The December closing of ViaSat’s $568 million cash and stock acquisition of Ka-band satellite broadband provider WildBlue, following November’s $75 million cash investment by SES into Google-backed startup O3b, which plans to provide high speed Internet access to the “other 3 billion” people of the developing world reflected in its name who lack broadband access, put in focus the rapidly developing satellite broadband market.

In retrospect, the satellite broadband projects of the 1990s were just ahead of their time. Broadband satellite service has grown substantially during this decade. U.S. market leader Hughes Network Systems boasts more than 500,000 subscribers (WildBlue has more than 400,000); Barrett XPlornet in Canada and Eutelsat’s Tooway service in Europe are also developing their respective markets. These providers primarily target low-population-density regions in which potential subscribers are not served, or are underserved, by terrestrial providers, whether cable, fiber or DSL, or wireless.

Satellite broadband development in the United States comes at a time when the legal and regulatory environment may be more favorable than in the past. The American Recovery and Reinvestment Act of 2009 funded broadband initiatives intended to accelerate broadband deployment throughout the United States. The Recovery Act authorized the U.S. Federal Communications Commission to create a National Broadband Plan for such penetration and specifically to promote broadband deployment in unserved, underserved and rural areas as well as strategic institutions. In addition, new FCC Chair Julius Genachowski in September argued that wireless terrestrial carriers should be subject to pro-net neutrality, “open Internet” rules that the FCC has begun to apply to wireline broadband providers such as Verizon, AT&T and the leading cable operators. A pro-net neutrality FCC, a marked change from the FCC under the Bush Administration, generally should tend to level the playing field for satellite broadband service by preventing larger terrestrial providers from entering into preferential deals with content providers.

The role of satellite service in furthering the Recovery Act and implementing the National Broadband Plan could not be clearer. Hughes senior vice president and general counsel Dean Manson, testifying before the FCC in October, noted that a significant portion of the more than 10 million unserved households in the United States never will be served by terrestrial wireline or wireless broadband, because the population density in those regions could never support network infrastructure, the implementation of which has been estimated to cost as much as $350 million, and multiple the cost per subscribers compared with cost per urban subscriber. Manson noted one of the critical economic components of satellite service — that the capital cost of providing broadband service is virtually the same per subscriber, whether rural or urban.

The principal economic hurdle for satellite broadband, as with all satellite service, is that there is no revenue stream during staged network implementation to fund buildout and to provide returns to investors; virtually all capital costs for a broadband satellite and associated terrestrial network must be incurred pre-revenue. Under those circumstances, a stable and supportive legal and regulatory environment is all the more critical to prospective investors, because all risk is frontloaded, with reward backloaded. It is an additional burden to satellite broadband that under that risk profile, satellite service must offer greater reward than its terrestrial competition. In that context, Manson testified when “government incentivizes more rapid adoption of broadband … it should strive to implement those programs in a way that enhances rather than distorts existing, well-functioning markets.”

Broadband stimulus plans should not favor any type of terrestrial provider or favor terrestrial service over satellite service. One method would be by use of a fixed subsidy for each acquired customer in a targeted region or market, irrespective of technology platform or provider. Fixing the subsidy vesting on acquired customers would also avoid creation of a taxpayer-subsidized “broadband bridge to nowhere.” Another way would be to gear stimulus subsidy spending to satellite uniquely upfront capital costs, to ensure that providers are able to promise the same return on investment for subscriber reached as their terrestrial competition, and to promote true competition that way.

In these ways, the government can get out of the business of picking “winners” in different regions and allow the subscribers to do so.

Owen D. Kurtin is a founder and principal of private investment firm The Vinland Group LLC and a practising attorney in New York City. He may be reached by e-mail at [email protected].