In a few years, the satellite industry may be able to look back and see 2005 as a true turning point for consumer and small business satellite broadband direct Internet access services. The incumbent in the U.S. market, Hughes Network Systems (HNS), saw its DIRECWAY service add nearly 6,000 new net subscribers per month, and the company also introduced its new DW7000 platform. This latest equipment enables HNS to address a number of shortcomings in its previous offer, especially return channel speeds, and gives them the flexibility to offer a whole new range of service plans. The year also saw Gilat acquire all outstanding shares of StarBand and merge it with its U.S. subsidiary, Spacenet.
In parallel, WildBlue’s Ka-band satellite broadband services were launched in mid-2005 using capacity on the Anik F2 satellite. Some early equipment production issues seem to have been overcome, and WildBlue announced that it had in excess of 25,000 subscribers as of the end of the year. Take-up has been so strong in some parts of the United States that two of the Ka-band beams on Anik F2 reached saturation, and no new subscribers in the areas covered by these beams are being added until a number of upgrades are implemented to augment capacity. WildBlue expects to launch its WildBlue-1 satellite in December 2006, and will bring it online in 2007 to allow for continued subscriber growth across the country.
All in all, satellite broadband services appear to be off to a strong start in early 2006, and it is Northern Sky Research’s (NSR) view that competition has helped to raise awareness among consumers and small businesses in the United States that satellite broadband is a viable option, and to push the service providers to offer a better deal to their subscribers. NSR estimates that satellite broadband is closing in on, if it has not already exceeded, 350,000 subscribers in the U.S. market.
Interestingly, HNS and WildBlue also have seen more small businesses turn to them for broadband access services, and both companies have begun to offer higher bandwidth packages targeted specifically at this class of user. Further, a significant minority of consumer subscribers are taking on the higher bandwidth packages and are simply not content to stay with the introductory offerings that are priced closest to typical terrestrial cable and asymmetrical digital subscriber line (A DSL) services.
Both HNS and WildBlue have likely realized that even if they are targeting areas that are unserved or underserved in terms of ADSL or cable modem broadband services, their main competitors are actually as much the terrestrial service providers as each other.
One would think after all the difficulties faced by satellite broadband in years past, the recent strong showing would have the satellite industry highly excited about the future of this new market opportunity. At least, this was the case until it emerged that DirecTV and EchoStar were in talks to jointly deploy a terrestrial wireless network in order to bring broadband and voice services to their combined 27 million subscribers.
The two U.S. direct broadcast services (DBS) players have long recognized that cable’s triple play of pay television, broadband and telephony is the future direction of the industry, and the push among the major telcos to enter the pay TV market through the introduction of IPTV (Internet protocol TV) services has only raised the stakes.
Of course, DirecTV and EchoStar have teamed with a number of telcos to offer a combined TV/A DSL/telephony package, but it is more than probable that these partnerships will slowly die away as the telcos begin to truly ramp up their own TV services. Further, it was not too long ago that it looked as if DirecTV and EchoStar would eventually go the satellite route for a double or triple play, possibly on their own or in conjunction with one of the current satellite broadband service providers. As of today, this now appears much less likely, and it is only fair to ask where will satellite broadband fit into the U.S. market over the long term?
In short, NSR’s answer to this question is two fold. First, satellite broadband currently has a window of opportunity, and the service providers must make the most of it as quickly as possible. Second, in all probability satellite broadband will be more complementary to terrestrial wireless than competitive, as each service tends to best fit certain user profiles.
Looking into these answers in more depth, it must first be noted that a terrestrial wireless solution will take time to be put into place. In fact, it will likely take longer than either DBS player expects and will almost certainly end up costing more. One of the first hurdles to be overcome will be the choice of spectrum to be used for terrestrial wireless services. Most of the spectrum across the U.S. normally associated with WiMAX services is spoken for, and there are possible interference issues should the DBS players decide to use the same frequency band as their satellite TV offerings. Further, the hype is still rather high regarding the capabilities of WiMAX [wireless broadband] equipment, and it may be several years and several generations of equipment before reality catches up with expectations.
The next important issue is partnering with one or more tower companies in order to build out the network. Typical names here include Crown Castle, SBA Communications and American Tower. Choosing the best partner (or partners) will not be obvious and could be quite time consuming, especially since DirecTV’s and EchoStar’s individual interests might not always be 100-percent aligned.
All of the above boils down to a few critical factors that may leave a growth path open for satellite broadband services. First, satellite broadband service providers arguably have at least 12 to 18 months (if not more) before the DBS players can gather much momentum, and it is unlikely that an integrated terrestrial wireless network will start to come together such that more than trial services can be offered to satellite TV subscribers in the coming year.
This leaves time for satellite broadband to significantly add to their subscriber bases and also for placing the HNS Spaceway-3 and WildBlue’s WildBlue-1 next-generation satellites into orbit and becoming operational.
Further, when DirecTV and EchoStar do start offering terrestrial wireless broadband and telephony services, they will most likely be rolled out in a piecemeal fashion across the country where the satellite TV companies will first target those geographical regions in which they expect the highest uptake.
What will these areas look like? In all probability, they will be regions where cable penetration is low or non-existent, satellite TV penetration is high, and (in fact) ADSL services likely are available but telco IPTV is not. Essentially, DBS players will first equip towers in areas where their subscriber concentrations are highest, which will include small towns and villages. Often the target satellite TV subscribers already will have an ADSL connection, and DBS will try to hook them onto a bundled double or triple play package. After these prime markets, DBS players will most likely next target more urban/suburban areas where they have good subscriber density and they can then tackle the cable and telco competition head-on.
The good news here is that this still leaves to satellite broadband, initially at least, households and businesses that probably have no terrestrial (wireless or otherwise) broadband options. Typically these target clients will also be the farthest from the towers or in areas where the density of eventual subscribers is very low even when there is a cell tower.
Early on, these rural regions will be less attractive for DBS terrestrial wireless build-out because potential subscriber density is low, and the return on investment for the DBS players will be slower than the previous two target markets just described. Also, small businesses will continue to be a ripe opportunity for satellite broadband since business clients do not generally need a bundle that includes pay-TV services.
For satellite broadband services, there is a clear window where a service provider can enter and hopefully lock up the client. While satellite broadband equipment pricing is declining, the investment in the equipment will nonetheless act as a barrier to churning to an eventual DBS triple-play.
The key will be for satellite broadband to offer a cost competitive and a high-quality service. If the satellite broadband players are given enough time to double or triple their current subscriber base, these services will become a force to be reckoned with in the industry, and this could well open doors to future partnerships that are not currently envisioned. It is critical for satellite broadband providers to move swiftly and effectively in the year to come. This sector has already been given a second chance, and it is unlikely they will get a third if they fail to perform well in the coming months.
Patrick M. French is regional director, Europe & senior analyst at Northern Sky Research (NSR).
