Filed by HEC Holdings, Inc.
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
and EchoStar Communications Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 333-84472
The following is a transcript of the Question & Answer session of the Internet
webcast hosted on July 31, 2002 by Hughes Network Systems, Inc., a subsidiary of
Hughes Electronics Corporation ("Hughes"). A replay of the webcast, including
the Question & Answer session, is being made available on Hughes' website
beginning August 5, 2002. A copy of the presentation made in connection with the
webcast was made available on Hughes' website beginning July 31, 2002 and was
filed on Form 425 on such date. Certain text contained within the transcript
has been bracketed because it was inaudible:
In connection with the proposed transactions, General Motors Corporation ("GM"),
HEC Holdings, Inc. ("Hughes Holdings") and EchoStar Communications Corporation
("EchoStar") have filed amended preliminary materials with the Securities and
Exchange Commission ("SEC"), including a Registration Statement of Hughes
Holdings on Form S-4 that contains a consent solicitation statement/information
statement/prospectus. These materials are not yet final and will be further
amended. Holders of GM $1-2/3 and GM Class H common stock are urged to read the
definitive versions of these materials, as well as any other relevant documents
filed or that will be filed with the SEC, as they become available, because
these documents contain or will contain important information. The preliminary
materials, the definitive versions of these materials and other relevant
materials (when they become available), and any other documents filed by GM,
Hughes Electronics Corporation ("Hughes"), Hughes Holdings or EchoStar with the
SEC may be obtained for free at the SEC's website, www.sec.gov, and GM
stockholders will receive information at an appropriate time on how to obtain
transaction-related documents for free from GM.
GM and its directors and executive officers, Hughes and certain of its officers,
and EchoStar and certain of its executive officers may be deemed to be
participants in GM's solicitation of consents from the holders of GM $1-2/3
common stock and GM Class H common stock in connection with the proposed
transactions. Information regarding the participants and their interests in the
solicitation was filed pursuant to Rule 425 with the SEC by EchoStar on November
1, 2001 and by each of GM and Hughes on November 16, 2001. Investors may obtain
additional information regarding the interests of the participants by reading
the amended preliminary consent solicitation statement/information
statement/prospectus filed with the SEC and the definitive consent solicitation
statement/information statement/prospectus when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
EchoStar, Hughes, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes, Hughes Holdings or GM
include, but are not limited to, the following: (1) the businesses of EchoStar
and Hughes may not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected benefits and
synergies from the combination may not be realized within the expected time
frame or at all; (3) revenues following the transaction may be lower than
expected; (4) operating costs, customer loss and business disruption including,
without limitation, difficulties in maintaining relationships with employees,
customers, clients or suppliers, may be greater than expected following the
transaction; (5) generating the incremental growth in the subscriber base of the
combined company may be more costly or difficult than expected; (6) the
regulatory approvals required for the transaction may not be obtained on the
terms expected or on the anticipated schedule; (7) the effects of legislative
and regulatory changes; (8) an inability to obtain certain retransmission
consents; (9) an inability to retain necessary authorizations from the FCC; (10)
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; (11) the introduction of new
technologies and competitors into the subscription television business; (12)
changes in labor, programming, equipment and capital costs; (13) future
acquisitions, strategic partnership and divestitures; (14) general business and
economic conditions; and (15) other risks described from time to time in
periodic reports filed by EchoStar, Hughes or GM with the Securities and
Exchange Commission. You are urged to consider statements that include the words
"may," "will," "would," "could," "should," "believes," "estimates," "projects,"
"potential," "expects," "plans," "anticipates," "intends," "continues,"
"forecast," "designed," "goal," or the negative of those words or other
comparable words to be uncertain and forward-looking. This cautionary statement
applies to all forward-looking statements included in this document.
****
HUGHES Electronics [GMH] - SPACEWAY Enterprise Business Plan Briefing
Wednesday, July 31, 2002 4:30 PM ET
JON RUBIN: Okay, thanks, everyone. I'm Jon Rubin, Vice President of Investor
Relations for HUGHES, and I'd like to welcome everyone to our briefing of the
SPACEWAY Enterprise Business Plan presented by Hughes Network Systems.
First, I'd like to introduce the folks that are here to make the presentation
from HNS and to answer your questions: Pradman Kaul, Chairman and CEO of HNS;
Mike Cook, Senior Vice President, General Manager of SPACEWAY; Paul Gaske,
Executive Vice President of North America Division; and George Montague, Vice
President of Finance for HNS.
We have a lot to talk about tonight, so we're going to try to keep this as
informal as possible, meaning that we would encourage you to ask questions
throughout the presentation. It's a rather long presentation. We have a lot to
talk - a lot of good things to talk about, so feel free to interrupt us during
the presentation and ask your questions.
For those listening via the webcast, just so you'll understand the logistics, we
are making this presentation in New York City to the sell-side analysts who
cover HUGHES. If you'd like to follow along and view the slides, you can do so
on the computer, but we ask that you - you're going to have to manually advance
the slides on your computer to stay with us. And I'm going to ask the speakers,
when you change slides, actually, to just try to remember to mention "next
slide," so the folks on the webcast will be able to follow along.
I'd just like to remind everyone that this presentation really is only about the
HNS Enterprise business. And, as such, we really ask that you keep all your
questions centered around this topic. So we will not be taking any questions
tonight on the merger with HUGHES and EchoStar or what this business plan may
look like after the merger or what the consumer broadband business plan may look
like. This is really focused on SPACEWAY enterprise, so please respect that and
keep the questions focused around that topic.
With that, I'd like to introduce Pradman Kaul.
Oh, one other thing is when you have a question, for the folks on the webcast so
that they can hear the question, we'd like to get you a microphone before you
ask the question, so --
PRADMAN KAUL: Good afternoon. Thank you very much for joining us here today. My
colleagues and I here today are going to present to you the business plan and
the aspirations we have for SPACEWAY in the enterprise business in North
America. But before we get going, I think I have to put up some of the slides.
Do you want us to read these?
UNIDENTIFIED SPEAKER: No, actually, those are forthcoming. They're the
guidelines [indiscernible].
PRADMAN KAUL: You don't want me to read all this?
UNIDENTIFIED SPEAKER: No, no, no. It's just -
PRADMAN KAUL: We've got two pages of these guys, so I'll let you scan through
it. It's also in the hard copy that we're giving you, folks. But when you're in
the middle of a merger, there are all kinds of lawyers involved that give us
guidelines in what we can say and not say. So that's all - yeah, I was going to
do it right after we do the guidelines because the video might be covered by
that.
Okay, now before we actually also get started on the presentation, we have a
30-second video that we would like to show you about SPACEWAY, and then I'll get
started.
[Video playing]
PRADMAN KAUL: Okay, so we've broken up today's presentation into six sections.
We'll give you an overview of our enterprise business today and how it evolved
into SPACEWAY; we'll then talk about the needs of our customers in the
enterprise sector; describe the SPACEWAY system and the market opportunity that
we are pursuing with SPACEWAY; and then we come to the financial part of the
presentation, the business plan; and finally end with a summary.
So, first, with an overview; I don't think I need to spend more than 10 seconds
on this. This is the HUGHES structure, Hughes Network Systems being one of the
four companies that's under the overall HUGHES Electronics umbrella.
There's a lot of confusion between DIRECWAY and SPACEWAY, and I thought I'll
take a couple of minutes in the beginning to sort of clarify when we use these
terms what we mean by them. DIRECWAY is our brand that we are using for end-user
services. We're using it today in the Ku-band world, and we'll continue to use
it in the SPACEWAY Ka-band world. It basically offers services that are turnkey,
and they're offered not only in the United States but globally for both
enterprises and consumers. It includes the manufacturer's sale and installation
and maintenance of equipment, the hub services, and the space segment necessary
to provide the services.
So when we say DIRECWAY, we're basically talking about the end-to-end service
that we offer both our enterprise and our consumer customers. Today, we're going
to talk primarily about the enterprise.
By SPACEWAY, we're talking about our next-generation satellite platform. It
includes the operations of the satellite, the owner and the operator of the
three satellites that we intend to launch to cover the United States, and the
provider of space segment to our DIRECWAY services and other people who might
want to use the space segment.
Now, when we present the numbers today and when we present the business today,
we're looking at the consolidated HNS North American enterprise SPACEWAY
business. So just think of the DIRECTV model, and it's going to be a change in
how we present our business. When the DIRECTV folks present their business case
to you, they don't break out the space segment separately from the total
end-to-end service that they're offering. The satellite that's being used to
offer DIRECTV services is an integral part of that service offering, just like
the terminal is or the content is or the programming is, etcetera. We are going
to present this business in that same way. The SPACEWAY satellite is just going
2
to be one element of this end-to-end service that we're going to be offering the
large, medium and SOHO enterprises in the United States. Our presentation today
and our business plan today also, as Jon mentioned earlier, will not include the
consumer DIRECWAY service. Okay?
Why are we so excited? Next slide. Sorry for the folks who are on the webcast.
Jon was just looking at me. This slide talks about the evolution of two-way
satellite communications. The reason we have been so excited about SPACEWAY is
that we believe that if you take the history of satellite communications from
the time it started, there have been two major discontinuities in the whole
business. One was obviously when the business started in 1964 and we had these
C-band satellites which we used for trunking applications. The satellites were
primarily owned by large carriers, like RCA, Western Union, British Telecom,
etcetera, Intelsat, and they were all C-band bent-pipe satellites, and the
antennas were very large 10 to 30 meter antennas.
Somewhere in the first half of the `83/'84 timeframe, the FCC authorized the use
of Ku-band, and we really started a whole new series of applications and a whole
new set of businesses utilizing the Ku-band world. We started the VSAT industry,
enterprise networks. Enterprises became the customers instead of carriers. The
applications were primarily star networks. The size of the dishes came down very
quickly to 1.8 meters, and now are at about a meter. Uplinks were at 256
kilobits today, and the downlinks are at about 45 megabits.
