BY THE MIDDLE OF this year, Canada’s largest satellite operator, Telesat, will be a much bigger company.
When Loral Space Communications and the Public Sector Pension Investment Board said in December it would pay about $3.4 billion for Bell Canada Enterprises-owned Telesat, it moved the Ottawa-based company into a larger playing field. Its seven satellites plus four from Loral and the four the companies currently have in the pipeline under construction or awaiting launch, will more than double Telesat’s size by the end of 2009, when the last bird on the drawing board right now is built.
However, much hinges on government agencies. The Competition Bureau and the CRTC are reviewing the change of ownership (as is the U.S. FCC) all while the company waits to hear back from Industry Canada on who gets which of 29 new satellite slots.
But even with these new slots and the satellites going to fill them, will there be enough capacity when every broadcaster is HD? When every broadband customer is downloading movies and TV shows?
Recently, Telesat CEO Dan Goldberg sat down with Cartt.ca editor and publisher Greg O’Brien to discuss such questions and what the company is doing to confront them. What follows is an edited transcript.
Greg O’Brien: Let’s talk about your new job at Telesat. The purchase agreement is on track to close what this spring or summer, correct?
Dan Goldberg (pictured): We’re saying mid-year because we need a couple of different regulatory approvals (Competition Bureau, U.S. Department of Justice and we need the FCC), so yeah we’re hopeful that we’ll have all those in hand sometime mid this year and can close the transaction.
GOB: And that new organization will give you how many satellites then? You’ve got seven now.
DG: We’ve got seven now. Loral Skynet has four. They actually have five but one of them is in a severely inclined orbit so it’s no longer capable of providing commercial service and is preserving an orbital slot, and then they’ve got a fifth one that’s under construction. So when the deal is done we’ll have 11 satellites in orbit, and then they’ll have one that they’re building on the ground. We’ve got three on the ground right now, one of which gets launched in early April.
Anik F3 goes up in early April and then we’ll have eight birds up there. Then we’ll still have two more with Nimiq 4 and Nimiq 5.
GOB: When will those two go up?
DG: Nimiq 4 will go up 2008 and 5 will go up 2009.
GOB: Providing what services?
DG: Nimiq 4 and Nimiq 5 are birds that are dedicated for the ExpressVu platform, so those are going to be direct to home satellite services for ExpressVu and F3 is a hybrid satellite so it’s got Ku band, it’s got KA band and it’s got C band. So the Ku band will be used to provide video services and the Ka band is going to supplement the two-way broadband service that we currently provide on Anik F2.
GOB: How has that gone? When people talk about residential broadband, satellite is rarely mentioned.
DG: Yeah, which is maybe our fault for not being sort of more visible in terms of promoting the service, but today there are about 22,000 subscribers throughout Canada getting a two-way broadband service directly from the satellite.
It has grown more quickly than we expected, and in southern Quebec and southern Ontario our beams are getting pretty full at this stage and that’s why having F3 up there will be important because it has two new Ka band beams serving those regions and it will give expansion capacity.
GOB: Where are you seeing most of the customers coming from?
DG: They’re coming from all over but a lot of it is in Ontario and Quebec.
GOB: Mostly in places where cable and telecom can’t reach?
DG: Yes. I would say almost exclusively. It is very much a service that’s intended for people who want a broadband experience but aren’t able to get DSL or have a cable modem (retailed primarily through Barrett Xplore).
GOB: And you also have the broadband customers within the States as well don’t you?
DG: Well, there we have a bunch of beams serving the United States, and all of that capacity has been taken by a company called Wild Blue. So Wild Blue used F2 to sort of jump start their service… and they have that capacity for the lifetime of the satellite. And, they’ve also just brought on their own satellite called Wild Blue 1, which Telesat is actually flying for them.
I would say that Wild Blue’s experience has also been very positive in terms of subscriber growth in the United States. And they, like us, were starting to get capacity-constrained on certain very popular beams and for them that’s why this Wild Blue 1 satellite was so important.
GOB: How many Internet customers can you serve per transponder?
