"This Is Only the Bottom of the First"

CEO Mark Pagon of satellite-TV and -broadband provider Pegasus explains why he's confident his industry's best days are ahead of it

Despite the downturn in the economy, demand for broadband services is still greatly outstripping supply. Enter the satellite companies which, with the flip of a single switch, can provide high-speed, two-way access to broad swaths of the country. Their target: rural areas, where cable and DSL providers have yet to begin providing broadband services -- and may never choose to because of the low density of subscribers and the huge cost of extending high-speed networks.

The latest company to jump in is Pegasus Communications (PGTV ), which launched its service Pegasus Express in late March (see BW Online, 4/17/01, "Pegasus Flaps Its Wings Harder"). By focusing on rural subscribers, Pegasus has grown from a market capitalization of $130 million in 1996 to nearly $2 billion. BusinessWeek Online technology reporter Jane Black recently sat down with Pegasus CEO Mark Pagon to talk about satellite broadband and its potential. Following are edited excerpts from their conversation:

Q: Pegasus is distinct from other satellite providers because it focuses exclusively on rural areas. In the last five years, we've seen huge increases in satellite subscriptions in those markets. Aren't we reaching a saturation point?


There was a huge uptake in the '90s. Today, there are about 15 million subscribers to [commercial satellite services], up from [almost nothing] in 1996. A little more than 8 million are in rural areas. I expect that to double in five years. I think we'll have 30 million subscribers in 2005, 16 million in rural areas.

That's because we are going to see a lot of customers switch from cable to satellite. I believe that most of the small cable operators out there that serve rural areas are going to go out of business in the next 5 to 10 years. They're just too small to survive. There's no economically viable way to run a system with fewer than 1,000 customers. So one day, these cable customers are going to wake up and find just snow on their TV. And they're going to say, "I want a satellite dish and I want it now." That is a pretty significant future for satellite.

Q: But are you still looking to provide new services, such as broadband?


Yes, last week we launched Pegasus Express, which is a two-way satellite-broadband service which will compete with digital cable. We think that will provide a huge opportunity for Pegasus and satellite in general. It's available everywhere in the U.S. -- no matter whether you are in Atlanta, Chicago, Kansas City, New York, or in rural areas. Digital cable isn't available everywhere. And most of that uptake will be in rural areas, because in many cases, you don't have a choice.

Q: There has certainly been overwhelming demand for broadband in the metropolitan areas. But are rural customers as willing to fork over $40 a month for broadband?


Our [rural] satellite-TV customers already pay about $50 a month for satellite, compared to a little over $40 a month in a lot of metropolitan areas. And I think rural customers might be more likely to pay for [broadband]. The value of a broadband connection -- even a narrowband connection -- will be a very liberating thing for people in rural areas. In a metro area like New York, if you need something, you just go down the road to the mall. In some rural areas, you have to drive 30 to 45 minutes.

The other thing to think about is that many rural areas are very affluent. You've got areas in Colorado that are only reached by satellite that are some of the most affluent in the country. We will see penetration happen there first.

Q: One concern about broadband satellite services is that the satellites themselves don't have enough capacity. At the moment, you can only send down a 40-megabyte stream. Will that be enough for, say, 20,000 customers?


Point-to-point service is more difficult for broadband than TV. The satellites that are up there right now weren't designed to do this. Today's transponders serve 10,000 customers each. I think [the satellite industry] will have 2 million customers in two years. In the U.S., there are 1,400 transponders in service at the moment. Ten percent to 15% of those are not currently in use. That's enough to take care of our growth in the foreseeable future.

By 2005, I think the industry will have 10 million customers. Then we'll need new transponders. But by then we'll also have new satellites that will have more capacity. New satellites launched in the next few years could provide as much capacity as all the transponders in existence today.

Q: Are there any other services which will sell particularly well with rural subscribers?


In the digital world, the next big trend is interactivity. Satellites always sent digital content. Now, we have a return path. We need to take passive TV and make it a personalized service. That will include gaming, betting, and shopping. That's not special to rural consumers. But as they are in increasing demand, rural consumers will come to satellite because it is the only way to get [these services].

Q: It's been rumored that Pegasus is an acquisition target for GM's Hughes Electronics (GMH ). Any comment?


Many companies, including Hughes, would like to acquire Pegasus. We're not for sale. Or at least we haven't put ourselves up for sale. If it was a compelling opportunity for shareholders we would -- at least by law -- have to consider it. And we would.

But I don't think selling now would be right. Our new opportunities are good. Five years ago, we had $30 million in revenues. In five years, that will be $5 billion. There has been talk like, "It has been a great ride, but now it's over." We believe this is only the bottom of the first inning. There is so much more opportunity to provide digital rural services. We don't see the need to sell, but if someone invites us to become part of a larger opportunity, we'll consider it.

Q: Why has Pegasus stock been hit so hard? What plans do you have to revive it?


Well, at least we're still around [laughs]. Seriously, we're in the same situation as EchoStar (DISH ) or [Hughes Electronics'] DirecTV. I think all satellite stocks are undervalued. Cable is valued at 16 times cash flow. Pegasus is less than 10 times. Hughes is at 11 or 12 times. The reason is because we have subscriber-acquisition costs and cable doesn't. That's because we are growing at 20% and cable is growing at a little over 1%. We are being penalized for growth. We also are valued lower because analysts don't give us credit for our potential broadband growth. I dispute that. We are now a broadband player.

Edited by Douglas Harbrecht