The timing of the American Recovery and Reinvestment Act’s passage in February could not have been better for the satellite industry. After months of panicked discussion among analysts and executives over a devastated economy and which financial institutions would be willing to invest in the next-generation broadband projects — let alone survive the recession — the U.S. government put $7.2 billion up for grabs in a battle between telecoms, WiMax providers and satellite companies to propose the most efficient and job-creating solutions to close the digital divide and connect underserved areas with modern Internet service.

At the time, any news of available credit was good news, and if satellite companies could get even a small piece of the pot, the government work could provide the extra padding that would bring the satellite industry through the recession unscathed if a prolonged crisis became reality. But the satellite sector’s optimism was short-lived. From nearly the start of the process, the broadband stimulus program was plagued with problems —from a lack of program leadership on the government side to rampant analyst assumptions declaring WiMax the dominant future provider of government-issued broadband services.

    For some satellite companies, the government investment became less attractive as the program’s details became more vague and disheartening, but others, like Hughes Network Systems, SkyCasters and WildBlue, invested time and energy lobbying congress on behalf of promoting satellite as a viable source of technology. Hughes and WildBlue felt so strong about the prospects that the fierce U.S. broadband satellite services market competitors cooperated to produce joint-promotional advertising campaigns and initiatives on the broadband stimulus bill. “We’ve briefed many in congress and have had meetings with the administration. I think everyone in Washington understands that there is no single solution for the rural broadband connectivity problems. Satellites, cable and fiber all have a role to play in providing to served and unserved areas and we will see what that role will be at the end of the year,” says Hughes CEO Pradman Kaul, who expresses confidence in satellite’s position.

    Fast forwarding through months of government scrambling to organize the application process, new and largely misunderstood funding requirements and the surprise withdrawal of the WiMax players, the satellite sector finds itself at the close of the first funding window and the beginning of the second in a process where there is no such thing as a veteran. Everyone involved, including the U.S. Department of Agriculture’s Rural Utilities Service (RUS) and the U.S. National Telecommunications and Information Administration (NTIA), named the responsible parties to issue out the funds, is new to it all.
What lessons were learned and what is the satellite strategy of the future? If the last few months are any indication, no one really knows.

A Rough Start

In the early stages of the program, when the NTIA was just an empty building with no management and the Broadband Stimulus Bill was estimated to be $6 billion, the satellite industry found reasons to worry. The process started off on an awkward foot by mentioning satellite only twice in the proposal’s 258-page rough draft, presented to the first session of the 111th U.S. Congress in January. The first mention of satellite came as an order to provide $600 million to the U.S. National Oceanic and Atmospheric Administration (NOAA) for “procurement, acquisition and construction” of satellite development for climate sensors, climate modeling capacity and establishing climate data records. The second mentioned the use of satellite as an option to deliver distance-learning programs via broadband. The U.S. House Appropriations Committee eventually allotted $2.8 billion for loans, loan guarantees and grants to be administered by the RUS’ distance learning, telemedicine and broadband program. Another $2.8 billion was designated for wireless and broadband deployment grant programs to be administered by the NTIA within the U.S. Department of Commerce. NTIA was instructed to use $250 million to provide underserved areas with voice services and $750 million for advanced wireless broadband data services with download speeds of 3 megabits per second (Mbps) and 1 Mbps for upload. The remaining $1.8 billion also will be split up for different service uses. Within the terms of this split, the U.S. also defined and updated the definition of “basic” and “advanced” services. Providers of basic broadband service (5 Mbps down, 1 Mbps up) were eligible to receive 25 percent of that amount, while providers of advanced services (45 Mbps down, 15 Mbps up) would have access to 75 percent of the funding.

    The U.S. Senate version of the bill upped the ante to $9 billion, increasing funding across the board. The Senate version also gave carriers a 10 percent tax credit for building out basic high-speed Internet and a 20 percent credit for advanced. Services were to be provided on an "open access basis" defined by the U.S. Federal Communications Commission (FCC) within 45 days of enactment and adhere to the FCC’s August 2005 statement of principles on net neutrality. However, the funding came with conditions. State governments were required to provide a report to NTIA indicating which geographic areas of the state should be considered to have the greatest priority for service. These areas could not represent, in aggregate, more than 20 percent of the state population or geographic area.

The Predetermined Winner

In December, when a group of telecoms players comprised of AT&T, Google and Verizon lobbied U.S. Congress to call to action for a comprehensive national broadband strategy, satellite platforms and delivery services were left out of the submitted document and largely ignored when qualifications for funding under the broadband stimulus package were being negotiated.  Analysts immediately picked up on this, and when reports lifted WiMax and fiber providers as the predetermined champions of the stimulus funding, which was passed in February, satellite companies energized their lobbying efforts from the outside. Hughes and WildBlue led the effort to highlight that the U.S. government was trying to fix a problem that the satellite industry was already trying to solve in rural areas largely and, in some cases, exclusively served by satellite providers for some time. When competitors retaliated by promoting the idea that broadband funding issued at the local state government level would favor them, smaller local satellite companies stepped up their own efforts.

