In my last column I sketched out the path by which the satellite industry transitioned from one wholly dependent on government and public switched telephone network (PSTN) customers to one that now has a thriving sector directly serving consumers.

One might ask why this matters. In some cases it doesn’t make as much difference as others, but the most important consideration is that satellite services delivered directly to the consumer generate more revenue than those sold wholesale, while at the same time requiring an entirely different sort of organization.

Satellite capacity leased for PSTN use generally commands the lowest price of any market for satellite services. With PSTN there is a minimum of special support required by the telecommunications providers using the transponders. Video distribution allows satellite operators to offer more in the way of specialized services. SES Americom, for example, offers both its Signalsat and IP-Prime services that allow a broadcast TV station or cable headend to act as a pass through and use the “headend in the sky” to provide video programming. Intelsat, through what was once Loral’s North American fleet and it’s PanAmSat acquisition, offers a broad range of video services to cable and broadcast providers.

Although these are lucrative businesses, video distribution to broadcast stations and cable headends is still a wholesale business. It is part of video provider’s overhead, and as such, cannot cost more than a small percentage of a video provider’s revenue.  If, on the other hand, a satellite operator deals directly with the consumer, the operator’s revenue stream is the whole of available revenue.

In North America, companies like WildBlue and DirecTV own the majority of the satellite capacity that they use. DirecTV owns its satellites, while Echostar owns most of its own satellites but also leases some capacity from SES Americom. Hughes Network Systems has launched Spaceway 3 to provide its own Ka-band capacity for its HughesNet broadband offering (the current Ku-band capacity is leased). There are exceptions, such as  Canadian direct-to-home (DTH) provider Bell Express View, which lease satellite capacity from Telesat.

Of course, the extra revenue is not free. In order to deal directly with consumers it is necessary to provide installation, customer service, billing and other services that a consumer-grade service requires on a broad scale.  Although some of these services, such as local installation, can be outsourced, for the most part, providing services directly to consumers requires an extra layer of organization. Handled properly, these extra functions cost less than the extra revenue they generate, but the tradeoff between increased complexity and increased revenue is a complicated one, and it is not necessarily a good idea a wholesale service provider to pursue consumer markets.

The most important aspect of the transition from providing wholesale services to consumer services is the number of available customers. If there are relatively few potential customers then it is much more difficult to amortize the expense of the customer service organization. Subscriber churn also is an important factor in a consumer-based business and a large pool of potential customers helps to mitigate this problem by providing a pool of replacement subscribers.

In some cases, such as satellite radio, one of the initial difficulties is establishing who the potential customers are. Are they all radio listeners? If not, which radio listeners would prefer satellite? Likewise, what non-radio listeners would substitute satellite radio for a different audio source? A satellite service may not map well onto its terrestrial counterparts and a new market niche may need to be created.

In general, satellite sales to consumers can vastly increase satellite industry revenue and profits. This can go beyond just satellite operators, as satellite and ground equipment manufacturers also are involved. In order for DirecTV or Echostar to provide a service in competition to cable and broadcast TV they needed new satellites, home dishes and set-top boxes. Thus the growth of the satellite DTH market supported the broader satellite industry and not just the operators who provided the video signal to consumers.

In Europe and other parts of the world, the structure of the DTH industry is somewhat different from that in North America but similar structures can be found in the growing satellite and broadband market worldwide.