Buying Real Estate in the Sky

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With pressure increasing to add local and HD channels to their lineups, direct-broadcast satellite providers are eyeing the sky, looking to increase their satellite capacity through new birds — and, increasingly, through leased transponder space from commercial satellite systems.

But the skies are crowded, and with high cost and lengthy satellite-launch programs, the question is whether DBS providers can harness enough orbital real estate to keep up with their cable competitors.

There are two main flavors of broadcast satellite harnessed by DBS providers. The older Ku-band transponders are in the majority, used mostly for nationwide signals but also for spot beams targeting a local area.

Newer, higher-power Ka-band transponders can field multiple spot beams and promise to greatly boost capacity for local channels. They can also support two-way broadband Internet service.

But Ka-band capacity is now limited to a handful of satellites.

The two capacity crunches for DBS players these days can be blamed on the burgeoning demand for HDTV and local programming. Depending on the compression scheme, HD broadcasts consume upwards of five times the bandwidth — and therefore, the orbital transponder space — of standard digital transmissions.

And much of the available HD programming comes from local channels, putting additional stress on satellite-TV players to find or create more spot-beam capacity.

For that reason, Oppenheimer & Co. cable and satellite analyst Tom Eagan believes the capacity crunch is more of a mid-to-late 2004 issue, adding that the solution could be allowing DBS companies to transmit broadcast network feeds to local markets, or forcing local stations to increase the power of their broadcast towers.

"If you live in southern Connecticut, you probably won't get the HD signal for ABC, CBS or NBC out of Hartford," Eagan said. "If you were to have an EchoStar [Communications Corp.] or DirecTV [Inc.] dish and want to get the HD signal from a terrestrial antenna, you probably won't be able to get it because the broadcasters don't broadcast at full power."

Legal Throttle

Currently, the DBS service providers are not allowed to transmit distant network feeds to customers who can receive them off-air, part of the federal Satellite Home Viewer Improvement Act (SHIVA), set to expire in 2004.

As the federal government looks at that legislation, Eagan said, it might ease those restrictions to encourage HDTV growth.

But if neither of those scenarios come to fruition, then the DBS companies will have to scramble for capacity.

The DBS service providers don't seem to want to bet their futures on the chance they'll get favorable legislation. Each of the three DBS companies have plans to launch more satellites, and according to Carmel Group chairman and CEO Jimmy Schaeffler, acquiring new capacity has become the single biggest competitive issue in the industry.

Schaeffler said that with cable companies offering video-on-demand, HDTV, digital video recorders and high-speed data, in addition to digital cable, satellite companies are hard pressed to compete.

EchoStar already has nine satellites in orbit and has plans to launch No. 10 in 2005. DirecTV has seven birds in the air and plans to build two more.

Rainbow DBS, the satellite arm of Cablevision Systems Corp., launched a satellite in July for its Voom satellite-based HDTV service, and has asked the Federal Communications Commission for permission to launch five more satellites.

"However much they get, it's not going to be as much as two-way digital cable can provide," Schaeffler said. "They [DBS] have to have the best DVR, the best HDTV combination, the best interactive service and the best local-to-local. That's why it [additional capacity] is important now."

Here's a look at what some of the major satellite players are doing.

Echostar

Despite its satellite launch plans, EchoStar is still on the hunt for added orbital transponder capacity for its Dish Network platform.

In March, EchoStar struck a deal with SES Americom, which will lease the DBS provider capacity on its AMC-15 satellite planned for launch in the third quarter 2004. A hybrid bird, it will sport 24 Ku-band transponders and 12 Ka-band spot beams.

EchoStar also is planning to launch its next bird — EchoStar X — in 2005. Riding aboard will be two Ka-band, spot-beam transponders and 32 Ku-band transponders to provide backup for EchoStar's existing satellite capacity.

EchoStar chairman and CEO Charlie Ergen suffered a setback in his capacity quest in October, when his company lost out on a bid to buy bankrupt Loral Space & Communications Ltd.'s North American satellite assets — including six satellites in orbit.

Although EchoStar bid $1.85 billion, it lost out to preferred bidder Intelsat Ltd.'s $1.1 billion bid.

