By Theresa Foley

Via Satellite’s annual crystal-ball gazing exercise, involving some of the top CEOs in the satellite industry, finds few surprises in store for the year ahead: too many operators means that some big ones will absorb the smaller players. The Asian market is getting back on its feet. Manufacturing orders for satellites will stay fairly flat. Internet services, plus Ka-band/broadband start-ups, are the most exciting ventures for the year as they continue to make progress toward dominating the business.

Mobile satellite services (MSS) remain a wild card, with some of the CEOs looking forward to the start of revenues from those operations, while others try to distance the rest of the satellite business from the MSS sector.

Satellite Manufacturing

Jean Claude Husson, Alcatel Space CEO, sees more international cooperation and industrial partnerships in 2000. Besides Alcatel’s regular U.S. partner, Loral, the French company is considering partnering with Japanese companies Mitsubishi and Toshiba, plus bringing in a U.S. partner, Loral most likely, to bid on the new Intelsat Alpha program.

Lockheed Martin Commercial Space Systems President Peter Kujawski also sees new alliances in the months ahead among manufacturers, such as Lockheed Martin’s relationships with TRW and Orbital Sciences. The satellite builders will find themselves partnering with each other one day, and competing the next, he predicts.

Manufacturers may be done consolidating in 2000, but operators are not. Some small regional operators will be eliminated in one fashion or another as they are acquired by or link up with the larger global operators to survive, says Robert Ross, CEO of New Skies Satellites N.V. In late 1999, at least three or four regional operators were on the market, he says.

Alcatel sees some of its investments in satellite operations starting to bear fruit in 2000. It has invested in Globalstar, Eurasiasat and Europestar, all three of which should begin bringing in revenues this year, pending successful launches for the latter two.

Husson says the first revenues from Globalstar will show up in the coming months, the result of an Alcatel investment five years ago. The company expects to break even in about two or three more years, meaning that the investment cycle took seven to eight years.

Alcatel’s other big investment is in Skybridge, which may enter the hardware construction phase of its development sometime between January and May 2000, but partnerships are needed, this time with telecom service providers. Only two had joined the Skybridge team by late 1999. "We are ready to build Skybridge, but it is necessary to have the equity in place for Skybridge to have the green light," Husson says.

"In 2000, we have many opportunities to tie into commercial communications projects with Arabsat, Hispasat and big projects like Rascom and Bolivarsat," he continues. Alcatel also is prepared to invest in observation and meteorological satellites for Europe in 2000, and to start the Galileo satellite navigation project this year with funding from ESA and the European Union. "The challenge is to arrive at the end of 2000 with a decision from the European authorities to begin manufacturing. It is a very big project and Alcatel is very well-positioned," he says.

Orders for satellites may be slightly better in 2000 than in 1999. Husson expects satellite manufacturing to pick up after a depressed market in 1999 due in part to the Asian economic crisis. "We have to have an increase of the market for communications satellites," he says. "There is a lack of transponders in orbit," to serve growing demand.

Kujawski says orders for geostationary satellites will stay flat at around 30 for the year. "The trend is toward big satellites with a lot more capability, and we can meet those objectives with fewer units. The market is also tempered by the ability to finance some of the projects. A successful Globalstar will help in that regard, but I don’t know if that will be in 2000 or later," he says.

The Rise Of The Internet

Everyone in the industry seems to agree that the IP and broadband momentum that started about two years ago will continue to build this year. The arrival of Ka-band satellite systems and a flood of new capacity will start this year, according to William Steele, president of Kencast, a company that makes "middleware" to connect computers to satellite networks.

"The year 2000 will be an excellent year for Internet, voice and data growth. For teleports that are repositioning themselves to serve the Internet and data business, it will be good, but it will be a tough year for companies that haven’t done that," says Kay Sears, vice president of Internet voice and data services at ATC Teleports. ATC is looking for more than 50 percent increase in revenues from Internet, voice and data over 1999. The biggest regions where demand is growing are the Middle East, Africa, Central and South America and Asia.

New Skies’ Ross says that 75-80 percent of new sales for his company in 1999 were Internet related: "It’s clear, the growth segment of the business is in Internet, both distribution, Webcasting and trunking to the U.S. backbone, and inter-regional trunking. Some will go over cable, but some will not."

