How an Industry's High Hopes
To Profit in Space Fell to Earth
Lockheed and Loral Discuss Teaming Up
Amid Soaring Costs, Telecom Disarray
By ANDY PASZTOR and ANNE MARIE SQUEO
Staff Reporters of THE WALL STREET JOURNAL
In the 1990s, entrepreneurs looked up into space and
dreamed of money. Satellites would create huge profits
from broadcasting TV signals, carrying Internet
connections and beaming precise images of the earth.
Two of the biggest cheerleaders for commercial-space
ventures were Vance Coffman, chairman of Lockheed
Martin Corp., and Bernard Schwartz, chairman of
Loral Space & Communications Ltd. Their giant
aerospace companies championed projects that would
have invested more than $10 billion in various orbiting
telecom endeavors.
But today the space industry is plunging back to earth,
the victim of ballooning expenses, markets that never
panned out and rivals on the ground who came up with
cheaper ways to do business. Now, according to
industry officials, Mr. Coffman and Mr. Schwartz are
moving toward a merger of their commercial
satellite-making operations -- the second- and
third-largest in the U.S. -- into a joint venture that could
compete more effectively against industry leader
Boeing Co.
Such a joint venture, if it goes through, could meld two
weakened players into a more potent No. 2 satellite
maker. Loral has managed to snare more orders than
Lockheed, but cash flow has been tight after the failure
of its Globalstar satellite-telephone system. Lockheed's
factory, though now severely underused, features
state-of-the-art assembly. Together, the two
businesses could slash overhead and personnel costs
and still respond swiftly to market shifts. The new
operation, though still appreciably smaller than
Boeing's, could offer lower prices and take on
European challengers more aggressively.
No final deal has been struck, and
neither company is commenting on
the talks. But the story of what
compelled these two longstanding
satellite rivals to seek to combine
forces shows just how fast and far expectations have fallen for
the business of space.
All too often, the allure of space seemed to overwhelm
common sense. "People were trying to make space do too
many things," says Frank Lanza, who previously worked at
both Lockheed and Loral and is now chairman of New
York-based aerospace supplier L-3 Communications Holdings Inc. "That's
why there has been a roll call of failures."
While the Sputnik era sparked the initial enthusiasm, the collapse of the Soviet
Union marked the unofficial opening of space to commercial projects. Some of
the government and private-sector funds that had been devoted to space
defense began to underwrite the dreams of space commerce.
But space projects were slow to get off the ground. The high cost of launching
payloads and timetables that could span decades restricted the number of
companies that could realistically do business and raised the uncertainty of a
payoff for those that could. Many projects demanded hundreds of millions, or
even billions, of dollars up front before a single customer could sign on.
Building, insuring and launching one of today's biggest satellites can cost as
much as $250 million.
Telephone and cable-television companies frequently beat their satellite rivals
to some markets by being more nimble and offering lower prices. The market for
other applications -- such as satellite-imaging or remote-sensing devices that
would keep track of boxcars, monitor pipelines and transmit environmental data
to farmers and corporate customers -- never took off.
Even when initial rosy forecasts didn't pan out, investors, both
space veterans and newer converts, had become so
enamored of the technology that they failed to craft
more-realistic business goals. Microsoft Corp. founder Bill
Gates, Liberty Media Corp. honcho John Malone and cellular
pioneer Craig McCaw were all bitten by the space bug only to
learn belatedly just how tough a business it is. In all, more
than $17 billion has been plowed into commercial-space
ventures since the mid-1980s without showing much of a
return.
Some ventures have succeeded. Traditional video services, in
which satellites distribute cable and news programming to ground facilities that
then send it on to customers, are flourishing. Direct-to-home broadcasters such
as Hughes Electronics Corp. and EchoStar Communications Corp. have
managed to prosper partly by snaring disgruntled cable customers. Satellite
radio programming may yet become a winner if auto makers continue to support
it with funding and marketing.