A Loral buyout would have boosted EchoStar's drive to increase local-into-local programming.

To date, EchoStar is providing local programming to 85 markets, with plans to reach 100 markets by the end of the year. It does so primarily via its Ka-band spot-beam transponders, except for the New York, Los Angeles, Chicago, Dallas and Atlanta markets, where local stations are sent nationwide using Ku-band transponders.

"We probably have some efficiency gains if we were to take some of those and put them on spots, which we could do," Ergen said during his third-quarter earnings conference call. "As far as additional local cities, the vast majority — all but maybe one or two — will come from the 105 degree location, which is a satellite we are leasing from SES Americom."

Schaeffler said that there are several options to increase bandwidth in addition to launching more birds. One is the so-called Switzerland plan, which would enable DBS companies to share one satellite, which delivers all local channels.

"The majority of local channels are carried twice," Schaeffler said. "Years ago, there was a proposal to build one satellite to do that. That will happen, but it will take three, five or 10 years to do it to get past the legal and technical issues."

Another reason shared capacity hasn't materialized yet is the extremely competitive nature of the DBS business.

But some industry observers believe that with News Corp.'s pending acquisition of a controlling interest in DirecTV's parent Hughes Electronics Corp. by the end of the year, that acrimonius relationship might ease.

During the third quarter earnings call, Ergen did leave open the possibility of actually joining forces with a News Corp.-controlled DirecTV to create a standardized broadband technology — similar to cable's Data Over Cable Service Interface Specification, or DOCSIS — and perhaps share capacity or backhaul systems. Such a standard could cut the cost of equipment, and better the business case for broadband services.

"Obviously, we have had to go a bit of a different direction with capacity and have made some significant investments to make sure that we will have the capacity we need to compete against cable irregardless of whether we can share technology or spectrum with other satellite providers," Ergen said. "So we are prepared either way.

"But I can guarantee you at least from my perspective if somebody came in here and said, 'Hey, we can save you $100 and you are no worse off than your competitors, and that maybe your competitor can save $100 and it is equal,' I'm going to do it. And as a matter of fact I'm going to do it if I save $100 and they save $200."

DirecTV

Rival DirecTV Inc. is also looking for ways to beef up its local-into-local channel and HDTV capacity.

The DBS provider is getting a second spot-beam satellite ready for an early 2004 launch, which will allow it to add local programming in another 40 markets. It now offers local programming in 64 markets.

In an October SkyForum interview session, DirecTV chairman and CEO Eddy Hartenstein said the company is already distributing equipment to new customers in anticipation of that spot-beam satellite capacity, so "I think that the gratification in this case will be instant and very positive when all of those local markets come up at launch."

"Currently we expect the satellite to be delivered right on or about the end of the year, ready for shipment to the launch site probably on or about the first or second of January, and just going with the flow of the launch vehicle manifest, a launch as early as the end of January," Hartenstein said.

He also created a buzz by suggesting that parent Hughes Electronics Corp. is considering diverting transponder capacity, planned as part of its $1.5 billion Spaceway satellite broadband Internet project, to feed DirecTV local and HD programming. The first Ka-band SpaceWay satellite is set to launch in 2004.

"It happens to possess the orbit locations that are actually collocated with our prime orbit location," Hartenstein noted. "It is a system that has an amazing amount of flexibility, and we're looking at all of the possibilities associated with that."

Much of the drive for this stems from a pledge to boost local channel availability as part of the pending acquisition by News Corp. Hartenstein said News Corp. has pledged to raise the local channel capacity for DirecTV to 210 stations by a target date of 2006, but no later than 2008. That could well include harnessing the Spaceway capacity.

"I think that we can use a portion of that spectrum and a portion of the capacity on those satellites to fill a big need of DirecTV, while still fulfilling the mission of high-speed data access for enterprise and even commercial customers for Spaceway," he said. "So I think we can get there on our own."

PanAmSat

The DBS players' bandwidth plight may improve the prospects for commercial satellite operators including, PanAmSat. A sibling to DirecTV that is 81% owned by Hughes Electronics Corp., PanAmSat sees the DBS providers' bandwidth plight as a good potential market opportunity.

