The bankruptcy of satellite industry stalwart Loral Space and Communications [OTCBB: LRLSQ] and the sale of its valuable North American satellite assets to rival Intelsat for $1.1 billion ranked as the biggest story of 2003.
Other important stories during 2003 included News Corp’s [NYSE: NWS] pending purchase of Hughes Electronics [NYSE: GMH] and its satellite business units, the brisk growth of satellite radio in the United States, and the sale of Inmarsat to a pair of private equity firms. Another key story whose full impact will not be clear for several years is Cablevision’s [NYSE: CVC] launch of its high-risk VOOM satellite TV business.
The past year also marked the return of financial market interest in satellite companies that previously had to scramble for funding. In fact, Sirius Satellite Radio [Nasdaq: SIRI] raised $150 million last month, which the company used to sign a seven-year, $220 million contract with the National Football League (NFL).
Fixed satellite services (FSS) operators, a traditional source of industry strength, turned in a lackluster financial performance due to overcapacity in key regions. The FSS operators have responded by broadening their reach to provide hybrid services that include fiber-optic cable capabilities.
The war in Iraq spurred use of satellite capacity by the U.S. military and broadcasters worldwide. However, that increased demand was insufficient to compensate for an overall sluggishness in demand for satellite capacity. A related trend that crystallized this year was growth in U.S. government demand for satellite services of various kinds.
Regulation of the industry made the top 10 list due to a potentially important change by the Federal Communications Commission (FCC) to its satellite licensing process, as well as a decision to allow ancillary use of terrestrial capabilities by mobile satellite services (MSS).
The FCC’s International Bureau adopted a first-come, first-served satellite licensing regime aimed at speeding approval and deployment of satellite systems.
The Loral-Intelsat transaction unquestionably was the most important story of 2003 in the view of many industry observers and insiders queried by SATELLITE NEWS for this article.
“After over 40 years of existence, Intelsat finally got a foothold in the U.S. domestic market through the approval of the acquisition of several Loral satellites and orbital locations,” said D.K. Sachdev, president of Vienna, Va.-based SpaceTel Consultancy.
Maury Mechanick, an attorney in the Washington office of White & Case, said, “By far and away the biggest story of 2003, for sheer drama and reverberations throughout the industry was the Loral bankruptcy. Among other things, it has probably indelibly altered the fundamental nature of the relationship between satellite operators and satellite manufacturers from this point forward.”
Intelsat CEO Conny Kullman heartily agreed. “First, it would give us immediate access to the North American video and corporate network markets. It would also provide further evidence of a consolidation/convergence trend in the industry. Finally, it validates our commitment to enhancing our geographic coverage and further diversifying our revenue stream. It’s a clear indication of our belief that a consolidating satellite services marketplace is going to be led by those who can provide their customers with end-to-end connectivity on a global basis,” Kullman said.
The soon-to-close acquisition of Hughes Electronics and its units by News Corp ranked as the top industry story in the opinion of Chuck Hewitt, former president of the Satellite Broadcasting and Communications Association (SBCA). The deal could help satellite TV enhance its competitiveness with cable, he added.
Rival EchoStar Communications [Nasdaq: DISH] also impressed Hewitt by reaching an agreement with SES Americom, a unit of SES Global [Luxembourg: SESG], for additional satellite capacity at a prime orbital slot above North America. That pact combines traditional direct broadcast satellite (DBS) capacity with medium- powered Ku- and Ka-band services to expand EchoStar’s potential product offerings, he added.
Satellite radio also made important progress in 2003. Joseph Clayton, president and CEO of Sirius, said he is optimistic that the economy is starting to “come back” and retail sales are improving. Both factors are positive for consumer electronics sales in 2004.
Clayton’s confidence was reflected by the $220 million deal he signed last week to obtain a treasure trove of exclusive NFL programming that will allow his service to air every regular season game for the next seven years, starting in 2004.
Rival XM Satellite Radio [Nasdaq: XMSR], the front-running U.S. satellite radio service, surpassed the 1 million subscriber mark last month, less than two years after its national debut on Nov. 12, 2001.
XM has firmly established a new mass-market entertainment medium for U.S. consumers, said its President and CEO Hugh Panero. XM reached 1 million subscribers in less time than cable television or online subscription services — two of the nation’s most successful subscriber businesses.
The bad news for satellite radio was the bankruptcy of Luxembourg-based Global Radio. That company could not raise the necessary funding to proceed with its plans to offer satellite radio in Europe. An attempt to fill that marketplace void will be made by a partnership involving Washington-based WorldSpace using an in-orbit satellite that covers Africa, the Middle East and most of Europe.
The sale of London-based Inmarsat is another key story in 2003, said Phil Spector, managing partner of the Washington, D.C., office of the law firm Paul, Weiss, Rifkind, Wharton & Garrison. “This represents a decisive shift away from the old model for Inmarsat, which was previously dominated by former state-owned telephone companies,” Spector said.
A story to track into 2004 is the development of HDTV, and the role Cablevision’s VOOM service may play in serving the market, Sachdev said. VOOM features an exclusive package of 21 commercial-free HDTV channels created to meet the demand of the rapidly growing but underserved HDTV audience.
