WildBlue CEO Counting On Pent-Up Rural Broadband Demand

Building a successful business in the satellite broadband arena is no easy task. While it’s easy to talk about the size of markets not covered by DSL and cable, it’s far harder building a long-term, profitable business in this area. One company that could change the face of satellite broadband is WildBlue Communications, which plans to launch commercial service in the United States sometime early in 2005.

Denver-based WildBlue, owned in part by Liberty Media [L], Intelsat and the National Rural Telecommunications Cooperative (NRTC), initially will use a portion of the transponder capacity aboard a recently launched Ottawa, Canada-based Telesat Canada Anik F2 satellite to provide its service. A second satellite is being built for launch when capacity dictates.

The market opportunity for WildBlue would appear to be substantial, with tens of millions of U.S. households still unable to access a broadband connection through either DSL or cable.

The stakes are high. If WildBlue can succeed, the company likely will provide impetus to the global satellite broadband industry. In an exclusive interview, Tom Moore, CEO of WildBlue Communications, talks with International Editor Mark Holmes about the challenges facing the operator as it bids for a berth in the U.S. broadband landscape.

Satellite News: Satellite broadband businesses have had a checkered history. Why do you think the time is right for WildBlue to be successful?

Moore: I wouldn’t say that broadband over satellite has had a checkered history. In fact, sort of like the early days of satellite TV – the C-band television business before mainstream DBS came along – satellite broadband hasn’t had very much of a history at all. I think there are between 200,000 and 300,000 customers in the United States willing to pay high prices to have [such a] product…because they have no other alternative. It is better than dial-up. But that’s not really an industry yet – it’s still a niche offering.

Satellite News: What’s changed in terms of market dynamics, which means you are confident in succeeding?

Moore: Five years ago, you had to convince people it made sense to pay $40 or $50 a month for [high-speed broadband]. People understand that today. What they want is something that is high-performance at that price point and is reliable. I think the reason why we will be successful is that we are going after that market with a different technical approach.

If you look at the existing broadband services today using existing Ku-band satellites, they are taking multi-purpose satellites designed mostly for broadcast and trying to turn them into a point-to-point platform. Unfortunately, the economics of that are not super attractive. From the early days of DBS satellite TV, it really took starting from the ground up with a specific customer need in mind and designing an end-to-end system to really have something that can drive you into the mainstream. I think that WildBlue will be the first satellite broadband player to do that end-to-end — everything from brand-new Ka-band spot beam satellites to an architecture based on standards and low cost CPE. We will be the first to put all those pieces together, which will be the key to our success.

Satellite News: What have you learned from other satellite broadband initiatives that failed?

Moore: One of the things we’ve tried really hard to do is to focus on customer need. I can’t tell you how many times I have heard from satellite providers that their killer app is ubiquity. Ubiquity is not a killer app. Ubiquity is only interesting if you have a killer app or a compelling consumer proposition to start with. The ability to offer broadband anywhere is interesting only if it is really high-speed and affordable.

What we have tried hard to do is focus on the consumer need first, and then build the system around that need. We start by realizing that consumers are not going to pay more than they would for cable and DSL, even if we are not competing directly with those services in our target market. There is only so much value a consumer can see in a broadband connection. You can’t charge multiples of that just because you are ubiquitous.

Because we are not owned or controlled by a satellite or equipment manufacturer, we have the luxury of buying whatever it takes from the satellite world and the ground- equipment world to make our business case. I think a lot of other initiatives have been either satellite manufacturing-driven or equipment-driven. What we have learned from other’s mistakes is to focus on the customer first and bring technology to bear to meet a specific customer need, and to not start with cutting-edge technology and then attempt to find a customer application for that technology.

Satellite News: Tell us about the business model you are planning to deploy in rural and remote parts of the United States. What targets do you have in terms of gaining subscribers in 2005?

Moore: Our plan in early 2005 is to roll out first in the Rocky Mountain region (approximately 20 percent of the United States) with a well-controlled beta trial. After the completion of that beta, we plan to expand quickly throughout the rest of the United States.