"Beyond local into local, there is simply not enough bandwidth on the DBS satellites as they exist today to support all of the HD they wish to carry," said Mike Antonovich, PanAmSat's senior vice president of global sales. "So I think all of the DBS guys are earnestly shopping to acquire more bandwidth to support local into local and HDTV."

But not all capacity held by the other satellite operators is there for DBS's taking. To lease capacity on other satellites, DBS providers have to find birds close enough to their own and close enough so the same customer dish can pick up signals from both birds. In North America, that generally narrows the field to within about 10 degrees of the orbital arc DBS birds now inhabit.

"You've got to have availability, which isn't easy because those center-of-arc satellites are very popular for the rest of the user community — the data guys and the broadcasters," Antonovich said. "So having an nice empty satellite at the end of the domestic arc doesn't help. What you need is a satellite in the middle of the domestic arc, which most of us providers don't have."

The satellite also has to be able to transmit at the higher power levels required by DBS, and that creates a problem. The higher the power, the wider you have to space satellites to avoid interference, so satellites operating with in a few degrees of each other have a maximum power limit.

With all that in mind, prospects for seeking additional Ku-band capacity for nationwide HD channel additions may not be so bright, Antonovich said.

"If you look at this belt between 91 degrees and 129 degrees — 10 degrees on either side of where the big DBS providers are — there is only the opportunity to develop one or two more slots," Antonovich said. "There is already a satellite every two degrees. And so Ku-band will be limited in terms of how much it can help out. Even if you could, it is two to three years out, and the problem is right now."

Nor can PanAmSat offer much extra capacity on satellites within that range.

"Virtually everything is consumed or committed, and so that's a good place, but we don't like to leave customers on the table," Antonovich said. "And so that's where we are. There is help, and there is interim and there is bridge capacity that we can do, but it won't solve all of the DBS guys' problems."

That said, the DBS players' needs may influence PanAmSat's own business plan in the coming years. PanAmSat has a couple of satellites that are scheduled for replacement, giving the satellite operator an opportunity to revise the technology and the customers they serve. That could include replacing a Ku-band satellite with a hybrid Ku/Ka-band bird.

"It comes down to who needs it the most. A year ago, the DBS guys didn't have this opportunity or have this problem, depending on which side of the coin you are on," Antonovich said.

Strengthening that need is the possibility the FCC will take up News Corp. on its pledge to boost DirecTV local programming markets to 210 markets as part of its acquisition of the DBS provider. That not only will spur DirecTV's hunt for satellite capacity but also force EchoStar and Cablevision to do the same just to keep up.

"We love that kind of FCC mandate," Antonovich notes with a laugh.

Meanwhile, in the nascent Ka-band game, there may be better chance commercial satellite providers can give DBS a hand. PanAmSat has a number of filings across the domestic and international satellite arcs, and it is exploring the potential for Ka-band satellites. But cost is a factor.

"It's not just the satellite terminals on the ground that are expensive — building Ka-band satellites are inordinately expensive, because they are brand new," Antonovich said. The Spaceway Ka-band project has been quoted at about $1.5 billion to build two satellites and a spare, and "that's roughly double or triple the cost of our other satellite programs. And so how do you get the return on that in a market that is still developing?"

With the bandwidth hunt fully under way, DBS providers' attitudes toward other commercial satellite operators may also have to change.

"In some respects, they are going to have to look at us more as partners, because there isn't anybody else that has got as much access to bandwidth as the commercial satellite guys," Antonovich said. "A sober assessment of the business is, it doesn't matter who owns the bandwidth; it's who owns the customer. And the DBS guys own the customer, so they need to put as much bandwidth at that doorstep as they can.

"So I think it is a great opportunity and we love it, because it is a sustainable business — 10 million consumers can't be wrong."

EchoStar has made plans to launch its own Ka-band service, called SuperDish, but Schaeffler said that others are reluctant because the service requires deploying a new larger dish that can range between 28 inches and 30 inches in diameter. The SuperDish equipment is expected to be about 28-inches in diameter.

"There's a real acceptance threshold above one meter," Schaeffler said. "The more below one meter you are, the more acceptable it is."

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