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Bearish On Multimedia

By Staff Writer | April 1, 2003

by Douglas Graham

Satellite broadband and multimedia have been a tough sell on Wall Street, yet the resistance to the technology among the moneypeople seems questionable given satellite’s tremendous potential. Even the sourest skeptics acknowledge its possibilities. Cable and DSL are not available in many of the world’s most remote regions, and for the people who live there satellite is the only alternative. There is clearly a need, so why is the money required to fill that need in such desperately short supply?

The problem seems to be one of perception. History has not been kind to satellite business pioneers. We all remember the Iridium debacle. Back in 2000 the company filed Chapter 11 with debts totaling $4.4 billion. Iridium’s fleet of 60 aerial platforms crashed and burned, figuratively speaking, and after that investors were shy about sinking their assets into any orbiting communications solution. Today the song remains the same. Where satellites are concerned, no one wants to be a pioneer.

"The future of satellite multimedia is speculative at best," says Thomas Watts, managing director for SG Cowen Securities Corp. in Manhattan. "Best case it will take off and earn billions. Worst case, it will take off and come crashing down again, or never get off the ground at all. Any satellite multimedia service requires big capital funding upfront, and the real demand for such services is still unknown. There are already competing media in the broadband area. Cable and DSL have a multi-year head start, and there’s still the question of how much equipment and service will cost the operator."

The difficult economy is also hampering multimedia deployment, Watts continues. The current state of capital markets could be best described as lousy. Funding for untried projects is a lot harder to get then it used to be. Strategic partners have problems with their core businesses, private equity people have become decidedly more cautious and public equity backers seem disinterested in financing early stage ventures.

The Europeans are ahead of the United States in the development of interactive consumer offerings via satellite, due mainly to the fact that the cable industry is less dominant on the continent than it is on this side of the Atlantic. Because there is room for growth, satellite multimedia will probably gain a toehold in Europe before it does anywhere else. Even that will not happen any time soon, however, thanks once again to monetary woes. Europe is having a recession too, and it seems unlikely that European providers will be willing or able to come up with the hundreds of millions of Euros needed to launch new satellite projects any time soon. These days, investors both here and abroad are showing strong disinterest in risk, and cool, practical and inevitable though it may be, satellite multimedia is risky business.

"The current financial status of satellite multimedia is not promising," says Jimmy Schaeffler, chairman and CEO for The Carmel Group, a telecom consultancy based in Carmel-by- the-Sea, CA. "The sector as a whole is not viewed all that well by Wall Street, and the newer services like multimedia broadband are regarded with some suspicion. Were it not for the financial interest recently generated by Wildblue, I would be surprised to see anyone investing in that space."

Wildblue first launched under the name of KaStar Satellite Communications in April 1995. Its mission–"to accelerate customer access to broadband." Recently, the Colorado-based Wildblue announced its intention to deliver "affordable high-speed Internet services via satellite to homes and small businesses, virtually regardless of their location in the United States by 2004." The company also intends to expand its service offering to Canada and Latin America. A house or office equipped with a Wildblue satellite dish can access the Internet as much as 50 times faster than with a 56 kbs modem. Up to eight computers, TVs or Net-enabled smart devices can be connected via a single 26-inch satellite dish and a tiny modem, or so the company claims.

Apparently somebody believes them. Serious money is being thrown at this venture from big players in the satellite and telecommunications industries, including Liberty Satellite, Intelsat and the National Rural Telecommunications Cooperative (NRTC.) In December 2002, the three announced their intention to invest $156 million in the company, a whopping sum given the shaky state of satellite multimedia financials.

"The large investment in Wildblue in the face of tough financial markets is a strong endorsement of Wildblue’s business model and ability to revolutionize wireless broadband," Wildblue CEO Thomas Moore commented. "Wildblue will change the consumer broadband market, making affordable high-speed Internet access available to virtually every home and small business in the contiguous United States. When this transaction closes, we will be able to complete our investment in the space and ground infrastructure to allow us to launch our service in 2004."

Though Wildblue has yet to prove itself, the strong financial interest it has stirred among communications players is encouraging. Maybe this time what goes up will stay up.

Douglas Graham is a contributing writer to Via Satellite.