Companies that were in the business, like Intelsat, Eutelsat, Astra, quickly
moved from the C-band world to the Ku-band world. Instead of selling one earth
station at a time, we started selling thousands of earth stations at a time to a
customer. And we were able to spawn a whole new generation of technologies and
businesses. And we've basically been in that business for the last 20 years,
from 1984 to today. We've improved the technology. We've reduced the size of the
dishes a little bit. We've increased the speed. We've driven the costs down. But
fundamentally, we've been operating in that domain in the data communications
world.
Well, I think with SPACEWAY, we're ready to make the third major jump in this
whole industry. With SPACEWAY, we'll now go to mesh networks instead of star
networks. We'll have peer-to-peer applications. We'll still serve the
enterprises, the large and medium and probably a significant number of new small
SOHO enterprises. We'll serve telecommuters, people who are working from their
home. The antennas will typically be .7 meter in size. The uplinks now - we've
sort of been limited to 128 or 256 kilobits, like they have for the last 15 or
20 years, will increase suddenly from 512 kilobits to as much as 100 megabits.
The downlink, instead of being limited to 512 kilobits as it was for a long
period of this last 20 years with the 45 megabits it is today, will go up by an
order of magnitude to 440 megabits. And for the first time, we'll be flying a
satellite with on-board processing with a "switch in the sky."
Significant changes, and I think we'll spawn a significant change in the
business that we are in and will also spawn a significantly different way of
looking at the business. And today, as we go through the presentation, I think
you will see why each of these items that I have on this chart represent a
totally different way and a different business than what we have today.
Now from the HNS perspective, a lot of people have asked us, "You know, all of
your competitors in this Ka-band arena are falling by the wayside. Why are you
going to succeed? Why are you still staying in the business where everybody else
has left the business? I think the answers are fairly straightforward.
What are the core strengths of HNS? One clearly is the technology. We invented
the first VSAT in 1983, and we've continued to lead the way as the chart shows
in different generations of VSAT technology. About seven or eight years ago, we
also started going into the consumer electronics business and manufacturing
3
DIRECTV set-top box receivers. And as you can see, in 2002, today, we have
shipped nine million DIRECTV set-top boxes. Why is that important? Well,
clearly, what it says is we have the technology, the know-how, the manufacturing
expertise, the support expertise to basically build very inexpensive electronics
for satellite communications. We have the expertise to distribute it, we have
the expertise to support it, maintain it, and install them.
The second major reason why we think we'll succeed in the business and why the
management at HUGHES and General Motors have supported this very large
investment is that we are in the business and we are successful in the business.
We've always been the market leaders, and today, we have a formidable list of
customers already in the United States that we hope will transition in a
significant way to SPACEWAY. I think we have about 200,000 - approximately
200,000 enterprise VSATs in operation in North America today from a whole list
of companies in these different verticals that you see on this chart. In the
automotive world, Ford, General Motors, Chrysler, Toyota, Lexus - all the
dealerships have an HNS VSAT.
In the energy industry, we have almost 50,000 VSATs - Texaco, BP, Exxon,
Chevron, Shell, Amoco, Hess, you name them.
In the hospitality area, we're beginning to grow much more in that area than we
had in the past, and over the last few years have won some significant accounts,
and we see that as a major growth area.
Retail - that's where we started in the VSATs with our first contract with
Wal-Mart, who continues to be a customer of ours today, and a whole other series
of retail chains that we serve. And then many others in the services side.
But something new that's been happening over the last year or two is we've also
been developing an indirect channel sales organization, and we have a pretty
impressive list of resellers today that have begun to resell our VSAT services,
our DIRECWAY services, and we expect that'll continue in the SPACEWAY world when
we move to the Ka arena. And then we are developing a set of specialist sales
channels for the government, for carriers, and for live systems.
In addition to all of this, we have over 8,000 installers and maintenance
technicians across the United States who are trained on our products, who are
available to go to the next generation of DIRECWAY, on when we go to SPACEWAY.
And so the bottom line in all of this, I think, that we're trying to tell you is
we don't have to develop new distribution channels. We don't have to develop
significant new customer penetration. We don't have to develop - we don't have
to start on the technology front from the bottom. We are totally self-contained
and can do the whole job, and that's what helped build up confidence in our
minds and helped build up confidence in the minds of our owners to make the
investment in SPACEWAY. Next slide.
So if you look at today, we are the global market leader in broadband satellite
services. We have a 55-percent share of the VSAT market, according to COMSYS;
that's reasonably accurate. Between our global installations, we have over
500,000 terminals now ordered or installed, and our revenues in 2002 for
enterprise worldwide will exceed $600 million. So we are a player in the
business, and these are real numbers.
In the last five years, the growth that we've achieved has really been fueled by
our technology advances. And what these technology advances have done are two
things. One, by reducing the prices, they've allowed us to address larger
markets. And by providing new applications, we've been able to broaden the
markets that we've been addressing. However, today, I think it's fair to say we
4
feel we've reached the performance limits of the current platform. We just can't
squeeze out more than 45 to 60 megabits out of a Ku-band transponder. Because of
FCC regulatory constraints and the economic realities, we cannot uplink more
than 256 kilobits from a small dish - from a small VSAT. These are real
constraints, and these constraints make our competitive position with the
terrestrial alternative that customers are beginning to see today, become a real
limiting factor.
So it was very clear to us when we started building the SPACEWAY satellite that
if we were to continue to grow this business and take it to the next level, we
needed one obviously significant additional capacity, which cannot be provided
in Ku-band today, but also capacity which supported higher speed at lower costs
and significantly higher speed and a significantly lower cost, both on the
uplink and the downlink. And we feel the answer is the SPACEWAY platform. Next
slide.
So what is the market opportunity we're going after? Today, when we sell a
network to an enterprise or a large corporation, it's primarily a private branch
network. For example, for General Motors, we've connected their host computers
in Detroit to the 9,000 dealers they have. For a Chevron, we connect the
facility in San Ramone, the host computer in San Ramone, to all their Chevron
gas stations. These are private networks for these large corporations.
But I think with SPACEWAY what we expect to do is significantly expand the
addressable markets, allowing HNS to compete with the carrier - with the
terrestrial carriers for the private line and frame relay services to all large
enterprises. We think we can compete very well in the IP virtual private network
services for large and medium enterprises. We'll be able to provide broadband
services to the small, medium and [SOHO] sectors and to teleworkers and other
extranet applications.
We're going to - Mike Cook is going to take you into a little more detail
through this, but the bottom line in all of that is that the market that we're
addressing today with today's Ku-band platforms, we estimate to be about $3.5
billion. In 2004, when we have SPACEWAY in service, we expect that market to
increase by an order of magnitude -- that is the addressable market - to $38
billion. And in some subsequent slides, we'll take you through why we believe
those numbers are reasonable. Next slide.
And we'll do all this and I think generate superior financial returns. In the
last section of this, we'll take you through some detailed financials, but we
expect to increase our HNS enterprise revenues by a factor of almost three in
five years because it's a larger market, we get increased - we'll be able to
satisfy increased customer throughput requirements and offer new value-added
services. And not only will we increase the revenue by a factor of three, but we
expect to increase our EBITDA margins by a factor of four in five years.
Many of you will ask, and we'll go through some of the explanations, as to why
do we - how do we achieve that kind of magic.
But, clearly, one of the major reasons is for the first time, HNS will own its
own satellite platform, and that means we will derive the space segment profits
that in today's Ku-band world our business does not show because we buy the
space segment from the FSS operators.
Secondly, we'll have significantly increased leverage on fixed costs because as
we expand the business, the fixed costs are clearly all paid for and the
incremental gross margin flows to the bottom line. And we expect to add some
significant value-added services. Our steady, state cash flow, in fact, could
repay the SPACEWAY investment every three years once we get into the steady,
state mode. Next slide.
5
With this, I'd like to ask Mike Cook to now go over the next three sections,
starting with what are the needs of our enterprise customer.
MIKE COOK: Thank you, Pradman, and good afternoon, everybody. So for those on
the webcast, we're currently on page 14, and I'm about to move to page 15.
In order to understand the markets and the business case for SPACEWAY, it's
important to be able to understand the market that we are dealing in and the
things that are driving the needs of our customers. So we want to talk to you
about how enterprises communicate today, and we're talking here about large
corporations, and we're talking here about small- to medium-sized corporations.
One primary way, perhaps the original way in which enterprises communicated
between its own branches, was the use of dedicated private circuits. The benefit
of that to the enterprise is that they know the amount of bandwidth they have,
it's available to them the whole time, but the down side is it's a fixed amount
of bandwidth, so if they have peak utilization, they're constrained by the
amount of bandwidth they have, and they have to pay for that bandwidth whether
or not they're using it. So there is an economic trade of dedicated, committed
guaranteed bandwidth versus the cost of doing that.
As a result of that, enterprises began to use other means of communicating, and
they moved to packet-oriented technologies, and more, particularly, they moved
to the use of managed bandwidth, where the service provider basically puts in an
infrastructure, shares that bandwidth between many customers, and passes some of
that economic benefit back to the end-user. And typically today, the most
successful of those managed bandwidth systems are frame relay, which is the
largest part of this market, and the IP virtual private network market, which is
something which is emerging. And that is emerging as a result of the Internet.
Service providers are leveraging the Internet backbone infrastructure that they
have put in and are offering now enterprises the opportunity to share that
bandwidth. The down side of the managed networks are that none of these service
providers actually control the whole of the network infrastructure that they're
using. So it becomes more difficult for them to offer end-to-end quality of
service guarantees and, to some extent, these service providers are dependent on
others for the economic basis of the service which they offer.
So the next slide covers another aspect of what's going on in the market, and
that is that enterprises have been, in the past, very centralized in terms of
their data communication needs, very headquarter-centric, and that suited the
architecture that we had with our hubbed Ku-band communication systems. And what
we've seen is a major trend to diversification in the network, where what is
going on in the Intranet of the enterprise at branch level is as important as
what's going on at headquarters, and the need for branches to communicate with
themselves, for branches to communicate with the regional offices, and even more
important, for branches to communicate with customers and suppliers and people
outside the corporate network. So the trend has moved toward a much more
distributed data networking architecture.
