Broadband Beat: Fighting To Stay In The Broadband Game

by Theresa Foley

Broadband satellite projects will find it difficult, if not impossible, to raise the large amounts of capital this year necessary to build out their systems, which cost anywhere from hundreds of millions to many billions of dollars, depending on their architecture. The gloomy economy, the general malaise of the capital markets and a growing investor distaste for satellites have combined to leave nearly a dozen satellite broadband hopefuls with few options for financing in 2001, leaving most to play a survival game.

Remember the old Beach Boys song that goes, “Catch a Wave, Sitting on Top of the World”? Phil Spector, a satellite industry lawyer who focuses often on broadband issues, says that in 2001, the satellite industry is not riding the wave but is buried beneath two of them. The bankruptcies of some of the most prominent mobile-satellite players represent the first tidal disaster to hit; and, trouble in the terrestrial broadband business, which has not rolled out smoothly or provided good news for stock investors, is the second wave of bad news to crash down on satellite broadband players. “Companies are trying to make it in satellite and broadband [at a time] when neither is a good place to be,” Spector says.

Just how severe the wreckage will be by year-end is anybody’s guess but in early 2001, there were numerous signs that the happy-go-lucky days for satellite broadband had ended. Bernard Schwartz, the satellite mogul who built the Loral and Globalstar empires, followed Globalstar loan defaults with a decision to back away from Loral’s ambitions to start a two-way consumer Internet access satellite project. PanAmSat’s much-touted Net-36 initiative to use satellites for broadband content distribution went commercial in the end of 2000; but, by the start of the new year, PanAmSat revealed that it would spend only half the original planned investment in 2001 to deploy the network to DSL and cable headends around the United States. Alcatel’s massive project to launch a fleet of low earth orbit satellites for broadband last mile services, SkyBridge, also appeared to have shelved its original plan at the start of the year and shifted to reliance on existing satellite capacity instead of a new $6 billion, 80-satellite fleet, according to published reports.

The slowdowns and strategy shifts don’t stop there. The start date of Craig McCaw’s well-known broadband satellite venture, Teledesic, has slipped further in time, again, to 2005 or beyond. In addition, Teledesic has been relegated to a low-profile status compared to its sister company, the new ICO Global Communications, which also was in highly uncertain status at the start of the year. Three broadband-related satellite companies, StarBand, WildBlue and ICO-Teledesic, were in registration for IPOs early in the year, but toward the end of last month StarBand decided to withdraw its planned initial public offering. As for the other two, their chances of successfully going public appear difficult due to a weak IPO market.

Due to the IPO and high yield bond markets’ inaccessibility, many satellite companies will have to rely on private equity markets and strategic equity partners for money.

In 2000, the companies were relatively successful in tapping those sources, although the sums raised are far short of the totals needed. StarBand raised $100 million from strategic partners in 2000, including $50 million from Microsoft, $25 million from Echostar and $25 million from ING Furman Selz.

Denver-based Internet-access satellite hopeful WildBlue raised $239 million in private equity and $146 million in vendor financing prior to registering last year for its $200 million IPO, which hadn’t taken place by late February. The company plans a first quarter 2002 launch of its first satellite but observers expect to see a delay, especially if financing is unavailable this year.

The best hopes at this point appear to be Spaceway and Astrolink, the large geostationary broadband satellite systems backed by deep-pocketed, though perhaps not overly risk- oriented sponsors Hughes and Lockheed Martin, respectively. Astrolink needs $3.5 billion for its initial system and has commitments for $1.3 billion in equity. The company plans to launch its first satellite in early 2003 and start service in the second quarter. “We recognize that the climate of the capital markets has changed, but we believe that companies like Astrolink, who have good business plans and a strong team to implement those plans, will still be in a position to obtain funding,” said Astrolink Spokeswoman Arlene Taffero.

Even those two may have trouble getting the capital markets to give them new billions, thanks to the infamous parade of satellite debacles that includes Globalstar, Motorola’s Iridium, the original ICO and Orbital Sciences Corp.’s Orbcomm. The four have burned through many billions of previous investment dollars in the mobile sector and created an aura of loss around satellites that will be difficult to dispel. Granted, the smart investors know the difference between a mobile and a broadband project, but they may be sick enough of the broken promises to respond, “Who cares?”

So what does a satellite surfer do while he or she waits for the return of the perfect waves? Spector counsels patience first and notes that other good technologies like cable and DBS took many years of endurance, setbacks and several bankruptcies to produce solid businesses. The second step is more scaling back of big satellite plans and requirements for money. Staying in the game this year will be hard but valuations ought to be cheap and bargains easier to come by than they were in the past or might be in the future.

Theresa Foley is Via Satellite’s Senior Contributing Editor.