By James Careless
With the first five years of the 21st century nearly over, the satellite industry is looking ahead to the next five years with many questions in mind: What applications will be money makers? How will HDTV, IP, and the military's use of commercial influence the market? How will new mergers and recent acquisitions change the business landscape for the global satellite industry?
To get expert answers--or at least well-informed predictions--Via Satellite posed these and other questions to the satellite industry's most respected authorities. Our panel was comprised of:
Simon Bull, senior consultant at COMSYS; David Cavossa, executive director of the Satellite Industry Association; Patrick French, regional director, Europe and senior analyst, Northern Sky Research; Susan Irwin, president of Irwin Communications; Phil McAlister, director of Futron Corporation's space and telecom industry analysis division; Peter Nesgos, a partner with Milbank, Tweed, Hadley & McCloy LLP; Roger Rusch, president of TelAstra, Inc.
Via Satellite: Compared to the first half of the decade, will the satellite industry perform better, the same or worse in 2005- 2010?
Patrick French (French): In terms of the commercial satellite telecommunications market (FSS operators, and others), Northern Sky Research expects that the flat-to- declining market numerous operators have experienced in the last two years will level out and grow in many cases. The video market will remain the foundation of this market and IP satellite broadband services stand a real chance to make a significant positive contribution toward the end of the decade.
Susan Irwin (Irwin): Better. Given the infusion of new investments, new markets and what I perceive to be a renewed sense of optimism within the satellite industry, I believe it will perform better throughout the next five years.
Peter Nesgos (Nesgos): Marginally better on the whole. Decisions on capital expenditures for new space projects are being made quite conservatively, with limited exceptions (that is, in the DTH space). Fixed satellite services will likely see some growth in new capacity ... DTH and HDTV will be key drivers [and] broadband service will likely see modest growth with the start of service. This will translate into flat performance in the manufacturing and launch services sector.
Phil McAlister (McAlister): This decade is better viewed in terms of three phases. The first phase was characterized by a rapid slowdown in the growth rate for most satellite-related markets, with some markets actually contracting (DTH TV was a notable exception). The second phase is characterized by a stabilization of most markets, but no significant growth. In the latter part of this decade, as the overcapacity in most markets gets absorbed and some new service offerings get some traction, we will start to see more robust growth rates.
David Cavossa (Cavossa): Throughout the next 10 years, the general awareness of the critical role satellites play in our economic and physical security will increase substantially. This will hopefully help the industry develop and serve new markets and users.
Roger Rusch (Rusch): The sale of satellite service companies to private equity firms means that there will be changes in management priorities. Not all decisions can be predicted, but we should expect that investment decisions will be more cautious and deliberate. Some strategies may change. The new owners will insist on higher profits and free cash generation so that the new owners can pay off the debt that was raised for the purchases.
Via Satellite: What sectors do you expect to be market leaders? Which ones will offer satellite service providers and equipment manufacturers the best chances to make money?
French: We believe that DTH services will account for the majority of growth in many of the markets in the coming years. There will be a few weak spots (Latin America and possible further consolidation in Europe); however, even these weak markets should improve once the shakeouts have occurred. Dropping equipment and bandwidth prices along with expanding applications will continue to allow satellite broadband to increase its penetration with the large, medium and small enterprise sectors. The emergence of a strong satellite broadband market within the consumer and small office/home office (SOHO) segment remains a distinct possibility; however, the window of opportunity will not remain open forever as other technologies are developed and enter the market (WiMAX and improving range of DSL services, and others).
Irwin: Certainly the consumer market sectors, especially DBS/DTH and satellite radio will be market leaders. The companies that are involved in making software and hardware for those markets, that is, DVRs, iTV, HDTV will also benefit. Lastly, the government market will continue to offer revenue opportunities to global fixed and mobile satellite service providers.
Nesgos: In the near term, providers of satellite capacity for HDTV and government services applications will lead the pack in generating steady income. Digital audio radio will continue its demonstrated incremental growth.
Rusch: DBS is the clear leader. It would be wildly profitable today except that it is investing to increase market share. DBS will continue to grow because it has fundamental advantages over terrestrial alternatives. Digital Satellite Radio is likely to attract more subscribers than television DBS/DTH in the United States.
McAlister: DTH and VSAT. These are the highest growth areas and offer the biggest opportunity for mass manufacturing, though equipment prices will continue to decline. DirecTV's move with the Spaceway satellites is profound and will ensure DTH remains competitive with cable for many years. It also provides news corporations with an opportunity to test the Internet broadband market without committing a ton of capital/capacity.
Bull: In VSAT, I see broadband programs of all types--basic local government, schools and local communities--growing in importance. There are many large initiatives of this type in Asia, Latin America and Europe. Base enterprise services will continue to be strong: 2003 saw some exceptional growth over 2002 and there is good evidence that service pricing is holding steady.
Cavossa: I expect the government but more specifically the U.S. Military and U.S. Department of Homeland Security to increasingly find new uses for commercial satcom as they expand their network-centric needs in fighting the war on terrorism and responding to both natural and manmade disasters in the United States and throughout the world.