On slide 17, we're also looking at the drive that there has been for enterprises
to have more bandwidth, to require more bandwidth, and we can measure that by
looking at some of the market statistics. So if we take the chart here on the
bottom right-hand side, this is derived from 18 - information coming from 18,000
enterprises of 500 employees and above. And you'll see that in 1999, about 63
percent of those enterprises were using high-speed dedicated lines. The green
bars on here represent the dedicated bandwidth, the private lines. And here
we're measuring T1, which is 1.5 megabit-per-second private lines and fractional
T1 circuits. And you'll see that the trend has been to move from 63 percent
6
requirement or usage of those types of lines to in 2002 somewhere over 90
percent - 95 percent of all of these large enterprises using dedicated
bandwidth.
The blue chart on here - or the blue lines on here represent frame relay
penetration in these large enterprises, moving from 42-percent penetration in
'99 to something like 70-percent penetration in 2002. You can see - well, in
fact, these numbers add up to more than 100 percent, that many enterprises use
both private lines and managed bandwidth in a mix to fulfill their data
communication requirements. So that's an indication that bandwidth requirements
are increasing. Another indication is that if you look at the statistics on
frame relay and look at the port speed that customers require, back in '99, we
were talking pretty much about 64 kilobit access speeds for frame relay
networks. Well, today, pretty much half of all of the frame relay networks are
requiring access speeds in excess of 64 kilobits per second, and that trend is
expected to continue, and, indeed, there is a migration upwards in the access
speeds that people are using.
As Pradman had said, we have a limitation today with our Ku-band platform that
we are really cost effective in the 64- to 128-kilobit-per-second access speed
range. As we drive above that, we pretty much hit a hard limit of 256, where we
simply cannot put in a competitive network. And we, therefore, need to have a
technology which allows us to continue to compete with the frame relay - in the
frame relay marketplace.
On slide 18, we're also addressing the availability of the capacity that we
currently use. All of our data communication systems today are using Ku-band,
FSS - fixed satellite service - capacity, and there is a problem for us in this
space. It is very difficult for us to secure adequate bandwidth in and develop
services in one orbital position. Today, as this chart shows, the blue bars or
blue satellites are all existing in orbit-launched payloads, and there, frankly,
are no more available Ku-band slots for the deployment of new FSS Ku satellites.
There are some additional satellites that are being launched, which are the pink
satellites on this chart, and those are fundamentally for replacement of the
existing-in-orbit satellites. So it's a very little new capacity that is being
launched.
To put SPACEWAY in perspective, we today have three satellites under
construction. One of those is scheduled to be an in-orbit spare, for the three
SPACEWAY satellites will provide more capacity than the whole of the existing
Ku-band-in-orbit fleet. That fleet today represents about 600 transponders,
about 24 gigabits per second of capacity, gross capacity, and a gross capacity
on the first - on the three SPACEWAY satellites that we're building have a - has
a gross capacity of about 30 megabits per second - 30 gigabits per second.
So concluding that section, SPACEWAY is going to enhance HNS's competitive
position because it's going to enable us to provide the increased speed and
performance that our customers are demanding. And we'll demonstrate to you, it's
going to give us lower transmission costs. It's going to allow us to meet the
changing architectural requirements of our customers as they move to this
distributed architecture. And, most importantly, it's going to provide us with
the opportunity to concentrate and develop our services in the orbital positions
that we have available to us.
So let's talk a little bit about the satellite system itself.
First of all, we have taken the satellite technology, and for the first time we
have optimized that technology to provide point-to-point data communication.
Ku-band satellites today are fundamentally designed for broadcasting. SPACEWAY
satellites are at the other end of the spectrum; they're fundamentally designed
for point-to-point communications. Each satellite has the equivalent Ku-band
capacity of between five and eight Ku-band satellites. The typical Ku-band
satellite is between about 1 and 1.3 gigabits per second. We have licensed slots
7
from the FCC at 101 degrees west and 99 degrees west, and in the second round
earlier this year, we were awarded a third slot which has U.S. coverage - not
quite full CONUS coverage at 131 degrees west.
The most important thing about SPACEWAY which differentiates it from today's
platform is that any one of the terminals connected to the SPACEWAY system will
be able to communicate - or to a SPACEWAY satellites will be able to communicate
directly with any other terminal connected to that satellite without the need to
go to a hub or other terrestrial gateway.
So on slide 22, we're talking about the speed and performance of the platform.
And Pradman has mentioned some of these characteristics a little bit already.
But fundamentally, we're offering, compared to the Ku-band platform, 16 times
faster uplink speed, up to 16 times faster. We will have terminal options and
carrier speeds that operate at 512 kilobits per second in the uplink and 2
megabits per second, at 16 megabits per second, and, indeed, we will be able to
offer up to 100 megabits per second from the end-user site up to the satellite.
In a downlink, we will be delivering data at 440 megabits per second, and we
will, therefore, be able to offer a whole range of different quality-of-service
options to the end-user depending on the service and the tariff that we put
together for that service.
Another fundamental difference that SPACEWAY has against pretty much any of the
other technologies is that we will truly be able to offer bandwidth on demand. A
terminal that has data to send will be able to burst, we will be able to offer
higher instantaneous data rates to take that data away than the average or
steady-state data rates that are available to a terminal.
We've also designed into the system multiple classes of service so that we can
prioritize traffic and deliver the appropriate quality of service for the type
of traffic that our enterprise customers are presenting to us.
And we've also designed in the capability of making capacity available
permanently on a point-to-point basis, so directly analogous to the terrestrial
private line that we talked about on dedicated bandwidth, and we can also make
that bandwidth available to the customer on a switched basis. So if they just
need that capacity for an hour, we can nail it up for an hour. If they need it
for a day, we can nail it up for a day. Or we can give them permanent
point-to-point connectivity. So we've designed an extremely flexible platform
which is going to allow us to compete in all of the markets that you heard
Pradman talk about.
Where are we, as far as the program is concerned? Well, we concluded our design
review phase for the program --- or design phase for the program in a sense last
year with the Critical Design Reviews. We've now entered the manufacturing and
integration phase of the system. The bus and the payload are well advanced in
manufacture, as are the ground terminals. The first spacecraft is planned to
launch in mid-2003. Currently, the window is July and August of next year. And
after in-orbit testing and final system integration, we expect to come into
service early in 2004, in the first half of 2004. The second spacecraft will
then launch in mid-2004, and the third spacecraft at a point thereafter,
depending on the demand.
So far, we've spent about $1.2 billion up to the end of June, 2002. At launch,
we will have spent about $1.7 billion on this platform. And the total investment
that we're looking at is about $1.8 billion. I just want to put that $1.7
billion in perspective. I mentioned earlier that the amount of capacity that we
are building here is equivalent to the whole Ku-band fleet. The whole Ku-band
fleet, if you were to launch it today, would cost about $6 billion. So that will
give you an idea of the cost effectiveness of the platform that we have put
together.
8
Now, we mentioned a couple of times that we're going to be competitive, so let
me expand a little bit on that. And this takes us to slide 25. We will be, we
believe, extremely competitive with terrestrial managed services, private lines,
frame relay and IP virtual private networks. I'm going to talk about each of
those. It's important, also, to remember that we are combining the best features
of terrestrial networking with our point-to-point capability with the best
features of satellite networking, which are broadcasting and multicasting. So
our platform is designed to retain the capability of broadcasting and
multicasting and being enhanced to provide these point-to-point services.
Another important point from the point of view of delivering quality of service
to our customers is that we will be pretty much the only major service provider
that actually controls the complete infrastructure on which the service is
delivered. We are not dependent on third-party service providers to provide
parts of the network, we don't have to have interconnection agreements, and we
don't have to have third party local loop access.
Again, Pradman has mentioned some of the points on slide 26. If you compare our
position to the position of other satellite service providers, we have a
customer base, we have a well-established direct sales activity, we've spent the
last several years building up our indirect sales capability through several
distribution channels, we have an extremely effective fulfillment capability, we
have well-established network operations, both satellite operations and data
networking operations, and we have well-established field support. So we're in
an extremely advantageous position compared to the other Ka-band satellite
entrants. However, the most important thing is that we expect that we're going
to have the lowest transport cost of any of these systems.
So on slide 27, we're comparing the capital costs of implementing the SPACEWAY
satellite system against a typical Ku-band system and against a couple of the
other Ka-band systems, which we've obviously estimated from publicly available
information.
So if I compare us, first of all, with the Ku-band system, a typical Ku-band
satellite, FSS satellite, has a capital cost per megabit per second of capacity
of about $200,000. That includes the cost of the platform itself, it includes
launching it, and it includes the insurance required to perform that launch.
If you look at SPACEWAY and we take our $1.8 billion, which is the complete
development, to complete launch and insurance coverage for the three satellites
that we're building, we have an equivalent cost per megabit per second of
capacity of about $61,000. So we have a three-to-one gain in transport costs
compared to Ka-band - to Ku-band systems. Again, what we've gleaned from
publicly available information also implies to us that we would have a transport
cost advantage also against the other two target Ka-band platforms here, which
is Astrolink and WildBlue.
It's also worth saying that the type of platform that we have, the
processor-based platform, gives us tremendous flexibility in the way we put
capacity on the ground. We can literally change the amount of capacity that's
available geographically. Part of it happens dynamically, and part of it happens
by configuration. But we can change the amount of capacity we lay down on the
East Coast, for example, versus the West Coast, dynamically pretty much through
the system. That is quite different to a bent-pipe system. If you look at Wild
Blue, it is what we call a bent-pipe satellite, where capacity is locked into
certain beams, and if the demand is not there, the capacity is not available to
other users. With SPACEWAY, it's available because we can reconfigure the way we
put that capacity on the ground.
