From Herring Magazine:
herring.com
----
Loral goes superstratospheric with an
array of satellite-based
communications services.
By Jonathan Burke
It's not easy being AT&T or MCI right now. These
days, everyone wants to compete with the
telecommunications giants: first deregulation opened up
the cozy closed markets, and now the telcos' equipment
suppliers, the aerospace defense contractors, and a few
high-tech entrepreneurs want to become satellite-based
communications services companies. When you look at
the rewards, who can blame them?
True, the satellite business is remarkably risky, with 20
satellites lost since 1990 (including several on Ariane 5,
a rocket that exploded on its maiden liftoff this year).
This is, after all, the only industry that puts
multimillion-dollar products on the tip of a firecracker. And the business also places extraordinary demands on
a company. Getting requests for space spectrum through
international regulatory bodies takes three to four years,
colossal fortunes are required to build satellites, and few
companies have the technical expertise to operate them.
But the potential payoff is immense: the commercial
satellite business could become the most financially
rewarding industry imaginable. It has the same economic
prospects as the Internet--an April Merrill Lynch report
predicts that annual revenues will grow 500 percent in
the next decade--without the Net's mob of startups. As a
result, the industry has attracted some enormous players.
General Electric, Motorola, Lockheed Martin, Hughes
Space and Communications, and now Boeing are in. So
are the corporate Gary Kasparovs, canny strategists like
Rupert Murdoch, Masayoshi Son, Bill Gates, Craig
McCaw, and John Malone. Analysts expect additional
entrants--possibly Lucent, Ericsson, and Nokia as well
as various software companies--before consolidation
rears its head.
Given a billion dollars to stake in the satellite industry, the
enlightened investor might pass over these illustrious
companies and instead sit down with Bernard Schwartz,
CEO of Loral Space & Communications and, at age 71,
an unlikely space-age entrepreneur. Mr. Schwartz has
the upper hand: Loral is flush with cash, it's completely
focused on commercial satellite communications, and it's
the second-largest designer and manufacturer of
satellites. The company therefore has an insider's
advantage in its second line of business, satellite services,
which Loral is in a unique position to optimize for its
equipment. As Lior Bregman, a satellite analyst with
Oppenheimer and Company, sees it, "Satellites have just
become the cornerstone of the wireless revolution, and
Loral has a key franchise that could be impossible to
duplicate."
War and peace
Mr. Schwartz was to the defense electronics industry
what Craig McCaw was to cellular. Twenty years ago,
he was a CPA in the insurance business who was
recruited to resuscitate a $5 million company called
Loral. Through a controversial acquisition strategy, he
assembled the world's most valuable defense electronics
company, which prospered even after the disintegration
of the Soviet Union. Nevertheless, explains Mr.
Schwartz, "we could see that defense was a static or
declining business and decided to focus on satellites,
which had no horizon for the foreseeable future."
By the time he sold the defense portion of his business to
Lockheed Martin in 1995, Mr. Schwartz had added
shareholder value of $15 billion to Loral. And with 72
straight quarters of revenue and earnings growth and a
compound annual growth rate of 20 percent over 20
years, he commanded Wall Street's respect. Instead of
retiring, Mr. Schwartz retrenched and vowed to
duplicate his success, this time in the commercial satellite
industry.
Mr. Schwartz retained only Loral's satellite
manufacturing division, formerly Ford Aerospace, and its
leadership equity position in a consortium that was
planning a mobile telecommunications satellite service
called Globalstar. He then acquired AT&T's Skynet
satellite operations for $471.5 million and began
developing CyberStar, a data-broadcasting satellite
service fully owned by Loral.
Divested of its defense holdings and with much of its
capital invested in development, Loral is still the No. 2
commercial satellite manufacturer in terms of annual
revenues but is No. 17 among satellite service operators,
according to the Merrill Lynch report. Yet several Wall
Street analysts are blowing Loral's horn, arguing that the
company can wield its satellite manufacturing strength to
gain a huge advantage in satellite services--the industry's
brass ring.
Shooting for the stars
By getting into services early, Loral has landed leading
properties in the four promising commercial satellite
sectors: video broadcasting, rural mobile telephony, data
b
roadcasting, and direct-to-car audio services. The most
mature of these sectors is the video market, which has
grown to represent nearly 60 percent of the $5 billion
worldwide commercial satellite services market,
according to the Merrill Lynch report.
With the Skynet acquisition, Loral gained the equipment
and services that enable national television broadcasters
to share video with their affiliates. Loral intends to extend
Skynet's footprint beyond the United States through
more satellite launches. Merrill Lynch analysts are
impressed with this expansion strategy and predict a
surge in bandwidth demand for video: "There will be
several hundred new digital broadcast TV channels for
each linguistic market in the world," the report claims.
Besides Skynet, Loral owns a minority stake in
Mabuhay, a provider of direct broadcast TV service to
the Philippines.
Mr. Schwartz is even more enthusiastic about the rural
mobile telecommunications sector and Loral's 33 percent
investment in Globalstar, of which he is chairman. Begun
in 1986, the project will have consumed $2.6 billion
before it starts making money in 1999. But Globalstar
hopes to launch satellites as soon as December, has
partnered with ten major companies, and has created
franchises to sell the service in more than 100 countries.
