The development of the TV channel market is a key component of the satellite
 
platform’s economy. We are indeed far from the euphoria that surrounded
 
the announcement of large-scale multimedia moving satellite projects such as
 
SkyBridge and Teledesic. The overwhelming sentiment is now one of caution, and
 
a great many long-standing satellite operators have elected to re-centre and
 
reinforce their television broadcasting strategy, an activity which constitutes
 
the mainstay of the civil communications market, and currently ensures operators’
 
profitability.

Satellite operators’ profitability has been confirmed, with EBITDA and
 
net profits that are well in the black. For a number of them, the share of turnover
 
derived from providing satellite capacity for broadcasting TV channels and associated
 
services well outweighs earnings generated by providing capacity for other services
 
such as telecom (accounting for 56% of Eutelsat’s 2000 turnover and 68%
 
of AsiaSat’s 2001 turnover, for instance).

The sector is enjoying high operating profitability, roughly 70%, and one which
 
has remained relatively stable over the period. For a great many, however, this
 
relatively enviable situation may be altered when confronted with major trends
 
which will come to affect television markets in the short and medium term.

• Competing solutions encountering serious difficulties

Satellite emerges as clearly the most efficient technology for TV channel broadcasting.
 
A number of worries have nonetheless come to the fore over the past few years
 
as operators are faced with the increasing power of alternative solutions, cable
 
and digital terrestrial.

The cable network has recently undergone two types of upgrade: digitisation
 
of the network itself and the launch of cable modems with a return path that
 
enable data transmissions. It became necessary to devise a new business model
 
to justify the massive investments that these developments entailed. Through
 
the triple play approach, operators are expected to be in a position to boost
 
their ARPU by providing customers with combined television, telephone (currently
 
in circuit mode; IP in future) and internet access services with varying bitrates
 
(with increasing use of the DOCSIS norm).

If we take a look at the number of subscribers per geographic zone presented
 
in the framework data of our analysis, cable operators emerge as satellite operators’
 
prime competitors on television markets, particularly in the US where, despite
 
its growing use, DTH has not yet overtaken the longstanding lead enjoyed by
 
cable — which is well into a massive consolidation phase. Cable is however
 
in a particularly delicate situation in Europe where it has been the focus of
 
considerable investments over the past few years, investments which have now
 
translated into insurmountable debts for operators. Crippled by a debt of over
 
17 billion USD, NTL has had to file for bankruptcy; UPC has become entirely
 
dependent on whatever support its leading shareholder Liberty Media is willing
 
to offer, and Deutsche Telekom failed in its attempt to sell off the majority
 
portion of its cable networks to… Liberty Media.

Deployed in still only a limited number of countries, digital terrestrial television
 
is likely to eventually replace analogue transmissions. The main obstacle to
 
this broadcasting platform’s development is the need for viewers to purchase
 
a decoder. The spectrum available via digital terrestrial (DTT) is also rather
 
limited, a fact which naturally reduces the number of channels available to
 
viewers when compared to cable and satellite offers. Added to this, digital
 
terrestrial TV does not allow a return path which means that it will need to
 
be coupled with a telecommunications network in order to provide a return path
 
for interactive services. The advent of DTT has nonetheless raised concerns
 
about a major shift in the pay-TV market, ipso facto an upheaval for cable and
 
satellite channels that subsist largely thanks to subscribers who are willing
 
to pay for a bouquet of channels. A too vast offer of programmes on DTT is likely
 
to diminish existing subscriber bases, a fact which translates into lowered
 
licence fees, fewer viewers and therefore fewer advertising revenues for niche
 
channels, many of which may even disappear. It must be said, however, that digital
 
terrestrial is off to a bad start. In the US, for instance, the market has not
 
taken off despite networks’ more or less strict adherence to obligations
 
to launch a digital service. In Europe, British bouquet ITVDigital, which had
 
up to 2.2 million subscribers at one point, has gone off the air, while Spanish
 
bouquet Quiero has also announced the upcoming termination of its broadcasting.

