9.2.1.1. The features of the aerospatial products

Three salient activities constitute the axes of the aerospatial industry. These are space transportation (conventional launchers and US space shuttles operating until 2011), satellites (telecommunications, remote sensing, geolocation, meteorology) and land stations. At the same time, these categories combine into a complex network of systems, subsystems and components during the manufacturing process.

“The construction of the launcher requires assemblying and integrating metallic elements (structure, cap), propulsion systems, fuel, cells and other components (turbopumps, equipment boxes, board computers, inertial guidance, telemetry, etc.) which are produced thanks to the combination of mechanical engineering, the chemical industry and electrical and electronic engineering firms […]” [OEC 85].

Properly speaking, a satellite is composed of two fundamental elements: a platform and a payload, containing the equipment that will provide the satellite with its mission and specificity. Generally, the payload is provided by an electronics company while the platform remains under the responsibility sphere of an aerospace firm.

As [GUG 02] observed, “the emergence of system products is a feature of the globalization of markets making inter-firm cooperation agreements attractive”.

9.2.1.2. Massive investment in intangible assets

One of the most important features of the space sector is that it demands an enormous amount of fixed and intangible investments, which are the source of barriers to entering and exiting markets. All “space products” (be they launchers or satellites) are the result of systems, subsystems and components that can be produced in different countries.

The development of space activities gave countries originally engaged in this adventure the possibility of developing new technical processes and testing many technologies, despite the fact that the high technological level of the space sector is more focused on integrating external technologies rather than on generating its own technology. Space production is closely linked to other high-tech sectors and results from the application of diverse techniques issued from the combination of aerospace, computer and composite materials industries. The space industry has also benefited from technical changes that affected the telecommunications and semiconductors sector.

In this industry complexity derives from the need to continuously integrate technical innovations. This results in an extension of the development phase for certain space products which do not fully comply with a large-scale manufacturing logic.

“The satellite industry is craft, even haute couture! Satellites are tailor-made and the volumes are not very large; on a good year, the prime contractors receive about 20 orders, but some years it barely amounts to a dozen satellites” [BLA 10].

The costs of designing and launching new products are steadily increasing. This increase proves the extent of complexity and diversity of basic technologies [COL 02]. At the same time, the life span of satellites has substantially expanded. This is shown in Table 9.1, the Intelsat satellite series is representative of the spectacular growth of space telecommunications.

9.2.1.3. High entry and exit barriers

The intensity of barriers to entry (capital, R&D, know-how, etc.) and exit (sunk costs related to investment in machinery, equipment, etc.) varies according to the spatial activity in question. While barriers are lower in satellite activity, they are still high for launchers.

In the field of launchers, the costs of entry refer not only to the costs of the equipment and the necessary infrastructure required for manufacturing and testing the prototypes, but most importantly the research costs. The technique of launchers is far more complex than that of satellites. These key technologies (cryogenic propulsion for the upper stages of launchers) demand considerable expenses in R&D.

The high threshold for initial fixed investment is so large that it can only be assumed by governments and public funding, at least at the beginning of the project. In fact, in the United States (NASA) and in Europe (CNES, European Space Agency), the initial investment was obtained via national space agencies. Based on the success of the first public space program, private structures later emerged. This is how Arianespace, a private European company settled in France, was founded and is now responsible for the commercialization and operation of space launch systems such as Ariane. In the United States, private investors also have an important role. SpaceX (or Space Exploration Technologies Corporation) was founded in 2002 by Elon Musk, a private provider with whom NASA entered into a freight contract for the International Space Station (ISS) under the COTS program.

In both sectors (launchers and satellites), the learning curve (several years for satellites, at least a decade for launchers) gives decisive advantages to first movers.

9.2.2.1. The 1980s: the consortium, a privileged form of cooperation

In the industry we are studying, consortiums and joint ventures were the most common forms of cooperation in the 1980s.

“The choice of industrial consortiums as a privileged, if not exclusive, form of cooperation in these sectors [aeronautics and space] is directly linked to their “strategic” or “political” character. In all these sectors the threat of a monopoly or quasi-monopoly situation is more than real and the constitution of industrial alliances is the means for certain companies and certain countries to continue to produce, in such a way that a minimum degree of competition remains on world markets” [CHE 88a].

