayaIP, delivering standard Internet services to an A5-size portable form factor at 444 kbps.

On the other side of the world, ICO Global Communications launched its G-1 spacecraft in April 2008, a next-generation spot beam S-band satellite. However, to this date, it is still in the demonstrating phase, putting through tests the virtues of the satellite network in the Las Vegas and Raleigh region and it has yet to generate revenues. ICO recently ran into financial problems with its North American division and is running the risk of not delivering its highly-touted multimedia service to vehicles if its funding problems continue. If it can settle issues with spectrum in Europe where it lost the S-band decision, fight an appeal from its manufacturer over ten satellites, and find a suitable launch service provider, ICO could finally deploy in the next few years a medium Earth orbit (MEO) constellation designed to provide MSS globally.

A low Earth orbit (LEO ) operator that has been around for a long time, Orbcomm Inc., based in Fort Lee, New Jersey, launched six satellites in June 2008 to augment is current constellation. They offer narrow band, two-way messaging, data communications, and geo-positioning services, globally. It now has 29 satellites in orbit and ordered in early 2008 another 18 satellites from Sierra Nevada Corporation for $117 millions (excluding launch and insurance), with an option for another 30 satellites to replace the current constellation. The new satellites should be launched between 2010 and 2011.

Finally, Solaris Mobile, a joint venture of FSS operators Eutelsat and SES Astra, is the newest player in the game, having launched in March this year an S-band payload onboard a geosynchronous orbiting satellite built for Eutelsat for European customers. The company has signed up various suppliers such as DibCom and Alcatel Lucent and is in the process of recruiting national mobile operators, broadcasters, and equipment manufacturers to develop an ecosystem which will sell products and services that will us its capacity for mobile TV, in-car entertainment, and data services. The S-band payload has, however, experienced problems that could delay the service roll-out. Furthermore, the European Commission decided in May 2009 to allocate frequency on a continent-wide basis in the 2 GHz part of the spectrum to Solaris, which may be in jeopardy if the company is unable to recover its payload.

The High-Pressure Front
All counted, it is five GEO spacecrafts, one GEO payload, and six LEO satellites that the industry launched in the last three years. This is just the beginning of a whirlwind of launches for the industry, with a swell of large and powerful satellites to loft in the next few years.

Terrestar Networks recently lifted Terrestar-1, a huge 6,700 kg. spacecraft, into geosynchronous orbit over North America, and one more craft is expected in 2010. It will be the largest commercial satellite ever built, outfitted with 500 S-band spot beams to link handheld and PDA users in a roaming fashion over it satellite/terrestrial network. At the time of this writing, the company had delayed the launch to verify the Harris Corporation-built S-band antenna, which developed similar problems on the Solaris Mobile payload that lifted off in early March 2009. Its roaming agreement with AT&T is the principal route to market for them as no proprietary ground infrastructure has been set-up to enable the ancillary terrestrial component of its network to provide service. They are the third operator in line authorized to fly with an MSS-ATC authorization from the Federal Communications Commission (for a satellite-terrestrial hybrid network) as ICO and Globalstar are already in orbit but both have yet to deliver any service commercially through this authorization.

Iridium will launch its NEXT constellation much later, starting in 2014, and will elect a supplier in the 3rd quarter of this year for the manufacturing of the 66 spacecrafts. It plans to have a little more than four years to build and launch what should be the most powerful LEO constellation ever built. As the current specifications stands, end-users will be able to get reserved capacity in the downlink direction of up to 2 mbps.

The company is still reaping the benefits of its arch-rival Globalstar, which continued to have problems with its voice service over the last two years. This situation has given almost a monopoly situation to Iridium in many satellite handset markets and there should be no stopping them in the next 12 to 24 months as Globalstar replenishes its constellation and Inmarsat delays its entry into the handheld market until mid-2010.

Through its bent-pipe satellites, offering CDMA-type connectivity, Globalstar is on track to roll-out its new services in late 2010 at the earliest, and delivering 256 kbps downlink to the handset. In the meantime, it has retained many of its customers by offering large discounts on phones and services packages, while at the same time signing up new ones with simplex data hardware and a new critically-acclaimed consumer-oriented location-based messaging device called SPOT. Its main shareholder, Thermo Capital Partners, also infused a healthy does of goodwill by changing debt into equity to lessen the dire financial situation of the operator.

Lastly, SkyTerra L.P., formerly MSV, has continued the roll-out of its successful push-to-talk solution with government and state emergency responders in the U.S. It is actively preparing to launch two high-power spacecraft to a hybrid network upgrade that will include a terrestrial component and higher capability handsets in 2010 and 2011.

Of interest is also the continued key metric offered by OrbComm, the machine-to-machine and asset tracking specialist in the VHF part of the spectrum, which has increased its subscribers base (or as it calls them ‘billable customers’) to 460,000 last year, but has seen a decrease of more than 30 percent in equipment sales. Its revenues from service were up 34 percent, which is a shift that reflects their efforts to hone in on service revenue and less on hardware. They believe that what best suits the application decides the hardware, and in doing such, that they are helping manufacturers develop new hardware to meet the new needs of the market. They also were struggling with board-level disputes recently that were settled, but lost much expected revenue when a key order from its largest customer in the transportation industry last year (over 200,000 units) was withdrawn. This news requires them to go after greater diversification of income in the coming years, perhaps shifting to the maritime and government segments in the face of weak transportation sales.

