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FEATURE: What's So Great About The FSS Business Model?
by Bruce Elbert

The FSS business model is predicated on a satellite operator who makes a “sunk” investment in rather expensive space hardware that can perform its service for a specified (but limited) period of time. In the abstract, the spacecraft could perform any function as long as the operator receives revenues that effectively liquidate this investment over the lifetime. The FSS model depends on revenue from selling satellite capacity in the form of transponder bandwidth and power to a market composed of commercial and government users.

The supply side of FSS is elegant and easy to define. In dealing with an established satellite operator, the all-important prerequisites are taken care of, including:

  • an available orbit position in the geostationary orbit
  • access to one or more countries with quality customers
  • the ability to purchase and operate the satellite over its lifetime
  • brand recognition

Well-known operators such as Intelsat, SES, SkyPerfectJSAT, Eutelsat, and Telesat, would receive high marks for their accomplishments in these areas. For that reason, my remarks address the businesses of these companies as a group. This group happens to represent about half of the total orbital resources and revenue of the entire FSS operator segment.

The MarketFSS satellite operators enjoy a multiple segment market comprised of many deep-pocketed corporations and government agencies. The largest FSS operator, Intelsat, recently announced their first quarter revenues for 2008 of $572.7 million, broken down as follows:

Media: 36%
Network-related services: 48%
Government: 14%
Satellite-related services: 2%

The media piece at $206 million is tied to the core of television and radio broadcasting in the U.S. Even direct-to-home TV companies such as DIRECTV and DISH rely on services carried by Intelsat.

Historically, media in general, and TV in particular, were the main money makers for successful operators such as Intelsat and SES. However, the current revenue breakdown reveals a considerable shift in the distribution: network-related services at $275 million exceed that from media. Much of this comes from the delivery and exchange of digital information in various forms, and a large chunk is for computer data transferred by the Internet Protocol (IP). There is certainly a media element here as well, in the form of streamed and downloaded content through the public Internet.

Operating Leverage
According to J. Fred Weston’s Managerial Finance textbook, operating leverage is, “the extent to which fixed costs are used in a firm’s operation. Breakeven analysis is used to measure the extent to which operating leverage is employed.” Weston observes that where management has chosen fixed expense (such as big satellite investments) instead of variable expense (for labor and services) to produce its product, the firm is said to be “highly leveraged”. The result is that a relative small change in sales results in a large change in net operating income. In the FSS trade, the availability of solid revenues from major media and telecommunications companies tends to reduce much of the risk. Any additional revenue from added customers or markets goes directly to the bottom line.

The rather large investment chunk per satellites is the result of the cost of manufacture and delivery to orbit. The satellite operator pays the manufacturer for hardware and the launch agency for services to place the satellite in orbit. Once functional, the operator puts the satellite in service in a previously-coordinated orbit position. At that point, they can sell transponder capacity to users, garnering revenues to cover the initial investment and the relatively low operating cost of the satellite and overall business.

Once a satellite is put into service, its lifetime is limited to the range of 15 to 20 years based on a number of factors. Principle among these is the station keeping fuel on board (normally enough for 15 years) and the power output of solar panels and batteries. Redundancy of other elements, such as RF power amplifiers, motors, and on-board digital electronics, would normally allow the spacecraft to survive even longer, possibly at reduced capacity.

Bigger is usually better when it comes to satellite control as operating efficiencies increase with the size of the fleet. As an example of the benefit of size combined with operating leverage, SES just reported a “strong profit increase”. This amounts to $367.11 million for the past six months through the end of June, with close to a 14 percent increase compared to the same period last year. Contributing to this were steady revenues, a high fill factor of nearly 80 percent, and good results from all major divisions, including Astra, New Skies, and Americom. This represents about a 2 percent increase in transponder use, which, while small, still provides a strong enhancement to profitability.