So, again, if we go back to the $38 billion of market opportunity, that is
broken down into a $17 billion market, which is dedicated bandwidth - these are
the private lines, and I'm going to go into each of these in a little bit more
9
detail - and about an $11 billion market, which is the frame relay market, and
about a $9 billion market, which is the IP virtual private network market.
Again, the important thing from a risk assessment point of view is that we only
need to capture somewhere in the region of 3- to 4-percent of this market in
which we compete in order to secure the business plan returns that we're going
to show to you later on in the presentation. Sorry? Yeah, we're going to move on
to slide 29.
So here I'm dealing with a private line market, and this is where enterprises
buy their dedicated bandwidth from local exchange carriers. Today, the retail
part of that market is worth about $17 billion. And we literally cannot compete
at all in that market today because we have a hubbed system, and if the hubbed
system does not allow us to deploy or to deploy point-to-point capacity between
remote sites.
If you look at what's happening in that market, about $6 billion of that 17 is
going to migrate toward managed bandwidth services, like frame relay and like
IP-VPN. And we do compete directly with IP-VPN and frame relay services. The
rest of that market, which is the local access market, is growing substantially,
and that also reflects some of this migration to managed bandwidth services.
We're going to be able to compete because if you look at dedicated circuits,
there's a huge chunk of that market where enterprises are buying circuits
because they have a peak load requirement, and they need the performance during
that peak application, busy hour, busy time. The rest of the time, the private
circuit tends to be extremely underutilized. Because we're going to be able to
give bandwidth on demand, we're going to be able to meet the peak loads with
higher bandwidth, maybe even than they'd get from a typical private line, at the
same time, providing them with ongoing bandwidth capacity, which will meet their
normal business requirements. In that way, we will come up with a much more
cost-effective solution to providing those bandwidth needs.
Likewise, if an enterprise requires more bandwidth very quickly, to provision a
terrestrial - an additional terrestrial circuit or circuits is an extremely
lengthy process. We will be able to reconfigure their system almost
instantaneously to provide them with incremental bandwidth.
On slide 30, we're looking at the frame relay market. And here, we're looking at
a market which is growing very rapidly. It's about $12 billion in 2002. It's
growing to - projected to grow to $12 billion in 2004. And that growth, as we
saw earlier, is primarily in high-speed networking.
Today, we can't compete in the growth of that market because we cannot support
the speeds that frame relay users are requiring. With SPACEWAY, we will be able
to compete on speed. And as you see from the two graphs on the right-hand side,
we also will be able to compete, we think, very aggressively on price despite
the fact that frame relay prices have fallen over the last few years and are
projected to continue to fall over the next few years.
On slide 31, we're addressing the IP-VPN market. This is an interesting market
because it is sharing the Internet infrastructure, and it is an attractive
solution for small- and medium-sized enterprises. It's estimated to be worth
about $5 billion in 2002. And, again, today, HNS can only really compete in the
low-speed end of that market.
With SPACEWAY, we will be able to compete in the whole of the IP-VPN market
because we'll be able to compete on speed. We will have certain advantages
because we don't have local loop access issues, as VPN service providers have.
Because we have our own infrastructure end to end, we will be able to control
and offer high quality of service to all of our customers, and we'll be able to
top up the bandwidth needs on an on-demand basis as we go forward.
10
As well as those three core markets, something which is not included in the $38
billion opportunity is value-added applications, and we've recognized that we
would like to have - we have an opportunity to present some significant
value-added to the transport services that we've been providing up to now. As a
result of that, we've taken a couple of initiatives. We've established an
application center of excellence, where today we have over 100 engineers who are
dedicated to building the next generation of SPACEWAY-oriented applications. In
other words, peer-to-peer applications, applications that exploit the
flexibility of the platform.
In addition to that, at the end of last year, we launched the HUGHES Broadband
Alliance Program because today it isn't reasonable that any one company can
expect to do everything in terms of new applications and value-added services.
So we established the Broadband Alliance Program to give us a vehicle to work
with the leading industry companies in IP networking and in IP value-added
services. Since we launched that program, we've had over 700 applications to
join, and we, I think, just announced a couple days ago that we have 20 fully
signed members with people like Sony and Intel and Hewlett-Packard and Sun and
Polycom as part of that Alliance Program. So now we have the two parts of this
program working together. We have our development team, we have some joint
initiatives that are going on with our Alliance partners in order to enable us
to deliver a generation of very exciting applications.
On page 33, we deal with one of those, which we think is particularly relevant
for the SPACEWAY platform, and that is video collaboration. So we're putting
together a collaboration tool which will allow video conferencing and video
telephony. It will allow dynamic, interactive file sharing. It will include
messaging capabilities and a certain number of other features to enable groups
of individuals within an organization or external to an organization that are
working on a project to collaborate together very effectively. The most
important thing about this, when we talk about videoconferencing, here we're
talking about a desktop service. This is not videoconferencing where you have to
go to a conference room and set everything up days in advance. This is
instantaneous, interactive, from-the-desk video conferencing and collaboration.
We believe that the market today for video conferencing services is about $2.5
billion. It's growing at a significant rate, about 43 percent a year. There's a
lot of drivers in the market today with the cutback on travel that are driving
that market forward, and we expect to have our video collaboration service
available at the launch - at the commercial launch of the SPACEWAY service in
2004.
I talked a little bit about multicasting. There's another driver for bandwidth
that's going over [indiscernible]. That is streaming services, IP streaming
services. Forty percent of the growth is projected to come from IP streaming
services by 2005. And because of the multicasting and broadcasting capability of
a satellite platform, we are uniquely positioned to be able to provide
high-quality streaming and multicasting services, and we're putting together
plans to be able to address that market.
On page 35, we're now at the financial summary, so I'm going to hand back to
Pradman Kaul.
PRADMAN KAUL: We haven't had any questions so far. Do you folks want to ask some
questions before we go into the numbers? Sure, Tom.
TOM WATTS: [Inaudible]. How much of that is recurring revenue versus one-time
sales?
JON RUBIN: Could you repeat the question, please?
11
PRADMAN KAUL: Yes. The question that Tom Watts asked was we had mentioned
earlier that we had $600 million of enterprise revenues globally in this year,
2002, and the question is how much of that is recurring and how much of that is
a one-time revenue.
I'll take a guess, and I'll look at George to make sure that he keeps me honest.
I would guess about 350 to 400 million - roughly about 400 million is recurring
and about 200 million is one time. A lot of our international business is where
we sell equipment. Almost all our domestic business is recurring revenue in
North America, and we have service companies in Europe and India whose business
is also recurring in nature. So I think if you took 330, 350 for the domestic;
50, 60 in Europe; and 40, 50 in India, so about 450 would be recurring. And
about more than 150 would be one time.
TOM WATTS: [Inaudible].
PRADMAN KAUL: Okay, the question was, have we had discussions with our existing
customers about moving to SPACEWAY? And what does it mean for the revenue per
customer?
Yes, we've talked to a number of customers, and many of them are very, very
excited about the capabilities of SPACEWAY. I think our proposition to them is
going to be where we'll give them more bandwidth, more bits than what they have
today, by a significant amount for the same monthly cost that they pay today. So
it's a no-brainer, in essence, for most of our existing customers who have the
need for additional bandwidth. Our hope is that once we do that that we will
increase our revenues from them significantly because of the new services we're
offering and additional bits that we'll be transmitting with that.
Any other questions? Yes?
TY CARMICHAEL: What are the peak load assumptions that underlie your bandwidth
model, and how much flexibility do you have to adjust for changes in end-user
usage patterns?
PRADMAN KAUL: I'll let Mike answer that.
MIKE COOK: Let me deal with the capacity flexibility, first of all. SPACEWAY is
a spot beam system. We have about 112 uplink beams and actually about 784 for
downlink spots.
In the downlink, we are able to respond to the demands from the ground in terms
of putting capacity on the ground. There's no individual maximum amount of
bandwidth we can give to any one of those spots. It depends on the aggregate
traffic demand that's coming from the ground, so we have the flexibility to be
able to load the satellite across the whole of the footprint of the satellite,
depending on the demands that are coming from the end-user terminals.
In the uplink direction, we have 112 spots, and we have demodulators on the
spacecraft that we can allocate very flexibly to those spots. So we can
reconfigure the spacecraft to meet the changing demand patterns from the ground.
What does that mean in terms of being able to load the satellite? It means that
we can - we have very little wasted capacity. We can change the configuration of
the satellite, and the satellite's [indiscernible] dynamically reconfigures
itself in order to maximize the amount of throughput.
As far as the business model is concerned, we're probably looking at an average
utilization of about 50 percent within the business plan of the capacity - of
the two operational spacecraft that we will have in orbit.
12
TY CARMICHAEL: The increase over time - does the network - you know, if all of a
sudden video conferencing does become the standard service to deliver, does the
network have the ability to handle those types of changes in the future?
MIKE COOK: Again, the -
TY CARMICHAEL: If you just [indiscernible] from the perspective of what your
assumptions are and your business plan versus what's being experienced today.
MIKE COOK: Okay. First of all, the reason we need to have SPACEWAY is because
our customers are using more and more bandwidth, and we're finding it difficult
to be able to satisfy their needs. So we are - we have a trend that we have
built into the business model, which is that our customers are going to increase
their bandwidth utilization. By the time we get into service, probably from -
take the last couple of years, by the time we get into service, it's about a
three times increase and then a further increase as we go forward into the
business plan. We've also overlaid on that the increased utilization from the
value-added services that we have.
And, again, you know, we - there are two things. First of all, do we have enough
capacity to be able to meet that demand? Yes, we certainly have enough capacity
to be able to meet the business plan that you're going to see later. Can we
continue to grow the network? Yes, we can continue to grow the network. We
simply will need to launch additional spacecraft, and that will give us the
capacity to continue to grow the business.
PRADMAN KAUL: Our business plan assumes the capacity of the satellites we have
will be reasonably full by 2008. So as we go beyond that, if we're successful in
doing what we think we can, then we'd have to launch additional satellites.
MARC NABI: Pradman, just a couple of questions. One relates to - the satellites
again, are they 702s? I forget again if they are 702 -
PRADMAN KAUL: We're using 702 bus.
