The commercial communications satellite industry finally appears to be entering the long-anticipated next round of consolidation. As always at such times, the question is — what’s next? While everyone is asking which companies will be next to merge or change their financial structure, and how regulators will react to such changes, attention should also be given to whether this consolidation also will lead to a major industry realignment.
Has the satellite industry evolved sufficiently to make it vulnerable to the convergence fever now affecting the rest of the telecommunications and media world? The communications satellite industry developed in the 1960s out of a desire by governments and national telecommunications operators to have a common infrastructure for their expanding service needs in an increasingly global economy. After 20 years, as the telecommunications industry evolved, technology and market forces expanded the size of the sector and a true industry began to emerge.
While this was mostly a fixed satellite business, along the sidelines a small but valuable sector for satellite-based mobile communication services emerged through Inmarsat, another treaty organization.
By the mid-1980s the industry exploded as two important new forces entered the business from different parts of the value chain: direct-to-home television broadcasters from the consumer end, and private satellite operators, some with ties to satellite manufacturers. These two groups started the first wave of industry realignment, opening new markets for manufacturers and service providers alike, and taking satellites closer to the consumer.
For the next 20 years the satellite industry rode the boom of telecommunications and media growth, with players sometimes crossing into each other’s market spaces or entering into markets even further down the value chain, establishing large, value-added enterprises incorporating bits and pieces of multiple markets.
This first round of convergence created a group of expanding satellite businesses that moved throughout the breadth and depth of the telecommunications and media markets. These included the continuingly evolving mix of Hughes Electronics, Hughes Space & Communications Co., Hughes Network Systems, DirecTV and PanAmSat as well as the similarly evolving combination of General Electric, GE Americom, Spacenet and SES Astra (now SES Global).
As their markets grew and evolved, so did these companies — from satellite manufacturing, to satellite operations, to manufacturing and distribution of user equipment and provision of the content to the user. In addition, a new mobile satellite sector emerged — or at least tried to — with Iridium and Globalstar bringing attention to the business, if not always positive attention. During this time the satellite business overall emerged as a strong and identifiable industry, one that grew from some $38 billion in 1996 revenues to $97 billion in 2004, according to the “State of the Satellite Industry” analysis by Futron Corp.
As this second 20 years drew to a close, the telecommunications industry experienced a series of seismic changes (including, but not limited to, the rise of the Internet and the dot-com boom and bust). Satellite companies likewise started another round of change, as their once strategic investors rediscovered their financial obligations and began to sell or trade assets.
The market for satellites also changed, as telecommunications companies increasingly focused on exploring new terrestrial wireless opportunities, which offered only a limited role for satellites. At the same time broadcasters emerged as the dominant users of satellites, with the rapid expansion of pay television, direct-to-home (DTH) television and high-definition television.
Of the $97 billion total industry revenues noted above, some 51 percent are from DTH services sector. This growth was illustrated in Futron’s recent analysis, “The Transformation of the Satellite Services Industry,” which shows that a third of the satellite capacity currently covering the United States is used for DTH, a number forecasted to double in five years.
These DTH companies now play a large role in the fate of satellite manufacturing and launch companies — as reflected by the fact that they have dominated recent purchases and have pushed the capabilities of both groups with their demands for large and high-powered spacecraft.
Also emerging — albeit on a smaller scale — is a retooled and perhaps now ready-for-primetime mobile satellite industry. Recent events have highlighted the value of mobile satellite services for military operations and disaster relief, giving a boost to all players in this market, while regulatory changes in the United States have opened the door for revamped business plans by smaller players such as TerreStar and ICO Global Communications.
So is now the time for the satellite industry to move to a third phase of restructuring? Will this phase include a true convergence of satellite businesses — fixed, mobile and broadcast? After all, this is what’s happening in the rest of the telecommunications realm as the world has become digital. Businesses as well as individuals expect to be able to communicate anytime, anywhere, as the telecommunications and media worlds have introduced a dazzling array of mobile, integrated and increasingly low-cost products and services.
Cable companies, telephone companies and Internet-access providers are all in each other’s businesses, if not outright buying each other’s businesses. Comcast, the largest U.S. cable company, has 21 million cable subscribers, but also 7.7 million broadband Internet subscribers and 1.2 million phone subscribers. Verizon and SBC Communications — traditional telephone companies — are both emerging as strong triple-play companies, heavily invested in mobile phone businesses and launching video services. And these latter markets themselves are merging, creating a new business in video clips for mobile-phone users.
Even the entrepreneurial start-up Internet ventures such as Google and eBay, now multibillion-dollar enterprises, are entering the fray with Voice Over Internet Protocol telephony services, interactive mapping and undoubtedly more to come.
So what’s a satellite operator to do? Already traditional fixed-services satellite operators with their new financial investors have been pushing further than ever into value-added businesses. Often these moves have been taken in partnership with their media and telecommunications customers, including the DTH providers and mobile telephone and data users.
The DTH companies themselves are entering relationships with terrestrial telecommunication companies to facilitate their triple-play businesses in markets as diverse as the United States and Chile.
In addition to these changing business dynamics, the financial and regulatory issues faced by satellite companies — largely efforts to ease the burdens of restructuring — now are very different from those 20 or 40 years ago.
Will the increasingly convergent interests of the telecommunications and media businesses take the lead in directing the future role of satellites? As they continue to drive industry consolidation (as surely they will), are the new financial investors that now own the world’s major satellite operators also prepared to fund expanded excursions into the value-added services businesses?
Or are they likely to look to the emerging integrated communications companies as potential partners, possibly driving satellite operations back to a purely infrastructure role? And might this not be a positive move if those satellite operators have positions across the spectrum of frequencies as well as markets? The satellite industry now is living through one of those proverbial “interesting times.” The challenges of staying put are greater than those of moving forward — whichever direction forward may be.
Andrea Maleter is the acting division director, space & telecommunications at Futron Corp .