Chris Johnson, president, Boeing Satellite Systems. Credit: Boeing

PARIS — To paraphrase Warren Buffett, it’s when the tide goes out in the commercial geostationary-orbit satellite market that you find out who’s been swimming naked.

The market was good enough, for long enough, to make even military-focused companies turn their heads. Boeing and Lockheed Martin for years said they were retooling for a commercial market in which global fleet operators were expanding, national operators were going regional and one-nation systems were popping up everywhere.

That market now appears exhausted, and geostationary-focused satellite builders without a solid book of business in the  government/military markets of their home countries are, well, underdressed.

How far the geostationary market will fall before finding its equilibrium is anyone’s guess. Wide-beam direct-to-home satellites will continue to be ordered. GEO-orbit HTS satellites for broadband will, too. But the annual volume of open-competition bids will not make up for the lost demand.

What once was a vice — reliance on high-margin government work, said to compromise builders’ commercial agility — is now a virtue.

For Boeing, winning the billion-dollar contract for the first seven SES mPower medium-Earth-orbit HTS satellites signaled the company’s readiness to pivot in a market that is more unpredictable than ever.

Chris Johnson, president of Boeing Satellite Systems; and Bruce Chesley, senior director of strategy for Boeing Space and Missile Systems, assessed the new commercial satellite environment.

How do you see the immediate of the commercial GEO satellite market?

Johnson: Traditional GEO players have talked about how they’re still evaluating LEO, dabbling in it, taking little pieces here and there. But from my perspective as a manufacturer, our traditional strong customers that have been in GEO have taken a strong position that that’s still a place they want to be, and will need to be, to be successful.

So it won’t go to zero. But seeing SSL ready to throw in the towel is a remarkable statement on the market’s prospects.

Johnson: Loral has always been a formidable competitor to us, and also slightly adjacent from a market perspective. I’ve read about the decisions they’re making. But our overlap with where we competed with them was getting smaller and smaller.

In what way?

Johnson: Just where we were focused, and where we applied our technology into the marketplace. We’ve been investing in digital, and the flexibility Boeing’s been investing in and deploying to the marketplace, for a long time, has kind of been our calling card. But these weren’t necessarily where we entered competitions against SSL.

The technology we’re developing on mPower, and other technology we’re developing on government programs — and the synergy we get across there — is one way to see our way through a commercial market in turmoil.

Having a balance within our portfolio, with great companies like SES that see the value in the technology and enable us and with them to advance it, but then also taking investments from other customers, helps put us in a different position to offer various sets of capabilities.

But if you take away the GEO market, that’s a radical change in the business, even for Boeing with its diversified customer set.

Johnson: Certainly.

Let’s say 90% of the DTH capacity will be replaced. Add GEO-HTS broadband satellites, and let’s say that grows. The net will be lower total business in GEO. Is that the thesis?

Johnson: I think we’re in alignment about what the overall GEO market looks like for the next few years. It isn’t coming back to 20-25 satellites a year. SSL has been quoting more in the 10-12-15 range.

We’re still bullish in that we think we’ve got the right technology and solutions to satisfy a good portion of that market as it evolves. And we’re balanced with NGSO [non-geostationary], and specifically mPower, to help take away some of the sting.

Bruce Chesley, senior director of strategy, Boeing Space and Missile Systems. Credit: Boeing

Chesley: And the fact is we’re hiring in El Segundo right now, for our overall business, driven largely by some recent government wins. But that positions us well for the long run on commercial as well.

So a young engineer coming out of school is offered the possibility of moving back and forth between military, civil and commercial space systems?

Johnson: That’s the career track pretty much everyone at Boeing is taking. We see that as an advantage, not only from a factory perspective, but also from perspective of how to get the best and the brightest to work on these programs. It’s showing them things like mPower, and next-generation GEO, and all this government work we can’t talk about in this forum. It’s all really interesting work. Within our division we’ve got the Space Launch System, the Commercial Crew activity. There’s a lot.

Chesley: Also the International Space Station, the future of human space flight, that’s all part of career development that you could do if you’re coming aboard.

Johnson: At El Segundo specifically, having the ability to go back and forth between commercial, military and civil is definitely something we look for our employees to do.

