II. The General Motors Years
A new board of trustees of the Howard Hughes Medical Institute (HHMI, owner of the Hughes Aircraft Company) was formed after the death of Howard Hughes in 1976. The new trustees decided it was their duty to sell Hughes and diversify their holdings and an auction process was started with the coordination of the investment banking company Morgan Stanley. The winning bidder, General Motors, paid about $5 Billion in cash and stock that was to trade in the NYSE as GMH. The evolution to a publicly traded company was to become an important factor in the future of Hughes and SCG.
After the GM purchase the previous SCG organization was soon to change dramatically.
Shortly after the acquisition, Alan Puckett, CEO of Hughes retired and was replaced by Bud Wheelon. Bob Roney joined Bud in the corporate office and Paul Visher retired. Tony Iorillo, formerly head of the defense business replaced Wheelon and his principle deputies became Dick Brandes, former head of the commercial Satellite Division and Steve Dorfman, former head of HCI. It’s a testimony to the Wheelon management team that the management succession was so orderly and the new team continued the momentum that had developed.
The following years, 1985-2000, marked a dramatic growth and expansion of SCG.
Defense and National Security National Security Systems remained a core business unit for SCG with continuation and expansion of the relay satellites so key to the NRO surveillance mission along with other systems for other customers. Not much can be said about these classified missions other than they were the most challenging undertaken by SCG and were vital to national security. Hopefully these stories can be told at some future date.
NASA Systems SCG focused on the applications and robotic exploration portion of NASA’s efforts and since manned exploration was the major program for NASA Hughes was a relatively small part of NASA’s overall program. In fact the major interaction between SCG and NASA was Hughes buying launch services supplied by the Shuttle and Delta programs. At one time Hughes was purchasing more from NASA in launch services than NASA was contracting with SCG for space systems. Perhaps the most significant interaction between Hughes and NASA involved the rescuing of stranded Hughes- built satellites by the Shuttle astronauts. In three high profile rescue missions the NASA astronauts, displaying the “right stuff” and risking their lives, aided in placing the Palapa, Westar, Leasat and Intelsat VI satellites back into service.
SCG ‘s support of the NASA application program included the GOES weather satellite for use by NOAA and also similar satellites, in conjunction with NEC, for the Japanese Meteorological Agency. SCG also supplied NASA the Tracking and Data Relay Satellite, the imaging sensors, the Multi Spectral Scanner and Thematic Mapper for the Earth Observation Program. Most of these systems are still operational in 2012.
Commercial Satellite Systems The ending of the cold war led to reduction in defense spending and affected the defense portion of the SCG portfolio. At the same time there was an explosion in global investment in infrastructure much of it privately financed and much of it in satellite systems that enabled rapid expansion of a nation’s communication system. Hence the Commercial Satellite System Division expanded significantly during this time period with first or second generation systems for entities in Australia, Brazil, Canada, UK, Malaysia, Thailand, Norway, Luxembourg (Europe), Japan, Russia, Hong Kong, China, UAE (mid east) and the US. By 1995 Hughes was launching at record rate of a satellite a month. Many of these were delivery in orbit where Hughes was responsible for acquiring the launch services. In earlier years the SCG business was approximately 75% cost plus government work and 25% fixed price commercial work. Now it was just the opposite; 75% commercial and 25% government. The diversification between these two businesses continued to be a successful SCG strategy.
For a while the spin stabilized HS-376, an evolution and refinement of the inventions of Harold Rosen and his colleagues, remained the basic bus for Hughes’ communication satellites as it had been for many years. Its relative simplicity, reliability and low cost made it the choice of most customers including the early HCI Galaxy system. And Hughes remained the market leader with over 50% market share in a highly competitive market. In addition Hughes collected hundreds of millions of dollars in royalties from the patents associated with spin stabilization. But new applications were driving requirements for higher powered satellites and body stabilized satellites with deployable, sun oriented solar panels are more efficient for producing high power. Hughes needed to transition from spinners to body stabilized to remain competitive. GM was supportive of investing in SCG and willing to invest $100M for what was to become the HS-601 bus. The first customers were Aussat for 3 satellites and the US Navy for 10 satellites, delivered in orbit and with significant performance guarantees that were necessary to assure customers that this new satellite bus would work. It was a high-risk situation for Hughes but it paid off. Both programs were successful (though not without problems) and the HS-601 went on to become the most used bus in the satellite industry with over 80 launched for commercial and government customers. By the end of the 90’s SCG was working on the next generation bus, the HS-702.
