By Mark Holmes

Recently, experts from the investment bank community warned that the operators, who have been acquired by Private Equity (PE) firms, could be under much tougher constraints when it comes to capital expenditure plans. Max Herrnstein, managing director at Morgan Stanley, says, "You will see limited capital expenditure. The name of the game could be turning a 15 satellite fleet into a 10 satellite fleet." And such thoughts could have an impact on future ka-band endeavors.

The comments come at a time when operators could be thinking about ramping up their plans for next generation’s Ka-band satellites. With broadband penetration increasing dramatically across established economies around the world, it appears that there is no better time for satellite operators to finally be successful in this area. What impact the PE firms will have on operators such as New Skies, Panamsat and Intelsat remains to be seen, but satellite broadband via Ka-band remains a key issue for a number of operators.

In fact, many global satellite operators are already playing a key role in satellite-delivered broadband applications. From corporate private networks to consumer connectivity, this is one business segment that remains strong on the industry’s revenue growth plans. Intelsat, for example, is aggressively playing in the Ka-band arena through its stake in Wildblue Communications, the broadband service provider that is ready to offer commercial Internet services via satellite in 2005 throughout the United States. Wildblue will be a key barometer for the industry generally, as it looks to buck the trend of less than successful satellite broadband operations. Therefore, Ka-band satellites will be vital to its success. Tom Moore, Wildblue’s CEO, says that Ka-band satellites will remain instrumental for its business success. "I do think Ka-band satellites will do certain things very well, and by that I mean they are by nature very high capacity. They have much more capacity per dollar of capital investment than any other satellite available today, if you are using them for point-to-point applications or unicast applications (where each user is doing something different). Ka-band satellites are very well-suited and very cost-effective for that. Are Ka-band satellites the second coming? No, but they are definitely required to do the kind of service that we are talking about, which is a low cost broadband service offering to the consumer."

Even though service has yet to fully be realized for Wildblue, Moore remains confident that his business will succeed for a number of reasons. According to him, the rules of the game appear to have changed. Even two to three years ago, there were people who had very little perception of what broadband was. Now, broadband is everywhere. It is mass market and that branding could be the catalyst for its service success. In terms of satellite broadband, Moore believes the comparison with Direct Broadcast Services (DBS) is a good one . He says, "I think you will see a progression very similar to the early days when DBS was introduced into the satellite TV market. At first, there were a handful of C- band customers willing to pay any amount of money for a TV signal and willing to have a huge dish in their backyard.

"Along came Hughes, which designed an end-to-end system for DBS that was optimized for lots of channels on a very small dish. It was much more consumer friendly and launched satellite TV into the mainstream. Others saw the wisdom in the Hughes approach and new competitors entered the market and the customer base grew from tens of customers, to thousands, to tens of thousands and then ultimately millions of customers. I would predict that the satellite broadband world will evolve in a similar fashion."

The market opportunity for Wildblue in remote and rural America is considerable, and according to Moore, this could be around 25 million homes, which do not have access to DSL or cable. Wildblue aims to tap into this. "We plan to search for customers with no alternative not because we don’t think we will be competitive with terrestrial offerings, but because we think that there is a whole untapped market with lower churn and more loyal and robust customer base if you go where others are not. That is where we will focus our efforts for the time being. We think that market is a very large opportunity and more than enough to keep us busy," Moore says.

25 Million Homes

If the demand for satellite broadband takes off, and talking to Moore, you get the impression that he is confident that it will, then Ka-band satellites will be vital for WildBlue in its drive into these 25 million homes. "The real difference between Ka-band spotbeam satellites and existing Ku-band satellites is better economics for applications like ours. For instance, on a Ka-band satellite with spotbeams and high-frequency reuse, we can spend approximately the same amount of capital as on an existing FSS satellite and can deploy about 10 times the capacity. What that means is that we can either put 10 times the customers that you could support on a Ku-band satellite, or that we can give 10 times the bandwidth per customer, or that we could charge a fraction of what existing players are charging for the service or some combination of all of those. Either way, that order of magnitude of improvement in economics is what is necessary to compete with cable or DSL. You couple that with standardized low-cost consumer equipment and all of a sudden you have a pretty compelling offering," Moore adds.

One of the major challenges for Wildblue will be to overcome a certain negative perception in the marketplace of satellite broadband offerings. Moore, however, believes it is more a lack of awareness than a negative perception. He comments, "We were worried that maybe some negative perception would exist. What we have found through work we have done with focus groups is that the vast majority of rural America does not even really realize today that satellite broadband is an option. It is not that they are negative about it. They don’t even realize that it is for real. That lack of current awareness is partly because of price, and partly because there is not enough capacity available today for the existing providers to get super aggressive from a marketing perspective."

Europe Eyes Ka-band Broadband Sector As Well

While Wildblue is seen as leading the way in terms of satellite broadband and even in Ka-band, other satellite operators are beginning to look to tap into this area. Robert Bednarek, executive vice president of corporate development at SES Global, believes the costs factors are now starting to turn in satellite operators’ favor.

"Throughout the last two years, we have seen continued work on the development of terminals and terminal technology, with a steady lowering of terminal price points, both in the commercial sector and in the residential sector. Some of that is based on the continued evolution of standards work, whether via DVB-RCS or DVB-S2, or the work that WildBlue has done to standardize around DOCSIS tools. I think on the residential side, if there was to be a sufficient volume commitment at this point, the price points of below $400-$500 would certainly be achievable," Bednarek says.