Finding Public Shelter
All these satellites come at a time where economics may trump business plans and dry up future streams to make good on large capital infrastructures payments. The expected launches shows the cyclical nature of the MSS market: most satellite are ordered, built, and launched within a five years time window, and sometimes less, which is a feat in itself when considering the increased complexity, range of capabilities, performance, and sheer number of satellites in production, small or large. If these are placed into orbit at a time of general economic distress, equipment sales and associated airtime revenues will eventually suffer, even if the wholesale model and the industrial customer base of the majority of operators continues to communicate, albeit at a slower pace.

In the case of Terrestar, as mentioned before, they have forfeited the build-out of their terrestrial networks putting on hold a $76 million contract with Bechtel Communications. Perhaps this was due to stringent and mounting requirements on financial obligations, which are why the operator may start needing new money by early 2010. Terrestar is faced with huge contractual obligations totaling $2.4 billion. In the meantime, it has extended its development of a PDA form factor with Elektrobit and hopes to promote and roll it out through AT&T’s sales channels. The PDA, the first for the industry’s next-generation satellites, will be made in Malaysia by mobile electronics manufacturer Flextronics.

In April of this year, one year after launching its MSS-ATC satellite, ICO filed a Security Exchange Commission document that contained a ‘going concern’ assessment from its auditors, meaning that the company would be hard pressed to meet repayment commitments on loans and notes if it did not have fresh financing. In May, its North American subsidiary, whose name was changed to DBSD, was placed under Chapter 11 protection to restructure under a mountain of debt.

All this begs the question: who is going to pay for all this? The answer certainly does not lie in too many directions and at a time when banks and institutional investors are leery of anything that is new and unknown with a high risk factor, it is not a sure bet that going to the market will be an easy task.

It is perhaps time to think in more pragmatic terms and consider that the public domain, as a whole, is benefitting from jobs in high-tech, high-speed global mobile satellite communications, and may be the only funding source ‘game enough’ to absorb high-risk ventures such as mobile satellites.

Globalstar, which stole the show at the Satellite 2009 conference by announcing a $586 million credit arrangement brokered by the French government’s export credit agency COFACE, has understood that its 48 satellites currently under construction in France were providing jobs to the French aerospace industry. Before crumbling under mountains of debts, and thus forcing the layoffs of hundreds of jobs, it rightly used public institutions help to shape a deal that still puts the onus on the company to deliver but handed them a needed hand at ‘crossing the bridge’ to its next-generation satellites.

The advantage is clear for the operator: increased reliability of its faltering system and the completion over an 18 months period of a brand new, high-speed, IP-based satellite network. It users will be able to continue using their current handsets, but also a Hughes-built, MSS-ATC, dual mode chipset that will be placed into each device in hopes such will get subscribers back with the constellation all the while gaining new ones. Time is of the essence for Globalstar, once seen as a dying ‘star,’ which will need to put pressure the equipment manufacturer to deliver on its promise so it can meet FCC requirements for two-way MSS-ATC service by July 1, 2011, to keep its authorization. Furthermore, through its partnership with wireless rural operator OpenRange, this service has to include WiMAX (TDD) air interface protocols to retain its FCC authorization.
On the pure financing side, the backers of Globalstar changed the paradigm with increased governmental-funding of the satellite manufacturing side of a commercial industry. This is a change that, in this day and age, should benefit other operators such as Iridium that have a stronger bottom line to show for their long-term financing needs. Iridium will certainly be well-advised to try and get public money to stay the course over the next few years. For that, it may seek the same sources of export credit. But to complement this, it will probably host payloads on its polar-orbiting constellation that are likely to come from government agencies or military users, especially for surveillance or Earth Observation missions. Add to this the continued critical support that it provides in Iraq and Afghanistan through its contract with the U.S. Department of Defense, which continued to grow last year, and one has a strong case for using dollars from the public as a basis to spread risks.

As for the other newcomers in the next-generation game, Terrestar and ICO, their onus, given their weak position, will be finding a telecom or wireless operator that wants S-band spectrum to either use it as is, or re-purpose it (with a little help from the FCC). They stated their aim is to address government and homeland security markets from the get-go, but this is not likely to be enough to generate revenues to pay down debt.

Terrestar still has a card in hand, however, in its majority owner Harbinger Capital Partners, which has a solid hold and many hedge positions on spectrum across the MSS-ATC and wireless allocations in the US.: they own a large stake in SkyTerra and about 29 percent of Inmarsat plus a good portion of Leap Wireless. When coupled with the impending merger of Inmarsat and SkyTerra, Harbinger could certainly combine Terrestar or leave it as is, while supporting it long enough to cash-in its chips by selling both S- and L-band spectrum received by its subsidiaries for MSS-ATC services. As for ICO, other than a ‘spectrum clearance sale,’ only a clear signal of support from its majority owner, Eagle River Investments, LLC (owned by telecom mogul Craig McCaw) can bring much needed cash to convert the company into a multimedia service operator .

As there are more satellites flying above to offer mobile services at ever greater speed to more devices than ever before, one of the main obstacles and yet the one item that will accelerate MSS operators to success (and help them stay above the flotation line) is access to cash to pay down the large capital outlay that builds the satellites mentioned above. There are a few companies that can look for their short- to mid-term needs at deep-pocketed financiers, such as Harbinger. However, there is more than just a lump in the road ahead, and as NSR has stated in the past, it is perhaps easier for the MSS industry to seek money from the government investment arms — those have backed far more troubled industries lately — until the horizon clears up. This will help the MSS companies weather the storm and come out of the trenches with a healthier outlook when the economy does rebound.