The consortium of prime contractors and subcontractors brings together industrialists for a sufficiently long period (the time required to carry out a program), which may exceed 10 years. In the space industry, we may encounter two types of consortia:

• – an alliance with a large company, a prime contractor, and a host of subcontractors. In general, these subcontractors are smaller in size;
• – a consortium of equal or almost equal partners, “where the question arises concerning industrial and technological leadership within the alliance, as well as a discussion about labor division between firms” [CHE 88a].

During this period, the type of consortium integrated between American companies on the one hand and European and/or Japanese companies on the other hand demonstrated the predominance of the American prime contractor.

9.2.2.2. The 1990s-2000s: acceleration of the restructuring process of the aerospatial industry via the renewal and development of new alliances

The cooperation agreements concluded during this decade differ from those concluded in the previous period:

• – consortium is no longer the preferred form for industrialists who desire to conclude an agreement. We are gradually moving towards strategic alliances (between rivals);
• – agreements between European companies are now made on the basis of financial and commercial requirements. From a historical perspective, while the policy adopted by the European Space Agency (ESA) was necessary, its contribution was nonetheless insufficient to efficiently prepare the European space industry for facing stiff international competition. Unlike the major American competitors, at the moment, no single European company was capable of single-handedly carrying out the totality of a satellite. The European Space Agency had yet to reach a size that allowed it to compete with the United States on an equal footing.

In parallel with the production agreements, the telecommunication satellites sector also experienced large-scale concentration in the form of external growth. For a long time, the sector concentrated on the level of American manufacturers: Hughes Aircraft (purchased by General Motors in 1985) and Ford and General Electric, who took control of RCA in 1986. In the 1980s, almost three-quarters of the world market for civilian telecommunication satellites were supplied by these three firms.

In the 1990s, important maneuvers took place in the industry. For a start, Loral acquired Space Systems/Loral division of the Ford car company in 1990. Nine years later, General Motors decided to sell Hughes Space and Communications to Boeing. In 1994, Martin Marietta and Lockheed, who long benefited from contracts with NASA and the Defense Department (DoD), announced the merger of their military and space activities.

On the European side, two poles emerged in the 1990s: one with Matra Marconi Space (MMS) and the other with Aerospatiale, Alcatel and Alenia (Italy). The end of the 1990s was marked by several mergers that led to the consolidation of the European industry in the face of the all-powerful American companies:

• – after Aérospatiale was privatized in 1998, the two French historical competitors, Aérospatiale and Matra, decided to merge in 1999;
• – on October 14, 1999, there was a merger agreement between Aerospatiale Matra and Daimler-Chrysler Aerospace (DASA);
• – on June 12, 1999, the German DASA and the Italian CASA (Construcciones Aeronautica) merged.

In July 2000, as a result of these mergers, the European Aeronautical Defense and Space Company (EADS) was created. Astrium became a satellite subsidiary of the EADS group. A Dutch company, EADS registered its offices in Amsterdam. It then became the European leader and world’s second largest aerospace and defense industry ahead of BAE Systems - until that moment known as British Aerospace, the world’s fourth largest defense and aerospace company.

The second European grouping in 2000 was Thales Alenia Space, a joint venture between France and Italy, founded in April 2007 by Alcatel-based space activities. At the end of the 2000s, the sector was composed of five major players:

“From the five manufacturers of telecommunication satellites in the world, three are American. These are Loral, Boeing and Lockheed-Martin. The other two are European, EADS-Astrium and Thales Alenia Space. Each manufacturer holds about 20% of the world’s market and offers a production capacity of about four satellites per year” [BLA 10].

During the 2000s, EADS implemented a number of business reorganization plans, which were more or less successful [DAI 15a]. With a failure of the merger with the British firm BAE (opposition of the Germans), the strategic plan Vision 2020 conceived by Louis Gallois yielded less than average results.

Thus Marwan Lahoud, President of EADS France, could say before the Economic Affairs Committee to the National Assembly on October 16, 2013:

“[…] while civilian activity is experiencing an exponential growth of 5%, the military and the space sector are stagnating or even slightly decreasing. Confronted against such lasting trends and having confirmed the failure of the merger with BAE, it had to be assumed that the balance between the two activities was not possible”.

