This year has shown continued positive growth across all sectors of the satellite industry and has been filled with important events and signs of new directions for the future. The satellite industry, however, is still a very small niche within the global telecommunications and media sector.
For example, the total cost of commercial satellite launches in 2006 is on the order of $4 billion, whereas Verizon alone has announced capital expenditures for new fiber of $25 billion. In addition, Clear Channel, with flat revenue prospects at best, has just been valued at $26.7 billion, an amount twice as high as the entire satellite radio industry combined.
The satellite industry’s tail may be wagging more vigorously these days, but the telecommunications/media dog will continue to be driven largely by technology evolution and changes in end user needs on the ground. This will be particularly true in the dynamic video consumption world and the rapidly expanding broadband wireless market.
The good news is that despite a seemingly unstoppable satellite decline in overall telecommunications and media market share versus terrestrial providers, the total pie of demand and revenues is growing at a sufficient rate to provide the satellite sector with significant and attractive growth opportunities for the foreseeable future. Our recap of 2006 and predictions for 2007 are below:
Fixed Satellite Services (FSS)
If 2005 was the year of private equity and consolidation, 2006 was the year of integration, cost cutting and strategic realignment. Next year should show the fruits of this year’s efforts with improved profitability, continued asset rationalization and renewed FSS consolidation. We also expect increased interest in non-FSS add-on acquisitions for vertical integration of downstream service businesses, especially to better serve government customers. However, some of this interest will be constrained by an even greater interest in leveraged buyout debt reduction.
Big stories for the year were the closings of the Intelsat/PanAmSat and the SES/New Skies deals. Integration efforts have lead to management shuffles and headcount reductions. Right now, there is plenty of talent on the street to spark new satellite ventures, and we would be surprised if we did not see some come to fruition.
- Transactions involving the acquisitions of at least two of the following FSS companies will be announced: Telesat Canada, Loral Skynet, SatMex or XStar;
- Eutelsat capital structure or ownership is materially altered;
- Intelsat announces an initial public stock offering;
- average global capacity utilization and transponder pricing continues its gradual improvement;
- video and datacasting applications continue to drive industry profitability as efficiencies of satellite point-to-multi-point broadcasts protect industry from expanding fiber, cable and wireless alternatives; and
- two-way broadband subscribers and traffic expand with successful launches of Wildblue 1 and Hughes’ Spaceway.
Direct Broadcast Satellite (DBS)
Despite the prediction by many of a transition year for DBS versus cable given the triple play onslaught of video, Voice Over Internet Protocol and broadband Internet access, DBS again far outpaced the cable industry in subscriber acquisitions.
Wall Street analysts estimate total net subscriber adds of approximately 1.8 million for DBS and roughly 350,000 for cable. Roll-out of high definition and significant new niche content combined with digital video recorder subsidization maintained the DBS value proposition versus cable, but at substantial expense. Revenues are up, profitability is down. On the technology front, higher-powered satellites, spot beams and compression (MPEG-4) continue to dramatically lower cost per bit, even as the number of bits broadcast increases.
- DBS firms will continue to offer competitive video services in their core markets while introducing new services and content;
- pressure for a triple and perhaps a quadruple play adding wireless services continues to build;
- DBS firms announce wireless broadband strategies to address triple play question; or one of the DBS companies announces a business combination with a major teleco or wireless company;
- IPTV competition from telecos and rural cable grows but does not yet present a strong threat; and
- as gross subscriber additions moderate due to market saturation and competition, the DBS firms become even stronger cash-generating machines.
Digital Audio Radio Service
XM Satellite Radio and Sirius Satellite Radio stocks started the year at $28.15 and $6.52 and reached lows of $9.63 and $3.60, respectively, before rebounding somewhat to $14.61 and $4.17 as of Dec. 4.
Investors appear worried about further delays in the point at which either or both will become cash flow break even and a potential downward adjustment in long-term profitability due to higher content costs, rising subscriber acquisition costs , constrained average revenue per user and the threat of iPOD, MP3 and cell phone music services. However, continued solid subscriber gains, improved service offerings and a brightening light at the end of the negative cash-flow tunnel have recently renewed investor interest.
