Shift of Spaceway 3 to Ariane 5 Will Cost HNS $83 Million

PARIS — Hughes Network Systems’ (HNS) decision to switch the launch of its Spaceway 3 satellite from Sea Launch to Arianespace will cost the company $83 million in unplanned spending this year. The extra expense, however, will be partly offset by the earnings the company will achieve by getting the Ka-band, two-way broadband satellite in orbit this year, HNS officials said.

The Germantown, Md.-based company, which currently leases dozens of Ku-band transponders on the commercial market to provide broadband service to its growing consumer and small-business subscriber base, said it expects to migrate 40-50 percent of its current customers to Spaceway 3 within three years.

Spaceway 3 is currently scheduled for launch aboard an Ariane 5 ECA rocket in August. The switch from Sea Launch Co. was made in late February following the company’s Jan. 30 launch failure that grounded Sea Launch and Land Launch rockets.

In a March 27 conference call and a March 26 filing with the U.S. Securities and Exchange Commission (SEC), HNS said it had expected to spend $50.5 million on Spaceway-related expenses in 2007 and 2008. The switch to Arianespace will mean Spaceway 3-related costs will rise to $133.5 million.

Getting the large-capacity Spaceway 3 — its first fully owned satellite — into orbit as soon as possible has been a priority for HNS. The company’s fast-growing consumer and small-business broadband business in the United States forces HNS to lease satellite capacity in Ku-band at a cost of about $1.5 million per year per satellite transponder.

To keep these costs to a minimum, HNS often leases for multi year periods. The company said in its SEC filing, that as of Dec. 31, it had $399 million in satellite-lease commitments outstanding, of which $155.9 million were due in 2007.

HNS Chief Executive Pradman Kaul said Spaceway 3 should be available commercially by early 2008. At that point, he said, all new HNS customers will be placed on the new spacecraft. Existing subscribers, whose dish antennas will need to be modified or replaced to work with the Ka-band service provided by Spaceway 3, will be migrated gradually to the new satellite . Kaul said that by 2010 or 2011, up to 50 percent of HNS subscribers should have been transferred to Spaceway 3.

HNS is currently leasing, on average, 15 to 20 new transponders per year to keep up with demand and to replace expiring leases. That figure will drop as soon as Spaceway 3 is in orbit. “Over a three-year period that can be a significant savings,” Kaul said.

The North American consumer-broadband service is HNS’ fastest-growing business. HNS reported it had 327,000 subscribers as of Dec. 31, a 19 percent increase above the numbers achieved during the same period in 2006. Revenue from these subscribers grew by 18 percent during the year, to $292 million.

In this North American consumer-broadband market, HNS is in direct competition with WildBlue Inc. of Denver, which has been in operation since June 2005 using Ka-band capacity on Telesat Canada’s Anik F2 satellite and, as of March, has been commercializing service on its own WildBlue-1 satellite as well. WildBlue-1, which also uses Ka-band, was launched in December.

WildBlue reported March 20 that it had more than 130,000 subscribers in the United States. With the addition of WildBlue-1, the company said it has sufficient in-orbit capacity to serve 750,000 customers in the United States. The company had been capacity-constrained in some high-demand areas of the United States when it was limited to using the Anik F2 satellite.

The addition of WildBlue-1 and, starting in early 2008, Spaceway 3 will improve the competitive posture of both competitors. But already, they have had a full year to size each other up and view the market’s reaction.

For Kaul, the early verdict is that U.S. consumers without ready access to high-speed DSL or cable Internet links exist in large enough numbers to support both companies.

“We were adding about 10,000 subscribers a month when WildBlue began to offer service,” Kaul said. “Since then, we have been growing at about 11,000 subscribers per month, and they have been growing by a similar amount. Our market is clearly big enough for both of us. Their marketing activity has increased the public awareness of [satellite broadband potential] and has had the effect of doubling the size of the market.”

HNS estimates that between 10 million and 15 million U.S. households currently have no access to DSL or cable and will not have such access for at least another three to five years.

In addition to offering consumer broadband, HNS provides two-way satellite access for data and voice communications worldwide to governments and companies.

HNS also has developed an expertise in ground-based beam-forming technologies for mobile satellite services companies, a technology that permits these satellite operators to limit the on board complexity of their satellites by making a replacement investment on the ground.

HNS has secured contracts from most of the principal mobile satellite operators with existing or planned systems using large satellites in geostationary orbit — Thuraya, Inmarsat, ICO, TerreStar and Mobile Satellite Ventures. Revenues from these companies totaled $71.4 million in 2007.

HNS reported total company revenues of $858 million in 2006, a 6 percent increase over 2005. EBITDA, or earnings before interest, taxes, depreciation and amortization, was up 24 percent, to $108 million.