Satellite operators also have learned lessons from the past, and Bednarek believes a more cautious approach could soon bear fruit for operators as they are "more realistic" in their approach. He adds, "There is a more realistic incremental approach to the provision of satellite-based two-way broadband. We can approach it incrementally. We can deploy systems in specific regions and specific market segments. I think that is the most appropriate way to approach the broadband rollout, as opposed to a brand new constellation that requires billions of dollars of upfront investment. I think the industry is on the path of a more appropriate incremental implementation."

In terms of the deployment of Ka-band satellites, Bednarek says, "The positive characteristics are the ability to use smaller antennas, operate with higher power and operate in less congested frequency bands where you don’t have to share with terrestrial services. The disadvantage is rain fade and the inability to have very wide beams. The smaller spotbeams used by Ka-band satellites are both an advantage and a disadvantage depending on the application.

"Does Ka-band match well the requirements of two-way broadband? Yes, the spot beams are not a problem with two-way broadband because you are typically linking an individual or an individual site, to some sort of terrestrial network, so you don’t necessarily need pan-continental broadcasting," adds Bednarek.

In terms of offering satellite broadband via Ka-band, Bednarek believes it is all related to potential. He says, "With Ku-band, you obviously have a valuable resource that can be used for broadcasting over a wide area. In some cases it would be a waste using it for an individual, specific site. Since most Ku-band satellites don’t have spotbeams with frequency reuse, you have a cost per subscriber that is higher. In Ka-band, it is possible to have a series of smaller spotbeams, reuse the same frequencies and therefore have more capacity per satellite which if, and only if, you use all the capacity results in a lower cost per subscriber."

Other European satellite operators are also beginning to ramp up their strategies in this area. Eutelsat already has Ka-band space segment on Hotbird 6, and also on W3A. Robert Feierbach, executive director of Skylogic Italia (a Eutelsat affiliate), says that European operators will need to develop services in Ka-band.

"There is no doubt that most satellite operators in areas with a dense concentration of satellites, such as Europe, the Americas or Asia, will eventually need to develop services in Ka-band, since the current Ku-band spectrum on the key orbital slots is not sufficient to support multiple hundreds of thousands of consumer broadband subscribers in the same position. Only Ka-band will be able to achieve this under these situations," Feierbach says.

But even though a robust market seems to be looming on the horizon for Ka-band satellite-enabled broadband services worldwide, costs still need to come down. "The current drawback on Ka-band technologies on the CPE (Customer Premise Equipment) today, is the much higher cost of the high-frequency RF components, which are still in limited production today. With the advent of one or two operators launching major initiatives requiring large-scale Ka-band CPE production, this should certainly improve," adds Feierbach.

Like others, Feierbach believes that time could be right for satellite broadband to make an impact. He also says satellite operators are more realistic with their expectations, but believes costs will prevent satellite broadband being mass marketed throughout the next two to three years. In terms of how Eutelsat views the satellite broadband arena, Feierbach says, "Satellite broadband is certainly an important growth driver for Eutelsat’s business during the next few years. To sustain this, we have already installed 13 broadband two-way hubs covering a large part of our satellite fleet, with homogenous IP connectivity around the world, through our Skylogic broadband affiliate in Italy. However, we don’t see a mass market for broadband during the next two to three years, but rather a healthy enterprise services growth."

But, like Moore, Feierbach believes the explosive penetration of broadband services across Europe will ultimately offer satellite operators such as Eutelsat a number of opportunities going forward. "One of the positive developments is that the market seems to be more aware of the broadband service capabilities of satellites, particularly for the professional sector," he says. "In the consumer market, with the proven success of small-dish direct-to-home services, and the high-quality perception of digital TV via satellite, there will be a potential to upsell when the time is right, and the two-way broadband systems can finally be made available for an impulse-buy purchase and service price at the major electronic retailers."

Critical Mass

The challenge is really to get the critical mass of subscribers. The dynamics, however, seem to be shifting in favor of satellite operators. It is not just that broadband is becoming a mass market product, it is becoming more than just an access product. A number of ISPs are beginning to offer digital TV style bundles of content and ultimately content could become as much of a differentiator as price.

In terms of how the business might develop, Bednarek says, "Broadband will be increasingly used as a video delivery mechanism. You only have to look at the music business. Broadband is becoming one of the dominant distribution mechanisms in that business. It is not too big a stretch to say that in five to 10 years time, you will be doing a lot more video delivery over broadband. The more broadband is used for video, the more it plays into our strength of being able to multicast across large areas and distribute video efficiently to multiple broadband devices." However, while broadband and Ka-band seem to be intrinsically linked, Bednarek believes they could be used effectively in broadcast markets.

Crossroads

Satellite operators are entering a crucial period in their history. It could be argued many are at a crossroads. In recent years, many have suffered from flat revenue growth and overcapacity in the marketplace has seen price erosion in terms of transponders. However, while market conditions have not suddenly gotten better overnight, there are growth opportunities on the horizon, most notably satellite broadband and HDTV. While HD continues to dominate the headlines, satellite broadband could offer considerable opportunities.

As Wildblue rolls out its service, all eyes on the satellite industry will be on how quickly it can build a profitable business. With prices comparable to DSL and cable offerings, lower costs of equipment, as well as broadband now being an accepted medium, there really can be no excuses for failure. Its success could provide the impetus for other operators. As broadband becomes mass market, and as dial-up access begins to fade, the time may finally be right for Ka-band satellites to become a key part of the equation for satellite operators.

Mark Holmes is the senior editor of Inside Digital TV and international editor of Satellite News, both sister publications to Via Satellite.