BusinessWeek. Risks Soar, the Rockets Don't. The payoff in satellites keeps receding
BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY
Commercial satellites were supposed to be the next big bonanza in global
communications--the spark for an era of whizzy new services like phone calls
from the middle of the desert or Internet access from the top of Mt. Everest.
Sure, the projects would be expensive: $140 billion worth of the silver birds
were set to be launched in the next 10 years at a cost of $70 billion in rockets
and ground services, according to the International Space Business Council. But
once in space, the satellites could generate more than $150 billion a year from
telephony, high-speed Internet access, and satellite images by 2008.
That was the promise. Now, for the new math. A string of rocket failures, the
prospect of rising insurance costs, and more restrictive federal export policies
that make it harder to launch birds abroad have changed the payoff calculations.
Worse, the financial turmoil of Iridium--which spent $5 billion to launch a global
phone system now used by about only 10,000 people--has investors wondering
whether these grandiose business schemes can ever make money. Iridium
announced on May 13 that it's in technical default on $800 million in debt, and on
May 18, PanAmSat Corp. said its 1999 results will be below expectations
because Hughes is late delivering satellites. For investors, ''the ardor has
definitely cooled,'' says Paul H. Nisbet, president of aerospace consultancy JSA
Research Inc.
DEEP FREEZE. Already it's looking much more difficult for projects to get
funding. In 1998, says Donaldson, Lufkin, & Jenrette Inc., 17 satellite deals
raised $6.1 billion in debt and equity. Now, the initial-public-offering market for
satellite companies has gone into a deep freeze, and companies are scrambling
even to float junk bonds. CD Radio, a plan to beam high-quality audio to cars in
the U.S., recently raised $200 million in debt but had to pay 14.5% interest and
offer warrants to back the bonds.
Some firms are paying even more: Bonds issued last July from ICO Global
Communications Holdings Inc., a mobile-phone project, are now trading at a
yield of 32% to 33%, says Scott D. Moskowitz, senior managing director at
Bear, Stearns & Co. ''The capital markets are incredibly difficult,'' says William
B.F. Kidd, an analyst with C.E. Unterberg, Towbin.
Not all projects are lost in space. ORBCOMM, a partnership between Orbital
Sciences Corp. and Canada's Teleglobe, has launched 28 satellites and signed
up 130 corporate clients for its messaging network, says Orbital Sciences CFO
Jeffrey V. Pirone. The venture could hit revenues of $75 million this year.
Likewise, Loral's Globalstar is proceeding with its plan to wholesale mobile-
phone service. It has launched 20 of 52 planned satellites and expects to begin
service this year. Loral CEO Bernard L. Schwartz concedes ''investors are
spooked.'' But he isn't worried about raising $600 million more for Globalstar: If
lenders charge too steep a price, he says, Globalstar's partners will cough it up.
Today's rocket failures and capital flight may subside in time for other projects
now being planned. Teledesic, a 288-satellite ''Internet in the sky'' backed by
cell-phone pioneer Craig O. McCaw and Microsoft Corp.'s William H. Gates
III, has already raised $1 billion from Motorola Inc., Boeing Co., and other
sources to help with its 2003 launch. ''Our investors have a long-term
perspective,'' says a spokesman.
But higher launch and insurance costs are throwing Teledesic's $9 billion budget
into doubt. ''A more reasonable figure is $15 billion, but they're not willing to say
that yet for fear of scaring off Wall Street,'' says Marco Caceres of researcher
Teal Group. Teledesic plans eventually to go public.
Teledesic's rivals have worries, too. To jump-start its three-satellite Spaceway
project, Hughes Electronics Corp. had to shell out over $1.4 billion of its own
money. That could pay off big, however: America Online Inc. is considering
investing up to $1 billion in Spaceway, according to sources close to both
companies. Similarly, Boeing Co., once a prime contractor, is now set to take
over the $1.5 billion Ellipso project, which aims to provide phone service via 17
birds in unusual elliptical orbits.
Analysts remain downbeat about phone projects like Iridium or Ellipso. But they
like schemes to use satellites for high-speed broadband data communications,
such as Spaceway and Lockheed Martin's Astrolink. As companies and
consumers search for greater bandwidth to speed up digital communications,
satellite will be seen as a necessary complement to optical fiber, says analyst
Timothy O'Neil of SoundView Technology Group. And when it comes to
broadband, there doesn't seem to be any reluctance to invest billions.
By Andy Reinhardt in Silicon Valley, Calif., with Catherine Yang in
Washington and bureau reports
Copyright 1999, by The McGraw-Hill Companies Inc. All rights reserved.
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