- a restructuring, recapitalization or acquisition of WorldS pace Inc. to better exploit its valuable L-band spectrum; and
- announcement of at least one major strategic relationship with Internet media.
Mobile Satellite Services
This was a huge year for mobile satellite services — a phoenix-like rise from the ashes of bankruptcy. This rebirth was largely the result of fresh-start balance sheets and the risk capital of new owners, but also was sparked in part by the gifts of ancillary terrestrial component (ATC) spectrum and very active U.S. government demand.
Spectrum values grab investor interest. For example, cellular and cable companies paid $13.7 billion for advanced wireless service spectrum ( more than 50 cents per MHz-Pop), continuing their warehousing of massive amounts of wireless spectrum while setting a benchmark for ATC spectrum and calling into question the timing of its demand.
Motient and SkyTerra reconfigured to separate their ownership structure into pure L-band (MSV) and S-band (TerreStar) plays. Globalstar and Orbcomm complete their initial public stock offerings on the backs of strong subscriber growth and projections and, in GlobalS tar’s case, the extrapolated value of its ATC spectrum.
The trading levels have been disappointing, but Globalstar has received real market value for its ATC spectrum and both companies now have significant cash to expand marketing efforts and begin fleet renewal activities.
Inmarsat, not standing still against this resurgent competition, acquires ACeS and launches its Inmarsat BGAN service. Much of this progress is due to the onward advance of technology, which has given us significantly lighter, smaller and more affordable phones and user terminals with longer battery lives.
Combined with the balance sheet restructurings, we now have more realistic sub 10-cent-per-minute usage charges in many markets.
- MSS subscriber additions will remain strong;
- ATC search for strategic cellular/wireless partners will continue but mostly with no success;
- at least one and possibly two business consolidations among Inmarsat, Iridium, GlobalS tar, MSV, TerreStar, ICO and Thuraya are announced in large part to gain a critical mass of spectrum and share infrastructure costs.
Satellite Manufacturing, Launch & Insurance
In the United States , Lockheed Martin Corp. and Boeing Co. focus on government customers and higher priced commercial satellites allowing Space Systems/Loral to expand its domestic share of the commercial market (hard to compete on price with a company coming out of bankruptcy).
The International Traffic in Arms Regulations continue to transfer market share from the United States to Europe and eventually China, India, Japan and Russia, but the export process does appear to be getting faster if not more lenient.
Large, powerful satellites in geosynchronous orbit still rule the day, however, Orbital’s small geosynchronous satellite continues to gain significant new orders in a trend we expect to continue into 2007.
The l aunch industry remains highly competitive and fragmented with the two Evolved Expendable Launch Vehicle suppliers, Lockheed Martin’s Atlas and Boeing’s Delta, finally getting approval to merge operations to survive. The newly merged company began operations as ULA Dec. 1. New vehicles like the Space Exploration Technologies Corp.’s (SpaceX) Falcon are on the drawing boards in the United States and several other countries, but unlikely to provide much lift capability in the heavy geosynchronous segment for several years.
Insurance providers get a year of historically low failure rates and good premium income. As always, this means more money will flow into the market and push down insurance rates — good news unless you are an insurance broker.
- Space Systems/Loral is put in play with bidders encouraged by activist Loral shareholders;
- Another year of low failure rates;
- International Launch Services finds a new home;
- Sea Launch sees some shareholder change;
- SpaceX completes several successful launches, and
- insurance rates go lower.
Satellite Ground Segment
Companies winning government contracts did quite well, while many commercially focused firms continue to suffer from a deeply fragmented and inefficient industry. This was, however, the first year where we saw a growing realization among senior management that consolidation had to occur — and soon — in order to attract and reward investors, achieve regional or global marketing strength, fund research and development for exciting new applications and eat into the larger terrestrial telecom pie.
- The year ahead s hould be one of significantly increased industry consolidation.
Hoyt Davidson is chief executive officer and managing member of Near Earth LLC.