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Turning swords into satellite dishes

Defense contractors have decided making money in the telecommunications industry is far better than losing their shirts in the business of war.

Make money, not war.

As the government's need for stealth fighters, smart bombs, and radar systems wanes, many defense contractors in the United States have gained a new lease on life by embracing the communications industry.

By turning their attention to telecommunications, long-time military suppliers have staved off obsolescence and are profiting from shooting cable television shows to homes with satellite dishes, pondering ambitious Net access plans, and incorporating cell phone services in a sort of communications potpourri.

The latest example of this marriage is word of an impending deal between regional phone company SBC Communications and the DirecTV arm of former defense giant Hughes Electronics. That follows last month's $1.5 billion investment in Hughes by Net access provider America Online.

Companies like Hughes, Lockheed Martin, and Boeing suffered at the end of the Cold War when the Department of Defense saw its budget slashed. About the same time, the communications, entertainment, and Internet industries began to grow, offering an opportunity for companies with technological expertise.

In 1997, for the first time, more commercial satellites were launched than government satellites, according to DFI International, an aerospace and space consulting firm. "It was a transformation," said DFI vice president Brett Lambert. DFI expects government satellites to account for only 20 percent of all satellite launches over the next ten years.

By putting their expertise to work, defense contractors have weathered the worst of the industry shakeout and have assured themselves a piece of the juicy telecommunications pie, according to analysts.

"Ten years from now there's still going to be many of these same players, they'll just look a lot different. That's part of the game," said Steve Blum, a satellite industry analyst at Tellus Ventures.

From battlefields to greenbacks
At one time, the nation's military force grew exponentially as the arms race with the former Soviet Union, China, and other perceived aggressors escalated. As such, there was an ongoing need for supersonic jets, armament systems, and other wartime equipment. But today the United States is the world's only superpower.

"A lot of these companies got used to living on government contracts," Blum said. "So then came the end of the Cold War--that's what really triggered it--and military spending?was drastically scaled back. So, these guys had to find something to do."

As an example, Hughes--at one time a large supplier of electronics systems to the defense industry--began shifting away from it's reliance on the military market in the late 1980s, according to Hughes Electronics spokesman Richard Dore.

"We realized that the defense industry was flattening out and that there was more activity and growth potential in the telecommunications industry," Dore said.

After a sale and a restructuring in 1997, Hughes Electronics became a "pure play" in the telecommunications industry. The company owns satellite TV service DirecTV and satellite Net access provider DirecPC. Hughes also holds an 81-percent stake in PanAmSat, which leases satellite transponder capacity to network television customers and others.

"I think the main driver was what was perceived as a large growth opportunity in the consumer market," said Clayton Mowry, executive director of the Satellite Industry Association, a commercial satellite trade group. "The tremendous growth is in the individual consumer market."

In 1998, DirecTV generated the largest increase in revenue growth for Hughes, which posted nearly $6 billion in annual revenue.

Analysts said Hughes has been among the most aggressive of the defense contractors in retooling for a new age.

"Hughes switched early ? [and] is the only one who has done it successfully," said Cai von Rumohr, a securities analyst at investment bank SG Cowen. "The companies where you could argue they have not been as successful certainly would include Lockheed Martin, certainly would include Boeing."

Consolidation in the industry
Yet Lockheed Martin, analysts said, is perhaps the best example of post-Cold War consolidation. The company is an amalgam of several one-time defense industry players.

One of the company's new business units is an investor in Astrolink, one of the new breed of proposed satellite data services. The company also is going after fiber-optic and wireless contracts, analysts said, and is attempting to acquire Comsat, the government-backed representative in an international satellite network.

"They're turning themselves into a telecommunications service provider, but they're not taking it all the way down to the consumer level the way Hughes has," Blum said. "Lockheed Martin has probably been less adventuresome and less entrepreneurial. They're still in that 1980s mode of thinking to a certain extent."

Another player, Loral Space & Communications, has met with moderate success in transitioning from a military heavyweight to a communications player, according to analysts.

The company sold its defense assets to Lockheed, but Loral does have Skynet, a fixed satellite business, as well as CyberStar, a satellite video service. The company also is developing Globalstar, a satellite services company which is expected to challenge Iridium for global mobile phone services.

Other firms have transformed themselves over the years. Motorola, a leading maker of handheld two-way radios for the U.S. Army in the 1940s and a supplier to NASA astronauts in the 1960s, is one of the world's leading mobile phone and paging equipment and chip makers today.

The company also is a major investor in global satellite communications company Iridium and has been named the prime contractor for Teledesic, a broadband data-via-satellite firm.

Boeing, also a Teledesic investor, had considered selling its data services business, but the aerospace giant is now expected to target the data services and mobile phone businesses, according to reports. When the company acquired McDonnell Douglas, Boeing added a substantial commercial space component, analysts said.