Hughes Electronics swallowed a bitter pill last year when it ended an
ambitious partnership with America Online to deliver high-speed Internet access
over the Hughes satellite network.
The severance of the $1.5 billion deal offered a tacit admission that the
satellite industry's costly attempt to step into the broadband ring was an
abysmal failure. The technology was expensive, both for the satellite companies
and for consumers. And the competition was fierce, as evidenced by cable modem
and DSL's (digital subscriber line) overwhelming dominance of the U.S.
Now, despite ongoing technical and economic reservations, satellite companies
including DirecTV-parent Hughes and refinanced start-up WildBlue
are preparing risky plans to re-enter the broadband business--a reversal that
signals they can't afford to sit out the race.
"It's a way for the DirecTVs of the world to fill a broadband gap to compete
with cable, and to a lesser degree, with DSL," said Jim Penhune, an analyst at
market research firm Strategy
The second coming of satellite broadband underscores the increasing sway of
digital technologies in the telecommunications industry and the convulsions that
have come with it. Cable companies can now offer phone and Internet services
along with television programming, and phone companies are working hard to
deliver video to augment data and voice. Consumers are being wooed with bundles
that put all of these services on the same bill.
Satellite companies have partnered with phone companies to match the cable
companies for now, but they face a troubling future if they can't eventually
bolster their television products with Internet, and ultimately voice, service.
Although satellite broadband has a limited market for now, investments today
could lead to improvements that may ultimately keep satellite services relevant
in the face of a growing array of data services--including the still-undelivered
promise of long-range, high-speed wireless Internet networks.
Satellite companies will begin reintroducing broadband services this summer,
targeting rural customers ignored by cable and DSL providers.
Hughes plans to launch a satellite into orbit that can deliver broadcast
signals more efficiently using better technology on what's called a Ka-band. The
Ka-band satellite also has the ability to offer faster, two-way broadband
Internet service, which Hughes plans to sell to small businesses under the
Hughes currently sells a broadband service called Direcway
to small businesses. The service is expensive, given equipment costs and monthly
subscription fees. However, the company thinks Spaceway will eventually position
it to offer broadband to households in a few years.
"As we move forward with Spaceway, I think we can definitely see a day down
the road to attack the (broadband) marketplace with a more concerted manner,"
said Arunas Slekys, a spokesman for Hughes Network Systems, which runs Hughes'
broadband Internet business.
In addition, satellite broadband provider WildBlue plans to put a Chapter 11
bankruptcy filing behind it and relaunch later this year with backing from
investors that include John Malone's Liberty Media and Silicon Valley venture
capital scion Kleiner Perkins Caufield & Byers.
WildBlue will sell two-way broadband for $49.95 a month for speeds of up to
512kbps downstream and 256kbps upstream. Installation will cost an additional
few hundred dollars, according to a company representative.
There is no question that satellite broadband has
a long way to go to catch up with cable and DSL leaders. Cable companies and the
Baby Bells, who own the largest DSL services, have prospered in cities and
suburbs where they hold strong positions in the market.
Satellite, on the other hand, wants to start over in areas where their
competitors cannot reach: the rural market. These companies hope for a second
chance to launch a business in their traditional power base.
"They're not looking to take over DSL or cable mass market share," said
Patrick Mahoney, a research analyst at The Yankee Group. "They know it's not
possible, but they know they want a strong presence in the rural market."
Last week, Hughes took one step aimed at cutting satellite broadband costs, endorsing the Internet Protocol over
Satellite (IPoS) standard, which sets a common language for devices and
applications to work with a satellite broadband service.
The hope is to rally support among manufacturers who make PC devices such as
handhelds, Wi-Fi hubs and Net phones. If manufacturers all develop products
based on those standards, then broadband satellite equipment will become
cheaper, the thinking goes.
Thus far, Hughes has not announced any manufacturers who have endorsed its
WildBlue is taking a different step. The company is adopting an existing
standard, Data-Over-Cable Service Interface Specifications (DOCSIS), that's
commonly used for cable modems. This, according to WildBlue, lets the company
lower costs on its equipment, although customers will still have to buy an
expensive satellite dish to use the service.
Like Hughes, WildBlue's unveiling this summer will coincide with the launch
of a satellite that operates under the new Ka-band technology, which makes
transmissions cheaper and faster.
Whether these renewed efforts will signal new life for satellite companies
depends on the test of time. The industry believes that the problems of a few
years ago are being resolved. For now, satellite companies are ready to build
their broadband businesses with smaller, more realistic ambitions than before.
"Their expectations are more realistic to just target a few million
subscribers rather than numbers greater than 10 million," said Steve Mather, an
equity analyst at Sanders Morris Harris.
Rural America has always served as a comfort zone for
satellite companies, beginning in the days when they first launched their
television services in the early to mid-1990s. At that time, cable was the only
pay-TV business in most households, especially in cities and outlying suburbs.
But for communities in more remote areas, more people began turning to satellite
providers to get their premium channels.
Satellite's popularity began to spread, largely because it was able to serve
more channels with arguably better picture quality than cable's analog lines.
Soon, competition became fierce enough for the cable industry to take action.
In the late 1990s, the cable industry underwent an ambitious plan to upgrade
analog lines to digital, spending an estimated $75 billion to rekindle its
network. The upgrade allowed cable to offer not only as many channels as
satellite, but it also added the advantage of offering broadband Internet, voice
calls and high-definition TV on the same bill.
Throughout this process, satellite companies tried their own attempts to get
into the game. Their services, however, ended up too expensive for most
consumers to afford, leaving some companies such as Hughes to target only small
The difficult part will be to take another crack at households, starting in
rural markets, once again.
"Satellite TV service providers feel vulnerable that they don't have an
across-the-board high-speed Internet solution right now to compete with cable
companies," said Strategy Analytics' Jim Penhune.
Meanwhile, prices for broadband continue to decline. In 2003, some Baby Bells
introduced DSL service for less than $30 a month
in some areas, just a few dollars more than dial-up ISPs such as America Online.
Cable companies responded to DSL's challenge by raising their base download
speeds instead of lowering prices.
Satellite companies are not worried about these trends because their target
markets are places where cable and DSL have not reached. But the industry is
still trying to figure out ways to lower the economics to one day offer more
competitive rates should satellite broadband follow the path of television.
"The trick here is getting scale, because if you don't have the scale, you're
not going be able to drive price points down enough to foster consumer
adoption," said Matthew Harrigan, an equity analyst at Janco Partners.