Skycasters, a broadband satellite Internet solutions provider based in Ohio, launched an extensive press and political campaign in an effort to promote its ability to supply government customers with Internet connections for schools, libraries, rural communities, remote industrial sites, disaster response teams and oil, gas and mining operations to the web. Skycasters President Michael Kister seemed to be making statements and exclusive state government contacts every week — presenting satellite infrastructure as the economically viable solution to potential customers. “There are funds available [in the bill] to build Wi-Fi networks to connect small communities that were previously ‘off the grid’ as far as the Internet is concerned,” says Kister. “Wi-Fi is often a great solution, but there’s still a missing link. How do you connect the Wi-Fi network to the rest of the Internet backbone? Fiber buildouts can be prohibitively expensive, costing $10,000 to $20,000 per mile, or more, depending on the terrain. Satellite is a viable alternative in these situations.” Kister also believes that there are opportunities for satellite in the bill that go beyond the broadband stimulus portion. The highway infrastructure plan included in the economic package provided a potential customer in construction companies. “The reality is that if you are going to do a construction project in the 21st century you need reliable communications to the site — not just cell phones, but real IP communications for e-mailing documents, verifying plans and work orders,” he says.

Skycasters soon found itself serving as a role-model for stimulus pitching, as satellite companies fine-tuned their proposals to be ultra-specific to counter the broad, sweeping solution proposals from their competitors.

WildBlue’s proposal ended up state-specific. The company filed for $30 million in the bill’s first funding window to help subsidize satellite broadband connections for about 10,000 homes in Colorado and Wyoming and another 10,000 in Arizona that are out of reach of high-speed cable, fiber and DSL lines. About $15 million of that sum would go toward the Colorado/Wyoming effort, with the rest earmarked for the Arizona project, the company said. SkyTerra Safety Access LLC filed its NTIA application requesting $37 million in order to deploy two new wireless devices for public safety workers. In addition to the $37 million of stimulus funding, SkyTerra said it would contribute $9 million more to build out the wireless device deployment infrastructure it needs to launch new services. Hughes delivered a variety of first-step solution proposals offering managed network services to assist smart-grid technology — a product of the stimulus bill’s tenfold magnification of the U.S. Department of Energy, enterprise virtual private networking and emergency communication services for municipalities.

Along the way, satellite companies mentioned personal contacts in their press releases — from Rep. Chris Van Hollen (D-Md) to Gov. Ted Strickland (D-Ohio), while the giants of land-line services, like AT&T and Verizon, and even software kings Google, Microsoft and Cisco Systems, went big. Fortunately for the satellite sector, the NTIA and RUS’ funding requirements, which were released late in the game on July 1, a mere two weeks before the start of the first funding window, leveled the playing field by throwing a wrench into everyone’s plans and cranked up the overall confusion. The RUS and NTIA’s Notice of Funds Availability (NOFA) declared that all broadband stimulus money must be disbursed by Sept. 30, 2010 and grant recipients have three years to fully complete their projects. The outlines also revealed that the agencies would issue funding to a single provider per region and that companies with solutions that cover several areas would have to break up their applications and provide specifics in separate applications. This provided good news to satellite companies, which were focusing on individual areas and a nuisance to the land-line providers, who were forced to reorganize.

The requirements also answered some questions posed by satellite industry executives as to what constitutes adequate broadband speeds as well as what defines an unserved and underserved area. The organizations require an advertised speed of at least 768 kilobits per second (kbps) downstream and at least 200 kbps upstream to end users or “sufficient capacity in a middle-mile project," according to the NOFA. The NTIA and RUS defined an area as underserved if no more than 50 percent of the households in the proposed area can already have access to "facilities-based, terrestrial broadband service" at greater than 768 kbps downstream and 200 kbps upstream, no fixed or mobile broadband service provider advertises broadband transmission speeds of at least 3 Mbps downstream and if its rate of broadband subscribership equals 40 percent or less of its households. An area meets the definition of unserved if at least 90 percent of its households lack access to broadband service.

    However, the three-year project deadline cast more doubts on satellite’s role. Could the next-generation systems proposed by WildBlue be finished and launched in time? Once again, some analysts went to work on satellite write-offs. But others noticed problems that the WiMax industry was dealing with on its own, and brought attention to the fact that its investors were jumping ship.

