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Peering Around The Curtain
What surprises does 2009 hold for the space industry?
by Peggy Slye, Division Director, Futron

A year ago the space industry’s near and mid-term future looked extremely bright, with annual industry studies happily validating individual organization’s reports of increased revenue, improved sales, strong revenue growth and enhanced profitability, all buoyed by several years of consistently increasing global demand for satellite based services. Through the first half of 2008, strategic financial transactions continued to close, albeit at a somewhat slower pace than in previous years. Globally, government space programs maintained focus on expanding their military and civil projects. By all the signs and leading indicators, the pundits agreed that, although some overdue government policy and commercial sector adjustments were certainly wellwarranted, there was no need to look for clouds on the horizon. And there was certainly no reason to anticipate an interruption in the industry growth trends that had been solidly in place since 2003.

A few months have considerably altered that rosy perception. The key question for the new year used to be “will there be any change in 2009”. Now the question is “how much, and what kind of change will 2009 bring”?

The global space industry will most certainly be affected by the deepening worldwide credit crisis and will also react, although probably on a somewhat more delayed basis, to the related decline in consumer spending. In 2009, these dual issues are likely to start constraining the ability of commercial companies to invest in new products and to rejuvenate or expand their fleets. These constraints will take two distinct forms:
the reduced availability of commercial credit which may not return to previous levels for many months or, in a worst case scenario, not for several years
2) significant tightening of credit terms.

The second constraint, though less immediately visible, makes it increasingly difficult to construct an attractive business plan for high dollar satellite and network investments that entail some degree of technical risk and which require several years for realization of the projected return on investment.

As global economic concerns continue to spread, consumers withdraw from investing as well as their spending on discretionary items. The strong demand for more and better products and services, which has fueled steady industry-wide growth, will contract and future planning projections will be curtailed accordingly. In previous economic downturns, government, especially military, and commercial space outturns have operated in opposite business cycles, with contractions in one arena being offset or even outstripped by expansions in the other. As a result, although all elements of the global space industry have been subject to challenging market conditions periodically in the past, there have also been attractive new and different opportunities, which emerged in parallel during the same time as some traditional markets were declining. Agile commercial companies and perceptive government agencies have prospered by being very flexible and adapting to these evolving market conditions. Tthose who adapted most readily to the changing market enjoyed the best eventual positions.

Unfortunately, in 2009, with ongoing requirements for huge, unforeseen investments in the global financial infrastructure taking top priority for most governments, it is highly unlikely that any major new programs or expansion opportunities will develop to offset this projected slowdown for the global space industry. Although industry reports for Q3 and Q4 2008 may remain reasonably strong, reflecting the carry-forward impact of previously robust market conditions, the global economic circumstances will undoubtedly color global industry results beginning in 2009, and, depending on the depth and severity of the contraction, possibly for several years beyond. As overall commercial satellite fleet utilization levels are now at historically high levels, especially in the highest demand regions, a delay in operators’ fleet replacement and expansion plans will also create potentially difficult operating constraints for customers, particularly for the most sensitive government and military clients.

Just as pressure creates remarkable gems in nature, near term global financial pressures could also produce some important global, industry-wide benefits. The need for increased productivity and the desire for increasing access to significant space-based programs may lead to increased global collaboration and to the creation of more public-private partnerships. The early definition and development of badly needed frameworks for global cooperation, in key areas of space activity such as remote sensing, earth observation, systematic space traffic control, as well as common standards for regulating and ensuring safety in the emerging fields of human commercial spaceflight and space transportation, also require cooperative agreements rather than solo projects.

In the United States, the transition of leadership to the Obama administration will create some unique operational challenges for U.S. space-related agencies and U.S. based space programs. The obvious timing issues associated with selecting, installing, and training new leaders cannot be minimized. Some key space decisions really won’t wait! In its list of top issues for the new administration, the GAO named the Shuttle Transition as a key decision requiring attention in the very near term.

In addition, industry leaders and experts are unanimous in their view that the time for reforming the ITAR (International Traffic in Arms Regulations), the U.S. export control regime that has unduly burdened the U.S. space industry as well as those who would conduct business with U.S. industry partners for years is long overdue. Although this issue is one that has been discussed repeatedly, it is a likely target for actual reform and action next year because it impacts and could improve the health of the U.S. economic and industrial base.