Hughes Communications HCI expanded its business along several fronts. Galaxy 4, 5 and 6 were launched to serve a growing US market for transponders. These were HS 601 satellites with both C band and Ku payloads with a total of 48 transponders as opposed to the earlier Galaxy satellites with 24 C band transponders. HCI became the leading satellite communication services company in the US, eventually acquiring some of it’s competitors like SBS and Westar , earlier buyers of SCG satellites. The successful Galaxy system was the foundation for further expansion of the Hughes communication business.
JCSAT HCI formed a joint venture with two Japanese trading companies, CItoh and Mitsui to start a satellite communications company in Japan called JCSat. This was a package deal where HCI supplied two SCG built satellites, delivered in orbit, along with HCI know-how and management for $300M and also became a 30% owner. This company was very successful and is still doing business in Japan though HCI eventually sold off its share.
Hughes Network Systems After several failed efforts to start a ground system business to augment it’s satellite business Hughes seized the opportunity to acquire a division of M/A-COM that specialized in satellite networking and digital communications at the bargain price of $100M. This company was renamed Hughes Network Systems (HNS). HNS supplied SCG a much needed digital communications expertise at a time when digital communications applications were expanding in all areas including satellite networking. Satellite networks use very small satellite aperture terminals (VSATs) deployed at enterprise locations and tied together through satellite transponders. HNS soon grew it’s business from $100M a year to $1B a year supplying VSAT networks to many enterprises around the world and becoming a major user of HCI transponders.
AMSC/XM Radio Exploiting the license for satellite mobile communications was troublesome since there were 7 applicants for the same frequencies. With FCC encouragement these applicants jointly formed a company, American Mobile Satellite Company (AMSC), with HCI being a part owner and two SCG built satellites were launched to cover North America. Unfortunately these transactions took over a decade to complete and by the time AMSC was ready to start service North America was covered with relatively inexpensive terrestrial networks and cell phones while the AMSC phones, limited by older satellite technology, were bulky and expensive. The system was not competitive and AMSC went into bankruptcy. A second part of the AMSC business was the frequencies for satellite that turned out to be a valuable holding. A service, called XM radio, was formed and the debt to HCI was paid off as part of the transaction. Two HS 601 satellites were launched for this service and now XM radio serves over 10 million users.
DirecTV The HCI application for the direct to home satellite frequencies was submitted in 1984 and the first revenues weren’t collected for this service until 10 years later. There were many impediments to getting started but the delay actually benefited HCI since several technologies came together to make this business an enormous success. The high power HS-601 became available for satellite transmission. Digital communication techniques permitted compression and encryption of TV signals so that hundreds of channels could be received by inexpensive 18 inch dishes located on consumer roof tops and revenues could be safely collected. Finally the continued improvements in chip sets (Moore’s law) permitted inexpensive decompression and decryption in small set top boxes. The consumer systems started at $700 but ultimately became inexpensive enough to give away in order to encourage consumers to start the service.
Like all the SCG achievements described in this summary, many people contributed to the success of DirecTV. However, principal credit goes to Eddy Hartenstein. Eddy was a system engineer on the Pioneer Venus program, became the head of the HCI Galaxy business unit and completed the transition from engineer to engineer/entrepreneur with the development of DirecTV (he also created the name).
The following was accomplished, all of it difficult: Convince GM to spend hundreds of millions of dollars for a very speculative project. Put together a system of satellites, networks, uplink stations in Colorado and California, fill the uplinks with sophisticated encryption and compression electronics and facilities for storing and unlinking pay per view movies. Then developing standards for transmission to set top boxes for consumer use and reach the business agreements with manufacturers to design, manufacture and distribute the boxes to consumers. Negotiate with media companies to supply the critical element of attractive programming. Then set up the marketing and advertising campaign to educated consumers about this new service. DirecTV started slowly but then built up to be the most important business in Hughes. Today there are 20 million subscribers in the US and 7 million in Latin America.
In 30 years Hughes had moved, in incremental steps, from being a supplier of cost plus systems to the government to being a major player in the media and consumer world.