Can WorldSpace Fill In The European Gap?

By Stephen A. Blum

With the closing of Global Radio, satellite radio in Europe will be limited to service from WorldSpace’s AfriStar bird for the foreseeable future. AfriStar was originally designed to serve Africa and the Middle East, but its L-band footprint is broad enough that listeners in most of Western Europe (south of Scandinavia) can receive a perfectly usable signal.

When they can see the satellite, that is. With most of the Western European market located north of the 45th parallel, AfriStar has to overcome low look angles ranging from 25 to 35 degrees in most of the potential market.

It’s a manageable problem for most listeners in fixed locations, such as homes or offices, but it is problematic for mobile listeners, particularly those whose driving habits keep them within a hundred kilometers or so of home and in the shadow of hills, looming buildings and narrow streets.

Long haul truckers, recreational vehicle aficionados and others who spend many hours a week driving along open motorways and through largely undeveloped countryside have less of a problem with terrestrial obstructions, a greater need for satellite radio service, and presumably more tolerance for signal outages caused by low look angles.

Market Segments

The initial home and office market for satellite radio in Europe would be focused in two specific segments: consumers of audio programming, particularly information and niche music formats, and expatriates looking for news and entertainment in their native languages.

If a satellite radio company, either WorldSpace or a new entrant, pursued the Western European home and office, and long-distance driving segments with a subscription-based service as effectively as XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI] have attacked the United States, significant growth is possible.

This forecast (see Table 1) assumes that enough sufficiently attractive programming is available to entice potential subscribers to sample the service at retail outlets and convince them to buy. It also assumes that the retail availability of satellite radio hardware is adequate, which might not prove to be the case. Although the European Union is gradually harmonizing consumer electronics distribution, retailing is predominantly organized along national lines, and favors small, independent retailers to a much greater degree than in the United States, where chain stores dominate.

The Tellus Venture Associates European satellite radio outlook model allows for a less efficient retail infrastructure, but the active cooperation of consumer electronics dealers cannot be guaranteed. The projections are not the result of an analysis of a particular system or business model, but instead a consideration of the prospects for generalized satellite radio technology and service. In any proposed satellite broadcasting venture, the devil is in the details, and seemingly trivial strategic choices can have a significant impact on subscriber prospects.

Europeans do not tend to drive as far or as frequently as North Americans, and growth prospects within the mainstream mobile users segment are more limited than in the United States. Still, a potential market exists (see Table 2).

The Trouble With GEO

A European satellite radio system that relies solely on geosynchronous satellites will have trouble extending its reach into the cars of average drivers. On the other hand, a geosynchronous-only system is cheaper to build and operate. One of the questions that WorldSpace or any other prospective European satellite radio operator must address is whether or not the size of the potential mainstream mobile segment justifies the additional investment and operating cost needed to effectively reach it.

One solution is to take the route Sirius pioneered in the United States and Global Radio proposed to follow in Europe, which is to use a non-geosynchronous satellite constellation engineered to provide high look angles over northern latitudes. Sirius deployed three satellites in a Molniya orbit with 50- to 70-degree look angles over most of its service area. Global Radio intended to go even further, using a different, highly elliptical, three satellite orbital scheme that would have given most listeners a 70- to 80- degree shot to a satellite. The nearly straight up look angle was deemed necessary because European streets tend to be narrower than in the United States, with multi-story buildings squeezed close to the curb.

The other approach, used by XM in the United States, is to supplement a Clarke belt system with terrestrial repeaters. Estimates of the number of repeaters necessary to supplement a European geosynchronous satellite radio system range from the hundreds (similar to XM’s network) to the thousands, which is what Global Radio’s evaluation indicated. WorldSpace participated in a test last year with Alcatel [NYSE: ALA] and other technology players. Using L-band frequencies authorized by the French government, the test broadcasts relayed satellite radio channels supplemented with additional information such as telematics data.

WorldSpace has set 2006 as a target date for repeater-based service in Europe. Much could happen between then and now, so the project is best evaluated as a possibility than as a definitive plan. In the meantime, WorldSpace is slowly building its line up of subscription-based services on AfriStar’s western beam, which serves Europe. Four channels, including Europe’s legendary Radio Caroline station, U.S.-based National Public Radio, an English language weather service and a French marine service, are available to Western European and Northern African subscribers. The other 36 channels on AfriStar’s western beam are free to air.

No new satellite radio ventures have surfaced in Europe since Global Radio closed its doors earlier this year. A key question WorldSpace or any future European satellite radio system will have to address is whether the likely audience reachable from a purely geosynchronous system will make the business case for investors, and if the additional expense of inclined orbit birds or terrestrial repeaters is worthwhile.

Tellus Venture Associates’ pro forma analysis (Table 2) backs up Global Radio’s assessment that the investment would more than pay for itself, producing much faster initial growth and roughly double the number of subscribers within five years. A company like WorldSpace, with a large existing investment and competing priorities around the world, might find its corporate interest better served by sticking with a geosynchronous-only strategy, but a new entrant will almost certainly pursue a more ambitious inclined orbit or terrestrial hybrid system. The bottom line is that four million subscribers can make a satellite radio system profitable depending on the assumptions used, but eight million will make the case under virtually any circumstance.

Stephen A. Blum is president of Tellus Venture Associates, a Marina, Calif.-based consultancy that specializing in DBS market research and analysis, and business development. He can be reached by email at [email protected], or via his company’s Web site at http://www.tellusventure.com.