Managed Networks as a Business Model in Satellite Communications

 

Bruce Elbert

President, Application Technology Strategy, Inc.

(published in SatMagazine.com, March 2006)

 

Our traditional industry core is the satellite operator whose business model involves launching and operating satellites and selling their transponder capacity to the wide variety of video, voice and data users. Owing to this, there are enterprises on the ground that utilize this bandwidth as one ingredient of their process of providing a service to consumers, businesses and governments. This division was referred to by analysts at Bear Stearns as the space game and ground game, respectively. Players of the ground game usually employ teleports to aggregate customers and manage their networks in a reliable and cost-effective manner. To be successful at the ground game, you must provide services that are user-friendly and affordable, something that was first demonstrated by Equatorial Communications, a data broadcaster from the late 1980s that exploited a successful but short-lived market. Later in the 1990s, managed services proved they could grow and be sustained by digital DTH operators in the US, Europe and East Asia.

 

The present decade of the 21st century has opened up many possibilities for managed networks run by smaller operators who address special segments that are not well served by terrestrial operators. Technologies that allow various forms of content to be delivered to literally any size of audience and that permit efficient return of data over the same satellite are available at low prices. A satellite network can be assembled from standardized components and managed by a single entity through a teleport and even over the Internet. In the following paragraphs, I review the characteristics of managed networks using satellites and discuss what factors encourage success in the global marketplace.

 

What Is a Managed Network?

 

Fundamentally, a managed network provides a telecommunications capability for a particular class of user (business-to-business markets involving enterprises and government agencies, not consumers). Such customers care more about the services provided and not particularly that they are offered via a satellite system (in fact, they should not be able to recognize that a satellite was even involved). This has been referred to as technology agnosticism. The selection of the best target is critical to success. Information for the end users would be made available to common customer-premise (or even hand-held) devices: telephones, IP routers, PCs, video displays, sound systems and the like. Another typical requirement is that the remote user not require specific technical knowledge beyond what is comfortable. The terminal device could be installed and maintained by or for the user; however, any user-installed equipment should be simple to configure. The managed network solution should be affordable by the user, which means it should cost less than the best alternative.

 

Requirements and Guidelines

 

While meeting all of these demands will benefit business-to-business customers, they do not guarantee a commercial success in the market. Anyone who has worked at managed networks knows that it’s a never-ending battle to stay competitive and find those attractive anchor customers who make it work as a business. A managed network presupposes an investment of ground and space resources – someone must design the system and allocate capital assets that can deliver the required services. We have two issues here – precisely what assets should we include, and how can we be sure that there will be an adequate financial return to the “owners”? This is why a managed network is also a business model.

 

Getting our arms around the business model takes a lot of effort and experience. A million new ideas for Internet-based businesses were explored in the late 19902 and many were funded by venture capital firms. In addition to the preverbal “elevator pitch”, the VC expected a new Internet start-up to provide a business plan that addressed a set list of prerequisites. Here is a sample of operational requirements that could apply to a satellite-based business model:

 

  1. Anticipated customer requirements – rather than waiting for the RFP
  2. Satellite-based application platform – using the benefits of the technology to the fullest
  3. Technical staff – expertise in all critical aspects of the system and customer use
  4. Service management architecture – capable of configuring the network for new customers and able to maintain a satisfactory quality of service
  5. Inside and outside sales – reputable people who can find qualified customers and sign them up appropriately
  6. Customer support staff – immediate and effective response to calls for assistance
  7. Business controls – assure that proper bills are sent and money collected in a timely manner
  8. Relationships – partners who provide some of the important elements and services (above) without the corresponding direct investment

 

Mature markets in developed countries are attractive because the money is there; however, so is the competition. For this reason, many are exploring how managed networks can be applied to developing regions where there is unfilled demand. Getting the application platform to work correctly in such regions requires proper definition of the following:

 

  • The geography to be covered and the satellites capable of doing this
  • Appropriate placement of the hub in a place with good infrastructure (site, terrestrial network, human resources, and business environment)
  • Solving the regulatory problems, involving trans-border data and financial flows
  • Centralized control, response to customer requests (easy with respect to the hub, but potentially difficult for the remote user)

 

Business Model Example

 

I’d like to draw from past experience in order to examine a simple but effective managed network and its associated business model. Illustrated below is a one-way content distribution network for digital information using the Internet Protocol as the common denominator. The managed network to be provided would give a business-to-business customer the means to distribute files and streaming media on a point-to-multipoint basis. In this example, we consider the capital expense (CAPEX) and operating expense (OPEX) that determine the revenue requirement for a given rate of return. This is a classical analysis of the type common in the telecommunications business. We are not addressing the revenue “top line” of the income statement as this depends on the nature of the market and how the customers will pay.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Application Technology Strategy, Inc.

