By Theresa Foley

By year end, the satellite industry will know whether 2000 will be remembered as the launching point for massive new satellite broadband services, or as the second consecutive year in which the troubled Mobile Satellite Services (MSS) sector dragged the rest of the industry down with it. Signs of growth and progress occurred this spring as satellite firms prepared to expand their businesses into Internet access and radio delivery, but ominous early reports of Globalstar’s early sales results cast a shadow on the non-MSS operators.

Several of the major publicly-traded satellite firms participated May 4 in the first ever “virtual satellite conference” held by Bear Stearns & Co., and organized by its lead analyst for satellites, Vijay Jayant. The event allowed CEOs from around the world to brief Bear Stearns clients, analysts and journalists without any of the participants having to travel to New York.

Prognosis Good?

The CEO of Loral and Globalstar, Bernard Schwartz, started the day by saying that all signs for Globalstar remained positive. However, the results he disclosed about the new mobile satellite operator’s early performance caused analysts to once again lower their ratings and estimates for future performance for Globalstar for the rest of the year.

Globalstar reported a first quarter loss of $216 million on $609,000 in revenues, derived from 550,000 billable minutes of usage plus royalties paid on gateways. Using those figures, ING Barings calculated that only 1,500 subscribers, an extremely low number, were paying for Globalstar during the first quarter. Other analysts said their figures were higher by a few thousand. Banc of America analyst Armand Musey commented that revenues were far below the $3.6 million he had expected, even after lowering his estimates in recent months. He said investors were raising concerns about Globalstar’s liquidity later in the year.

“We are very hesitant concerning the company’s prospects going forward,” Musey said. “There are definitely uncertainties concerning Globalstar’s liquidity. Globalstar’s funding through year end is dependent upon the renewal of a $250 million credit facility with Chase Manhattan in June.”

Globalstar is burning cash at a rate of about $120 million a quarter, and will run out of the $232 million it had in March during the third quarter unless there is a dramatic turnaround in revenues. Last fall, Schwartz had optimistically projected that Globalstar would bring in $500-$600 million in revenues this year, an amount that clearly will be impossible to achieve.

By March, Globalstar service was available in 36 countries. Schwartz said 73,000 Globalstar phones were in the distribution and sales chain. He cited as positive signs interest from the U.S. government and the Red Cross; new advertising campaigns from service partners like Vodafone-Airtouch; and new investment in the services end of the business by the owners of T.E.SAM, which are backed by Alcatel and France Telecom.

Exactly what effect Globalstar’s rocky start is going to have on parent company Loral Space and Communications, 45 percent owner of Globalstar, over the long term is not clear. Schwartz said Loral was in a position to manage problems at Globalstar with its cash without having to pledge any more of Loral’s assets. If no money is used to help out Globalstar, Loral expects to end 2000 with more than $400 million in cash or the equivalent, but that pot apparently is going to be tapped to invest in other new areas. Aside from funding for Globalstar operations, Loral is planning to invest in related Globalstar service ventures to the tune of $110 million.

ING Barings, one of the strongest supporters of Globalstar on Wall Street, commented that Globalstar’s future was uncertain and that created an overhang on Loral’s equity price and future plans. Schwartz said that Loral would not be jeopardized to rescue Globalstar. One option for providing Globalstar with more funding is to ask all the strategic partners to put in more cash or guarantees.

While Globalstar is struggling, the rest of Schwartz’s satellite empire got off to a strong start in 2000. Loral landed new business in its satellite manufacturing and fixed satellite services units.

Loral’s fixed satellite services business, made up primarily of Skynet and Satmex, showed strong demand globally in early 2000, with Skynet having 2.6 times the bookings in first quarter 2000 at $563 million over the previous year. Big new contracts included a Boeing agreement to use 11 transponders for its new service to airplanes in flight, and a 10-transponder deal from Hughes Network Systems to use Satmex capacity to support the expansion of DirecPC Internet services.

Manufacturer Space Systems/Loral also reported five orders in the first four months for new satellites. Schwartz expects additional contracts for new satellites for Asiasat, ISky, the M2A Asian broadband services satellite, a large data satellite for Thaicom, and new orders from Intelsat.

Data services, which continues to lose money while increasing its revenues, is one of several areas where Loral plans to invest in 2000, and this area may be vulnerable to the influence of Globalstar. Loral intended to get into the broadband data business using two Ku-band transponders in 2001 to support a streamed media offering for Internet companies and to kick off a consumer Internet access service. Partners for both services were still being lined up in May. In the farther term, a Ka-band satellite service will be developed, Schwartz said. Four Ka-band satellites could be positioned in two orbital locations, providing services to more than 10 million customers.