Leverage rests upon the strong foundation of good working satellites at excellent orbit positions, which is the forte of the major operators cited above. One recent example of this strategy was the Horizons 2 joint venture between Intelsat and JSAT International, the U.S. subsidiary of SkyPerfectJSAT. A successful JV for Horizons-1 (the name given to the Ku-band payload on the hybrid satellite at 127° WL that also carries a C-band payload referred to as Galaxy-13) was completed. The new project took what appeared to be significant investment risk by replacing the aging SBS-6 satellite at 74° WL with a new bird with even greater power.

Timely replacement was difficult for PanAmSat, the operator of SBS-6 that was subsequently merged into Intelsat. Quickly, JSAT determined that this kind of investment in the U.S. would be very attractive as a result of the growth in demand for Ku-band capacity. Once launched, Horizons 2 quickly acquired long-term customers and the venture was on its way to being as successful as Horizons 1. Joint venture partner Intelsat operates Horizons 1 and 2, and treats them as their own.

Today’s Challenge
Over the years, FSS operators have experienced many problems, and some rather prominent organizations have been either closed, or merged, into others. Examples include Western Union, the first U.S. domestic operator whose satellites were purchased by Hughes Communications and successfully transferred (with all customers) to the Galaxy system. Spacenet was started by the Southern Pacific Railroad and invested heavily in satellites and VSAT networks. After several years of poor overall financial performance, the satellites were sold to GE Americom, and the VSAT business transferred to Gilat.

Satelindo of Indonesia was established to compete with the government-owned telecom provider by introducing new FSS satellites in conjunction with GSM cellular telephone and fiber-optic services. In the aftermath of the Asian financial difficulties of the late 1990s, Satelindo and its resources were merged into PT Indosat, an international carrier that was experiencing difficulty adapting to changing market trends in the region.

How one avoids failure in this business is to have a solid footing of investments and users. The latter needs to come from good economies and solid revenues. This is the case for the U.S. operators that serve media and digital communications needs, and European and Asia operators that deliver television and other content to a major segment of the population. The leaders work hard to hold onto their customers and they continue to invest in the appropriate satellites for operation at the best orbital positions.

  • Stability results from long-term use that is confirmed by leases and outright purchases of transponders by leading media and telecom companies and governments
  • Use and revenues increase because most current markets are growing, and new uses and customers appear from within the natural broad regional coverage of the satellites
These two factors can persist through a recession because most applications are not cyclical in nature. For example, TV viewing persists no matter how bad an economy may be, and people use their computers to access content while they are at home as well as work.

The current recessionary period is one where television broadcasting in its various forms is experiencing resurgence from greater HD penetration and increased broadcasting activity. For example, the Wall Street Journal reported on August 1, 2008, that Tribune Company is expanding its TV broadcast stations at the same time the firm is cutting staff at its newspapers. From an economic perspective, TV is the most cost-effective entertainment medium — it does not require its customers to travel, purchase items, or pay admission.

A well-positioned small satellite operator in a closed market can obtain these benefits and prosper for a considerable period of time. However, this is the exception rather than the rule. The best financial performance goes to the FSS operators with well-managed big fleets. These companies have international recognition and are traded on public markets, giving them access to capital for new and replacement launches.

About the author
Bruce Elbert is president of Application Technology Strategy, Inc. and assists satellite service providers, U.S. civil and military agencies, and enterprises that employ these technologies for strategic advantage.  He was Senior Vice President in international business development at Hughes Electronics where he introduced advanced broadband and mobile satellite technologies in the U.S., Asia, Latin America, and Europe. During the 1980s, Mr. Elbert directed all engineering, marketing, and operations of the Galaxy System and contributed to the startup of DIRECTV. Bruce Elbert has authored eight books on satellite technology, including Introduction to Satellite Communication (third edition, 2008). He holds an MBA degree from Pepperdine University, an MS degree in communications engineering, and computer science from the University of Maryland as well as a BSEE from CCNY. He is an adjunct professor at the University of Wisconsin - Madison and an instructor in the UCLA Extension Engineering program. For further information, please access this direct link.