Rural Broadband Providers Look Skyward
Just after nightfall on Aug. 14, a new state-of-the-art satellite owned by Hughes Communications (HUGH) will blast off from Kourou, French Guiana, into an orbit more than 22,000 miles above earth. The satellite, Spaceway 3, is part of the company's bid to reach a bigger slice of a sizable but untapped U.S. broadband market that remains beyond the reach of cable or DSL Internet service providers.
For years, as major telecom and cable operators such as Comcast (CMCSA), AT&T (T), Verizon Communications (VZ), and Time Warner (TWX) have rolled out a bevy of new bundled telephone and Internet packages for urban centers, many rural regions languished with dial-up access as just about the only option for Internet access. For the most part, investments in the hinterlands bear considerable risks: Absent the economies of scale that come with densely packed customers, providers are forced to hope that their services are widely adopted. If not, such investments may never pay off.
That leaves a potentially huge market without high-speed Internet access. Hughes Chief Executive Pradman Kaul estimates there may be as many as 15 million homes and small businesses in areas deemed too remote for cable modem or DSL connections. Less than 2.5% of those potential customers are current subscribers, leaving plenty of room for Hughes to grow.
Hughes' launch follows less than a year after its chief competitor, WildBlue Communications, launched its own new satellite. Like Hughes, WildBlue had been leasing space on another satellite, but since it launched its own last December, it has seen subscriptions grow briskly, CEO David Leonard says. WildBlue, based in Greenwood Village, Colo., has added 1,000 to 1,500 new users per day since the satellite became operational in March, says Leonard.
Of those households and businesses without access to DSL or cable Internet services, Hughes and WildBlue serve only a tiny fraction of that market: Hughes had about 353,000 subscribers at the end of June, and WildBlue has between 225,000 and 235,000. By Kaul's reckoning, there is more than enough room for both companies to grow without crowding each other: "If we each get a couple million subscribers, we'll both be very happy campers."
The size of this untapped market may be a boon to Hughes and WildBlue, but it exposes a trend that some analysts believe portends ill for the U.S.'s global competitiveness. While the U.S. boasts more than 58 million broadband users—more than any other nation—it trails many smaller countries in penetration, according to a study performed last December by the Organization for Economic Cooperation & Development (OECD). For example: Denmark, first in the world in per-capita broadband use, boasts 31.9 subscribers per 100 residents, while the U.S. ranks 15th behind Iceland, Belgium, and Luxembourg, among others, with 19.6 users per 100 people.
There are other technologies in the works, like wide-area wireless networks—known as WiMAX—or broadband delivered over power lines, that could make a difference for underserved parts of the country. But both Kaul and Leonard say they don't consider either technology a near-term threat to their satellite ambitions. Neither does Christopher Baugh, an analyst with Northern Sky Research, a telecommunications consultancy in Cambridge, Mass. The truly rural customers that Hughes and WildBlue are targeting are still beyond the grasp of both entrants. "WiMAX won't touch that market for another five years or so," Baugh says.
It's easy to see why Hughes, through its HughesNet brand, and WildBlue, partnered with AT&T or under its own name, are focused on rural areas. For one, urban and suburban customers pay less for DSL or cable Internet than their country cousins must for satellite. Verizon DSL, for example, costs $14.99 per month for the first year of service, while WildBlue costs $49.95 per month and HughesNet is $59.99. But in the places Hughes and WildBlue are targeting, the only alternative often is a dial-up modem.
But as urban areas continue to expand into areas where farms and forests once dominated, the number of customers beyond the reach of cable or DSL is also shrinking. Asked if he thought Kaul and Leonard's estimates of the size of the potential market for satellite Internet were accurate, Northern Sky's Baugh demurred. "I'd err more on the 10 million side," he said, noting that a few years ago such estimates were considerably higher.
In addition to reaching the underserved, Hughes says its Spaceway 3 will also help address some of the more common customer-service complaints that have plagued satellite Internet. Chief among those complaints are service interruptions caused by bad weather, sluggish downloads and browsing, and restrictions on heavy bandwidth usage. Speed is an issue because satellite signals must travel from the user's dish to space and back before, say, a Web page can be displayed. "In a direct competition with DSL or cable, satellite can't touch them," Baugh says.
Yet because Spaceway 3 will carry a router on-board, some of the lag time between a customer requesting a Web page and its appearance on his browser screen should be reduced, says Arunas Slekys, the company's vice-president of corporate marketing. And because the satellite will be able to retarget its coverage areas to accommodate demand, users with heavy bandwidth needs will be less likely to find their connectivity throttled back in response. "We will give consumers more bits at higher speeds than they're getting today," Slekys says.
Growth in Hughes' consumer and small-business operations helped power the company to a strong second quarter. The company said in its quarterly earnings report on Aug. 10 that it added 30,000 new broadband subscribers between April and June and saw revenue grow by 17%. Wall Street pushed Hughes shares 4.5% higher on the news.
The Hughes satellite is scheduled to become fully operational in the first quarter of next year. "I think by the end of 2008 we should start to see an impact on our numbers," Kaul says. And the added capacity from Spaceway 3 will allow Hughes to pursue new customers more aggressively, Kaul says: The company already is planning for its next satellite. Spaceway 3 is Hughes' first new satellite since News Corp. (NWS) sold its stake in the company to private equity group Apollo Management, taking its DirecTV satellite television business and the Spaceway 1 and 2 satellites with it. (News Corp. eventually sold DirecTV to Liberty Media in exchange for Liberty's News Corp. stake.)
WildBlue's Leonard says his company is also looking ahead to its next satellite launch. He expects WildBlue will reach 750,000 subscribers in the next few years, requiring further capacity. "That falls in the timeline to deploy another satellite," he says.