November 2008 Satellite Finance article and interview with Philip Father, ProtoStar’s President and CEO

November, 2008 –The International Telecom Union’s delivery of a telegram to all of its member nations indicating that the ProtoStar-1 satellite is operating over Asia within all applicable rules and regulations has either set a new precedent for how satellites must be launched and coordinated, or is simply the most diplomatic way of resolving a unique situation.

The operator ProtoStar’s neighbours were convinced that the satellite could not be launched. To them, the higher priorities of the orbital slot filings held by their respective sponsor administrations meant that the responsibility to coordinate the satellite fully was stacked on the shoulders of ProtoStar.

This month, ProtoStar hit back, claiming it had not received the full cooperation of its neighbours in its attempts to coordinate and that its neighbours were employing anticompetitive measures to block a new entrant to the Asian satellite market, despite the company’s repeated statements that it planned to fully follow ITU guidelines on the issues of signal interference.

Both parties have differing views of how ITU regulations are to be interpreted. The ace in ProtoStar’s hand is that ProtoStar- 1 was launched in July, and now sits at its orbital slot at 98.5E with much of its payload active.

In this context, with the ITU finding that ProtoStar-1 is not significantly interfering with its neighbours beyond the norms of satellite interaction, it would naturally have found it difficult to justify demanding action against a satellite that provides capacity to a hungry Indian market simply for the purposes of hierarchy.

The issue facing the ITU is whether this case sets a precedent that a satellite launch can take place without coordination occurring to the satisfaction of all parties.

One senior figure at the regulatory office of a major global satellite operators said that he believes that this is a unique case that, if it sets any precedent, is likely to mean that this situation will not arise again.

“The market will self-regulate, if I may run the risk of defending a discredited ideology,” he said. “After observing this situation, what kind of lender will not use this case as an example to do even greater due diligence on orbital placement than in the past? Furthermore, even beyond governments and regulators, if the customer’s needs are threatened, the operator will take whatever compromise steps are necessary to ensure the safety of their business.”

On this particular case, the source said that ProtoStar’s immediate engagement of Intersputnik and Belarus as its sponsor following its abandonment by Singapore in June showed that the ITU retained its legitimacy. “They didn’t go rogue, they wanted to stay within the national community,” he said. “At this point, ProtoStar is operating within ITU rules and their neighbours can’t show evidence of its satellite interfering with their own, then they don’t have a case. If and when they introduce new satellites to orbital slots that have greater priority filing and interference occurs, then ProtoStar will have to take steps to ensure the interference ends.”

ProtoStar looks beyond coordination quarrel

The satellite operator ProtoStar has been at the centre of a row with its neighbours over the coordination of its first satellite, ProtoStar-1, which was launched in July. The coordination issue is covered in depth along with the most recent reaction of the International Telecoms Union to the subject in the Asia operators section of this issue. In this Q&A, SatelliteFinance reporter Ronan Murphy focuses on how the coordination issue has affected ProtoStar’s business strategy, and how the company is proceeding with the launch of its second satellite next year, as well as looking into its partnership with the Philippines satellite operator Mabuhay.

Ronan Murphy: Would you be able to shed any more light on how ProtosStar-1 lost its orbital slot filing with the Singapore administration?

Philip Father: What happened is that the Singapore filing was due to expire on June 27. From a factual standpoint we were happily on track for our launch. We ran into three or four successive delays with the launch on the Ariane, obviously not catastrophic delays, but a number of minor ones that amount to a few weeks here, a few days there. That put us behind on the launch. We went to the Radio Regulations Bureau (RRB) in June prior to the launch and submitted what was necessary for an extension to the filing.

The types of decision to extend filings are typically taken at the World Radio Conference and the next one is in 2011. Out of the ITU and some of the bureaucratic bodies, while everybody’s well-intended, some of the methods just aren’t as crisp or clear as one might like – it can be interpreted different ways by different people.

In this case I believe that the decision provided the Infocomm Development Authority of Singapore (IDA) with a lack of clarity on its ability to move forward with priority in that filing.

I think at all times we’ve seen the ITU and the RRB act with the utmost integrity, but through no fault of their own some of the processes and procedures are a bit cumbersome.

The IDA and Singapore in its own wisdom and internal workings were negotiating trade agreements, there were bureaucrats back and forth negotiating different things between the two countries and I believe that at the end of the day, it became unclear to Singapore as to whether it should move forward or not given the uncertainty surrounding the situation and their relationship with China.

