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Gottlieb — On Maritime: High Stakes, Huge Risks: The Race Is On...
by Alan Gottlieb, Managing Director, Gottlieb International Group, Inc.


After years of building their business, Inmarsat’s third party Distribution Partners now find themselves in a price war with the giant satellite operator. They are fighting what appears to be a direct-to-end user distribution strategy. Announced in a June 30th press release, Inmarsat’s aggressive strategy incorporates extraordinary reductions in the price of VSAT combined with an unlimited Fleet Broadband back up package.

GottliebFig.1 In addition, small fleet operators are reporting huge reductions in fixed priced Fleet Broadband. Packages have been reported of FB 500 going for prices competitive to VSAT (i.e. 15 Gigabytes for $3,750 per/month) — far below the best Shared Corporate Access Plan pricing.

Already, Vizada has landed a counterpunch. On July 22, Inmarsat’s largest DP (which accounts for 40 percent of Inmarsat sales) announced a far more attractive package at lower cost and free from the five-year commitment mandated by Inmarsat. As the two giants battle driving prices lower, smaller VSAT competitors and Distribution Partners with limited cash reserves could be driven from the market or acquired by Inmarsat or Vizada. There are no winners in a price war — only survivors.

Huge Risks for Inmarsat
Given the recent decline in Inmarsat’s stock price, it is clear that investors have significant concerns over the huge investment the company is making in Global Xpress as well as the implementation of its new predatory pricing and distribution strategies.

BridgeTech_ad_SM0911 Will Global Xpress Achieve ROI sufficient to justify the risk? By driving down bandwidth prices to the levels in the June 30 announcement serious questions are apparent as to whether the return on the Global Xpress investment will be sufficient to justify the enormous technical and market risk associated with the initiative.

Alienation of Key Distribution Partners: By making what appears to be a move to go direct and by bypassing its distribution partners, Inmarsat risks alienating important marketing partners like Vizada and Globe.

Further Reductions in Stock Price: By initiating a price war, it risks its own near term profitability further alienating its stockholders who have seen the value of their shares drop nearly 30 percent in the last year. Given the prospects for a further drop in the stock price, stockholders may demand the ouster of current management.

Hostile Takeover: Should the stock price fall further, Inmarsat could become an attractive takeover target.

Customer resistance to Global Xpress Upgrade: By selling Ku-band services, high-end customers may become accustomed to Ku’s superior resistance to Rain Fade and may resist a transition to Global Xpress.

Insufficient L-band Capacity: By offering L-band in 10 to 15 Gigabyte per/month packages at prices competitive to VSAT, will sufficient L-band capacity be available to users?


Intelsat_adFig3 Potential Rewards
What, then, could Inmarsat hope to gain? Initially, the move suggests a grab for market share. However, by driving down revenue and margins of its Distribution Partners, the value of the partners’ businesses would be significantly reduced and ultimately Inmarsat or Vizada could buy them for pennies on the dollar. The result would be a significant consolidation of suppliers and a limited choice for shipping consumers and potential for higher prices. Of course, the same consolidation could also occur in military and aviation markets. Under such circumstances, how, then, can Distribution Partners and VSAT competitors maintain their independence and profitability? What can they do to effectively compete and survive?

Fighting Back...
There are significant weaknesses in the Inmarsat strategies and in the technical aspects of Global Xpress, and the Distribution Partners can exploit them. Consider the following:

What Inmarsat has done is to commoditize the delivery of Broadband to Vessels;

Global Xpress has potentially significant technical and “continuity of service” issues (Rain Fade and no spare satellite) that could make it undesirable for use in critical communications in the high end large fleet segment, Inmarsat’s core market — facts that the satellite engineering community is aware of but have not been effectively communicated to the shipping industry. Switching to Iridium OpenPort is an alternative to Fleet Broadband and to Iridium’s next generation constellation, NEXT, as a Ku- VSAT backup when it becomes available.


Differentiating Product/Service:
Much of the logic behind Inmarsat’s strategic initiative is based upon the Stratos and Ship Equip experiences. It is important to note that significant portions of the revenues of these companies are based upon selling bandwidth and hardware to highly sophisticated end-user communities i.e. the Offshore Service Vessel and Energy markets.

Such end-users have highly sophisticated IT people who are familiar with VSAT and are much more likely to see bandwidth as a commodity vs. Tanker or Containership customers, who demand significantly higher levels of systems integration assistance and service delivery. Consequently, competitors can gain advantage over Inmarsat in these markets through differentiation in value-added services supplemented by training of sales forces in consultative sales technique.

SubsHouseAd Demystifying Global Xpress
Our extensive research documented in the February 2011 issue of SatMagazine (The Coming Battle for the Maritime Market) reveals significant potential weaknesses in reliability and “continuity of service” that could make Global Xpress unacceptable to high end users and could relegate its use to more non critical applications such as Crew Welfare (assuming, of course, that the price is low enough). This would support the continuing application of Ku- alone or a Ku-/Ka- hybrid service, but not Global Xpress alone.

Note that the increasing complexity of applications employed across ship to shore satellite will require links of high reliability not compatible with the Rain Fade characteristics of Ka-band. While it may be possible to maintain a link under tropical rain conditions, available bandwidth and bit rate would be severely diminished and variability of bit rate could, according to experts, play havoc with interactive applications. Ironically, while Inmarsat has previously been critical of Ku-VSAT, it now introduces a service even more susceptible to Rain Fade, Global Xpress. In addition, the lack of an in orbit spare satellite brings into question “continuity of service.”

Currently, there is no other global, over water Ka- service planned. Should an I5 satellite fail, users would essentially be out of service for an extended period and would have to rely on Fleet Broadband. With Ku-, this is not a problem, since it is usually possible to provide alternative coverage with another satellite. Hence, competitors can exploit these Global Xpress weaknesses through customer education via advertising, issuance and distribution of White Papers, PR, conferences and seminars.

Marketing, Marketing, Marketing
Competitors need to coordinate marketing efforts around the common themes of product and service differentiation offering complete solutions and high-end service vs. low priced, commodity bandwidth and hardware. Additionally, they need to educate customers explaining that while Global Xpress may be a worthwhile addition to the overall product mix available to mariners, it is not the revolutionary solution Inmarsat claims it to be.

The Game Has Changed
Like many markets before it, the maritime VSAT market now faces the kind of competitive environment in which only the fittest, cleverest and most agile will survive. Whatever the outcome in the battle for maritime markets, the good old days when satellite gentlemen cooperate and share the bounties of a market now appear to be gone forever. b

GottliebHead About the Author:
Mr. Gottlieb is Managing Director of Gottlieb International Group Inc. (www.gottliebinternationalgroup.com) Established in 2001; his firm, located in Washington D.C., is a recognized global authority on the use of VSAT on Commercial Vessels. His firm provides Market research, Business Development and Sales Training in Maritime and Oil and Gas Satellite Communication Markets. Major clients have included Satellite Operators, Equipment Manufacturers, VSAT Vendors and Private Equity firms. His publications include Buying VSAT, The First Independent Guide, and numerous articles published in SatMagazine and Digital Ship.


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