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Satellite industry hitting interference
Glitches are making launches more costly; tighter export controls are
slowing projects
BY ANDREW POLLACK
New York Times
LOS ANGELES -- The promise of the space business was shown recently when
Hughes Electronics announced a $1.5 billion investment from America
Online to deliver Internet service via satellite.
The pitfalls of the space business were seen the same day when Hughes
disclosed, much more quietly, problems in manufacturing satellites that
would cause it to write off $125 million and take a big quarterly loss.
It was only the latest in a series of setbacks for Hughes, the unit of
General Motors Corp. that is the nation's largest satellite company.
Last year one of its satellites failed in orbit, knocking out paging
service for most of the nation. Another satellite blew up when a rocket
exploded. The company's assistance to China in analyzing launch failures
has placed it under criminal investigation for violation of national
security laws. And the resulting furor in Washington forced Hughes to
forfeit a $450 million contract for an Asian satellite system.
As Hughes goes, so goes the satellite industry. Rarely, it seems, has an
industry been blessed with so much potential and cursed with so many
problems. Manufacturing glitches and rocket failures have made it more
difficult and costly to get satellites into the sky. Tighter export
controls in the wake of the controversy about technology leaks to China
are slowing projects.
''The events of the last year have created higher hurdles for the
companies to get the work done,'' said Clayton Mowry, executive director
of the Satellite Industry Association, a trade group.
Perhaps the biggest problem is that Iridium LLC, which owns a
66-satellite system offering worldwide mobile telephone service, has
failed to attract subscribers and is struggling to stave off bankruptcy.
All these problems have taken some of the bloom off the commercial
satellite business, which has only recently surpassed the
government-owned satellite market in size. Investors are becoming wary
of pumping billions of dollars into numerous systems to provide
telephone service or high-speed data transmission. Many projects will be
scaled back or might never get off the ground, analysts say.
Problems
ICO Global Communications, which is developing a satellite-based phone
service to compete with Iridium, failed to raise the $500 million it
sought from a public rights offering despite extending the deadline
twice. It is now scrambling to raise money from unnamed investors. If
ICO fails, Hughes, which is building the satellites for it, could have
to write off as much as $500 million.
And Boeing Co. has, for now, shelved plans to buy a controlling stake in
Ellipso, another company planning a satellite-based telephone system.
Even so, Mowry and many other executives and analysts shrug off various
problems as short-term ones. ''I don't think the problems we're facing
today are any more severe than the industry faced after the Challenger
explosion,'' said Hughes chairman Michael Smith. ''This is a risky
business, and we've never said anything but. But it's also
high-reward.''
Robert Kaimowitz, an analyst at ING Baring Furman Selz, was even more
upbeat, saying, ''Everything in the industry is going great right now.''
He expects the global industry to grow 12.8 percent a year from its
current size of $60 billion.
Indeed, both Boeing and Lockheed Martin, the nation's two biggest
aerospace companies, are trying hard to move into commercial satellite
communications, which is potentially faster-growing and more profitable
than military contracting.
Lockheed, with a new division called Lockheed Martin Global
Telecommunications, is trying to buy Comsat for $2.7 billion and has
joined forces with TRW Corp. and Telecom Italia to develop Astrolink, a
$3.6 billion system to deliver Internet service and high-speed data from
satellites. Boeing is developing a satellite system to provide Internet
service to airline passengers.
Some recent technical problems, in fact, seemed to be caused by a rush
to fill orders. ''The development capability is stretched to the
thinnest,'' said Smith of Hughes. ''We had gotten to the point where we
skipped tests, and that's not wise.''
Fizzles
There have been six well-publicized rocket failures in the last year,
prompting investigations by the Pentagon and by rocket makers Lockheed
and Boeing. There have also been ''more in-orbit satellite failures than
we have been used to in the past,'' said Rick Hauck, president of Axa
Space, a space insurance underwriter in Bethesda, Md.
Hughes had component failures in six satellites in orbit in the last
year, though only the paging satellite failed completely. Lockheed
Martin reported a second-quarter loss, in part because orders for
satellites dropped and component defects caused a six-month
manufacturing delay.
Launches are also being postponed. Arianespace, the European launch
company, was supposed to have conducted six launches so far this year
but has handled only two because the satellites are not ready.
Still, the big money to be made is not in building and launching
satellites, but in offering services using them, and that is where
investors focus most attention.
Indeed, Hughes' share price -- it trades as a tracking stock, GM's class
H stock -- has held steady despite its satellite problems because of its
DirecTV division, which delivers dozens of digital channels to 18-inch
home dishes by satellite. Cai von Rumohr, an analyst at S.G. Cowen &
Co., estimates that the domestic DirecTV business is worth as much as
$50 of Hughes' share price, which closed Tuesday at $53.69.
DirecTV's rival, Echostar Communications Corp., a service company not
weighed down by satellite manufacturing, has seen its stock zoom from a
low of less than $9 a share a year ago to a high of $88.25 in July,
although it has now dropped to $71.50.
Neither DirecTV, with 7.5 million customers, nor Echostar, with 2.6
million, is profitable yet. But each is adding 100,000 subscribers a
month and is on track to move into the black in a year or so.
The satellite TV business has a lot going for it. Through mergers, the
industry has already shrunk from five players to two. And broadcasting,
which involves one-way transmission from a single source to many
receivers, is well suited for satellite technology. A single satellite
in geosynchronous orbit 22,300 miles above the earth can beam its signal
to much of the nation.
Conversely, the satellite-based telephone business has not yet gone
through a consolidation. And using a broad beam to carry telephone
conversations, which go between two points, does not seem to make as
much intuitive sense. Moreover, the calls are two-way, meaning the
telephones must transmit to the satellite as well as receive.
Thus, the Iridium failure is more serious than the industry's recent
technical problems because it raises questions about the fundamental
demand for satellite services.
Motorola, Iridium's biggest backer with an 18 percent stake, has said it
will not put in more money unless other backers do as well. So Iridium
is scrambling to restructure its finances and avoid bankruptcy or
liquidation.
Glitches
Iridium has suffered from technical glitches and marketing errors. Its
phones are bulky compared with cellular phones and initially cost about
$3,000. Calls cost around $7 a minute. And because an uninterrupted line
of sight between the phone and the satellite is needed, Iridium calls
can be made from the top of Mount Everest -- but not from inside
buildings, inside cars or even on city streets near tall buildings.
Moreover, cellular service has spread rapidly since Iridium was
conceived and standards now allow some phones to be used in more than
one country, reducing the need for satellite phones.
Iridium has now slashed the price of phone service to about $3 a minute
and the price of phones to less than $1,000, and its executives hope for
a turnaround. ''In the last six months we were in a trial launch mode
when we told the whole world we were in full commercial launch,'' said
chief executive John Richardson.
Competitors are making multibillion-dollar bets that Iridium's failure
is the result of poor execution, not lack of demand.
Next up is Globalstar Telecommunications, a company backed primarily by
Loral Space & Communications that plans to begin service in September.
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