DG: Well it’s complicated because the architecture of a Ka band payload is very different from the architecture of your typical C or Ku band payload. At capacity Anik F2 could support something around 130 to 150,000 subscribers across Canada.
GOB: Do you find at all that the rapid explosion of video available on the web is affecting your broadband capabilities?
DG: I’d say that it drives more and more homes to want to have access to a broadband connection. So I would say that it’s certainly one of the factors that’s probably driving penetration of broadband services just broadly speaking.
GOB: You’ve got 10 applications in for new satellite slots.
DG: Yes. Exactly right. Industry Canada instituted this process back in July and I think they put essentially 29 licenses up for consideration. We applied for 10 of them (Ciel Satellite and Canadian Satellite Radio applied, too).
GOB: So even with those applications and with the satellites that you’ve got under construction plus the ones that are already (in space), do you see Telesat being able to offer enough capacity to the industries you serve into the foreseeable future?
DG: The issue is two-fold. One, you’ve got a significant number of customers here in Canada that are looking for incremental capacity from us for mostly two kinds of services, one is more video distribution. So I would say that’s ExpressVu and Star Choice. And the other big drivers are these broadband services because we’re getting very constrained from a capacity standpoint there.
So we filed very comprehensive applications in terms of technical proposal, commercial proposal and the like. The applications were universally supported by the user community. So you’ve got the exclusive support of ExpressVu, the exclusive support of Star Choice, the exclusive support of Barrett, and then just a whole host of other folks like the CBC and CTV and a lot of others to supporting our applications.
We’re out of capacity. The spectrum is a limited resource and Telesat has done a really good job in terms of efficiently using what we have to date. And again we’ve got the three new satellites that will be coming on stream. But then we’re at capacity. And if we’re going to meet customers’ expansion needs then we need Industry Canada to act favorably on our applications.
So that’s number one. The other giant challenge we have is that Telesat is growing by launching new satellites. So we’re growing organically. Telesat is also growing inorganically through this combination with the Skynet assets. And so when that deal is concluded we’ll be the fourth largest operator in the world. But we’re still, I would say, very meaningfully sub-scale relative to the three guys that are bigger than we are.
So we’ll have 11 satellites when the companies are combined. Intelsat has 55. SES has something like 40. Eutelsat has probably mid-20s. That means these businesses really benefit from economies of scale. The infrastructure that you need to operate 10 satellites is frankly not that different than the infrastructure you need to operate 40 or 50 satellites.
So it means that these guys are able to achieve margins that are superior to what we could achieve. They’re able to bring things to customers just by virtue of their larger scale that we are challenged to meet in the marketplace. You have meaningful advantages when you achieve meaningful scale.
GOB: So do you see yourself looking for additional acquisitions to get bigger?
DG: I see us being phenomenally focused at continuing to grow the company, both organically by launching the new satellites that we have under construction and by getting access to new orbital spots so that we can continue to grow our business organically. And then yes, we’re going to have accelerate some of that by looking at some incremental acquisitions to try to grow the company inorganically and try to cure our smaller posture so that we can be a more effective competitor to these much, much larger operators that are out there.
GOB: When do you expect a decision on the satellite slots? Is that this spring?
DG: Our expectation is this spring. Industry Canada hasn’t said anything definitive about that, but our hope is that they will be in a position to act on the applications in the spring.
GOB: Has satellite manufacturing – or the way in which the companies that actually do the building of the satellite gotten any quicker or different? The complaint among the DTH companies and the satellite operators has always been it’s such a long time from decision to build to getting the satellite in space. Has that accelerated any more or is there still concern as a CEO that you’ll be adding old technology when you finally do get it in orbit?
DG: The short answer is no, that situation really hasn’t changed any. It still takes, depending on how large of a satellite you’re launching, anywhere between two and three years to have the satellite in orbit. From a technology perspective, I don’t think there’s a real threat that you’re going to be launching obsolete technology largely because so much of the advancements from a technology perspective are advancements that take place on the ground. So, for instance, MPEG4 or new modulation schemes or whatnot – those are all things that happen on the ground. So a satellite can transmit MPEG2 as easily as it can transmit MPEG4.
GOB: That’s what I was getting at.