MARC NABI: 702 bus?
PRADMAN KAUL: But the rest of the satellite is so different, it won't look
anything like an existing, you know, Ku-band satellite.
MARC NABI: The problems that were experienced by Boeing on the 702s, I mean how
does that relate to your Ka-band satellites as far as I'm sure you've gone over
that with them to ensure that there is no - there is not a degradation issue?
PRADMAN KAUL: Yeah, I think the problem you're referring to is the solar cell
problem?
MARC NABI: Yeah.
PRADMAN KAUL: And obviously Boeing has, you know, recognized the problem and
fixed it. The fix is in, and I think they're going to have, I think three
satellite launches with the fixed solar cell prior to our launch. I think the
first one is going to be launched in January of 2003. And then there's another
one for Thuraya scheduled in February/March timeframe where they have fixed that
solar cell problem.
13
MARC NABI: Okay. Other question relates to today, the VSAT, HNS VSAT business.
How many transponders do you lease off of PanAmSat's satellite? I know you also
do SkynET as well. And I take it eventually, those are going to disappear, those
types of leases, because you won't need to utilize them for your customers.
PRADMAN KAUL: I'll let Paul - Paul, do you want to answer the question?
PAUL GASKE: Okay, I think basically in the enterprise business we have about 50
transponders today. And a large percentage of those are PanAmSat's. I want to
guess 60 percent or something like that. And then I think, also, as you look -
as we go forward with the SPACEWAY fleet, we still will have pretty strong
requirements for multicasting and video applications as we will keep at Ku-band
and dual illuminate. So we expect that some portion of those will be selling
additional services with those as well. So we will contract transponders to some
degree, but we have applications that will stay in there for the long term.
PRADMAN KAUL: One of the things, Marc, we are looking at is that if the
multicasting and broadcasting applications increase like we all expect we will,
then our SPACEWAY terminals could have two feeds, the Ku-band feed and the
Ka-band feed. And for the broadcast kind of applications, we'd continue to use a
significant amount of the Ku-band capacity that PanAmSat has. And for the
point-to-point application, where SPACEWAY is really fantastic, we'd use the
SPACEWAY capacity. So depending on how much - how we fill the satellite, we
don't really envision that we will use - we'll see a significant decline in our
use of PanAmSat's transponders. We think - first of all, we think about a third
of our customers will stay on Ku-band so they continue to use the existing
Ku-band, and hopefully these additional applications in broadcasting and
multicasting will enable us to continue using PanAmSat's Ku-band. We won't see
growth in Ku. You know, the growth will all come in the - from us, it will come
in the Ka-band world.
UNIDENTIFIED SPEAKER: [Inaudible].
PRADMAN KAUL: Yes, yes. I mean like today, for example, when we have our
DirecDuo, obviously we're receiving the two feeds. As long as it meets certain
orbital constraints, which these will, you know, we can receive the two signals,
yes.
BOB PECK: Actually along those lines, can you talk a little bit about the
hardware and where that pricing's going to come in? And I guess sort of being
competition to fiber, where would a customer have to be if they're deciding
between SPACEWAY and fiber? What sort of upfront costs would they have versus,
you know, what terminals are going to cost as well?
PRADMAN KAUL: Sure. We expect that the basic terminal, which is the 512 kilobit
uplink and, you know, 440 megabit downlink, with some reasonable amount of
applications, will sell for less than a thousand bucks, in that price range.
Now, what we typically do with our customers, they don't pay that up front
because most of the enterprise customers have good credit ratings, etcetera.
Like when we do a VSAT contract today, we try to bundle that into a monthly
service offering if they give us a firm commitment for five years. And we are
able to take that paper and sell it to a third-party leasing company and get the
cash for the capital. So the customer sees a price, you know $100 a month or
$150 a month, whatever he's buying. So he has no up-front capital requirement.
It's a monthly recurring cost which either displaces an existing cost that he
has with the phone company, or if it's a brand new lead, then it's still just an
additional monthly cost.
14
BOB PECK: I just have two other questions. You showed before a graph about cost
per bit against versus the other satellite competitors, AstroLink, WildBlue,
etcetera. How do you compare against some of the fiber competitors?
PRADMAN KAUL: I think probably the best way to look at that is if you think - if
you remember the chart that Mike showed for the frame relay because that is a
sort of competitive managed bandwidth service. And if you looked at a port speed
of 256 kilobits, our projection is that by 2004, 2005 timeframe, the terrestrial
carriers, who are using fiber primarily to provide that service, will be
offering their service for about $250 to $500 a month at 256 kilobits port. Our
models have assumed we'll do that same thing for about $300. Now, we could do it
for $300 and meet all the margin requirements, which is significantly - which is
40 percent lower than what we think the terrestrial guys are.
Our feeling is that we would typically in the VSAT business, too, we try to
price our offering, if it's competing head on with a terrestrial guy, at a 15-
to 20-percent discount on what the terrestrial guy offers. And so what this
tells us that in our model we still have headroom to go more aggressive if the
prices of frame relay or even fiber, drops at a faster pace than what we are
anticipating. And then if you go to the T1 port on that same chart, you'll see
the same logicals - you know, we are like - we have room, about 35 to 40 percent
room of where we expect that to be. And so we have that flexibility in that,
also.
BOB PECK: One last question. Could you just talk us about Ka-band and any
problems or rain fade issues that SPACEWAY would face in issues with customers?
PRADMAN KAUL: Mike?
MIKE COOK: Yeah, we've - first of all, there's obviously a difference because
we're using a different frequency band, Ka-band than Ku-band; there's a
difference in the propagation characteristics. These - the differences are very
well known, very well documented. There are existing Ka-band systems in orbit,
and we've, therefore, taken all of that information and we've designed in
certain parts of the system, such that the endpoint is that we will be able to
offer at least the same levels of availability on the Ka-band system as we would
on a Ku-band system today.
And we do that in a couple of ways. We have fullback mode, which enables us to
lower the bit rates in extreme propagation situations so that we can maintain
the link for as long as possible and maintain availability for the end-user. And
then on spacecraft itself, we built in some very sophisticated power control -
downlink power control systems, which, again, enables us to take the available
power on the satellite and increase the power in the spot beams that are
affected by the propagation, and that part of the system also works with a
real-time weather feed so that we can actually anticipate propagation issues and
increase the power before the link would otherwise be degraded.
So we've spent a lot of time and effort to ensure that we can, as I say, at
least maintain the same level available as you would on a Ku-band system, and in
many cases, improve upon that.
PRADMAN KAUL: William?
WILLIAM KIDD: Pradman, when you gave the guidance, there would be roughly 80
percent, or heavy utilization in 2008. How much bandwidth have you actually sold
to your customers at that point? You know, you have 30 gigabits if it's heavily
used. Have you sold 200 gigabits' worth of capacity or 100?
PRADMAN KAUL: No, no, total capacity we would have is 30.
15
WILLIAM KIDD: But how much do you oversell it? Or is there any overselling in
the model of that capacity?
PRADMAN KAUL: I don't think so. I'm not sure I even understand the question.
WILLIAM KIDD: [Indiscernible] you have utilization on your satellites as 50
percent.
PRADMAN KAUL: Oh.
WILLIAM KIDD: In a given year, you've obviously sold more than 50 percent of
your capacity.
PRADMAN KAUL: Right. But I think the difference, William, is again, if I
understood your question right, unlike today's VSAT market, where we basically
tell a guy we're giving him one megabit of bandwidth, of - in the case of
SPACEWAY, it's total bandwidth and demand. We're going to bill a person by the
amount of data he uses or the number of packets we use. So if you look at the
capacity, that 30 gigabits of capacity, 10 of it's - for the moment, let's
assume in our model, spare that they're not even using, so you've got 20
gigabits of capacity, and I think, as Mike mentioned, in our model issues, we
bill for half of that. So if estimates of billing are for about 10 gigabits,
approximately in that timeframe.
WILLIAM KIDD: I see. And so I guess what I was trying to figure out is -
PRADMAN KAUL: Mike, do you want to add something there?
MIKE COOK: Yeah, I was just going to add that, again, the concept of overselling
is really a pricing issue. You know, how are we going to price for the capacity.
Well, clearly, we're going to be pricing for the capacity in a number of
different ways appropriate for the service that we're offering. It will include
regular monthly subscriptions for a fixed amount of bandwidth. It will include
bandwidth on demand and, if you like, some megabyte-orientated pricing. And so
the combination of those things mean that we will generate a certain amount of
revenue, and there'll be a certain amount of actual utilization. So when I
mentioned 50-percent utilization earlier, I was talking about the actual user
bits that we are transporting through the system, not effectively what we've
billed for or what we've generated revenue for.
WILLIAM KIDD: Okay. And with respect to - I guess, just a conceptual thought is
that when most of the broadband systems were envisioned, there were kind of
ubiquity plays, you know, coverage plays, in essence. In the presentation that
you've outlined, it's very much a head-to-head competition that we're price
effective and we can compete with, you know, terrestrial links using the system.
And I guess when did that philosophy change, and what's - is it really just the
10 gigabits of capacity that gives you the confidence that you can compete with
terrestrial price points and --
PRADMAN KAUL: I think it's more than that. I think if you remember even our
earlier SPACEWAY presentation a couple of years ago, ubiquity in multicast and
broadcast, clearly, satellite advantaged.
WILLIAM KIDD: Um-hmm.
PRADMAN KAUL: But we realized right from day one when we designed the SPACEWAY
architecture, and that's why we put the router on board the satellite, that we
had to compete with what the terrestrial guys could do at this timeframe. If we
are to make that step function increase to - which I showed in my first chart,
to address larger markets than today's VSATs have been able to address, so when
we compete, we compete on price, as I mentioned, by being at least 15 to 20
percent lower, we'll compete on quality of service because we control the whole
link, unlike the terrestrial guys who have to make deals and have great
16
difficulty because they don't control either the tail or they don't control the
long-distance parts. So they can't guarantee the QOS that we can, and we'll
compete because of the traditional satellite advantages on the ubiquity and the
multicast and broadcasting. So you combine all three of them, I think we have a
compelling story for our customers.
