A Look Back at the Satellite Industry - Then and Now

Bruce R. Elbert

President, Application Technology Strategy, Inc.

In my last column in SatMagazine, I referred to 2004 as a watershed year, largely based on the changes in satellite ownership and operation. Let me explain why I felt this way and, by way of a review of some history, address what the new structure might mean.

The Early Years

The inauguration of commercial satellite communications by COMSAT in 1965 brought in the era of true global services by a single company. Thanks to an innovative satellite design by Hughes Aircraft Company along with the success of launching into geostationary orbit by the NASA Delta rocket, we saw that even a 76-pound weakling spacecraft named Early Bird could do impressive things. An ITU frequency allocation at C-band provided the spectrum needed to begin the era of geostationary satellite communications. COMSAT was a stock company, owned partly by public shareholders and partly by telecom companies that were also users of the system. However, the industry really didn’t get its grounding until Télésat Canada was formed to implement the first domestic system. Following the regulatory innovation in the US called “Open Skies”, the number of North American satellite operators increased to four.

The majority of these satellite operators in the 70s and early 80s all used C-band and were connected to telecom companies, namely AT&T, GTE and Western Union. Intelsat, formed by COMSAT, was owned by a consortium of telecoms. However, an electronics and aerospace company, RCA Corp, decided to start a satellite operator that would get its birds from their manufacturing division, Astro. The early success of RCA American Communications (Americom) set in motion the first big change in industry structure, because Hughes decided to start its own satellite operator as well. Loral followed suit, and these companies began to dominate. The ascension of satellite manufacturers cum operators brought with it the withdrawal of the telecom companies from satellite ownership.

The western European PTTs liked the Intelsat model rather than the North American “Open Skies” approach, and created a quasi-government operator in the form of EUTELSAT. Rather than the tried and true approach of C-band transmission, EUTELSAT chose to go with the higher, less-established spectrum at Ku-band (a subsequent ITU allocation). The benefits of Ku-band, e.g., its non-conflict with terrestrial microwave systems at C-band and the potential for smaller antennas, were motivators for this approach. However, an added benefit was that it would be something entirely different from the American model, giving European manufacturers a leg up in the international market for spacecraft and ground stations. The result is that Ku-band has become a fixture of the industry, recently overcoming the domination of C-band.

Getting to Orbit

In the background but very visible (and audible) was the launch industry, led at the time by McDonnell Douglas with their Delta. RCA gave Delta a boost by paying McDonnell Douglas for a payload upgrade (the first ever private payment for launch vehicle development). However, NASA decided to launch a new direction with the Space Shuttle, formally known as the Space Transportation System (STS). This was to take over from the expendable LVs, based on the expected (but unproven) economic benefits of this concept. While the US banked on a reusable manned system, the Europeans bet their money on a commercial expendable vehicle called Ariane. The tragic loss of the Shuttle Challenger ended the young life of a number of heroes, including that of Greg Jarvis, my friend from Hughes; it also killed the dream of a commercially-viable STS. This caused a huge glitch in the process of getting spacecraft into orbit, because not only did we lose the Shuttle, but the venerable Delta had its own mishap. Fortunately, Ariane was ready to pick up some of the slack, as did Martin Marietta’s Titan. Other LV systems, like the General Dynamics Atlas and the Japanese N and H series, got into the fray as well.

The launch industry reorganized itself as a commercial sector rather than a government activity. However, the impact on the insurers who stood behind the buyers of satellites and transponders took a licking. A major underwriter, Lloyds of London, was so battered that many are still licking their wounds. The availability, and unavailability, of cheap launch insurance is another driving force for change in the makeup of satellite operators. It is important to note that Lockheed Martin and Boeing entered into joint ventures with rocket manufacturers in the former Soviet Union to get Proton and Zenit, respectively, into the market.

A Second Life

By 1990, the game of satellite service marketing settled down in the US to a competition between what we referred to as the three generals and Ma Bell (the three generals being General Electric, General Motors and General Telephone and Electronics; Ma Bell was an affectionate name for the Bell System, owned by AT&T). A second change in industry structure when entrepreneurial satellite operators appeared. The first of the breed, PamAmSat, was created and owned by Rene Anselmo, who paid out of his own pocket to put his first satellite in orbit. He fought and won the battle with Intelsat to compete in the trans-Atlantic marketplace. AsiaSat was formed by a telecom company, Cable and Wireless, and two Asian companies: , CITIC from the PRC and Hutchison from Hong Kong. Other such operators established in Thailand (Shinawatra), Malaysia (Binariang), Indonesia (Satelindo) and Luxembourg (SES). The latter became so successful, it has grown to be the largest operator in the world. These entrepreneurs cared most about what they were paying and that the satellite ended up in the right orbit position with all of its transponders working properly. As long as you were buying a “standard” satellite with a known track record, some significant risks of putting hardware in orbit were reduced.

