Cover Story: The Year In Review: A Look Back
by Theresa Foley
The year 2001 turned out to be one of the more chaotic years on record for the satellite industry, even though the business seemed tranquil compared to the stormy telecom and technology sector. Many satellite companies are in the midst of a multi-year process of consolidation or break-up that is changing the face of the business. As the roster of players changes, so do expected areas of growth. As broadband services lost much of their shine in 2001, satellite broadcasting prospects took on renewed attractiveness.
The companion trends of consolidation and break-up were a major theme this year. Big financing was readily available to solid players with overarching strategic objectives but entrepreneurs found themselves for two consecutive years facing a severe shortage of money for high risk ideas.
Privatization of former intergovernmental organizations and the start-up of another long-planned new service, satellite radio, also were important changes in 2001.
The biggest story of 2001 came early on, in February, when Société Européenne des Satellites of Luxembourg struck an agreement to acquire GE Americom’s satellite unit for $5 billion. “Subject to regulatory approval, SES Global will become the world’s premier satellite operator with a global fleet of 29 fully owned satellites as well as 13 part-owned spacecraft through strategic investments in Asiasat, NSAB, Star One, Nahuelsat and Americom Asia Pacific,” said Romain Bausch, CEO of SES. He saw consolidation across the industry as the most striking change in 2001, and predicts more to come, “notably in Asia and Latin America, with SES Global intending to remain an active player in a changing industry.”
The SES-GE deal took most of the year to become final. When complete, the world’s largest global satellite operator with $1.2 billion in annual revenues and a fleet that includes all or part of 42 satellites will ascend to the top operators list, leaping over Intelsat and Panamsat in the highest ranks.
An even bigger acquisition was in the works over the entire course of 2001 as two suitors, Rupert Murdoch’s Sky Global and Charlie Ergan’s Echostar, bid to buy DirecTV and the other satellite assets owned by GM’s Hughes Electronics. Echostar won the contest in late October with a bid to pay nearly $30 billion for DirecTV and GM’s other satellite assets. The deal was expected to undergo rigorous scrutiny by the Justice Department and some analysts speculated that it could be blocked due to regulators’ concerns about creating a U.S. satellite TV monopoly. If it goes through, however, the combined entity will benefit through cost reductions and spectrum sharing, and Echostar will be faced with decisions on what to do with its huge stake in Panamsat.
Eutelsat also was in the acquisition mode in 2001, buying 21 percent of Spanish operator Hispasat in a deal that boosted the Paris-based operator’s reach across the Atlantic and signaled more expansion following its mid-summer conversion from intergovernmental organization to a private company.
Eutelsat and Intelsat both completed their privatizations in July, capping several years of planning by each and preparing each to issue public stock in the near future, as market conditions allow.
Intelsat expects to be more flexible and able to capitalize on its position as a technological pioneer and industry leader. “The change means we can move beyond providing only space segment, into giving our customers access to service and solutions, including last-mile and end-to-end capabilities that will help them grow. In addition, we have also gained flexibility in how we price our services and in access to the financial markets. By privatizing, we have gained the ability to grow into a much bigger player in the overall telecommunications market,” said Conny Kullman, Intelsat CEO.
Kullman believes the satellite industry is becoming more competitive through the restructuring that occurred in 2001 and sees Intelsat remaining at the top. “The industry players are recognizing the advantages of being global, and the economies of scale which come with increased scope of operations,” he said.
Tracking The Trends
New trends in satellite applications also took shape in 2001 as broadcast applications took on more importance and telecom uses of satellites felt the wind taken out of their sails. As evidence of the digital satellite TV revolution, Euroconsult reported in September that 8,276 satellite TV channels were operating, of which more than 7,000 were created in the last four years. In 2000, 53 multi-channel satellite pay TV services were in existence, using 542 full-time transponders.
Marc Giget, Euroconsult president, said two dozen new TV channels are created every week to fill the demand created by this new media. Those 53 platforms hosting the satellite TV services produced $17 billion in revenue in 2000. While they lost $2.2 billion in 2000, Euroconsult found that growth was strong and the heavy losses for the platforms would be dropping.
In comparison, Euroconsult said that 294 transponders were used for Internet services as of mid-2001, including 242 for backbone and transport, and 52 for direct access.
