2004 Promises To Be Dynamic Year

By Staff Writer | January 5, 2004

News Corp’s [NYSE: NWS] strategic plans for newly acquired El Segundo, Calif.-based Hughes Electronics [NYSE: GMH] and the rollout of new satellite broadband services rank as the top satellite industry stories for 2004.

Other important stories this year will include the progress of Bethpage, N.Y.-based Cablevision [NYSE: CVC] in enticing subscribers to its new VOOM satellite TV service, subscriber growth gains for satellite radio operators and the implications of Intelsat’s purchase in late 2003 of Loral Space and Communication’s North American satellite assets. Speculation is mounting that the latter development could spur pent-up industry-wide consolidation.

The acquisition of Hughes’ DirecTV unit gives News Corp its long-coveted entry into the U.S. satellite TV market and a chance to showcase its interactive service offerings that have reduced churn in other markets. DirecTV, the largest U.S. direct broadcast satellite (DBS) provider, is the one Hughes unit that News Corp seems certain to retain and to grow.

The innovations that News Corp is likely to unveil at DirecTV should spur responses by the large cable operators and rival DBS operator EchoStar Communications [Nasdaq: DISH], said Jimmy Schaeffler, a satellite analyst who heads The Carmel Group consulting firm in Carmel-by-the-Sea, Calif.

EchoStar likely will react by intensifying its efforts to build almost “magical” set-top boxes to enhance consumer enjoyment, Schaeffler said. One casualty from the increased competitive multichannel video landscape could be small to medium-sized cable operators, Schaeffler said. Those small cable operators may need to merge or go bankrupt, he added.

Mystery Mounts

Whether News Corp plans to keep other Hughes units – Wilton, Conn.-based PanAmSat [NYSE: SPOT] and Germantown, Md.-based Hughes Network Systems (HNS) – remains an open question. PanAmSat will give News Corp its first fixed satellite services (FSS) operation, while HNS gives the Australian company set-top box manufacturing facilities, as well as VSAT and broadband businesses.

News Corp had been trying to acquire DirecTV for years but ended up with the other units because General Motors [NYSE: GM] wanted to sell Hughes in its entirety.

News Corp will be a factor in the broadband marketplace since HNS plans to launch its $1.4 billion SpaceWay satellite broadband service this year. Two other satellite broadband ventures -Denver-based WildBlue Communications and Asia’s iPSTAR – also are expected to launch their two-way services this year.

“The launch of SpaceWay constitutes a revolutionary addition to the overall broadband telecom infrastructure in North America,” said Sylvette Barr, senior director of marketing for North American services at HNS. “On its own, the amount of bandwidth provided by SpaceWay will be double that of the current amount of Ku-band satellite capacity serving North America, thereby dramatically increasing the overall market size.”

SpaceWay is intended to give businesses, telecommuters, small office/home office (SOHO) users and eventually consumers access to two-way high-speed broadband applications, including telemedicine, desktop video conferencing and interactive distance learning. The SpaceWay service would integrate with existing land-based local and wide-area networks and be compatible with a range of communications standards, company officials said.

WildBlue will be launching high-speed Internet access via satellite to homes and small offices in small cities and rural America in the second half of 2004. The two-way service will offer downstream speeds up to 1.5 Mbps and upload speeds up to 256 Kbps. All subscriber packages will be competitively priced with DSL and cable modems and will include e- mail and other bundled services, company officials said.

The WildBlue service will use U.S. capacity on Telesat Canada’s Anik F2 satellite, now under construction and scheduled to launch in the first half of 2004. Investors in WildBlue include Liberty Media [NYSE: L], Intelsat, Kleiner Perkins Caufield & Byers, and Arianespace.

Thailand’s Shin Satellite (ShinSat) is launching the iPSTAR system aimed at providing telecommunications and multimedia services to households, businesses and public organizations in Asia. Pricing for iPSTAR broadband satellite capacity is expected to be less than one-third of the cost of conventional satellite capacity. Service providers can pass this cost reduction on to subscribers. The company will focus in the early years of service in China, India and Australia.

