Going up…

Posted in Handheld, Inmarsat, Maritime, Operators, Services at 10:44 am by timfarrar

2011 was a very tough year for Inmarsat, when the company struggled to grow its MSS revenues at all in the face of a shipping downturn and military pullback from Afghanistan. Now 2012 has started on an even worse note, with LightSquared defaulting on its $56.25M Feb 18 payment to Inmarsat.

In the face of this pressure, Inmarsat have adopted a somewhat surprising response to increase their revenues. Inmarsat indicated in the latter part of 2011 that maritime E&E prices would be increased from January 1, 2012 in an attempt to shore up legacy maritime revenues. This move was at least somewhat logical, as it did not affect the early adopters who would be most likely to churn to other services.

However, in early 2012 Inmarsat also announced they were withdrawing the wholesale voice price cuts made in early 2011 when they trumpeted a suggested retail price of $0.55 per minute for FleetBB and FleetPhone voice calls. I’m told that apparently these wholesale price cuts had simply been absorbed by Inmarsat’s partners, and had not led to widespread retail price declines (because Inmarsat’s maritime crew calling rates were still uncompetitive with Iridium), but they did have a major negative impact on Inmarsat’s maritime voice revenues in 2011.

Even more remarkably, this week Inmarsat have just told partners that they will be increasing the price of ISatPhone Pro handsets by about 20% and withdrawing the two year prepaid card expiry for low value cards that I criticized back in 2010. It therefore appears that Inmarsat has finally recognized (as Iridium very bravely concluded when they continued with a premium handset strategy) that there is very little churn in the MSS handheld market and this cannot be increased simply through lowering prices.

UPDATE (2/27): I’m told that Inmarsat is also increasing the monthly subscription prices for postpaid ISatPhone Pro service very substantially, and we are likely to see retail prices rise by around $15 per month (in other words what is currently a ~$200 per year service for low end customers would potentially double in price). I’ve not yet managed to confirm when this price rise will take effect. This is likely to cause quite a lot of upheaval as distributors figure out how to reposition the ISatPhone Pro once it is no longer pigeonholed as the “cheap and cheerful” satphone option.

Taken individually all of these changes therefore seem to have a rational basis, but it has to be very worrying when distributors have to go and explain to their customers that Inmarsat’s prices are being increased in numerous different areas, when historically customers’ biggest complaint about Inmarsat has always been that they get a great service but are being gouged on price. This also comes in the context of a wider telecoms sector where it is almost universally accepted that prices will go down and services will improve each year. While these changes may be sufficient to allow Inmarsat to achieve (at best very modest) positive growth in MSS revenues during 2012, they could also set up more difficult comparisons in 2013, especially if some customers opt for competitors’ services instead.

More broadly, Inmarsat need their customers to respond positively to the company, especially now that direct sales are being emphasized and when Global Xpress is poised to enter a much more crowded maritime VSAT market in a couple of years time. As a result, it will be interesting to see how views on Inmarsat develop across the MSS industry as these price changes filter through to end customers, and whether customers’ satcom choices are affected in the future.


Jumping ship…

Posted in Financials, Inmarsat, Maritime, Operators, Services, VSAT at 9:26 am by timfarrar

Back in 2008, the decision of Maersk to choose Inmarsat’s FleetBroadband service for 150 (later increased to 370) vessels was described by Inmarsat as “a ground-breaking deal” which represented “the strongest possible endorsement of our revolutionary FleetBroadband service”. As a result, this week’s revelation that Maersk is now going to shift 400 vessels to VSAT must be a correspondingly earth-shattering blow to Inmarsat, because not only has Maersk decided to move away from FleetBB, but it has opted for a Ku-band solution from Ericsson and Thrane & Thrane (with a 7 year service agreement), rather than the XpressLink service from Inmarsat which would provide an upgrade path to the Ka-band Global Xpress service.