Post 2000

The telecom companies and aerospace manufacturers have since decided to divest their orbital assets and concentrate on their core businesses,. So, who would they sell their multi-billion dollar satellite systems to? The answer appeared in the form of investment bankers and leverage buyout groups that, as I said in the last article, seek to make money. They likely have no strategic interest in owning satellites except that the cash flow is good and the assets can be valued. The latter was discovered in the 1980s when owners of satellites and transponders found they could borrow money cheaply by selling and leasing back these assets. The difference now is that the satellite operator gives up its ownership and control position.

The next challenge for the new class of owners is to decide where to go from here. Do you do some financial engineering to reduce debt and look for another buyer? A twist on this, just announced by a newly-privatized PanAmSat, is to sell off part of the company in an IPO. Or do you seek to bulk the company up through further acquisitions in the same or related businesses? SES just closed on its acquisition of Verestar, an operator of several teleports. Or do you decide to roll up your sleeves and grow the business internally? This strategy is allowing JSAT, the largest operator in Asia, to extend its reach to North America with the Horizons 1 Ku band satellite. We will probably see these, and other, approaches tried in the coming years.

The manufacturing segment is likewise not what it used to be. During the early years, satellite manufacturers designed and made nearly 90% of the hardware they launched. Today, they operate more like systems integrators who design the basic vehicle and adapt payload hardware obtained from specialists in North America, Western Europe and Japan. Suppliers in Australia, China, Korea and India are likely to become competitive in space hardware as well. The prime contractors pull the pieces together, perform the necessary qualification and production tests, and support the placement into orbit. Some of the biggest among these companies also supply the launch vehicles that go along with the spacecraft.

The favorable economics of big satellites in terms of cost per transponder are in balance with the current buyers’ market in satellite services. Transponder rates around the world are not rising, providing an opportunity for service providers of all types. Construction of satellites remains well below the peak of 1997, a time when many spacecraft were bought in anticipation of replacement as well as service expansion. After the trough in 2002, the demand for spacecraft hardware is moving higher, but there is a large overhang of manufacturing capacity. These factors will probably result in an overall reduction of manufacturing capacity, although the more successful aerospace companies will make improvements and possibly purchase some of the facilities that otherwise might be closed down.

Leveraging the Future for Fun and Profit

By taking the lead in satellite operation, the mega-investors have the potential to take the industry to the next level. This is due to their access to capital markets for the money to buy, launch and operate the new generation of more capable satellites. To attain an adequate revenue “top line”, they will need all the help they can get on the marketing side. The key to building a good system (e.g., one that meets the needs of users) is to spend the time and effort to get the requirements right. So, the new leaders must get deep into the minds of current and prospective buyers of satellite-based services. Of course, the big trick is to identify these buyers even before they know that they are the best targets.

The other side of the coin is to specify the communications and vehicle design requirements so that the right satellite can be built and launched within the window of opportunity. The documentation needed to properly buy a satellite is in and of itself quite imposing – technical specifications to make sure the satellite you want is actually constructed; terms and conditions that assure that the contractor will perform as agreed; testing requirements that verify that the hardware works as specified and will last the requisite 15 years in orbit; and statements of work to provide the buyer with a complete listing of what is being bought and how the buyer can track the program from beginning to a successful end.

Another important aspect that a newcomer to our industry needs to embrace is the value of good regulatory policy and spectrum management. Right now, there is a reasonable balance between supply of spectrum at C and Ku bands and demand in terms of the 200 or so geostationary satellites currently in service. This, however, is not a static situation for a number of reasons. For example, powerful terrestrial competitors are approaching the gates to the satellite industry’s comfortable regulatory environment. The December 15, 2004, issue of The Wall Street Journal reveals that many players on the terrestrial side are clambering at the FCC to get more microwave spectrum moved over into their column. Giants like Microsoft and Intel see big growth in local uses of wireless to multiply the success of W-LANs using the IEEE 802.11 standards and personal LANs using Bluetooth. This could encroach on the “new” regime at Ka-band and possibly threaten our current bread-and-butter orbit-spectrum resources at C and Ku bands.

A Galaxy Not So Far Away

While it’s impossible to predict what satellite operator strategies will work best in coming years, consider the past as prologue with this historical case study of Galaxy 1. As I mentioned above, Hughes entered the satellite operating business. They chose the reliable HS-376 satellite, which spun for stability and carried 24 C-band transponders. The management team, under Tom Whitehead, conducted a careful search of potential users of whole transponders and arrived at the conclusion that they could come from the burgeoning cable TV industry. So, the marketing team went out and visited every cable network then in existence. At the same time, a regulatory strategy (without which the business could not move forward) was conceived to get the OK from the FCC to sell transponders, condominium style, rather than renting them, common carrier style. The FCC concurred that this was in the public interest, and Hughes was successful in the marketing the first blocks of transponders to HBO and Turner Broadcasting. With these “anchor tenants” in place, other major players in cable programming followed suite. The satellite was launched in July of 1983 with all 24 transponders taken up – for the life of the satellite. Even now, that’s what satellite marketing is all about.