THE SATELLITE BIZ BLASTS OFFHundreds of launches in the next few years will open a new Klondike for the few that prevail
It was barely 9 a.m. on Jan. 10, but Edward F. Staiano's nerves were already jangling. One month earlier, Staiano had left a top post at Motorola Inc. to head its Iridium venture, a wildly ambitious $5 billion satellite phone service project. Now, for the second morning in a row, Staiano sat in a Washington (D.C.) office, gazing intently at a live video feed from California's Vandenberg Air Force Base, roughly 2,400 miles away. Twice in two previous days, the launch of a Delta II rocket that would carry the first three of Iridium's 66 ''birds'' into space had been scrubbed.
With less than a minute to go before try No.3, the tall, thin Staiano leaned forward and tightly clasped his hands. But once again, luck was against him. At precisely 9:22 a.m., with just 20 seconds left in the countdown, yet another maddening technical glitch scrubbed the launch for the third straight day. ''Dammit,'' said Staiano, crumpling a piece of paper and slamming it on the ground. Later, with a slight laugh, he asked: ''Is it too early for a martini?''
With the next try now scheduled for Jan. 19, chances are Staiano will want many more martinis before Iridium is up and running smoothly. And he's not likely to be the only one in need of a stiff belt. Across the globe, dozens of corporations, large and small, are pouring roughly $50 billion into an exploding race to build, launch, and connect seamless satellite networks. As their plans gather steam, Motorola and its rivals are fueling a high-stakes, space-age equivalent of the California Gold Rush.
All in all, more than a dozen projects aim to blanket the skies with satellites that could completely transform the way that telephone calls, broadcast signals, and data will dart around the earth. A staggering 1,700 or so birds will be launched in the next decade--more than 10 times the 150 commercial satellites now in orbit. ''This is the best opportunity I have seen in my business lifetime,'' exclaims Bernard L. Schwartz, chairman of Loral Space & Communications Ltd. Loral's Globalstar project is a $2.5 billion, 48-bird phone system that will rival Iridium.
Schwartz isn't the only one who sees a potentially huge prize in the offing. The satellite industry has attracted a virtual Who's Whoof big-time, risk-loving capitalists. Bill Gates, Craig McCaw, and Rupert Murdoch are all big players, as are traditional aerospace powerhouses such as TRW, Hughes Electronics, and Lockheed Martin. And lining up behind them are a host of scrappy entrepreneurs hoping to find a few nuggets of their own. From roughly $9 billion today, Bear, Stearns & Co. analyst Thomas W. Watts expects annual revenue from satellite services to more than triple, to $29 billion, by 2000.
What will the new satellite services provide? The biggest fight will probably be over the untapped market for satellite-delivered phone services. Motorola, Loral, ICO Global Communications, TRW, and others are scurrying to put up competing satellite systems able to beam phone services to globe-trotting executives and rural villagers worldwide.
Meanwhile, Hughes Electronics and its rivals in the direct-to-home (DTH) satellite broadcast market have scored the burgeoning industry's first big home run. Using satellite signals sent directly to tiny home dishes, viewers can receive vast programming choices, clear pictures, and CD-quality sound--all without having to rely on cable. Another potentially huge business--using satellites to provide rapid Internet access and desktop video--awaits just over the horizon.
That, at least, is what men like Hughes Electronics Corp. Chairman C. Michael Armstrong and Loral's Schwartz are betting. On Jan. 16, Armstrong was expected to announce the sale of Hughes's defense assets to Raytheon Co. for around $9.5 billion. With the move--coming on top of Hughes's recent $3 billion acquisition of satellite video transmission leader PanAmSat--Armstrong has squarely refocused the company on satellites and related services. ''Commercial satellites are driving our business,'' he says.
He's not alone. Last year, Schwartz sold Loral's military businesses to Lockheed Martin Corp. for $9.1 billion so that he could focus on Globalstar. ''We could have stayed in the defense business and earned a nice 15% return,'' says Schwartz. ''But with Globalstar, we're going to earn a 40% return, and let me tell you, that's a whole lot more fun.''
Why the frenzy? Although commercial satellites have been around for decades, advances in battery power and digital- compression techniques, as well as the technology for manufacturing and launching satellites, have all dramatically slashed costs. That has made affordable mass-market products possible. At the same time, the breakup of decades-old government-backed telecommunications cartels around the globe has offered up new markets at an unprecedented rate.
''A BLOODBATH.'' Yet with so many ventures racing to embrace an uncertain marketplace, the competition is going to be brutal. The only real question: ''Who is going to be the one making the money?'' asks Hughes Electronics' Armstrong. ''Unless you're first, you won't make much.'' Steven D. Dorfman, who runs Hughes's Telecommunications & Space Co., is more direct: ''There's going to be a bloodbath,'' he says.
