12/98 Frost report. New Cold War Worries Limit Contacts, Opportunities in the Satellite Communications Industry
frost.com
By Jose del Rosario
International commerce among former adversaries is never easy, especially when the industry has
inherent, strategic national security considerations. The launch of the Russian Sputnik 41 years ago,
which contributed to and accelerated the onset of the Cold War, continues to cast its influence
over the satellite communications industry. In 1957, concern over the launch of the orbiting Sputnik
translated to fears over space-based weapons systems that presented the Russians with
advantages over the United States.
In 1998, the U.S. government began investigating Hughes, Loral, and Motorola's "liaisons" with
the Chinese launch industry over potentially harmful technology transfers that could aid China's
missile capabilities.
With the end of the Cold War in the early 1990s, the "peace dividend" has enabled military-based
and space-based technology to migrate to the commercial sphere. U.S. based aerospace
manufacturers are increasingly tapping and developing products for satellite-based applications:
Internet access, creation of intranets, rural telephony, and DTH among others-for the benefit of,
and to dig into the pockets of consumers. In the classic debate over "guns vs. butter," recent years
have clearly indicated that business plans of the private sector and policy initiatives of various
governments have sided with the "butter" side of things.
Recently, however, some disturbing developments have taken place that could adversely affect the
commercial satellite industry.
In January of this year, the United States threatened to cut the number of U.S.-built satellites from
using Russian launchers from 11 to 7. The threat came amid U.S. contentions that Russia continues
to aid Iran in developing its missile and nuclear programs. The 11 planned launches aboard
Russian Proton rockets were agreed under a previously negotiated expanded quota pact. At
approximately $70 million per launch, Russia and its partners (which includes U.S.-based Boeing)
stand to lose $280 million in revenues.
In December last year, the Pentagon submitted a preliminary report to the U.S. Congress,
concluding that satellite manufacturer Hughes gave information about launches to China that was
potentially damaging to U.S. security. Supposedly, Hughes provided the Chinese with
"know-how," which would have allowed them to improve the mathematical models used to
anticipate stresses on Long March rockets during launches.
In a related development, the U.S. Justice Department initiated a criminal investigation of the
Central Intelligence Agency (CIA) to determine whether the agency obstructed justice by giving
Hughes information about a congressional inquiry into the transfer of U.S. space technology to
China. Allegedly, the CIA gave Hughes information about the technology transfer investigation
conducted by the Senate Select Committee on Intelligence that may have enabled the company to
anticipate the moves of congressional investigators. (It is worth noting that Hughes has supplied the
CIA with satellites and sophisticated communications equipment for decades.)
The CIA response was that any information that they may have provided to Hughes was done so
"in the normal course of business between the agency and one of its major classified contractors
with no intention of interfering with the investigation."
In December 1998, Intelsat began providing China Telecom with links to the U.S. Internet
backbone through its spacecraft at 177 degrees East in geostationary orbit. There are at least 1.2
million Internet users in China, and the number is expected to grow substantially in coming years.
In the same month, however, a court in Shanghai tried 30-year-old businessman Lin Hai under the
charge of "inciting the overthrow of the state" by providing a U.S. based pro-democracy Internet
publication with 30,000 Chinese e-mail addresses. Lin Hai, arrested in March 1998, runs a
software business in Shanghai was tried by a closed court in December 1998, and was found
guilty and sentenced to two years in jail in January 1999.
On the one hand, Chinese authorities are recognizing the need to establish international links to the
U.S. backbone, which drives growth for satellite services and use of the Internet. On the other
hand, the Chinese government is creating an uncertain environment through its continued attempts
at controlling the flow of information in the "open" Internet, thereby restraining growth in the
satellite and other high-technology sectors.
Finally, in December 1998, Globalstar delayed launch of additional satellites for its global
communications system in response to reported diplomatic bickering between the United States
and Russia. Globalstar had planned on launching four satellites from Baikonur, in Kazakhstan, but
a disagreement over the "Technical Safeguards Agreement," which protects U.S. technology inside
Russia or Kazakhstan, has held up the launch.
The intricate, often confusing relationship between these three national giants could affect other
deployment plans now in place. Over the short-term for instance, AsiaSat of Hong Kong which
has ordered a backup spacecraft from Hughes in case the launch of its AsiaSat 3S fails, is using a
Russian Proton rocket from Baikonur to launch the satellite. Would this launch be held-up? In the
long term, would hundreds of commercial satellites proposed for launch, including the 288 LEO
constellation Teledesic be delayed? (Would Bill Gates' participation in the Teledesic program raise
some concerns within the Justice Department?)
Although the consumer market is clearly where profit margins are best improved, the recent
political climate in Washington, Beijing, and Moscow are restraining growth in the industry. The
question then is, "Is this restraint temporary and short-lived, or does it have far-reaching effects?"
Developments in recent months have not all been negative. Some positive developments in the
industry have occurred.
Two U.S.-made Iridium satellites were successfully launched without delays using two Chinese
Long March 2C rockets. The December 21 launch was especially noteworthy because it took
place amid investigations and controversy involving Motorola and Long March.
The first U.S.-built satellite supplied to Russia with a Boeing Delta-2 rocket was also successfully
launched in December last year. The Hughes-built Bonum-1 satellite is to be used by MediaMost
to directly distribute the company's NTV Plus channel to homes in Russia. Despite criticism within
Russia over use of a U.S. satellite rather than one manufactured locally, business considerations
prevailed. MediaMost ordered a U.S. satellite because of problems encountered with faulty
transponders on existing Russian GALS satellites and delays in the construction of a new GALS
spacecraft that will carry foreign transponders.
A U.S.-built Unity module and the Russian-made Zarya module for the International Space Station
(ISS) were successfully launched. The two segments were docked together on December 6. The
Zarya, or Sunrise module, contains the initial propulsion and guidance systems for the ISS, while
Unity is a docking node to which future components of the space station will be attached. These
cooperative efforts between Russia, the United States, and eventually other nations involved in
ISS, should lead to further international cooperation in other segments of the space industry.
"Confrontation and collaboration" among governments and between the government and the
private sector will continue in the short-term as well as the long-term. The adage "all politics is
local" has triggered some negative initiatives affecting the industry in recent months including,
"one-sided" campaign contributions (at least in the United States) that led to the investigation of
Loral, then Hughes and Motorola. Yet the relationship in the satellite industry between the United
States, China, and Russia is clearly profitable, highly lucrative, and beneficial to their respective
constituencies, including the local satellite manufacturing companies, the local launch service
provider, and consumers (who are also voters).
It is safe to assume that the political, economic, and business forces, which are both
confrontational and cooperative, among these three nations should produce a logical and mutually
beneficial end result that only marginally harms the commercial interests of the local satellite
industries. The political restraint of the market, therefore, is expected to have a pronounced impact
only in the short term. "Triggers" such as "one-sided" campaign contributions are expected to be
managed better by the contributing entities in the U.S. elections in 2000.
Given the nature of politics, however, it is also safe to assume that other "politically related
challenges" and "triggers" will affect the industry. The overriding conclusion about the commercial
satellite industry is that political challenges are just one of the many issues that need to be
constantly tracked and managed.
December 1998
IRG # 66
AT Code: 323
© 1998 Frost & Sullivan. All Rights Reserved.
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