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Satellite High-Speed Data Service Coming Fast
DirecTV and Echostar are scrambling to offer fast service over TV sets
By Alan Breznick
Despite a late start and a few initial missteps, satellite TV providers are racing to catch up with cable operators and regional phone companies in bringing high-speed data services to consumers and businesses.
With cable modems now in more than 1 million North American homes and growth accelerating, DirecTV Inc. and EchoStar Communications Corp. are both scrambling to offer fast Internet access to subscribers over TV sets, rather than personal computers like most cable operators. Both DBS operators have allied themselves with well-heeled partners in the computer world to deliver the Internet TV service, EchoStar with Microsoft Corp.'s WebTV Networks and DirecTV with American Online Inc. (AOL).
General Motors' Hughes Electronics Corp., the parent company of DirecTV, will also team with cable antagonist AOL to offer high-speed data service to PC users, starting early next year. As part of AOL's $1.5 billion investment in Hughes, the two partners will re-brand Hughes' struggling DirecPC service as a satellite version of "AOL Plus," a high-speed variety of AOL that will also launch soon over several regional phone companies' digital subscriber lines (DSL).
"We think the (AOL) brand name in front of it will help tremendously," said Mike Smith, chairman/CEO of Hughes Electronics, while announcing the deals to reporters in late June. "It really jumpstarts us on the consumer side."
In addition, AOL will play a still undefined role in the development of Hughes' planned Spaceway network of high-powered Ka-band satellites. Hughes intends to spend $1.4 billion to build and launch the first three broadband birds, designed to deliver such two-way services as quick Internet access, video conferencing, long-distance learning and possibly interactive TV to dish owners, starting in early 2002. "We plan to make AOL Plus available through all high-speed technologies - DSL, cable, satellite and wireless," Steve Case, chairman/CEO of AOL, told reporters in the same conference call. He called it part of the "high-speed tapestry" that AOL is trying to weave.
The DBS catch up moves come as cable operators, heady with the early success of cable modems, seek to expand their data lead over their telco and satellite rivals. With cable modems now in more than 1 million U.S. and Canadian households, industry analysts expect the total to reach about 1.6 million homes by the end of the year.
"Cable clearly, at minimum, has a five-to-one lead," said Michael Harris, president of Kinetic Strategies Inc. He estimated that DSL modems are in no more than 200,000 homes so far.
They also come as the phone companies, alarmed by the growing popularity of cable modems, belatedly step up the pace of DSL rollouts in their major markets.
Late last month, for instance, Bell Atlantic Corp. announced that it will double the pace of its DSL deployment, while GTE Corp. became the fourth regional phone company to agree to carry AOL Plus on its DSL lines.
"There's a lot of competition in the DSL market and a lot of promotion," said Cynthia Brumfield, principal analyst at Broadband Intelligence Inc. "There's a real big, aggressive push on DSL."
Given these market dynamics, the two DBS companies seem well behind their cable and telco competitors. EchoStar began offering WebTV service only about two months ago and has not yet announced any subscribers for it. DirecTV won't start offering its planned AOL TV service until early next year.
DirecTV and EchoStar also start out with a couple of major disadvantages compared to cable operators.
First, unlike most cable-based Internet access players with fat broadband pipes, the two satellite operators cannot provide fast two-way data service to customers, at least not until they launch the new breed of more powerful Ka-band satellites. While they can beam the data down to dishes quickly, they're dependent on much slower phone lines to carry signals back upstream from the subscriber's home.
"It's a klugey (clumsy) solution," Harris said. "Cable totally has the upper hand."
Second, the DBS providers are focusing, at least initially, on the emerging, still unproven Internet TV market rather than the booming, well-established PC market. Despite Microsoft's marketing might, WebTV has signed up a disappointing 800,000 subscribers after three years. WorldGate Communications Inc., the leading cable-based Internet TV player, is a distant second with 7,500 customers after a year of commercial operations.
"This area is going to be really important if DBS is going to stay on the cutting edge," said Jimmy Schaeffler, chairman of the Carmel Group. "But I still think they're swimming upstream."
But, while they acknowledge these shortcomings, DirecTV and EchoStar executives think they have some advantages over cable too, including better marketing and far more retail clout. Most of all, they like to stress, they offer a national footprint for rolling out data services all at once, a reach that MSOs and phone companies can't come close to matching on their own.