As some of the most successful businessmen of the past decade enter the fray, personal fortunes, reputations, and egos are also on the line. Craig McCaw scrambled to the top in cellular before selling to AT&T for $12 billion in 1994. And Iridium's Staiano built a $50 million cellular sideshow into a $11 billion powerhouse. Now, he has left his executive office at Motorola and is ''taking a major pay cut'' in exchange for a ''significant'' cache of options in Iridium, which may go public this year.
At Teledesic Corp., meanwhile, the double-double-barreled draw of backers William H. Gates III and Craig McCaw persuaded David Twyver, the former president of Northern Telecom Ltd., to join an enterprise that few outsiders give much hope for success. ''When two of the greatest entrepreneurs of the 20th century ask you to come work with them, how can you say no?'' asks Twyver, who recently signed on as Teledesic's new chief executive. ''You would spend the rest of your life wondering if you had made a huge mistake.''
Still, the risks for Twyver and his compatriots in the new space race are enormous. The technologies needed to use satellites for global telephone services and Internet transmission remain largely unproven. And getting past regulatory hurdles to gain access to foreign markets remains a huge sticking point. But the biggest conundrum may simply be gauging the market amid the hype. ''Nobody really knows today what services people really want,'' concedes Robert Berry, president of Space Systems Loral, which will debut its CyberStar Internet access service in 1999.
None of that seems to have diminished all the enthusiasm. The reason can be summed up in one word: DirecTV. Hughes Electronics' rapid success in launching its direct-to-home broadcasting venture in 1994 proved that an enormous consumer appetite exists for satellite-based services. DirecTV quickly spawned a handful of imitators; all together, they've now signed up 4.5 million subscribers. By 2002, they expect to hit 16 million subscribers in the U.S. alone, with revenues of $6 billion. Global growth could double that.
That's why DirecTV has quickly emerged as both the envy and guiding light of a nascent industry. ''It's a phenomenal product,'' says McCaw, who is spending $9 billion on Teledesic, which, if successful, will use 840 small satellites to provide low-cost, high-speed Internet access, corporate networking, and desktop video. Adds Schwartz of Globalstar: ''We want to be the DirecTV'' of satellite phone services.
To get there, however, Schwartz had best be ready for a dogfight. In addition to Iridium, Globalstar will also be battling ICO Global Communications, a London-based private company spun off from the quasi-governmental Inmarsat consortium. It will cost about the same as Globalstar, although it lags by at least two years. And another system, Odyssey, is being pushed by partners Teleglobe Inc., a big Canadian telecommunications company, and TRW, long a leader in military satellites. While several years behind the others, TRW and Teleglobe have recently added equity, and TRW Chief Executive Joseph Gorman vows Odyssey is in the race. ''Our system is the best, bar none,'' says Gorman.
PRICEY PHONES. Because they're digital, the satellite phone services will provide features such as voice mail, paging, and caller ID that are now being introduced as personal communications systems (PCS) on ground-based cellular. But while the satellite phones will offer the same freedom as today's cell phones, they've got one big advantage: The same phone will be usable around the globe. ''We're going to offer one number, one phone, one bill, anywhere on the planet,'' says Staiano.
No one needs a win more than Staiano and new Motorola CEO Christopher Galvin, the 46-year-old son of renowned former CEO Robert Galvin. Coming off of Motorola's worst earnings slide in more than a decade, Galvin is counting on Iridium's 1998 debut to help revitalize Motorola.
Iridium is hands down the most technologically sophisticated. It will carry a call from anywhere on the planet, relay it through a vast switching network in the sky, and bring the signal back down anywhere else on the earth's surface. That also makes Iridium the most expensive, with a projected cost of $5 billion and phones starting around $3,000.
The technical challenges remain daunting, though. For starters, Iridium must link its 66 satellites in the sky with software that seamlessly switches calls. Effectively, Motorola will replicate ground-based phone switching networks hundreds of miles above the earth--a technological feat no one has ever tried before.
Iridium's biggest hurdles, though, may be in its strategy and marketing. For years, the spread of sophisticated low-cost, land-based cellular networks has chipped away at the potential market for satellite phones in the U.S. Now, cellular systems are also proliferating in such countries as China, India, and Brazil. The shift has forced Iridium, which began as a general replacement for ground-based cellular, to refashion itself as a premium product for well-heeled business travelers who can afford its phones and the $3-per-minute charge.