Fiber continued to make inroads against satellite in 2001. Philip Langsdale, CEO of BBC Technology, commented, “Over the past year we have seen a significant drop in long haul fiber pricing, which has shifted some of our business away from satellite for the more popular routes. However, the problems associated with fiber have not gone away. The last mile cost is still exorbitant. Its inflexibility and point-to-point nature will always give the broadcasting industry a headache when trying to cover live or late planned events. It is in these situations that satellite connectivity will always win out due to the flexibility and fast responsiveness of utilizing an outside broadcast vehicle with satellite capabilities.”
Low Cash Flow
Bankers also were looking to satellite broadcasting’s strength to bolster the faltering telecom side of the business. “We bankers are under very close regulatory watch by our authorities. There is a need to diversify. Satellite is part of the communications industry but also part of the broadcast industry and that is a lot less hurt,” Gilles Gantois, senior vice president and head of the telecom group for Credit Lyonnais bank of France, told the Euroconsult World Summit on Satellite Finance in late August.
Deal flow moved away from project financing to corporate financial support for IPOs and mergers and acquisitions in 2001. Criteria for attracting investment became more stringent than in recent memory, as the markets demanded bigger market opportunities, better business plans, more equity commitments and fewer risks before considering turning over their money to satellite players. Financing for start-up ventures became a huge challenge, and most new ventures were forced to rely on existing backers or new private money as a bridge to the future when they hope to be able to tap larger sources of money.
“The trauma that started in 1999 with mobile satellite services meltdown and launch and in-orbit failures has not disappeared,” Gantois said. The bankers perceive satellites as a complex industry and take a wait-and-see attitude about infusing more capital. Meanwhile, the economic recovery in Asia has been slow, and the environment in Latin America went into decline in 2001.
Nevertheless, by the end of August, Credit Suisse First Boston had identified $9 billion in total financing (including equity, high yield, bank and investment grade financing) raised in 2001, compared to $6.4 billion for the entire year of 2000, and $9.7 billion in 1999. The record year was $12.4 billion in 1997. Of the $9 billion, $5 billion was for the SES-GE acquisition.
Satellite Radio Makes Waves
The much-anticipated start of Digital Audio Radio Services via satellite occurred in late September when XM Radio became the first company to offer these services directly to consumers. On September 25, XM services debuted in two U.S. urban markets–Dallas/Ft. Worth and San Diego, National services were to be offered in November, and competitor Sirius was expected to start its service sometime in 2002. The same week service started, XM disclosed power array problems with its Boeing-supplied HS 702 satellites but said the expected premature degradation of power would not affect XM’s quality of service, business operations or costs.
In October, Marc Nabi, satellite analyst at Merrill Lynch, downgraded Merrill’s rating of both DARS company stocks, citing concerns that each will run short of operating cash in 2002.
Sirius also was hindered by an inability to produce commercial quantity radio chipsets in 2001, putting it behind XM Radio in entering the market first.
Merrill predicted that XM would have 45,000 subscribers by year’s end 2001 and 420,000 subscribers by year end 2002, which is a reduction from Merrill’s earlier projection of 600,000 for XM by year end 2002. Sirius was predicted to have 10,000 this year, and 180,000 by year’s end 2002, down from an earlier prediction of 400,000.
Mobile Services Keep Moving
Unfortunately, 2001 was another lackluster year for the mobile satellite services sector. Globalstar, and ICO continued to experiment with survival strategies that allowed each to remain in business, although in a weakened state, after failing to win a sufficient number of users in 2000 to be financially viable.
Meanwhile, the regional geostationary mobile satellite services, ACeS and Thuraya, went into commercial service in the Pacific Rim and Middle East/Europe respectively, providing their first reports of subscriber counts.
ACeS, the Asia Cellular Satellite service based in Indonesia, started its commercial operations in September 2000 and had launched service in seven Asian countries by mid-2001, offering mobile phone calls for less than $1 a minute and service from fixed terminals at less than 15 cents a minute. Only 10,000 mobile subscribers were using ACeS by June, with subscribers making an average of three minutes worth of calls a day. Fixed users were making an average of 50 minutes of calls a day, leading the company to switch its emphasis to fixed services and order 10,000 fixed terminals in 2001 to help increase use of its satellite.
Thuraya, the $1 billion regional mobile satellite project based in Abu Dhabi, United Arab Emirates, started commercial services in July. Customers paid a monthly fee of $14-$20 and 50 cents to $1.50 a minute per call.
