Story on satellite industry, from Briefing.com:
StreetBeat
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Updated 10/13/97
The purpose of StreetBeat is to provide you with additional insights on
the market from recognized financial experts on (and off) Wall Street.
It should be noted that the views and opinions expressed by the
panelists below are not necessarily those of Briefing.com.
StreetBeat looks at the satellite communication business this week with
Marc Crossman and Robert Kaimowitz.
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Panelists
Marc Crossman, Vice President and Satellite Communications Analyst at
Oppenheimer & Co. Mr. Crossman is one of a small number of analysts that
devotes his time solely to the satellite communications industry. His
articles are featured in several industry publications such as Via
Satellite, Satellite News, etc.
Robert Kaimowitz, Satellite Industry Analyst at Unterberg Harris. Mr.
Kaimowitz was the first analyst on Wall Street to cover the satellite
industry and Unterberg Harris hosts the first and only annual investment
conference dedicated solely to the satellite industry. He is widely
quoted in both financial and industry press, including Broadcasting &
Cable, Satellite News, the Wall Street Journal, New York Times, Red
Herring, and Investors Business Daily.
Q&A
Briefing: What are the main advantages in using satellite communications
versus terrestrial-based communication networks?
Marc Crossman: Satellites are most efficient providing
point-to-multipoint communications - that is moving traffic from one
point to many points simultaneously. Using satellites is also the
fastest means to create a communications link over large geographic
areas. Although it is not clear that satellite is necessarily less
expensive than fiber, it has been projected that in the U.S. alone,
building fiber to the curb is a $20+ billion project. A satellite
covering the same geographical area can be built, launched and insured
for under $250 million. The trade off is between capacity and cost. We
don't think very many companies can afford to build a $20+ billion
network.
Everyone is always looking for the hands down winner. The reality is
that many forms of communications will coexist. In 1996, the
telecommunications services industry generated $660 billion in revenue.
Satellite accounted for between $7 billion - $9 billion of that total.
It has and will remain a niche in the overall scope of communications.
The real story in satellite stocks is the move from a 1% niche player to
a 2% niche player.
Robert Kaimowitz: The advantages of using satellites over terrestrial
based infrastructure differ from application to application. From a
macro perspective, satellites represent a more "efficient
infrastructure." Satellites, however, are not always the best
telecommunications solution. Satellites are the best solution for those
areas of the world where the ratio of population density/affluence of
population do not favor terrestrial infrastructures. Typically more
rural areas are best suited for satellite applications.
I meet with over 100 portfolio/fund managers annually, usually walking
them through what I call Satellites 101. I discuss three investment
themes:
Theme 1: There is significant worldwide demand for telecommunications
services. Example: There are over 3 billion people on the planet without
access to a telephone.
Theme 2: Satellites represent the most efficient telecommunications
infrastructure. Although satellite services companies require a
significant capital investment before they become operational, in terms
of telecommunications infrastructure costs, satellites are significantly
less expensive than any terrestrial infrastructure. We expect this
efficiency eventually will translate to significantly above average
operating leverages, cash flow margins and, believe it or not, earnings.
Example: Let's compare analog cellular telephony in the United States to
mobile services delivered from satellites in low Earth orbit. Since the
introduction of cellular in the United States in 1984, more than $40
billion has been spent by service providers to install an infrastructure
that passes 200 million people. That is an investment of $200 per person
passed. Globalstar, at a cost of $2.5 billion, will pass virtually every
person on the planet -- approximately 5.5 billion people at a cost of
$0.45 per person passed. As a result of significant demand and efficient
infrastructure, revenues for satellite services worldwide are expected
to grow to more than $37 billion per year by 2000. This reflects nearly
a three-fold increase over a five-year period, or a compounded annual
growth rate of nearly 20 percent.
Theme 3: While satellite service revenues grow, many billions of dollars
will be spent on the enabling infrastructure of ground systems,
including very small aperture terminal (VSAT) networks. The ground
station market exceeded $18 billion in 1996 and is expected to grow to
an average $46 billion by 2006. From a few thousand ground station units
intended for professional users only, the market is rapidly expanding to
millions of units primarily for individual consumers. Momentum continues
to build as new applications, such as direct-to-home television, emerge.
Technological improvements, reductions in satellite dish diameters and
the resulting decline of earth station prices will be additional
catalysts to this growth. The trend will be reinforced through the year
2000 with the introduction of several new satellite systems providing
innovative applications, such as multimedia communications (examples
being Cyberstar or Teledesic), mobile communications (Globalstar,
Iridium) and radio broadcasting (CD Radio, Worldspace). All these new
systems require ground infrastructure and target the individual consumer
with services provided through small, inexpensive terminals.