Loral wants to invest $50 million in the broadband business this year and about $3.5 billion over the next few years. Other investments will include about $300 million in new satellites for Skynet and other initiatives, and another $90 million in infrastructure required on the ground. Total investment for the Loral projects, excluding Globalstar, was planned to be about $450 million out of the $515 million cash on hand at the end of March.

Satellite broadband and DARS operators also need to raise money this year to implement their new term services. The CEOs at the Bear Stearns conference showed no signs that Globalstar had affected their ability to raise cash, although their strategy for financing this year appeared unclear, due in part to the volatile market conditions.

A Healthy Dose of Internet

ISky Inc., the prospective Ka-band satellite operator from the Denver area, continues to work toward rollout of its satellite Internet access venture in 2001 and has added Echostar to its list of investors, helping the company to reach half the $750 million it needs to get into business with two satellites. Echostar will help ISky to design a single-dish, single-box system for delivering broadband and satellite TV. The financing strategy is being assembled for the remainder, which could include a high yield bond offering. “We are 12-18 months ahead of the other players,” said Paul Froelich, vice president of finance for ISky, during the Bear Stearns investor conference.

ISky also has purchased the Ka-band payload on Telesat Canada’s Anik F2 satellite, which is to be launched by the end of 2002. Most of the Ka-band payload will provide ISky with coverage of the United States and Canadian markets, and presumably would give ISky a start in business even if its own satellites are delayed.

But investors like Echostar often are hedging their bets by getting involved with more than one broadband startup. Echostar also has invested in one of ISky’s main competitors, the Gilat-To-Home (GTH) satellite Internet access project from Gilat Satellite Networks. Froelich said Echostar is supporting Gilat because it needs a “medium-band offering as soon as possible” to remain competitive, and that ISky’s service would be preferable to Gilat’s due to its higher speed and lower cost.

Yoel Gat, Gilat CEO, dismissed the near term threat of Ka-band systems like ISky’s. “The cost of the terminal will be more expensive than Ku-band for years to come,” he said, adding that GTH hopes to have one million dishes installed before Ka-band is available.

Gilat will begin selling its service this year, giving it a year head-start over ISky. Both will face competition from Hughes Network Systems’ DirecPC. For Gilat-to-Home, 5,000 or more friendly users will begin testing the service in July, followed by limited commercial service in the third quarter and full service in the fourth quarter. Gilat had raised $125 million in partner-equity for GTH and needed another $25 million more in equity, plus $150 million in debt, to carry it to the end of 2001.

Gat said that GTH’s partners, Microsoft, Radio Shack and Echostar, bring much more than just money to the venture. Microsoft’s commitment to order several hundred thousand VSATs from Gilat for the service will bring the venture to break even. In addition, Microsoft will build a co-branded portal for GTH, establish retail and Internet sales channels, provide brand recognition, and work to optimize use of Microsoft products over the system. Radio Shack will assist GTH in tackling the rural market, helping to sell to the 4 to 5 million homes that do not have flat rate, high-speed Internet service. Echostar will distribute the product, receiving a residual payment for sales.

Gilat is leasing eight transponders for the service and could increase that to 20 to 25 by 2001. Jayant said that in 2002, Gilat could launch its own Ku-band satellite.

Gilat had a strong year in 1999, in which Gat claims Gilat won more than 50 percent of the VSAT market share for the first time with 75,000 VSAT orders booked. In 1998, Gilat had about 40 percent of the market. (Hughes Network Systems, the long time VSAT industry leader, contests the claims.) Gat said the evolution of the consumer market is going to bring more cost effective products to the VSAT industry and change the shape of the business market for VSATs in the process.

Take Two-Way and Call Me Next Year

In Europe, two-way satellite broadband services will start on SES Astra satellites by the end of 2000, a significant delay from the earlier timetable due to difficulty in getting the non-satellite elements of the service ready. SES and EMS Technologies completed a demonstration of a DVB-RCS (Return Channel Satellite) system in May, and EMS will deliver the system to SES by year end. EMS now has a role in supplying SES with the hub and user terminals for the broadband service. But the user terminal will remain expensive at the outset at over $1,800, limiting the market to business users. In 2001, the hope is to get the terminal cost down to less than $450. Nonetheless, even before the two-way service began, SES was reporting sizable growth in its one-way satellite broadband service in 1999, the first year it was offered. Romain Bausch, SES director general, said SES was using 11 transponders by end 1999 for multimedia or broadband applications.

