The Year In Review: The Analysts Speak
By James Careless
Frankly, the global satellite industry has seen better years than 2002. Of course, so has virtually everyone else in the business arena. With the telecom crash-and-burn, the Enron/Worldcom accounting follies, and the lingering fallout of the dot.com bomb, 2002’s been tough all over.
So what have been the major satellite stories of 2002? What have been the primary challenges, and what lies ahead for 2003? To answer these and other questions, Via Satellite has brought together some of the industry’s top analysts for a “2002 in Review Roundtable.”
In alphabetical order, they are Christopher Baugh, principal analyst at Northern Sky Research; Steve Blum, president of Tellus Ventures Associates; Susan Irwin, president of Irwin Communications; and Phil McAlister, director, Futron Corp. All are veteran observers of the satellite scene, and have served as reliable, insightful sources for Via Satellite magazine.
Via Satellite: What have been the major satellite stories of 2002?
Christopher Baugh: The Echostar/ DirecTV merger–or non-merger, depending on what transpires throughout the next few weeks–continues to dominate the industry’s attention. Editor’s Note: At press time, the U.S. Justice Dept. filed a lawsuit in U.S. District Court in Washington, DC, to block the merger. I would consider satellite radio as the number two story of the year, especially since both Sirius and XM are experiencing financial difficulties in the early stages of service.
Industry consolidation was and is news as well, particularly on the operator side. I expect to see much more consolidation in the months ahead–especially in manufacturing–as companies try to ride out the current economic storm.
Steve Blum: In no particular order, I thought the major stories of 2002 included the unravelling of Vivendi–in particular the dismemberment of Canal Plus–which, when combined with the slow break up of Hughes, leaves News Corp. as the only DTH company with a global vision and reach.
Then there is the market’s judgement on satellite radio. We will know it by the start of 2003: How Sirius and XM do in the fourth quarter is the critical question.
If it is resolved this year (either way it goes), the Hughes/Echostar merger will have a major impact on the worldwide satellite industry. If it is not resolved, then it is not much of a story for this year. Then there was the “dead stop” in the satellite manufacturing business during 2002.
Finally, there was the crash in telecom share prices, which hit satellite companies very hard. Who would have believed that Loral would ever be selling for 27 cents a share?
Susan Irwin: Even though it was announced in 2001, the merger between SES Astra and GE Americom remained a major story this year. The Echostar/DirecTV situation also stayed in the headlines, probably because its resolution is far from clear.
Meanwhile, the economic downturn certainly hurt the satellite industry, due to the overall drop in stock prices. The Ka-band players, in particular, have seen their market cap values seriously eroded.
To say the least, this was news, as was the demise of the telecoms. They have had a huge impact on the satellite industry, even though they had nothing to do with it. Ironically, the telecom debacle’s only good effect, as far as satcom is concerned, is that it might delay fiber optic expansion into remote areas. This would preserve these markets as the sole preserve of satellite operators, at least for a while longer.
Phil McAlister: In my opinion, 2002’s top news stories include the IPO delays for Inmarsat, Eutelsat and Intelsat. While these delays were more a reflection of weak financial markets as opposed to weaknesses in the stock offerings of these companies, the IPOs were a chance to restore investor confidence in the satellite industry. Now, the industry will continue to be dogged in financial circles until a major positive event, or many major positive events, occur.
Then there was the continued non-resolution of the Echostar/Hughes merger. This merger has many significant implications for the satellite industry and several of its major players. Since there was no resolution or even any public progress on this issue, the satellite industry was hurt by the uncertainty this created.
Also newsworthy was the increased number and size of satellite insurance claims prompted by major satellite anomalies, in particular losses claimed by XM Satellite Radio and Thuraya. At a time of weakness for the industry, the recently experienced satellite anomalies did no one any good.
There was also the introduction of significant new satellite capacity. The industry is on pace to launch more than one thousand 36 MHz transponder equivalents to geosynchronous orbit before the end of the year. This capacity is coming online just as the telecommunications industry is undergoing a period of reassessment, with sluggish demand and falling prices for transponder time. It will be a challenge for the satellite operators to fully utilize all this new capacity in the near term.
As for good news? Well, there was the successful maiden launch of the Atlas 5. This launch signalled the re-emergence of the United States as a competitive player in the large satellite launch market.
