A satellite industry falling to earth?

Indeed, the Zenit 2 mishap is the latest in a series of snafus that have slashed satellite stock prices, sapped investors' confidence, and slowed the arrival of several hotly anticipated satellite communications services.

The trouble began last May when Galaxy IV, a satellite built by Hughes Space and Communications for PanAmSat Corp., spun out of control and disrupted pager service to millions of Americans. Since then, PanAmSat, satellite TV services DirecTV and Echostar, and Iridium LLC, a Motorola-backed satellite communications service, have reported glitches with several other satellites, and a Boeing Co. Delta III rocket carrying another PanAmSat satellite exploded. The wave of bad news has caused some short-term backers to flee the business, while long-term players have reined-in their euphoria about when, and indeed if, satellites will revolutionize global communications.

Indeed, the questions that Bob Egan, research director for wireless issues at the Gartner Group, has about Globalstar in the wake of Wednesday's Zenit crash apply to the satellite industry as a whole: "Are they going to stay on time? Are they going to become viable? Are they going to attract investment?"

Short-term stock tumble
Short-term fallout from the Zenit disaster is easy to quantify. Valued at roughly $15 million a piece, the 12 satellites cost Globalstar $180 million. (Because the launch was fully insured, however, Globalstar should recover those losses.)

On Wall Street - where the Dow tumbled 249 and Nasdaq 39 in a broad selloff - Globalstar shares fell $7.13 to a two-year low of $10.75. Shares of Loral Space and Communications, which owns 42 percent of Globalstar, sunk $5.06 to $13 - a shade above the $12 price of Loral's initial public offering in April 1996.

George Soros, who paid $245 million for 8.4 million shares of Globalstar stock in early July, saw the value of his 4 percent stake in the company slip to $90 million.

Expect delays in satellite communications
Harder to quantify is the long-term harm of delaying the commercial introduction of Globalstar's satellite-based, wireless communications services. Originally expected to debut in early 1999, Globalstar services are now more likely to rollout at the end of next year, analysts say. Consequently, Iridium, the Motorola-backed satellite communications venture that yesterday pushed its service inauguration back from Sept. 23 to Nov. 1, will get a valuable head start.

"This will give Iridium essentially 12 months of being in the marketplace alone," says Jim Linnehan of Nationsbanc Montgomery Securities.

Yet Linnehan and others say the delay will not cripple Globalstar's ability to ultimately provide worldwide wireless phone, paging and data services that prove popular with consumers.

"The business case is still strong. It's still a strong value proposition for the consumer," says Linnehan.

Unrealistic expectations
Mark Oderman, a satellite industry consultant with CSP Associates in Cambridge, Mass., agrees. He believes Globalstar and Loral were unfairly pummeled on Thursday because investors have had unrealistic expectations about the potential and pitfalls of the satellite business. Beginning in 1996, Oderman says, the satellite sector rode the same wave of euphoria that drove scores of telecommunications and Internet stocks to record highs. That euphoria began to dissipate when Galaxy IV blipped off the radar.

"Just as people gave [satellite stocks] a little more upside than was warranted up through May, they are now being hammered more than they should be," Oderman says.

Still, there are several reasons for concern beyond the disruption to Globalstar's business plan.

First is the increasingly tight market for capital to fund satellite ventures, particularly ventures that are still several years away from generating positive cash flow.

"There was a 12 to 24 month bull market for satellite equity and high-yield deals, and a lot of people forgot about the risks involved in these projects," says Linnehan. "The high-yield deals are going to get harder and harder to carry through." ICO Global Communications, a satellite-based competitor to Globalstar and Iridium, LLC, had hoped to go public in July at $18 or $19 a share, but had to settle for an IPO price of $12 a share. ICO shares closed Thursday at $8.88.

Funding roadblocks
Two other satellite projects currently out shopping for financing, Ellipso and Constellation Communications, are likely to run into similar funding roadblocks, says CSP Associates' Oderman.

Rising insurance premiums are also a worry. The insurance industry has paid out roughly $1.25 billion in claims stemming from satellite mishaps in 1998, while taking in premiums of less than $1 billion, says Alden Richards, president of insurer Space Machine Advisors, Inc. in Greenwich, Conn. That imbalance is going to put upward pressure on premiums.

Wednesday's Zenit crash will have technical as well as financial fallout for Sea Launch, a joint project of Boeing Co. and partners from Russia, Norway, and Ukraine.

Sea Launch plans to provide low-cost commercial satellite launches from a floating launch platform in the Pacific Ocean positioned at the equator, where rockets can reach their orbital positions quickly and efficiently. Sea Launch has planned to use Zenit rockets. Hans Ten Cate, a program manager with satellite consulting firm Futron Corp., says Sea Launch has 18 Zenit launches "waiting in the aisles" - 10 for Hughes Electronics, another 5 for Loral.

A Boeing spokesman said it is "too early to tell" if the Zenit crash will force Sea Launch to postpone its first launch, which is currently slated for the first quarter of 1999. Sea Launch is also facing regulatory delays; the State Department has temporarily suspended Sea Launch's operations while it reviews whether Boeing has made improper technology transfers to its Ukranian partners.

Yet beyond all of the current ill tidings, most analysts agree that the long-term outlook for Globalstar and the rest of the satellite communications business remains bright.

"The evolution of satellite communications as an extension of terrestrial global networks is going to continue. It's not a question of if, it's a question of when," says Egan of the Gartner Group. "The visionary investors are in it for the long haul."