Industry Studies Indicate Sector in Good Health

The satellite industry is in strong health, with the industry showing strong increases in overall revenues and satellite players able to participate in new growth segments.

According to a State of the Satellite Industry report prepared by Futron for the Satellite Industry Association (SIA), worldwide satellite industry revenues in 2007 were $123 billion, an increase of $17 billion compared to 2006. In 2002, worldwide satellite industry revenues were just over $71 billion, so if the growth continues along this curve, it could mean industry revenues double between 2002 and 2008. Of the $123 billion in revenues in 2007, 60 percent came from the satellite services industry, the same as in 2005. In fact, the make up of the satellite industry revenues has remained the same between 2005 and 2007. Satellite manufacturing accounted for 9 percent of overall revenues in both 2005 and 2007. Ground equipment accounted for 28 percent industry revenues in 2007, the same as in 2005.

World Satellite Industry Revenues

"Booming interest in global positioning technology, and industry’s rapid expansion of the array of products and services using this technology, have delivered impressive market results," according to "The Space Report 2008: The Authoritative Guide to Global Space Activity," released in April by the Space Foundation. "Satellite radio and direct-to-home (DTH) television service are also contributing to substantial growth in the space industry. Private exploration of space by entrepreneurs and adventurers who invest significant personal funds represents an industry sector in its infancy, that could in the near future reach a turning point toward significant development."

The Space Foundation estimates that global space revenue from government and private sources reached $251 billion in 2007, a strong growth rate of 11 percent over 2006. More than three-quarters of global space economic activity stemmed from purchases of commercial satellite based products and services (55 percent) and U.S. government spending (25 percent). Activity in two commercial satellite services, DTH television and GPS equipment and chipsets, drove robust space industry growth, the report said.

The Space Foundation also indicates that satellite manufacturing revenues increased 14 percent to an estimated $13.6 billion in 2007. This growth was driven by a 26 percent increase in revenue for government payloads to $11.4 billion. Ground equipment was the largest growth sector of space infrastructure in 2007, increasing approximately 6.5 percent over 2006. Revenue from ground equipment related to space operations is estimated at $30.7 billion.

FSS Industry

The fixed satellite services (FSS) industry is a particularly strong sector that shows no sign of slowing down. "By all measures, the FSS industry of 2008 appears to be fairly strong and vibrant, fueled by the twin engines of Internet and HDTV-related services, augmented by new applications such as digital signage and communications on the move," says Maury Mechanick, counsel in the Washington, DC office of White & Case LLP. However, Mechanick believes there are potential obstacles ahead that could curtail this growth. "While business prospects continue to look favorable, there are two uncertainties that could affect near- or medium-term business growth," he says. "One is obviously the general global economic downturn driven by the mortgage and banking difficulties, coupled with the volatility in oil prices of the past several months. The question here is what ripple effect, if any, this may have on those business segments served by satellite operators. The second is the extent to which the expected roll-out of WiMax, still a few years in the offing, could diminish demand for certain types of satellite services. In the case of WiMax, it could either be a blessing or a curse for the satellite industry, and ultimately dependent on whether WiMax evolves into a network extension technology (blessing) or a network replacement technology (curse)."

World Revenues By Sector

"If certain technologies/applications, like broadband, had demanded growth the way we had hoped, we may not have seen a down cycle. The projections for the demands of broadband satellite were probably over ambitious." — Caceres, Teal Group

Andrea Maleter, technical director at Futron, also says the FSS industry was in good health. "The FSS industry has been very strong lately, and there is every reason to expect that the sector will continue to grow. From 2006 to 2007 global FSS operator revenues from transponder agreements (leases and sales) grew about 21 percent, reflecting both expanded levels of service (primarily from video and government customers) as well as strong pricing. While the major operators are adding new satellites to their fleets, they are also carefully realigning those fleets to maximize asset utilization," she says.

Though Patrick French of NSR says the credit crunch could have an impact in the FSS sector, "specifically clients who may slow or delay new capacity purchases, but this should not be a major negative. Overall the same basic trends continue as in year’s past with growth in video distribution, DTH, [high definition] and other related segments accounting for the majority of new capacity demand are the key trends for the coming year," he says.

