Turning swords into satellite dishes
By Corey Grice
Staff Writer, CNET News.com
July 16, 1999, 12:40 p.m. PT
Make money, not war.
As the government's need for stealth fighters, smart bombs, and radar systems wanes,
many defense contractors in the United States have gained a new lease on life by
embracing the communications industry.
By turning their attention to telecommunications, long-time military suppliers have staved
off obsolescence and are profiting from shooting cable television shows to homes with
satellite dishes, pondering ambitious Net access plans, and incorporating cell phone
services in a sort of communications potpourri.
The latest example of this marriage is word of an impending deal between regional phone
company SBC Communications and the DirecTV arm of former defense giant Hughes
Electronics. That follows last month's $1.5 billion investment in Hughes by Net access
provider America Online.
Companies like Hughes, Lockheed Martin, and Boeing suffered at the end of the Cold War
when the Department of Defense saw its budget slashed. About the same time, the
communications, entertainment, and Internet industries began to grow, offering an
opportunity for companies with technological expertise.
In 1997, for the first time, more commercial satellites were launched than government
satellites, according to DFI International, an aerospace and space consulting firm. "It was
a transformation," said DFI vice president Brett Lambert. DFI expects government satellites
to account for only 20 percent of all satellite launches over the next ten years.
By putting their expertise to work, defense contractors have
weathered the worst of the industry shakeout and have
assured themselves a piece of the juicy telecommunications
pie, according to analysts.
"Ten years from now there's still going to be many of these
same players, they'll just look a lot different. That's part of the
game," said Steve Blum, a satellite industry analyst at Tellus
Ventures.
From battlefields to greenbacks
At one time, the nation's military force grew exponentially as
the arms race with the former Soviet Union, China, and other
perceived aggressors escalated. As such, there was an
ongoing need for supersonic jets, armament systems, and
other wartime equipment. But today the United States is the
world's only superpower.
"A lot of these companies got used to living on government
contracts," Blum said. "So then came the end of the Cold
War--that's what really triggered it--and military
spending…was drastically scaled back. So, these guys had
to find something to do."
As an example, Hughes--at one time a large supplier of electronics systems to the
defense industry--began shifting away from it's reliance on the military market in the late
1980s, according to Hughes Electronics spokesman Richard Dore.
"We realized that the defense industry was flattening out and that there was more activity
and growth potential in the telecommunications industry," Dore said.
After a sale and a restructuring in 1997, Hughes Electronics became a "pure play" in the
telecommunications industry. The company owns satellite TV service DirecTV and satellite
Net access provider DirecPC. Hughes also holds an 81-percent stake in PanAmSat, which
leases satellite transponder capacity to network television customers and others.
"I think the main driver was what was perceived as a large growth opportunity in the
consumer market," said Clayton Mowry, executive director of the Satellite Industry
Association, a commercial satellite trade group. "The tremendous growth is in the
individual consumer market."
In 1998, DirecTV generated the largest increase in revenue growth for Hughes, which
posted nearly $6 billion in annual revenue.
Analysts said Hughes has been among the most aggressive of the defense contractors in
retooling for a new age.
"Hughes switched early … [and] is the only one who has done it successfully," said Cai
von Rumohr, a securities analyst at investment bank SG Cowen. "The companies where
you could argue they have not been as successful certainly would include Lockheed
Martin, certainly would include Boeing."
Consolidation in the industry
Yet Lockheed Martin, analysts said, is perhaps the best example of post-Cold War
consolidation. The company is an amalgam of several one-time defense industry players.
One of the company's new business units is an investor in Astrolink, one of the new breed
of proposed satellite data services. The company also is going after fiber-optic and wireless
contracts, analysts said, and is attempting to acquire Comsat, the
government-backed representative in an international satellite network.
"They're turning themselves into a telecommunications service provider, but they're
not taking it all the way down to the consumer level the way Hughes has," Blum
said. "Lockheed Martin has probably been less adventuresome and less
entrepreneurial. They're still in that 1980s mode of thinking to a certain extent."
Another player, Loral Space & Communications, has met with moderate success in
transitioning from a military heavyweight to a communications player, according to
analysts.
The company sold its defense assets to Lockheed, but Loral does have Skynet, a
fixed satellite business, as well as CyberStar, a satellite video service. The
company also is developing Globalstar, a satellite services company which is
expected to challenge Iridium for global mobile phone services.
Other firms have transformed themselves over the years. Motorola, a leading maker
of handheld two-way radios for the U.S. Army in the 1940s and a supplier to NASA
astronauts in the 1960s, is one of the world's leading mobile phone and paging
equipment and chip makers today.
The company also is a major investor in global satellite communications company
Iridium and has been named the prime contractor for Teledesic, a broadband
data-via-satellite firm.
Boeing, also a Teledesic investor, had considered selling its data services
business, but the aerospace giant is now expected to target the data services and
mobile phone businesses, according to reports. When the company acquired
McDonnell Douglas, Boeing added a substantial commercial space component,
analysts said.
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