Maersk’s average spend for the 370 ships using the FleetBB service was about $2600 per ship per month retail, implying that wholesale revenues to Inmarsat in 2011 were between $8M and $9M (and making them Inmarsat’s biggest single maritime customer for L-band service). While Maersk will presumably keep Inmarsat as a backup, its safe to say that the vast majority of this revenue will likely be lost once the transition is completed. The decision to make this change comes after Inmarsat’s move to impose usage caps on maritime vessels in October 2011 (with the data rate limited to 20kbps once the cap is reached), because Maersk had apparently been generating as much as 25% of all I4 (BGAN+FBB+SBB) traffic under its former unconstrained deal, and Inmarsat was worried about the saturation of its I4 network in regions such as the Middle East, which could impact higher value traffic from defense and media users.

This news also comes in the wake of Inmarsat’s major reorganization, which was revealed in early January, and has led to the exits of a number of senior managers in the government and maritime business. Despite Inmarsat’s claims that it “does not intend to change its policy of distributing its services primarily through independent channel partners”, the new management structure will have both direct and indirect sales reporting to the same people, which has been very poorly received by Inmarsat’s distributors, who clearly expect Inmarsat to cut them out of the business in the future, as Inmarsat emphasizes its own direct sales channels and gets “closer to our partners and customers” as the new CEO describes it.

I’m told another part of the reorganization is that Inmarsat’s financial reporting will be realigned from Q1 2012 so that the four new business sectors (Inmarsat Maritime, Inmarsat Government US, Inmarsat Government Global and Inmarsat Enterprise) will report their own results on a total (retail) basis, rather than breaking out wholesale L-band revenues in land, maritime and aeronautical sectors separately. This will mean that a maritime customer transitioning from a FleetBB L-band service to a resold Ku-band service such as XpressLink will bring in the same (or more) retail revenue (albeit with a much lower gross margin), whereas previously Inmarsat would have had to take a hit to its wholesale L-band revenues to facilitate this transition.

However, this is going to make financial analysts even more confused about the prospects for the company than they already are. Most analysts have maintained a very positive view of the company, and apparently the consensus view is that Inmarsat should continue to derive value from its North American spectrum assets, whether or not LightSquared files for bankruptcy. With the triple threats of continuing bad news in the maritime sector (where there is a pretty bleak outlook for shipping companies), reductions in defense spending (including the pullout from Afghanistan) and that Inmarsat might ultimately end up paying money to LightSquared’s creditors rather than receiving future lease payments, Inmarsat’s next results call is definitely going to be worth listening to.


Not very happy holidays for the MSS sector…

Posted in Aeronautical, Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Orbcomm, Services, TerreStar, VSAT at 12:20 pm by timfarrar

As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.

This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.

Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.

If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.


Rumorwatch: Will Inmarsat buy Thrane & Thrane?

Posted in Broadband, Financials, Inmarsat, Maritime, Operators, VSAT at 5:12 pm by timfarrar

In recent discussions we’ve heard rumors that Inmarsat may soon make a bid to take over Thrane & Thrane, its biggest equipment supplier. Inmarsat has certainly been in acquisition mode over the last year, taking over Stratos and Segovia and investing in SkyWave. Nevertheless, such a move would still be quite a shock for many in the MSS industry.

However, it would be a logical accompaniment to Inmarsat’s Ka-band strategy: Inmarsat would be able to reduce the price of L-band equipment (particularly FleetBroadband terminals) and thereby help to fend off the threat from Ku-band VSAT for the next few years until its new Ka-band satellites are in orbit. Thrane could also play an important role in development of mobile Ka-band terminals, which are clearly the biggest technical risk in Inmarsat’s entire Ka-band plan.

Though the threat from Ku-band has been hyped up recently, most notably in Comsys’s recent maritime VSAT report, our view continues to be that L-band has a very sustainable market position, outside the highest spending ships. To date, Ku-band VSATs have achieved only limited penetration within Inmarsat’s core maritime commercial transportation market (which incidentally is much smaller than 100,000 ships), and most of these ships spend far too little to ever contemplate a move to VSAT.

