The New Year Offers Little

A speedy industry recovery from a dismal 2002 is not expected anytime soon.

The outlook is for modest improvement in the economy and in business prospects during the year. Satellite companies may receive only slightly increased demand for their products and services. One hopeful sign is that increased government and military spending for satellite services could grow yet further to address homeland security and national defense needs.

The year “2003 will be the most challenging and critical year the industry has ever faced,” said Maury Mechanick, counsel in the Washington, D.C., office of the White & Case law firm. The past year’s “unpredictability” will carry forward into 2003 with ferocious effect, he added.

“A year from now we will face an industry that is thinner, leaner and meaner than what we know today,” Mechanick said. “But it should also be an industry that will have begun its ascent out of the abyss in which it has sunk over the past two years.”

D.K. Sachdev, president of the SpaceTel Consultancy in Vienna, Va., predicted that consolidation issues could take center stage in 2003.

“The future of Eutelsat is obviously the topic number one as we enter the New Year,” Sachdev said. “The flight of long-term investors from Eutelsat demonstrates how deeply the owners have been hurt by the dual punch from the telecom slump and the huge licensing costs for 3G.”

A merger with either Intelsat or PanAmSat [SPOT] would create a top global organization and become an especially formidable competitor to SES Global, Sachdev said.

The challenge of successfully trying to acquire Eutelsat is compounded by the need to negotiate individually with different significant shareholders rather than a single owner.

Other consolidation issues include the future for Hughes Electronics Corp. [GMH] after EchoStar Communications Corp. [DISH] tried and failed to win regulatory approval for its offer to buy the company. EchoStar abandoned its attempt last month and agreed to pay a $600 million breakup fee, but the door now swings open for News Corp. [NWS], Liberty Media Corp. [L] or a partnership between the two companies to seek controlling interest in Hughes and its satellite TV operator DirecTV Inc.

Arranged Marriage?

Consolidation also is a possibility among satellite manufacturers. Lockheed Martin Corp. [LMT] and Loral Space and Communications [LOR] have discussed forging an alliance of some kind in the past and continued weakness in new orders industry-wide could add impetus for such an arrangement. Previous consolidation in the European satellite manufacturing market has winnowed the field in that region to two companies, Alcatel and Astrium, and industry sources speculate that they ultimately may combine forces.

“Spacecraft manufacturers and launch services providers are going to have a tough time,” said Tim Logue, a space and telecommunications analyst with the Coudert Brothers law firm. “There will not be that many contracts to chase. They should use 2003 to work the kinks out of their technologies, which have only served to discourage potential buyers and drive insurers crazy.

Uncertainty of winning regulatory approval is an overhang on any proposed merger between two major providers of a product or a service, Logue said.

“Consolidation is inevitable and likely to accelerate,” Logue said. “Previously unthinkable mergers will take place and the anti-trust officials in the U.S. and the competition people in Europe may just have to swallow hard and accept the course of nature.”

This year also could turn out to be “decisive” for satellite broadband services in the United States, Sachdev said.

“On one side, the expanded Comcast cable system is promising to give a really hard time to satellite services,” Sachdev said. “On the other side, the launch of the first Spaceway spacecraft and the possible rebirth of WildBlue with new and powerful investors may well bring the critical mass for viable and competitive satellite-based broadband services to businesses and homes.”

This year could be even more challenging for many sectors of the satellite industry than 2002, Logue said.

Market Saturation

“Consumer services like DirecTV and EchoStar are running into problems of market saturation and a cable industry that is responding to competition, Logue explained. “New consumer services like [satellite radio] are facing a general economic market that is soft. But, if the overall economy improves they should do well when people start feeling more confident.”

The satellite transponder business has incurred weakened demand and that trend should not change anytime soon, Logue said. Transponder leasing is dependent upon three currently unhealthy sectors: telecom, video and Internet services.

“Telecom will take at least another year to sort out,” Logue said. “The video business, which is at least partly driven by the advertising market, may come back later in 2003. If the economy improves, the Internet market will not go back to the go-go days of the 1990s anytime soon.”

Big upside potential exists in government services, but the commercial satellite industry and the government need to learn how to work better together, said Logue, who added he thinks that cooperation is beginning to develop.

“The two rays of hope are that there are a lot of idle people out there who are probably trying to figure out what the next big thing will be and some of them may find it,” Logue said. “The problem will be financing it, but in time money will come back into the business. The more immediate hope for certain sectors is that, if there is a war, it may be good for some parts of the business, but will have significant potential downsides for other parts.”

Government Demand

David Logsdon, manager of space operations at the Aerospace Industries Association, offered insight about ways the commercial satellite business and government may work more closely together this year than in the past.

