Happy Days In The Bird Business

With political intrigue, high finance and customers in exotic locales, it’s not a boring time to be in the “bird” business.

Despite a global communications sector slowdown and tepid business climate, revenues of satellite services companies grew 7 percent to $49.8 billion in 2002, according to the Satellite Industry Association.

But it’s not the best of times, either – that 7 percent growth pales in comparison to the 17 percent jump in 2001.

Operators, though, are investing heavily in new technologies and standardization despite a string of bankruptcies over the past decade that have made financing more difficult.

The major players – Inmarsat, PanAmSat, New Skies Satellites, Loral Skynet and Eutelsat – operate constellations of satellites, providing a broad range of services and technologies.

As new satellite-based network technology emerges and the industry enters a transitional phase, these companies must foster new growth while maintaining their core customer base.

The current generation of satellites are essentially “bent pipes,” in that they take a signal from a specific location on the ground and broadcast it back towards earth to an area significantly larger.

But the next generation of birds promises very high-speed Internet connections and on-board, high-speed digital signal processing; satellites will effectively become Internet routers-in-the-sky.

While pay television has been a runaway consumer success story for the satellite industry, efforts to sell satellite phones before their time soured the concept of satellite phone and Internet services in the minds of consumers (and the investment community).

Yet behind this image is a steady and sizable business.

The core customers are the military, governments and corporations seeking secure, remote access to data; broadcast television, and telephony. Satellite services are particularly good at providing communications between central offices and remote locations in industries like natural-resource exploration, finance, manufacturing and transportation.

By far the largest commercial customers are military; Gartner DataQuest estimates that the U.S. Department of Defense alone spends $300 million annually on satellite services. Satellite communications, says Patti Reali, an analyst at Gartner, are a significant part of U.S. military tactics. In turn, the military is driving the requirements for the next generation of satellites, she said.

Satellite companies are hoping their new capabilities will appeal not just to governments but to businesses small and large seeking the ability to send and receive data from anywhere.

Inmarsat, the world’s first global satellite communications operator, is the best-known name in the small circle of satellite consortia that operate in this business. Established by the United Nations in 1979, the International Maritime Satellite Organization was privatized in 1999 and has 86 government and corporate shareholders. After retreating from plans for an initial stock sale because of unfavorable market conditions, Inmarsat is now seeking a private sale.

It is the object of a bidding war between a pair of British private equity firms, Apax Partners and Permira, and a U.S.-based consortium comprising Soros Private Equity and Apollo Management.

The bidders are attracted by Inmarsat’s maritime customer base and military contracts. Inmarsat now also serves mobile business Internet users with its Regional Broadband Global Area Network product, known as R-BGAN, a portable satellite modem providing relatively high-speed Internet access from a portable unit that resembles a notebook-computer.

“BGAN is not for everybody,” said Paul Griffith, vice president for portfolio development at Inmarsat. “It’s not consumer-oriented, but it will be very attractive to businesses” beyond the traditional oil and gas, humanitarian aid groups and media markets.

If satellite companies hope to appeal to more mainstream groups, they will have to make their offerings simpler, cheaper and more universal.

A newly-adopted standard, digital video broadband return channel over satellite, or DVB-RCS, may foster competition and help reduce satellite broadband Internet charges, allowing satellite companies to compete with terrestrial options such as digital subscriber line, or DSL; cable; and fiber optics.

Satellite companies are also appealing to developing countries, who find that the cost of building a traditional, earthbound communications network is sometimes more expensive than a wireless solution.

Even the developed world has areas in which satellite technologies can complement fiber and cable networks. Satellite can more cheaply bring broadband to remote regions in countries like Spain, France and even Germany and the Netherlands to help those countries comply with an EU initiative called eEurope 2005, which mandates that all public schools, administrations and hospitals have broadband capabilities by 2005.

Similar government initiatives in Canada and Mexico have caught the eye of satellite services companies.

“We also continue to see strong demand in the Middle East and Asia,” said Diederik Kelder, senior director of business planning for New Skies, “and there is a lot of activity in Western Africa as well.” New Skies, which provides infrastructure to Internet service providers operating in remote areas, has seen heavy interest in data services in and around Iraq as that country’s reconstruction ramps up.

Late this year, the Spaceway unit of Hughes Network Systems will employ high-performance Ka-band satellites, which combine sophisticated onboard digital processing with advanced transmission capabilities. Hughes hopes to upgrade customers like banks, credit card companies and other businesses, which need terminals to communicate with a central location, to this next-generation of satellite. They will simultaneously try to expand into the small-and medium-size business market with services such as fast Internet access.

As for satellite companies offering broadband services to consumers, analysts are skeptical that a case can be made. The few initiatives which have popped up – notably including Star Band and DirecPC in the United States – have been commercial failures. Lars Godell, a senior analyst at Forrester Research, places satellite services firmly in the “other” category when discussing the European broadband market.

“Consumer selection of broadband comes down to price, price and price,” he said, “most satellite solutions require either a large subsidy from the service provider or, less likely, from the consumer – just remember how cheap DSL and cable modems are these days.”