The overall revenue figures in 1999 for Internet-related services were still a long way from the $30-$60 billion a year analysts are predicting later in the decade. The slow ramp up may be due to the time required for a sale of a new multimedia delivery system, Steele says. He sees the entry of multimedia satellite networks and services into the market taking four stages before they will produce big revenues. First, a demonstration at a trade show or other venue; second, the purchase of a very limited pilot system; third, a soft rollout to a small number of sites, perhaps 20-100; and finally, a full-blown deployment.

Steele says many applications are in the third phase, the soft rollout stage. "It doesn’t generate a lot of revenue, but it is exciting," he says. He cites Europe On Line as an example, where a satellite Internet-access service is just being offered and will take several years to reach its full potential market of many millions of users.

Integrating satellites into the Internet world is the biggest challenge facing the satellite business in the year ahead, Steele says. He believes that satellites will be just as integral to the Internet as they are to the broadcast industry. "If satellites were shot out of the sky, you would have no TV in the United States. Cable carries television but it’s just locally. The Internet will be the same way," he says, describing a world where multicasting of Internet data over satellite is the rule rather than the exception. "IP plus DVB combined is a wonderful solution. We are just seeing the tip of the iceberg," Steele says.

Myron Mosbarger, CEO of Helius Inc., a small satellite ground equipment supplier based in Utah, says IP multicasting customers are asking for a full suite of remote access tools to manage new IP networks employing new satellite-access routers to connect network users to satellite infrastructure. "We introduced our third generation router in February. Routers are the trend, and all will need SNMP (simple network management protocol), remote management and the ability to diagnose and service routers from a remote location."

Special satellite routers can manage use of satellites more efficiently because they account for latency and thus do not burn up extra bandwidth as the IP equipment sends messages back and forth, checking to see if data packets arrived intact. Helius believes it will sell thousands of the satellite routers in 2000.

Mosbarger says a long term trend will be for satellite and landline access providers to stop fighting and work together with a combined router that provides satellite multicasting and landline unicasting. The technology is not there yet but Helius is working on it.

Helius is also a big believer in open standards, and Mosbarger sees the resistance to open standards among satellite service providers as the industry’s Achilles’ heel. "They are digging themselves deeper into proprietary standards, when the customers want open. It will be counter to everything done in the last 15 years." Satellites should be included in international standards technical meetings and satellite operators should start talking to big router makers like Nortel and Cisco, he says. "The satellite operators need to get out of the hardware business and into the business of selling service. It’s the way they are used to doing business. Satellite has always been a secret brotherhood, the handshake of mystery. Now we have a new generation of people doing business," who come from the computer and networking world where proprietary standards are regarded as damaging to growth.

Web page content will be on the rise, driving the need for more bandwidth as the year unfolds, says David Hershberg, chairman and CEO of Globecomm Systems. Latency associated with geostationary satellites will not be an issue, he predicts, even for voice telephony on IP-based networks. "IP voice over satellite is very competitive with terrestrial needs. The infrastructure for satellite is very convenient and inexpensive," he says. In places like Europe and North America, telephony depends on fiber and the small voice delay isn’t acceptable, but Hershberg says that for the 150 other countries that currently use satellites for voice telephony, the delay doesn’t matter.

Broadband Takes off

"The year 2000 is the start of momentum for satellite broadband," says Tom Sharon, chairman and CEO of EMS Technologies, a satellite and earth station hardware supplier. In 1999, EMS purchased a 50 percent stake in U.S. Ka-band licensee Netsat28 as its entry into satellite broadband.

Sharon says Netsat28 is an inexpensive way into the broadband market, since it will be able to see the entire continental United States from one orbital slot occupied by a satellite costing about $250 million. The spacecraft will be equipped with EMS’ multibeam antenna technology to allow more efficient use of the bandwidth into 50-100 spotbeams concentrated on highly populated markets. The multibeam component technology is developed, but packaging it into a payload has yet to be done, Sharon says.

Netsat28 will be a "last-mile" service aimed at residential users and small businesses. Sharon believes home Internet users desire an access system to send packetized data out of their homes and bring high-bandwidth content into their homes in a highly asymmetrical fashion. EMS Technologies envisions new terminals that can do just that, bringing in video clips or other content at 40 Mbps maximum rate, on dishes that cost under $1,000 for a monthly service fee of $50-$150. Internet content providers also should be able to uplink to satellites at high rates, cutting the costs greatly from what it would take today to transmit their pages to the Net over satellites.

