by the Phillips Satellite Group

This year’s installment of the Phillips satellite conference series, Satellite 2000, was another record-breaking event, both in terms of attendees and in the news and information revealed at various events. More than 6,000 registered guests attended the show, as opposed to about 4,200 last year. And the panel sessions this year were packed full of breaking news and market analysis. Some of the highlights are described below.

Industry Leader’s Roundtable

Perhaps the prize for the most well-timed development should go to Eutelsat Director General Giuliano Berretta, who announced early in the Industry Leaders’ Roundtable that the FCC had just awarded the organization its much-awaited U.S. landing rights. With an earlier orbital positioning dispute with U.S. company Loral Space and Communications now resolved, Berretta emphasized that now was a time for increased cooperation between all companies in the satellite industry: “The enemies are not in this room, they are outside.”

John Connelly, chairman and CEO of GE American Communications (GE Americom) and Via Satellite’s Satellite Executive of the Year 1999, was questioned regarding the unraveling of his company’s acquisition of Columbia Communications. “It’s in an evolving stage,” Connelly said, indicating that the entire history of negotiations with Columbia had been very “on again, off again.”

Connelly expressed optimism that the deal would eventually go through, saying that the negotiations are now “on track and close to schedule.” This assessment of the situation has been borne out by recent announcements that the Columbia deal is once more expected to be completed. In a later interview, Connelly told the Satellite 2000 Show Daily staff that a number of complex issues in the deal may have led to a misunderstanding between the negotiators on both sides.

“Terms are pretty much settled, but some terms and conditions remain in play,” Connelly said. “At the end of the day, a deal like that will be back on track. This is the right deal for us and the right deal for them.”

Speaking of deals, Terry Hart, Loral Skynet president, addressed the reasoning behind the recent financing efforts on behalf of Globalstar that leveraged the Telstar satellites as collateral. Hart assured the audience that Globalstar was on track to meet its goals, but that in the unlikely event of a financial failure of Globalstar, the vertically- integrated Loral family of companies would leverage additional corporate assets to prevent the forfeiture of the Telstar satellites.

Romain Bausch, SES Astra’s director general, was asked about his company’s plans for expansion into North America. Bausch conceded that Astra has not succeeded in finding a North American partner, despite high hopes at last year’s conference. Discussions are under way, he said, but he attributed the delay to the rapid growth of the DBS sector in the stock market, which made structuring deals based on equity transactions difficult.

Satellite Executive Of The Year Award Luncheon

In what has been called one of the best acceptance speeches in the history of the award, Connelly stressed that the satellite industry must focus on quality, regulation and the Internet. These issues formed the basis of his remarks at the award presentation ceremony.

With regards to quality, Connelly referred to the issues of on-orbit satellite reliability and launch schedule delays that plagued the industry in 1999. According to him, there is a cause-and-effect relationship between high quality service and maintaining profitability. The issue of accountability was also raised. “Our reputation is in need of repair,” Connelly admitted, referring to the industry as a whole.

Quick to assume his own share of accountability, Connelly conceded that the biggest reason for GE Americom’s delays has been its own “inadequate subcontractor management.” According to Connelly, “Going forward, our contracts will give us even more insight into the process and improved standards for subcontractor management, incorporating some of the best practices learned by a number of our GE industrial businesses.”

He also cited difficulties in meeting regulatory hurdles as another critical concern. Paper satellites are the gravest offenders, he said, claiming that they profoundly restrict the ability of the industry to effectively compete with terrestrial alternatives.

He also warned that U.S. authorities must be prepared to limit or deny market access to the United States if steps to seek “independent, broad-based, non-signatory ownership of Intelsat” do not happen quickly.

Connelly’s final observation was the need for the satellite industry to “set satellite as a standard for the Internet.” He advised the industry to find “savvy Internet partners who can complete the value proposition–be it caching or streaming or whatever–and find ways to quickly build out ground infrastructure.” Second, he said that satellite companies must focus on product design and distribution, with particular emphasis on distribution. Finally, Connelly urged the industry to take a hard look at next-generation platform costs. “There are very few industries today that face multi-billion dollar development efforts before knowing if they have a sellable product,” Connelly observed. “As an industry, we need a reality check.”

Regulatory Update

Export control and spectrum sharing took center stage at another Satellite 2000 session, when industry leaders zeroed in on the most important regulatory developments the satellite industry faced in 1999. According to the panel, these two issues continue to impede the full growth of the satellite market and interfere with the unique ability of satellites to provide ubiquitous communications.

In an effort to illustrate the significant impact the export issue is having on the commercial satellite sector, Phil Spector, an attorney with Washington-based Paul, Weiss, Rifkin, Wharton and Garrison, said that the process of changing the currently Byzantine regulatory regime is moving at “FCC speed” in an era of “Internet Speed.”

“We are still talking about export control, and within that discussion we are talking about countries such as Japan, France, and the United Kingdom who are needlessly suffering the effects it poses,” he added.

“More than half of the satellites we launch are built by U.S. companies totaling one-fourth of our business,” said Doug Heydon, president of Arianespace Inc. “Therefore, as a service provider, the export regime plays a significant role in our business.”