Case said DirecTV's national reach was a key factor driving AOL's decision to hook up with the DBS provider. He noted that less than one-third of U.S. homes enjoy broadband access today and no more than two-thirds of all households are expected to have it by 2004.
"The exciting thing is a majority of (our) customers have no broadband option," he said. "Those people will finally have an option."
Beating DirecTV and AOL to the punch, EchoStar and WebTV have already started marketing their joint satellite TV-Internet service to the public. For the past two months, they've been jointly promoting an advanced digital set-top box, DishPlayer, that lets subscribers get DBS service, browse the Internet, send and receive e-mail, download video games and carry out such "personal video recorder" (PVR) functions as pausing, rewinding and fast-forwarding TV shows in progress.
EchoStar officials say sales have been brisk so far, although they decline to give out numbers. After cutting the introductory price by 60% to $199 in late May, they hope to sell hundreds of thousands of DishPlayer receivers by the end of the year.
"We're selling everything we can make," said Mark Jackson, SVP of satellite services at EchoStar. The company's subscribers pay an extra $24.95 a month for WebTV Plus service and then another $4.95 a month for the PVR services.
As part of its Internet TV strategy, EchoStar also intends to roll out a suite of a few dozen interactive data channels for DishPlayer customers this fall. In late May, the company unveiled five new Web content providers - Intellicast.com, MBT International, SailingNews.com, SimplyTV and Women.com Networks -adding them to a list of 11 providers already signed up.
Eventually, the company aims to offer up to 300 data channels, a mix of text and multimedia information and entertainment, to subscribers. Although pricing hasn't been set yet, some channels will be packaged together for a small monthly fee while others will be priced individually. EchoStar is also tinkering with "on-demand" fees, or pay-per-view charges, for some of them.
"There are really good revenue possibilities above and beyond television," said Doug McGary, manager of broadband data products for EchoStar. "We'll get more (money) out of all of the above."
DirecTV's plans with AOL are still fuzzy. "It's really about enhancing the TV experience and adding more convenience to people's lives," said an AOL spokeswoman. "We're not trying to replace the TV with the PC or vice versa."
But, similar to EchoStar and WebTV, DirecTV and AOL will make use of dual satellite TV-Internet TV set-top boxes produced by both Hughes Network Systems and Philips Electronics. DirecTV subscribers will pay perhaps an additional $10 to $15 a month for the AOL TV service.
In an interview in late June, Eddy Hartenstein, president of DirecTV, predicted that the two partners will sign up a combined 1 million to 1.5 million customers over the next three years. With the $1.5 billion cash infusion from AOL, Hughes will spend up to $500 million promoting DirecTV's "plain-vanilla" service and another $400 million marketing the combined AOL TV/DirecTV service.
"We think it'll be a significant (subscriber) driver for us," said a spokesman for DirecTV, which is already growing at a record pace this year. "It's a huge initiative for us."
Over at Hughes Electronics, Smith figures that the new alliance will also generate 1.5 million customers for DirecTV's sister DirecPC service over the next three years. A business-oriented Internet access service that uses phone lines for its return path, DirecPC has struggled to pick up 40,000 customers in the U.S. and 60,000 in the rest of the world since it launched several years ago.
"We have not marketed it aggressively," Smith said, blaming "financial constraints." With up to $600 million in promotional funds from AOL committed for DirecPC and its companion DirecDuo service, he believes this problem has been remedied.
Several industry analysts agree that the AOL/DirecTV combination should perform well. In its latest forecast last month, for instance, the Carmel Group projects that the two will sign up 1 million joint customers by the end of next year and 5 million by the close of 2003.
Although both EchoStar and DirecTV are largely stressing TV-friendly data services, one analyst thinks the two will also have some luck signing up PC users for satellite-delivered Internet access. Steve Blum, president of Tellus Venture Associates, predicts that the two will sign up a combined 167,000 PC customers by the end of the year, 368,000 by the end of 2000 and 2 million by the close of 2003, with EchoStar accounting for the lion's share at first.
"EchoStar has been a lot more aggressive with computers than DirecTV has," Blum said, contending that Microsoft shifted its alliance from DirecTV to EchoStar this year for that reason. But, he added, "the (DirecTV's) deal with AOL will open the door to more down the road."
(August 16, 1999)
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