ProtoStar chose the right business path to move to a situation of greater certainty, working with the Russians and Intersputnik, whom we’ve had a relationship with and felt clear on the situation and how to move forward.

We came to the point where there was indecision and uncertainty based on a confluence of events, and ProtoStar chose to remove that uncertainty by going with an administration that had clarity in its mind on how to move forward. That doesn’t mean that anybody else in the decision process was wrong, it just means that there was a lack of clarity.

“While we’re disappointed in the outcome in Singapore, we’re appreciative of the relationship we have with Intersputnik".

How were you able to get a new filing with Interputnik at such short notice?

PF: Intersputnik had an attractive filing for that slot with date priority 2005. In addition, the filing covers all the spectrum and frequency that the ProtoStar-1 satellite has.

In conjunction, we had an ongoing relationship with Intersputnik. As ProtoStar, we’ve worked with them before on a few different initiatives. Several of our folk have worked with Intersputnik previously in their careers, so while they’re wearing a different hat now with ProtoStar, there’s still a longer working relationship based on some of our management team.

We think that they are a terrific business partner, it’s a quality shop and they’re very well run.

One of our anchor customers is PlanetSky of Cyprus and they have a very good working relationship with Intersputnik, they use some of their satellites and were helpful in building up our relationship. While we’re disappointed in the outcome in Singapore, we’re appreciative of the relationship we have with Intersputnik.

To what extent have these coordination wrangles affected the time period in which ProtoStar-1 has gone into service?

PF: We’re actually live today and we have customers on the satellite. The satellite is healthy and we’re actively servicing customers as we speak. We are of course doing that in a methodical way with Intersputnik and our sponsor administration.

We’re bringing up our capacity like any other satellite operator in crowded skies and we’re trying to avoid interference as much as possible.

The reality is that interference happens amongst satellite operators a lot.

You don’t phase that out or minimise until you’ve brought the satellite up and you’ve been working on it. If somebody’s out there crying wolf and saying “you’re interfering with me,” the informed audience knows that satellite operators interfere with each other on a continual basis.

We’re very thoughtful as to how we power up our capacity and that is being done within guidelines we’ve developed with our sponsoring administration and partner that are very consistent with ITU rules, regulations and guidelines.

From a business plan perspective we were hoping to go live in June or July. Because of the delays of the Ariane and the switch of administrations, we basically lost one quarter. Is that hugely consequential to a company that is in it for the long haul? Three months? I don’t think so, it’s a blip.

We are very happy with where we are because we had a terrific launch – these are the events that you worry about, where it could have been catastrophic for ProtoStar, if we had a failure or if the satellite was proven to not be healthy.

The satellite industry is not something like the software industry, no disrespect to it. You can’t have an alpha, a beta, – you have one shot at the satellite. The industry is big, lumpy, chunky, CAPEXintensive; it’s not going to be a smooth elegant process.

I think that’s why cooperation and focusing on the customers is necessary, that’s the glue that holds it together.

Is ProtoStar-1 capacity fully booked?

PF: Not yet. We like what we see on the supply and demand balance. We’re coming to the market at a good time. I’d like to take credit for being able to broadcast that, and it’s true, but I don’t want to be arrogant about it, you do need Lady Luck on your side.

The reason it’s not full is that we are being methodical with respect to our neighbours and the ITU process.

We want to minimise any interference that we might create as we bring our system online.

We had always targeted that we would take a graceful period to bring our satellite up to high utilisation rates, but we are generating revenue, we are healthy and we are working closely with our customers, we have happy customers.

I would hope that by the middle of 2009 we will have very high utilisation rates and that will be consistent with a methodical approach to bringing up our capacity.

In terms of the type of capacity that you’re still bringing up, is it with the C-Band that you’re trying to be more methodical? On the flipside of that, is the Ku-band fully utilised?

PF: The Ku-band is in the process of becoming fully utilised. You are correct when you say it is the C-band we are being more methodical on.

That is the area where we have to look at power levels, polarisation and proximity to other satellites. Where the uplink and downlink antennas are, that type of thing.

Our business model is not built around C-band, it’s built around Ku-band and Direct To Home, so we are more comfortable with taking a methodical approach to powering up the C-band. A, because it’s the right thing to do, B, because it’s the right thing to do! and C, we’re not selling the C-band in bulk because it’s not a DTH customer.