Not so long ago, Boeing was saying it would raise its commercial profile to keep up with SSL.

Johnson: If you go back and trace the way the commercial market has gone over time, we’re in one of those dips again. We don’t think it’s a dip to the bottom, that there’s still a lot of opportunity out there to raise back up.

Your Horizon X venture fund puts small amounts of money into startups. If there is a big failure among the mega-constellations, how badly will that affect Horizon X investments?

Chesley: It feels like to me like the VC world has rushed into the space sector pretty heavily, more heavily than we’ve seen, and it’s a pretty broad interest. It’s not all going into satellite broadband. It’s remote sensing, smallsats and really specialized applications.

Johnson: Networking…

Chesley: Networking too. It’s not just LEO programs. I think the investors are a little bit more differentiated. I think they want to understand the business plan within that.

Certainly if one of these big constellations got deployed or partially deployed and then ceased to operate — yeah, that would be a bump in the market.  There’s a lot of things that could bump the market. Recession, interest rate increases could be a significant disruption.

Would you agree that the VCs are spreading their bets, unlike what the PE investors did 15 years ago, so that a single big failure won’t necessarily sour them on the entire sector?

Chesley: Yes, it’s really creating an ecosystem as opposed to kind of one particular large bet, I agree. That’s what’s happening this time around.

What’s the end game for Boeing with HorizonX: You bring back stuff you can use at Boeing, or there’s a transaction that occurs, or both?

Boeing’s HorizonX fund is an investor in optical communications startup Bridgesat. Credit: Bridgesat

Chesley: The idea of HorizonX is to place technology bets in areas that are potentially disruptive to our core markets and making sure we are paying attention to that. It’s not necessarily that it has to be a one-for one direct input into our programs, but with something like Bridgesat [a recent HorizonX investment] it’s easy to see where that could provide direct benefit to our programs and customers. It’s a good way for us to foster that ecosystem of innovation and technology and make sure we’re gaining access to some of the latest developments and keeping a vibrant technology base out there. Our interest is in a variety of advanced communications and applications, and Bridgesat kind of fits into that.

Is Boeing now on the board of Bridgesat?

Chesley: I don’t think we disclose that.

Given the market for replacement satellites and HTS in GEO, are you ready to say the GEO market is bottoming out this year?

Johnson: I’m not, personally. There’s a lot of uncertainty, and the freezing effect as people see what’s going to happen in the LEO market.

About that LEO market: Are you a believer in LEO broadband as a business?

Johnson: I think one or two will survive.

As a business over time, or just as a satellite construction project?

Johnson: It all depends on whether the rest of the ecosystem ready to go. And that’s not unique from a LEO perspective. We’ve seen that in the space industry a lot, where you have the space asset but you don’t have the ground terminals or you don’t have the network access or you don’t have the consumer end. I’ve personally witnessed that on commercial programs, government programs.

So, while it sounds unique to fly in LEO and to put thousands of satellites up, they’re not going to have unique challenges to being successful in the marketplace. I’m confident that the technology from a satellite perspective will be there, that the rockets that will be there. The real telling point will be all these other network, terminal, consumer go-to-market kinds of things that traditional systems have faced too. We saw some of that more recently on the Ka-band roll out.

The way those companies and those applications are able to deal with those challenges will be the key to whether they’re ultimately successful.

If you think one or two multibillion-dollar, global broadband-access systems will be in service, that must drive Boeing decisions on positioning itself in the future.

Johnson: Based on our investment and understanding of those businesses’ market, you really you need to find what market you’re going after. If it’s just the market that today is being addressed by satellites, it doesn’t make sense.

Plus schools and villages in Asia, Africa…

Johnson: We have customers today that we’re building satellites for, or have built satellites for, that have a very similar narrative — in GEO.

The kinds of things you just described don’t grow the pie enough to recover that capex. There’s a school of thought, and I believe part of it, that there are ways to actually grow the pie that would then enable those constellations to be successful. But the consumer or the business doesn’t care that it’s LEO or space at all, so it will need to find a way to grow the pie in a way that it’s just ubiquitous and going to work, just as easily as these phones now work when I travel overseas.