Clayton Mowry, executive director of the Satellite Industry Association, concurred with Heydon adding, “Export control impacts everything and everyone within the satellite industry.” No stranger to this issue, Mowry has spent the greater part of 1999 walking U.S. congressional halls, meeting with top executives and lobbying for process change on behalf of the satellite industry.

The thorny and contentious issue of sharing valuable spectrum was also a topic of discussion. “Solving this issue will be a real tall task for the industry,” said Thomas Tycz, chief of the FCC’s satellite and radio communication division.

At the heart of this issue lies the fact that long waits for obtaining frequencies to operate satellites has increased as more satellite systems are being introduced. And filing procedures at the ITU and at the FCC continue to move slowly with no signs of improvement. “The industry backlog is very inconvenient and I wouldn’t hold my breath for swift change,” said Jorn Christensen, a Canadian-based frequency coordination consultant.

Satellites And The Internet

At Satellite 2000’s Internet panel, Irwin Communications’ Susan Irwin said that leading companies such as Loral Cyberstar, Intelsat and Panamsat have seen the growth of their Internet services jump anywhere from 200 to 300 percent over the past year. The question of whether or not satellites will work for the Internet is no longer an issue.

“There is absolutely no doubt that satellites and the Internet are made for each other,” said Clay Whitehead, of Whitehead Associates. “Satellites are tremendous vehicles for providing Internet to emerging markets.”

The panel’s participants suggested that one of the major revenue potentials for satellite transport services is in providing backbone where international fiber is not available. In addition, they suggested areas that are poorly served by terrestrial infrastructure will also be hot areas for a satellite/Internet solution.

MSS: The Future Is Now

With the high profile bankruptcy filings in the mobile satellite industry, all eyes will be focused on Globalstar. The success or failure of the satellite telephony provider will set the stage for the future of the MSS market.

“2000 is an important year,” said J. Tracy Mehr, vice president of investment banking at Donaldson, Lufkin and Jenrette Securities Corp. during the “Mobile Satellite Services: The Future is Now” panel. “What happens this year will effect future financing in the mobile satellite sector.”

If Globalstar follows the same path as ICO Global Communications Services Inc. and Iridium, financing that has generally been given to the mobile satellite sector could dry up.

Being tied to Loral has helped Globalstar, and so have the positive reviews given by Wall Street analysts, said Mehr. However, he suggested that industry followers watch the valuation of the bonds that Globalstar has issued before making a final assessment.

One thing that will be key for MSS systems going forward will be to keep the focus on the core business of telecommunications–not just satellites, said Roger Blott, senior vice president and general manager of the business operations group and acting CFO of Ellipso. He attributed many of the problems that mobile satellite companies experience to not concentrating on the selling of services through retail channels.

“You have to design systems for the service provider,” said Blott. “It must be designed in a way that makes it easy to sell.”

DBS And DARS

Direct-to-home satellite services are experiencing explosive growth, and there are no signs of it slowing down anytime soon. However, it is going to be important for the future growth for companies to work together to help the industry succeed.

“[Direct broadcast satellite] is in a position to compete effectively against cable,” said Michael Alpert, president of Alpert and Associates during the “DBS and DARS: The Drive to Consumer Services” panel.

However, the recently filed anti-trust lawsuit against DirecTV by Echostar could do more to hurt the industry in the short run than help it.

“It would be much better if the industry worked together,” added Alpert, with companies fighting each other instead of competing against the cable TV industry.

With Alpert estimating the number of total DBS subscriber to exceed 30 million by 2007, there is room for everyone to share in the marketplace pie. “The market is big enough for all companies to succeed,” said Alpert.

Addressing the promising DARS market, panelists said the future looks just as bright as it does for DBS. The two competitors will have to work together, as consumer products must be interoperable between XM Satellite Radio and Sirius Satellite Radio, unlike their video counterparts.

But Alpert gave the same warning to DARS that he did to DBS–the focus must remain on customer service and quality of service.

“If the customer gets good service, [DARS and DBS] will succeed,” said Alpert.

WTA 2000

Carrier consolidation, difficulties with customer service and personnel drain are some of the factors making profitability an increasingly elusive goal for today’s teleport operators.

Such was the consensus at the opening panel of the World Teleport Association 2000 track at Satellite 2000 when Stephen Tom, president of Teleport Consulting Group International, posed a simple question to a group of experts: “Can you make any money in teleports?”

David Sprechman, executive vice president and CEO of Globecast America, thinks the answer, for those still engaged in what he termed “classical” teleport operation, is “no.”

“Classical teleport profitability is an oxymoron, like ‘jumbo shrimp,’ or ‘plastic glass,'” he said. He believes that profit margins are dwindling for traditional carriers who haven’t yet branched out into “value-added” operations such as post-production and language conversion. “Transmission services are loss leaders,” Sprechman said. “We’ve realized that if we stay transmission-only, we’ll watch our profits go down.”

Sprechman also cited high capital equipment costs as another barrier for small operators. “Even non revenue-producing items such as uninterruptible power sources and multiple generators require huge capital. You can’t just jump into the market with two antennas anymore.”

