Updated on July 13:
PARIS — Speedcast International has been a go-to company for mergers and acquisitions in the satellite services industry in recent years, its latest being the purchase of Harris CapRock.
The company says its increased size is a prime reason its EBITDA margin has grown from 11% in 2011 to 19% in 2016.
Industry consensus is that there are still too many service providers, especially given that some satellite fleet operators, notably SES, are moving into their territory in search for growth.
Speedcast Chief Executive P.J. Beylier discussed the SES challenge and the likely changes in the market in the coming years as ever more satellite bandwidth arrives.
Satellite overcapacity, bandwidth prices dropping: This must be paradise for you.
It certainly plays in our favor but it will also create pressure on our prices for some of our customers, long-term. We have seen capacity costs coming down significantly in some cases.
For some of your contracts bandwidth is a minority of the total cost?
Yes, definitely for some oil and gas customers. In five years it may be different. But today, bandwidth is still the majority of what we sell.
But seeing your raw-material cost going down is good for you, isn’t it?
You’re hesitating: You’d prefer a bandwidth shortage?
More than the specific evolution of prices, what is interesting is to understand the dynamic of supply and demand and how we can leverage our skills and our buying power.
If satellites are full, we cannot leverage it much. So yes, you’re right, if bandwidth prices are going up, it’s not good. I think some amount of oversupply, with prices coming down, is good.
Today it’s OK.
But because of HTS tomorrow’s market may be glutted?
Because of HTS, but not only HTS. There are more and more satellite operators, and they’re all launching the same capacity over the same areas.
A dream come true for you….
So far, it is good because our costs are coming down. Our prices are coming down too, but not as fast as our costs. And then, volume is growing.
Your margins in principle wouldn’t decline.
Your margin percentage would stay the same or grow, but in absolute dollars it could potentially come down. It’s all about balance. And we are trying to consolidate the market.
Bangladesh is the latest example of a nation entering the satellite telecommunications operator market.
Don’t they have better things to do with $250 million than launching a satellite? I should think so.
Colombia, Nepal, Mongolia are considering this…
PNG, Afghanistan too — they did a deal with Eutelsat but I think they have a long-term vision to have their own satellite.
When do you jump into the aero connectivity market?
We are in aero today — not meaningfully, but we are. We don’t talk much about it because we don’t have anything meaningful to say. But we are providing services to Panasonic Avionics. And we are providing services to a few government aircraft — presidential aircraft to governments.
Of course it’s a market we are looking at and trying to understand.
The Panasonic-ITC and GEE-EMC mergers combined aero and maritime service providers. Do you endorse the logic of marrying aero and maritime?
On the earlier acquisition of MTN by EMC, MTN had some maritime business and was developing in the cruise market but seems to have lost it. So I am not sure this was the right buy, especially when the two companies were declining. And ITC Global didn’t have that much maritime. Maritime uses a lot of C-band. Aero is all Ku-band. So to me, not all these acquisitions made sense.
But is it one path to consolidation?
The logic makes sense. The networks need to be a bit different, to be adapted to today’s situation and to the technical differences between the aero and maritime markets. The antenna on aircraft have much lower gain, so you cannot use the same network for maritime as for airplanes.
The synergies are not significant?
The synergies are not as big as they might seem. Second, the ecosystems are completely different. We don’t yet fully understand the whole aviation ecosystem, with the certifications. It’s extremely regulated, very complex. So it’s not obvious.
On top of that: Look at what is happening in the aero market. There seems to be a competition as to which service provider is going to announce the biggest capacity contract, at a time when capacity prices are coming down.
We are actually signing shorter and shorter-term contracts.
GEE said they got a great deal in purchasing the SES inclined-orbit satellite capacity rather than leasing it.
In some cases there may be amazing deals, or deals that today seem amazing. But will they be as amazing in three or five years from now? Maybe not.