Via Satellite: How do you see the growth of HDTV and ethnic programming shaping the next five years of satellite-enabled broadcasting services?
French: We do see increased satellite broadcasting of HDTV and ethnic programming. HDTV programming will have the greatest impact in developed markets such as the United States, Japan, Australia/New Zealand, Western Europe, Canada and South Korea. We forecast that hundreds of new HD channels will begin to be broadcast globally within the next five years; however, advances in compression in digital programming implies that this will translate into moderate growth in the lease of satellite transponders with the majority of the impact coming later in the decade.
Irwin: Given the ability to distribute to broad geographical areas, satellite is a natural transmission medium for HDTV, particularly in regions where DTH satellite systems thrive. Clearly, consumer equipment prices have to plummet in order for this substantial growth to occur.
Nesgos: This is going to be pretty significant and driven as much by hardware upgrades as by content. While ethnic programming will be important, so will specialty channels and programs.
Rusch: HDTV will certainly create more demand for DBS/DTH satellite capacity ... A wild card could be the introduction of a la carte rather than bundled video services. If users only pay for the video channels that they want to watch, the multichannel distributors may elect to eliminate some of the weaker offerings.
Via Satellite: Will satellite broadband services such as Wildblue finally take off, or is satellite broadband doomed to be a marginal player?
French: We recognize the potential market that Wildblue is addressing and believe that should Wildblue meet its stated services levels and pricing, then it should have some success. However, we consider the most promising path to success to be tying together satellite broadband with satellite TV and a concrete and active partnership between Wildblue and a satellite TV operator has yet to be put in place. Further, advances in increasing the reach of DSL loops and the introduction of WiMAX and 3/4G technology will work to reduce the potential available market for Wildblue.
Bull: Hopefully yes. I do not see the challenge as technical, but rather a marketing and operational issue. I believe that the learning curve will be painful, but that Ka-band spotbeam technology will [help to] bring about a major change. With a favorable wind it should also help raise the awareness of satellite broadband as a viable alternative when terrestrial is not available.
Irwin: Taking off and being a marginal player are probably synonymous in the broadband satellite sector. Satellite will only become the preferred mode of broadband in rural areas and developing countries. If the business models make sense with the kinds of numbers that apply to those populations, then the broadband satellite players will be successful. If their returns on investment depend on achieving a dominant market share, they will fail.
Nesgos: If marginal implies niche, then yes; for the near term, the market for broadband satellite services will likely witness a modest uptake ... The question is whether it will develop in line with operational costs.
Rusch: Growth in broadband services has been almost a religious belief in the satellite industry for a decade. I expect that it will create a temporary jump in the use of satellites for broadband. However, based on growth trends, it appears that satellite broadband may be a marginal player and seems likely that it will never be a significant alternative to terrestrial solutions.
McAlister: Every analysis we perform on this market shows it to be a niche service offering. Even if it does manage to become mainstream and be competitive with terrestrial service offerings, it will take a number of years before it will be profitable.
Via Satellite: How well will Iridium and Globalstar fare in the next five years? Will military customers remain as the savior of satellite telephony, or will it find other ways to come into its own?
Rusch: Iridium and Globalstar investors will continue to dream the impossible dream. These LEO systems can never compete on a cost basis with geostationary solutions. Satellite lifetime is too short. The capital cost for replenishing the constellations is overwhelming. Operating costs are high. Service quality is low. The military is unlikely to invest the major funds needed to save these systems.
McAlister: The military was the savior of Iridium right after the bankruptcy ... Since then, Iridium and Globalstar have really diversified their offerings and their customer base. I do not believe either will require a long-term commitment from the military in order to remain viable and healthy throughout the next five years. The interesting question to ponder is whether Iridium and Globalstar will be successful enough during this time to enable them to launch follow-on systems once the current constellation obsolesces.
Nesgos: MSS constellations will face a day of reckoning soon, as second generation systems are contemplated. It is unlikely military applications will be sufficient to sustain operations on their own. As new enhanced systems will be needed in the next few years, the requisite capital will be hard to come by without a pretty compelling business case.
Via Satellite: VSAT applications have been booming due to the industry's acceptance of IP as a de facto standard, and the ever-increasing speed of satellite transmission. How far do you expect these trends to go: just how varied will the VSAT market of 2010 be?
French: The continued effort to push down bandwidth and equipment costs has allowed satellite networks to continue to penetrate and expand an ever-broadening segment of the enterprise market. These successes have led to a positive ROI for satellite networks with ever smaller site numbers and to amalgamate together individual clients allowing for a spreading of costs over an even larger set a users. The ideal will be for clients to not even question if network connectivity is being provided by terrestrial, satellite or some hybrid. Satellite networks are continuing to move in this direction and will continue to play an essential role through 2010 and beyond.
Nesgos: Right now, IP is the strongest driver of future growth. Whether we will witness a steady and stable growth or a paradigm shift in demand will depend on how quickly and pervasively IP is adopted. I view VSATs as an applications-driven market whose success will depend on strong and effective marketing.