The Indian satellite project, Agrani, was refocused away from mobile toward fixed services in 2001 as well. Jai Singh, CEO of ASC, the parent of Agrani, which is backed financially by Indian media magnate Subhash Chandra, said the restructured company would operate retail stores in India selling mobile communications products to consumers, while also developing a private Indian satellite system. ASC received an Indian license in July for Agrani 2, a $245 million satellite that will carry C- and Ku-band transponders. Chandra was to provide equity, as was Alcatel Space, with other strategic partners needed, Singh said in September. The intention was to begin operating Agrani 2 in early 2003.
Risky Business For Broadband
Broadband data services remained a high-risk area in 2001, a year in which many of the projects were delayed. “We could blame delays on the financial difficulties of Iridium and the big LEOs, but the timing was wrong,” Roger Rusch, president of Telastra, said. He said the broadband satellite market is probably not big enough for all of the entrants that have proposed systems. “The good news is that some systems are being abandoned. Staffs have been reassigned or laid off,” he commented. “We expect that the VSAT business will transform itself in the next few years into the broadband services business. We have some data to track growth in that industry. If this growth trend continues, the number of broadband users could be as small as 1.3 million in 2010. However, we expect the growth rate will pick up because the cost of user terminals is dropping, and the demand for high speed Internet-access is growing.”
Telastra’s estimate of subscribers for satellite broadband in 2010 is 1.3 million to 10 million–a vast range that leaves a lot of room for error but much uncertainty about market size.
Satellite manufacturing started 2001 off strong. “A total of 21 satellites were ordered by June 30, 2001, compared to about 35 satellites ordered for all of 2000,” Rusch said. “However, several of the companies that have started production of broadband satellite systems have had difficulty raising additional funds. ICO-Teledesic, Starband, and Wildblue withdrew registrations with the SEC because these companies could not find potential investors. Other companies are reducing staff. There are no clear indications when the telecommunications growth will resume, but there are firmly established and fundamental factors that will drive the need for broadband satellite services.”
Investment by the telecommunications industry fell off a cliff in 2001 as sales declined for cellular telephones and computers, and the volume of traffic dropped, and infrastucture procurement dropped. But the satellite industry did not see an immediate corresponding drop in sales of GEO satellites by mid-year. By the second half, however, manufacturers began to feel the pinch.
Ted Gavrilis, Lockheed Martin Commercial Space Systems president, said overcapacity affected satellite prices but his company was still able to win orders. “Overall, we received orders for seven more satellites from customers worldwide, including a second A2100 satellite for Telesat Canada and three more satellites for GE Americom,” Gavrilis said.
“On the economic front, a general softening in the telecommunications industry was evident. Fewer satellites were ordered, and competition was intense,” said George Torres, Boeing vice president of communications. He also noted a surge in demand for satellite services following the September 11 terrorist attack. “Longer-term impacts, such as reduced travel, could well result in additional demand to support teleconferencing and other alternative forms of communications. No doubt satellites will play an important role in the future defense of our country, as well.”
Loral Skynet saw increases in part-time use of its fleet for satellite newsgathering, lowering its rate after the terrorist attacks to help its news media customers.
“Loral Skynet (Skynet), a subsidiary of Loral Space and Communications, volunteered its transponder capacity on its Telstar 4 and Telstar 5 satellites to ABC, CBS, NBC and FOX broadcasting networks for their joint telethon, America: A Tribute to Heroes held on Friday, September 21, 2001,” said Amy Trowbridge, a Skynet spokesperson.
Flaws were found in several satellites in orbit in the fall, adding to existing concerns about the quality of some of the most popular satellite models. Six new Boeing 702 satellites, including ones owned by XM Radio and Panamsat, were affected by a flaw in their solar arrays that will result in power levels degrading years before they should have on spacecraft with a 15-year-plus expected lifetime. Panamsat also reported a 25 percent power degradation on its PAS 7 satellite that was built by Space Systems/Loral (SS/L). The problem appeared to be limited to one satellite only, according to a Loral statement, which said that Panamsat’s customers were not affected by the power loss.
“This year, we’ve seen an unprecedented number of satellites [that] have problems in orbit beyond the initial test period,” said Chris Kundstadter, executive vice president of the satellite department at USAIG. “Clearly there’s a problem. Manufacturers are trying to convince us that their products are better than ever and improved from previous generations. But it seems like problems are becoming more widespread. Fleetwide problems crop up again and again.”
On a more positive note, Boeing Satellite Systems broke records in space-based digital signal processing in 2001, according to Torres. “A narrowband satellite launched in October 2000, entered service in 2001 and holds the world record for being the most powerful satellite-based digital signal processor, five times more capable than any previous Boeing digital processor,” he said.
