Broadband Beat: Hard Days Ahead For Broadband Pioneers

by Theresa Foley

Cidera, iBeam, Net 36, Edgix, Netsat Express. A long list of promising names that last year looked like they’d be pioneers in a new sector of satellite-based services for improving the architecture of the Internet. By springtime, one of those would-be pioneers, Edgix, shut down, laying off 100 employees, while layoffs, cash shortfalls and delayed implementations hit the others. At our deadline, virtually all the business plans were in question, and by year end, the list of survivors could be a short one.

What went wrong and is there any hope that some will survive? At least two hurdles got in the way. First, capital markets dried up rather quickly. A year ago private and public investment was relatively easy for the Internet-related satellite companies to obtain. Today it’s virtually impossible. Second, the paying customers for the services are in short supply.

The business models now need to be fixed. Evidence can be readily found to support the idea that satellite-based distribution services are needed to improve the Internet. A report in late March by investment bank JP Morgan said the global market for delivery of static content would be $1.4 billion by 2005 and dynamic content $200 million by then.

New York-based consultancy Jupiter Media Metrix estimated in April that enterprise spending on streaming video technology will grow from $140 million in 2000 to $2.8 billion in 2005, led by corporations using the technology for employee communications. iBeam reported $9 million in revenues in the first quarter of 2001, a small amount compared to mainstream satellite operations, but an indicator that some content providers are willing to pay for the kind of help these companies are selling.

“I don’t think many will succeed. Most will consolidate or go out of business,” said analyst Christopher Baugh of Cambridge, MA-based Northern Sky Research, of the satellite CDNs (content delivery networks). “The companies are rethinking the CDN strategy of owning their own networks and incurring massive levels of cost. A new approach, like New Skies is doing, is one where they don’t own the hardware, they license the software and they do offer CDN services to core customer segments. It’s a different model, but it accomplishes the same thing.”

The smaller startups may be hoping to be acquired, but Baugh said the installed networks may not have great value to larger operators since the hardware is often installed in smaller Internet Service Providers and the real value of the services often is in software.

But the managers running the satellite CDN businesses say they have hopes of surviving. “We are embarked on an approach of responsible management,” said Sriram Iyer, Cidera director of corporate development, in an interview in April. Last year Cidera was building out its network of equipment, going from 50 to 600 places or “points of presence,” and from 60 to nearly 300 employees. Cidera was the first to cut its staff back, laying off 90 in January and another 40 in April, when it slimmed down to 149 people. Iyer said Cidera has enough cash to continue into 2002 when either the capital markets will reopen or the customer climate will thaw. “We’re monitoring the markets and we’ll do what it takes to survive to next year,” he said. “We’re not worried,” Iyer said, since Cidera is counting on its investors, such as Worldcom/UUNet, Dell Computer, GE and Intel, to put more money into the venture if necessary.

iBeam, which has a streaming content distribution network that uses both satellite and terrestrial capacity, will run out of operating funds in the third quarter of 2001. It needs $150 million more to take it to profitability, or a buyer. Tom Gillis, ibeam Broadcasting senior vice president and general manager of entertainment and media, is optimistic, and said the company is doing well other than not having enough money. It expects to bring in $55-$60 million in 2001 revenue and traffic is growing at 10 to 20 percent each month, Gillis said.

Net 36, the Panamsat initiative to distribute broadband content for entertainment customers to cable and DSL headends over satellite, by spring had twice reduced its planned capital expenditures for building out Net 36 this year. Whether Panamsat will fold Net 36 later this year remains to be seen but a spokeswoman, Amy Inlow, said the venture was only being slowed down until the market caught up, and that Panamsat was still committed to the project.

More precise information about Net 36 came from the Wall Street analysts covering Panamsat. For example, Merrill Lynch satellite analyst Marc Nabi issued a report citing long negotiations with last mile broadband service providers, the dotcom fallout, the slowing economy and the challenge of getting the last mile providers to sign on for “pay per byte” contracts as among Net 36’s troubles.

“While we are optimistic that Net 36 will work through these problems it has become more apparent that the venture will continue to burn capital in the intermediate term,” Nabi said. He said Net 36’s revenue forecast had decreased to $5-$10 million from $15-$25 million expected previously, and that Panamsat had cut investment this year in Net 36 to $40 million from an earlier range of $70-80 million. However, management has also lowered its capital expenditure expectations to $40 million. The EBITDA loss would be $30 million in 2001.

While the satellite distribution ventures continue to bleed money, more conservative satellite service providers like Verestar, Globecast and Intelsat are watching the developments with interest.

One safe bet is that if the first wave of satellite broadband delivery specialists is decimated, a second wave will come along in a few years from the more conservative operators when the financing and customer problems have been resolved.

Theresa Foley is Via Satellite’s Senior Contributing Editor.