Interesting article on broadband (via Raging Bull site) - note Qwest reference.
Broadband In The Sky
May 19, 1999 - 2:45 PM
By Roderick Beck
Media attention on broadband during the last year has focused largely on cable and digital subscriber line, or DSL, technology. The broadband brouhaha has largely ignored the emerging role of satellites in providing data services such as high-speed Internet access. But companies like Softnet Systems (SOFN) and Hughes Electronics (GMH) unit Hughes Network Systems are using satellite technology to attack the U.S. broadband market. Due to its multicasting function and a lack of broadband networks in developing countries, satellite is poised to be the dominant broadband technology in much of the world.
What Is Broadband?
Broadband generally refers to the ability of high-capacity networks to rapidly deliver large amounts of data. In the absence of network congestion, large capacity means minimal delay and high quality. What most investors fail to realize is that broadband comes in two flavors, backbone and local access. Backbone refers to the long-distance networks that route phone calls and data traffic, including the Internet, across the country and around the world. Local access refers to the ‘‘last mile'' - the copper phone lines and cable television networks that connect the telecommunication backbones to the customers.
Over the last several years backbone capacity has exploded due to huge investments in fiber optic networks complemented by more powerful switching equipment. Not only have the leading carriers dramatically increased their ownership of fiber, but new technologies like wave division multiplexing and new broadband carriers like Qwest Communications (QWST) have also contributed to an explosion in backbone capacity.
Unfortunately, the local networks have not kept pace. The result is that the copper wire connecting the end user to the backbones is too thin. It has become a bottleneck. While the backbone networks are like 20-lane highways, the exit ramps are one lane and backed up for miles.
What Satellite Does Poorly
Many investors misunderstand where satellite fits in the broadband picture. Many think the absence of wires makes wireless technologies cheaper than the alternatives. That is a myth. Satellites use electromagnetic spectrum very inefficiently compared with fiber. For example, a satellite broadcast of an analog television channel requires six times the spectrum of a cable system. Such inefficient use of the spectrum is a general problem with wireless technologies.
However, it's not the key problem. The Achilles Heel is that the use of a spectrum by one satellite precludes the spectrum's use by any other satellite or party in the same broadcasting footprint. In contrast, fiber spectrum is virtually unlimited because each strand of fiber uses it without excluding other fiber strands from exploiting it. While fiber replicates spectrum, satellite excludes its use by another satellite within the same broadcasting area. Hence, spectrum is essentially free in fiber optic cables, while satellite providers face a limited and costly supply of wireless spectrum. This limited supply of spectrum means that satellites cannot offer the huge capacity found on the fiber optic backbones criss-crossing the U.S. and other developed nations. In other words, fiber is here to stay as the backbone of the wide-area telecommunication networks.
The inefficiency of satellite is particularly striking in point-to-point applications that involve two-way communication or interaction like telephony. Devoting limited satellite spectrum to handle a simple phone conversation is expensive because there is a high opportunity cost. The same spectrum can provide much greater value if used in broadcasting applications that serve a large number of customers. Scarcity of spectrum leads me to believe that fiber will dominate the developed world. The cost of fiber is less than copper on a capacity-adjusted basis, and it's aided by developments in electronics that can increase raw fiber transmission capacity by as much as 13,200%, so its cost will continue to plunge.
Where Satellite Excels
The key strength of satellite lies in broadcasting the same content to many locations - point-to-multipoint applications. Because the cost of delivering data within a satellite's footprint is independent of distance or the number of sites receiving it, broadcasting is a much cheaper way of sending data to a large number of sites than terrestrial links. Hence satellite broadcasting has huge cost advantages in multicasting content of all kinds, including distance learning, video delivery to cable companies, and Internet web pages. The huge economies of scale make satellite more economical than fiber links for large businesses, government organizations and ISPs that need the same content delivered to many domestic or international locations.
While satellite is unlikely to usurp the fiber optic backbones in developed countries, I expect a very different outcome in the developing world. In many African, Latin and Asian countries the cost of building broadband wire networks is prohibitively expensive due to lack of money and extremely challenging terrain. Not only do the countries lack the internal networks to quickly carry Internet traffic, but they must buy expensive international links to the U.S.-based Internet which can cost as much as $70,000 a month. Adding insult to injury, Internet speeds are extremely slow in most developing countries with large numbers of users who share the equivalent of a single phone line's capacity. Even in a place like Greece, an ISP might be serving large numbers of residential customers with the equivalent of single phone line connection. The result is a very expensive, but exceedingly slow Internet experience.
Satellite is emerging as a solution to these problems. A private U.S. company, InterPacket Group, is broadcasting the Internet to foreign ISPs via satellite in more than 40 countries. In essence, satellite is used to leapfrog the transoceanic fiber networks, directly connecting ISPs in countries like India to the U.S. Internet. The result is that the ISP pays a fraction of what a terrestrial U.S. Internet backbone provider would charge and receives much faster access for its customers. In many cases the Internet traffic is carried right to the ISP's point of presence, or POP, bypassing the unreliable and congested national networks as well.
Even ISPs in the U.S. are beginning to use satellite. A company called SkyCache offers to monitor the Web sites being downloaded by an ISP's customers to determine which are most popular. It then broadcasts the sites directly to the ISP's network, where they are stored in a local storage device known as a cache. The result is that the most popular Web content is stored locally at the ISP POPs or regional centers, reducing the need for fat, expensive pipes to the Internet. Moreover, because the Internet is congested, satellite delivery improves speed and overall quality.
A related service is delivery of multimedia content to ISPs. Softnet Systems, a cable Internet access company, is using satellite to deliver streaming video and audio content to its cable affiliates. Because streaming video and audio content hogs bandwidth, satellite can once again reduce the amount of Internet access that cable companies need to purchase from the backbone providers.
Another interesting development is the DirecPC service provided by Hughes Network Systems, the huge satellite provider. Customers access the Internet through phone lines. Requests are forwarded to the Web site, with the return traffic being sent to a satellite transmission tower which beams the traffic to a satellite. The satellite then sends the download at 400-kilobit speeds to a small satellite dish owned by the customer. While this particular service itself has not been an outstanding success, I believe satellite Internet access could dominate rural areas of the U.S. where cable and DSL aren't available. In the developing and third world, DirecPC-type services will probably be very popular.
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