“The improvements involve high density application specific integrated circuit chip technology that allow more complex processing at lower cost,” Torres said. The next- generation ASICs are in production for broadband service. They will range in size from 136,000 to more than 8 million gates, a record-breaking space performance milestone with a capability of more than 50 trillion operations per second. That is equivalent to more than 10,000 Pentium-III computers.
Remi Roland, spokesman for Astrium, said 2001 saw harmonization of European space policies on environment surveillance and for security and defense. “The preparation of a long- term space defense plan is a necessity for Europe. In telecommunications, Astrium and Alcatel Space have pulled together their research and development efforts to develop larger and more powerful satellites called Alphabus,” Roland said.
For SS/L, contracts announced in September for two X-band communications satellites were a high point in 2001. Hisdesat S.A.’s Spainsat and Xtar’s Xtar-Eur, the name of a company partly owned by Loral and also the name of its first satellite, mark the birth of a new service business in quasi-commercial X-band communications, a frequency area that has been used by governments for military communications in the past. “It stands to be a big business if it’s successful. It will multiply around the world,” said Dan Collins, SS/L’s senior vice president of international marketing and sales.
Manufacturers like Loral were still assessing the effects of all the cross-ownership and consolidation going on in their customer base. Collins said the shifting is healthy for the market. “With recent privatizations, it’s becoming a truly commercial market, and it’s getting stronger, with the number of larger players. There’s a lot of competition and opportunity to sell satellites,” he said.
Slow Launch Traffic
In the area of launch vehicles, 2001 saw routine operations by International Launch Services’ (ILS) Proton and Atlas rockets, but the schedule was more sporadic for Arianespace. The failure of an Ariane 5 launcher in July to place its satellite payload in the correct orbit due to a propulsion problem in the second stage affected that launcher’s operations and schedule for the second half of the year.
ILS maintained its leading position in the space launch services business in 2001, according to Mark Albrecht, ILS president. ILS won 11 new launch orders by late September and expected to carry out 10 missions by year’s end. Arianespace also won 11, but three of those were smaller satellites, giving ILS the lead in contract wins for large or intermediate size satellites, according to Albrecht.
For ILS, the highlights of 2001 included the first use of the Proton M with the Breeze M upper stage in April, providing an upgrade in reliability for Proton, and demonstrating a mutual back-up capability in the fall when a DirecTV mission was moved from the Atlas manifest to the Proton rocket with only four months notice. Manufacturing delays caused the satellite to miss its original launch date.
Clayton Mowry, president of Arianespace Inc. in the United States, noted the move toward heavier communications satellites this year.
“This trend was predicted years ago by Arianespace, which led the company to develop its Ariane 5 launcher to provide GTO payload lift capacity up to 12,000 kg. As a result, Arianespace will be able to pair up satellites for cost-effective dual launches on Ariane 5, including the 6-metric-ton-class Inmarsat 4 spacecraft series–for which Inmarsat placed an order during 2001 for Ariane 5 launch services beginning in 2003/2004,” Mowry said.
For Arianespace, the most important event of 2001 was the European governmental decision to complete development of the ESC-B upper stage for the Ariane 5, which will provide a dual launch capability to the company for large satellites weighing up to 12 tons combined into geostationary orbit.
Sea Launch’s 2001 highlights were the launches of both XM Radio satellites. The rocket had a light schedule, however, and does not have another flight scheduled until the second quarter of 2002. It won five contracts in 2001 and has a 17-launch backlog, but manufacturing delays of the payloads have hampered Sea Launch’s ability to move into more routine launch operations so far.
Supply And Demand
As always, innovation in the satellite industry continued to come from the base of earth station and component suppliers spread across North America and Europe.
“Last year’s business performance far exceeded our most optimistic upside forecast,” said Mike Pley, president of Com Dev Space. Com Dev supplies subsystems and components, such as RF multiplexers, scientific instruments and batteries, to satellite prime contractors. “It was a record year, buoyed by the combination of increased demand for transponders, the strategic decision by some primes to outsource non-core products, and the payoff from investments we’ve made in process improvements.”
Pley said competition among the prime contractors has created intense economic pressure on the value chain. “Vertical integration to produce commodity products has long been recognized as capital intensive and a drain on resources. This year, a couple of our customers made strategic buy decisions in areas where they would traditionally” make the components in house, Pley said.
EMS Technologies, a manufacturer of satellite antennas, broadband terminals, ground hubs and onboard processing systems, supplies satellite antennas to commercial and government customers.