The Surprise Retreat

A week after the close of the first funding window, Research firm Analysys Mason released a report the questioned the ability of North American and European WiMax markets to grow and sustain the interest of continued investments from their partners in the software industry. Terry Norman, senior analyst at Analysys Mason, said his firm especially was alarmed by WiMax investors such as Cisco Systems, Google, Intel and Motorola were writing off billions of dollars in Clearwire, majority-owned by Sprint, as sales had been slower than expected. Norman wrote that the finance drain may stall plans for WiMax network rollouts. “This does not look good for WiMax,” said Norman.

    The report also predicted that North American CDMA operators may opt to move with WiMax’s competitor platform, Long Term Evolution (LTE) — an assertion supported by Ericsson’s purchase of Nortel’s interests in CDMA and LTE in North America. “In the developed markets of Europe and the United States, we see some early signs of a difficult future for WiMax. In developed European markets, operators are almost certainly upgrading their 3G technologies to 4G LTE in order to match the rising demand for data,” said Norman. “We expect that [the WiMax operators] will compete head-to-head for the same customer base, and LTE will have a clear advantage in this.” The report coincided with the surprising retreat of WiMax from its expected strong participation in the broadband stimulus’ first window. Verizon, AT&T, Qwest, Comcast and others have indicated they will not file for stimulus money due to a range of factors, including net neutrality stipulations, which restrict funding distribution. Clearwire maintained that it filed for “significant” funding but would not reveal the exact amount or the extent of its solution.

Other WiMax proposals seemed to take on an approach that seemed to defy the application requirements — placing chips on multiple numbers in hopes that one of their investments will hit. These proposals also asked for a noticeably larger amount of funding than sought by satellite players. KeyOn Communications, a wireless broadband provider specializing in connecting rural areas, announced Aug. 27 that it submitted multiple applications requesting a total of $150 million in U.S. broadband stimulus funding, with promises to connect millions of households within three years. KeyOn’s proposal was five times larger than WildBlue’s application. KeyOn said its existing wireless networks, which covers about 2.5 million people, would be expanded to cover as many as 16 states and provide wireless broadband access to as many as 6.5 million people. According to the NTIA and RUS guidelines, each one of those states requires a separate application with no guarantees. “The management, employees, and key consultants of KeyOn have spent the past three months focusing on and refining our plan to submit these applications under the BIP for rural broadband deployment. … I believe we are strongly positioned to extend the reach of broadband to the neediest areas in the country," KeyOn CEO Jonathan Snyder said in a statement.

Despite the tense environment and the less-than-smooth sailing of the government’s stimulus administration, the RUS and NTIA have reported that they are swamped with applications and that competition is healthy. “Over the last several days, the online application system has experienced service delays due to the volume of activity from potential applicants,” the Departments of Commerce and Agriculture said in a joint statement, released Aug. 14.  To address the capacity issues, the agencies added additional servers and six more days to the deadline for companies who already started the application process.

But the process itself has its own share of critics. The FCC, which is waiting for NTIA and RUS progress reports under its own pressure to meet a Feb. 17 deadline to submit a national broadband rollout plan outlining the benefits of improved broadband infrastructure for such things as education, employment, and health care as well as the issues related to deployment, adoption and affordability to U.S. Congress and President Obama, held a workshop Sept. 1 with some of the country’s leading economists. The panel only revealed frustration, as economists and capital investment managers warned the FCC that there is insufficient research data to enable the U.S. government to accurately assess what type of national broadband plan would benefit the economy.

    University of Georgia economist Chris Forman told FCC moderators that economists are surprised that the process of handing out $7.2 billion in broadband stimulus funding has been unorganized. “It is interesting that the government has conducted none of its own surveys to gauge how residents in unserved rural areas would use broadband to their economic advantage. The government is using data from the private sector [and] in some cases, from university surveys conducted by students,” said Forman. The government “cannot force demand with supply.” Tom Wheeler, managing director at Core Capital Partners, said that too much attention is being focused on bringing broadband to households but not enough on bringing cost-reduced services to enterprises, which he believes will provide the intended economic boost. “We’re looking at the wrong thing. We’re looking at the pipe and how to build that pipe, but we’re not looking at the reason for the pipe, which is what investors like me need to know. What about providing data for enterprises at reasonable prices? Enterprise industries will provide more of a direct impact on the economy and neither the FCC nor NTIA or any government agency has collected data on enterprise prices, prices for virtual private networks or broadband options. Surely, the amount of applications the NTIA should tell them that the amount of providers is robust, but we have no data on pricing,” said Wheeler.

    With the broadband stimulus bill application process approaching its halfway point, with two more windows, October to December and April to June, on the horizon, the agencies and companies involved find themselves facing several new questions, without having answered the basic ‘”who, what, where, when and how” that the NTIA and RUS were tasked to determine. With economists and investors throwing ‘why’ into the mix, the concept and definition of the U.S. broadband problem becomes a little broader.