Panamsat (PAS) also will be an early entrant into satellite broadband, launching its Net 36 service for broadcasting customers this summer. PAS sees its existing customer base of 300 world media companies as a primary customer base for Net 36, according to Doug Kahn, PAS CEO. Net 36 will conduct beta tests in the second quarter with its partner, US West, which will connect the broadband services to DSL-users in communities in the southwestern United States, and have commercial availability by third quarter. Rollout into Europe and Asia is scheduled for fourth quarter, with expansion into Latin America and Africa in the first half of 2001.

Kahn said the venture represents a new revenue model for PAS, with payments from content providers who will pay a fee based on the bits consumed. PAS will put 3,500 to 5,000 servers for the service into the field by the end of 2002. Kahn said 15 to 17 million broadband users would be connected through the service by 2002 and that Net 36 will use 24 transponders by 2004. The venture should bring in $20- to $30 million in revenues next year, becoming cash flow positive in 2003. Kahn says the potential exists to generate EBIDTA margins in the 70 percent range, which would make Net 36 a fairly profitable business.

PAS’ stock price was hit harder than other satellite companies in the spring, dropping to about $35 from a high of $70 in the previous 12 months. Kahn however, was optimistic about the year ahead for PAS, especially since the launch of new satellites had given it capacity to sell in the U.S. market for the first time in four years.

A Strong and Steady Beat

DARS satellite radio operators are close to starting their commercial services at year end and hope to emulate the financial performance of direct-to-home (DTH) in the months ahead. Both U.S.-based DARS operators, Sirius Satellite Radio Inc. and XM Satellite Radio Inc., face challenges this year as they approach service startup.

Sirius planned to launch its first satellite as we went to press, with two more launches in September and October. In May, chipset manufacturing for Sirius’s radios had yet to begin and the Sirius network of terrestrial repeaters to guarantee smooth signal reception in 46 markets will not be completed until fourth quarter, the same time the chip manufacturing should start. David Margolese, Sirius CEO, said Sirius will subsidize the initial $50 chipset cost to boost the market. The chip price should drop to $20.

XM, with its first satellite launch in November 2000, needs to raise another $235 million in funding to carry it through commercial service startup in first quarter 2001. XM also has to build prototype radios, which are targeted for availability by year end.

The competitors have demonstrated increased willingness to work together to build a market for satellite-delivered radio, most recently agreeing to develop an interoperable radio that can work with either satellite service by about 2004. The open-standard radio will mean that deals with automobile manufacturers to build the satellite radios into cars will be non-exclusive.

Sirius has agreements with six major car manufacturers, Mercedes Benz, Ford, Chrysler, Mazda, BMW and Volvo. XM has a relationship with GM to put its radios into the GM line. Margolese said a revenue-sharing model will give about 15 percent of revenues to the automakers. Another enticement for the auto makers to encourage satellite radio installation is stock purchase warrants given by Sirius to Ford and Chrysler that allow each to buy up to 4 million shares at $30, well below the stock’s price, once the car maker installs Sirius radios into 4 million autos.

A Prescription for Success

Analysts also continued to closely follow the management of Orbital Sciences Corp. (OSC), which has had a difficult year in the stock market due to accounting irregularities that forced the company to restate past financials. Orbital CEO David Thompson told the Bear Stearns audience that the problems have now all been addressed, and that OSC was ready to turn its stock performance around.

He said all three of OSC’s divisions would report strong growth in 2000 and that the company will stay focused on small space markets. Orbcomm, the little LEO (low earth orbit) firm that is partly owned by OSC, hopes to have 120,000 paying subscribers by year end, with 150,000 terminals installed and 300,000 more on order. The venture’s ramp up of paying users had gone much slower than anticipated, but Thompson said 3 million subscribers should materialize within three to four years from the top 100 Orbcomm accounts.

Finding a Cure

Satellite projects are still demonstrating their earnings potential to Wall Street investors, but as of late spring, the financial markets appeared to remain fairly well open to the sector, despite the queasiness the MSS failures have caused. With a few success stories among the new ventures this fall that replicate the direct-to-home satellite TV roll-out, the ability of satellite companies to tap the markets for capital could regain the momentum of two or three years ago.

Theresa Foley is Via Satellite’s Senior Contributing Editor.

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