“During 2001, EMS Technologies became the number one supplier of base station antennas in North America,” according to Al Hansen, president and CEO of EMS. Besides satellite antennas, EMS supplied components to NASA for science missions and the international space station. “In addition, EMS introduced a terminal that supports high-speed data access to include e-mail, Internet, voice and fax services while airborne.”
Defense interest in space technology saw resurgence in 2001, Hansen said. “There are strong indications that we will be able to make significant contributions in defense areas of increasing national importance, such as secure satellite communications, electronic warfare and aeronautical high-speed data for surveillance and communications.”
The consolidation trend affected component and system suppliers as well as the big operators, with several suppliers expanding their business base by buying up other companies.
Advantech Advanced Microwave Technologies Inc., which makes solid state power amplifiers, block upconverters and transceivers, acquired U.K.-based Signal Processors Ltd. and U.S.-based ACT Wireless in 2001. The new units make satellite modems, low cost L-band satellite terminals, data broadcast receivers and antenna control systems. “This acquisition will strengthen Advantech’s global presence, overall product offering and benefit the company’s core team technology and competence to lead the future challenges of satellite communications networks,” according to David Gelerman, president and CEO of Advantech.
Hardware Goes Hybrid
In early 2001, L-3 Satellite Networks acquired Gilat’s iSat product, a VSAT system for telephone trunking, Internet, LAN and extending terrestrial networks. By mid-year, L-3 had sold iSat as a new application for using satellites to trunk cellular telephone traffic between cells on a terrestrial GSM network in Mauritania, a small island nation off the coast of Africa. Stuart Mac-Kiernan, L-3 Satellite Networks president, said the patented technology for using VSATs as a trunking system for terrestrial networks is an emerging use of satellites that showed growth in 2001.
“We’re developing a broader offering beyond GSM. We’ll offer the same type of connectivity for other wireless solutions,” he said.
“Across the satellite industry this year, it’s become apparent that the use of satellites connected with terrestrial wireless will be used more and more,” he said.
L-3 also noted an increase in demand for transportable earth stations just after the September 11 attack. Demand came from the media, the military and emergency services organizations for earth stations that could be deployed in New York and elsewhere to set up temporary communications.
Tripoint Global, a manufacturer of satellite antennas and communications systems, completed the integration in 2001 of companies that it acquired during the previous two years, according to Gary Kanipe, Tripoint’s president and chief operating officer. In 2000, Tripoint acquired Vertex Communications and its subsidiary companies and merged them with its RSI Group to form VertexRSI. The company also found itself helping its customers arrange financing to a greater degree than in past years.
Kanipe is optimistic that the government will strengthen its military communications capabilities, providing a boost to ground segment suppliers, and that further growth will come from supplying wireless infrastructure.
Comsat Laboratories, a specialist in the provision of satellite broadband networks and products known under the Linkway and Linkstar brand names, became a division of Viasat Inc., in 2001. Benjamin Pontano, Comsat Laboratories president, said 2001 saw good growth. “We have expanded our market share successfully, especially in the Africa and Asia regions, and significantly increased our revenues over the year 2000,” Pontano said.
He points to more powerful satellites becoming available in all regions of the world as a notable trend in 2001. More affordable broadband satellite networks are resulting, as are projects that use Ka-band frequencies.
Dan Prushnok, president, chairman and CEO of Quintech, said increased use of satellite-transmitted content in 2001 caused growth in the use of redundant matrix switch and routing units for automation of teleport signal management. Financial pressures across the industry were behind another trend in 2001, which was to maximize the use of existing plants and equipment with more cost-effective practices, Prushnok said. Quintech makes broadband RF system solutions.
CPI Satcom, which makes microwave amplifiers used in ground stations, solid state amplifiers and other special satellite products, moved its manufacturing operation for satellite amplifiers products from Palo Alto, CA, to Georgetown, Ontario, Canada.
“The move of these manufacturing facilities has progressed on schedule and is essentially complete, with all of our products now being shipped from Georgetown. The move to the new facilities has led to dramatically improved responsiveness, with all products now being available on very short lead times,” the company said.
Up To The Challenge
As the curtains draw on 2001, the satellite industry continues to sort through a long list of challenges and problems. The roll-out of new applications and services has not gotten any easier with time, nor have financial pressures eased. The growing size and clout of the leading names in the industry has countered the problems by injecting stability into services, demand, revenues and orders for hardware, allowing the satellite sector to stay on an even keel in the year that is ending.
Theresa Foley is Via Satellite’s senior contributing editor.