Chesley: That’s kind of an interesting wrinkle in all of this is. It kind of becomes a global utility if you have this ubiquitous network and I think of the regulatory piece, and the privacy concerns and the landing rights…

You think India and China are going to let them in?

Johnson: I wouldn’t bet against them, frankly.

Chesley: But the China, India, Russia landing rights issues is not a new thing.

Johnson: It’s all the same challenges, except probably even more under the spotlight when you have a big capex number and need to show a return for investors.

What’s your factory look like now?

Johnson: It’s pretty full.

Really? There’s Global IP, Sky Perfect JSat with Kacific, a couple of ViaSat-3 platforms…

Johnson: And the Horizons 3 satellite for Intelsat and JSat is at the launch base now. A lot of progress on the mPower constellation and its successful PDR. There’s a lot of dialog with not only traditional GEO operators but others on what fleet replenishment plans look like and what they really need in this changing business environment.

And your answer?

Johnson: We’re not ready to roll it out publicly, but you won’t be surprised to hear some of the themes: a little more standardization, pushing further from a digital perspective to be able to provide flexibility, and how can we build it faster such that it doesn’t take you five, six years plus launch to realize what that business model is in such a dynamic case?

Will an event like SSL, if it closes its Palo Alto plant, be enough to stabilize the demand in the GEO world by reducing the number of suppliers? You still got China.

Chesley: There are people coming in, that’s right.

Johnson: There are a number of formidable competitors. We think we’re well-positioned, because of the technology that we’re developing, not only for our commercial customers but you know, leveraging capabilities that have been developed for other customers as well. We’re going to take our fair share of the commercial GEO market.

But is the total pie big enough for the current supplier base minus SSL?

Johnson: That’s a tough question to answer, given what else is going on in the marketplace. We all have to size our operations to be efficient enough to hit the aggressive capex and price-points that the commercial operators need. If we as the industry aren’t able to adjust, or provide the technology that can get you to the right price-point, then the industry will struggle. But our intent — and it’s where we’re headed — to hit those aggressive price points.

SES and other operators have been talking about a standardized product to which  payload elements would be added for specific missions. Are operators ready to collaborate on bulk orders like this?

Johnson: It’s certainly a change in buying behavior. We have seen positive signs that the industry is ready to have discussions in that way.

Chesley: If you’ll forgive the airplane analogy — we make a few airplanes too at our company — a 737 for Ryan Air is not exactly the same as a 737 for Southwest Airlines. The key is to be able to provide that amount of customization without making the whole thing custom. How do we minimize the amount of customization that’s required that meets the business plan of each of the different operators? That’s the journey that we’re on.

The seven Boeing-built second-generation O3b satellites will have 30,000 shapeable, steerable spot beams, giving a total system throughput of 1 terabit per second from their 8,000-kilometer equatorial orbit, with throughput to expand, should demand require it, to multiple terabits per second with more satellites and gateway Earth stations. Credit: SES

Shall we bet on whether mPower will be ready for launch in 2021?

I’ll go with yes. What are we betting?

It’s an aggressive schedule isn’t it?

Johnson: No. I would not characterize it as aggressive.

Chesley: It’s a program that has development in it. The history of development programs in the satellite industry has success stories and some that aren’t as successful. We are on the path to be one of the successful ones. And that’s the commitment that we’re going to meet.

It’s an interesting contract. They don’t pay you a nickel until delivery.

Johnson: I’m not in a position to talk about the contract, I’d say talk to Mr. [SES Chief Executive Steve] Collar.

It tells you something about the industry. Not all contractors could offer that option.

Johnson: Boeing is a pretty large corporation, with a lot of business acumen. That’s one of the things that we bring to the table that’s a differentiator — our ability to be creative when it comes to it, in all aspects of the project. In this case a number of factors led to the win.

mPower is 4,000 beams per satellite, lots of flexibility in coverage — is all that applicable to programs in GEO and LEO too, or is it somehow specific to MEO?

Johnson: We have the core building blocks that can be used in any orbital regime. The way those building blocks are put together will be different for the different regimes, and that’s based on if you’re whizzing by at 1,000 km or whether you’re in GEO — still whizzing by but it doesn’t feel quite the same. That’s the way we’ve designed this.