Rusch: Although the VSAT sponsors do not like this comment, it seems that VSAT and broadband services will merge. I predict that there will be between three and four million broadband subscribers and/or VSAT terminals in 2010.
Via Satellite: The satellite manufacturing industry has finally started to move toward consolidation. What are the trends, and the business chances, for this sector in the next five years?
McAlister: Futron's forecast shows that there is demand for eight to 15 commercial GEO communications satellites (C-, Ku- and Ka-band) per year throughout the next 10 years. This is taking into account positive developments such as the increase in HDTV programming, the expansion in last mile broadband services, and the increased demand from government users. Satellite manufacturers are going to have to continue to gut it out in a tough market. Consolidation would help; but this probably will not happen.
Nesgos: Consolidation can only go so far for national strategic reasons. Even though the business case supports fewer competitors, we need at least two major satellite manufacturers in the United States and Europe. The wild card will be how suppliers from Russia, China, Japan and India will figure into the equation in the 2005-2010 time frame.
Rusch: Unless there are some surprises, a continuation of strong competition with price-cutting and low profits seems most probable. At some point we might see self- initiated contraction. Most of the satellite primes are part of larger companies that could provide an administrative structure for a much smaller team of satellite builders.
Irwin: The good news is that there may be a resurgence of satellite replacement orders in the 2007 to 2010 era. This could give springtime to the survivors or even rejuvenate those companies that choose to hibernate through the long cold winter.
Via Satellite: Will military business remain a major component of the commercial satellite sector? Or will the military build more of its own satellites, and withdraw from the commercial market?
Cavossa: Both. The military will need to build its own protected satellite systems. However, the military is also best served by some combination of both commercial and Milsatcom.
McAlister: It will remain a significant component of the commercial sector while launching its own assets.
Rusch: It seems possible or even probable that the expansive military campaigns of the United States will decline in the years ahead. This could reduce the demand for commercial satellite services. It is also true that several military communications systems are under production and others are being planned. At the same time, military leaders believe that they need more capacity and are prepared to lease commercial services rather than build a permanent infrastructure. I do not think they will ever withdraw from the commercial market, but the rate of growth could taper off or even decline.
Irwin: The military will build more of its own satellites. However, as military satellite applications grow and efforts to form strong alliances between the Defense Department and commercial satellite operators continue to be pursued, the likelihood of cooperation will become stronger and the government will continue to support the commercial market.
Via Satellite: Launcher overcapacity remains an issue; How will they succeed in making their revenue numbers in the next five years?
McAlister: The launch vehicle manufacturers will not consolidate. Maybe a product or two will drop from the market, like the Delta 4 did last year. But the companies are too distinct and too tied to nationalistic concerns to consolidate.
Rusch: The situation for the launch service companies remains very similar to the satellite manufacturers: There is enormous overcapacity in the launch industry. This has been the case for nearly 10 years.
McAlister: I think in the near term, capacity has tightened up somewhat. It is hard to get a ride throughout the next 18 months given the manifests of the major launchers. However, once Europe regains its footing and the Ariane 5, Soyuz and Vega begin launching regularly, overcapacity will become an issue again.
Rusch: This is a business that would benefit from emphasis on high quality ... Consider a comparison with the airline industry. A satellite and an airplane cost about the same amount of money. Do you think that millions of people would fly if the reliability levels for airplanes were as low as for satellites?
Via Satellite: Besides the above, what major trends do you expect to play out in the next five years?
Nesgos: In fixed satellite services, the key trends will be rationalization and consolidation. I expect that we will be witnessing the consequences of financial discipline from financial sponsors, which now dominate the major operators and will shape this business. The DTH business will continue to be a major factor. We should see significant growth in emerging markets such as India and China as well as Eastern Europe. Latin America will likely see a resurgence based on new and better product offerings. In the U.S., the steady trend of continued but gradual erosion of the cable subscription base will be the key driver as continued collaboration with telcos will enhance offerings through bundled services.
Rusch: The following is a list of my predictions including the ones above:
- Broadband market share will be less than 0.5 percent
- FSS transponder lease prices will drift lower due to overcapacity
- MSS will serve millions of users
- LEO satellite constellations will disappear
- HDTV will become pervasive within a decade
- DBS/DTH will dominate television broadcasting
- DARS will become bigger than DBS-TV in the United States
- There will be a market for small GEO satellites
Based on our experts' answers, 2005-2010 will see growth in the areas of DBS/DTH, digital satellite radio, VSAT applications, HDTV and government usage of commercial satellite services.
On the downside, our panelists expect satellite broadband and MSS to be facing challenging times in the years ahead. They also predict that the satellite manufacturing and launch sectors will not consolidate--even though both have too much capacity at present--due to national security concerns.
If there is a message in all of these predictions, it can be found in the words of Phil McAlister. Musing on the next five years, he said, "The current market will not change dramatically in the near term. We, in the industry, have to get used to that reality."
As Via Satellite's Senior Contributing Editor, James Careless has covered all aspects of the global satellite industry for more than six years.