Following its $3.75 billion deal with Hughes, Boeing Space & Communications is set to emerge as the world’s largest space group. Hughes is turning towards the more profitable business of becoming a satellite operator. Why is Boeing getting more involved in the business of being a satellite builder?

Last weekend (January 13), Boeing made a much anticipated announcement jointly with Hughes Electronics that it was acquiring the Los Angeles-based company’s satellite building arm, Hughes Space & Communications (HSC), plus other related operations for $3.75 billion in cash.

These Hughes businesses are expected to generate $2.3 billion for 1999, a figure expected to increase by 35 per cent by 2001. When added to existing Boeing Space & Communications revenues for last year, revenues are expected to total almost $10 billion.

Since Boeing seriously took the plunge into the space business two years ago with the acquisition of all of McDonnell Douglas and Rockwell, it was clear that sooner or later it would have to build or buy a commercial satellite building business. Its acquired asset in this area, the Rockwell unit in Seal Beach, California, was constructor of the original GPS-Navstar positioning satellites for the USAF, and has recently recovered this business (from Lockheed Martin (LM)) with an award to build 33 Block IIF Navstars beginning in April 2001. But the Navstars cannot be described as commercial communications/broadcasting satellite. Creating an entity to make them from the ground up would have been a protracted affair. Acquisition would be a surer path, assuming a willing seller emerged.

There is no evidence that Boeing shopped around; HSC seemed to be the only real candidate, even though Lockheed Martin’s present share price situation might have prompted it to sell its satellite arm if the price was right. Even if it is universally true that (at present) there is more money to be made from operating satellites than from building them, LM’s own Lockheed Martin Global Telecommunications entity is not sufficiently well established for the company to live solely through operations. This business is also contingent on LM’s challenged acquisition of Comsat.

Hughes Space & Communications, however, has been tipped a likely Boeing acquisition for some time. Hughes Electronics seems quite happy to rely on its faster-growing businesses. Current high growth contributors to the bottom line include DirecTV/DirecPC (the former is still leading rival Echostar by a substantial margin) and PanAmSat, which is 81 per cent owned by Hughes Electronics. For the future there is the potential offered by Hughes’ joint venture with AOL. Last June’s investment of $1.5 billion in Hughes by AOL has recently been followed by AOL’s takeover of Time Warner. There is also Hughes’ upcoming Spaceway venture (for which Boeing will now build the satellites while Hughes Network Systems (HNS), will operate the service.

Hughes Electronics has revamped its structure in moves that seem clearly rehearsed with Boeing. Eddy Hartenstein, previously president of DirecTV, has been named corporate senior vice president for the Hughes Consumer sector, while Jack Shaw, until now CEO of HNS, will mirror Hartenstein’s role in charge of the Hughes Enterprise (business) sector. This will include HNS, PanAmSat and business applications of DirecPC and Spaceway.

HNS will discontinue its mobile cellular telephony and wireless local loop activities.

Current Hughes Space & Communica-tions president Tig Krekel will move to Boeing, now in charge of what will be known as Boeing Satellite Systems. He will report to Boeing Space & Communications Group president Jim Albaugh. The former Hughes Space & Communications unit will remain in El Segundo, California. It is thought likely that the ex-Rockwell satellite unit in Seal Beach will later be merged with it.

Also transferring to Boeing are two Hughes Electronics companies: Hughes Electronics Devices (a component supplier) and the solar array supplier Spectrolab.

Boeing Satellite Systems now becomes one of Boeing Space & Communications’ largest suppliers. Among its 36-plus contacts, worth over $44 billion, are five HS-601HT satellites for PanAmSat and DirecTV, and five HS-702s for PanAmSat and Spaceway.

The deal is of course subject to various regulatory and government reviews, but it is expected to receive necessary approvals by the end of June.

If operating satellites is so much more profitable than building them, why should any US company devote itself to making hardware? Surely it would be more cost-effective to leave this task to some other upcoming manufacturer, maybe in India.

The Hughes view is that manufacturing (and the research and development which lies behind it) generates valuable know-how which translates into operational skills. But the process does not necessarily work the other way round. Hughes may have learned (almost) all there is to learn about building satellites; but the only other way Boeing could acquire this knowledge would be by painstakingly establishing its own spacecraft lines. In other words, Boeing needed Hughes Space & Communications more than Hughes Electronics did. In the meantime, Hughes will find the cash useful in eliminating its debt, estimated currently at around $2 billion, Hughes CEO Michael Smith admitted that his company’s resources had been "limited".

Boeing Space & Communications has moderate investments in both Teledesic and the GMPCS system Ellipso. The latter is still struggling for finance in the wake of the ‘Iridium effect’. Teledesic is of course pitching for a majority stake in ICO Global Communications, whose satellites Boeing will now be supplying. The first ICO satellite is to take off from Sea Launch, which is 40 per cent owned by Boeing. So whether or not Boeing ever does any satellite work for Teledesic, it looks well placed to make money out of Teledesic-controlled activities.

Boeing indicates that its marketing thrust will place more emphasis than that of Hughes on government (including military) satellite systems including space-based air traffic management systems, and the "movement of broadband information on and off mobile platforms and defence systems." This would seem to imply that Boeing too has ambitions as an operator, even in a different field from Hughes. Perhaps Inmarsat and the EU Galileo organisation should take note.