A Look Back; A Look Ahead
As 2007 winds down, it is interesting to think about the satellite industry subsectors and where they are going.
In our industry, companies compete within subsectors such as fixed satellite service (FSS), mobile satellite service (MSS), direct broadcast satellite, digital audio radio service, broadband, Earth imaging and others. The same holds true among manufacturers, where the “big five” large satellite manufacturers compete among themselves, as do small satellite manufacturers (recognizing that smallsats do compete in some cases for traditional large bus/payload business) and subsystem manufacturers. There is also intra-subsector competition among launch service providers, ground equipment manufacturers and ground service providers.
However, there is very little competition across subsector lines — between the FSS and MSS operators, for example. Nor is there much in the way of vertical integration: operators have not opted to develop organically or strategically acquire or invest in manufacturing capability to assure supply and pricing, obtain intellectual property or prevent competitors from doing so. Again, there are exceptions, such as manufacturers/launch service providers Boeing and Lockheed Martin and manufacturer/operator Loral Space and Communications.
These competitive enclaves are not the rule in every industry. In terrestrial telecommunications, vigorous competition has developed across industry subsector lines — for example, between cable operators and wireline telephony carriers for provision of fixed-line broadband service. To be sure, technological incompatibility is responsible for some of the silo effect in the satellite industry, as is a business case of avoiding competition with customers, but we should not ignore the possibility that inability or unwillingness to think outside the box also is responsible.
Cable operators and telephony carriers increasingly think of what services can be provided via their networks rather than thinking of themselves as limited in service offerings appropriate to cable or telephony. Terrestrial wireless carriers have realized that they compete with, and do not merely supplement, landline telephony.
How often do satellite industry players think about the variety of services that can be offered by their networks — as opposed to thinking of themselves as being an FSS player, MSS player or other category and limited in service offerings by the box in which they identify themselves?
The FSS and MSS subsectors both are at crossroads. In the wake of the consolidation drives by SES Global and Intelsat, Loral — now emerged from reorganization proceedings — is the logical third leg of an emerging global FSS tripod. By its recently concluded acquisition of Telesat Canada and contribution of its Loral Skynet assets to new Telesat, Loral has become just that. Depending on how one views Eutelsat, there are now three or four truly global FSS operators and a host of regional players, particularly in Asia. There may well be further rounds of consolidation of regional operators. However, further intra-FSS consolidation may be hindered by shortages of cash and debt burdens on the potential acquirer side and by national pride, desire for independence and belief in regional niche viability on the potential target side. In 2008, FSS operators are more likely to continue focus on their core businesses and look for growth to come from High-Definition TV, Internet Protocol TV and other new services.
The MSS subsector remains unconsolidated — a mix of fleets, spectrum bands and business plans. Some companies have intensive capital raising needs, fleets in various stages of life and spectrum and technology synergy and interoperability issues. The ancillary terrestrial component market is unproven, but it is genuine innovation. MSS broadband service also is innovative, and its market is proving itself with its legacy customer base.
2008 should provide guidance as to whether all the MSS business plans will be financed. The turmoil of the credit markets in the second half of 2007 has made financing dicier, and, even when obtained, more expensive and rigid. Still, debt remains cheap in historical terms, and there are enormous capital reserves on the sidelines that have to be deployed or returned to investors. The betting is that all or most of the MSS plans will be funded.
But those are intra-subsector plays. Maybe we should be thinking outside the box. Combinations, strategic investments, joint ventures or other kinds of partnerships among the subsectors might unlock unrealized value and growth.