“We remind you that our business is not devoid of growth opportunities,” Eutelsat Chief Executive Rodolphe Belmer told investors in late July.
It’s the kind of reassurance that markets like to hear some 2.5 months after a company drops a bombshell revision of near-term revenue and profit.
Eutelsat’s May 12 announcement sent chills throughout the fixed satellite services industry and beyond.
This was not some struggling fleet owner whose financial woes were well known or suspected. This was the world’s third-largest operator by revenue, and one whose business is solidly grounded in video distribution.
Thank heaven for little TV stations
Sixty-three percent of Eutelsat’s revenue is from video, most of it from the world’s most lucrative satellite television market, Europe, where transponders in popular satellite orbital neighborhoods still sell for 3.9 million euros, or $4.3 million.
For Paris-based Eutelsat, video revenue from emerging markets grew by 4 percent in the 12 months ending June 30. Also good news for the company: Some 45 percent of its video customers have already transitioned to the MPEG-4 compression standard, whereas only 20 percent have moved to high-definition programming.
That means Eutelsat has absorbed the bad news of bandwidth-saving compression but has yet to fully reap the rewards of bandwidth-hungry HD.
Of course, the problem wasn’t the TV business, it was data transmission that was the main cause of Eutelsat’s revenue and profit warning.
This is a business where it’s raining hard for just about every satellite fleet owner and along with local issues such as Brazil’s economic downturn has caused them all to take a fresh look at the business.
Telesat: Figure five years to regain supply-demand balance
Daniel S. Goldberg, chief executive of Telesat of Canada, estimated that in Latin America, satellite bandwidth prices have fallen by 10-15 percent in the past year or two. In Africa and parts of Asia, it’s worse, with declines of 15-20 percent in the same period, he said.
“There is excess capacity for sure in certain markets, and has been for at least a year now,” Goldberg said. “Demand is still growing; folks want more bandwidth. But industry is going to have to digest. Operators are exercising more capex restraint and the excess supply will be mopped up.”
How long until the gradual pullback in capex and the gradually rising demand, albeit at lower per-megahertz prices, rebalances these markets? “These conditions have been true for at least 18 months and it will take two, three, or maybe five years to recover,” Goldberg said.
And even in the worst markets, satellites targeting specialized applications, such as aeronautical mobility, are finding customers.
SES: We’re doing fine in Latin America
“All the new assets that we have deployed, including our current assets, have had very good traction” in Latin America, SES Chief Executive Karim Michel Sabbagh told investors.
“Notwithstanding the fact that there are number of assets that are being brought into the region by alternative satellite operators, in our case — and I take as an example SES-14 and SES-15 — we’ve had unprecedented traction of these, particularly in aeronautical. The payloads that we have designed on these assets are perfectly customized.”
SES-14 and SES-15, all with high-throughput satellite (HTS) mobility payloads, are scheduled for launch in 2017.
“I can’t comment on the reference to [pricing] that may have been attributed to other satellite operators,” Sabbagh said of pricing. “In our case, in the applications we serve, that is not the case.”
Eutelsat specifically cited the pressure on prices caused by large HTS satellites entering the market in Latin America that overmatched the increase in overall demand for bandwidth. Intelsat’s IS-29e, the first of the company’s Epic HTS spacecraft, is Exhibit A here.
“Large HTS systems bring in overcapacity and… negative pricing pressure,” Eutelsat’s Belmer said. “Prices will continue to decline over the next five years. But we have capacity to sell a lot of it and this will enable us to mitigate the negative effects.”
That sounds like a price war in which Eutelsat will use its excess widebeam capacity to match Intelsat’s Ku-band HTS in Latin America.
Intelsat’s HTS-widebeam split personality
“We’ve said that we always expected pricing would come down on a megabit-per-megabit basis with Intelsat Epic,” Intelsat Chief Executive Stephen Spengler told investors in August. “That was part of the thesis and what we believe is important to unlock new sources of demand. And so, that price decline may be little bit faster than we anticipated in our business plan, but the [demand] volume is a little bit higher. So, we’re well within our expectations in terms of our business plan and business case for the Epic satellites.”
Until earlier this year, when the Epic HTS satellites began to deploy, Intelsat was a defender of the wide-beam faith. Now it has a foot in both camps — defending the wide-beam pricing structure for its legacy fleet, and attacking that structure with its Epic HTS.
“In terms of wide-beam oversupply, it wasn’t until this second quarter of 2016 that we had an alternative to wide-beam supply. We brought our Epic into service in the first quarter of this year. Prior to that, our perspective on the competitive environment has been largely a wide-beam competitive environment. We see that area being especially challenging from a price standpoint and a competitive standpoint.”
The challenge for Intelsat and any other operator fielding HTS capacity alongside existing wide-beam satellites is how to keep the former from attacking the business of the latter — not just between operators, but inside individual fleets.
“We don’t believe that cannibalization has been a factor,” Spengler said. “On every one of the [Intelsat 29e] contracts except one, customers took more capacity onto the network.”
Was the total revenue volume on these contracts equal to the revenue on wide-beam satellites? It may be too soon to identify a trend, and Spengler avoided the topic.
“Pricing is based on market factors in each one of those deals,” he said. “When you renew or transition a customer, you’re subject to market pressures, competitive pressures, at any given time. So that’s been a factor. But in the majority of those transitions, customers have opted for more overall volume of capacity, leading to an uptick in overall revenue.”