Best and worst of times in satellite industry

During 1999, some of the communications industry's biggest success stories and most glaring failures came from the satellite sector, giving investors and executives reason to both cheer and jeer space-born technologies. The mixed results have cast a shadow of uncertainty over several proposed satellite phone and data services, which will launch over the next several years.

Satellite television service providers, such as DirecTV and EchoStar Communications, made significant inroads with consumers in 1999. Thanks to new legislation, the companies are allowed to deliver local TV channels, which is expected to boost their popularity.

Analysts have said the Direct Broadcast Satellite (DBS) industry is likely to have a record-setting year, adding roughly 2.5 million new customers--more than in any previous year.

EchoStar's shares posted huge gains on Wall Street, where few stocks, aside from Qualcomm, have matched the company's nearly 700 percent year-to-date rise.

In addition, America Online, the world's largest Internet service provider, invested $1.5 billion in Hughes Electronics in June, a move some observers said went a long way toward validating satellite technologies in the marketplace.

In stark contrast, however, were the mobile satellite phone concerns--such as Iridium and ICO Global Communications--which had a tough year marred by tepid demand for their bulky phones and costly services. This led to slumping stock prices and executive resignations, culminating with the companies seeking bankruptcy protections.

Several launch failures and other technical problems also added to the industry's woes. Industry group leaders said the cyclical satellite manufacturing business is on the decline after a rash of large orders in recent years.

"It's been a mixed bag for the industry this year," said Clayton Mowry, executive director of the Satellite Industry Association, a U.S. commercial satellite trade group. "We've had great success for the direct-to-home services. They have had record numbers of subscribers, the analyst ratings are high and the subscriber acquisition numbers look solid.

"The downside is [that] the mobile satellite services, with the bankruptcies of Iridium and ICO Global, hurt the industry," he said.

Despite 1999's mixed blessings, dozens of companies are rushing headlong into 2000 with plans to deliver high-speed Internet access, mobile phone services and digital car audio, all using satellite technologies.

Among the new entrants are Globalstar Telecommunications, a satellite-based mobile phone service provider that recently began offering limited commercial service. Also in the mix are a handful of data services such as Teledesic, SkyBridge and Spaceway, which have extraterrestrial plans to beam the Internet down to Earth.

In addition, several companies, such as SkyCache, iBeam Broadcasting and Edgix, are using satellites to distribute Internet content and streaming media.

But many analysts said that satellite technologies will have the most success serving only niche markets, causing some consternation among executives and investors who are betting billions on upstart satellite-related companies trying to serve big business and mass-market consumers.

Even as companies scramble to design and deploy satellite-based data services, many analysts believe the widespread adoption of digital subscriber lines (DSL), cable modems and other land-based alternatives will hamper the growth of satellite data services.

"I think satellite in general in developed nations will begin losing some ground because we're having better land-line alternatives and more of them," said Lisa Pierce, director of global telecommunications services at Giga Information Group. "Where satellite has a place is in underdeveloped countries or for the global roamer."

Other analysts agreed.

"The Teledesics and SkyBridges of the world are going to have a tough time competing in the U.S. consumer market because the terrestrial competition will be too strong by then," said Zia Daniell Wigder, director of bandwidth and access strategies for Jupiter Communications, a market research firm.

Analysts expect that the satellite industry, long dominated by a few major former defense contractors, will face several hurdles in the next decade.

Despite their successes this year, challenges lay ahead for the DBS operators. Foremost among these will be dealing with "churn management," or the ability to retain customers and avoid turnover, said Bruce Leichtman, a satellite industry analyst at market research firm The Yankee Group.

And until costs for mobile satellite phone services fall and companies can improve their marketing acumen, many analysts question their long-term viability.

Although the potential market for satellite services is huge--Dataquest predicts that more than 10 million people will use a satellite phone by 2003, for example--the industry's spotty track record has left some analysts wondering which of the satellite industry's dual personalities will emerge in the new millennium.

Still, there are high hopes in other sectors of the satellite industry, namely in new satellite car audio systems, expected in late 2000 and 2001.

Sirius Satellite Radio, with support from Ford Motor, and XM Satellite Radio, which counts General Motors as an investor, are developing coast-to-coast digital music systems that will deliver as many as 100 channels of commercial-free music, talk shows, and news and information to commuters and long-haul truckers nationwide.

At $10 per month, industry experts expect millions of Americans to latch onto the satellite radio services, as new cars begin including the systems and as stereo makers such as Alpine, Clarion and Panasonic offer new after-market satellite receivers.

"[Satellite radio] will be the fastest-selling consumer product of all time. It's going to be huge," Leichtman said. "This has very widespread appeal, and people get it immediately. They understand what it is."