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In Satellite Contracts, What You Don't Know CAN Hurt You

Posted By Robert Bell, Friday, July 6, 2012

Satellite capacity is a uniquely valuable asset.  It can do some things, like broadcasting one signal to millions of destinations, better and cheaper than any other technology.  But it is also a scarce asset, thanks to the laws of physics and the skilled yield management of the operators that fly spacecraft in Earth orbit.

In 2011, the members of World Teleport Association shared with us in confidence the amount of money they spend on satellite capacity.   The average teleport operator spends an amount equal to 47% of revenue – in effect, turning over half of its annual income to the provider of transmission capacity in the sky.  Spending on terrestrial capacity doesn't even come close.

That is why, on June 13, we published a report titled Best Practices in Satellite Capacity Contracts.  It focuses on the actual terms of capacity contracts that can create potential harm or advantage for the service provider, from ramp ups to termination clauses, portability to usage and resale rights.  It may not be a thrilling read to take on your summer holiday, but it offers valuable insights culled from interviews with teleport executives who know the contracting process inside and out. 

What are the biggest potential traps to avoid when you sign a contract for satellite capacity? They range from everybody's top-of-mind concerns to subtle nuances in wording.            

Lease Term
Anything in the contract that doesn’t line up with your customer contract represents a risk to your business.  "The conditions that cause us the most concern in satellite capacity contracts,” one teleport operator told us, "are firm, fixed end dates without respect to who the end user is and what their service is.  Sometimes our customer may only ask for one to two years, while the satellite operator is asking for 7 years.  We should be able to match the same terms as our customer requests.”  

Your transponder may not suffer interference from cross-pol or adjacent carrier interference today, but what about five years into the contract?  Will you have the right to move or end the service if interference becomes so bad that, in your judgment, you can no longer use your capacity?   

Resale Rights 
Some contracts place restrictions on the teleport operator's ability to resell capacity.  It is understandable that satellite operators want protection from competition from their own customers. But some restrictions can severely limit the service provider's options.  A teleport operator with long-term leases and major media customers said that, "We want the ability to resell and use the capacity for video, data, or whatever we want, with or without value-added services.  Reducing the risk as a wholesale buyer, by being able to resell, is my main request.”  

Liability and Indemnification 
Most contracts require the buyer to indemnify the operator against damage due to an act or omission of the buyer.  The buyer may also be required to indemnify the operator against claims or damages by third parties.  Some teleport operators find these uncapped liabilities to be their single largest concern.  "Normally the satellite operators impose liabilities on the contract, uncapped liabilities as a start,” said one executive.  "We don’t want to sign up to unlimited liabilities.  That is the most difficult issue to negotiate, and is very important as far as risk management is concerned.”  

Buyers may not always be able to get the terms they want.  That's a matter of negotiating leverage, which comes down to how much you are buying, in what market, for what purpose, and who you (or your customer) are.  Above all else, our experts stressed the need for clarity.   Buyers need to make sure their operations and their customer's expectations are aligned with what the satellite operator can actually deliver in both best and worst-case situations.  And they can only do that if the contract spells it out in detail.   

Best Practices in Satellite Capacity Contracts is available free to members of WTA and for purchase here on our site.  Read this post and other articles in Satellite Executive Briefing at Satellites & Markets.  

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