• Consolidation of the broadcasters’ market

 
Most of satellite operators’ customers on the TV broadcasting market, i.e.
 
channels and bouquets, are experiencing serious financial difficulties. With
 
respect to channels, signals from the past year are not terribly encouraging,
 
particularly given the increase in the number of channels, the drop in advertising
 
revenues, dwindling growth of the subscriber base and advertisers’ disappointments
 
over audience ratings. Coupled with this is the fact that negotiations appear
 
to be increasingly difficult between bouquet operators and the channels they
 
broadcast, and tend to end with lower fees paid per subscriber. A number of
 
channels are therefore struggling to break even. Faced with dwindling advertising
 
revenues and licence fees from the bouquets, small niche channels are more and
 
more vulnerable, all the more so when they are not market specific. They are
 
also anxious over the prospect of competing with digital terrestrial, which
 
may lead to already forecast massive consolidation. Saturation of themes and
 
the fragility of channels’ economy may well justify a re-composition of
 
the cable and satellite channels landscape, and lead to a levelling-off of their
 
numbers, as indicated in the European context in the graph below (data is based
 
on figures up to 1999, followed by IDATE estimates).

For their part, bouquets have long favoured conquering market share, seeking
 
to boost operating profits. They have thereby accumulated losses over the years
 
due to the high cost of acquiring subscribers. In most countries, satellite
 
bouquets are either competing with other satellite bouquets (France, Spain,
 
Italy, Poland) or with another digital platform such as digital terrestrial
 
and cable. Bouquets therefore often enter into fierce sales wars, vying for
 
dominance over their rivals, a process which has had a negative impact on digital
 
operators’ books. These losses have been further aggravated by the exclusivity
 
wars being waged by the bouquets, generally over film and sports (primarily
 
football) rights. Digital platform owners are now endeavouring to limit their
 
losses and to generate profits, which naturally goes by way of reduced competition
 
and attempts at alliances or mergers. This concentration amongst satellite bouquets
 
is a world-wide phenomenon, and can be seen particularly:

• In Germany where two digital offers, DF1 and Premiere, were unable to
 
co-exist. Kirch eventually found itself manning these two offers, and was able
 
to regroup the bouquet’s and pay channel’s digital activities, leading
 
to the launch of the Premier World platform in early October 1999. Since that
 
time, Leo Kirch, crushed by some 6.5 billion EUR in debts, was forced to file
 
for bankruptcy, first in April 2002 for KirchMedia, the company that manages
 
the most lucrative operations of the Kirch empire, and then in May for KirchPayTV,
 
the group’s pay-TV division. The fate of the group’s other divisions,
 
and notably pay-TV channel Premiere World, remains uncertain. Premiere, which
 
is in serious difficulty with losses of 898 million EUR for 2001 alone, and
 
which each day costs the company an additional two million EUR, may soon fold.
 
The KirchPayTV bankruptcy does not yet involve the pay-TV channel which, while
 
incorporated in the group, is also controlled in part by another company and
 
therefore continues to broadcast for the time being.

 
• In Italy where, in July 2001, Vivendi Universal announced the conclusion
 
of a merger between Italian pay-TV bouquets Stream and Telepiù. Up until
 
that point, Vivendi Universal had controlled 99% of Telepiù via its subsidiary
 
Canal+ (with the RAI controlling the remaining 1%) while Stream was a 50-50
 
joint venture between News Corp and Telecom Italia. In early May, Italian anti-trust
 
authorities gave their conditional approval for the transaction, subject to
 
ten provisions aimed at maintaining competition. Deeming that these new conditions
 
were too restrictive and would not allow them to ensure the new company’s
 
medium and long-term viability, Vivendi Universal and Canal Plus ultimately
 
forewent their acquisition of Stream. Canal Plus is expected to now focus on
 
developing the operational performance of its subsidiary, Telepiu, by undertaking
 
a cost cutting plan and working on boosting the bouquet’s ARPU.

 
• In the US, where the merger between Hughes and Echostar was announced
 
on 28 October, 2001 — a deal worth an estimated 26.3 billion USD. The next
 
step is to win approval for the merger, first from the FCC (which is expected
 
to render its decision in June or July), and then from the FTC whose decision
 
is expected to be handed down in August or September, at the latest.

 
• In Spain where, after five years of fierce competition, Canal Satellite
 
Digital and Via Digital, both heavily in debt, announced their merger in May.
 
If it gets the go-ahead from Spanish and European competition authorities, the
 
deal will lead to the creation of a new company whose capital will be controlled
 
equally by Sogecable, Telefonica and Prisa (23% each), with existing shareholders
 
maintaining their stake.