“As far as sectors are concerned, I think it’s a make or break year for satellite broadband, both for consumer services and for enterprise and SOHO markets,” said Susan Irwin, president of Washington-based consulting firm Irwin Communications. “I’ll be watching WildBlue, SpaceWay, IPSTAR and EchoStar’s use of SES Americom’s AMC 15.”

Rainbow DBS, Cablevision’s satellite division, introduced VOOM last October as the first television service to offer a comprehensive array of high-definition (HD) programming to customers throughout the continental United States. As an incentive to subscribe, charter customers pay no monthly programming fees through February 2004.

The VOOM system uses a powerful Lockheed Martin [NYSE: LMT] satellite that gives the service potential to develop a satellite TV business with just one spacecraft. However, it faces entrenched satellite and cable TV competition.

Satellite radio will be watched closely this year to see if promising subscriber gains are built upon and meet analysts’ forecasts. The momentum of Washington-based XM Satellite Radio [Nasdaq: XMSR] that included netting its one-millionth customer last year likely will continue in 2004. Sirius Satellite Radio [Nasdaq: SIRI], its New York-based rival, is marketing its commercial-free music channels, next-generation receivers and exclusive sports programming in an attempt to expand its customer base in 2004.

Jim Collins, vice president of corporate communications at Sirius, said that the introduction of portable “plug and play” satellite radio receivers has made accessing satellite radio easier. The portable aspect of these devices allows subscribers to access signals in their cars, homes, boats or RVs virtually anywhere in the United States.

“In less than a year, we went from being a company where people were questioning our viability to one that successfully recapitalized its finances, reduced its debt from $1.2 billion to less than $60 million, and raised tremendous amounts of cash,” Collins said. “This has given us the strongest balance sheet in this growing category, and is allowing us to take advantage of opportunities, such as our recent NFL [National Football League] agreement, to make our programming the best in this new industry.”

Chance Patterson, vice president of corporate affairs at XM, predicted that 2004 would be a “great year” for his company. Industry analysts considered XM one of the top performers in 2003 and their confidence remains as 2004 begins.

XM should double in size for the second straight year, while Sirius will also pick up steam, predicted Tom Watts, a satellite analyst with SG Cowen.

Washington-based Intelsat will try to capitalize on its acquisition of Loral’s North American satellite assets this year and expand its efforts to tap the media and entertainment, hybrid service and global end-to-end connectivity markets, said Intelsat CEO Conny Kullman.

The future of bankrupt Loral remains unclear, but Roger Rusch, who heads the Palos Verdes, Calif.-based TelAstra consulting firm, thinks the company has the potential to improve substantially one year from now. Conventional wisdom suggests that Loral will falter, but Rusch noted that the company’s predecessor, Ford Aerospace, also had a dim outlook in 1970 before large orders breathed new life into the venture. The winning of new contracts by Loral last year could put the company on the path to recovery, Rusch explained.

Other key stories to watch this year include the selection of a prime contractor to head Europe’s proposed Galileo global positioning system, increased government demand for satellite services, and expanded HDTV programming by satellite TV services.

The prime contractor for Galileo will take the lead in arranging private financing for the deployment and operational phases of the system, said Remi Roland, a spokesman for EADS, which submitted a joint bid with Inmarsat and Thales to fill that role.

–Paul Dykewicz

(Jimmy Schaeffler, The Carmel Group, 813-643-2222; Sylvette Barr, Hughes Network Systems, 301/601-6373; Susan Irwin, Irwin Communications, 202/223-1016; Jim Collins, Sirius Satellite Radio, 212/901-6422; Chance Patterson, XM Satellite Radio, 202/380-4318; Conny Kullman, Intelsat, 202/944-7800; Roger Rusch, TelAstra, 310/373-1925; Remi Roland, EADS Astrium, 33-1-34-88-35-78)

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