Our target market is not the cable head-end provider, it’s more the GSM cellular backhaul providers. In that context, they’re unlikely to buy in bulk, no more than one, two, three, four transponders at one time.

So if we have 28-30 C-band transponders we’re going to take longer to build up high utilisation rates, in comparison to Ku, where DTH operators buy in blocks of 10-14 transponders at once.

Regarding customers, can you define exactly the nature of your relationship with the Indian DTH provider DishTV?

PF: At the highest level, Agrani and Dish TV is synonymous with Zee Broadcasting, it’s a well run media conglomerate that’s the largest DTH provider in India. In the broadest context, Agrani/Dish TV was our first anchor customer on the satellite and as such has heritage as our premier anchor customer. We’re very happy with that relationship and fortunate to have them as a partner. With anchor customers, you give them special relationships.

Part of how Agrani/Dish TV works with us is related to any relations they have with ISRO, and it’s inappropriate for me to comment on that particular relationship. I can tell you that Agrani and Dish do not currently own shares in ProtoStar.

Can you summarise the attraction of India as a market for your business model?

PF: From a media perspective, India is tremendously effective. There are currently eight licensed or licence pending DTH operators in the country, the most competitive DTH market in the world by a long shot. The forecast is 50 million subscribers over time.

I’ve seen break-even estimates on a per operator basis go up over the last two years, but if that 50 million figure is true, which seems rational given the number of middle income houses in India and that ARPU is only US$5 per month per subscriber, you’re still looking at a market that could healthily support 4 to 5 DTH operators over time.

I see some pretty interesting faces in that market that are well capitalised. It’s an attractive business to be in and there are synergies for those operators based on their respective positions.

We believe we’re bringing in very attractive capacity to relieve the bottleneck over India. This brings us full circle back to coordination. We hope that as we do the right thing over the coordination process, the other satellite operators will do the right thing based on ITU guidelines and principles, and that our capacity will be allowed to move forward in the Indian market where there’s quite a bit of need for it.

Did you sell capacity at a lower price than the market norm on ProtoStar-1 in order to get it out to the customers?

PF: If you’re going to ask someone to commit as an anchor customer 24/25 months prior to launch then its like an office building – you’re going to get a better rate if you commit to leasing space before it has been built.

What is the current status of ProtoStar-2?

PF: We’re looking for a late Q1 09 launch. We’re very pleased that the Proton has been able to take off for a few back-to-back launches and we’re very confident in the manifest that we have. Right now we’re just in the process of clearing some important dates at Boeing on the manufacturing side and our program is holding together. It’s another program where we have a terrific anchoring customer in Indivision.

What is the situation with ProtoStar- 2’s orbital slot? Do you have one lined up, and will you be using Intersputnik and Belarus as your sponsor administration for this satellite?

PF: Right now, we have a couple of alternatives and we’re still in the process of managing that opportunity. Right now, consistent with our original plan, we’re working with Indivision and the Indonesian government as our baseline. I need to stay quiet on the opportunities we have available to us, but we are fortunate enough to have a couple of choices that meet Indivision’s criteria and our criteria.

And do you foresee the kind of coordination issues that have been
raised with ProtoStar-1 appearing again with ProtoStar-2?

PF: If I go down the checklist on what created this unique situation on ProtoStar-1, one was that we had a filing that was expiring, which wasn’t the case last year. We also don’t see the Singapore-China mix, so I don’t see it as a similar situation at all.

“It’s much easier for financiers to understand something that’s in their back yard".

Will you be looking at similar lease rates as on PS-1 or will you be
raising them in any way?

PF: I think they’ll be based on market dynamics. We have some similar geographic coverage but we’re covering different target markets. With PS-2 we can put some Ku-band capacity into the Philippines and Taiwan. The other important thing to note is that PS-2 is all DTH, there’s no C-band at all. I would expect on an average per transponder basis you’re going to see higher lease rates than PS-1 because Ku-band commands higher lease rates. We’re happy with where we are; we’re seeing good lease rates but not astronomical ones. We want to help our customers get their business started and maybe, once the DTH operators get more healthy, break even and become profitable, there will be an opportunity to raise the lease rates, because they will have the ability to pay.