9.2.2.3. The 2010s: new technological and competitive challenges

With the arrival of Tom Enders in 2012 as the CEO of EADS and the change of the name “EADS” to”Airbus Group” in 2013, the strategy of internationalization quickly became stronger:

“What we are revealing today is an evolution, not a revolution. This comes as a logical step in the development of our company. Today, we affirm the predominance of commercial aviation in our Group. We are restructuring and reorienting our Space and Defense businesses as a means of reducing costs, improving profitability and obtaining a better position in the market. Our change of name is a simple way of placing the whole company under the aegis of our best brand, a symbol of internationalization, innovation and integration, and also the trademark that represents two-thirds of our turnover. This cannot help but reinforce the message “we make things fly”. Tom Enders (Airbus Group, 2013).

Nowadays, Airbus Group is composed of three renamed entities: Airbus (civil aircraft), Airbus Defense & Space (Cassidian, Airbus Military and Astrium) and Airbus Helicopters (Eurocopter).

The period 2010-2016 yielded contrasting results for telecommunication satellites in the international market. To begin with, the early 2010s were rather favorable to European groups. Thalès Alenia Space (TAS) and Astrium accounted for 32% of the market share over the 2009-2011 period [PRO 12]. On the other hand, in 2013, the decline in backlogs affected the activity of Astrium and TAS, resulting in downsizing policies. At the same time, competition against American companies intensified, with Boeing strengthening its position in the fast growing segment of electrically powered satellites. While maintaining the same performances, this type of technology makes it possible to manufacture satellites which are lighter than those functioning on the basis of chemical propulsion. On the other hand, Loral, the world leader in telecommunication satellites offers satellites at very competitive prices enabling the firm to accumulate orders. At the same time, European companies witnessed a significant recovery in the years 2015-2016: as a matter of fact, Astrium and TAS accounted for around 30% of 2015 orders for telecom satellites. The rise in the dollar was also favorable for them over the period to the point that Astrium is now emerging as one of the world leaders in electric-powered satellites.

At this point, it is important to reckon that the intensity of rivalry between different players in the space telecommunications sector must not overshadow the development of cooperative strategies. [FER 13, FER 15] studied cooperative relations between TAS and Astrium in the telecommunications satellite industry. The authors showed that cooperation exists between these two competitors and has caused numerous tensions, not only at an inter-organizational level but also at an intra-organizational one.

In the space sector, other developments are anticipated which will have a direct and indirect impact on the telecommunications satellite markets. In a report published in July 2016, Fioraso recalled the three elements that are currently revolutionizing the sector: a drastic reduction in the costs of launchers and probably satellites, an acceleration of digital technology with the identification of space as a major provider of valuable data (Big Data) and increasing competition on the part of emerging countries [FIO 16]. The data obtained from the space sector is attracting growing interest from digital players such as GAFA (Google, Apple, Facebook, Amazon), but also One Web, Virgin Galactic and a whole constellation of start-ups. The arrival of new entrants will have repercussions on the way in which the actors already present in the market interact (cooperation, coopetition). Finally, the report is also a meditation on how the offer will evolve towards “applications guided by the uses and not only driven by technological progress”.

9.4.1.1. Nintendo or the strategy of a pure player

Hiroshi Yamauchi is known both as the historical CEO and iconic figure of Nintendo. This entrepreneur largely contributed to the success of the firm by focusing on R&D activities. The arrival of Satoru Iwata to Nintendo in 2002 created a new dynamic based on reorganization of activities.

Known in particular for its portable consoles, Nintendo achieved considerable success in the 1990s as has been shown by the popularity of this form of entertainment in the younger audience. In 2006, the group decided to launch a new model console, the Wii, and thus adopted a different position from its competitors:

• – an expanded target for players aged 7-77 and women;
• – a console that is more “playful” than technically efficient. As a console, the Wii is less sophisticated than the PS3 and the Xbox 360. It does not include a DVD player and does not have very powerful processors. Its chip is limited to 750 MHz while that of its rivals reaches 3.2 GHz. From a technological point of view, Nintendo made a strategic decision expecting that the originality of the Wii would compensate for the slightest graphic quality among the general public. However, compared to its competitors, the Wii’s gameplay advances were incontestable (Box 9.2). Nintendo also capitalized on the success of games like EyeToy (Sony). As history later showed, the success of the Wii was immediate and sales exploded. Nintendo also announced that unlike its competitors, the Wii was not sold at a loss.

In November 2012, Nintendo tried to renew the considerable success of the Wii by launching the Wii U. Nevertheless, the results were far below expectations. The Wii U sold a limited number of units in comparison to the Wii. So far, Nintendo has not decided the fate of the Wii U. The launch of a new generation of consoles under the name Switch was expected for March 2017.

