Terrestrial Competition Shuts Down Satellite Broadband Operator

By | February 6, 2006 | Europe, Feature, Telecom

The beginning of the end of broadband satellite provider Aramiska can be traced back more than a year, as the company was unable to compete against aggressive terrestrial broadband providers, former CEO Philippe Bodart told Satellite News.

Aramiska, a pioneer in the satellite broadband business when it launched service in December 2001, abruptly closed down Jan. 27, catching its customers by surprise and potentially harming other satellite broadband providers, industry officials said.

Although headquartered in the Netherlands, nearly 65 percent of Aramiska’s business came from the United Kingdom, where it served rural businesses and provided wireless Internet access to some 200 rural communities in conjunction with wireless Internet service provider (WISP) ehotspot.

"We knew in September 2004, around the third quarter, that it would be very difficult to sustain our customers over time in the United Kingdom," said Bodart, who served as CEO for most of the company’s lifespan before departing in late 2005. "At that time, we had 70 percent to 75 percent of our installed base within the country. We knew that we would probably lose them over time, unless we did the same kind of pricing [as our competitors] which was literally impossible."

The rollout of broadband in the United Kingdom from multiple providers, especially BT‘s aggressive expansion plans, put added heat on Aramiska. "I think the first signs that things were not great was when BT announced the availability of DSL/broadband around the country at a price of 20 to 30 [British] pounds ($35.60 to $53.40). That is when we got hit very heavily in the U.K. market. From an economic perspective, this is when things started to go sour for the company."

Bodart admitted it then became a "race against time" to build up Aramiska’s business elsewhere to take up the slack. "We then had to convert our installed base to other countries, which we did, but then we went to countries like France, Spain and Italy, but the take-up was not nearly as good as it had been in the United Kingdom," he said. "For months and months we could not increase the size of our network, which was not good, of course, because we had churn that was bigger than anticipated and customer acquisition costs were getting bigger and bigger as we moved to other markets."

Not Cautious Enough

So what lessons can be learned from the way Aramiska approached the market? Bodart admitted that perhaps the operator tried to grow too big, too quickly. "Knowing what I know right now in Western Europe, I would be very cautious to put something together," he said. "It would be smaller rather than putting a full-fledged telecoms company together. The market looked to be there five to six years ago, and given the stage of technology, an alternative technology was a good business proposal at that time. We could not scale fast enough and our prices could not come down fast enough. It was a vicious circle. I think if I started now to compete against all sorts of terrestrial technologies, I would be more cautious."

The situation seemed a lot different a few years ago. Bodart cited research forecasts, which indicated "around 25 percent of the market was available for alternative access technologies." However, he now believes these forecasts were incorrect. "In retrospect, that has not happened. In most western European countries, there is zero residual market available for alternative technologies. That is where the whole thing went sour for us. There were other markets like the Middle East or Africa, which you could address right now with alternative broadband access technologies. In 2000, those markets were basically non-existent. In retrospect, if we had known you could have a broadband connection for 19 euros ($23) everywhere in Europe, there would be no business case. We could never sustain that kind of economic model."

Bleak Future For Satellite Broadband

The abrupt demise of Aramiska also could create problems for other satellite providers, as many Aramiska customers were caught by surprise. The lack of notice given to customers could tarnish the reputation of satellite broadband services still further.

Luc Temmerman, executive vice president of business development and marketing at Aramiska, when asked why a longer notice period was not given to customers, said, "It was a surprise even to us. I am glad we were able to send a message to customers. No one was expecting this situation. It is absolutely in the hands of the courts now. We regret what happened but I can’t really disclose any more."

Patrick French, a satellite analyst with Northern Sky Research was critical believing Aramiska could have avoided this situation. "If Aramiska can be criticized, it is how they failed. Once Aramiska knew they could not continue in business, it seems that it would have been not too difficult to make some arrangements with one or more of the many other service providers in Europe to arrange for a more graceful transition for their clients. Going out of business as they have has given a black eye to the satellite industry and one that will only serve to tarnish the reputation of satellite as a viable alternative just as things were looking up."