By reducing the cost of L-band equipment, in concert with its aggressive moves on airtime pricing over the last year, Inmarsat has a very viable opportunity to hold off Ku-band VSAT incursion. Even the recent concerns about shortfalls in Inmarsat’s maritime revenue growth during the first quarter of 2010 appear to stem much more from the price reductions that Inmarsat and its distributors have used to remain competitive on high spending vessels, rather than any substantial loss of market share to VSAT in the commercial transportation business. Indeed many maritime VSAT service providers had a very disappointing year in 2009, and quite a number of them are now up for sale, in what we would view as an attempt to exploit the perception of rapid future market growth before they actually need to fulfill these expectations.


Guaranteeing a competitive future for MSS

Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar

So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.

Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.

We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.

The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.

The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.

In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.

Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.

Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.


No longer full speed ahead for miniVSAT

Posted in Inmarsat, Maritime, VSAT at 7:22 pm by timfarrar

In January 2009, we questioned whether KVH and Viasat could afford the investment needed to complete their 2009 coverage expansion plans, as shown below.

Planned miniVSAT coverage expansion (Dec 2008)

Now the planned coverage expansion shown on KVH’s website has changed, with the South Pacific coverage expected in Q4 2009 dropped (at least for now), and the East Asian expansion delayed. Is the current economic slowdown beginning to impact miniVSAT demand, or is it just that with other parts of KVH’s business suffering, the company is now trying to be more cautious with its investment?

Although Inmarsat has not yet seen any impact from the downturn, we should find out in the next few months how widely the current economic pain is going to be felt in the maritime satcom market. Given the high capital cost of maritime VSAT equipment, it wouldn’t be surprising if VSAT suffered more than Inmarsat from any slowdown in maritime communications spending.


Cold feet over maritime VSATs

Posted in Inmarsat, Maritime at 2:45 pm by timfarrar

On Monday, Thrane & Thrane announced an agreement with KVH Industries to distribute KVH’s TracPhone V7 mini-VSAT product. At first sight, this seems to be an expression of confidence in the potential of maritime VSATs, with Thrane noting that “the market for Ku-band equipment for maritime satellite communication is expanding strongly” by about 1500 terminals per year. However, Thrane’s original plan was to pursue development of its own maritime Ku-band VSAT product and service, the SAILOR 900, announced last June, which has now been cancelled.

The Ku-band maritime VSAT market has grown dramatically in recent years, taking market share amongst high end users, who can afford the expensive terminals (typically $50,000+) and need the flat-rate, always-on connectivity that Inmarsat cannot provide with its L-band satellites. However, the Achilles heel of Ku-band systems has always been coverage: as Connexion-by-Boeing found out in 2006, the cost of leasing a global Ku-band network far outweighs the near term revenue that can be gained in what is a very fragmented business, with the largest players (Vizada/Marlink, SeaMobile/MTN, Caprock and ShipEquip) each having a market share of less than 20%. As a result, providers have to date offered C-band systems to customers requiring global coverage, and focused Ku-band solutions on intra-regional users.

KVH and Viasat have promised to change this model with their mini-VSAT network, building out global Ku-band coverage for both aeronautical and maritime applications, along similar lines to the concept envisaged by Connexion (though with smaller, cheaper terminals costing around $30,000). Thrane’s decision to join with KVH is an acknowledgement that even a company such as Thrane, with it’s very strong maritime brand, is unable to justify the costs of establishing global Ku-band coverage on its own. The question now is whether KVH and Viasat can afford the investment needed to complete their 2009 coverage expansion plans.

Orders have remained strong for maritime VSATs, even in recent weeks, but in the current financial climate, maritime VSAT looks far more vulnerable than Inmarsat to ship operators seeking to cut back their communications spending: it generally has a high fixed cost every month (compared to Inmarsat’s pay-by-the-use) and is usually sold on the basis of getting “ten times more data for double Inmarsat’s cost”, not on the basis of saving money over current expenditures. Most importantly, in many cases it is seen primarily as an investment in crew welfare: when there are few jobs going either at sea or on land, crew retention in 2009 will be much less of a problem than in 2008. As a result, Thrane looks amply justified in getting cold feet over pursuing its own VSAT product.

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