Another likely action that will impact the space industry would be any potential changes to U.S. foreign policy and military presence in Iraq and Afghanistan. An accelerated drawdown of troops in the field, for example, is likely to be accompanied by a related increase in UAV activity in the region to ensure the safety of forces remaining on the ground and to assist the local government with security measures. Implementing this type of transition would increase demand for commercial satellite capacity in that region — capacity already in extremely short supply.

Beyond the change of leadership, the economy, NASA’s timing for key program transitions and evolving military strategy, the twin issues of space policy and space governance also offer the potential for driving key changes in 2009. The reports of two key U.S. government committees — the National Security Space Independent Assessment Panel (Allard Commission) and the House Intelligence Committee (Reyes Report) — recommend a comprehensive governance overhaul for U.S. government-driven space programs and related agencies. This further indicates a unified decision-making and advisory organization for all U.S. national space matters (such as the previous National Space Council) should be established at the highest level of government. If implemented, this entity would provide a forum for developing a unified and updated national Space Policy as well as the related Space Strategy needed for implementing a unified national vision for space effectively. Recommendations such as this, which normally attract significant resistance during prosperous times, are often welcomed as positive potential changes when increased productivity and efficiency are viewed as vital for all government activities.

At the same time, regulatory issues loom large for the satellite industry as well. This year’s ITU debates and decision on C-band spectrum allocation and use, coupled with the FCC’s recent decisions on White Space initiatives, reveal a steady and increasingly challenging global debate over the best application for scarce space resources. Simultaneously, satellite’s role in promising new markets may well be challenged by new technologies for fiber and terrestrial wireless systems.

All of these uncertainties raise the obvious question of whether 2009 will see more consolidations, mergers, and acquisitions. At recent industry conferences, financial analysts and leading experts offered opinions on the likelihood of near term investments in the space industry. These opinions ranged from “little or no activity (especially major activity) in the next few months” to the almost dire “there will be almost no activity for the next few years”. However, industry experience shows that financial pressures also create impetus for consolidations from a different perspective. With slower growth probable for the next few years, and far more challenging operating conditions expected throughout the industry, companies whose business plans relied heavily on increasing growth and/or improved operating margins will try to seek partnerships, alliances, and consolidations to avoid major business reversals, particularly in market segments that are already overcrowded or tight with intense current competition.

Adverse economic and market conditions also offer important opportunities for growth by improving productivity and enhancing business outcomes for customers and end-users, something that the global space industry knows how to do extremely well. The ‘telecom bust’ of 2001 found many commercial space industry members exposed to a rapidly collapsing market. The industry discovered multiple ways to become more efficient and to provide services for customers that substituted technology for more costly human effort and improved service and productivity, while reducing costs for end users.

The difficult economic cycle and global correction also stimulated the entire space and telecom industry to develop critical new skills. These included...
  • improved cost management techniques
  • differentiatedstrategic staffing approaches
  • better inventory and supply chain practices
  • a systematic methodology for managing yield and network optimization
  • more realistic business models

Applying such business insights and expanded skill sets in the current environment will allow the more agile and perceptive space industry players to create meaningful and sustainable growth, even while the market levels out somewhat in the near term and reorganizes over an extended period of time.

The new year promises to be eventful and exciting for the space industry. Although 2009 shapes up in stark contrast to the year that might have been in earlier projections, the prospect for major industry-wide changes with lasting impacts and eventual benefits has never been greater. The only requirements for success are being open to change as a means for achieving necessary transformation; and flexibility in identifying and mining the best new opportunities! This industry is adventurous and bold and should be well positioned to thrive in this newly challenging global change cycle as well as to provide a leadership example for other industries also facing multiple challenges. The old maxim truly applies to our industry today — whether we believe we can — or we believe we can’t — we will be right!

About the author
Peggy Slye has more than 24 years experience in the global telecommunications industry, and is currently Director of the Space & Telecommunications Division at Futron Corporation, where she leads a team of engineers, economists, regulatory / policy specialists and analysts in meeting the needs of a very diverse base of global commercial and government space and telecommunications clients. Prior to Futron, Ms. Slye served in a wide range of management positions at Intelsat, including sales, marketing and customer service.