Via Satellite: Who’s been hurt the worst by the economic downturn in the satellite industry this year, and why?
Baugh: I don’t know if they have been hurt the worst, but the satellite radio companies have been hit hard just as they are rolling out. This is the stage in any startup’s life, where expenses outstrip revenues. Having the market tighten up at this stage is pretty rough for both Sirius and XM.
Blum: The manufacturers. They have tremendous, constant overhead and very lumpy income, even in good times. A year-long drought could send some of them under.
Irwin: The hardest hit has to be start-ups and other speculative ventures, many of which were Internet-related. What made matters worse for them was their investors encouraged them to build unrealistic business plans and inflated revenue projections, which in turn drove them to borrow more than they could afford to carry. As a result, a lot of valid technology has ended up being scrapped.
McAlister: Hurt worst were broadband businesses such as Astrolink, Skybridge, Starband and the shareholders/investors in any innovative consumer business. Also [hard hit were] employees of these companies and the non-defense related divisions of companies in the rest of the industry as interest and focus has shifted.
Via Satellite: Who’s done the best in these hard times, and why?
Baugh: Companies serving the traditional TV broadcast and DTH businesses have fared better than overall market conditions would suggest. Consumers in every region are growing DTH subscriber totals as global cable TV infrastructure is severely lacking in coverage.
In addition, the nearly saturated TV broadcast business remains the cash cow of the industry and the majority of revenue for most satellite operators and resellers. Since both TV broadcast and DTH services are centered on the core broadcast capabilities of satellite technology, I expect both segments to remain critical to market growth.
Blum: The DTH television broadcasters. Several in Europe and the Americas are either showing an operating profit or are about to. It is because television is, economically speaking, an inferior good. Which is to say that as incomes decline, demand increases.
Irwin: Companies who have been able to tie into the Homeland Security market, as well [as], those companies whose shareholders told them to “stick to your knitting” a few years back. By staying out of the new tech craze, they have stayed alive and in business.
McAlister: Anyone with military or defense-related products has done well because that has been the strongest market recently. Also the launch companies have done well. They have had a great string of successful launches, even if they are not getting a lot of new orders.
Via Satellite: Is there really a market for satellite broadband, or is this an idea doomed to go the way of Iridium?
Baugh: Given the recent failures of many high profile broadband satellite endeavors, it is fair to question the viability of provisioning broadband services to consumers and businesses. The low penetration of fiber and other terrestrial access technologies around the globe, however, points to a significant opportunity for the ubiquitous coverage of satellites. The primary obstacle to broadband growth was, and continues to be, the supply of technically sound platforms at market-driven price points. Mastery of these two issues is central to the viability of broadband satellite services.
Blum: It has to launch and then fail before it can go the way of Iridium. So far, Spaceway is the only system with a real chance of launching. But as an idea, it can work if satellite companies can integrate into terrestrial networks and leverage satellite’s advantages.
Point-to-point, consumer or small business level communications is a dead issue for satellites. Satellites are too expensive to waste on that sort of business, as evidenced by the high cost and low performance of the current consumer offerings. If you can build a satellite layer over a terrestrial network, and use the satellite element for point-to- multipoint communications, it is a winner. The days of the standalone satellite network are behind us.
Irwin: I think there is certainly a market for broadband, and a subset of that market for satellite broadband. This said, I expect cable and DSL to continue to dominate this market. As for satellites: they will fit into the mix if they play to their strengths–notably serving remote areas–and leave the easy pickings to the terrestrial operators.
McAlister: As with MSS, a key success factor will be time to market and price. There is definitely a market need; it is a question of how big and at what price. If satellite offerings cannot get started within the next few years, a lot of the market will have been overtaken by other technologies.
Via Satellite: Are the days of big mergers like SES Global over? Or is more consolidation ahead?
Baugh: As I said off the top, I expect to see a lot of consolidation in the satellite industry. The current revenue levels compared to the number of suppliers out there make it inevitable.
Blum: Expect more consolidation. Size still counts in the telecom business, so long as you are not talking about the size of your debt service.
McAlister: More consolidation is definitely ahead among the operators, probably heading towards equilibrium at around three big, global players with a few national or regional players still staying independent.
Via Satellite: Will governments be willing to prop up the current number of launch service providers?