Globalstar's stock (Nasdaq: GSTRF) has risen from $20
to $38 since its February 1995 initial public offering. This
growth comes despite the progress of the heavily hyped,
Motorola-backed Iridium World Communications,
another recent IPO (Nasdaq: IRIDF), which has already
launched 17 of 66 planned satellites. Although both
companies are pitching satellite-based mobile
communications, their business models and technologies
are so different that they hardly compete. Iridium is
designed for well-heeled businesspeople who want one
mobile telephone service that will work at any port of
call. In contrast, Globalstar serves the average consumer
living in India, China, or elsewhere who can't get a
telephone line installed.
With such a new market, of course, demand is
unpredictable, and the possibility exists that many of the
billions of people without access to phone service now
will be unable to afford it even when it becomes widely
available. But Arden Armstrong, a mutual-fund manager
for MAS with holdings in Loral, will hear none of this.
"I've been following wireless services for over a decade,
and I've never seen a demand shortcoming," she says.
Rob Kaimowitz, an analyst with Unterberg Harris,
agrees, saying that all of the market research he's seen
indicates robust demand. By his wildly enthusiastic
calculations, the core target market is 30 million users,
but even if there are only 3 million subscribers, he says,
Globalstar stands to earn $15 per share in 2002.
"If everything goes according to schedule, Globalstar
could be one of the biggest stocks of the next decade,"
Ms. Armstrong concludes. Indeed, she says that the
company has the potential to earn an astounding $5
billion in revenues in 2004, with operating margins of 93
percent. "If Globalstar flies--and a lot of risks are
involved--it'll be a giant money machine in the sky," she
says.
Anything Bill can do . . .
In the data broadcasting satellite sector, meanwhile,
Loral has the CyberStar constellation, an initiative that
was begun in 1996. The idea behind CyberStar is that it
will transmit data over the new Ku-band frequency,
which is ten times broader than the now standard Ka
band. CyberStar won't be completed until 2000,
however. In the meantime, Loral will begin offering data
services using its Skynet satellites.
Although CyberStar will compete with Teledesic, the
satellite startup backed by Mr. Gates and Mr. McCaw,
its blueprint is far less costly. Teledesic plans to launch an
armada of 350 satellites; CyberStar will have only 3.
CyberStar will compensate for this by having its satellites
in deeper orbit (with a broader footprint) and through
Loral's partnership with Alcatel Alsthom, which will
network CyberStar with SkyBridge, Alcatel's
constellation of 64 satellites. According to Mr.
Kaimowitz, "CyberStar can do everything Teledesic can
do for one-ninth the cost, and CyberStar has a big head
start." (For more on Teledesic, one of The Herring's top
50 private technology companies of 1997, see "$100
Million Down, $8.9 Billion to Go," September, issue 46,
page 94.)
In the driver's seat
Loral's most recent initiative is its entry into the
direct-to-car audio services market. CD Radio of
Washington, D.C., has tapped Loral to develop three
satellites that will allow drivers to receive 50 to 100
digital audio channels through an antenna the size of a
silver dollar. Loral will take in $350 million for the
equipment sale and has in turn bought a 15 percent stake
in CD Radio. Merrill Lynch projects a market of 5
million to 20 million subscribers paying between $10 and
$15 per month when the service begins near the end of
1999.
Globalstar will put its first payload in orbit by the end of
the year. But even the company's most eager backers
acknowledge the huge risks in their investments. Says
Ms. Armstrong, "I've been a Globalstar shareholder
since the IPO, and I'm still not sure it's going to work;
the potential payoff is enormous, but I want to see some
rockets go up." From her perspective, the main
investment risk is timing: satellites have a short life, so
money burns if a system's constellation isn't completed
on schedule or the sales force isn't prepared.
Wherever risk is massive, the market favors
consolidation. Although the number of satellite services
companies is growing, Merrill Lynch expects this trend to
reverse itself at the turn of the millennium. Mr. Schwartz
concurs: "We have an inefficient use of capital in the
industry; as the market tightens up, companies will pool
their resources." Merrill Lynch notes that vertical
integration between satellite manufacturing and services is
already beginning. Like Loral, Hughes has added satellite
services to its manufacturing businesses. If satellite
manufacturers indeed have an advantage, it's a
two-company space race. Conspicuously absent are the
major telcos, which, unlike the satellite equipment
companies, seem unable to escape the tight orbit of their
past business models.
Loral Space & Communications at a glance
CEO Bernard Schwartz
LOCATION New York, New York
PHONE 212/338-5658
WEB
www.inetbiz.com:80/ssloral/home.html
OWNERSHIP Public (NYSE: LOR)
FOUNDED 1996
EMPLOYEES 4,000
PRODUCT Satellite manufacturing and
video, voice, audio, and data services
PARTNERS Qualcomm, AirTouch,
Vodafone, France Telecom, Hyundai,
Alcatel Alsthom
COMPETITORS Hughes Space and
Communications, Lockheed Martin,
Motorola, Teledesic
MARKET VALUE $3.6 billion |
