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AOL's satellite investments may pay off

The online giant's reported interest in investing as much as $1 billion in satellite technology firm Hughes Network Systems could be a knee-jerk reaction to AT&T's aggressive broadband moves.

America Online's reported interest in investing as much as $1 billion in satellite technology firm Hughes Network Systems could be a knee-jerk reaction to AT&T's aggressive moves in the cable industry--but one that may pay off in the future.

Should the deal, reported by Business Week, go through, analysts say the investment will give AOL an early jump into a broadband platform that is expected to compete with cable for access to millions of consumers' homes.

Some analysts say it would be just See related story: The new world order an expensive investment in a platform that may not catch on with consumers.

Market research firm Jupiter Communications says satellite market share will always pale in comparison to access via cable or digital subscriber lines (DSL). It predicts that by 2002, 12 percent of all online households will have cable modem access, 6 percent will have DSL, and only 1 percent to 2 percent will use satellite.

"It's a waste of AOL's money," said Jupiter analyst Abhi Chaki. "Satellite Internet access will at best command very, very niche audiences in the U.S., and it's never going to be a mass market play."

Others disagree, pointing out that cable has hurdles of its own to overcome.

"In reality satellite is already further along. The systems are already digital, and it's national. Cable is system by system," said Antonette Goroch, vice president for research and consulting at the Carmel Group, a communications and satellite industry consulting firm. "I don't see cable getting there any faster than the two-way satellite services because of the upgrades they have to do."

With its $62 billion buyout of No. 3 U.S. cable company MediaOne, AT&T plans to package high-speed Internet access, television service, and local phone service within one service to households, using cable as the delivery platform. In reaction to the moves, Microsoft last week invested $5 billion in AT&T in an effort to get a piece of the action.

Broadband or bust
AOL wants to offer Net access via cable to its 17 million subscribers. There are more than 66 million U.S. homes and businesses served by cable television, and cable networks are capable of delivering high-speed Internet access through modems designed for cable.

However, federal regulations do not require cable companies to open their lines to outside providers, so AOL and other ISPs are essentially shut out of a potentially lucrative market. AOL has led a group of ISPs in pushing for new federal laws that would require AT&T and other cable operators to open their networks to competitors.

Many analysts agree that cable modems will prevail over DSL, especially for the mass market. DSL is being targeted primarily at small and medium-sized businesses.

Satellite technology gives AOL a third broadband option. Some analysts believe it could be a wise play for AOL if consumers take to broadband satellite data services the way many have embraced satellite TV.

In 1998 nearly two-thirds of all new multichannel video subscribers signed up with a direct broadcast satellite (DBS) operator, according to a January study by the Federal Communications Commission.

Pie in the sky?
AOL's recent alliance with DirecTV, the nation's largest DBS operator, and three other interactive television companies gives it some options for developing its AOL TV strategy.

But more immediately, an investment in Hughes Network Systems could put AOL ahead of AT&T in the broadband game if two-way satellite data services take off, analysts said.

"This move positions [AOL] very well because they'll already have the alliances when the technology becomes a reality," said Carmel Group's Goroch.

HNS, a business unit of Hughes Electronics that operates DirecTV, is developing a new satellite service capable of high-speed two-way communications.

The service, dubbed Spaceway, will consist of a constellation of satellites and is slated to launch as early as 2002. Many analysts believe it will be about five years before two-way satellite data services become a reality, but several firms are betting on the systems.

Cellular technology magnate Craig McCaw and Microsoft chief Bill Gates are partners in Teledesic, a similar planned service, but Lockheed Martin, Alcatel, and Loral Space & Communications are planning or already have their own two-way satellite systems in place, ready to offer an Internet-in-the-sky.

Goroch believes AOL is making a smart move to hedge its bets on the technology, because "it's going to be a patchwork of local access options for consumers." In addition, satellite technology is better suited to broadcasting data to many consumers, instead of the one-to-one relationships set up by today's Internet. Goroch said many data services will migrate to a broadcast model in the future.

Should AOL go through with an investment in Hughes, the online giant will gain an edge in offering an alternative to cable modems. But the question remains whether dumping up to $1 billion into satellite technology will prove worthwhile in the long run.

But as history has shown, being early in the game has its rewards.

"This is a really an early chess move by a Web chess master," said Ron Rappaport, an analyst at Zona Research. "They can't afford to wait a decade or a generation to strike a company like Hughes."