Remote sensing provided by commercial satellite imagery companies will play an increasingly critical role in the national security arena, Logsdon said. With the next-generation military imaging program behind schedule, the Pentagon will continue to rely on commercial imagery for national security, he added.

“With the emergence of the newly formed Department of Homeland Security, additional national, state, and local applications may be identified for commercial imagery,” Logsdon said.

This year also will usher in stepped up negotiations about how to combine use of the existing U.S. Global Positioning System (GPS) service and Europe’s planned Galileo satellite navigation system. A key issue will be the “impending showdown” between the U.S. and European militaries about the M-CODE, Logsdon said.

The U.S. government also will definitely take a closer look at U.S. space assets to clearly determine their role as “critical national infrastructure,” Logsdon said.

Spectrum issues also loom large in 2003. The debate between the U.S. Defense Department (DoD) and the cellular community will intensify and lead to involvement from Congress, Logsdon said.

“Look for various members of Congress to push ‘spectrum reform’ legislation,” Logsdon predicted.

Government orders for launches also are needed to partially compensate for the sluggish demand for commercial missions expected in 2003 after a weak year for new orders in 2002.

“It’s going to be tough for the next couple of years, with fewer satellites being ordered and therefore fewer to be launched,” said Mark Albrecht, president of International Launch Services (ILS). “But we believe customers will look for a launch company committed to reliability and customer service.”

Sea Launch, an international joint venture that launches from the Pacific Ocean along the equator, has five commercial missions scheduled for 2003, said Paula Korn, its director of communications. The first launch is set for the first quarter. The company has 17 firm launch contracts on its manifest and anticipates adding a couple more soon, she added.

The Sea Launch joint venture, consisting of U.S., Russian, Ukrainian and Norwegian partners, only contracts for commercial launches and cannot rely on government missions to generate revenue.

“We are keeping an eye on Asia, which appears to be emerging on the scene with some new satellites,” Korn said. Sea Launch, with its lean expenditures and efficient management of systems and personnel, remains healthy and active, constantly streamlining and improving processes, training new launch teams, etc. While the next couple of years will be very busy, with 5-6 launches a year, we are prepared to succeed through the dry spell and come out a leader in the commercial, heavy-lift niche.”

U.S. government launches are a key part of The Boeing Co.’s Delta rocket launch manifest.

In 2003, the Delta family of launch systems is scheduled for 14 missions, Boeing officials said. Ten of those will be aboard the Delta II. The first mission of the year, scheduled for January, will be to use a Delta II to deploy two primary NASA payloads, ICESat and CHIPSat.

The Delta team will lift a GPS satellite this month for the U.S. Air Force.

The other eight missions to be launched by the Delta II involve a mix of Air Force and NASA payloads, company officials said.

In the spring, Boeing will introduce the first Delta II heavy rocket capable of lifting up to 4,723 pounds to geosynchronous orbit.

Boeing also has four Delta IV missions in 2003. All are for the U.S. government, including the first U.S. Air Force evolved expendable launch vehicle payload — the Defense Systems Communications Satellite (DSCS) III A3.

For companies in the satellite business, the big challenge will be to boost revenues in 2003. That goal will take on a heightened priority for the fledging satellite radio operators in the United States that found financial markets difficult in 2002.

Radio Waves

“The major objective for 2003 is to grow our subscriber base substantially,” said Chance Patterson, vice president of corporate affairs with XM Satellite Radio [XMSR]. “We were projecting to have more than 1 million subscribers by the end of 2003.”

XM issued guidance at the end of 2002 that it had 340,000 to 350,000 activated units by the end of 2002. Roughly 24,000 radio units are believed by XM officials to have been sold during the holidays but not activated at the time of retail purchase. Most of the radios given as gifts by the buyers and not activated by year-end 2002 are likely to be activated during the first two weeks of this month, company officials said.

Keys to that growth include continued expansion of the rollout of XM in new General Motors vehicles, with nearly all the automobile manufacturer’s car and truck models offering it as a factory-installed option in the next two years, Patterson said.

The new portable SKYFi radios sold by XM will be a “huge product,” Patterson said.

“Besides the functionality, this device will allow us to enter into a new part of the retail business: the home audio and portable audio consumer segments.”

Exposure of XM in the portable audio and home audio section of consumer electronics stores will give the company access to a new group of potential customers, Patterson said.

XM also is looking to enhance technology to make the devices “smaller, faster, better and cheaper,” Patterson said.

“We have come a long way, since the SKYFi product is $100 cheaper than the comparable product that was available at the same time last year,” Patterson said.

On the automotive front, XM expects “significant growth” beyond GM to other auto manufacturers as both a dealer-installed and factory-installed option.

“There will be a lot of progress in this area,” Patterson said. “XM will be available as a dealer installed or factory installed option at all U.S. car dealerships, regardless of the brand. We want to make it as widely available as possible.”

–Paul Dykewicz