9.4.1.2. Sony: a long-standing unrivalled leader

Sony’s strategy in this business area dates back to the early 1990s after significant investment. The firm finally entered the market in 1994 with the succesful introduction of the PlayStation. The launch of this console followed the failure of its collaboration with Nintendo in the early 1990s when they had attempted to create a CD-ROM driver for Super NES. Its involvement in the video game industry was reflected in the creation of a subsidiary known as Sony Computer Entertainment (SCE), which held the manufacturing rights for the PlayStation and its video games, as well as for managing third-party publishers. Consoles and video games quickly became a strategic business unit (SBU). The success of the entire Playstation range contributed to making SCE a heavyweight in the market with the unparalleled success of the PlayStation 2, which, until the beginning of 2013, held the world record for console sales.

9.4.1.3. Microsoft: an important rival

From the moment it entered the console market, Microsoft made quick progress despite difficult beginnings: the Xbox was largely out distanced by the PS2. With the Xbox 360, and Xbox One starting in 2013, Microsoft became a dangerous competitor to Sony and achieved undeniable sales performances. The sales of the PS3 and Xbox 360 can be compared by taking a look at Table 9.4. The success was mainly due to competitive pricing policy for consoles. This choice allowed the firm to gradually attract a larger number of consumers while increasing its profits with the sale of the games. The figures in Table 9.4 show the commercial performance of various consoles and the distribution of market shares of the three players. After having produced it for 11 relentless years, Bill Gates announced the end of production for the Xbox 360 in April 2016.

With regard to the positioning of the three players in the “new generation of consoles” market, Sony continues leading the sales with its PS4, far ahead of Microsoft and Nintendo. The sales of the PS4 exceeded even those of the Xbox One and the Wii U considered together. It may be that a part of Sony’s strategy relies on a non-zoned platform which does not require a mandatory Internet connection.

9.4.2.1. Still limited alliances between all the actors in the sector

So far, emphasis has been placed on the links between the game console manufacturers and publishers. However, we must bear in mind that other actors also play a role in this sector. For example, this is the case with development studios, which are devoted to creating games. In general, these are small businesses who design the game and create a master that is sold to the publisher. Until the mid-1990s, the creation (or development) of games was mainly done by teams integrated within publishing companies. Nowadays, development studios have become more autonomous giving rise to other problems associated with the nature of their subcontracting mission.

Along with these three main categories of players in video games, we should add:

• – during the upstream phase: manufacturers of electronic components which are necessary for manufacturing and operating games and consoles. Issues in this area are becoming increasingly important (see section 9.4.2.2);
• – on the downstream end: manufacturers of various accessories, retail trade (dedicated retailers and mass retailers) as well as specialized media.

At the end of the 2000s, IDATE highlighted the need to encourage industrial cooperation and open standardization in favor of innovation. Achieving this objective included interoperability, open standards and the use of open source software:

“Developing activities in a more open and better shared standard environment remains a fundamental question, which must aim at the progressive shift from technological competitiveness for content developers, towards creative and innovative competitiveness […]

These are the actions that should be taken next:

• – The cooperative development of tools, software and platforms such as middlewares, which rely on interoperable and/or open and community-based international standards.
• – The development of collective actions at the European level in view of promoting or enhancing technological growth that favors diversity, innovation and creation in an environment for equipment and software that is as open as possible. We should revisit the hypothesis of an emerging “European equipment manufacturer”, which could act as a catalyst for a global industrial movement with knowledge of the complexity of the stakes and strategy of each of the actors involved.
• – The development of tools common to all players in the innovation synergy (competitiveness clusters, local productive systems, professional and institutional networks, service providers in networking and intermediation between actors, new cooperative practices within the company, etc.)” [IDA 07].

9.4.2.2. The evidence of coopetitive practices?

There are no strategic partnerships between console manufacturers. Despite this, apart from their independent activities, Sony and Microsoft have forged links with the same suppliers (IBM and Toshiba) in view of developing different products (and/or technologies). This led to the emergence of “coopetition” between the firms. From the year 2000, Sony was involved in an alliance with IBM² and Toshiba to produce the Cell³ microprocessor (integrated in the PS3), but at the same time Sony embarked on the battle of DVD players in high definition against Toshiba, who was then involved in an alliance with Microsoft. Sony has successfully defended its Blu-Ray format (integrated in the PS3) against the HD-DVD, which was offered as an option with the Xbox 360 (Figure 9.2).