WILLIAM KIDD: And just one minor question, with respect to the actual footprint
itself, is the actual like a honeycomb footprint or footprint itself? Is that
actually covering the whole contiguous United States?
PRADMAN KAUL: Oh, yeah. Yeah, it covers the United States. It'll cover Alaska,
Hawaii, Puerto Rico, Northern belt of Canada, and, in fact, we have five, six
beams on South America, where we'll be able to have a beam on Buenos Aries, beam
on Sao Paolo, Mexico City, you know, where they could even incorporate
[indiscernible] because these beams can move around.
MIKE COOK: Just [indiscernible], that's the southern belt of Canada as opposed
to -
PRADMAN KAUL: Southern belt of Canada, excuse me.
MIKE COOK: Northern belt is U.S.
PRADMAN KAUL: Northern belt would be difficult. Yes?
STEVE MATHER: Can you share with us your views on the implementation costs
beyond CAPEX?
PRADMAN KAUL: Paul, do you want to cover this?
PAUL GASKE: In terms of the installations?
STEVE MATHER: Well, implementation, meaning possibly equipment subsidies to get
that online or, you know, channel support in order to --
PAUL GASKE: SAC - you mean like SAC, subscriber acquisition costs?
STEVE MATHER: Well, not exactly, but occasionally enterprises may be slow to
adopt this even at a 15-percent discount to an alternative, and they may just be
complacent. And so there may be some expense beyond CAPEX that you'll incur --
PRADMAN KAUL: Yeah, I think when we go to the business plan, we'll show you some
of those costs.
STEVE MATHER: Okay.
PRADMAN KAUL: Okay? If you can hold off, let me come back to the question if we
haven't answered it.
TY CARMICHAEL: Just wanted to follow up on - you said 15 to 20 percent below the
comparable threshold offering. Is that pricing on a monthly basis, or is it
going to be a combination of monthly and per-bit? And how does that -
PRADMAN KAUL: It's primarily on what -- on a monthly basis. But the equivalent
costs on a per-bit, etcetera, the model would follow that directly.
17
TY CARMICHAEL: But what happens to the model if the usage goes up per month
relative to what your assumptions are, so you're not able to generate the
revenue per bit?
PRADMAN KAUL: Oh, because -
TY CARMICHAEL: What's the critical assumption there that's missing?
MIKE COOK: The bottom line is that we -- the pricing plans that we put together
will enable us to generate incremental revenues if the bandwidth goes up. So as
Pradman said, the pricing will be a combination of fixed monthly subscriptions
and also bandwidth-on-demand pricing. And the comparisons that we did were based
on a fixed amount of capacity requirement coming from those individual example
models that we put together in the pricing scheme. But it would not be our
intention to be locked into pricing which did not allow us incremental revenue
in the event that the customers' requirements for bandwidth actually increased.
TY CARMICHAEL: So does that close the gap on the pricing differential, I mean
the terrestrial guys that are [indiscernible].
MIKE COOK: No, because - in the terrestrial world, if your capacity requirements
go up, you probably have to buy a bigger access circuit, you'll probably have to
have that higher committed information rate from your frame-related supplier,
and all those will put your price up. So there's, you know, in every pricing
plan, there's a certain amount of headroom for growth. In our pricing plans,
there'll be a certain amount of headroom, but fundamentally, if there's a
significant increase in capacity, you pay more money in both worlds.
TY CARMICHAEL: All right.
JON RUBIN: Any other questions?
PRADMAN KAUL: Okay, so let's go to the financial models that we've been working
on. The first element from a summary perspective is that we expect a significant
reduction in our cost per transported data, and that's very critical. Roughly,
as Mike said, our cost will be two-thirds lower than Ku-band.
The second bullet is probably one of the most important ones in the model. It's
that for the first time we will retain the satellite operators' cash flow and
margin at typically 70, 75 percent EBITDA. You know, remember, that's what SES
Astra has or PanAmSat has or Intelsat has. And in this case, like the DIRECTV
model, since we own the satellite - it's an integrated service - we retain that
cash flow and margin, and we expect about 60 percent of our existing enterprise
users to migrate within the first three years.
The rest of the plan will show that our enterprise revenues will triple in five
years because of the increased revenues from existing customers, the new market
segments, and the value-added services that we're offering. And the EBITDA
margins will increase by four times, and all that results in the return on
invested capital to exceed 35 percent when we go reach steady-state, 2008 and
beyond.
Fundamentally, what we've assumed the plan is that we start service in the
second quarter of 2004 and we will have unused capacity in the beginning,
obviously, as we fill the satellite up. But by 2008 on a fairly linear basis, we
18
will have the two satellites at a steady-state place. That was slide 36 for our
folks on webcast. We're now going to slide 37.
If you look at how we build up our Ka-band market share, looking at 2008, we
looked at the different segments, at the large business, medium business,
telecommuters and SOHO. In each of these segments, we looked at the overall
market size, and these are fairly conservative numbers gotten from a number of
different sources and some management estimates.
In the large business area, there are roughly 400,000 sites in the United
States, and all of them, we believe, have a broadband need. As Mike showed you
on an earlier chart, almost 93 percent of them today are reaching, where they're
leasing either T1s or frame relay services. We think about 150,000 of them will
go - are addressable by satellites, and about 250,000 of them today are
terrestrial. These are our people like existing customers today, 150,000 of
them. And 20 percent of the terrestrial guys, we think, will potentially switch
to satellite with these new services. So you do the arithmetic. We assume a
two-third's market share for the existing satellite sites because we have most
of them anyway. So maybe that's a little conservative there. And then maybe a
third market share. And when we were doing this plan, Astrolink was in the game,
WildBlue was in the game. So we were thinking that we would take a third of the
people who chose satellites. And, again, with those two folks not in the game
today, these numbers could potentially go up.
But anyway, doing the math in that form, you come up with 118,000 sites that we
think will get in the large business area. Similarly, in the medium business,
the market size about a million one terminals, we think most of them have
broadband needs, 25 percent of them being addressed over by satellite markets.
Again, a third of them being won by HNS. That's close to 100,000 sites, or
95,000 sites. Telecommuter, a similar calculation, another 95,000. And the
server world, which is much larger, 13 million sites. By 2008, we think 3.5
million of them would have broadband needs, a third of them roughly would be
addressable by satellite, maybe capture 20 percent, which results in 200,000
sites. So if you add all of that, that comes to about 500,000 sites. We think
that the other wholesale markets that are not directly corporate networks but
we're serving as a retailer in specialized segments, like government, etcetera,
that would be over 160,000 sites. So we think the total market that we would
have - that we would basically be able to fulfill would be about 670,000 sites
by 2008.
So the first test is, is that a credible number. The reason we believe in that
number is, as I said, we're already at 200,000 sites today. And we're at 200,000
sites today with a system which is essentially very, very limited in terms of
the needs that it can fulfill from our existing customers. And, therefore, it
doesn't require a big leap of faith to think that with all this extra capacity,
with the significantly improved economics that SPACEWAY has, that we should be
between 2002 to 2008, six-, seven-year period, that we should be able to go from
200,000 sites to 670,000 sites. And that's the number we've used in our plan.
Going to the next slide, slide 38, we thought it might be useful to look at the
business as it exists today, our enterprise economics, and then look at what we
think it will be in 2008.
First, is the number of sites. As I said, we have approximately 200,000 sites in
2002, and we expect to go to 670,000 sites in 2008. Today, in 2002, our monthly
service revenues per site, [indiscernible] covers a wide range, but the real
low-end user who uses only a few bits and doesn't have any sophisticated
applications like video or multitasking, etcetera, they're typically at about
$60 per month. That's the one extreme. If the customer has a bunch of
applications, uses a bunch of bits, etcetera, it can go to $125 per month. So
we're in a range of 60 to 125 dollars per month. The terminal-installed VSAT
today is anywhere from $1,500 to $3,000. Many of you are aware of how the prices
19
have dropped down. All that translates to a revenue plan for us for 2002 for the
enterprise business in North America of 330 to $350 million. Okay?
In terms of the DIRECWAY Ka-band service in 2008, we think the monthly service
on the low end, if a customer basically does nothing more than what he's doing
today, we - just transports a few more bits, would still be at $60 per month for
the service costs. But if he uses a significant amount of bandwidth because of
the new services, because of the managed bandwidth capability, because of the
frame relay displacement that we talked about because of the virtual IPNs,
virtual private networks, you know, in the IP domain, the high end, we expect
the range to be at about $250 per month. We think the terminal cost is actually
going to be a wash between Ku and Ka, that if we get enough volume, these
terminals are going to cost the same, about $1,500 to $3,000. And we expect our
revenue in 2008 from the 670,000 terminals to be about $1.4 billion.
In terms of the cost structure, the space segment costs today, where we make no
margin, which we just buy from a PanAmSat or a SatMex or whoever, is about 30
percent of our service revenue. That means in the low end, it represents about
17, 18 dollars per month of our service revenue in the space segment cost. Now,
we don't make any margin on that today. On the high end, if you go to $125, it
represents about 36 to 37 dollars per month. And in the case of SPACEWAY,
because we'll be operating these satellites, the cost of the TT&C and the
operations of the whole satellite constellation, etcetera, we'd have a cost of
50 million dollars a year, plus, of course, the depreciation on the capital, you
know, that we'd be depreciating, so that would represent our space segment costs
in the two cases.