That could leave Iridium and its rivals fighting over the tiny number of globe-trotting executives willing to pay for worldwide service. ''We could see that ground-based systems will eat you alive,'' says McCaw, who had toyed with the idea of satellite PCS service as recently as 1994, but instead focused Teledesic on Internet access.
Schwartz, too, steered another course early on. He has opted for a technology that is simpler and cheaper than Iridium's. Rather than switch signals around the planet from one bird to another, Globalstar's calls will go up to a satellite and then be bounced down to the nearest ground station. That's helping hold costs to $2.5 billion, with handsets initially priced at $750.
Globalstar differs from Iridium in another key way: Schwartz sees most revenues coming from rural areas underserved by land lines. Some 60% of the world's population has no phones, estimates Globalstar, which is stacking up orders from such countries as China and India for thousands of satellite phone booths to put in far-flung villages.
Globalstar's biggest strength, though, may be its marketing game plan. Rather than bypass local telephone systems as Iridium does, Globalstar brings each call down to one of 102 partners on the ground. By giving a piece of the action to those ground partners, including China's biggest phone company, France Telecom, and California's giant AirTouch Communications, Schwartz figures he will reduce regulatory delays. Globalstar has also awarded France's Alcatel Alsthom and Italy's Alenia big chunks of manufacturing.
Once service starts, Globalstar will charge each local telephone company a wholesale price averaging 50 cents per minute. ''It's the project with the least technological risk and the most reasonable commercial strategy,'' says Michel Bertinetto, managing director of mobile services for France Telecom, which will market Globalstar in 21 countries, including Poland, the Czech Republic, and Mexico.
SECOND-TIER TECH. Globalstar has plenty of its own obstacles, though. More than 100 ground stations, at $5 million each, could boost the system's price tag if they go over budget. Moreover, Globalstar's decidedly second-tier technology could come back to haunt the cost-conscious Schwartz: A weaker signal could spell inadequate service.
And both Globalstar and Iridium have more immediate financial woes. Each must raise billions more, but publicly traded Globalstar has had a number of troubled equity and debt offerings. ''Let's be honest: It took Bernard Schwartz and Loral to put up their own money for [Globalstar] to work,'' says one big shareholder. And Motorola was turned down by AT&T and Nippon Telegraph & Telephone Corp. as equity partners, settling instead for a patchwork of 17 smaller players such as Taiwan's Pacific Electric Wire & Cable Co.
Another looming cloud is the spread of regional satellite services, particularly in Southeast Asia. Asia Cellular Satellite Systems (ACeS), for example, has financing for a no-frills, $660 million system using two birds hovering 23,000 miles above the earth. It will offer calls covering much of the Far East for $1 a minute to customers who don't need global coverage--or mind slight delays in voice transmission. With close ties to national governments in the region, ACeS could have a virtual lock on business in Indonesia, Thailand, and the Philippines. That may be why Hughes has chosen largely to sit out the voice-services war. Instead, it's supplying hardware: building 12 birds for ICO under a $2.4 billion contract, its largest commercial deal ever. ''We frankly don't see the market for placing phone calls from deep in the Amazon,'' says Charles H. Noski, a vice-chairman of Hughes Electronics.
At Lockheed Martin, Chairman and CEO Norman R. Augustine is also cautious. ''We've got a lot of bets hedged,'' he says. ''The technology moves so fast. One day you're No.1, the next you're No.10.'' Lockheed owns 20% of Loral; it also has a multibillion-dollar contract to build components for Iridium, in which it holds 1.23%.
To see the problems they face, the globo-phone gang need look no further than Hughes's rocky debut in the international DTH broadcasting market last year. After hitting pay dirt with DirecTV in the U.S., Hughes is finding out how tough a global rollout can be. DirecTV's 1996 Latin American launch was plagued by licensing delays despite strong regional partners in Mexico and Brazil. ''The concept of a global satellite market is great, but the devil is in the details,'' warns Garath Chang, president of DirecTV International. ''We learned that the hard way.''
Having inspired an industry, DirecTV is starting to face a battle even at home. Its early lead drew a host of imitators. Scrappy Englewood (Colo.)-based upstart Echostar Communications Corp. is pressuring DirecTV with a savage price war it set off last summer. And after a slow start, the cable industry's satellite broadcast entrant, Primestar Partners, has snatched up 3 million viewers through aggressive marketing.
But the biggest threat probably comes from Rupert Murdoch's News Corp. Using the expertise built up through his British Sky Broadcasting system, which dominates satellite broadcasting in Britain, he's attacking Hughes at home with the launch of American Sky Broadcasting later this year. Despite Hughes's head start, ''we do not think that DirecTV has an insurmountable lead by any stretch of the imagination,'' Murdoch says. Pointing to a programming library that includes British soccer, Asian movies, and a plethora of American sports, Murdoch argues that ''this race is hardly started.''
