EchoStar’s Interest in TerreStar May Involve Future of Video

As I write this, the biggest news in the mobile satellite world is TerreStar’s bankruptcy. On the long road to the deployment of TerreStar’s ATC network, TerreStar has hit another bump.

Only time will tell what will happen when TerreStar emerges from bankruptcy, but what has really interested me is the talk about EchoStar. EchoStar is providing debtor-in-possession financing ($75 million) to allow TerreStar to continue operations. There is considerable commentary suggesting that this is a backdoor way for EchoStar ultimately to acquire TerreStar (of course EchoStar’s presumed interest is not new to the world of satellite industry conjecture). The interesting question is why EchoStar might want to acquire TerreStar at all. The answer, of course, is that nature of video delivery is changing.

Just as the digital revolution changed the music industry from one based on albums sold in brick-and-mortar stores to individual songs sold online, it also is changing the video industry. The increasing bandwidth of Internet connections has allowed the development of new video delivery models. Services such as Hulu are creating a new distribution channel for video, one bypassing previous broadcast style networks such as cable, DSL or DTH. I previously noted that DTH providers were at a disadvantage due to their lack of a return channel to allow video-on-demand types of service, but it looks increasingly like the path to the next generation of video services may bypass all of the old video providers.

The delivery of video programming has been dominated by the “last mile” problem, and video providers existed to solve this problem. When DTH services entered the marketplace, it was as a high-value offering that provided a superior digital signal to the consumer. DTH’s competitors offered an inferior analog product to their customers because it was all their physical plants could allow. Over time, other video providers upgraded their networks to provide digital video and eased this performance gap with satellite services. In the case of cable companies, this was done, in part, also to provide access to the internet. As a medium-term business decision, this worked out well, with broadband service becoming an increasingly important source of revenue for cable companies.

For telcos, the need to provide broadband forced them to develop technologies (largely variations of DSL) that would allow them to deliver broadband over their existing copper infrastructure. Having done so, they discovered the possibility of providing video over these digital channels by the use of IP-based switched video. In all of these cases, the key requirement to provide a modern digital video signal was digital access to the customer — the last mile.

These days, however, the digital last-mile problem largely has been solved, and anyone who wants to send digital content can. One of these results of this universality of digital broadband access is that it is not just satellite, lacking two-way channels of communication, but all video providers who must deal with competition from services enabled by the growth of the Internet “cloud.”

Just as a record store no longer is needed, neither, perhaps, is a dedicated video network. An example of this danger can be seen in the growing retransmission wars, in which channels and networks demand higher fees for their programs and seem more willing than they once were to simply remove their content from a given video provider’s network. In the satellite world, a recent example of this is the Dish-Fox dustup in which Fox removed sports and other channels from Dish Network’s lineup. It seems as if video distributors’ bargaining position is declining relative to content providers.

Exactly what these shifts mean, I am not sure, but one way or another, the satellite industry is wedded to the current video distribution industry. In fact, I am just beginning work on a study to make sense of the threat to satellite (and other traditional) video from the Internet. Anyone with thoughts on that, I would love to hear from you.

The satellite industry would do well to seek ways to adapt and compete if it doesn’t want to join the record industry in witnessing the precipitous decline of its business model.

Max Engel is and experienced satellite and telecom industry analyst and founder of The North Star Consultancy.
He can be reached at maxengel@thenorthstarconsultancy.