Bodart doubts that other satellite providers could fill the void left by Aramiska, believing the costs involved stack the cards against satellite. "I don’t see how you can sustain an economic model," he said. "You already have millions of people that are on terrestrial broadband networks, and those costs will continue to go down. I don’t see how a satellite offer can compete with that. I don’t see much of a future for satellite broadband in the United Kingdom. Maybe someone else can, maybe a niche market, niche applications, but it is going to be very hard. You still have your network costs. They are going to be extremely high. The costs of bandwidth are there and the costs of terminals are there, and you still need to go and acquire customers. That is the same for everybody. In 2006, you are up against operators who have millions of customers and can absorb those costs amongst millions of customers and as a newcomer you cannot."

However, French still believes there are opportunities for satellite broadband in the United Kingdom, despite the intense competition. "There certainly are opportunities to continue offering satellite broadband Internet access services in the country, but it is equally clear that competition with terrestrial service providers is very, very stiff and the spread of ADSL services has exceeded even some of the most positive expectations from two to three years ago," he said. "A large part of the difficulty lies in the satellite industry itself, which maintains such high prices for space segment capacity, with Western Europe the area with by far the highest prices in the world."

Other Providers Clean Up Mess

Aramiska’s demise and the way the company handled the situation also confused other industry providers. "We were not necessarily completely surprised that they have exited the market, as the market is financially demanding," Bernhard Baer, vice president of European sales and marketing at Hughes Network Systems Europe (HNSE) said. "The long-term stability of the company depends on knowing and understanding the cost structure. In general satellite broadband services have to have certain price levels to make economic sense. I didn’t think of Aramiska being under that big pressure."

Like French, Baer is concerned that bad press created by Aramiska could plague other satellite broadband operators. "In terms of impact to the satellite industry, it gives it bad press and it doesn’t really help the whole satellite broadband arena because people will be even more cautious and ask what is happening," he said.

HNSE already is looking to do its part to help former Aramiska customers, unveiling a program designed to help those satellite broadband users restore their Internet service as quickly as possible through HNSE’s European network of value-added resellers.

"The lesson for service providers is don’t build your business on long-term growth," Baer said. " It is one important lesson for the telecoms markets in general: If you enter the market and you want to achieve massive growth, you probably have to offer low mass market pricing from day one to achieve enough traction. That is a risk we exercise in particular when the growth is not as dramatic as you build into your business case. If also your customer acquisition costs are too high, you have a serious problem."

HNSE did not really consider pursuing a business model similar to Aramiska, Baer said."We have looked at several options of doing a big push into the European mass market consumer business, and we always thought it was a high-risk exercise of investing millions into marketing, not to mention the technology costs," he said. "The consumer acquisition costs was something that stopped us doing a mass-market big advertising campaigns, which Aramiska did. I thought their campaigns were good, but I guess they cost a lot of money to do."

Mark Wynn, managing director of Avonline, another company helping put ex-Aramiska subscribers back online, said, the failure "was a bolt from the blue. The first that we knew of it was when the very quick-off-the-mark customers started phoning us. Our first ex-Aramiska customer got installed Monday morning (Jan. 30)," he said. "We have more installed today and more scheduled for the rest of the week."

While admitting he was surprised at the sudden fall of Aramiska, Wynn admits he had doubts about the Aramiska business model long ago. "We started off in 2003, and the first thing we did was sign an Aramiska reseller agreement," he said. "We realized very quickly, within one or two months, that the model had no sustainability for us as a commercial entity, and having run the numbers, could not see how the longer-term model was going to run from their perspective."

Wynn also is worried about lingering damage that Aramiska might inflict on remaining satellite broadband providers. "My big nervousness is the damage it might do to people looking to come into the satellite broadband market as a potential way of getting broadband," he said. "When people research it, they will talk about the Aramiska demise, and I think that will have a significant impact throughout the next three to six months on who actually take the plunge into satellite broadband."

For a product that runs on tight margins, this could be especially critical over the next few months, Wynn said, "It is an expensive product," he said. "To try and maintain some form of market and customer appetite, one has to work at low operating margins and therefore run a tight ship. What you want to do is provide customers with a service that once it is installed, it just sits in the background and works like clockwork."

Contact, Patrick French, Northern Sky Research, e-mail, pfrench@northernskyresearch.com, Mark Wynn, Avonline, e-mail, Mark.wynn@avonline.co.uk, Bernhard Baer, Hughes Network Systems Europe, tel, 00 49 6155 844 0

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