Satellite Net provider in orbital limbo

Pegasus Communications has been offering DirecTV video service to rural America for years and boasts 1.5 million subscribers. Just this week it signed its first customer to Pegasus Express, a two-way high-speed Internet service it is launching using leased satellite capacity. Its goal, however, is to launch two satellites that would cover the United States so that it could provide its own video and Internet service to the markets not reached by cable modem service or DSL.

But to do that, Pegasus needs the Federal Communications Commission to give it orbital slots currently assigned to other companies.

"If we don't get full (coverage) we don't have a business plan," said Pegasus Vice President Cheryl Crate.

"We've had an application at the FCC for forty months," Crate said. "We need these licenses soon" so the company will have time to launch the satellites before 2004, when under an international agreement the licenses would be returned to the International Telecommunications Union if the slots aren't in use.

Though not yet a business issue, Pegasus' plight underscores the increased role FCC decisions play for emerging communications concerns. The FCC maintains that all issues related to the licenses will be resolved by this summer, but a source couldn't speculate as to what licenses would be available for applicants.

Working with Washington
There are a number of orbital slots in what is known as the Ka-band that would suit Pegasus' needs, but they're in the hands of major satellite players such as PanAmSat, majority-owned by DirecTV owner Hughes Electronics, itself a General Motors subsidiary.

Under FCC rules, if these so-called first-round license holders fail to build and launch satellites to these slots the FCC takes the slots away and assigns them to a second-round company such as Pegasus.

The FCC took some slots away from a number of companies last year but they appealed. A Commission source said those and other issues should be resolved by this summer, but Crate fears that at least one company will get to keep its license, leaving fewer options for Pegasus. What the company wants is two slots that together cover the entire United States, known as CONUS (continental U.S.) coverage.

An FCC source defended the time the agency's International Bureau has taken in reviewing first-round licenses. The removal of a license from a company that has been awarded one is a serious matter, the source said, and the bureau is required to follow numerous procedures before concluding that a company has no intention of launching a satellite. Even then, companies have a right to appeal a revocation, as all three companies did who were singled out by the FCC last year.

There was an additional delay as the FCC resolved rules on how satellites can communicate with each other, the source said, and that order was only released last month.

Another concern for Pegasus is that some of the first-round license holders that have not put their slots to use will succeed in transferring them to other companies that didn't apply in the second round more than three years ago, the way Pegasus did.

"The FCC would essentially be supporting line-jumpers," she said. Any combination of these decisions from the FCC might mean there wouldn't be adequate slots left for Pegasus. Decisions on some of these transfer applications could happen as early as next week.

Of suits, countersuits, and financing
Whenever the FCC acts, Pegasus is guaranteed to be a late broadband entrant, said ING Barings analyst David Kestenbaum. Broadband deployment "is already in the third inning," he said, with digital cable extending to rural areas.

There's also the issue of financing the construction and launch of two satellites, which could come to about $500 million, plus the cost of new set-top boxes for each Pegasus customer. "Whether the markets would finance this is questionable," Kestenbaum said. Getting the service off the ground "is not a no-brainer."

Crate insisted that while the company doesn't have the money now, "we have the financing lined up" if the company wins the licenses.

But the analyst said the company appears to be adept enough to survive its currently muddled position. "I think they're creative and they'll find their way out of this box" if they don't prevail with the FCC or with the suits, he said.

Additionally, there's the matter of Pegasus' partnership with DirecTV. That expires when DirecTV's satellite is ready for retirement in a few years. Pegasus contends it has the right to continue the partnership, but DirecTV disagrees, and the companies are suing each other.

Kestenbaum suggested that pursuing the orbital slots might be a way to convince DirecTV that Pegasus had a serious alternative to a continued partnership, which might lead to a settlement of the suits. But Crate insisted the company was not pursuing the licenses merely to improve its negotiating position with DirecTV.