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Satellite seeks broadband re-entry

Satellite companies Hughes and WildBlue are prepping high-speed data services for rural markets. Will they get burned a second time?

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.

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What's new:
Satellite companies are taking another crack at offering broadband Internet access, beginning in the second half of 2004. Their first stop: their stronghold in rural America.

Bottom line:
Satellite companies have tried in the past to launch broadband services, but the offerings wound up being too expensive and too slow compared with cable and DSL. New technology and greater demand may help bridge the gap.

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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. broadband market.

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 Analytics.

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 moniker Spaceway.

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.


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New subscribers' preference
for low price over fast
connections benefits DSL companies.

"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.

Playing catch-up
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 standard.

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.

In country
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 businesses.

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.