The Scramble for Profits Aloft

By Christopher Byron

Communicating by satellite sparks a spirited race to space

When the Columbia space shuttle rises from its Kennedy Space Center launch pad this week, some anxious businessmen in the U.S. and Canada will be glued to their television sets, and not just to marvel as the reusable spacecraft's twin Thiokol rockets thrust it up and over the blue Atlantic. The launch, fifth in the Columbia series, will be the first in which the shuttle begins earning money from private, corporate customers for the National Aeronautics and Space Administration.

Aboard the craft will be two satellites, each weighing about 1,400 lbs., built by Hughes Aircraft Co. and owned by Telesat Canada, a partly public, partly private Canadian firm, and Satellite Business Systems, formed as a joint venture by IBM, Aetna Life & Casualty Co. and Comsat. Each of the two companies will pay NASA about $9 million to launch its "bird." Once in orbit, the satellites will form links in what is rapidly be coming a vast and complex corporate telecommunications highway 22,300 miles above the surface of the earth.

Along this highway already flows a torrent of information, from stock and bond quotes for banks and brokerage houses, to telephone conversations, to sitcoms and first-run movies for networks and cable TV companies. Telesat's new Anik C3 will speed the flood along by strengthening Canadian telephone service, as well as by bringing addi tional pay television programming to cable operators and, through them, to the homes of cable TV subscribers throughout Canada. Meanwhile, SBS's satellite, SBS-3, will be targeted toward the U.S. market, offering long-distance direct-dial service to consumers at rates lower than AT&T's.

In total as much as 10% of all long-distance telecommunications and data-relay traffic in the U.S already moves via satellite at one stage or another of its journey. That in turn is generating revenues that last year exceeded $11 billion, and telecommunications industry experts now estimate that technologically advanced applications, like relaying computer data, could keep growing at a 25% annual rate through the remainder of the decade. Says Al Parker, vice president for marketing at Ford Aerospace & Communications Corp., which, along with Hughes Aircraft and RCA Corp., is a leading manufacturer and marketer of satellites and telecommunications systems: "This is already a large business, and it is going to get much larger. How big is anybody's guess."

The reason for the industry's bright business outlook is, in a word, economy. A typical telecommunications satellite can cost up to $75 million to manufacture, launch and monitor while in orbit above the earth. But that expense is small compared with the burdens involved in laying thousands of miles of cable across a continent or even an ocean.

Though satellite transmissions are being used for everything from clearing checks to providing televised conferences of company executives in distant cities, the industry's hottest prospective market is for direct broadcast by satellite. D.B.S., as it is called, will enable entertainment-programming companies to beam television shows and movies via satellite directly to homes equipped with rooftop "dish" antennas, thereby cutting out cable companies altogether. Prices for the devices currently begin at around $2,000, but a number of companies are at work on family-size units that will retail for less than half that amount.

One Comsat subsidiary, Satellite Television Corp., has already invested an estimated $500 million in developing a direct broadcast system, and earlier this year was granted a license by the Federal Communications Commission to put it into operation, probably in 1986. Last week the commission granted D.B.S. approvals to a number of other eager firms, including CBS Inc., Graphic Scanning Corp., RCA, Western Union and Video Satellite Systems Inc.

Any outfit capable of beating its competitors into such a wide-open market would obviously gain an advantage, and one firm, General Instrument Corp. (fiscal 1982 sales: $957 million), is trying hard to be first. The company has entered into a partnership with United Satellite Television, an upstart venture headed by Francesco Galesi, a New York City businessman with ambitious plans to launch a D.B.S. operation in the northeastern U.S. next July. The group's objective is to rent dishes manufactured by General Instrument for $35 a month, which will also provide customers five channels of news and entertainment programming.

Companies offering satellite services must compete for so-called transponder access rights from the satellite companies themselves. Aboard each of the 19 commercial satellites currently in U.S. domestic service are anywhere from ten to 24 of the communications devices, each acting as a kind of sophisticated relay station that captures messages beamed up from, say, New York or Atlanta, then bounces them back to to such destinations as Los Angeles and perhaps Honolulu.

Fighting over transponder access rights has long since reached virtual Star Wars proportions in the industry, and the surging demand for the devices has already spawned middlemen brokers eager to cash in on the profit potential of trading the rights. Some firms have actually gone into business in order to lock up transponders before they are launched, a practice encouraged by FCC rules requiring satellite owners to offer transponders to customers at a fixed price on a first-come, first-served basis.

In an effort to keep more of the market value of the transponders to itself, RCA Corp., a major satellite producer, last November auctioned off transponder leases at Sotheby Parke Bernet in New York. The seven transponders that were put on the block, launched aboard Satcom IV two months later, brought from $10.7 million to $14.4 million in the bidding, and would have immediately netted RCA $90 million had not the FCC later ruled the auction invalid on the grounds that it undermined the intent of the tariff regulations. (RCA was, however, eventually allowed to offer each of the leases at the average price paid at the auction.)

Scrapping over transponders is especially intense among cable television-programming companies, which see the devices as a way to cut costs and gain on the competition. For them, by far the most popular and sought-after transponders are the 24 aboard RCA's Satcom III-R, launched into orbit last November. They can carry two dozen different channels of cable TV programming. The satellite's customers include the pay TV channels Showtime and Home Box Office as well as Warner Amex and Turner Broadcasting System.

Satcom III-R carries so many big programs that practically every cable operator in the country has a dish to pick up its signals. As a result, says John Tagliaferro, president of Hughes Televison Network, "if you get access to one of those transponders, you have reached 90% of the cable homes in the country." Tagliaferro's company, a subsidiary of Gulf & Western, is not on Satcom III-R, but he wishes it were. The company rents four transponders on several Western Union Westar satellites and sells time on them to customers seeking temporary services, primarily for sporting events.

Originally, Satcom III-R transponders were rented by RCA to entertainment and programming companies for up to $1.5 million a year. But by July of 1981, four months before Satcom III-R was even launched, demand for space on the satellite had grown so hot that Landmark Communications Inc. of Norfolk, Va., which broadcasts round-the-clock weather forecasts, found itself having to pay a cool $10.5 million up front to acquire sublet rights on one of Satcom's transponders. The seller of the lease: Premier network, a failed joint venture of several Hollywood film studios.

The best way to get transponder prices down is to increase the supply of satellites. More are on the way. NASA is coming under competitive pressure for launching services from the eleven-nation European Space Agency's Ariane project, which is booked solid for launches beginning late next year and running through 1985. Meanwhile, a no-frills private-enterprise launching service, Space Services Inc., successfully tested a launch rocket last summer at Matagorda Island, Texas. The prototype rocket, dubbed Conestoga I, was built in part from spare NASA assemblies, including the motor from a solid-fuel Minuteman missile. The firm's owners now plan to go into commercial service in 1984, with monthly launches starting two years later. With space technology rapidly advancing and the competition for launches beginning to perk up, prices may start dropping out of orbit long before the satellites do. --By Christopher Byron. Reported by Jerry Hannifin/Washington and Stephen Koepp/New York

With reporting by Jerry Hannifin, Stephen Koepp

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