Briefing: Which markets will drive the demand for satellite
communication technology?
Marc Crossman: Virtually all of the markets that drive wireline and
wireless terrestrial communications will drive the market for satellite
communications. Satellites will fulfill a portion of the demand for high
and low speed data communications, mobile and fixed telephony and
backhaul and broadcast video.
Robert Kaimowitz: Please see response #3.
Briefing: Has a clear leader emerged in this business or is there still
opportunity for new entrants? What are some of the barriers to entry?
Marc Crossman: In fixed satellite services, Hughes Electronics (GMH) and
Loral Space & Communications (LOR) are the two giants of the industry.
However, in the mobile market of satellite services no company has taken
the lead. In fact, the majority of the proposed systems have yet to be
deployed. The next few years will be interesting as many new entrants
try to carve out their piece of the pie.
The U.S. DBS market is closed. Primestar, DirecTv/US Satellite
Broadcasting, and Echostar are the only survivors left after a massive
consolidation. Any one wishing to enter into the U.S. DBS market would
be committing financial suicide. The international DTH market, however,
is wide open.
The two biggest barriers to entry are capital and licenses, for obvious
reasons.
Robert Kaimowitz: I separate the satellite industry into two major
groups; services and equipment; and then into five distinct sub-groups
within service. Below is my "coverage list" I will address each of your
questions above for each sub-group.
Satellite Services
Diversified Space & Communications: Loral Space & Communications (LOR),
Hughes Electronics (GMH), and Orbital Sciences Corp. (ORBI)
Description: The core competencies of these companies historically have
been satellite manufacturing. Hughes and Loral are two of the three
largest satellite manufacturers in the world. Between Hughes, Loral and
Lockheed Martin (a diversified defense company, I only cover satellite
"pure plays") 80% of the world's large commercial communication
satellites are manufactured. Orbital Sciences is a world leader in small
satellite manufacturing. Each of these companies has similar long-term
strategies on a macro-perspective; to leverage satellite manufacturing
as an entr‚e into satellite services businesses. The leaders in this
respect are Loral and Hughes.
Our pick in this category is Loral Space & Communications (NYSE- LOR).
We have several reasons for this bullishness:
1) Management, Management, Management: Led by Chairman & CEO Bernard
Schwartz and President Michael Targoff, Loral's entrepreneurial
management style has created spectacular shareholder value over the past
20 plus years. I am a big fan of entrepreneurial management teams that
create significant shareholder value.
2) Strategy: Loral's target is to provide telecommunications services
throughout the world in places where there is the most demand. Example:
Loral is the managing partner and significant shareholder of Globalstar
Telecommunications Ltd. We expect Globalstar to be a fantastic success
providing phone service via satellite to those areas of the world that
are too rural in nature to warrant a prohibitively expensive terrestrial
infrastructure
Barriers to Entry: In both satellite manufacturing and services there
are very strong barriers to entry. In manufacturing, the key barriers to
entry are technical, financial and a successful track record. Satellites
require advanced technologies, most of them derived from military space
and communications applications. Additionally, large satellite systems
typically cost between $500 million to $1 billion to build and launch. A
satellite operator is more likely to give a satellite order to
manufactures with long histories when investing this kind of money into
a system. The leaders in satellite manufacturing are Hughes, Loral and
Lockheed Martin.
There are two primary barriers to entry in satellite services. The first
is an absolute barrier to entry which is regulatory. Without a license
to operate from a governing body such as the FCC or the International
Telecommunications Union (ITU) a service cannot be launched. The second,
and still a strong barrier to entry is financial. As mentioned earlier,
even a relatively small satellite communications system with just one
satellite will cost approximately $500 million. Globalstar will cost in
excess of $2.5 billion, Iridium over $5 billion and Teledesic is
expected to cost in excess of a staggering $9 billion.
Direct Broadcast Satellite/Direct-To-Home: DirecTV (subsidary of GMH ),
Echostar Communications (DISH), United States Satellite Broadcasting
(USSB), and TCI Satellite/Primestar Partners (TSATA).
Description: There are four players in domestic DBS (Above), each with
clearly different strategies. DBS is a cable like service which can be
received with an 18" satellite dish rather than a coaxial cable to the
home. Typically, DBS provides better quality digital audio/video than
cable with significantly more channels and lower subscription costs.
Leader: The clear leader in this group is DirecTV, a wholly owned
subsidiary of Hughes Electronics. With far and away the largest base of
subscribers (approximately 3 million), the best orbital location to
broadcast to the entire United States and most programming choices
(content is king) and the best distribution (over 20,000 retail stores
nationwide) DirecTV has clearly the most tools in place to give it
better odds for long-term success.
