Some rather bearish satellite telecom comments from this weekend's Barron's telecom roundtable. (In my judgment these guys aren't all that close to the satellite side of things; e.g., a supposed problem--- time to build a system--- is in reality a major barrier to entry advantage to the two incumbents who are close to launching service. I* and G*.) Anyway, yet another echo of the issue of pricing. To my mind, yet another reason to think that G* is the much better bet.
--------snip-------from Barrons:
Q: Okay, on to satellites, those expensive electronic birds that are parked
in the sky. Will this business be profitable?
Grubman: Annual global telecom revenues are about $800 billion. Less
than 10% of the world's population has a phone. Satellite providers hope
to serve the 90% that isn't served by a telecom infrastructure. These
ventures are a play on the lack of teledensity outside the 20 largest
markets in the world.
The biggest threat to satellites is this: By the time all their equipment is up
and running, global telecom settlement rates and bilateral agreements
between existing telecom markets largely will have broken down. I wonder
if economic models on which satellite business plans are based -- namely,
multiple dollars per minute of international calling to a lot of places -- will
be viable. I think their revenue expectations are unrealistically high,
looking out three or four years.
Castro: These enterprises are pricing their services for the elite, not the
masses, and there are too many satellites in the works. I'd like to see a
satellite venture that could provide broadband on demand. One privately
owned company, Teledesic, is talking about this. It could represent a great
opportunity.
Q: As opposed to what?
Castro: Offering voice connections only to places where there is no
telephone service. Some investors are participating in this field because
some very great visionaries have gone into this business. I'll buy a piece
of it only when I see it working properly, at prices that are affordable for
everyone. Currently, it's cheaper to install a cellular system anywhere in
the world than build and launch a satellite.
Grubman: Exactly. The problem I have with satellites is the lead time it
takes to put them up. There's a reason why no telephone infrastructure
exists in many parts of the world. The markets that these satellite guys
want to serve are markets where there isn't much to serve. And when
there becomes something to serve, chances are there will be a lower-cost
way of doing it. Chances are, if all of a sudden the Sahara Desert
becomes the epicenter of telecom transit, guess what? Lucent
Technologies and Ericsson and Siemens and others would be installing
infrastructure, and someone else would be paying for it.
Q: Is there enough data business for competing satellite systems?
Grubman: Fiber optics is a point-to-point business. Point to multi-point is
something that satellites always will do. You can network fiber together.
There will always be a need for high-capacity bandwidth capability through
satellites. I'm just not sure this justifies having multiple satellite systems.
Q: Let's sum up these potential threats to traditional telcos. First, you say
voice over IP telephony in the U.S. now exists only because providers of it
don't pay access fees to regional phone companies. This advantage could
disappear within 18 months.
Second, you say the business plans of satellite ventures are flawed. The
revenues they expect won't be available by the time they get all their birds
up in the sky.
Castro: Exactly.
Oscar A. Castro, a managing
director of Montgomery Asset
Management, who runs the
Montgomery Global
Communications fund, which is
up 42% this year.
Jack B. Grubman, a managing
director of Salomon Smith
Barney, who heads that firm's
global telecom team.
Richard Watt, a managing
director of BEA Associates, a
unit of Credit Suisse, who leads
global telecom coverage. |