You managed to raise US$245m in debt financing for ProtoStar-2 earlier this year. How difficult was it to do with the credit markets in the state they were in then, and would it be possible to do such a deal now?

PF: No, it’s not possible to do today. The credit markets have effectively shut down. From what I hear talking to the bankers, I don’t think you’re going to see any movement whatsoever until the second quarter of 09. I’m not even saying deals will get done in Q2 09, I mean maybe the bankers will entertain a call or a roadshow. People are going to be focused on getting the liquidity back in their portfolio.

That doesn’t mean that there aren’t corporate finance opportunities. A strategic partner who has access to capital and wants to put it to use in a complimentary way; that could be available to a satellite operator. There’s access to money, but not from the traditional capital markets.

How did we pull together the financing in March? It was a lot of hard work, and we had some good bankers involved with the Credit Suisse guys. Again, it’s a question of cooperation, and working through issues, structuring challenges, understanding the other guy’s needs and wants as well as your own.

It’s being creative and flexible in a dynamic environment and creating a trust equation and working with credible people that allowed us to pull that together.

I also think it’s a testament to our business model. ProtoStar’s not doing anything exotic.

We’re pretty open-book. We’re trying to develop customer orders for satellites doing what satellites do best, point-topoint television.

One difference with the PS-2 financing was that a good percentage came from Asian sources.

It’s much easier for financiers to understand something that’s in their back yard. People don’t struggle with this type of business model as they do with some others.

What is the status of ProtoStar’s debt?

PF: Our leverage is within the typical debt to equity parameters that the market would finance.

I’d like to keep the numbers confidential, but we’ve got a healthy dose of equity in the company and that’s what the debt guys looked to when they financed us earlier this year. It was solid enough for them to pull the trigger back in March, and we have equity players that are strong and committed to the business.

If you’re asking if the debt crisis has introduced any risk to us because we’re over-levered, then the answer is no.

Given your comments on the credit markets, can we assume that ProtoStar is not looking for any financing on a major scale in the near future?

PF: That is true in the following context, that we are now focused on implementation rather than project financing.

We’re always looking for new opportunities; we’ve got a couple in the funnel that we’re looking at. We may be able to finance these through strategic sources or we may structure so that we postpone certain programs and use our balance sheet more, or I can cite the recent Mabuhay-PLDT transaction that we consummated. There’s the ability to build your satellite fleet through cooperation.

Can we take as read then, that ProtoStar has no plans to launch a brand new satellite in the next two years? Is the Agila 2 satellite that ProtoStar now holds transponders on a means of offering capacity in a time where credit is hard to come by and this kind of partnership is the best way to gain access to an extra satellite without going through a full procurement procedure?

PF: I think that building an entire new satellite and getting an anchor customer is very expensive, particularly in light of how high current launch prices are.

It becomes harder to provide capacity to India at affordable rates. The rates we would have to charge under the conventional business model for a third satellite would not be affordable for Asia, so you have to look at creative sources like Mabuhay/PLDT.

"A business acquisition or a merger can be a more effective use of capital".

Are any of the partnership possibilities you have lined up similar to the Mabuhay/PLDT deal?

PF: It depends on the partner. We do have opportunities, but what’s equally important to us is implementation. We have to take a balanced approach to growth versus implementation. We need to not overcompensate on one to the detriment of the other and we don’t want to get ahead of ourselves.

"A business acquisition or merger can be a more effective use of capital"

So far, ProtoStar has used creative strategies such as buying refurbished satellites or making partnerships in order to get its fleet in the air. At what stage can you see yourselves having the desire or the capability to buy and launch a satellite from scratch?

PF: If you look at us, luck and implementation willing, we’re going to be three satellites strong by the middle of next year. We will have control of three operational satellites within the space of ten months, and I think that is enough to be focusing on for the moment.

What kind of revenue and EBIT is ProtoStar hoping to take in this year?

PF: When you look at ProtoStar, we’re still bringing up capacity and not really looking at things on a quarterly basis at this point in time, but we are expecting healthy revenue.

Given the current transitory state of the business, would it be more advisable to ask what projections ProtoStar has for next year, when PS-1 has had a full year of operations?

PF: We have projections, but we’re in the middle of redoing them as we speak in order to reflect the synergies and benefits of the Mabuhay situation so it’s not a guess I’d like to make at this point in time. I’ll have a clearer picture by the end of the year.