 

 

The following table is a simple spreadsheet model for this platform, identifying the major components at the hub and remote sites. What we are looking for is the equivalent monthly cost that must be covered before the network can operate at a profit. Capital expenses in the CAPEX column are converted to monthly equivalent costs by calculating their straight-line depreciation over a period of 60 months (5 years). While this correctly represents the consumption of capital, we have ignored other aspects of the annualized cost such as interest expense and taxes.


 


Source: Application Technology Strategy, Inc.

 

The values in this table indicate orders of magnitude and are not intended to represent a real network. It shows, for example, that CAPEX is dominated by hub and other brick and mortar facilities. The cost of the remote site, on the other hand, is quite nominal because it is for a small receive-only installation. Furthermore, the OPEX includes large monthly sums for transponder capacity (e.g., 36 MHz) and headquarters staffing. An interesting outcome of this simplified analysis is that the monthly per site values in last row are strongly a function of the number of sites. The total inclusive cost per site is nearly $1000 at 500 sites but drops by a factor of 100 to less than $10 at 50,000. This is because there is a large fixed cost (hub, bricks and mortar, staff and satellite transponder) that must be “amortized” over the number of user locations. Because this is a one-way model, I have ignored the cost of any return channel provided either terrestrially or over the satellite. This would add another element to monthly cost and must be evaluated in a similar manner (i.e., a fixed cost to be amortized along with the monthly cost of the added capacity).

 

Business models like this one are easy enough to put together and millions have no doubt been proposed. They become incredibly complex as analysts subdivide the elements into smaller and smaller constituents on many successive pages of an interlinked workbook. The problem with such models is that only the model maker really understands what is going on. A simple model like the one suggested above is often valuable for understanding what matters and where the risks reside.

 

Developing a Business

 

Managed networks now serve developing regions using hub facilities and staff in well established centers in North America, East Asia and Europe. As mentioned above, this has the potential advantage of accessing markets without existing competition and reducing financial exposure for the largest part of the investment – because we are placing a major part of investment (and staff) in a country friendly to the business. A key to success is having the right partners in the area being served; however, this is easier said than done. If you can do it, you will probably succeed (the obverse is true, as well). Therefore, spend as much time picking a country and partner as you do on technology and funding.

 

The business model is likewise a critical part of a managed network. As illustrated in the sample spreadsheet, the CAPEX can be compiled based on the architecture and technology elements. These can be estimated from the major companies that supply to the ground game of our industry. Likewise, quotations for satellite capacity can be obtained from the relevant satellite operators. If your business warrants, you can even get a huge bulk discount on capacity by purchasing your own satellite. OPEX, on the other hand, is usually harder to fathom because we won’t know everything that could possibly be needed to address the eight items previously listed. Therefore, it is best to err on the high side and then look to ways to refine the estimates.

 

Before you can predict your “bottom line”, it’s best to put all costs on a monthly basis. A start at this is done in the suggested model, but we also need to include other financial items such as interest expense, taxes, insurance, licenses, and other government-mandated items. Subtracting the total monthly cost from the estimated revenue provides the profit or earnings. Many start-ups in the Internet economy ignored this approach and instead focused on something called EBITDA - earnings before interest, taxes, depreciation and amortization. A conservative approach sticks with what I refer to as GOROI – good old return on investment. This is what future stockholders really are interested in.

 

Making Your Idea Happen

 

While most MBA programs teach how to compile a decent business model, one has to look very hard to find clear guidelines for managed networks. It’s been a matter of the entrepreneurial “gut” where business analysts were relegated to preparing financial statements after the fact. There are many uncertainties involved, but that is not a reasonable excuse to leave this to chance. Most of the key levers are rather easily determined by taking the time before beginning a rollout. It’s a little late to do this homework after sinking millions into the space and ground games.