2006 Business Moves Set Stage For 2007

2006 saw the culmination of the Fixed Satellite Service (FSS) consolidation process begun in 2004, and also brought ferment in the Mobile Satellite Service (MSS) sector with Inmarsat’s and Globalstar’s initial public offerings and plans for ancillary terrestrial component (ATC) service and fleet replacement by Mobile Satellite Ventures, Globalstar, Iridium and ICO.

The year also brought flattening growth profiles for direct broadcast satellite (DBS) operators and digital audio radio satellite (DARS) operators, leavened in the DARS case by interesting content plays, such as shock jock Howard Stern’s move to Sirius Satellite Radio.

The manufacturing sector also showed signs of consolidation and rationalization, with Boeing and Lockheed Martin acknowledging their turn from the commercial sector to concentrate on government and military contracts. One deal emblematic of the new paradigm was the U.S. Air Force’s award to Boeing of a contract valued at more than $1 billion to build the first block of Wideband Gapfiller satellites, with an option on a second block of spacecraft. Other events were the emergence from bankruptcy reorganization proceedings of Loral Space & Communications, rumors of European consolidation involving Alcatel Alenia Space, Astrium and Thales, and the retirement of two leading and admired manufacturing sector CEOs, Bernard Schwartz of Loral and Ted Gavrilis of Lockheed Martin.

Launch service providers also responded to market forces. In October, Lockheed Martin completed the sale of its stake in International Launch Services (ILS) to a new company, Space Transport, Inc., and announced that ILS President Marc Albrecht would retire from Lockheed Martin at year’s end, another significant changing of the guard. Also in October, the U.S. Federal Trade Commission gave conditional approval to the United Launch Alliance joint venture that would combine Boeing’s Delta and Lockheed Martin’s Atlas government launch service businesses.

What is to come in 2007? Perhaps a second level of consolidation, and perhaps a focus on new organic opportunities, because FSS still needs a path to growth. While Intelsat and SES Global are possible participants in regional consolidation, they have their recent acquisitions to digest and, in the case of Intelsat, a significant debt load that must be reduced, making financing another acquisition problematic.

In October, the restructured Loral announced a $300 million financing agreement to fund strategic acquisitions in both satellite services and manufacturing. However, Loral may not seek to acquire regional operators in an effort to become the third leg of an FSS tripod and subsequently announced that it may spin off its Skynet business to concentrate on manufacturing.

The U.S. Federal Communications Commission has indicated continued opposition to DBS consolidation. DARS consolidation may lack an obvious business case except avoiding to divide up an increasingly saturated market. An interesting possibility is a DBS-DARS deal, driven not necessarily by fleet and technology compatibility but by the possibility of sharing subscriber base, billing and other functions. The unknown in such a deal is overlap between DBS and DARS subscribers and the likelihood that existing subscribers for each would sign up for the other service, even at bundled rates.

Another current to look for is integration with terrestrial partners. The emergence of ATC as a principal driver of new MSS business plans has received a lot of press, but is not the only way in which satellite and terrestrial service may learn to collaborate instead of compete. As terrestrial telecommunications operators search for the triple play of voice, data and video broadband Internet Protocol-based service, satellite providers may provide unique partnering solutions. Mobile service, emergency response, imaging and other services may present partnering opportunities and higher growth opportunities for FSS operators. Yet to be determined are what opportunities exist for partnerships between terrestrial telecommunications providers and satellite operators and what form such business combinations would take.

It will be an interesting year.