DG: It can handle QPSK as easily as it can handle 8 PSK or 16 QAM or whatever. So that’s not really concern. Everyone would like these turnaround times to be shorter, but these are expensive, very bespoke pieces of sophisticated hardware and you can only do so much in terms of accelerating the build. If there’s been any concern over the past 24 months it’s been on the launch side.
GOB: How so?
DG: The number of launch providers has been shrinking. There’s less and less launch capacity out there and that has meant two things. One, launch prices are significantly higher than they were just 12 months ago – and I mean significantly higher.
GOB: Like a factor of
DG: Like 30%-plus higher. Dramatically higher – even 50%. I’d say they’re 30 to 50% higher than they were just 12 to 18 months ago.
Also, the launch manifests are very, very full, and there was just a launch failure last week. And when you have a launch failure it means that there are big delays for everybody who is standing in the queue for that next launch… here then has to be a failure investigation. And that means that the next launch is delayed. And then you have a domino effect which means the next five launches are delayed.
GOB: How many launch pads are there in the world?
DG: Well for commercial satellites there are really about four or five launch providers that you can go to. Increasingly though two of those guys are focusing more and more on the government market and less and less on the commercial market. So this is something that we all have to keep an eye on.
GOB: I wanted to go back to capacity and ask you that as high definition develops and IP changes and MPEG4 develops, is satellite going to be able to serve all of this as we go forward?
DG: This is one of the challenges that we have – HD is here, and it’s growing. If you look at the Nimiq 5 agreement that we announced, so much of that is about ExpressVu’s HD strategy. They simply needed more capacity if they’re going to have the satellite platform that they need to transmit all the HD traffic that they want.
And my guess is Star Choice is in the same position. (Star Choice and ExpressVu) have come to Industry Canada, urged Industry Canada to grant us authority to make use of more frequencies, in many ways to meet their HD expansion requirements. So whether or not we’re going to be able to stay ahead of the game and satisfy their requirements for more capacity, that’s going to have everything to do with Industry Canada, on the applications that we’ve submitted.
GOB: Where do you see Telesat in five years from now?
DG: I believe that even five years from now it will continue to be the case that we will be deriving a very significant portion of our revenues from the Canadian marketplace. But with this combination with Loral, who’s satellites are serving everywhere else in the world really but North America, our revenues will become more diversified, which will be a good thing for us and a good thing for our customers. So I would say that over time a more meaningful portion of our revenues will be coming from outside of Canada, which is essential because there are significant growth opportunities here in Canada, like HD, like the broadband services.
But there are other markets in the world, particularly the developing markets, in Africa, markets in the Middle East, markets in Central Asia and Southeast Asia, that are also growing very, very quickly. Because those economies are growing more quickly and the state of their telecommunications infrastructure isn’t always as sophisticated and ubiquitous as it is here in Canada., there are good opportunities in those markets.
GOB: What about the business services aspect of Telesat, your business telecom side, do you see that as on a significant growth path as well?
DG: That’s a business of ours that has been growing very significantly. Over the past 18 months we have introduced into the market a hybrid service, so it is a combination of DSL/VSAT service, satellite-delivered service. and so we’ve gotten some very significant wins like General Motors. So Telesat has the contract for General Motors North America’s International Distance Learning network.
It’s a very sophisticated, very broad based network throughout North America that is being supported by Telesat. Here in Canada we’ve got Shopper’s Drug Mart, we have Canadian Tire, we have Esso, we have some of the lotteries. And this new hybrid service has really allowed us to offer those kinds of customers a hybrid network that really is tailored to their requirements.
So in densely populated areas, DSL is what we bring to them, but for their more remote points of presence yeah we’re providing that via satellite. That is seen to be something that has really been well-received in the marketplace. And we are going to be rolling out a lot of those networks throughout the course of this year.
GOB: Wal-Mart has one of the more sophisticated satellite networks in the world.
DG: Wal-Mart, postal services, lotteries, yeah they have very sophisticated, cutting edge, highly efficient from a bandwidth perspective satellite networks and people don’t even realize it. You go to a gas station, you swipe your card or you buy a lottery ticket, a huge number of those transactions are taking place over satellite.
