Satellite’s Future Is Not All ‘Doom and Gloom’

By D.K.Sachdev

Weak demand for new satellite orders recently forecast by Jim Albaugh, president of Boeing Integrated Defense Systems, must be taken seriously. But it does not suggest that the industry is in for a train wreck. Unlike his optimistic outlook a few years ago, Albaugh this time has come out on the pessimistic side, particularly for the commercial sector.

Albaugh’s perspective as the head of all the space-related activities for Boeing [NYSE: BA], the industry giant, is especially notable because the company now owns what was Hughes Space and Communications, the world’s perennial leader in commercial satellite orders. That operation has a pioneering legacy that includes the work of Harold Rosen, who built the first geostationary satellite. From that initiative was launched a new era of international and domestic telecommunications.

Periodic Pessimism

Since the beginning of the commercial satellite industry, there have been periodic pessimistic forecasts about the future of telecommunication satellites. One such moment occurred in 1988 when the first wideband undersea cable began operating under the Atlantic Ocean. However, time and again the satellite sector has reminded us of Gen. Douglas MacArthur by not fading away and instead becoming more and more efficient by managing to stand up to the challenges posed by the phenomenal advances in fiber-optic technology. As some of the diehards predicted at that time, while the relative share of satellites has declined, the overall size of the telecommunication pie has continued to increase sharply.

The slack demand for orders that the industry is enduring now with grit and determination, is due to two recent developments. First, manufacturers succeeded in selling a large number of high-capacity satellites with long life spans during the 1990s. As a result, the telecommunication satellite replacement cycle has become much longer. Second, a serious and unintended consequence of telecommunication deregulation was that the meticulous long-range planning for telecommunication needs, both at the national and international levels, disappeared. As a result, a series of almost reckless investments were made in fiber-optic routes, thanks to the go-go investment climate of the 1990s. These factors not only created excess capacity but also seriously impaired the ability of telecommunication entities to invest in satellite capacity. We can hope that such excesses will eventually be worked out of the system and a healthy business environment will once again prevail.

Albaugh could have legitimately touted his satellite manufacturing unit’s success as a provider of spacecraft for direct broadcast satellite (DBS) services. DirecTV, which purchased a number of satellites from the unit when it was part of Hughes, has been coveted by some of the world’s largest corporations. More recently, the continued growth of Thuraya’s subscriber base raises cautious hope that the lessons of previous failures in the mobile sector have been learned effectively. Recent initiatives by the Federal Communications Commission (FCC) to allow integrated satellite/terrestrial mobile networks, along with the steady but sure success of Inmarsat, show that the industry has a key role to fill in providing enhanced mobile communications services.

Satellite Radio Success

Another positive sign for the industry is digital satellite radio. Broadcast services offered via satellites are becoming part of the everyday lexicon of the young and the old. It is only a question of time before a sizeable fraction of the 750 million cars and trucks worldwide will have satellite radios. The next challenge being tackled is Internet and broadband capabilities via satellites.

A few words about the industry’s future are needed to put the latest sluggishness into context. One of the reasons for the dwindling order books of the “big five” manufacturers is that the two largest population areas of the world, China and India, are becoming self-sufficient in meeting their space-related needs. Because of their lower wages, they are building satellites at a reduced cost. Therefore, it is in the broader interest of the industry to have greater industrial partnerships across the globe. Obviously, a pragmatic view of the regulatory environment will be vital to enable these partnerships to form.

Overall, despite signs of gloom and doom, there is reason for modest optimism. What we are going through, in part, is a gut-wrenching change in the dominant market segments from traditional telecommunication to new growth areas of mobile access, broadcasting and broadband. Given the long history of the satellite community in creating – as well as enduring – change, we can be reasonably sure that this transition will happen without too many bruises.

D.K.Sachdev is president of Vienna, Va.-based SpaceTel Consultancy LLC. He can be reached at 703/757-5880.