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By Charles Dubow
he satellite industry says it can bring broadband to the world. The only
question is whether the world wants it.
Only yesterday, Boeing (nyse: BA) announced that it would develop its
own satellite system, while at the same time satellite telephony
company, Iridium (nasdaq: IRID) was forced to slash personnel and prices
because it hasn't been able to sign up enough subscribers.
Amid all the talk these days about broadband, the two technologies most
often mentioned are cable and DSL (digital subscriber line). Wireless is
gaining ground slowly, but the technology that commands the least
respect is satellite. There are four primary reasons for this: First,
satellite systems require a lot of up-front costs and are subject to
launching delays; second, they do not currently offer the same robust
interactivity as competing technologies; third, for the most part
satellite companies do not yet represent attractive investment
opportunities; and fourth, satellite service is too expensive for the
consumer market.
The notion that satellite technology was made for people who live in the
desert or in trailer parks is not entirely inaccurate. Because of
geography or expense, approximately 30% of U.S. homes and businesses
cannot be served by cable or DSL. The percentage is even higher outside
the U.S. As DBS (direct broadcast satellite) has proved, there is a huge
domestic and international market for satellite television services. In
the U.S. alone, more than 10 million homes get DBS, and that number is
constantly growing.
The corollary is that most people who live in areas that don't have
access to either cable or DSL are often in lower economic brackets and
may be less likely to spend the money for an upgrade to satellite
broadband.
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There is no way the satellite industry can grab any meaningful market
share for at least another five years.
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Therefore, it remains unclear if, despite the demand for more television
channels, the demand for broadband will be equally strong. Today, around
40% of U.S. homes have PCs, and the Internet has an estimated 64 million
users. According to New York City-based investment bank C.E. Unterberg,
Towbin, by 2007 there will be 131 million broadband subscribers
worldwide, of which only 10% will get their high speed access via
satellite.
"Right now the only people who can afford satellite broadband are large
enterprise customers," according to Armand Musey of Banc of America
Securities. "The beauty of satellite is that it offers both a seamless
global network and unmatched convenience. All you need is one protocol,
one type of hardware and one upgrade. What's more, you don't have to
worry about negotiating with dozens of different telcos, broadcasters or
Internet companies around the world."
In addition to expense, the existing satellite broadband technology
known as VSAT (very small aperture terminal) lacks the bandwidth to
support a mass-market base. So far the only major players are Hughes
Electronics' (nyse: GMH) DirecPC and Gilat's (nasdaq: GILTF) SkySurfer.
At the same time, other companies are attempting to infiltrate the space
as well. "The problem for mass-market satellite broadband providers like
Teledesic and SkyBridge," says Musey, "will be in driving the hardware
and services costs down to levels affordable to most consumers, while
widening the pipe to support subscriber levels in the millions as
opposed to the tens of thousands."
At the same time, however, the major satellite companies--Hughes, Loral
Communications (nyse: LOR), Echostar (nasdaq: DISH), Lockheed Martin
(nyse: LMT), Gilat, closely held Teledesic and others--are working to
develop technology that will allow them to reduce their fees and offer
more bandwidth to a wider audience.
They plan to do this by launching new satellites that take advantage of
the Ka-band (20 MHz to 30 MHz), which offers an unprecedented 12 bands
of spectrum. For years satellites have used the smaller Ku-band (11 MHz
to 13 MHz), which has been easier to work with but offers only two
bands. The other advantage to Ka-band is that it allows satellites to
reuse frequency, which has been a major obstacle, and to double
available capacity.
Ka-band, however, has been more susceptible to natural interference,
such as rain or heavy clouds. But, those problems are being solved and
the first commercial Ka-band satellite is expected to launch this
summer. Nevertheless, some satellite systems are likely to use a
combination of Ka and Ku.
That means there is no way the satellite industry can grab any
meaningful market share for at least another five years, possibly
longer. At the rate that terrestrial broadband such as cable, DSL and
wireless is accelerating, it is conceivable that by the time Ka-band is
operational, new technologies on the ground will already be into the
next generation.
So if the technology is too expensive and in danger of becoming
obsolete, why are satellite companies spending an estimated $30 billion
to develop it?
Today an individual satellite costs approximately
$225 million, and launching a system of three
to five satellites--including the subscriber
management system, call center, uplink,
etc.--can cost up to $2 billion. "The problem
with satellites is that once you launch one, they're
gone," says Jimmy Schaeffler of The Carmel Group, a
research group in Carmel-by-the-Sea, Calif. "If there's
a glitch or a problem, when they're 22,300 miles up
there's nothing you can do to fix it, so when they go
up they have to be perfect."
But compared with the $120 billion it has so far cost
AT&T (nyse: T) to establish itself as a cable presence,
Schaeffler argues, satellites begin to look less
extravagant. "How many subscribers did they get for
what they paid? Fourteen million." he says. "With
three birds in the air Echostar has the ability to reach
every single house in the U.S. Satellite has the
potential to penetrate every house in the world."
Until this year there had been high hopes for satellite.
The cable and telephone companies had not yet
begun aggressively rolling out broadband, and certain
companies like Teledesic and Iridium were still held
out as potential leaders in the broadband arena. But
then Teledesic, founded by Bill Gates, Craig McCaw
and others, radically scaled back its original plan of
launching 900 satellites, and Iridium failed to make
its numbers, leading to a collapse in its share price
and the resignation of its CEO and CFO.
With the exception of Echostar, satellite stocks have
been anathema to the market for most of the year.
Brian Hayward, who runs the $778 million large growth
Invesco Worldwide Communications fund (ISWCX),
says that while Echostar is his third largest holding, he
wouldn't go near any other satellite companies.
"Echostar is a pure play," he says. "As opposed to
Hughes, it's more focused. Subscriber growth is
beating the forecast, and they came out of the
Primestar debacle well. But I don't know if the
business models work for the other companies, so I'm
not buying them."
"Currently there are no pure-play
public satellite broadband
systems available for investors."
"Currently there are no pure-play public satellite
broadband systems available for investors," says
Musey of Banc of America Securities. (Echostar is a
DBS play and doesn't launch its own satellites.) He
cites Teledesic, Hughes' Spaceway and privately held
SkyBridge as being the most ambitious projects in
terms of offering broadband to consumer markets by
2003. Loral's CyberStar and General Electric's (nyse:
GE) GE*Star do not represent a meaningful part of
their companies' overall valuation.
"The people and companies that see the potential of
satellite are among the most powerful in the world,"
says Schaeffler. "You're talking about Gates, McCaw,
Boeing, Lockheed, General Motors. They're all saying,
'We have a core competency, but it's time to take it to
the next level.'"
One of the best ways to do that, in addition to
increasing spectrum and bringing down cost, is to
increase the value of the service. To do that, Echostar
is working with companies like Microsoft's (nasdaq:
MSFT) WebTV and privately held interactive television
companies Wink and Tivo. Similarly, Hughes' DirecTV
and America Online (nyse: AOL) have teamed up to
offer online service to satellite subscribers.
But at the same time, one cannot help but wonder
why satellite companies are continuing to spend
billions on the broadband market. It is obvious that
satellite broadband will be unable to generate any
significant revenue for several years, and it remains
uncertain if even then they will ever be able to
meaningfully compete with cable, DSL and wireless. It
is possible that, having already spent so much time
and cash to develop a broadband strategy, they could
face the wrath of their shareholders for abandoning
their investments.
But as the developing world moves steadily into the
broadband age, satellite will play a part. While it may
not be the success its backers envision, it could
certainly come in handy the next time you want to log
on to the Internet in Outer Mongolia.
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