Can former IGOs reach commercial speed? Shorn of privileges and making their unaided way in the commercial world, Eutelsat, Inmarsat and Intelsat are feeling the weight of their inherited inefficiencies

Interavia Business & Technology, May, 2002 by Brendan Gallagher

They call it the "Surfboard"--the superbly crafted oval conference table stretching the length of what used to be known as the Council Chamber at Inmarsat's London headquarters. It was installed at a cost of tens of thousands of dollars in the mid-1990s when the company, then still an intergovernmental organisation (IGO), moved from rented offices to the expensively refitted marble halls that it still occupies.

If ever a symbol of the strengths and weaknesses of the former IGOs was needed, the Surfboard is it. With either governments or privatised monopoly operators ultimately picking up the tab, finance was never a worry. But the price was a ponderous system of governance that inflated costs, slowed decision-making and stifled management initiative. The recent privatisation of the IGOs means they are now halfway out of the golden handcuffs, but can they complete their escape in time to survive in a dynamic and dangerous marketplace?

For years after their creation, Intelsat (founded 1964), Eutelsat (1977) and Inmarsat (1979) dominated commercial satellite communications. Intelsat set the pattern. Formed around the USA's existing Comsat, it was a co-operative effort by 14 governments to use satellites to provide global long-distance phone and television links. It was owned by state telecoms operators whose investment parallelled their system usage, and its charter emphasised public service ahead of profit.

Eutelsat and Inmarsat followed suit, with the latter ingeniously combining existing satellite assets from Europe and the USA to form its first-generation constellation and avoid the high cost of developing new spacecraft from scratch. Backed by government funding and guarantees, all three organisations enjoyed the luxury of a gradual, comparatively cheap entry into operation --something denied to more recent global satellite aspirants like Iridium and Globalstar, which raced against the debt clock and lost.

All three thought of themselves as quasi-commercial operations, with a duty to deliver a return on investment to their owner-customers. But, cushioned by tax breaks and an initial monopoly in their respective markets, they were in fact far less concentrated on the bottom line than any ordinary company. Instead, driven by the often conflicting requirements of their owners, they put most of their energies into technical excellence in the form of very robust systems with plenty of margin and redundancy. They ran the networks while their owners handled distribution, and had little in the way of customer focus as a conventional business would understand it.

Pedestrian decision-making

This formula worked well enough for upwards of 20 years ... but the world was changing. In the face of mounting competition from regional new entrants, the IGOs' privileges and immunities proved less and less able to make up for their pedestrian decision-making. The satellite communications industry matured, making the risks more readily quantifiable by commercial lenders and investors and reducing the need for government guarantee. As trade barriers became increasingly a thing of the past, intergovernmental co-operation was no longer needed to oil the wheels. With most of the available spectrum and desirable orbital slots allocated, the need for IGO clout at the bodies like the ITU diminished. And the owner organisations themselves were going private and coming under pressure to improve returns to shareholders.

The result was a rapid succession of privatisations. Inmarsat was the first, emerging as a private limited company in 1999. Intelsat and Eutelsat became limited-liability companies more or less simultaneously last July. In one bound they were free. But so too were their owners, no longer under a collective obligation to invest in capital projects. Instead, the companies are all looking to initial public share offerings (IPOs) as a way of financing strategic development and broadening their ownership structure.

Intelsat and Eutelsat are due to go to the markets this year, while Inmarsat is pondering a new date for its postponed offering. When the prospectuses start landing on desks in Frankfurt, New York and the City, what bait will they dangle under investor noses?

Substantial assets, but ...

Investors would be buying into businesses with some assets that are very substantial and--as the mid-1990s wave of would-be new mobile satellite operators found to their cost--very difficult and costly to duplicate from scratch.

Their technical infrastructure is in place, well proven and with plenty of evolutionary development impetus behind it. Crucially, and almost uniquely in this era of debt-burdened telecoms operators, they have until recently borrowed little, though this is now changing as each company lines up debt facilities to pay for future capital programmes.

They can count on the long-term business of PTTs, international corporations and other blue-chip customers in the form of multi-year leases.

They have long since secured most of the regulatory clearances needed to underpin their service offerings: spectrum, national operating licences, numbering plans, standardisation with customer organisations such as ICAO and the International Maritime Organisation, user-equipment type approvals, customs agreements, and so on. And their engineers are top-class, with a careful, conservative approach to infrastructure and a track record of specifying and operating satellites that is second to none in the industry.