While Netsat28 is at least three years away from operations, the new SES Astra two-way data service, called ARCS (Astra Return Channel System), will begin services in early 2000 and is the precursor to the Netsat28 system.

"We see companies like Netsat28 focusing on content and less on the notion that there are transponders up there. You have to figure out what to do with them. The industry is driving to open standards and high volume, which will be essential in the battle for low cost. Getting the cost of chipset used in the consumer units down is also crucial," Sharon says.

"One mistake in the past has been to ignore the ground side of the equation and focus just on what the satellite is going to do. That leads to complex, expensive satellites more appropriate to the military world than what the commercial wireless world needs. We need to compete with terrestrial alternatives or we will see the same things happen in broadband as happened in mobile, where the spread of terrestrial systems made it hard for satellites to compete," Sharon says.

A Capacity Crunch?

Customers will be demanding some changes from satellite operators in the year ahead. Ross says that newer satellite users, especially those who have sprung up to compete with former PTT monopolies, are asking the operators to provide end-to-end services, rather than just selling space segment.

"Inherited customers, like BT and the other Intelsat signatories, still want raw bandwidth. New customers, who are less sophisticated users of unbundled services, are asking for end-to-end services," he says. Asian customers in particular are asking New Skies to put its space segment together with a teleport, fiber and an ISP connection. "It is key to getting the sale," Ross says. New Skies intends to get into the provision of terrestrial facilities in 2000, through joint ventures or acquisitions, in response.

Hershberg says Globecomm sees fewer huge gateway terminals being ordered, and an increasing number of smaller connect terminals.

Broadcast use of satellites will produce a very healthy business in 2000, in part due to the Olympics and U.S. presidential elections, according to Robert Patterson, CEO and president of The Spaceconnection. His company provides capacity to broadcast and distance learning customers on full and occasional use basis on numerous satellites.

Transponder supply over the United States is adequate to meet broadcasting needs currently, according to Patterson, who says prices ought to be stable in 2000 in the U.S. satellite service market, unless new satellites planned for launch fail. "The industry in general cannot afford anymore hits," he says. "The carriers, in general, would like to charge more for capacity but the market will dictate the price. We’re hoping it will be stable."

Some of the new satellites with higher power levels will rightfully command higher prices, he adds. Patterson says the going rate on the low end for preemptible C-band capacity in late 1999 was $125,000-$135,000 a month. Similar Ku-band capacity cost about $185,000 a month. On the high end, for capacity on "cable birds" that have a more desirable location, a C-band transponder that is protected from preemption on a satellite like Galaxy 5 can cost $250,000 a month, he says. "Second tier" satellites, like Telstar 7 or Galaxy 7, would cost $200,000 per month for C-band. Ku-band prices would be a bit higher.

New Technology

New satellite technology also is coming into play in 2000. Electric propulsion systems adopted from Russian technology, new lithium iodide batteries, and active array antennas also are making progress and will be demonstrated on the French technology experiment, Stentor, says Husson. Soon after the experimental flight, Alcatel, which is supplying two-thirds of Stentor, will be ready to bid active array antennas on its satellites, Husson says.

Pascale Sourisse, CEO and President for Skybridge, says satellite network technology will have more intelligence at the same time that systems like Skybridge become more compatible with mainstream telecom infrastructure. "We should not try with satellites to impose new standards. We should be transparent," she says. For example, Skybridge’s sponsor, Alcatel, is not only pursuing Skybridge but is very active in selling ADSL terrestrial broadband systems in the U.S. market, with an estimated 1 million lines sold in 1999. Skybridge would be used as a complement to such terrestrial networks in places where solutions like ADSL don’t work.

Mobile data services over satellite represent a technical advance made possible by the new low earth orbit constellations, Steele says. Satellites will deliver in-car services and connect mobile laptop users who will use these devices "almost like a Walkman" in the next two to three years. Steele believes that some of the new LEO systems, like Orbcomm, will be combined operationally with GEOs to introduce new commercial services such as remote Internet access. "The beauty of it is these systems can be set up in one day. The LEOs are very slow speed but the GEOs are at 60 Mbps and up," he says. "Combining LEOs and GEOs will be an incredible trend: it gives you speed and access."

Satellites also continue to improve efficiencies in throughput and other bandwidth-related areas important to customers, Hershberg notes. "For voice, the algorithms are getting better, so that less bandwidth is needed to carry voice over systems like Globalstar."

