Strategic importance is key to investment

By Stefan Barensky

Date: 10/02/05

By late February, the European Commission will have to decide which of the two bidding consortia - Eurely, led by Alcatel, or iNavSat, sponsored by EADS, Thales and Inmarsat - will become the operator of Europe's Galileo global positioning system (GPS).

Through this private-public partnership, the Commission hopes to share the burden of developing and maintaining the 30-strong satellite system, which will allow anyone to get information about location, speed and time with a higher accuracy than the American GPS, provided free of charge by the Pentagon.

Galileo satellites will act like super beacons in the sky. Everyone will have free access to their basic signal, so how could the bidders expect to make money with a free service competing with another free service? They don't, at least not directly. Galileo was designed as a civilian system, unlike the GPS, and will provide information on the quality of its signal, which will ensure the integrity of the highly accurate information services.

This extra feature - as well as the guarantee that the system will not be turned off to civilian users at the whim of the Pentagon - is key to the development of value-added applications in a large number of fields, from transport to communications, safety, agriculture or energy.

According to business estimations, within ten years the market generated by paid-for Galileo-related applications should exceed €250 billion. What the bidders are aiming at is to get their share of that money. That explains why many of the partners within the consortia are not known for their Space activities: motorway and toll systems companies, mobile phone builders and operators, automotive industry, water management or civil works.

Despite the size of the foreseeable market, it may take time before these investments pay off. In Space activities, commercial maturity takes decades and history shows that governments can see their investment paying back a lot earlier than private entities.

For instance, to develop the first generation of Ariane launchers (the Ariane 1 to 4), the European Space Agency (ESA) member states poured in €2.5bn in 1973-88. In 1979-2003, 144 launches sent more than 200 satellites into orbit, 90% of which were communications satellites whose ride was paid by commercial customers. This produced revenues exceeding €10bn for the launcher industry, four times the initial investment. Governments were able to recover more than their initial input by the simple game of taxes.

But they earned more than that. The objective was not to make money but to get an independent access to Space for Europe. Before Ariane, the nascent European Space industry had to turn to NASA to get a ride to orbit.

For the French-German Symphonie geostationary communication satellites, the deal came at an indecent cost: the two satellites could not be used for any operational international communications since this would breach the monopoly of the US-led International Telecommunications Satellites Organisation (Intelsat), whose satellites were built in the US.

With Ariane, Europe became independent and could develop its own satellites for its applications. This was the real kick-off for European satellite industry. A quarter of century and various consolidations later, there are five large satellite manufacturers in the world, two of which are European with €3bn of yearly sales, resulting in additional tax revenues for governments.

By offering Ariane commercially, Europe fostered the development of numerous satellite operators worldwide leading to the expansion of the telecom market in the 1980s-90s. Among the new booming operators, several were European-based such as SES or Eutelsat, today's first and fourth largest operators worldwide with revenues of €1.2bn and €760 million. The ripples have extended into the markets of terminals, television channels, and value-added services. All of these are paying taxes to governments, which paid for the first brick of the system.

But despite these results, the commercial launch market is still far from mature and cannot sustain itself yet. After the telecoms bubble burst, the market in the early 2000s shrank and launch providers in Europe and the US had to ask for massive government support to survive as strategic assets for the future while being poor commercial ventures at present.

For the time being, only one Space activity seems to have reached proven profitability: communications. Most satellite operators were initially founded by state-owned telecoms companies and gradually privatised after decades of government sponsorship. It is only over the last two years that these national companies have withdrawn and that equity firms have replaced them as majority shareholders. This might be the ultimate proof that 40 years after the inception of Intelsat, satellite operators are able to invest in new developments, prospect new markets and still make money.

Governments must keep in mind the strategic importance of their support, as private industry will not be able to sustain such services alone for long. This support will pay off, through taxes from all the participants involved, long before the private partners are able to see some benefits.

• Stefan Barensky is a freelance journalist and Space consultant.

By late February 2005, the European Commission is to decide which of the two bidding consortia - Eurely, led by Alcatel, or iNavSat, sponsored by EADS, Thales and Inmarsat - will become the operator of Europe's Galileo global positioning system (GPS). Through this private-public partnership, the Commission hopes to share the burden of developing and maintaining the 30-strong satellite system, which will allow anyone to get information about location, speed and time with a higher accuracy than the American GPS, provided free of charge by the Pentagon.

European Commission: DG Energy and Transport: Transport: Galileo http://ec.europa.eu/comm/dgs/energy_transport/galileo/index_en.htm

---