Even as concern over oil prices and the war in Iraq have "the level of [investor] uncertainty … about as high as I’ve ever seen it," Hoyt Davidson, CEO and managing member of Near Earth LLC, believes the outlook will improve for the satellite industry.

During a lunchtime presentation Oct. 19 at the University Club in Washington, D.C., three blocks from the White House, Davidson considered the outlook toward satellites amid both the public and private capital markets, the major factors affecting satellite investors and a sector-by-sector overview.

The founder of the New Canaan, Conn.-based investment bank described speculative aspects within the industry in terms of a weatherman’s meteorological forecasts. The climate for Fixed Satellite Services (FSS) is "sunny and warm," for direct broadcast satellite (DBS) "partly cloudy," and for Mobile Satellite Services (MSS) "warm and clearing," he said during "Space and Satellites: State of the Investment Climate" a presentation for the Washington Sp,ace Business Roundtable.

"We’ve seen massive disruption in telecom" markets, Davidson said. "Telecom has been beaten down, but it’s coming back," especially among the new media and technologically forward niches. "Traditional media, such as newspapers and things like that, have been taking [the brunt of] the hits."

While the satellite communications market is improved, the industry remains in its traditional state, dominated by transponders on geostationary satellites. "The same [geostationary satellites] of the last 20 years aren’t enough," Davidson said. "We need to raise the research and development levels."

Davidson seeks a new cycle of innovation to excite investors, and contemplates new satellite technologies, be they small satellites, virtual geostationary satellites or lasercom links. He remains hopeful for phased-array antennas both in space and on the ground, in-orbit recovery refueling and repair, and reusable launch vehicles.

"The gee-whiz factor is declining," Davidson said, citing a poll in which respondents ages 18 to 25 were the least likely to support NASA’s budget. "We need to find a way to innovate and get people back in."

Davidson pointed out that the increase in the amount of available terrestrial fiber to the home, also known as Moore’s Law regarding bandwidth, has pressured satellite telecom. Specifically, fiber’s decimation of the long-haul satellite market and proliferation of last- mile access solutions have pressured demand and reduced VSAT’s share of the market.

At the same time, however, Davidson noted that the increased ubiquity of Internet Protocol applications have increased the overall economic pie by increasing consumer and business demand and allowing for VSAT and consumer growth at Wildblue and Hughesnet, for example. "The good news is the pie’s been expanding so fast we haven’t noticed that our share of it is shrinking," Davidson said. "But that pie will [eventually] stop growing."

Davidson finds private equity to be more active and liquid than ever, with post-[dotcom]-bubble jitters diminished and cash flows being key, and preferably recurring. Consequently, venture capitalists are more cautious than in the past as fickleness in the initial public offering (IPO) market brings an exit-strategy risk, and the Internet and related sectors are demonstrating that only a dominant few succeed in a niche. He cited Google, Myspace, Amazon and Ebay as examples.

The "sunny and warm" forecast for FSS is due to private-equity deals and big shareholder successes. "The low utilization rate should keep declining," Davidson said.

DBS is "partly cloudy." MPEG-4 and data compression have helped reinvigorate cable, but rising subscriber acquisition costs have proven burdensome. Davidson cited a study noting that 64 percent of teens regularly watch their friends’ videos. "They’re not even watching TV anymore."

Also, while the quality (i.e., ARPU and churn) of customers is high and spot-beam technology has boosted channel capacity, high-definition (HD) services are consuming much of it. Nevertheless, "satellites are still [among available means, the] most efficient at point-to-multi-point," and demand remains high for channel bandwidth.

Satellite radio "has been a very successful consumer service, yet investors’ shares are probably below where they entered," Davidson said. "Millions more will go there, but there is great concern about how to get their music.

"I’m very bullish about the satellite-radio sector," he said. "I think that when people see that they’re real companies, more investors will come in. If they do well over the holidays — as they need to — the first quarter ought to see the clouds clearing."

MSS is comfortably "warm and clearing" as enjoyed by low-Earth orbit (LEO ) providers such as Globalstar, Iridium and Orbcomm, and geostationary companies such as Inmarsat, Terrestar, ICO, MSV and Thuraya.

Davidson believes that potential storms for MSS, such as the costs of replacing LEO fleets against the rate of subscriber growth, are offset by demand for ubiquity from both governmental and commercial clients.

"MSS was really pummeled," Davidson said, and "there needs to be some consolidation there… but they’re adding subscribers at a nice rate," and "ubiquity should help satellite a lot. Governments and military are demanding anytime-anywhere services, and companies are doing the same. It’s not acceptable anymore to be out of touch, at least not for very long."

– J.J. McCoy