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Pentagon Boosts Telecommunications Business Into Higher Orbit

April 2004
By Henry S. Kenyon

Increased spending bolsters lagging market.

After a period of declining revenues, the commercial satellite communications industry is profiting from growing U.S. government and military business. The increased tempo and wide geographic scope of recent U.S. and coalition military activities have caused a surge in commercial leased satellite use. Industry experts predict this additional demand for video, voice and data services to contribute steadily to the market’s growth for the next seven to eight years.

Although the commercial satellite industry remains highly profitable, companies suffered a series of business slumps from the economic downturn at the end of the 1990s. A combination of more competition from an oversaturated terrestrial landline market and technological advances such as data compression cut into satellite operators’ revenues. However, while these circumstances caused growth to falter, the burgeoning government sector demand for services has picked up the slack caused by economic and market malaise.

The growth of military and government business stands out against what had been a stagnant market for commercial services, explains Karim Nour, a research analyst with Frost and Sullivan in Palo Alto, California. He notes that, traditionally, up to 80 percent of satellite companies’ business came from video transmission leases to major broadcasting networks such as ABC, NBC and CBS. The remaining 20 percent of providers’ profits came mostly from telephony services and corporate customers with multiple sites requiring connectivity for private computer and communications networks.

The areas hardest hit by technological and economic forces were in application services such as satellite telephony and video. Newer, more efficient satellites that feature compression technology require less bandwidth for video transmissions, which reduces the demand and cuts into profits, Nour explains. The continuing glut of commercial and undersea fiber optic networks (SIGNAL, March 2003, page 37) also reduced the demand for satellite-based services, while recent economic slumps meant less money was being spent on telecommunications as a whole, he says.

This downturn in business was coupled with satellite transponder overcapacity. The industry suffered from decisions made during the telecommunications boom of the late 1990s. Nour notes that, because it takes two to four years between deciding to add another satellite to a constellation and launching the satellite, by the time the new satellites were on station, the projected demand did not exist.

But increased military spending over the past two and a half years has improved the market’s prospects for continued growth, Nour observes. Although the U.S. government relies on satellite communications for its consular overseas operations, it is the U.S. Defense Department that has primarily contributed to this growth because of the commitment of U.S. troops in Afghanistan and Iraq.

This growing use also reflects a fundamental shift in Pentagon strategy, Nour says. During the Cold War, U.S. troops were concentrated in Europe, South Korea and Japan.  Each of these regions could be covered by a single dedicated spacecraft.  But the need for satellite communications services has increased with forces being deployed across isolated stretches of the Middle East and Central Asia. “What that means is commercial capacity now becomes more attractive in a sense because it offers more flexibility,” he says.

Although the military has its own satellite communications networks, commercial leasing increases capacity and global coverage. For example, a company such as Intelsat operates some 25 satellites in geosynchronous orbit (see page 27). This broad coverage provides additional communications capability for widely dispersed forces that are constantly on the move. Nour maintains that this is more attractive to the Pentagon than relying on individual satellites covering specific regions or countries.

Leasing presents some advantages over owning and launching a satellite. A typical military communications satellite costs roughly $200 million to build and launch, followed by operational expenses. An average lease agreement for a transponder on a commercial spacecraft costs approximately $2 million. A variety of long-term and short-term leasing contracts also is available.

Despite the cost advantages of leasing, Nour adds that the military will never completely give up its own fleet of dedicated spacecraft. For maximum flexibility, the Defense Department will try to maintain a balance between its own constellations and commercial carriers. “It’s never going to be just one or the other. The military is always going to want to have its own satellites. Because they control [the military spacecraft], they don’t have to worry as much,” he explains.

During operation Iraqi Freedom, the U.S. government leased space from Eutelsat, a Paris-based satellite operator, despite the tense relations between the United States and France. Nour notes that, although the French are reliable providers, U.S. operators questioned whether the U.S. military could depend on some foreign satellite operators.

Because of the extensive cryptography used by the U.S. military, Nour says the concern with foreign operators is not about data security. Almost all transmissions sent via commercial satellites have some encryption. The primary threat lies in a national operator cutting off service during a crisis. “It’s not a radio frequency question but a national security question. It’s not so much that you’re necessarily afraid of losing the space asset, but it puts you under the thumb of the operating government to some extent,” he says.

Increased levels of government spending will continue for at least the next two to three years, Nour predicts. He notes that given the global situation and the military’s increased clout, even a change of administration would not drastically affect defense spending. Defense Department telecommunications spending may not be as strong in the next seven or eight years, but Nour believes that it will still be stronger than it was in the three or four years prior to 2004. This increased communications spending can be attributed to the Pentagon’s mobility doctrine, he says.

The coming years will see a need for more services—especially video transmission—from military customers. Demand for voice and data transmissions from consulates and embassies will be steady, but Nour expects an ongoing need for uplink services for military units operating in remote areas.

Ground infrastructure such as earth stations also will remain in high demand. Manufacturers of satellite ground equipment such as Harris and ViaSat will continue to profit from meeting the military’s requirement for earth stations.

One area that is not likely to see additional growth is commercial satellite communications for low earth orbit. Although the government helped to save the Iridium constellation, Nour doubts that the military market could ever make the firm profitable.

Nour is quick to note that Iridium has a dedicated government customer base that is very happy with the service. He adds that Telstra, Australia’s national telecommunications company, is using the constellation to provide services to rural populations. But even though it is easier to mount satellite dishes or to distribute satellite telephones than to install copper or fiber optic lines, these uses will not justify the cost of launching another constellation similar to Iridium.

Although systems such as Iridium, Teledesic and Alcatel’s Skybridge were brilliant engineering ideas, in the long run they were not profitable, Nour explains. “You really have to be careful with any kind of space business for two reasons. First, it’s really expensive—you cannot recall the satellites once they’re up there. And second, it’s very difficult to get funding for any of these projects,” he says.

Funding is important because commercial lenders need collateral, which is difficult if an expected service market fails to materialize once a constellation is in orbit. Equity services also are wary of providing funds as space programs usually take many years to become profitable. Because of this dearth of seed money, it is often left up to the satellite operators and manufacturers to fund new spacecraft and services.

Despite the interest and money that were lavished on low-earth-orbit systems, a major shift away from geosynchronous satellite services never occurred, Nour maintains. The satellite operators are very conservative companies that are averse to risk. Because of this culture and the industry’s roots in telecommunications, satellite companies continue to be very profitable organizations, even with the economic slowdown following the collapse of the dot-com bubble.

With the exception of telephony, commercial sector growth continues to rebound for satellite services. Nour is unsure whether demand will be as high as it was in the late 1990s, but he predicts that it will be high. “It’s very closely tied to the economy, so it’s going to start to come back,” he says.

Nour also expects the industry to undergo a round of consolidation among satellite operators. He believes this will continue for several years and will make operations more efficient. The nature of these companies’ businesses is very similar, making mergers an attractive means to eliminate the large number of redundancies in the industry, he says.