Tom Watts, a satellite analyst with investment firm SG Cowen, said 2003 marked a renewal of support for a broad cross-section of the industry from the financial markets.
“The stock market roaring back made capital available again to the satellite industry, enabling Hughes and EchoStar to re-finance, and Sirius and XM to raise additional capital,” Watts said.
Tim Logue, a consultant in the Washington office of the Coudert Brothers law firm, said he was heartened by the gradual recovery of the satellite manufacturing industry that began to take shape in 2003. However, Logue noted that softness continues in transponder demand.
Another positive development for the satellite industry in 2003 was its value during the war and reconstruction in Iraq.
Susan Irwin, president of the Washington-based satellite consulting firm Irwin Communications, identified the need for live remote broadcasting and military communications from the war in Iraq as an “unexpected driver” for satellite use and Inmarsat’s new regional BGAN service.
“It was impossible to get signals out of the war zone via traditional broadcast or telecom methods,” Irwin said. “While the hope is that there will not be another such need, these satellite solutions proved to be viable, and will now be more likely to be used to communicate from and between remote locations that are not wired.”
To that end, government contracts are becoming more important for satellite operators.
Jim Frownfelter, Greenwich, Conn.-based PanAmSat’s [Nasdaq: SPOT] chief operating officer, said growth in demand for commercial services has not been rising nearly as fast as the needs of government users.
PanAmSat is one of a number of satellite companies targeting growth opportunities in government services. “In a flat to declining market, the new business from government has created a swing from negative to positive growth for some operators such as PanAmSat, but just having positive growth of a few percent is not enough to make FSS a growth business,” Watts said.
In the view of Armand Musey, a principal with the boutique investment-banking firm NearEarth, the heightened growth in demand from defense and civil agencies has been largest in non-consumer applications such as remote sensing and, to a lesser extent, FSS.
“The defense demand appears to be saving the remote sensing industry but is merely a nice add-on for the FSS industry,” Musey said.
Overall, government use of commercial systems is not likely to rise above 10 percent to 15 percent of most companies’ total revenues, but it will account for a substantially larger share of many satellite operators’ revenue growth, said Richard DalBello, president of the Alexandria, Va.-based Satellite Industry Association.
Giant aerospace companies that build satellites and are affiliated with companies that launch them are trying to tap both the government and commercial markets wherever the opportunities exist.
One example is EADS Astrium, a Paris-based satellite manufacturer that is going after the increased demand for military satellites. The company’s Paradigm business unit gained a GBP2.5 billion (US$4.4 billion) contract to supply the UK military with satellite communications.
Paradigm will contract with EADS Astrium for the design and manufacture of two satellites, launch services and corresponding ground segment, said Remi Roland, an EADS spokesman. The project will enable the UK government to provide secure military communications services over the next 15 years. EADS Astrium also won contracts to build four commercial communication satellites.
The world’s largest aerospace company, Boeing [NYSE: BA], has attempted to land contracts of its own but has been hamstrung by ethical scandals that include obtaining internal documents from rival Lockheed Martin [NYSE: LMT] prior to bidding on military launches. Further ethical breaches have come to light in recent weeks regarding military aircraft contracts, leading to the removal of the company’s chief financial officer. In addition, Boeing CEO Phil Condit stepped down Dec. 1 in the wake of the scandals.
At the same time, Boeing remains a giant in the satellite and space markets.
Joe Tedino, a Boeing spokesman, said his company is looking to tap the satellite “replacement market” that accounts for roughly two-thirds of the current demand for commercial satellites, while also bringing to that market technologies developed from its government work. “We’ve been able to complement the commercial and government business very well,” Tedino said.
Andrea Maleter, technical director of Bethesda, Md.-based market research firm Futron, ranked FCC licensing and MSS spectrum use changes high on her list of the industry’s biggest events in 2003. She also pointed to the spectrum allocation decisions at the World Radiocommunication Conference (WRC-03) as another important development.
Other highlights of 2003 that did not make the top 10 list but received mention from Roger Rusch, president of the Palos Verdes, Calif.-based consulting firm TelAstra, included Europe’s pursuit of the Galileo satellite navigation project, increased demand for HDTV capabilities, and the sale of bankrupt Globalstar to a new owner.
–Paul Dykewicz
(D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Maury Mechanick, White & Case, 202/626-3635; Conny Kullman, Intelsat, 202/944-7800; Jim Collins, Sirius Satellite Radio, 212/901-6422; Chance Patterson, XM Satellite Radio, 202/380-4318; Chuck Hewitt, independent consultant, 410/544-4108; Tim Logue, Coudert Brothers, 202/736-1816; Phil Spector, Paul, Weiss, Rifkind, Wharton & Garrison LLP, 202/223-7340; Kathryn Lancioni, PanAmSat, 203/210-8606; Joe Tedino, Boeing, 703/923-4054; Remi Roland, EADS Astrium, 33-1-34-88- 35-78; Armand Musey, NearEarth, 646/452-9931; Richard DalBello, Satellite Industry Association, 703/739-8357; Andrea Maleter, Futron, 301/347-3450; Roger Rusch, TelAstra, 310/373- 1925)
Source: Paul Dykewicz, SATELLITE NEWS