Satellite Data Players Hope for Lift in 2003

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Cable operators, take comfort: While 2002 didn't do you any favors, it was downright unmerciful to your broadband-via-satellite Internet competitors.

Bankruptcy, marketing freezes and financing delays battered such companies as StarBand Communications Inc., Hughes Network Systems' DirecWay and startup WildBlue Communications Inc.

But while some industry observers place heavy odds against all these services surviving over the long term, at least two of the three players say their prospects are now looking up.

After enduring a painful divorce from marketing partner and investor EchoStar Communications Corp., StarBand Communications Inc. was forced to file for Chapter 11 bankruptcy in June 2002, and went through three rounds of layoffs. The latest was in September, when it had to let 36 employees go — including its president, David Trachtenberg.

With a new service and a lower-cost residential offering in the works, the McLean, Va.-based provider is hoping to emerge from bankruptcy in mid 2003 with break-even operation, according to chairman and CEO Zur Feldman.

"I would not tell you that it was easy," he said. "I would definitely say that we had a tremendous painful process to get where we are today.

"It was not an easy ride by all means. But I can say today that 2003 will mark a drastic change in the company's future."

New 480 Pro

That means finding a way to increase its subscriber base, which has held a flat line through 2002 at about 40,000 customers. To jump start subscribership, StarBand used last week's International Consumer Electronics Show in Las Vegas to announce development of a new product, called 480 Pro.

With a built-in four-port router, a static Internet-protocol address and three to four times the upload speeds of current StarBand residential offerings, 480 Pro is aimed primarily at small businesses and teleworkers, although it could find home with telecommuters or residential customers who want an easier home-networking setup.

"It's a product that will be basically more [of a] user friendly, plug-and-play type," Feldman said.

StarBand will test several service configurations — including variations on speed and pricing — with several hundred customers during the first quarter. A service launch will occur in the second quarter.

At that time, the company will announce the final product offering and pricing.

StarBand also disclosed a new pricing package at CES. The new rates offered customers are as low as $49 per month for a three-year commitment, with the dish and modem selling for $699.

"We are really driving the cost down to the level of the lowest DSL you can get, if you can commit for three years," Feldman said. "That is the result of a lot of push from our dealers."

Still, Feldman acknowledges customers may remain wary because of StarBand's Chapter 11 status.

"I'll be very blunt: Chapter 11 is not an easy perception to get rid of," Feldman said. "Many companies — many good companies — did not make it, so I'm sure that is a big, big obstacle that we are confronting, and I'm sure by us emerging from Chapter 11, it will open a wide range of opportunities that right now are standing on the sidelines waiting."

Things don't look as promising for DirecTV Inc.-affiliated DirecWay two-way satellite service. In December, the direct broadcast satellite provider's parent company, Hughes Electronics Corp., said it was placing the satellite broadband Internet service in maintenance mode.

While DirecWay will add new customers to its 160,000 customer base, the company will not aggressively market the service while it ponders other options for broadband.

WildBlue impact

Then there is the sector's newest entrant, WildBlue Communications Inc. That company made a surprise market re-entry in December, when it announced $156 million in funding from Intelsat, Liberty Satellite and Technology Inc., and the National Rural Telecommunications Cooperative.

That cash should put WildBlue back on track for a 2004 service launch, according to vice president of business development and marketing Brad Greenwald.

"We have all the infrastructure we need to begin to bring on customers," Greenwald said. "So we'd expect to look at our financing needs as we get closer, but it puts us in really good shape."

WildBlue is aiming for a service that's equivalent to cable-modem platforms, offering somewhere in the range of 1 mbps downstream and 256 kbps upstream for $45 to $50 per month, with equipment selling in the "several hundred dollar range," Greenwald said.

As with StarBand, WildBlue will hunt for residential and small business customers in rural areas where there is no DSL or cable modem service available — a market of between 20 million and 30 million homes.

WildBlue originally intended to launch in 2003, but funding fell short. Pushing the rollout date back by one year may give StarBand a chance to gain some ground, but Greenwald said WildBlue is still confident of its potential.

"We've learned a little bit from the pitfalls StarBand and DirecWay have had," he said. "We're still confident what we have chosen — both in space and on the ground — will allow us to be the low-cost, and therefore, low-price provider of two-way satellite broadband."

Specifically, WildBlue will used standards-based access gear and deliver the signals via newer, high-powered, Ka-band spot-beam technology. StarBand and DirecWay use proprietary Very Small Aperture Terminal (VSAT) systems.

"In space, our cost per bit will be one-fifth to one-seventh that of the competitors, because we are using these spot-beam satellites," Greenwald said.

Even though EchoStar has dissolved its StarBand marketing relationship and DirecTV Inc. has frozen DirecWay marketing efforts, Greenwald said WildBlue is talking to both companies about distributing its service.

"We are talking to a number of folks like DirecTV and EchoStar about how we move forward, and our distribution infrastructure plans are sort of being worked out," he said. "We do expect the NRTC to play a significant role in distribution in rural America."

But the big question is whether the market can support three competing players. While there may be a ready market among rural customers starved for broadband, it is by its nature a limited one, according to Forrester Research analyst Jed Kolko, who studies consumer demand for Internet devices and access.

The continued rollout of cable and digital subscriber line products has cut down the number of areas where a wired broadband services are not available, he said.

"There is unmet demand in rural areas for broadband," Kolko said. "It's not as if there is no market. But it's a small market."

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