“Rationality” was the unlikely buzzword during “State of the Industry: An Overview of 2005 & Beyond,” the opening session of Satellite Finance 2005 on March 22 at SATELLITE 2005. Unlikely, in that satellite companies have traditionally focused on a calculated risk rather than a measured, rational approach to business, investors wanting safe stocks have typically stayed as far away from satellite as possible.

However, with private investors having bought into firms such as Intelsat and Panamsat in recent months, times have changed. In fact, with the exception of SES Global, all of the major satellite companies are now “under private ownership,” said panelist Philippe-Olivier Rousseau; managing director of BNP Paribas. “For the first time, mainly financial drives [priorities] are going to lead the industry.”

For many in the satellite industry, the replacement of bureaucrats by businesspeople has been a cause of celebration. In contrast to some of the financially questionable, politically motivated projects of the past, “The assumption is that we [private investors] are adding rationality to this market,” said panelist Mark Oderman, managing director of CSP Associates, Inc., which worked on the recent Intelsat and Panamsat stock sales.

Oderman’s statement was reinforced by the other panelists who painted the picture of a satellite industry under new management; one that will try to smooth out the drawn-out supply and demand cycle, which has always bedeviled satellite companies, and that prefers to work with known commodities such as satellite TV rather than gambles like satellite broadband. However, this does not mean that private investors will necessarily refuse to invest in new technologies. According to Oderman, it is still “too early to tell.”

This said, it was clear from the tenor of the session that “sure things” are this year’s satellite industry theme. For instance, panelist after panelist heaped praise on NewsCorp’s decision to “repurpose” two of Spaceway’s satellites from satellite broadband to DBS video. By doing so, NewsCorp has made it possible for the satellite industry to deliver HDTV to subscribers, said panelist and Satellite Development LLC managing member Dean Olmstead. A year ago, no one knew how to make this happen and SATELLITE 2004 delegates could not predict how DBS was going to compete with cable TV’s HDTV offerings. “Now we see the [satellite] players are going to bring Ka-band into use to meet that demand,” Olmstead said.

“With the repurposing of the two Spaceway satellites for video, I am breathing a sigh of relief,” added Joan Byrnes, panelist and associate with JM Byrnes Associates. “It sounds like a rational solution to the venture.”

This said, the introduction of private investor control in the satellite industry did stir some concerns among the panelists. For example, Byrnes wondered if “rationality” would result in less attractive long-term contracts being offered to satellite users: Will hard-nosed economics result in fewer benefits, and thus less incentive for customers to commit to this transmission technology?

Meanwhile, the desire of private investors to eventually sell their acquisitions for a profit also raised questions; none of which could be easily answered. Chief among these are the “exit strategies” that investors might dream up to make their satellite holdings attractive to new buyers: Would these come at the price of technological innovation and customer service?

After all, private investors are focused on “making some money and getting out,” said Byrnes. Such an attitude typically results in “a whole lot of conservatism about new business plans, [and] taking a chance” on new technologies, she warned. In turn, too much conservatism could result in satellite stock dropping in price, added Maury Mechanick, counsel with White & Case LLP. For private investors to sell their satellite acquisitions profitably, “they need to find a way to increase value,” he told delegates. This means taking some risk by adding new services; a fact that will force private investors to “balance their financial conservatism, and the consequences that flow from that, with what it takes to create additional value.”

In an effort to inject some optimism into the debate, Dean Olmstead pointed out that satellite companies such as SBS and Western Union may have come and gone, but their satellites remained. In other words, just because satellites have been repurposed for other uses, does not mean that these satellites or the companies that built them were failures. As for how this argument applies to future satellite development? “If we build it wisely, the asset can be matched to the marketplace,” he said.

As the debate continued, a few facts became clear. First, the fact that private investors are now managing much of the satellite industry and that their goal of short-term gain does not change the fundamental dynamics and demand of the satellite marketplace: If private investors refuse to gamble on new applications and technologies, they risk their companies losing value.

Second, just because private investors want the satellite market to deliver certain results does not mean they can force it to do so. In fact, if there is a lesson to be learned from the satellite industry, it is that the market will do what the market will do, and those who own satellite companies will always be in a position of responding to this reality. As a result, although ‘rationality’ may have been the buzzword of choice during this session, it does not mean that the satellite industry has or will ever become rational.

Beyond these facts, the assumption that the current generation of private investors is taking a “rational” approach implies that previous governmental and private owners were somehow irrational. In truth, the first were bureaucratic and the second entrepreneurial, but neither were irrational. Rather, they were just seeking different goals. Specifically, governmental satellite owners were more concerned with achieving policy objectives rather than profit, while entrepreneurs were willing to forgo short-term profit for long-term possibilities. The fact that the first group sold out in response to privatization pressures, while the second was forced out due to changing market demand and financing challenges, does not mean that either managed their satellite holdings in “irrational” ways.

Again, just because private investors hope to impose “rationality” on the satellite marketplace does not mean they will succeed in doing so. Indeed, their need to generate increased value in their satellite holdings may well force them to take “irrational” risks on new products and ventures, as the panelists pointed out. Should these private investors decide to pursue growth through risk, then they face the same perils that made so many satellite companies falter in the past; perils that made these companies into ripe takeover targets in the first place.

–James Careless