Satellite firm beams up big-name support

Microsoft and EchoStar invest in Israeli upstart Gilat, which plans to introduce the nation's first two-way consumer satellite Internet access service.

4 min read
Most providers of satellite Internet access services promise to deliver high-speed connections to even the nation's most rural and isolated areas--if you can wait until about 2005.

Several highly touted satellite Net offerings are being planned by military and space giants Lockheed Martin, Hughes Electronics, Loral Space & Communications, Boeing, Motorola and Alcatel, among others. But their high-speed, or "broadband," satellite Internet services will not be available for several years, ranging from roughly 2002 to 2007.

Gilat Satellite Networks, an Israeli technology company, hopes to beat those big names to the launching pad with some heavyweight support of its own: Microsoft and satellite-TV company EchoStar Communications have invested in the company.

Gilat plans to introduce in the United States the first two-way consumer satellite Internet access service, Gilat-To-Home, during the fourth quarter. The company yesterday said it is "on track" to launch the service this fall.

"Broadband Internet access is sweeping the satellite industry, and Gilat is right in the middle of it," said Sean Badding, an analyst at the Carmel Group, a satellite industry research and consulting firm. "They've got the big-name partnerships to do business."

Microsoft bypassed partnering with some of the space industry's largest names in favor of a stake in the much smaller Gilat.

"The reason that we went with Gilat is that they are going to be first to market with a consumer satellite service that can send data up and down," said Bob Visse, lead product manager for MSN. "Some of those companies (such as Loral and Hughes) have some interesting plans, but some of them are not as far along. And many don't even have their (satellites) up yet."

One such example is Teledesic, a satellite Net venture involving Microsoft co-founder Bill Gates and cellular phone entrepreneur Craig McCaw. Teledesic is not expected to offer service until at least 2004, although others such as Tachyon.net, which also offers a two-way system, already are available for businesses.

Satellite technologies have long been an attractive Internet delivery medium because of their high-bandwidth capacity and particular advantages for broadcasting streaming media. But early satellite systems, such as DirecPC, offered only high-speed downloads while requiring subscribers to send upstream information via dial-up modems and standard phone lines. Critics said the setup was far from "elegant" and made satellite systems costlier, slower and less attractive to consumers.

But Gilat will soon introduce a two-way system capable of both sending and receiving data via an 18- to 24-inch oblong satellite dish.

Based on very small aperture terminal (VSAT) technology, which primarily has been used for commercial data in the past, analysts expect the Gilat-To-Home service to offer download speeds of about 500 kbps (kilobits per second) with uploads of roughly 300 to 400 kbps--comparable with many competing digital subscriber line (DSL) connections.

The technology competes against DSL and cable modems, which are rapidly being installed by phone companies and cable operators to satisfy consumer demand for high-speed Net connections and to reap the higher profit margins typically generated by broadband services.

Gilat at a glance

HQ: Petah Tikva, Israel  
CEO: Yoel Gat  
Pres.: Amiram Levinberg  
Ticker: GILTF  
Exchange: Nasdaq

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Gilat yesterday posted second-quarter earnings that beat consensus expectations. It reported net income of $9.1 million, or 38 cents per share, narrower when compared with net income of $12 million, or 56 cents a share, for the same period last year.

Wall Street expected the company to earn 35 cents a share, according to First Call/Thomson Financial.

Quarterly revenue rose 46 percent to $108.6 million from $74.4 million for the quarter ended June 30 a year ago.

Gilat's slimmer profits are unlikely to cause concern ahead of a major product launch with its development and marketing costs, but the numbers may reflect weakness across the broader satellite industry, which has seen spectacular failures by satellite phone services Iridium and ICO Global Communications.

The company in February warned that its earnings would be lower because of lower profit margins for the Gilat-To-Home service, according to Reuters.

Analysts expect the service to be most popular, at least initially, in rural and isolated areas.

"They're not going after subscribers in the metro areas. Right now there's no clear advantage that satellites have over cable or DSL in the big cities," Badding said. "It's not going to make sense for most in metro areas, but it will make sense for those who live in areas not served by cable or DSL."

Analysts expect satellite Internet access to first take hold in the rural areas where cable and phone companies do not or cannot offer high-speed Net access and eventually spread to larger population centers as prices fall and new services are introduced.

"It will be similar to the growth pattern of satellite TV," Badding said.

A growth curve that even slightly resembles that of satellite TV would be promising for satellite Net access. Since being introduced in the early 1990s, satellite television has cut significantly into the market share of cable TV operators. The satellite TV industry is expected to claim about 15 percent of the market--reaching about 15.5 million households--by the end of the year, according to the Carmel Group.

The growth potential was significant enough to attract the likes of Microsoft, which has invested $50 million in Gilat, and EchoStar, which also invested $50 million and will provide some of the equipment.

EchoStar, the No. 2 direct satellite broadcaster, desperately needed an Internet offering to compete against DirecTV and its DirecPC satellite Net service, analysts said.

For its part, Microsoft will provide the ISP service and a Web portal front end based on its MSN service.

Reuters contributed to this report.