All this results today in 2002 with all the significant pricing, competition,
pressure, etcetera. You know, our EBITDA margins are going to be in the range of
12 to 15 percent. We have been as high - Paul says 1999 was the golden year - as
high as 20 percent, 18 to 20 percent, but so in our - with our existing
structure, you could see, depending on the mix of business we have in a
particular year, that EBITDA margins are, you know, in the range of what we'd
potentially do this year to as high as 20 percent. We expect that in 2008 to go
to 50 percent. Again, driven by two major factors. One is the 70-percent margin
on the space segment revenue that we don't make today that's showing up in the
FSS service provider, and that's a big chunk of that delta, okay. The second
element of that differential is that the ratio of the hardware cost - you know,
if you translate the hardware to a monthly service cost, in the case of the
Ku-band, it's anywhere from 30 to 50 percent of the monthly service costs. When
you go to the DIRECWAY Ka-band model, because there's much more space segment,
it tends to get closer to 20 percent, so you're making much higher revenues on
the - higher margins on the space segment, and that space segment represents on
the service revenues represent a larger percentage of the monthly cost. And the
third element that comes into it is the higher leverage you get from the fixed
cost being amortized and being paid for; all the incremental revenue margin
flows down to the bottom line. Those three elements represent the difference
between the 15 percent and the 50 percent. And then the last item we're showing
in the economics is the capital expense on a normal ongoing basis once the
satellites have been launched. Today, we spend about $10 million a year with the
uband because it's a larger volume of terminals, etcetera. We expect that to
increase to 20 million.
Going to the next slide, we thought we'd give you two points. The year we start
with SPACEWAY in 2004, and the 2008 point, which we think is a steady-state
point with just this satellite constellation. Obviously, beyond 2008, to grow
the revenues beyond 1.4 billion, we would have - we'd have to launch new
satellites, etcetera, and that - but at that stage, we're basically saying we've
reached steady state. Now, again, there's another point that you should keep in
mind is the 330 to 350 million in 2002. So what we're basically saying is the
business we are in today is generating revenues today of 330 to 350 million. In
2004, in itself will grow at some rate. Today's economy, I don't know what, but
10, 15 percent wouldn't be unreasonable. By 2004, we expect the combination of
our existing business and the incremental SPACEWAY business to result in $500
million. So, again, that's our first test of does it make sense, and I think it
20
makes eminent sense. We're already at 350. Getting to 500 without - by 2004 is
not unreasonable. Then between 2004 and 2008, we expect a fairly linear growth
in the business as we bring on added customers with added applications and added
revenues.
That - in 2004, we have all the start-up costs of SPACEWAY, so the operating
income and the EBITDA margins we've assumed are fairly conservative and fairly
low, so we're looking at EBITDA margins of 12 percent, operating income of 2
percent in 2004, and then reaching again, growing slowly over 2004 to 2008,
[indiscernible] on a fairly linear basis, growing to an EBITDA of 54 percent and
operating income of 45 percent, which would be fairly typical of people who are
in the space segment business. And space segment revenues start becoming a big
part of this. The CAPEX in 2004 - we're still finishing up the CAPEX
requirements for the launch of the satellites. And then in 2008, you're in the
maintenance mode. When you take all that information, the operating free cash
flow, which is really defined here as EBITDA less the CAPEX, in 2004, we would
use about $70 million of cash. But once we start reaching steady state in 2008,
we're generating about $730 million of cash. And, actually, we start getting
cash-flow positive in 2005. The return on invested capital in the beginning is
clearly low, [12] percent, but it rapidly starts hitting numbers above 35
percent. The payback period is less than five years beginning in this timeframe,
but, again, once you reach steady state with this kind of cash flow, 700
million, you can see it takes less than three years to pay toward the
investment.
So anyway, those were some of the financial models. In concluding, you know, we
believe this satellite platform, as I mentioned earlier, is going to take us up
a major step in satellite communications with the points that I made, "switch in
the sky," 10-gigabit capacity, the high-speed up and down links, the
point-to-point in broadcast capability. And then getting to the last slide, we
expect it to generate a very, very good financial return. It'll increase the
revenues, it'll increase the operating margins for the reasons we have
mentioned, and achieve a return on invested capital greater than 35 percent.
And that's all we had. With that - William?
WILLIAM KIDD: Can you help me understand the pricing model a little bit better?
I was thinking about your T1 pricing. I think that's $1,400 a month, give or
take?
PRADMAN KAUL: I think that's what they're charged for that.
WILLIAM KIDD: And that's a megabit and a half?
PRADMAN KAUL: Yeah, that's like a frame relay port, a 1.5- megabit frame relay
[indiscernible].
WILLIAM KIDD: I don't quite understand it. If it costs you $60,000 for SPACEWAY
per megabit and you're charging 16,000 per year for a megabit and a half, that
implies a revenue payback of many, many, many years, even before costs. And I'll
just point out one particular service element, but as an example, what am I
missing and why doesn't that seem to be so attractive?
MIKE COOK: I'm not sure the two bits of information you're relating are exactly
connected in that way. The $60,000 per megabit per second of capacity is not per
year; it's - no, the $60,000 on page 27 is the capital cost of an asset that
lasts 15 years.
WILLIAM KIDD: Right. But the revenue payback would be -
21
MIKE COOK: And then the revenue that you looked at from the other chart, which
is looking at one - it's one port in a frame relay network is a per-month cost,
a per-month price.
WILLIAM KIDD: Just to make it simple, though, if you just annualized that
monthly cost from 1,400 to 16,000 you make it equivalent to a T1 price
[indiscernible], so instead of 60,000 it's 90,000 for a 1.5 megabit?
MIKE COOK: It's 90,000 over 15 years is the likely base price.
WILLIAM KIDD: Right. But on a revenue basis, that payback's like over six years.
And if you assume a 15 - 50 percent EBITDA margin, the payback is over 10. And
so I'm not sure how - you know, I see the example you said where you have
30-percent margins and people pay that per month, but I don't see how this T1
example gets remotely near the payback that the model's showing. Like I don't
see that type of parallel pricing and profitability in this T1 example that I'm
working through.
PRADMAN KAUL: Yeah, I think the answer is that I don't think this is a dedicated
T1 point-to-point link.
MIKE COOK: It goes back to the other point that you're making on your own --
PRADMAN KAUL: Right.
MIKE COOK: -- in the sense this is shared bandwidth.
WILLIAM KIDD: I see.
MIKE COOK: And what is a T1 access? A T1 access is a peak load, the capability
to take a peak load at 1.5 megabits per second. But it isn't necessarily a
steady-state, 1.5 megabits per second.
WILLIAM KIDD: Exactly. So that goes back to my first question, which is what is
your model assuming that people have actually contracted. So it obviously
doesn't really look that attractive if someone buys 1.5 megabits and you give
them 1.5 megabits, so, obviously, is a little bit of overselling in there. So
what degree of overselling is implied in the model?
MIKE COOK: Okay, well, again, I don't think we have that statistic.
WILLIAM KIDD: Okay.
PRADMAN KAUL: But I think your point is well taken, and I think Mike made the
point on one of his slides that we're in the managed bandwidth business. We
don't expect to go compete with terrestrial. If somebody said, "I want a 1.5
megabit hard link from point A to point B," that's not - you know, satellites
will never compete with terrestrial on that. What our advantage here is to
compete using the managed bandwidth-on-demand capability, you know, and be - and
that's what frame relay does, right?
WILLIAM KIDD: Sure, sure, but -
PRADMAN KAUL: And, in fact, what frame relay does is you get a T1 port but then
you have to take a total network capacity that you are committing to, which
means that every port in a frame relay system, if they operated at their maximum
speeds all the time, it wouldn't work either. And it's exactly analogous to the
-
22
WILLIAM KIDD: But can you give us the assumption that you're making about that?
PRADMAN KAUL: We'll get you - though we haven't look at it in that form.
JOHN STONE: Hi. I wanted to get some idea in terms of your assumptions about
what kind of fixed costs you're going to have. I mean you mentioned the TT&C and
some other costs for the satellite, but there's also going to be marketing
expenses, G&A, R&D and other ongoing expenses per your business model. So what
sort of annual fixed cost should we plan on for SPACEWAY?
PRADMAN KAUL: George, do you want to talk about it?
GEORGE MONTAGUE: As Pradman said, the operating network is going to be about $50
million dollars. We have about $40 million for marketing. The R&D, we're
planning on about $30 million. G&A is about $40 million as well.
PRADMAN KAUL: You know, another way to look at it is if you build your revenue
model and you take the margins we're saying we're going to make, the
differential will obviously be a combination of the one-time costs, which is in
the hardware, which you can get from the hardware prices we've done. The delta
is the operating cost.
JOHN STONE: And, granted, you've given me most of the ingredients, but I'm sure
you guys have already cooked this one, so I'll ask you anyway. What sort of -
PRADMAN KAUL: George's got the cooked model there.
JOHN STONE: What sort of annual revenues do you guys need to generate to be at
breakeven, both on a cash basis and also on an earnings basis, including charges
for depreciation?
GEORGE MONTAGUE: [Inaudible] told you, we're pretty close to that point in 2004
with the revenues he showed. On a -
PRADMAN KAUL: We're actually making money in the - we're always making money in
this business.
GEORGE MONTAGUE: Right.
PRADMAN KAUL: You know, we're making money today, and when we progress into
launching SPACEWAY, we're going to be making money. We never - no year, we'll be
losing money. We've never lost money in VSATs since we started in the business
in '84.
PAUL GASKE: That - I think that may be one of the points that we should
emphasize is that our business has been structured around a set of customers in
enterprise today. There is a platform out there today called DIRECWAY which has
certain capabilities. As we launched SPACEWAY, it literally plugs into those
capabilities and the staff, the facilities, the network management, the
integration. All those things are utilized by SPACEWAY, so when you look at
bringing it on, it doesn't have a huge jump in cost day one, and it scales very
well because it's the same infrastructure. I think that's one of the big
advantages we have if you go back to the original charts on why our business
versus some of the other folks.
23
PRADMAN KAUL: So once the capital expenditure is finished, you know, in 2004
when you launched the satellite, we've basically ended up spending the capital,
we've become cash flow positive, and we're always making on the - we're always
making profits.
