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Despite great promise, satellite industry deals with myriad woes

The promise of the space business was shown recently when Hughes Electronics announced a $1.5-billion investment from America Online to deliver Internet service via satellite.

The pitfalls of the space business were seen the same day when Hughes disclosed problems in manufacturing satellites that would cause it to write off $125-million and take a big quarterly loss.

It was only the latest in a series of setbacks for Hughes, the unit of General Motors Corp. that is the nation's largest satellite company. Last year one of its satellites failed in orbit, knocking out paging service for most of the nation. Another satellite blew up when a rocket exploded. The company's assistance to China in analyzing launch failures has placed it under criminal investigation for violation of national security laws. And the resulting furor in Washington forced Hughes to forfeit a $450-million contract for an Asian satellite system.

As Hughes goes, so goes the satellite industry. Rarely, it seems, has an industry been blessed with so much potential and cursed with so many problems. Manufacturing glitches and rocket failures have made it more difficult and costly to get satellites into the sky. Tighter export controls are slowing projects.

"The events of the last year have created higher hurdles for the companies to get the work done," said Clayton Mowry, executive director of the Satellite Industry Association, a trade group.

Perhaps the biggest problem is that Iridium LLC, which owns a 66-satellite system offering worldwide mobile telephone service, has failed to attract subscribers and has filed for bankruptcy protection.

All these problems have taken some of the bloom off the commercial satellite business, which only recently surpassed the government-owned satellite market in size. Investors are becoming wary of pumping billions of dollars into numerous systems to provide phone service or high-speed data transmission. Many projects will be scaled back or might never get off the ground, analysts say.

ICO Global Communications, which is developing a satellite-based phone service to compete with Iridium, failed to raise the $500-million it sought from a public rights offering despite extending the deadline twice. It is scrambling to raise money from unnamed investors. If ICO fails, Hughes, which is building the satellites for it, could have to write off as much as $500-million.

And Boeing Co. has, for now, shelved plans to buy a controlling stake in Ellipso, another company planning a satellite-based telephone system.

Even so, Mowry and many other executives and analysts shrug off various problems as short-term ones. "I don't think the problems we're facing today are any more severe than the industry faced after the Challenger explosion," Hughes chairman Michael Smith said. "This is a risky business, and we've never said anything but. But it's also high-reward."

Robert Kaimowitz, an analyst at ING Baring Furman Selz, was more upbeat, saying, "Everything in the industry is going great right now." He expects the global industry to grow 12.8 percent a year from its current size of $60-billion.

Indeed, both Boeing and Lockheed Martin, the nation's two biggest aerospace companies, are trying hard to move into commercial satellite communications.

Lockheed, with a new division called Lockheed Martin Global Telecommunications, is trying to buy Comsat for $2.7-billion and has joined forces with TRW Corp. and Telecom Italia to develop Astrolink, a $3.6-billion system to deliver Internet service and high-speed data from satellites. Boeing is developing a satellite system to provide Internet service to airline passengers.

Some recent technical problems, in fact, seemed to be caused by a rush to fill orders. "The development capability is stretched to the thinnest," Smith said. "We had gotten to the point where we skipped tests, and that's not wise."

There have been six well-publicized rocket failures in the past year, prompting investigations by the Pentagon and rocketmakers Lockheed and Boeing. There also have been "more in-orbit satellite failures than we have been used to," said Rick Hauck, president of Axa Space, a space insurance underwriter in Maryland.

Hughes had component failures in six satellites in orbit in the past year, though only the paging satellite failed completely. Lockheed Martin reported a second-quarter loss, in part because orders for satellites dropped and component defects caused a six-month manufacturing delay.

Launches also are being postponed. Arianespace, the European launch company, was to have conducted six launches so far this year but has handled only two because the satellites are not ready.

Still, the big money to be made is not in building and launching satellites, but in offering services using them, and that is where investors focus most attention.

Indeed, Hughes' share price _ it trades as a tracking stock, GM's class H stock _ has held steady despite its satellite problems because of its DirecTV division, which delivers dozens of digital channels to 18-inch home dishes by satellite. Cai von Rumohr, an analyst at S.G. Cowen & Co., estimates that the domestic DirecTV business is worth as much as $50 of Hughes' share price, which closed Friday at $52.06\.

DirecTV's rival, Echostar Communications Corp., a service company not weighed down by satellite manufacturing, has seen its stock zoom from a low of less than $9 a share a year ago to a high of $88.25 in July, although it has now dropped to $64.62{.