The outlook for the satellite manufacturing market can be summed up in two words: stable and flat, according to new research offered by consultancy Frost & Sullivan.

During a recent conference call with reporters and market observers, Max Engel, satellite industry analyst for the Space and Communications Group at Frost & Sullivan, said that improvements in communications technology, particularly in the realm of compression technology, coupled with the increasing size of the satellites that are being ordered resulted in a stable manufacturing market but one that is not showing any sign of significantly increasing growth in the near future.

“This does not mean the industries on which the satellite manufacturing industries depend will not see more demand,” Engel said. The demand for satellite communications services is growing constantly, but it is not growing fast enough.”

Engel pointed to the satellites manufactured between 1982 and 2002 to illustrate how the rise in satellite size has in some way cannibalized the demand for more satellites, particularly when it comes to the replacement of in-orbit assets. “[Satellite] power versus lifespan, which can be taken as a rough measure of satellite capacity, has grown eleven-fold [between 1982 and 2002],” Engel said. “So one average satellite launched in 2002 had the capacity of 11 in 1982, and those satellites [ordered in 2002] are smaller than those being ordered and launched now as the trend toward larger satellites continues.” He noted that 60 percent of commercial geostationary satellites ordered between January 2001 and October 2004 would be classified as “large satellites” of more than 4,200 kilograms in mass.

But what is significant about the satellites’ size is that the growth is keeping pace with the demand for capacity. “As long as demand for satellite services keeps pace with the increase with the size of the satellites, the number of satellite will remain constant even though the satellite capacity on orbit grows,” Engel said. He pointed to the Astra KR satellite being launched as a replacement for two satellites, the Astra 1B and Astra 1C spacecrafts. “[KR] will more than fill the requirements that were put on them.”

HD Not An Immediate Driver

One market being looked upon to help drive capacity that, in turn, would increase the demand for new satellite capacity is high-definition television (HDTV) broadcasts. But Engel is not ready to call HDTV a driver for future growth in satellite manufacturing just yet.

“I am not very optimistic about HDTV as a major driver of increases in satellite manufacturing,” Engel said. “I think it is going to demand considerable new capacity, but that capacity will be filled by a relatively small number of larger satellites.”

He specifically pointed to improvements in compression technology as the main reason why growth in HDTV may not result in a spike in satellite manufacturing to handle the increased capacity requirements.

“Currently, people say it is three to four times the bandwidth required for an HD channel versus a standard channel, but when I first started tracking this, it was at four or perhaps more, so compression is already eating away at the amount of capacity required for HDTV,” Engel said. “I have people telling me now it is three to one versus standard television.”

And if those same compression technologies are applied to standard-definition broadcasts, it will reduce the capacity needs for standard-definition broadcasts and open up more existing capacity for high-definition broadcasts, reducing the need for new or replacement capacity, Engel noted.

However, while the improved compression technology will reduce the capacity needs for the broadcasts, it could result in increased demand and usage by some people who may not use HDTV for broadcasting presently, noted Modulus Video Chairman and CEO Bob Wilson.

Broadband Not Driving Yet

The other new service that holds some potential to drive new satellite growth is the looming satellite broadband market; but again, questions surround this market going forward and whether it will be a driver for satellite manufacturing.

“We have been talking about [satellite broadband] for a number of years,” Engel said. “When broadband and Ka-band technologies were first proposed, there were a large numbers of applications for orbital space and spectrum. This has not really worked out. It has been the greatest thing that did not happen thus far.”

Engel noted that recent developments, including the launching of Anik F2 and WildBlue’s commercial launch later this year, offers some promise for the industry, but that may not translate to a spike in satellite manufacturing. “Even if [satellite broadband] does turn out to be a major success in a commercial sense, the satellite manufacturing industry will not see any major benefit for at least a couple of years as new companies put together their financing and business plans and order satellites.”

Satellite Manufacturing’s Future

So with a stable but flat growth predicted for the industry, what comes next? Engel predicted two things will occur within the manufacturing industry to help ensure its survival: mergers and specialization.

On the merger front, Engel clarified the term to point toward internal mergers within companies rather than the merger of two companies. “I see another sort of merger going on in Boeing, Lockheed Martin and EADS Astrium in which the commercial side of the house is becoming more firmly linked with the military and national security sides of the house,” he said, which is resulting in a reduction in the oversupply of manufacturing capacity and engineering.

“The other answer is specialization,” Engel said “Boeing has chosen to become more of a systems integrator, selling its electron dynamic devices and making payload supplying agreements with Alcatel last year. Space Systems/Loral prides itself on being focused on the commercial market and providing a very commercially oriented service. Orbital Sciences has chosen to produce small satellites of roughly the 376 Class, for which Boeing is no longer receiving a large number of orders (one order in the past four years).

Engel said that these strategies should help keep the companies in the satellite manufacturing industry afloat during what he described as “this bad, bad climate” for the industry. But whether it is enough to sustain the companies for the long haul, “only time will tell,” he said.

–Gregory Twachtman