We are interested in the aero market. Why? Because it’s clear that it is going to be growing. We are a growth company and we are looking for growth engines. We may not be interested in all segments of it. There’s commercial airlines, private aviation, government aviation. We will have to decide in which ones we we want to play in and I don’t have that answer today.
Then we will have to decide whether we want to be a bigger player in the market and if so, whether we grow organically or with M&A. For commercial airlines, at least from what I see, we will want to wait to see what’s happening. The market is going to change and some players today won’t exist tomorrow. It makes sense to wait a bit.
Your owners obviously don’t fear M&A.
So far no.
Back to satellite services: Should we expect more consolidation?
I think it’s possible that most of our large competitors will change ownership in the next three or four years. It’s likely that consolidation will accelerate and that some of the consolidators will start acquiring companies that are not involved in VSAT services.
Rignet acquired a technology company, Marlink acquired Telemar and 60% of Telemar’s business is the sale and maintenance of equipment, not connectivity per se. I think you will see more of that. So there will be plenty of M&A activity in the services sector in the next few years. I would think Speedcast would continue to be active. We don’t have to go into aero.
You have issues with SES’s strategy of going down market to be closer to their end customers.
It’s O3b Networks, which is SES Networks now. They are going directly to end users in several markets — cruise, government and sometimes with mobile operators they want to go direct.
At the same time, they want to partner with Speedcast in other segments. I am skeptical about such an approach. I can accept that there will be some friction on a few accounts here and there, but it cannot be head-to-head competition in one segment, and a big partnership in another.
Doesn’t Intelsat have friction with you here too?
No, that’s not friction to me, because they are selling to service providers. If there is friction because I also have resellers and channel sales, that’s OK. Intelsat is not going directly to sell to cruise and maritime and oil and gas companies. They are not going to sell to end customers.
So SES is a competitive threat to you?
They are competing against us in the cruise sector and trying to get some of our customers. I think they are overestimating their ability to go against service providers like us and win business. They will need a much stronger network, going beyond SES satellites, and to develop other expertise, so I am fine competing with them.
You have 8,000 MHz of satellite capacity under lease. Because of your acquisitions it’s spread out. How quickly can you consolidate the capacity?
We have started already, to a certain point. We want to be opportunistic and also take advantage of special deals. With the rise of HTS, regional operators who don’t have the plans or the money or the size to launch HTS capacity are still there with their wide beams. They need business and some of them are willing to do attractive deals.
Is that sustainable?
No, but you can get capacity at prices you cannot refuse. We are not going to consolidate 100%. We’ll still have some fragmentation, but we want less fragmentation than we have today.
You have capacity on eighty satellites?
More than 80 — in C-, Ku-, Ka-band over each region. Our global Ku-band maritime network uses 35 different satellite beams. But yes, we use over 80 satellites. We need a least two or three beams so that when there is a line of sight issue they can change satellites.
The consolidation is ongoing and by the end of this year we will have done quite a bit. By the end of next year we will have completed the process.
That’s fast. You must have lots of short-term contracts.
It’s a lot of short-term contracts we’ve signed since prices have been coming down. Many of them are coming off in the next 18 months.
Are LEO broadband constellations a good or bad thing for the market?
Well right now it appears to be adding to the excess capacity problem. SES has one, Intelsat has relations with one, Telesat has one, plus you have startups like Elon Musk, who has one!
I think their arrival is further away than what they are saying. We are not going to see anything for five years or more. Plus technical and financial hurdles remain and the whole thing will change a bit, just like O3b changed. I would prefer to see it more mature in the planning, when it’s closer to providing a service, before I think too much about it.
My impression, with limited knowledge, is that the business case is not easy. Satellites with a service life of five or seven years don’t give much time to recover your money. LEO on its own is very challenging, it needs to be part of a GEO play, I would think. If it’s only cannibalizing from GEO, with no new revenue, then there is going to be some damage.
But some of the damage will be done beforehand; Some of these systems wont launch.