 
If this consolidation trend gains approval and becomes increasingly widespread,
 
there will be repercussions in terms of consumption of satellite capacity for
 
TV programme broadcasting, repercussions which could lower the price of bandwidth
 
at term.

• Ubiquitous digital broadcasting

Digital television offers are now available on all broadcasting platforms:
 
satellite, cable and digital terrestrial (DTT). Despite the difficulties that
 
have been underlined, digital TV is gaining ground: 20% of all TV homes in the
 
three main geographical zones currently have access to it. Of note as well is
 
that digital TV’s development is linked primarily to pay-TV for now, regardless
 
of the platform and geographical zone in question, while DTT’s development
 
may well come to alter this fact.

All bouquet operators are gradually migrating their offer to digital. Digitising
 
a signal carries a high price tag for operators: it involves upgrading set-top
 
boxes and a promotional offer to accompany its launch. Such is notably the commercial
 
tactic employed by BskyB which has been subsidizing subscribers’ purchase
 
of their digital STB since July 1999, a tactic which has had two major effects
 
on the offer’s deployment: steady growth of the subscriber base (+ 1,000,000
 
new subscribers a year, on average) and swift digitisation of subscribers —
 
increasing from 21% on 30 June, 1999 to nearly 80% on 30 June, 2000.

For satellite operators, the primary consequence of the transition from current
 
simulcast broadcasting (dual analogue and digital broadcasting) to purely digital
 
is a reduction in the bandwidth required for TV broadcasting: at the end of
 
2001, for instance, the rate of transponder use on the AsiaSat 2 satellite was
 
62%, versus 67% on 31 December, 2000 — the decrease being due to a drop
 
in demand in the region, but also to the migration from analogue to digital.
 
Full termination of analogue broadcasting depends largely on the level of development
 
of the digital equipment in TV homes. It nonetheless appears that satellite
 
operators are generally moving in this direction and are already broadcasting
 
a great many digital channels.

• Growth potential offered by interactive TV services

 
Enhanced TV services, and more generally interactive TV services (iTV), represent
 
new growth prospects for satellite capacity providers.

Today in Europe, most satellite TV bouquet operators market a more or less
 
wide range of iTV services. In the UK, for instance, Sky Digital subscribers
 
enjoy permanent access to a host of iTV services. In France TPS states some
 
50 iTV services and rival Canal Satellite over 70, while in Spain the Via Digital
 
bouquet includes over 40 permanent services.

Even in those countries where the iTV services offered via satellite remains
 
relatively limited (notably Northern Europe, the US and Latin America) satellite
 
pay-TV bouquet operators generally provide at least an electronic programme
 
guide (EPG) and a few basic services (weather and games in particular).

Given the impact that these services has on ARPU, there is no doubt that satellite
 
TV bouquet operators will seek in the short to medium-term to acquire or extend
 
the range of iTV services included in their offer, particularly in view of the
 
introduction of new digital video receivers such as PVRs that will make it possible
 
to launch new, more innovative, and especially more highly personalized, iTV
 
services.

Nevertheless, given the still limited memory that currently equips first generation
 
decoders, the bitrates used for existing iTV services rarely exceeds 1.5 Mbps
 
to ensure that download times remain bearable for users.

This means that, although the range of available iTV services will no doubt
 
grow in the short to medium term, the degree of sophistication of the services
 
offered will remain subject to the constraints of the specifications of existing
 
first generation decoders for some time to come. The use of video and animation
 
in iTV services, both of which consume a great deal of bandwidth, are not likely
 
to appear until the installed base of set-top boxes will be equipped with the
 
memory required to manage them, in other words not until a certain level of
 
renewal of the decoder base has been achieved.

Consequently, iTV services bouquet operators and service producers’ increased
 
satellite capacity requirements are not likely to be felt until:

• A minimum level of standardisation amongst iTV systems has been achieved;

 
• Sophisticated iTV services can be offered technically to a vast majority
 
of digital TV homes, in other words once new generation STBs and PVRs are in
 
widespread use in TV homes in the largest markets, making it a medium-term prospect,
 
then.