Getting Customers
Space Imaging, a joint venture funded by Lockheed and fellow military
contractor Raytheon Co., is drawing customers. The Denver-based company in
September 1999 launched the world's first satellite with the capability of
capturing details as small as a meter, or a little more than a yard, in length; the
previous leader in resolution was five meters. Space Imaging Chief Executive
John Copple says the company's sales of such photos to non-U.S. customers,
including government and military, have almost doubled each year, and that
U.S. commercial growth is starting to top 20% a year. While the company
received a big boost last year when the U.S. government purchased all of the
satellite's imagery over Afghanistan for two months, its backers are resisting
making additional investments until they see some return.
But even No. 1 Boeing, which has seen its government-related space business
take off, is hurting badly in the commercial arena. The company's
satellite-making unit has recently laid off nearly 25% of its work force and its
backlog of commercial-satellite orders has declined substantially during the past
two years. Randy Brinkley, who took over as head of the satellite unit about a
year ago, acknowledges the need for major changes. "The new market reality"
requires companies "to do it better than we've done in the past," he says. "Or
you won't be around to do it at all in the future."
Meanwhile, U.S. manufacturers are finding stiffer competition overseas.
European rivals such as Astrium, based in the Netherlands, and France's
Alcatel SA, have expanded production capacity, stepped up marketing efforts
and aggressively offered discounts or favorable financing terms.
Among the champions of ambitious projects was Lockheed, run by Mr. Coffman,
an Iowan who spent his entire career working on space programs. After
graduating from Stanford University with a doctorate in space sciences, Mr.
Coffman joined Lockheed in 1967 as the Apollo program was getting under way.
He worked on the Hubble Space Telescope and helped develop the military's
most advanced satellite-communications systems.
Shortly after Lockheed concluded its 1995 merger with Martin Marietta Corp.,
Mr. Coffman, then in charge of government space ventures for the newly
created company, issued a memo directing a team of five executives to find
commercial uses for military space technology. His goal: to transform Lockheed
into a powerhouse that wouldn't only make satellites and the rockets required to
launch them, but would offer a wide range of commercial services.
Lockheed spent two years and $2 billion in a lengthy campaign to buy Comsat
Corp., which owns shares of international satellite operators Intelsat and
Inmarsat. Around the same time, Lockheed launched a project dubbed Astrolink.
It aimed to use satellites with sophisticated signal-processing technologies,
originally developed for the military, to deliver inexpensive, continuous Internet
connections to small and medium-size businesses at speeds many times faster
than a telephone modem. To fund this initiative and others, the Bethesda, Md.,
company assembled $5 billion.
To help get Astrolink up and running, Lockheed signed up Liberty Media, partly
for its marketing savvy; TRW Inc., to provide more technical clout; and a unit of
Telecom Italia SpA, to give the project a European foothold. Together, the
backers planned on spending $3.7 billion in the first phase alone. Down the
road, Lockheed anticipated spinning off its entire global-telecommunications
unit, including Comsat, into a separately listed company.
But by late 2000, the partners were struggling over the technical hurdles of
knitting together Astrolink's satellite network and lofting it into space. The
biggest challenge was developing cutting-edge hardware that would allow the
largest number of customers to simultaneously receive signals from the
spacecraft. At the same time, many potential customers -- dot-com firms and
telecommunications outfits -- began imploding. In addition, cable and telephone
companies eager to use excess capacity on their lines were aggressively
marketing high-speed Internet services at prices that Astrolink would have found
hard to compete with after it got started. Some partners began arguing to slow
down or scale back Astrolink.
At a Bethesda meeting last fall, John Sponyoe, the head of Lockheed's global
telecommunications unit, insisted that his company remained committed to
Astrolink. Lockheed would pledge about $35 million in additional funding to carry
satellite construction through the end of the year, according to people who
attended the meeting. But the next day, his bosses overruled Mr. Sponyoe after
he told Lockheed President Robert Stevens in a heated meeting that the
company could end up being on the hook for as much as $150 million more to
keep Astrolink on track.
While Lockheed won't comment on the sequence of events, Mr. Stevens said in
an interview that Lockheed opted to bail out of Astrolink because demand for its
services "contracted at a rate and in a way that went way beyond" the
company's worst-case assumptions. Lockheed's losses related to its global
telecommunications endeavors amount to about $3 billion. Mr. Coffman declined
to be interviewed for this article.
