This article was first published in Satellite Finance in April 2011.
The need for alliances
Given the ever-increasing congestion in orbital position filings, access to space is an ongoing challenge. For many new entrants (and, indeed, some existing operators) this is a particular issue where, for example, they do not have a fully co-ordinated orbital position available for use. Despite the International Telecommunication Union's (ITU) attempts to reduce the problem by weeding out so-called "paper satellite" filings, finding a suitable orbital position is often not straightforward.
There may be many reasons why a slot is not readily available. The orbital filing may be submitted but the challenges of achieving co-ordination before projected launch may mean that the slot is difficult to use commercially. Completing co-ordination is, of course, a time consuming process and can be delayed if third party administrations are reluctant to agree to a new frequency use.
Alternatively, where an existing operator wishes to expand its footprint but does not have a suitable orbital position, it will need to look elsewhere.
In cases such as these, the most attractive solution may well be to use a form of joint venture or alliance with a third party which has secured orbital slot rights but, for whatever reason, is not in a position to commercialise them. This may arise where an operator has submitted its orbital filing but is not currently in a position to finance the procurement of a new satellite. Or it may be that the operator's strategic objectives have now changed and, hence, the orbital filing is less critical to its own business. Here, if the filing is to be maintained, the operator will still need to ensure that the relevant frequencies are brought into use within 7 years in accordance with ITU deadlines.
Joint ventures - picking the best model
Joint ventures can be put together in a wide variety of ways, according to the commercial priorities of the parties. Selecting the best structure can be a major factor in promoting success.
The first option would be for the orbital position to be licensed on arm's length commercial terms to the new operator. At the outset, the parties will need to agree on a suitable valuation for the orbital rights. This may depend partly on whether, for example, the slot is to be provided for the lifetime of one satellite or also to cover replacement or follow on satellites. As part of the deal, the slot owner will be keen to ensure that the new satellite is launched into the relevant slot and use of the frequencies is maintained. The parties will also need to discuss how far the frequencies will still be available after a launch failure or if the satellite life ends prematurely.
Secondly, a joint venture could involve the orbital slot being made available to the new operator in return for rights to use part of the new satellite’s payload. This has advantages for both parties. The operator acquires access to an orbital slot for its new satellite, while the orbital slot owner obtains the use of significant new capacity, without having the usual responsibilities for procurement, launch and financing of the satellite.
A third option would be to use a more formal structure, involving a joint venture company (JVCo), in which both parties are shareholders. A JVCo approach is also valuable if third party investors are involved. Under this option, the orbital slot would be made available to JVCo under appropriate commercial licensing terms, with commitments from JVCo to procure, launch and operate the satellite in the desired slot. The parties may derive commercial benefits by a combination of dividends from JVCo and/or exploitation of the capacity on the new satellite.
Fourthly, the parties may construct an alliance based on a form of hosted payload structure. While hosted payloads have traditionally been viewed as a purely governmental concept, enabling, for example, US Government agencies to acquire access to space segment capacity at more limited cost, the approach could be adapted to a commercial structure involving other players.
Making the deal work
Whichever form of joint venture is used, the participants will need to address some fundamental issues about how the programme is managed, both during the procurement and manufacturing phase and during ongoing operations.
Of course, the most critical issue is to ensure that the parties' strategic objectives for the collaboration are properly aligned. Any collaboration of this sort is likely to last for at least 15 years and potentially significantly longer. So the commercial and contractual arrangements will have to be balanced effectively in order for the deal to be viable long term. A deal which is unduly favourable to one party will probably not pass the test of time.
Another of the key issues will be how to allocate responsibilities for managing the procurement of the satellite and the launch services and securing appropriate financing. Typically, while the sponsoring operator will expect to have the primary control of the procurement and operation, it will often also be keen to draw on technical assistance from the orbital rights owner; especially so where the operator is a new entrant. If a JVCo structure is adopted, the corporate governance mechanisms will be the focus for dealing with many of the issues relating to collaboration between the joint venture partners. These will need to be evaluated alongside the commercial terms under which each party contributes to, and receives value from, the JVCo.
Finding the right structure for an alliance or joint venture of this sort will inevitably depend on the priorities of each of the parties. However, where there is a clear desire to collaborate, an appropriate solution should be achievable.
Sign up to our email digest