JOHN STONE: Two other quick ones. In terms of the $1,000 price point, what sort
of volumes are you going to have to generate in terms of units to get to that
point and --
PRADMAN KAUL: You know, in the Ku-band world today, we are well below that price
point today. So we expect that in the first year of manufacture, where we would
probably be in the 50, 60,000 terminal, we would be below that price point,
below that in cost. And, you know, this is not the consumer business, so we're
not looking to manufacture millions of terminals. Over a five-year period, we're
looking at 670,000 terminals. So we're looking to manufacture 150,000 terminals
a year, and we should be, you know, very - be able to sell these terminals for
$1,000 at that level.
JOHN STONE: And, last question, if the SPACEWAY satellite winds up in the ocean,
what kind of a delay are we looking at and what sort of insurance do you have?
PRADMAN KAUL: We are actively working the insurance strategies right now. You
know, usually wait about a year from launch, and so that's something that Mike
and his team is very active right now. They're looking at various strategies. If
it goes into the drink, I think it's supposed to be six months.
MIKE COOK: Yeah, we have a committed - a commitment from the launch company that
we could launch the second satellite within six months in the event of a launch
failure on the first satellite.
JOHN STONE: [Inaudible].
MIKE COOK: Oh, yeah, it's already - all three satellites -
PRADMAN KAUL: A big [indiscernible].
MIKE COOK: -- [indiscernible] in the factory in construction. And the third one
will be stored once its finished until we need it. But the second one is
actively - it's going through all of the phases, and it would be about six
months behind the first.
KARIM ZIA: Pradman, one of the underpinnings of the business model seems to be
this assumption of a 20 or 30 percent satellite share of the broadband sites by
'08.
PRADMAN KAUL: Um-hmm.
KARIM ZIA: And that seems to hinge on their still being a price umbrella, you
know, in the enterprise market the way you've laid it out, both in private line
and frame relay.
PRADMAN KAUL: Yes.
KARIM ZIA: It looks like you assume in that pricing curve that the terrestrial
competition pricing - the slope sort of flattens out. What gives you the
conviction that that's the case, and isn't it - I mean, given, potentially
recapitalization of a lot of the CLECs and things, what makes you think it's not
a straight-line curve?
PRADMAN KAUL: These - I think, Mike - correct me if I'm wrong - but I think
these are estimates from various consulting organizations and charts and
estimates. These are not our estimates by itself.
24
MIKE COOK: Yeah, the frame relay costs are third-party estimates, but, again,
let's just understand what's driving that. The frame relay provider needs to
acquire local access lines from the local exchange carrier. And the only revenue
the local exchange carrier gets is for local access lines. So there is a sort of
natural limit which comes down to the cost of a local access line, which the
frame relay costs can't quite come below. So in the end, you know, it's going to
asymptote to a number. Now, you can argue that number might go up and down a
little bit. On top of that, of course, the frame relay provider is going to
operate, manage the network, and he also has infrastructure. He has to continue
to provision additional capacity in the network in order to meet the growing
bandwidth demand. So he's got capital expenditure. He's got amortization. He's
got [indiscernible] corporation costs.
KARIM ZIA: Is that wholesale pricing model based on some kind of [indiscernible]
formula or something that gives you confidence that there is some floor?
MIKE COOK: I'm sorry, the --
KARIM ZIA: The wholesale pricing model you referred to, which the LECS are
essentially leasing to alternative providers?
MIKE COOK: Yeah.
KARIM ZIA: Is that based on some sort of cost-based formula?
MIKE COOK: Yes, it is. Yeah, the -- I think you'll see the sources that we have
for that are also doing cost-based analysis there.
KARIM ZIA: And, Pradman, I know you didn't want to talk about it too much, but
can you just talk about consumer applications at SPACEWAY? I mean are there
gating factors as to why you're not talking about it? Or is this a sensitive
merger issue?
PRADMAN KAUL: Well, if Jon let's me, I'll tell you what I think we can tell you
today. We believe that, you know, depending on what happens with the merger, the
consumer - I think Jack Shaw has publicly stated that if the merger does not go
through, our ability to fund the subscriber acquisition costs of the consumer
business is, you know, in serious doubt, whether HUGHES will have enough cash to
fund it on its own. So if the merger does not go through, it's - I'll use the
words highly unlikely that we would continue in the consumer DIRECWAY business.
If the merger goes through -
KARIM ZIA: You mean just Ku, not -
PRADMAN KAUL: Yeah, Ku and then what happens three years from today, who the
heck knows? But we won't be continuing in the consumer DIRECWAY business. If the
merger does go through, you know, it's a different ballgame with Charlie, and I
don't know what that game is right now.
KARIM ZIA: But given the cost structure you see here, I mean do you envision
that there could be a viable - a more viable consumer model with SPACEWAY?
PRADMAN KAUL: Yeah, clearly, because one of the things because of the time of
day and the differential, etcetera, you could [indiscernible] if you paid for
the SPACEWAY system on the enterprise business, on a marginal cost basis, the
space segment for consumers - you know, we have said that we could accommodate
about a million consumers per satellite in addition to the enterprise business
that we have because of the time-of-day difference. The space segment cost for
that, you know, on a marginal cost basis is nothing. So the economics of the
consumer business would be significantly better than Ku.
25
UNIDENTIFIED SPEAKER: [Inaudible].
PRADMAN KAUL: Yeah, I'm just talking about the space segment. Clearly, the SAC
issue is still an issue. It costs $500 to acquire a subscriber, and one would
have to figure out how to generate the cash to acquire SACs. That's the tough
nut to crack in the consumer business --
UNIDENTIFIED SPEAKER: Right.
PRADMAN KAUL: -- which we don't have any in the Enterprise business. Jon, do you
want to add anything to that?
JON RUBIN: No, that's fine.
UNIDENTIFIED SPEAKER: Just a couple questions on the cost of capacity. What sort
of assumptions are you baking in for amortization of the cost of satellite?
What's the useful life of a satellite?
PRADMAN KAUL: I think we're depreciating it over 12 years? Fifteen years.
UNIDENTIFIED SPEAKER: Fifteen years. And I mean just given that we talked a
little bit about the asymptote nature of the curve here, do you think that's -
is that reasonable according to your assumptions? I mean no one can predict the
future, but do you think that's --
PRADMAN KAUL: Yeah, I think - that's what the spacecraft is designed for, and
generally the spacecraft lasts longer. But the design goal - the design spec is
15 years.
UNIDENTIFIED SPEAKER: Okay. And just - to follow up on the consumer issue, also,
I mean the - on the move from existing VSAT customers onto the new platform,
what's sort of the new proposition to get, say, Chevron to switch from the old
network to the new network, and how does pricing look? If you take, say, your
$60-a-month customer, how does - if they take exactly the same amount of
bandwidth, how does that pricing match the new --
PRADMAN KAUL: Yeah, we're working on that, but our fundamental philosophy is
that a customer will not pay any more to move to SPACEWAY than what he's paying
yesterday on a monthly cost. And for that, we'll give him more bandwidth than
he's getting today. So it's a no-brainer. Should be a no-brainer for a customer
who has the need for more bandwidth. If a customer doesn't have the need for
more bandwidth, we'll probably not migrate him to SPACEWAY because he won't see
the potential for additional growth of more services. So that's the fundamental
premise.
UNIDENTIFIED SPEAKER: So it's fair to say that on an apples-to-apples basis, it
takes the same amount of bandwidth. It would be actually a lower price.
PRADMAN KAUL: Yeah, we may not really lower his bill, but we just give him the
additional bandwidth.
UNIDENTIFIED SPEAKER: Right. Okay.
PRADMAN KAUL: But on a price per bit or, you know, some major unit measure, it
would be lower.
UNIDENTIFIED SPEAKER: Okay.
26
BOB PECK: But actually just touching on that, though, he'd still have to pay for
the equipment, though, right? He'd still have to fork up the grand or three
grand?
PRADMAN KAUL: No, I think it's lumped into the monthly service costs. Nobody
pays for the equipment in North America today. Everyone - every contract that we
sign in North America today is a recurring contract where the guy pays $X per
month, but he commits to generally a three- to five-year contract.
BOB PECK: Okay.
PRADMAN KAUL: And that commitment for a three- to five-year contract with the
fact that his credit rating is good allows us from a cash perspective to sell
that paper, if we want to, to a third-party leasing company.
BOB PECK: And, lastly, on the consumer side, if DIRECWAY Ku gets shut down at
the end of the year, how does that work as far as the current subscribers?
PRADMAN KAUL: Don't expect that to happen.
BOB PECK: You maintain then it wouldn't get shut down?
PRADMAN KAUL: No. I don't expect that. My bosses can overrule me, but I - based
on everything I know, I don't expect the DIRECWAY consumer be shut. What Mr.
Shaw has said, what Jack has said, is that he doesn't think we can continue to
invest in new subscribers for the consumer -
BOB PECK: Okay.
PRADMAN KAUL: So the scenario would not be a shutdown, but where we wouldn't
continue to invest additional monies to acquire new subscribers.
TOM WATTS: Can you comment on the competitive situation in the enterprise market
now and how much the loss difficulties are affecting it? Are the SPACEWAY
customers up for grab?
PRADMAN KAUL: I'll let my friend, Paul, comment on that because he fights them
every day.
PAUL GASKE: Well, I guess as far as the market goes, the competition, the
number-one thing first off is getting companies to buy and expend capital funds
again. And we are seeing some good signs in some areas on that, and that's
improving. I think on the situation with competing with Gilat in the market, I
think the key elements there, we certainly still seem them in competition. They
certainly have a different look as an enterprise customer looks at them than
they had before because you have to look at security and so on. You know, we
fight them in every single account and so on, but I think the key thing we have
is with a big base that's also renewing and going into broadband right now,
which is also driving our business, and I think that's probably the most
important dynamic today.
PRADMAN KAUL: I think, Paul, our first six months of this year in both order and
[indiscernible] revenues, as we've announced in the quarterly reports, have been
very good, even better than the first six months of last year and so on. So
we've had very encouraging results for the first six months of this year.
JON RUBIN: Any other questions? Okay, that concludes the presentation. Thank you
very much.
PRADMAN KAUL: Thank you.
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