Patterson highlights the increasing use of digital compression and, as a result, the creation of new customers. Increased usage of digital compression brings a new problem, he says: "Because satellites are only two degrees apart, we will see an increase of interference between adjacent satellites as more people go compressed." Patterson recommends that satellite owners work toward more cooperation, that the rules on interference be adhered to, and that the uplinkers be policed to identify any source of interference.

To help solve interference problems, ATC Teleports’ John Hatem, vice president of operations, says that PC-based systems will be put to use this year as equipment for monitoring carriers, uplinks and spectrum usage. "These systems will replace expensive, custom-designed spectrum analysis boxes that had very limited capability due to their speeds and the large number of signals that needed to be monitored," he says. The problem of satellite interference will become cheaper and easier to resolve as a result.

Technology solutions to problems associated with using higher frequencies for satellite services, for example rain fade that is potentially disruptive for Ka-band and higher frequencies, is now available, Steele says.

A Year Of Recovery

Satellite executives also expect to see some long time problems turn the corner in 2000, starting with a recovery in the Asian sector of the market.

"We’re starting to see a pick up in the Asian economy, and I’m hoping that not too far behind that, we will see the Russian market. Both are highly dependent on satellites, compared to Western Europe, which is congested with fiber," says Hershberg, whose company operates teleports on both coasts of the United States.

Quality control problems in satellites and launchers that have plagued the industry for two years were still a concern as 2000 began. Husson says the decreased manufacturing schedules that customers have called for, and that some manufacturers have provided, is "dangerous" and that Alcatel will not trim its delivery time down to the bare minimum. "We are comfortable with 24 months to deliver a satellite," he says, but the actual length of time depends on the complexity and whether the customer asks for new equipment to be included. Ka-band satellites should be deliverable in less than 26 months, he says.

Kujawski says manufacturing problems are in hand, but that the satellite business is inherently challenging. "Everybody understands this is a risky business. One strike and you’re out. We’re paying close attention to it, so there are no mistakes. The business is intolerant of mistakes and we are trying to make sure we are as flawless as humanly possible."

On the operational side of the business, the biggest challenge will be handling rapid growth, Hatem says, especially in finding enough qualified operational personnel.

"The satellite market segment of the telecommunications industry is predicted to grow more rapidly than any other segment of the entire communications market in the coming years," says DeWayne Gray, president of M&C Systems Inc. "This fast growth tends to place a strain on the available pool of engineering talent in the industry." It is the lack of personnel, the required demands to decrease operational costs, and the increasing need of remote visibility that have many organizations in the satellite segment of the telecommunications industry looking for automation solutions, Gray says.

Financing also is an area that has many CEOs concerned. CPI’s Rick Schaffzin, president and general manager says, "The industry needs to have a solid year with no commercial satellite failures (both in orbit and at launch). Globalstar’s success in the marketplace will help relieve some of the fear in the investment community so that money becomes more available for the proposed new satellite systems and also for upgrades to the current systems."

The money markets were not particularly welcoming in 1999, and Sourisse says she will monitor the situation in 2000 with an eye toward her IPO plan in 2001. "It’s all a question of cycle. At the end of the day, it will be clear that satellites are not a single type of solution and there are major differences between Iridium, Skybridge and other systems. We are quite optimistic things should get better," she says.

But the consensus is that Iridium and ICO’s problems do not represent the general situation for low earth orbit constellation satellite projects. "Constellations can be a very cost effective way of providing services, as long as you can provide prices that are acceptable to the user," says Sourisse. "We are not changing our plans even if others are. We have identified a tremendous need for bandwidth, particularly in the local loop part. We will use satellite for the last mile and terrestrial for the long distance portion of the network."

New Skies is on track to have its IPO in the first half of 2000. Ross says the company’s bankers have advised it that Iridium and ICO’s problems have not ruined the market for fixed satellite service (FSS) businesses to go public. "Geostationary FSS is a known business, with blue chip shareholders, as opposed to a start-up. Institutional investors are sophisticated enough to know the difference," Ross says.

Failures and a lack of financing will threaten the business, as always, but with demand on the uptake and end-user equipment prices coming down, the satellite industry can look forward to a solid year of growth.

Theresa Foley is Via Satellite’s senior contributing Editor.

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