AOL may consider satellite deal

As America Online eyes more broadband deals, speculation is that the nation's leading Net service will look to the heavens for its next high-speed offering.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
5 min read
Is a high-speed satellite-based Internet deal between DirecTV and America Online in the works?

America Online is aggressively seeking ways to stream its service through high-speed Internet connections, as shown by its recent deals. Now, word has it that AOL's next target may be the heavens, through DirecTV's satellite network.

While officials from both companies refuse to comment on any possible discussions, analysts and people close to the company say it is a logical step for both.

DirecTV already has the technology available for turning its satellite TV service into a high-speed PC data connection, left over from an failed attempt to create a similar service with Microsoft several years ago.

"I'd be surprised if there wasn't some type of deal sooner rather than later between DirecTV and AOL," said Steve Blum, president of Tellus Venture Associates, a satellite consulting firm.

This morning, DirecTV moved to expand its satellite offerings by acquiring the assets and 2.2 million subscribers of Primestar in a deal valued at approximately $1.82 billion. The deal has been rumored for some time.

AOL wants to be everywhere
Last spring, AOL took the first step toward developing a television-based service when it bought NetChannel, which will help create AOL-branded interactive content for television.

Also, America Online is developing a set-top box-based service tentatively called AOL TV, according to company spokeswoman Jeanie Ryan. The television component is part of the company's larger "AOL Anywhere" initiative, a plan to make the online news and entertainment service ubiquitous by reaching most Web-enabled devices.

The company is planning to make its service available not only via the Internet, but through television and wireless devices such as smart phones and personal digital assistants (PDAs), Ryan said.

She declined to comment, however, on whether the nation's leading Internet service provider has held talks with any of the direct broadcast satellite (DBS) providers. "I can't wait to see us do something with satellites, but we're not talking about that right now," Ryan said.

Meanwhile, the rumor mill continues to churn out speculation that Hughes Electronics, the parent company of DirecTV, and AOL will strike a deal for a broadband Internet service. Such a service would compete with cable modem offerings by @Home and Road Runner.

Several financial analysts said they were familiar with the rumors, and said a deal would make sense for both companies.

"I don't think [General Motors] would sell the Hughes division but I do certainly think they could do an alliance or some agreement," said Jeff Pittsburg, an analyst with Goldis-Pittsburg Institutional Services, a boutique investment research firm. "AOL is going to have to have every medium possible to draw subscribers from."

Analysts said AOL's inability to utilize cable as a medium for delivering its content and online services means the company will have to look elsewhere for a entry into television.

The 15 million subscriber-strong company has been at the forefront of a group of ISPs pushing for so-called open access requirements that would allow the companies to deliver services over cable operators' coaxial wires.

Last week, AOL struck a deal with regional phone giant Bell Atlantic to deliver its services over the telephone company's digital subscriber lines (DSL).

DSL is currently the main broadband alternative to cable modems.

"They'd [AOL] like all three mediums," Pittsburg said. "They're saying to themselves, 'We have to have a strategy.' Obviously the Bell Atlantic deal was a step in that direction and subsequently a second deal with Hughes makes a lot of sense."

DirecTV to try again?
Hughes' DirecTV division is not a newcomer to the idea of data streamed from the sky.

The company previously struck a deal with Microsoft to create a PC card that could receive satellite signals for accessing the Web, along with the traditional TV signals. But that deal fell apart as Microsoft began to invest more into cable and turned its attention to its own WebTV system, said a source close to Hughes' efforts.

The failed Microsoft deal left Hughes and DirecTV with the technology to embark on a high-speed Internet-via-satellite effort; however, the company retreated from plans after concerns about customer support and a lack of viable multimedia content, the source said.

Hughes Network Systems, another division of Hughes Electronics, has launched DirectPC, a similar broadband-by-satellite effort that uses a different set of technology. Under that system, a consumer can access the Internet via a combination of satellite connections and traditional phone lines, with download speeds of about 400 kilobits per second (kbps), and ordinary dial-up modem upload speeds.

Between 80,000 and 90,000 of those units have been shipped worldwide, a Hughes spokesman said.

Another barrier to DirecTV's efforts has been the lack of multimedia content designed for a broadband Internet, said sources close to the company. But as DSL and cable modems become more popular, the number of programmers working on this kind of content has grown.

As a part of the Bell Atlantic deal, AOL already has indicated it would create new broadband-focused content for its service. This could help soothe DirecTV's previous concerns about the new medium.

Waiting for the right moment
Most analysts expect DirecTV to get back into high-speed Net access in its own right.

"The system was designed from day one with data service in mind," Tellus Venture's Blum said. "It's just a matter of integrating it into their existing bit stream."

With the technology for a high-speed data upgrade to the system essentially on the shelf, it has been a matter of finding the right partner and a compelling reason to offer the service. AOL, with its 15 million customers would be the ideal partner, analysts said.

While any DirecTV deal could provide a critical way into the interactive television market, allowing AOL to make an end run around recalcitrant cable providers, the move would essentially be just another logical programming decision for Hughes, which is the largest DBS provider with nearly 4.5 million TV subscribers.

"This would be just standard programming logic," Blum said. The company needs to offer whatever popular channels it can over its service, and AOL would be a "channel" with proven popularity.

"It's a little like saying HBO is going to be offered over DirecTV," Blum said.