We are not in a huge hurry to get out with a product or a service that is not completely reliable and completely tested. We only have one chance to make a first impression and we want to do it right. With this in mind, our goal during 2005 is to have a service available nationwide that is proved, reliable and tested. We also want to get a meaningful subscriber base; that subscriber base does not have to be huge early on. That is not to say we don’t plan to have tens of thousands of these happy customers by year’s-end but our focus is on performance.

Satellite News: Have you thought about exactly who your target audience is and how much it’s going to cost to serve it?

Moore: This is going to be a consumer offering. If you look across the United States, where there are approximately 110 million homes, we think about one in four of those homes in the short-to-medium term (during the next five years) will not have cable or DSL available. We think once a truly compelling broadband offering is available to that market, the penetration of high-speed service into those homes will be similar to what you see in the other 75 million homes (the urban market). We think our target customer base is millions and millions of homes – a good target market for us.

The economics of a broadband offering like this are similar in some respects to satellite TV and quite different in other respects. As with satellite TV (and most other consumer telecommunications services), the service provider must invest to acquire a subscriber. Then, as with satellite TV, customers pay you $40 to $50 a month of ARPU, and then you work hard to bring as large a percentage of that to the bottom line as possible to pay off that subscriber acquisition investment.

The difference between broadband and satellite TV is that we avoid the single largest cost in satellite TV: content. Our content costs are very low, if not zero. In the satellite TV industry where 50 percent to 60 percent of every dollar of revenue goes to the content provider, we don’t have that expense. For that reason, the gross margins on the broadband business will be better than satellite TV.

The flip side is that broadband satellite is a capital-intensive business. You must continue to launch additional satellites as your subscriber base grows, and robust margins are required to repay that capital investment. We think, if done properly with Ka-band satellites, the satellite broadband business can be very profitable.

Satellite News: How many subscribers would you need to become profitable? How big is the target audience?

Moore: It will be wholly dependent on how aggressive we are with subscriber acquisition. It is very similar to EchoStar’s [DISH] business; even now, with 10 million customers, the company’s profitability is based on how aggressive they are in the subscriber acquisition game. Satellite broadband will be similar to that.

Satellite News: Give us a progress report on the satellite now under construction. When do you expect it to be needed?

Moore: WildBlue 1 is being manufactured by Loral, and we are only several months away from being done with that satellite. It should be ready to launch in roughly the October timeframe. When we will actually launch it remains open.

With the successful launch of the Anik F2 satellite, we have plenty of capacity for several years so, we are not desperate to launch WildBlue 1. We think there are some interesting market dynamics that may drive us to launch it sooner rather than later and, obviously, we have some FCC and ITU deadlines that we have to be aware of as well. A lot of things factor into that decision, and we are just in the process of thinking that through.

Satellite News: Will WildBlue offer subscribers any forms of content to make the package more attractive?

Moore: We are going into a part of the United States where there is no broadband alternative so, today, all we have to do well is provide access at high speeds with reliably. That is good enough for the time being. How long that will be good enough remains to be seen.

Obviously, the Holy Grail of broadband is to have differentiation, whether it is different types of speeds or special content. One of the things that has great value to us is our strategic relationship with Liberty Media. That company is our largest shareholder, and it obviously has extremely compelling content that could be brought to bear. Liberty Media obviously wants the widest distribution of that content possible, so exclusivity is probably not realistic. But are there some things that we can do with them to make our offering much more compelling and interesting? I would say, ‘yes.’

(LaRae Marsik, October Strategies, [email protected])

WildBlue In A Nutshell

• Headquarters: Greenwood Corporate Plaza, Bldg. 1, 5970 Greenwood Plaza Blvd., Suite 300, Greenwood Village, CO 80111
• Phone: 720/554-7400
• Founded: 1995 as Ka-Star
• Capitalization: Approximately $500 million
• Major Investors: National Rural Telecommunications Cooperative (NRTC), Liberty Media, Intelsat, Kleiner Perkins Caufield & Byers, Arianespace
• Broadband Service Promised: 512 Kb/s, 1.5 Gb/s
• Anticipated Start of Service: 1Q05