And that's just the first leg in a titanic struggle for markets in Latin America and Asia. But despite the potential,
Hughes has discovered that getting people to sign up is not easy. ''Brazil alone is larger than the continental United States,'' says Kevin McGrath, chairman of Galaxy Latin America, Hughes's DirecTV division there. ''But there are no Circuit Cities, no Sears.'' Hughes has also found that centralizing billing in multiple currencies is no simple task.
While McGrath struggles to fix the problems, he's looking over his shoulder as Murdoch's News Corp. juggernaut gathers speed. Teamed with Tele-Communications Inc.'s John C. Malone and powerful local players, Murdoch is scurrying to launch service in Mexico and Brazil by April.
UNAUTHORIZED ENTRY. Hughes and Murdoch will also go head-to-head in Asia, starting with the debut of their rival services in Japan later this year. So far, Murdoch appears to have the clear advantage in content. Already, he has assembled a large library of Japanese movies and TV shows through his year-old STAR Plus Japan channel. Along with software maker Softbank Corp., he also bought a large stake in Japan's TV Asahi network. Still, Murdoch's Asian entry has faced troubles. In China, he stumbled badly by trying to end-run mainland authorities by beaming in Western programming.
And even as Armstrong and Murdoch slug it out around the globe, many in the satellite service business are beginning to suspect that the ultimate mother lode won't be either broadcasting or phone services but the ability to hook into the phenomenal global growth of the Internet. With World Wide Web usage mushrooming, the computer industry is scrambling to find faster, more efficient ways to move around big chunks of digital information and video. A few years ago, fiber-optic networks were considered the hot solution. But while fiber-optic trunk lines are going in from city to city in the U.S., progress connecting to homes is slow. ''Not only did fiber not happen, it's further away now than it was three years ago,'' says Teledesic President Russell Daggatt.
Instead, he and others say that satellite-based data networks will be able to offer the same fast transmission speeds and high-quality video images as fiber-optics, but for far less than current corporate networks cost. And they'll be available for home users years before fiber-optics. With services likely to start by decade's end, New York consultants Access Media International USA Inc. estimate a market of $10 billion by 2005.
That's why Hughes is hurrying out Spaceway, a $4 billion, 20-satellite system equipped with spot beams, which are sky-borne ''information funnels'' able to scoop up massive quantities of data and video from a computer in one part of the country and deliver it into the Internet at another. Users will be able to use Spaceway to tap into the Net, bypassing clogged systems on the ground. ''Eighteen months ago, I didn't believe there would be a market in Internet access,'' says Jerald F. Farrell, who is president of Hughes Communications Inc. ''Now, I am absolutely convinced that's the direction we need to move in.''
RELAY TEAMS. McCaw and Gates are thinking along the same lines. Having put up most of the nearly $100 million in equity, they each own 37% of Teledesic, which is also eyeing the Internet access market. McCaw insists they have the answer: 840 little birds zooming across the sky just 400 miles over the earth, far lower than traditional satellites. Each satellite will hand off Internet traffic to the next, sucking up data as it races over land and sea. But the unusual design has left many old hands skeptical. It will require extremely sophisticated software and networking to link the birds, not to mention the logistical challenge of getting that many up off the ground. ''It would be like the designers of World War I bi-planes saying 'Wow, that's terrific. Now, let's build a supersonic jet,''' says Loral's Berry.
Still, few doubt the market exists. Loral has ordered up CyberStar, a $1.6 billion system similar to Hughes's Spaceway. TRW, Motorola, GE, and Lockheed Martin are all developing multibillion-dollar projects. Hughes already has a hybrid product on the market called DirecPC that uses a combination of satellite signals and phone lines to connect users to the Net.
DirecPC is too expensive and too limited ever to become a mass-market product like DirecTV. But when Spaceway comes out in 2000, its chief, Edward J. Fitzpatrick, says consumers will be able use their computers to tune into the Net, hold a video chat with Grandma, or watch the ball game, all with one set of equipment for less than $1,000. Sounds like a fun world. But given the satellite revolution's price tag of $50 billion and counting, will anyone ever make any money at it? Craig McCaw, Bill Gates, Rupert Murdoch, Bernard Schwartz, and Mike Armstrong couldn't all be wrong, could they?
By Eric Schine in Los Angeles and Peter Elstrom in Chandler, Ariz., with Amy Barrett in Washington, Gail Edmondson in Paris, Michael Shari in Jakarta, and bureau reports
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.