But cutting costs has its pitfalls. Tom pointed to a recent Wall Street Journal article voicing the sentiment that as carrier consolidation continues and service options dwindle, networks have become less robust and overall quality-of-service has dropped. “How do you still provide ‘white glove’ service?” he asked.

Pat Enright, director of central region network services for Telesat Canada, feels that customers and customer service reps need to work together. “We listen to what the customer wants,” Enright said. “And we inject what the customer needs. We also try to give customers access to data, to let them find out as much as they can on their own.”

“It’s tricky,” Wes Hanemayer, vice president of teleport/satellite systems at Williams Vyvx, agreed. “You have to spend a lot of time training people. You want to be frugal, but you simply must support local teleport staff.”

In a rapidly changing era of deregulation and consolidation, teleport managers face many challenges, but Hanemayer voiced the optimism which keeps the business thriving: “Independents can still make it.”

Satellite Broadcasting

Satellite broadcasters expressed their displeasure at the direction the satellite industry in general is taking, based on remarks made during the opening session of Satellite 2000.

Robert Zitter, senior vice president of technology operations at Home Box Office, criticized satellite executives for their focus on opportunities in the Internet space.

And as reliability of current satellite systems declines, broadcasters must spend additional capital for back-up systems to protect themselves in the event of another satellite failure.

Part of the problem can be attributed to advances in satellite technology. As satellites become more complex, the chances for something to go wrong have increased.

“Broadcasters have not asked for satellites to be built faster or to be more complex–they just need to be as reliable as they have been over the past 20 years,” said Zitter.

Reliability becomes a greater factor when you look at the time it takes to replace or repair satellites. “A satellite failure takes several years to recover from,” said Brent Stranathan, vice president of broadcast distribution at CBS.

Finance And Investment Summit

Despite the troubles facing the low-earth-orbit (LEO) industry, “bullish” was the buzzword heard with regard to satellite stocks. A panel of experts from Merrill Lynch, Lehman Brothers, and others echoed the same sentiment over and over–satellite services are entering an extraordinary period of growth.

William Pitkin, vice president of satellite services at Merrill Lynch, kicked off the discussions with a thumbnail sketch of the past year in satellite stocks. Buoyed by the extraordinary performance of TCI Satellite in 1999, the industry ended with returns of 233 percent. “By any measure, it was a phenomenal year,” Pitkin said.

Robert Peck, senior satellite equity analyst for Lehman Brothers, maintained a similar optimism. “Demand for bandwidth will be huge–that’s no surprise,” Peck said. “Terrestrial will take most of that, as it is improving, but that service will be limited to rich urban centers.” Satellites, with their extended reach, simply “do it better” than terrestrial networks, Peck said.

Moderator Marc Crossman of JP Morgan opened the Q&A portion of the event with a change of pace. “Everybody’s bullish on everything. No one wants to be negative,” he pointed out. “But what are you short on? What stock would you not buy?”

Analyst Marc Nabi, from Morgan Stanley Dean Witter, gave a somewhat tongue-in-cheek answer. “I would be short on cable companies,” he said, citing rapid loss of cable market share to DBS competition.

Vijay Jayant of Bear Stearn was reluctant to single out any single stock. “If interest rates rise, you could see the whole sector, as a group, trade down. It’s a market call.”

Space Business 2000

Despite the remarkable reliability of satellite networks, the space industry is beset on all sides with threats and concerns that need to be addressed, according to the panelists at Space Business 2000’s “Protecting In-orbit Commercial and Military Assets.” The panelists highlighted a variety of concerns, ranging from tactical military issues to concerns about commercial manufacturing practices.

David Desrocher, senior project manager for the Aerospace Corp., detailed how his company’s space operations support office is striving to stimulate the commercial space arena. He pointed out how space losses impact many areas, and how investors and underwriters are getting smarter regarding their evaluations of the robustness of a satellite system.

George Levin, a retired manager for NASA’s Orbital Debris Program, commented on the observations he had made during his tenure at NASA. Levin and his colleagues developed some “rules of the road” in the late ’80s for reducing the generation of orbital debris, guidelines which became standard practice for all government missions. According to Levin, the government position has been to advise but not regulate the commercial industry, providing the NASA guidelines to commercial manufacturers and operators.

Clayton Mowry, executive director of the Satellite Industry Association, gave a snapshot of the space industry and pointed out some of the military’s concerns regarding deliberate “satellite warfare” that might be employed against commercial and military space assets. According to Mowry, threats such as jamming, high altitude bursts, tactical nuclear weapons and ground attacks are all issues that the military is attempting to address in its space assets. Unfortunately, taking measures to protect against such threats, such as radiation shielding and hardened electronics, increase the cost of satellites by 10 to 20 percent, in addition to increasing spacecraft weight and the resulting launch costs.

Looking Forward To Next Year

Satellite 2000 provided considerable insight into the directions in which this industry is heading, but as always, every answer led to even more questions. To get the answers to these questions, as well as an update on the industry’s progress in 2000, don’t miss next year’s Satellite 2001, March 28 to 30, in Washington, DC.

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