Baugh: No. You just cannot justify the number of launch companies in the world today. There is room in the market for a few, and that is it. Even governments are starting to acknowledge this fact.
Blum: Yes, because it is the sweet spot where social welfare oriented politicians meet the defense hawks. Jobs and sexy new toys!
Irwin: No. My hunch is that governments will not prop up the launch industry, and that we will see a number of mergers and consolidations taking place in the months ahead.
McAlister: Yes. Launch programs and access to space are critical issues for space faring nations. Each launch-capable nation has a large stake in its launch programs from a national security and national pride standpoint. The major players are here to stay.
Via Satellite: Just how tough was it for the satellite industry to get venture capital in 2002? What lies ahead for 2003?
Baugh: Outside of consumer-based services such as satellite radio, it was virtually impossible for satellite companies to secure investment capital in 2002. This trend should continue into early 2003 and will only change after true viability for new services is proven to the investment community.
Blum: Nearly impossible. In 2003, it should get better assuming the economy picks up. There is a tremendous overhang of venture capital out there, just waiting for the right conditions to arise again.
Irwin: It was very tough in 2002. As far as I know, the only sector that raised money was satellite radio, and even they are having a hard time making ends meet.
McAlister: Very tough. There has been funding, but it has been more traditional money, very different from venture funding. Next year is going to be very tough also.
Via Satellite: How important is the military satcom market for struggling commercial satcom companies?
Baugh: The Homeland Security endeavor, combined with the downturn in the commercial satcom industry, has made military spending more important for the satellite industry as a whole. Even companies that never went after military projects in the past are re-focusing themselves to chase these dollars.
Via Satellite: What do you see as the one most glaring flaw of the satellite industry today?
Baugh: Let’s face it, this industry has had two black eyes for the past few years due to failed endeavors, a lack of understanding of market requirements and relative isolation from the rest of the telecom community. The satellite industry operated in a vacuum for many years and is only now seeing the advantage of becoming part of the larger hybrid infrastructure.
Blum: The biggest flaw is a Texas cage match mentality–everyone is acting like they are locked in a closed market where the key to success is to try and grab the other guy’s stuff. Aggressive competition in an open market is one thing, constant litigation and lobbying is quite another. The satellite industry needs to develop some new concepts and new ideas. We are coming to the end of the great ideas, some better than others admittedly, that came out of the early ’90s. Nothing fundamentally new is on the horizon.
Irwin: The satellite industry’s greatest flaw is its inability to take its message successfully into the larger telecom market. As well, the industry needs to improve its image overall. Face it, we are the Rodney Dangerfield of telecom: we get no respect!
McAlister: In the past, the biggest flaw has been a preoccupation with technology and lack of importance placed on understanding the market. Recently, with all the bankruptcies, delays, and false starts, business skills are now at a premium.
Via Satellite: What is the industry’s biggest advantage?
Baugh: The biggest advantage is the ability to reach virtually every potential user with digital video, voice and data services. No other technology can make such a claim.
Blum: The industry’s biggest advantage is its global reach and ability to react to opportunities quickly. The problem now is that no one is pursuing the opportunities.
McAlister: Global connectivity to all regions, developed and undeveloped.
Via Satellite: Finally, if you could give the industry’s CEOs just one piece of advice, what would it be?
Baugh: Remember that economic cycles feature peaks and troughs. Despite the prolonged trough this industry is currently experiencing, do not lose faith in innovative services that may stretch your comfort zone beyond your traditional revenue base.
Blum: Besides tell your guys to return calls? I would tell them to hire young people and give them real responsibility. As an industry we need to break out of old ways of doing things, and the best people to do that are the ones who never learned the old ways in the first place.
McAlister: Do not overreact to the current economic situation by retrenching, stopping innovation and being hyper-conservative. It would be a death spiral to just continue with current product lines and services.
A Tough Year Ahead
Based on what the analysts above have said, 2002 was a very tough year, and 2003 doesn’t look much better. As a result, hanging tough is probably the best attitude for satellite companies to take in 2003.
Cut costs? Definitely. Consider mergers or consolidation to improve your market share? Certainly. But quit and do something else? Well, as Winston Churchill once said, “Never give in–never, never, never, never.”
James Careless is a contributing writer to Via Satellite.