By Owen D. Kurtin
Last year, we predicted that 2004 might go down in history as the year that the satellite business started to rationalize itself, turned the corner of the disastrous first years of the 21st century and positioned itself to take on both terrestrial competition and the challenge of new service offerings going forward. The dominating event of 2004 was the unprecedented entry of private equity firms into the space sector through leveraged acquisitions of several leading fixed satellite service (FSS) and mobile satellite service (MSS) operators, including Intelsat, Panamsat, New Skies Satellites, Inmarsat and Globalstar.
In the early part of 2005, the dominating event was the private equity exit and a probable harbinger of industry consolidation in the FSS sector lead by the Intelsat acquisition of Panamsat. One question left on the table in the wake of the faster-than-expected private equity "flips" is whether positive aspects of the private equity culture, such as financial, strategic and managerial discipline and accountability (as well as some potential negative ones, such as resistance to strategic investment that would be realized upon beyond the expected exit horizon) will infuse the satellite industry going forward.
But the IPOs and the Intelsat-Panamsat deal are not the only stories of 2005, and do not foretell all the likely stories of 2006. Prior columns in this space have described the success and changing business plans of Direct Broadcast Satellite (DBS) and Digital Audio Radio Satellite (DARS). DirecTV, which launched service in 1994, Echostar, which launched service in 1996, XM Radio, which passed the 5 million-subscriber level this year, and Sirius Satellite Radio have successfully established themselves as consumer choices and genuine competitors to their terrestrial service counterparts. It is time to stop calling DBS and DARS "emerging" or "new" services.
However, two emerging services grabbed a new spotlight in 2005, driven by the string of natural and man-made disasters that have beset the world: MSS satellite telecommunications and satellite imagery services.
As this column has also mentioned in the past, it is incredible that MSS should be back at all. The MSS telephony services of Iridium, Globalstar and ICO were the hope of the industry in the late 1990s, at a time when the ability of DBS to compete with terrestrial cable was not clear and when DARS was just a business plan marketing to long-distance truckers and had not yet launched satellites. The subsequent bankruptcies of all three cast a pall that lasted through 2003, until the high subscriber growth of DBS, the success of DARS and the private equity buyouts of FSS operators reenergized the industry.
Given that history, the reemergence from bankruptcy of the MSS operators, and particularly their relevance in providing telecommunications to disaster-struck regions when no one else could, has been remarkable. Globalstar, owned by Louisiana-based Thermo Capital Partners, in particular received a wave of positive publicity for its role in providing communications in flood-ravaged New Orleans this summer. While it is still unclear to what extent MSS telephony will emerge as a competitive service for "normal" conditions and to what extent it can or should be commercially paired with terrestrial wireless service, all analysts should recall to what extent they predicted that DBS and DARS were fated to remain niche markets before weighing in.
Earth imaging is another story altogether, although linked to the MSS reemergence by this year's disasters. Enormous press attention was given this year to industry players such as Orbimage and Digitalglobe for providing high-resolution images for a variety of commercially useful purposes such as disaster rescue and recovery, navigation, agriculture, traffic flow, meteorology, and security. In addition, the emerging industry has begun to rationalize itself: in the wake of the contracts awarded by the U.S. National Geospatial Intelligence Agency to Digitalglobe and Orbimage for next-generation satellites, Orbimage announced its acquisition of competitor Space Imaging, which had not won a contract. This early sector consolidation is almost certain to boost the surviving merged companies' fortunes.
2005 brought a substantial rationalization of the operator sector. What's ahead? Perhaps further consolidation of the FSS and manufacturing sectors. New Skies, the more widely expected deal for Intelsat until the Panamsat acquisition was announced, may be acquired by Eutelsat, SES Global or Intelsat. There may be some consolidation of the growing regional operator sector into the global operators, even as regional operators continue to hold their own in their markets. The manufacturing and launch services sectors stand to benefit from operator growth and vitality, but probably still need some combinations, such as the proposed Boeing-Lockheed Martin launch services joint venture, to thrive, if not survive. Manufacturers have resisted consolidation, and launch service options have actually increased. Specialization may provide an answer for some of these players, who may focus increasingly on civil or government/defense work, large fixed or small mobile service satellites and other niches.
Owen D. Kurtin is a partner in the New York office of law firm Brown Raysman Millstein Felder & Steiner LLP and a member of the firm's Technology, Media & Communications and Corporate Departments. He may be reached at +1.212.895.2000 or by e-mail at email@example.com.