Mobile Satellite Services: American Mobile Satellite Corp. (SKYC),
Globalstar Telecommunications Ltd. (GSTRF), Iridium World Communications
(IRIDF), ICO Global Communications (Private), and Odyssey
Communications (Private).
Description: After many years of planning, building and raising capital,
mobile satellite services are now just being launched on a world wide
scale. By using constellations of Low-Earth/Medium Earth Orbiting
satellites, these systems promise to provide telephone services to those
areas of the world that are beyond terrestrial infrastructures and to
worldwide travelers that need to be in constant reach of a mobile phone.
Leaders: Although we expect Iridium (IRIDF) to be first to market by a
few months, we believe that the offering from Globalstar
Telecommunications (GSTRF) holds the most promise. Globalstar's LEO
system with six times the capacity at half the cost of Iridium, will
provide cellular like services to the 3.5 billion people throughout the
world with no access to a telephone. Through its network of world class
partners such as Vodophone, Airtouch and Rosstelecom, Globalstar will
leverage its franchises local expertise in product distribution.
Additionally, we are very excited about Globalstar's yet-to-be announced
fixed-site rural telephony business to address the needs of those rural
customers who require significantly more minutes-of-use than the mobile
system can economically accommodate.
Digital Audio Radio Service (DARS): CD Radio Inc. (CDRD), American
Mobile Satellite (SKYC) and its subsidary, American Mobile Radio Corp.
Overview: DARS is the emerging satellite-to-car radio broadcasting
industry (satellite radio). On April 2, 1997, CD Radio Inc. and American
Mobile Radio Corp. each won a license at FCC auction for $83 million and
$89 million respectively. The license gives the holder the right to
provide a third, digital, radio band in the United States via satellite.
Within a few years, listeners will have access to AM, FM and satellite
radio bands. In our view, these licenses are particularly attractive
because they are nationwide in scope. DARS systems are expected to be
capable of broadcasting 30 channels of CD-quality music programming and
20 channels monaural programming (possible all-news, all-sports, and
all-talk programming) nationwide, ubiquitously via satellite. The
services are likely to be subscription based with the potential for
service tiers, such as in cable or DBS.
The Market Opportunity for DARS Translates In to One Of The Most
Compelling Business Opportunities I Have Seen for any Telecommunications
Service. We expect the primary target market for DARS to be the 200
million vehicles in the United States. Additional markets and products
could include receivers built into home stereos and personal portable
stereo systems. Independent studies suggest that the market for DARS
could be as much 100 million vehicular units.
No clear leader in this group yet. I believe in management's
capabilities of both companies and in DARS itself.
Enabling Technology and Ground Equipment: (a) VSAT Network Systems:
ViaSat (VSAT), STM Wireless (STMI), and Gilat Satellite Networks Inc.
(GILTF). (b) Integrators: Globecomm Systems Inc. (GCOM).
Description: While satellite service revenues grow, many billions of
dollars will be spent on the enabling infrastructure of ground systems,
including very small aperture terminal (VSAT) networks. The ground
station market exceeded $18 billion in 1996 and is expected to grow to
an average $46 billion by 2006. From a few thousand ground station units
intended for professional users only, the market is rapidly expanding to
millions of units primarily for individual consumers. Momentum continues
to build as new applications, such as direct-to-home television, emerge.
Technological improvements, reductions in satellite dish diameters and
the resulting decline of earth station prices will be additional
catalysts to this growth. The trend will be reinforced through the year
2000 with the introduction of several new satellite systems providing
innovative applications, such as multimedia communications (examples
being Cyberstar or Teledesic), mobile communications (Globalstar,
Iridium) and radio broadcasting (CD Radio, Worldspace). All these new
systems require ground infrastructure and target the individual consumer
with services provided through small, inexpensive terminals.
Leaders: Globecomm Systems and ViaSat.
Briefing: Which companies are you recommending and /or avoiding?
Marc Crossman: I like the vertically integrated companies that provide a
combination of hardware and services for the satellite industry.
Companies like GM Hughes Electronics (GMH), and Orbital Sciences Corp
(ORBI) have bottom line earnings to support the buildout of new
services. In addition, the bottom line earnings will provide a cushion
should the services fail.
I am skeptical about digital radio delivered via satellite (named DARS).
Cable has spent 52 years convincing consumers that television is a
subscription service. Changing the consumers mindset could prove to be
extremely difficult.
Robert Kaimowitz: Buys: Loral (LOR), Globalstar (GSTRF), ViaSat (VSAT)
Globecomm (GCOM), American Mobile Satellite (subsidiary of SKYC).
Holds: Echostar (DISH), United States Satellite Broadcasting (USSB).
[ Index ]
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