Managed Networks as a
Business Model in Satellite Communications
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
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:
- Anticipated customer requirements – rather than waiting
for the RFP
- Satellite-based application platform – using the benefits
of the technology to the fullest
- Technical staff – expertise in all critical aspects of
the system and customer use
- Service management architecture – capable of
configuring the network for new customers and able to maintain a
satisfactory quality of service
- Inside and outside sales – reputable people
who can find qualified customers and sign them up appropriately
- Customer support staff – immediate and
effective response to calls for assistance
- Business controls – assure that proper bills are sent and
money collected in a timely manner
- 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
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.
