The North American Satellite Market: What Lies Ahead

The year 2003 has left the North American satellite industry with a bit of uncertainty as the Fixed Satellite Service (FSS) arena adjusts to a swirl of activity surrounding Loral Space and Communications Corp., which filed for bankruptcy this summer and promptly drew competing offers for company assets from Intelsat Ltd. and Echostar Communications Corp. In mid-September, Echostar requested the bankruptcy court intervene in order to compel Loral to share due diligence information. A U.S. bankruptcy judge subsequently denied this request by Echostar related to accessing Loral’s books. In October , Loral’s board of directors rejected Echostar’s purchase offer.

This acquisition is important for the satellite community. First, if Intelsat is able to acquire the Skynet satellites, which serve North America, it will gain a critical toehold in this market for FSS. As Intelsat is evolving into an end-to-end service provider, this would be a great acquisition for it," says Leslie Taylor, president of Leslie Taylor Associates Inc. "The Skynet customer base and orbital locations are very valuable."

Now out of the running for Loral’s assets, Echostar also purchased satellite capacity on SES Amerciom’s planned AMC 15 satellite. "While SES has plenty of orbital locations over the United States, it probably would like to keep Intelsat from competing with it in this market. Americom has its roots in GE, which has made a business from financing, building and leasing assets," she adds.

In the DBS realm, Echostar crossed quickly over the nine million subscriber threshold, while DirecTV Inc. awaits the finalization of its acquisition by News Corp. Together, DirecTV and Echostar now reach 20 million plus households in the United States.

High Definition Television (HDTV) and Digital Video Recorders (DVRs) represent the dominant themes for the DBS sector, while the satellite broadband sector began ramping up with the launch of Telesat’s Nimiq 2 late last year, followed by Echostar 9 in August. Both Telesat’s Anik F2 and SES Americom’s AMC 15 with its Ka-band payload of a dozen 125-MHz beams will be going up soon, setting the stage for the beginning of a new era of satellite broadband in 2004 as well.

Chase Carey, News Corp.’s designated new boss of DirecTV, has been sending out strong signals recently that DVR–and even DVR-targeted content–lie at the core of News Corp.’s strategy for the future of DBS in North America, while HDTV will arrive on everyone’s doorstep via Ku-band and Ka-band.

Big players like Boeing, General Dynamics and Lockheed Martin are making adjustments to their respective launcher and satellite businesses, but the smaller players like Virginia-based Orbital Sciences are making significant gains too. Orbital delivered Galaxy 12 to Panamsat Corp., an in-orbit, C-band-only back-up satellite that is the first of three Orbital satellites ordered by Panamsat. Galaxy 12, which uses the Orbital Star 2 bus, was successfully launched in April.

"[The year] 2002 was the bottom," says Satellite Industry Association President Richard DalBello. "[The year] 2003 has been a rebuilding year and we are confident that 2004 will show signs of true growth both in the satellite services and manufacturing sectors. Driven by a robust economy, North American satellite revenues will continue to account for a major share of global satellite revenues.

"We believe that DTH television services will continue to be strong drivers for satellite service revenues in North America. The much delayed move to HDTV will be a strong driver for new DTH services and also for FSS satellite services delivering video to cable headends across the country," he adds. "Satellite radio has had a strong beginning, and as more satellite-ready automobiles are produced, this will continue to build momentum in this sector. New Ka-band business services and two-way Internet services, once they begin to roll-out in 2004, are likely to start slowly but hold tremendous potential for the future. The combined demand for all of these satellite services should spark a revival in the recently depressed satellite manufacturing market."

Karim Nour, research analyst/satellite communications at Frost and Sullivan, which has just issued its North American Transponder Study, is concerned about overcapacity. He sees it as a continuing problem for operators, but less so over North America than over Latin America, Europe, Asia, the Middle East and Africa.

"Today, video is the majority of the transponder leasing market in North America. It will continue to grow at a steady rate, perhaps two percent to four percent for the next six years or so. It is not growing as quickly as networking and broadband service–nevertheless it will still be the majority of the market by the end of the decade," says Nour.

"Satellite telephony continues to suffer from competition from fiber optic networks. We expect telephony traffic on satellite transponders over North America to decline slightly throughout the next six years," he adds.

Capacity issues aside, satellite bandwidth has the on-demand capacity and flexibility necessary to support the growth of non-linear content, which will be the most significant programming development in the coming 10 years, according to Steve Blum, president of California-based Tellus Venture Associates.

"With the launch of Wildblue, Spaceway and Echostar’s America2Home capacity, consumers will soon see a new generation of satellite services. The industry is nearly recovered from the business failures of the past few years, in particular the impact of failed satellite telephone systems," says Blum. "We are shaking off the old and launching the new. Combine that with an economic recovery, and I expect we’ll be seeing more new ventures and more smiling faces in the coming year.

"Value added, direct-to-user data and multimedia services, particularly services such as Subscription Video On Demand (SVOD), Tivo (DVR) and streaming media, are opportunities for growth," Blum adds.

Taylor agrees that the biggest growth potential throughout the next few years will be in provision of services direct to consumers such as DBS, digital audio and two-way broadband access.

"Another area will be providing primary and back-up communications for Homeland Defense and first responders," says Taylor. "Residential broadband demand grows in the very short term, but peaks within the next couple of years and turnover of those customers to terrestrial service is expected to happen rapidly thereafter," Taylor says.

Satellite broadband has an opportunity to garner market share in the next three to five years, especially as a combined offering with DBS because the telcos are unlikely to provide DSL access in many rural areas, ever, according to Taylor.

"In fact, some telcos have recently formed relationships with DBS providers so they can market their services. DBS today, two-way broadband tomorrow. The smart telcos will use the established relationships of the DBS operators also to market two-way broadband to the customers for which it is impractical or too expensive to extend fiber or make DSL available," says Taylor. "Heck, I am 11 miles from the White House and Verizon does not offer DSL in my neighborhood!"

At Futron Corp., Janice Starzyk, senior analyst and Andrea Maleter, technical director, are closely watching the new partnerships and alliances that have been created to better address the current state of the industry and the markets they serve. Programs such as Americom2Home and Intelsat’s expansion into the region through acquisition of the Telstar fleet will be especially interesting to watch, according to this pair of industry experts.

"The next couple of years will test how this configuration works, and whether they should be followed in other markets," says Starzyk. "The applications with the biggest expected growth throughout the next decade for satellite in North America are DTH services and private networks (which include VSATs and government networks). The video distribution industry is the largest segment of demand in North America, and will remain so, but the demand for those services is not growing at a fast pace."

A lot to chew on, right? Well, from our panel of experts, we extract these three additional tidbits for your files. "The number one opportunity in North America is the transition to digital television mandated by the FCC [Federal Communications Commission] by 2007, and the associated expansion of HDTV. This will lead to increased transponder requirements for the networks, the cable operators and the DBS operators," says Thomas Watts, managing director at S.G. Cowen.

"We expect transponder use for satellite networking to almost double by the end of the decade. Currently, we estimate the North American market leases almost twice as much satellite capacity for networking as it does for telephony. We predict the market will more than double by 2009," says Nour.

"Digital audio radio is the success many of us in the industry predicted it would be. I have the service in my home and I love it," says Taylor. "I would be very upset if anyone tried to take it away from me. Digital audio rules!"

Peter J. Brown is Via Satellite’s Senior Multimedia & Homeland Security Editor. He lives on Mount Desert Island, ME.