Consolidation

Pacome Revillon, managing director, EuroConsult, believes there will be very little consolidation taking place in the FSS sector, although one or two regional operators could be up for grabs. "The main driver that could push major players to look for acquisitions is the strong growth of regional operators, that captured 37 percent of FSS revenue growth last year, while their market share stood at 31 percent. However, given their current financial positions, the most active operators would likely be SES and Eutelsat. In terms of opportunities, I am unsure whether consolidation would be driven more by regional priorities or more by the availability of target companies. Currently, only a few regional operators, considering their shareholding structure, would be potential targets."

Launch Industry Revenues

"There has been a recent spate of failures, which contributes to the nervousness of various players from satellite operators to insurance underwriters. What is encouraging in this regard is the shorter recovery period following a launch failure than had been the case in the past." — Mechanick, White & Case LLP

Revillon also believes a new category of FSS operator could develop over the next few years. "A new category of middle-sized operators is expected to appear, with at least one major operator per region, which should present a size of five to 10 satellites. For these operators, reaching a critical size to both generate growth, secure their positions in their regional markets and increase their bargaining power against suppliers potentially appears as a strong requirement."

In terms of the prospects for new, more regionally based FSS operators, Mechanick says, "In general, the prospects for the new operators should be quite favorable, as they tend to target specific markets with particularized demand requirements. With respect to regional consolidation, there are certainly some regulatory difficulties that can retard regional consolidation to an extent, including residual resistance to consolidation in the case of so-called national flag satellite operators, but the economic logic of consolidation will over time override the effect of those difficulties."

Satellite Manufacturing

In terms of satellite manufacturing, Futron said that "although more satellites were launching in 2007 compared to 2006, satellite manufacturing revenues actually decreased" due to the increased number of micro satellites being launched. The report said 21 new GEO satellites were ordered in 2007, four fewer than in 2006. It was a better year for U.S. satellite manufacturers, which received more than 50 percent of global orders, up 10 percent compared to 2006. European satellite manufacturers gained 43 percent of the orders, slightly down compared to 2006.

The general trend for orders in recent years has been up, rebounding from the early part of the decade, says Marco Caceres, an analyst at the Teal Group. "I think it was somewhere in the mid-20s in terms of commercial satellite orders in 2007. It has been going up gradually over the past two to three years. Early in the decade it was at a low point, but the market is cyclical and a lot of commercial geostationary satellites were launched in the late part of the last decade. We expected there would be a down cycle at some point, early on this decade, because the telecoms industry cannot absorb so much capacity," he says. "Now, if certain technologies/applications, like broadband, had demanded growth the way we had hoped, we may not have seen a down cycle. The projections for the demands of broadband satellite were probably over ambitious."

Also, while the U.S. manufacturers improved their performance in 2007 compared to 2006, Caceres believes the global playing field has levelled in recent years. "I think there is probably a more level playing field than perhaps there was 10 years ago. The top satellite manufacturers were Boeing, Lockheed Martin and Loral, but I think over the past five to six years you have seen the Europeans such as Thales Alenia Space and Astrium bring technologies that are the equal to their U.S. counterparts. In many cases, they don’t need U.S. companies whether they are subcontractors or prime to help build their satellites."

World Revenues By Sector

A new category of middle-sized [FSS] operators is expected to appear, with at least one major operator per region, which should present a size of five to 10 satellites. — Revillon, EuroConsult

Launch Services

According to Futron, the launch services industry also was in good health in 2007, as global revenues increased 19 percent in 2007, which reversed a 10 percent decline from the previous year. "There were 68 worldwide orbital launches in 2007, 23 of which were commercially competed," says Maleter. "This compares with 66 total orbital launches in 2006, 21 of which were commercial. In 2004 and 2005, by contrast, only 54 and 55 orbital launches were staged, respectively — with only 15 and 18 commercial launches occurring, respectively, in those two years. So 2006 and 2007 marked a substantial improvement compared to the doldrums of 2004 and 2005. Launch tempos in 2008 are likely to remain fairly consistent with 2007 numbers. As of August 15, 39 orbital launches have taken place worldwide so far in 2008, 15 of them commercial."

