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Broadband Beat: The Dog Days Of Summer

By | August 10, 2001

      By Theresa Foley

      The heady days when satellite operators raved about the explosive demand growth that had no end in sight are over. Two more satellite-related companies collapsed in the spring, bringing the tally to at least five ventures that have either gone to bankruptcy court or failed in the last two years. The latest casualties, Edgix and SSE Telecom, had business plans centering around the Internet, thus differing in nature from the three big mobile satellite failures that shocked the satellite community in 2000.

      By summer, indicators were appearing that the steady growth of Internet traffic on satellites, and Internet traffic in general, was leveling off, and the difficult environment ahead makes conditions right for more satellite broadband failures, even before many get started.

      SSE Telecom Inc., a publicly-traded satellite equipment provider based in Fremont, CA, filed for Chapter 11 bankruptcy May 18. The reason, according to a statement from CEO and President Lee Blachowicz, was SSET’s inability to raise money to keep its ongoing businesses running while it ramped up an Internet-over-satellite product line.

      SSET revealed in a March 8 filing with the U.S. Securities and Exchange Commission that revenues had declined by 21 percent to $3.8 million in the first quarter of 2001 compared to the prior year. The company was running out of money as its government orders for existing products went into decline and while it kept investing in new IP products that had been in development since mid-1999. The IP product had brought in only $600,000 in revenue with a deficit of nearly $7 million, and SSET still needed to enhance, develop, introduce, sell and manufacture its IP gateway.

      Edgix Corp. of New York City shut down in late April. It had tried to use a satellite service to deliver content to ISPs. In a matter of months, the 100-person startup had burned through $65 million in financing from venture capitalists and other private backers, including Venrock Associates and Chase Capital Partners. Edgix’s idea was to offer a patented product called HotMedia for caching and delivering Internet content.

      Never in the 50-year history of the satellite business has there been a run of bankruptcies like the one that has occurred in the last 18 months. Many expect Globalstar to file next and several other small to medium-satellite enterprises, including several with close association to the struggling broadband sector that are having near-term cash problems, could enlarge the list well beyond five by year end.

      “This had to happen,” says Christopher Baugh, principal analyst at Northern Sky Research of Cambridge, MA, who adds the satellite industry is better off for the failures. “Companies that joined in during the last few years are primarily the ones dropping out. Many never had a sound business model to begin [with]. Edgix is one example. The company was basically a carbon copy of Cidera and other ISP caching solutions, with little new to offer. They basically launched a platform and went into business believing they would quickly generate revenue. Unfortunately for companies such as Edgix, once you continually say to investors, ‘There is a market out there and we can own it,’ you start to believe it yourself.”

      The failed satellite Internet companies missed the mark in several ways, including management shortcomings, lack of IP knowledge and targeting a market simply because it appeared hot, according to Baugh. The message to others whose business plans are focused on IP is that “the market is focused on generating revenue, and the IP VSAT space is becoming congested, with large players such as Hughes, Gilat, Skystream and Harmonic already in it,” he says.

      Broadband initiatives that the market views as requiring large amounts of cash, whether in system buildout or ongoing operating expenses, can impact their parent companies’ stocks. This has forced such companies as Panamsat and Gilat to scale back their respective Net 36 and Starband initiatives, according to Manish Thakur, SG Cowen’s managing director for broadband and satellite services. He says broadband satellite ventures can still get funded, but only if they have incremental approaches to launching their service.

      Who is losing the most from the bankruptcy trend? Bond holders, equity owners and strategic partners with lost investment are clearly at the top of the list, but the whole satellite industry will suffer over the long term. The trend among the mobile satellite firms to use the bankruptcy courts as a strategic option to shed debt and equity ownership obligations in order to keep operating could be just as harmful to the satellite community as a simple, failed business.

      “Executives would be foolish to think that this business can survive if satellite operators simply use bankruptcy protection as an excuse for recapitalizing their companies,” says Peter Nesgos, an attorney specializing in satellite finance at New York law firm, Milbank, Tweed, Hadley and McCloy. “Bond holders have long memories and the effect is negative across the industry even if one company can successfully reorganize by reducing its debt burden–if it’s not responsive to the interests of the holders of its bonds. These are short-term strategies with long-term pain.”

      Nevertheless, Nesgos bears in mind that the current state of the bond market should not be viewed as without salvation as some of today’s biggest satellite players, like Panamsat, Echostar and Sirius, had trouble raising money in their early days.

      “Ten to 20 years ago, some of today’s most successful satellite operators had trouble getting financing,” Nesgos says. “Think about how successful Panamsat is today compared to [it] trying to attract its first-round investors in mid ’80s. The lesson is, you can’t build a business in the current environment simply on marketing projections and predictions of demand that don’t keep pace with competing technologies and a market that is very volatile.”

      Theresa Foley is Via Satellite’s Senior Contributing Editor

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