Bigger Problems
Loral's effort to develop a world-wide satellite-telephone network known as
Globalstar Telecommunications Ltd. ran into worse problems. Mr. Schwartz, a
voluble accountant who built Loral into a major defense contractor only to sell its
military businesses to Lockheed in 1996, became an energetic booster for the
space business in the late 1990s.
Globalstar was supposed to offer the ultimate satellite phone. With 44 low-orbit
satellites and an international army of blue-chip partners including Alcatel and
Qualcomm Inc., Globalstar would have world-wide reach and unbeatable
reception, Mr. Schwartz boasted. In early 2000, the company launched a global
TV and billboard advertising campaign featuring scenes of the Andes, small
New Zealand villages and cities such as Shanghai, each tagged with the slogan
"Above and Beyond."
By the time Globalstar actually started selling its services, however, cellphone
rivals were already firmly entrenched throughout the industrialized world. In
poorer countries, few users could afford a phone that cost hundreds of dollars to
buy. A plan to install phone kiosks in developing countries for public use never
got much traction. Despite predictions that Globalstar would attract two million
subscribers quickly, the customer list amounted to a paltry 3% of that when it
sought federal bankruptcy protection last February. Loral, which owned more
than a third of the venture and has already written off $1.3 billion in costs, has
seen its credit rating damaged and its share price slashed by about 93% since
Globalstar began service in March 2000.
Mr. Schwartz, who has since stepped down as Globalstar chairman, says the
technology "worked perfectly and exactly as we planned." But he adds,
Globalstar "was simply too late" in hitting the market.
In the wake of the failure of Astrolink, Globalstar and an earlier highly publicized
space-telephone project called Iridium that was backed initially by Motorola Inc.,
demand for new satellites and rockets has dropped sharply. Industry executives
say prices for some launches are running about 30% below 2000 levels.
In fact, rocket makers expect to put in orbit about a dozen big commercial
satellites this year, the fewest launches since the mid-1980s. More than 25 such
satellites have been launched in three of the past six years. Launch providers
such as Lockheed, Boeing and France's Ariannespace, all of whom invested
heavily in new rockets in the belief that they faced a dramatic expansion of
orders, are now clamoring for greater government assistance to see them
through the current tough times.
Against this gloomy backdrop, Lockheed and Loral are struggling to agree on a
formula to pool their backlog of satellite orders, expertise and assembly
facilities, which are located near each other in Northern California. Exploratory
talks were kicked off months ago between Messrs. Schwartz and Stevens, and
since then have grown more complex over the issue of how best to value each
company's contribution to the venture. The new operation would have annual
revenue well in excess of $1 billion and, more important, a nearly $1.8 billion
backlog of commercial orders. The backlog of No. 1 Boeing's
satellite-manufacturing unit, including government orders, totals $3.6 billion.
After years of stubbornly refusing to talk about divesting satellite manufacturing,
Mr. Schwartz has decided that consolidation may be the only feasible option to
shore up Loral's battered stock price. But the company's chairman has told
associates he is adamant that Loral managers stay in place, according to
industry officials. Mr. Schwartz also wants to make sure the proposed entity will
have the financial support to come up with new models.
Lockheed, for its part, wants to minimize outlays, while structuring any deal so it
can retain its military satellite programs. Loral's current backlog of orders is
more than twice the commercial backlog of Lockheed. But Lockheed is balking
at using the same formula to determine valuation because it contends that
Loral's profit margins tend to be proportionately lower, say people familiar with
the negotiations. A spokeswoman for Mr. Schwartz said Loral had no comment,
and Lockheed also declined to discuss the matter.
With engineers designing increasingly more sophisticated satellites with longer
useful lives, manufacturers in any case have to get used to a slower flow of
business. So far this year, none of the three U.S. suppliers has announced a
single new satellite order.
Write to Andy Pasztor at andy.pasztor@wsj.com1 and Anne Marie Squeo at
annemarie.squeo@wsj.com2 |
