Apr 2002

The next step in broadband is coming, and at least some if it will be delivered by satellite. At least that's the theory.

The forecasts are that by 2005 there will be an estimated 7.3 million homes, or about 25% of the estimated total broadband demand in the biggest Western European countries, that will not be met by high-speed connections from either cable or local telcos. These potential subscribers, as well as another 1.3 million potential corporate broadband users, are the target market for wireless and satellite-delivered broadband, says a report by consultants McKensie.

A new, as yet unnamed, company formed earlier this month by SES Global, Alcatel and Gilat, plans to capitalise on this terrestrial gap in the broadband market. The newco, which includes Euro 200 million in capitalisation, will leverage SES Global's 33 million European Astra satellite dishes and Gilat's big presence in the V-sat market (some 250,000 installed) to build a new business first in Europe and possibly expending to other markets as well. Alcatel, whose experience linking up terrestrial networks with satellites through its beleagured Skybridge project, will provide systems integration, further development of the satellite broadband system and marketing. "We think that a business plan to serve between 5% to 10% of this potential market are very reasonable numbers," says Pascal Sourise, CEO of Alcatel Space.

The potential has already attracted one European telco; Deutsche Telekom will launch a broadband-by-satellite service (using Astra satellites) in May. Although this service is not strictly using the services of the newco venture, it proves demand. Germany has one of the highest broadband penetrations in Europe, but there are an estimated 100,000 DT customers today who want broadband but whose phone lines for one reason or another cannot be upgraded to the faster speeds. In the UK, BSkyB has had talks with BT about providing a "return path" for broadband on its phone lines from a Sky subscriber's set top box, but there are also conversations going on about a two-way via satellite broadband service. One ace up the sleeve of the new SES-Gilat-Alcatel venture is that it has relationships with the biggest distribution channels in Europe, including BSkyB and Canal Plus.

Equity analysts at Investec Henderson Crosthwaite point out that bundling broadband into the Sky TV package could greatly help the UK pay TV company achieve its goal of generating £400 of ARPU (average revenue per user) by 2005. At the end of 2001, Sky's ARPU figure was £331. Investec estimates that if just 20% of Sky's forecast customers take a broadband connection this would increase ARPU by £12.

The only problem is getting the balance right between cost and what the broadband service can provide in terms of services and, ultimately, revenues for the operators. "Sky doesn't want to bolt into this market too soon and then have to back pedal," says Kingsley Wilson of Investec.

SES's CEO Romain Bausch believes that a service for residential customers will retail for between Euro 50 and Euro 70 a month, with the SES-Gilat-Alcatel venture taking as much as 50% in a revenue share deal. But the cost of the customer equipment, marketing, and customer service all adds up, so any service will have to be more compelling than just faster emails and quicker Web surfing. And that's the rub. What are the services that will make people buy broadband?

The fact that Echostar in the U.S, has shelved the marketing of its Starband broadband service because it is "uneconomic" does not seem to augur well. However, some believe that Echostar's CEO Charlie Ergen has another agenda that has nothing to do with the economics of satellite delivered broadband. Ergen is effectively using broadband rollout as a bargaining chip in his efforts to get clearance for his pending acquisition of DirecTV. If he gets the deal cleared, then he will be big enough to compete effectively against US cable and the telcos for all kinds of services, including broadband.

Ironically one of the main reasons that Gilat began talking to SES six months ago about a deal was because it provides the hardware for the Starband service, which because of Ergen's priorities, was not getting a lot of take-up, leaving Gilat with good technology and no revenues. Time will tell how this second go-round works with a new set of partners.