Text of NYT article on satellite stuff.
August 4, 1999
Despite Its Promise, Satellite Industry Grapples
With Myriad Woes
By ANDREW POLLACK
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.
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."
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 $53.6875.
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, much as a spotlight beam widens as it gets farther from
its source.
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.
Iridium's system, which cost $5 billion, is designed to allow calls to be made
or received anywhere in the world. But Iridium, which began service in
November, had only 10,300 subscribers at the end of March -- the last
figures it has announced -- far short of the 52,000 called for in its
agreements with lenders.
Shares of Iridium World Communications, the U.S. arm of Iridium LLC,
have dropped 82.5 percent in the year to date, though its close of $6.90625 a
share, is up from the 52-week low of $4.96875 in June.
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.
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.
Globalstar and some other satellite phone services on the drawing board
intend to serve not only business executives but also remote villages in the
developing world not reached by wires. Even when people in these villages
cannot afford their own telephone, a phone booth can be set up in the village
center.
"There are 3.5 billion people who don't have any communication in a modern
sense," said Bernard Schwartz, chairman and chief executive of both Loral
and Globalstar, calling this "probably the largest market in the world today."
Globalstar recently arranged a bank credit line of $500 million, giving it the
final financing needed to begin service. Its stock has been doing relatively
well, even as Iridium's has collapsed and ICO's has dropped by half since its
initial offering last year.
Globalstar's phones will initially be priced at $1,100, and air time will sell for
only about 65 cents a minute retail. An ING Barings report says that since
Globalstar and ICO will have more capacity than Iridium, Globalstar could
break even selling service wholesale for 14 cents a minute and ICO for 23
cents, compared with $1.37 for Iridium.
Similar questions about demand are facing companies that plan to deliver
high-speed data and Internet service by satellite. The biggest gamble here is
Teledesic, the company backed by cellular telephone magnate Craig McCaw
and Microsoft chairman Bill Gates. Teledesic plans a $10 billion system of
288 satellites that will begin service in 2004. Motorola, despite the problems
with Iridium, is Teledesic's prime contractor and has committed to invest
$750 million in it. Over all, Teledesic has raised more than $1.5 billion so far.
But satellite services are in a race with cable and phone companies to provide
high-speed Internet access. Phone and cable companies have an economic
advantage in urban areas, while satellites probably have one in less dense
areas.
Teledesic is also facing competition from less costly systems, some of which
will be in operation before it is. These include Hughes' $1.5 billion Spaceway,
the Lockheed-led Astrolink, and the $4 billion Skybridge, which is backed by
Alcatel of France. Teledesic, though, argues that its system will provide
Internet service quality unavailable from the others.
With such sums being wagered, one thing is certain. As Schwartz of Loral
put it: "It's a large business. Our failures are going to be large. Our successes
are going to be large."
Copyright 1999 The New York Times Company |