 
The "explosion" of the demand for satellite transport capacity linked
 
to the development of new iTV services, high bandwidth consumers, is nevertheless
 
not likely to come about unless the cost of bandwidth is deemed affordable by
 
iTV service producers, in other words, initially with respect to the expected
 
level of earnings for each type of service. The price of bandwidth (1Mbit/s
 
= 150K€) is, in fact, one of the primary obstacles to this new market’s
 
swift development: in order to take the greatest advantage of the situation,
 
satellite transport capacity providers’ tariff policies will also need
 
to adapt to the conditions for launching these new services.

• Modelling demand for satellite capacity for broadcasting TV and interactive
 
TV services in Europe

 
Taking into account the trends described here above, IDATE has modelled the
 
evolution of demand for satellite capacity dedicated to broadcasting television
 
and interactive TV services in Europe, as well as the associated turnover to
 
be shared by satellite operators in this zone. Our evaluation of the Western
 
European market indicates that this market is likely to account for over 300
 
transponders in 2010, and represent a turnover of roughly 927 million EUR.

• Growth factors in the short-medium term

 
The financial difficulties that the consumer audiovisual sector is currently
 
experiencing lead to opting for a cautious approach with respect to the development
 
prospects for this sector in the short-medium term.

Over the past few years, the satellite TV sector in most of the world’s
 
largest markets has experienced relatively swift growth of the direct-to-home
 
(DTH) penetration rate and of the satellite television offer, both pay-TV and
 
free to air. The market has thus entered into a phase of maturity in the US,
 
Japan, Latin America and Europe, even if Eastern European nations still represent
 
a certain potential. It is estimated that an average 40% of TV homes will never
 
subscribe to a pay-TV offer. For capacity providers, from a geographical standpoint,
 
sources of growth are therefore now located on the highly coveted but still
 
equally closed Chinese market, and in those geographical zones which are economically
 
unstable and far more restricted, i.e. the Middle East and Africa.

With respect to the consumer audiovisual applications that are supported by
 
satellite, the sources for short-medium term growth remain uncertain:

• The success of interactive TV, and the satellite transport capacity
 
needs that will result, depend on both the speed of widespread use of standards,
 
the rate of renewal of the installed base of decoders and on a decrease in the
 
price of bandwidth

 
• In view of digital terrestrial’s "failure" in the US,
 
the prospects for TV channel operators’ migration to an HDTV system for
 
satellite broadcasting appear distant. The subsequent impact that this transition
 
could have had on players operating on the European market will probably not
 
come about. In the absence of a strong policy initiative from European authorities
 
and/or Europe’s leading audiovisual players, HDTV does not represent a
 
prospect for new revenues for the European satellite industry in the short-medium
 
term.

 
• Satellite is still unable to compete fully with cable in the deployment
 
of VOD services, added to which the development of this new type of service
 
can not be counted on to boost satellite operators’ revenues in the short-medium
 
term. It is true that, if we consider that NVOD services which are based on
 
the dual principle of a vast catalogue of programmes coupled with a tight showings
 
schedule could well constitute a true alternative to video-on-demand services,
 
satellite would have a role to play, provided that:

• A balance can be found between the number of programmes, the frequency
 
of showings and viewers’ actual use of the service in order to limit the
 
number of titles offered as little as possible;

 
• Given the number of channels required to implement this type of service,
 
considerable progress in terms of TV signal compression and/or significant reductions
 
in the tariffs charged by capacity providers are made.

• Thanks to multi-beam technology, satellite can finally serve local TV
 
channels more efficiently, although the choice between cable or terrestrial
 
broadcasting and satellite broadcasting will need to be made in favour of satellite.
 
Here again, apart from the viability of local television’s business models
 
on certain markets, the issue of broadcasting costs arises once again.

Two conclusions can be drawn from this brief analysis of the factors driving
 
growth of the satellite industry in the short-medium term:

1/ In the short term, sources of profit should probably be sought in areas
 
other than on the "consumer" audiovisual applications market. Given
 
the current economic conjuncture and the financial difficulties that the world’s
 
leading audiovisual players are experiencing, in the short term satellite operators
 
are likely to generate better financial performances on the market’s "corporate"
 
sector by focusing on the development of business TV, private network TV services
 
(TV services geared to distribution networks) and on rich media interactive
 
services aimed at the corporate market.

2/ One of the major challenges for satellite capacity providers in the short-medium
 
term is doubtless the implementation of a tariff policy that is adapted to the
 
conditions required for launching new audiovisual services, and iTV services
 
in particular, factors for growth of the entire industry in the short-medium
 
term.