"A number of variables" could affect launch tempos in 2009, says Maleter. "The new Orbcomm and Globalstar constellations will be closer to launch, though they may not actually launch until the following year or later. Suborbital space tourism plans will be closer to fruition. The space shuttle will be closer to retirement. A market-changing low cost launcher, such as SpaceX’s Falcon 1, may achieve operability, and new launch vehicles that have debuted this year, such as the Land Launch Zenit 3SLB and the Soyuz 2, may also alter the market landscape," she says. "It is too early to know how these variables, along with changing global economic conditions, will affect the launch landscape. That said, at this point there is nothing to suggest that launch tempos in 2009 will decrease from 2007 and 2008 rates. It is more likely that the number of launches in 2009 would remain steady or increase slightly."

Caceres believes the launch service industry will continue to exhibit strong growth over the next couple of years. "I would expect that to increase over the next two years, but I don’t think it will be a radical increase. There is a lot happening worldwide to suggest there would be an up cycle in terms of launch services. There continues to be demand for commercial communications satellites, so that will mean more business. There are a lot of replenishment satellites that need to be launched for mobile communication satellite systems. A fair number of smaller launch vehicles will be able to get some business that they have not been getting in the last few years," he says.

Mechanick also believes the launch services market is perhaps more resilient than it was before. "The launch industry has always experienced a degree of cyclicality in terms of launch successes and failures," he says. "There has been a recent spate of failures, which contributes to the nervousness of various players from satellite operators to insurance underwriters. What is encouraging in this regard is the shorter recovery period following a launch failure than had been the case in the past."

Satellite Manufacturing Revenues

Military

The military satellite market will be difficult to predict. "In general, the U.S. military continues to explore an Operationally Responsive Space (ORS) strategy, which involves more plug-and-play modular satellite architectures and rapidly replaceable satellite constellations assisted by rapid and flexible launch deployment," says Maleter. "2008 may see a significant military order assuming the prime contract for the Transformation Communications Satellite system is announced in the late-2008/early-2008 time frame, as is now expected."

Caceres believes the military market will remain strong over the next few years. "There is strong demand in this market. You have more countries worldwide that are dedicating more money for their national space programs, and usually that means for money for military satellites," he says. "The United States obviously launches more military satellites than anywhere else, maybe except for Russia, but we expect that will significantly increase over the next five years, as there have been a lot of satellite programs that have been delayed because of technical problems and cost over runs."

Convergence

With revenues increasing across the industry and more growth opportunities in market segments such as broadband, mobile TV, military, government, it is a good time to be a satellite player. With demand for information seemingly insatiable, satellite players are well positioned to take advantage of the convergence taking place in the media and telecoms industries. "The traditional silos of satellite-delivery (e.g. DTH) and terrestrial-delivery (e.g. cable/telephony line) of television content are breaking down," says French. "In the near future (and it is already happening now), a company will provide a pay-television service and use whatever mix of delivery mechanisms is most suitable to maximize their subscriber base. For the subscriber, the key value is the services and options that can be delivered inside the home (channel options, HD options, telephony options, VOD options, DVR options, broadband options, iTV options) and how those services get to the home of the subscriber are irrelevant to the subscriber," he says.

"Technological convergence and operator diversification actually go hand-in-hand, which is why you are seeing the mixing and matching of infrastructure platforms that are starting to take place today," says Mechanick.

Complacency

There is little doubt that the satellite industry has had some positive years recently with revenues going up throughout multiple segments. Also, with new opportunities in terms of markets, both in terms of applications and geographically, there is reason to be optimistic over the next few years. However, with more competition between infrastructures than ever before, the satellite industry certainly cannot afford to get complacent.

"I firmly believe that the satellite players are well poised to respond to competitive threats in the broadband, telecoms and broadcast arenas," says Mechanick. "I think the biggest challenge may actually be complacency. While the industry appears to be on an upward trajectory right now, new challenges abound, and the key to success is through continued innovation and creativity. Don’t rest on your laurels and don’t believe all your press clippings."