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StarBand’s Revamping Raises Hope

By | August 25, 2003

      McLean, Va.-based StarBand Communications, a high-speed, two-way satellite Internet provider, has undergone a revamping as it prepares to emerge from Chapter 11-bankruptcy court protection by year-end.

      The company recently filed a reorganization plan with the U.S. Bankruptcy Court in Delaware and has adopted a series of operating changes since seeking Chapter 11 protection on May 31 last year. StarBand’s changes include an expansion of its nationwide sales channel to more than 2,400 independent dealers, a debt-for-equity swap, upgrades to its network performance and reliability, and the launch of a next-generation broadband product line, the StarBand 480 Pro.

      “It’s wonderful to be in a position to clean the slate,” said Howard Lossing, StarBand’s vice president of sales and marketing. “Now that this albatross of Chapter 11 will soon no longer be around our necks, we’re excited to be attracting additional partners that will help us bring this great product to people in need.”

      The company survived the loss of its well-heeled former partner, EchoStar Communications [Nasdaq: DISH], which pushed StarBand into bankruptcy after abandoning plans to invest further in the start-up. EchoStar equipment dealers had been StarBand’s primary direct sales channel, supplemented by other wholesalers, prior to last year’s bankruptcy filing.

      Early in the bankruptcy process, a large number of those EchoStar dealers signed contracts to become distributors of StarBand. Last year, StarBand amassed an independent dealer network of 1,000 that has continued to grow. The majority of the dealers are EchoStar satellite TV equipment dealers who continued to sell StarBand service by signing contracts directly with StarBand rather than through EchoStar, Lossing said.

      “It’s been challenging during the Chapter 11 period to attract new, large distribution partners,” Lossing said. “However, it hasn’t been impossible.”

      StarBand began selling online directly to customers in June of this year. The direct sales channel already is accounting for 15 percent of monthly sales.

      The company also cut its expenses during bankruptcy by allowing its distributors to use an automated online service to handle routine business matters.

      “We’ve done whatever we can to make anything a dealer needs something that can be offered online,” Lossing said. That approach allows StarBand’s “dealer support team” to do more proactive calling, he added.

      Customer support also has been moved online to help customers service their own accounts. The automation of distribution and customer support have saved substantial amounts of money and are reasons why StarBand was able to reduce its full-time workforce to roughly 140 employees now, compared to a high of 400 people during the company’s pre-bankruptcy period.

      On the financial front, StarBand’s capital structure was improved significantly with the conversion of approximately $113 million of bank debt to equity. In addition, approximately $90 million of debt StarBand owed to Gilat Satellite Networks [Nasdaq: GILTF] will convert to equity along with a $14 million note, once StarBand emerges from Chapter 11 bankruptcy court protection.

      StarBand was helped during the bankruptcy when Gilat agreed to offer $7 million in additional financing as part of a new technology and hardware supply agreement between the companies. Under the arrangement, Gilat supplies the financing for StarBand’s customers to buy equipment at subsidized prices in exchange for a one to three year commitment from the customer.

      StarBand also was able to negotiate more favorable terms with its suppliers, such as satellite space segment providers.

      “StarBand has overcome many challenges since we filed for Chapter 11 protection and it is apparent we have become stronger as a result,” Lossing said.

      The latest dealer to sign a distribution pact with StarBand was Skywalker Communications, a large distributor of U.S. satellite television, consumer electronics and computer equipment. That distribution alliance was announced Aug. 6. More alliances are expected to be announced in the coming months. The company’s relatively small size may help to entice other distributors to work with it, Lossing said.

      Equipment Innovations

      StarBand officials have high expectations for the company’s 480 Pro service that offers high-speed downloading at up to 1 Mbps and upload speeds up to 100 Kbps, Lossing said. The upload speed is two to three times faster than the previous generation of equipment. It also is two to three times better than dial-up, he added.

      The new StarBand 480 Pro modem includes a built-in four-port Ethernet router and is compatible with a range of operating systems that include Windows, Macintosh, Unix, and Linux.

      When StarBand emerges from bankruptcy, Gilat will hold the largest ownership stake in the company with 38.9 percent. The other post-bankruptcy owners of StarBand will be Bank Leumi with 37.4 percent; First International Bank of Israel with 12.1 percent; and Israel Discount Bank with 12.1 percent.

      StarBand’s two-way, high-speed satellite broadband service is aimed primarily at residential and small office customers. The company’s network services customers in all 50 states, Puerto Rico and the U.S. Virgin Islands.

      Roger Rusch, the head of the TelAstra consulting firm in Palos Verdes, Calif., said “StarBand has been one of the most innovative systems for providing broadband Internet services because it uses existing space segment capacity. This means that the investment is reduced compared to broadband satellite systems like WildBlue and SpaceWay that have much larger debt loads for the space segment. That means that StarBand can pay for capacity as it needs it.”

      StarBand and Gilat also have developed-technology and infrastructure that can be used for the broadband service, Rusch said. With “clever modulation,” StarBand should be cost competitive. From a technical and programmatic perspective, the company has good prospects, he added.

      Successful distribution and customer service depends primarily on management, said Rusch, who added that he was surprised when the company filed for bankruptcy protection last year.

      “The concept certainly seems sound,” Rusch said.

      Simon Bull, a senior consultant who has followed StarBand for St. Albans, England-based Comsys, said he believes the company could “hold its own” with the current generation of service it is offering. StarBand and Hughes Network Systems appear to have reached an “equilibrium point” of covering the direct costs for their satellite broadband services, he said.

      “As time progresses the picture might gradually improve with greater efficiencies, but the longer term situation looks bleak as WildBlue and SpaceWay emerge,” Bull said. “I believe that the most logical and synergistic scenario is for StarBand’s experience and operational management to be merged with WildBlue’s technology management and spacecraft. This would create a very powerful combination, but there might be too many political barriers to overcome to make this happen.”

      The competitiveness of StarBand in the broadband arena also will be helped by the progress of Viasat [Nasdaq: VSAT] and other manufacturers in reducing the cost of consumer premise equipment, said D.K. Sachdev, who heads the Vienna, Va.-based SpaceTel Consultancy.

      “This also augurs well for satellite broadband in the near-to-medium future,” Sachdev said. –Paul Dykewicz

      (Howard Lossing, StarBand, 703/245-6245; Roger Rusch, TelAstra, 310/373-1925; Simon Bull, Comsys, 44-1727-832288; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880)

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