[kictanet] Balancing Act: Satcom 09: Africa’s satellite providers find themselves looking at a less rosy future

[alice]

Satcom 09: Africa’s satellite providers find themselves looking at a 
less rosy future

Satcom is the African satellite industry’s annual get-together and this 
year’s was held this week. On the second day of the conference the West 
African Cable System announced the signing of an over-subscribed 
fundraising. And this is only one of half a dozen international fibre 
projects that will be built. At the conference itself, new satellite 
entrants announced services that were both innovative and cheaper. 
Russell Southwood looks at how all this will change things for a 
regional satellite industry that has more or less been the main provider 
of bandwidth for the continent.

Guns to the left of them, guns to the right of them, it was not a 
comfortable conference for the more traditional satellite operators and 
resellers. On the one side, there was the ever-present story of the 
imminent arrival of much, much cheaper international fibre capacity. So 
although there are a number of new satellite launches (including 
Intelsat’s New Dawn) that in any other year would have held people’s 
attention, the spotlight kept drifting back towards the impact of the 
new fibre.

As if that was not distracting enough for those wanting to get their 
message across, a number of new entrants were offering some combination 
of innovation and price drops. O3B, which launches its constellation of 
satellites in 2010, was offering carrier grade satellite capacity with 
low latency at fibre or near fibre prices.

On a much smaller scale, Asia Broadcast Satellite was pitching satellite 
capacity for just above 03B’s prices for delivery in 2011. Based broadly 
on the US Wild Blue model, Yahsat was promoting its satellite broadband 
service YahClick for US$350 per site (FOB) at US$30 a month upwards for 
the user. And as Tata’s Head of Africa – Global Data Solutions said with 
a broad smile on his face:”It’s all good.”

Intelsat’s Executive Vice President and General Counsel Phil Spector 
might respond that neither 03B nor Yahsat had operational satellites but 
somehow the blow intended failed to make much impact. Indeed the 
traditional satellite operators seemed strangely passive. Improvements 
in modulation or compression? That’s up to the manufacturers. (To be 
fair, Intelsat’s Regional VP Flavien Babachi mentioned putting a router 
on a satellite and we await the results of that with interest.) Any 
plans to provide keener pricing? That will only happen if there’s a glut 
in the market and that’s unlikely. Why no new satellite broadband 
services? Our operator customers aren’t asking for them. They will not 
be able to stick to this script over the next five years: something has 
got to change.

Cheaper fibre and satellite prices will mean that operators and 
resellers will take their business elsewhere. Part of this is the 
natural transition that occurs when fibre arrives and national backbones 
begin to connect demand to the new international fibres. 90% of demand 
in most countries is found in their urban centres and these will soon be 
connected to landing stations. The process of doing this will by itself 
create a series of inter-country fibre connections.

Both those with satellite and fibre were at pains to point out that they 
were complementary (which they are) but the scale of transition about to 
occur made this seem simply like an act of good manners that did not 
quite ring true.

So what’s the upside for the traditional satellite operators faced with 
this transition?

* Despite the economic downturn, there will continued above-average 
overall growth in bandwidth demand at least up until 2013. So some of 
the effects of the transition to fibre will be blurred by everyone 
wanting more of everything.

* Fibre is new to Africa and some countries neither have the capacity to 
run it effectively nor is it always safe and secure. Ethiopia’s link to 
Sudan is a case in point which means that ETC is still a large purchaser 
of satellite bandwidth. Nevertheless the opening of the new route 
through Djibouti should improve matters. One operator was reporting that 
new fibre customers were signing up for 25% of their capacity on 
satellite as redundancy to cover these kinds of issues. 03B’s Greg Wyler 
made much of fibre outages in the Suez Canal. But with fibre routes up 
both sides of the continent, even that risk is to some degree mitigated.

* According to GSMA figures, 66% of Africa’s population now has GSM 
coverage. This disguises a range of progress from Uganda with 90% of its 
population covered to countries that still have only 30-40% population 
coverage. Satellite cellular backhaul will continue to fill this demand 
but as these will be low ARPU locations, operators will be under 
considerable cost pressures and will look hard at all pricing.

* Finally, many users have long-standing contracts (10-15 years) and it 
will be some time before the natural consequences of the transition are 
fully felt. But whilst this will be of some comfort in the short to 
medium term, it is not a long-term defensive position. A number of 
global satellite operators have significant parts of both their turnover 
and profitability coming from the continent: half of Intelsat’s fleet 
serves Africa. This is bound to change and the only question is by how much?

Some snapshots of the exchanges at the conference give some idea of the 
shifting of the tectonic plates:

* It’s pricing, stupid: Brian Herlihy, CEO of Seacom spoke about 
offering prices of between US$50-300 an mbps per month and whilst IRUs 
might add as much as 20% in interest payments, this is still much 
sunnier that the US$4-6,000 per mbps currently being charged for 
satellite. Better still, Seacom is promising this price wherever the 
capacity lands, whether in a coastal country or one inland. Paul 
Edwards, Chair of Nigeria’s largest CDMA operator Starcomms said he had 
been offered US$100 per mbps on one of the west coast fibres. In 
addition, O3B’s pricing is pitched fairly close to these numbers. The 
traditional satellite operators are stuck: they either have to take 
what’s left over or come up with something innovative technically which 
will improve their price offer. If they do, then it runs the risk of 
cannibalising existing revenues. (According to a report in an 
international industry paper, 03B has been in discussions with both SES 
New Skies and Intelsat. Read that how you will. Who’s courting who?)

* Price elasticity provides massive increases: Tata’s Steven Van Der 
Lind described the process of transitioning customers from satellite to 
fibre. Three years ago, their assumption was that it would be a 1:1 
replacement. As the likely fibre prices became more established, 
customers started asking for the equivalent of a 2:1 replacement. 
Recently he has signed contracts where the increase has been 10-15 times 
the original capacity being utilised. The arrival of fibre is also 
having an impact for those dealing with short-term satellite needs. Tom 
Omariba, Managing Director of UUNet Kenya (who have bought fibre 
capacity) said that they were “technology-neutral” in meeting their 
customers needs but increasingly it was leasing them satellite equipment.

* Pushing to the edge of market: Vodacom DRC’s Alain Malanda, Head of 
Transmission, Data Planning and Optimisation is probably one of the 
candidates for satellite cellular backhaul as DRC has few roads, let 
alone. However, he told the conference that 50% of his national traffic 
was carried by microwave and fibre and 50% by satellite. And whilst he 
was clear that they were still pushing out coverage, they had undergone 
an optimisation exercise on its satellite capacity to get more for less. 
The DRC Government’s announcement of a fibre route to the coast and the 
likely connection of Lumumbashi will also eat into the 100% of 
international traffic currently going by satellite. Timescale: 2-3 years?

* The 2010 bonus: Mashilo Boloka, Director: Broadcasting Policy at South 
Africa’s Department of Communications gave an update on preparations for 
the 2010 World Cup. He said that the fibre network between the 10 host 
stadiums and the International Broadcast Centre would be ready for the 
Confederation Cup in June 2009 and that a second teleport was being 
provide for outgoing links.

The satellite industry has done the continent a tremendous service when 
no-one was thinking of building the scale of fibre now being undertaken 
and whatever happens, it will still be the only technology to reach 
widely dispersed populations. It’s also hard to believe that the global 
operators will not come up with some innovations to strengthen their 
positions. However, it’s fair to say that the industry has had its five 
years of feast and may be entering a period where food is in somewhat 
shorter supply.