Rural Battlegrounds: Satellite Operators Face More Competition

While satellite traditionally has enjoyed a virtual monopoly in rural markets, operators are finding more terrestrial competitors entering these growing regions.

The small towns of Fairfield, Mont., Bridgeport, W.Va., and Bennington, Vt., are not used to being on the radar screens of corporate marketing departments. The towns have been so ignored by the communications industry that the best they could hope for was to be included in a federal subsidy program to run telephone lines to their homes. But times are changing, and the emergence of high-speed Internet and other services, coupled with the growth of direct-to-home satellite service, is fueling a high-stakes competition among broadband providers to bring services to the estimated 10 million American homes — some believe the number is as high as 20 million — without high-speed Internet access.

While not all unserved residences are rural, the portion is enough that satellite companies like Colorado-based Wildblue and terrestrial providers such as Country Roads of Maine consider these unserved homes central to their business plans. “Our mission from the start — and it has never wavered — is to bring broadband to rural areas,” Stephanie Lovett, director of marketing for Wildblue, says.

With its mission to bring high-speed Internet to rural residents for less than $50 per month, Wildblue founder Tom Moore hired ViaSat in the late 1990s to develop a satellite version of the Data Over Cable Service Interface Specification, or DOCSIS, which had been the standard specification for transporting data over cable modems for several years. The technology worked in lowering the cost of consumer terminals, but the turn-of-the-century economic downturn caused Wildblue to postpone its plans.

With the backing of companies like Intelsat, Telesat, SES Americom and Eutelsat, Wildblue launched its service in June 2005 and quickly moved to a Ka-band spot beam satellite that further lowered costs and improved service, Lovett says. Since the launch of its service, Wildblue has gained more than 100,000 customers, in part by undercutting the lowest-cost package for residential service offered by Hughes Network Systems (HNS) by about $10 per month. HNS, a subsidiary of Hughes Communications, provides broadband Internet service to all sizes of residential markets, businesses and government agencies, worldwide, using 85 transponders spread across 12 satellites. HNS remains the market leader with 300,000 residential customers and also is in growth mode. The company made its debut on Nasdaq in September.

Partnerships Fuel Growth

Much of Wildblue’s success seems to come in large part from alliances the satellite service provider has formed with its competitors. One of Wildblue’s first orders of business was to partner with the National Rural Telecommunications Commission, or NRTC, which represents more than 1,300 rural telephone and electric companies. The arrangement is similar to one the NRTC had with DirecTV, in which NRTC members could choose to bundle their services with DirecTV.
NRTC grew DirecTV’s customer base by nearly 2 million under the arrangement, Jack Harvey, NRTC’s senior vice president of operations, says. Comparatively, 320 NRTC members installed 44,000 Wildblue systems during the company’s first year of operations — 14,000 more than projected, Harvey says. Wildblue also has signed on to bundling agreements for video/Internet packages with DirecTV and, as of November, with Echostar Communication Corp.’s Dish Network.

The only catch to the partnerships is that Wildblue is sold only where rural customers cannot receive DSL. Still, Lovett says that stipulation is more than offset by business created through Wildblue’s deals for distribution by local phone companies and fits with Wildblue’s marketing plan to focus on areas with fewer than 100 households per square mile.
“The biggest success we find is working with the local dealers who are out in those communities meeting the people who need high-speed Internet,” she says.

Trying To Meet Demand

Even with Wildblue matching HNS with a growth rate of about 10,000 new customers per month, Mike Cook, senior vice president of sales and marketing for HNS, says the competition has been transparent to overall sales. “It has not dented our activation rate or order rate at all,” he says. “We think that’s because the demand in the market is much, much bigger than the rate that we are supplying it.” Cook adds that “Demand is limited only by our ability to get the word out.”

While government agencies and emergency service providers are increasingly looking to satellite for the most reliable communications service, satellite providers still have to market heavily to be considered among the better-known broadband providers in telephony for non-emergency customers. Cook represented HNS at the Southern West Virginia’s Broadband Summit in September arranged by Sen. Jay Rockefeller (D-W.Va.). “The municipal representatives kept saying, ‘When are we going to get fiber? When are we going to get fiber?’ When the truth is that they are never going to get fiber because of their location.”

Indeed, larger and more established providers such as Verizon focus on serving more densely populated areas in order to gain a higher rate of return, and Verizon has no plans to grow in rural areas other than to improve the services to current rural customers, says Jim Smith, director of media relations at Verizon headquarters in New Jersey. “If a small, local phone company has jurisdiction, we’re not going to step on them,” Smith says. “But for the rural areas we do serve, we understand the hunger to get into the 21st century and we’re working on that.”

Verizon is adding 3 million customers per year to its two-year-old Fios broadband service that provides the triple play of voice, data and video, Smith says. The $22 billion investment provides speeds of up to 50 megabits per second and is available in 16 states. “It’s where we’re placing our bets,” he says. Verizon is exploring all available opportunities to provide Internet service, but “has nothing to report in offering satellite Internet,” he says.

Rural Competitors

At the same time, Verizon and other large telephone companies are selling many of their rural lines to rural telcos like Altel, Country Roads and Centurytel, which are creating economies of scale by partnering, says Jeff Heyman, a directing analyst of Broadband and IPTV at Infonetics Research, a California-based think tank. “They’re becoming parent companies to the rurals,” he says. The arrangements “free up capital to build out infrastructure, purchase equipment and handle the business.” In the race to serve those unserved by broadband, Heyman says he would put the competition “at about 50-50” between terrestrial and satellite providers with wireless a distant second. “Wireless really hasn’t been available and it’s very new and very expensive,” he says.

In places such as rural Montana, the Wildblue partnership allows local phone companies to increase their methods of high-speed delivery and serve households that either cannot receive DSL or where phone companies cannot recoup their costs for extending the lines for offering DSL, says Darren Moser, general manager of 3 Rivers Telephone Cooperative in Fairfield. 

Although Wildblue allowed 3 Rivers to increase its “canopy of solutions,” satellite is not the company’s focus, says Moser, who added that 3 Rivers is in the process of re-engineering and rebuilding its lines. Particularly with customers who play Internet games, the latency of satellite is considered inferior, he says. We tend to prefer our DSL and fiber,” he says. “Internet is simply one application.”

Besides, Moser says, “Wildblue will compete with our DSL service. So, we’re competing against ourselves in some ways.”

Competition is “definitely increasing” in Montana with start-ups and cable companies entering the market as well as wireless, Moser says. “There is a lot of 4G in Montana at this point,” he says of the latest wireless access technology. Still, rural telcos enjoy a competitive edge that is hard to beat. Most of them are cooperative enterprises, which means customers “absolutely have a vested interested” in the companies. As their taxes support the company, they stand to profit from its success and customers get to vote for its board of directors, Heyman says. Rural telcos also garner widespread customer loyalty. “A lot of people in rural areas believe strongly in supporting their local companies,” Moser says. “There is brand loyalty.”

Also, “so many folks want that local presence providing their service,” says Kelli Laski, communications manager at NRTC. “These are the people you see at the grocery store and the county fair.”

The demographic for rural providers of having older, traditionally less computer-driven customers has been a challenge, although Moser says this is starting to change as seniors increasingly want to communicate by e-mail and download pictures from far-flung family members as well as do more online purchasing, especially with prescription drugs. At least, those are some of the benefits 3 Rivers promotes. “We have to tout the benefits of” high-speed Internet, Moser says. “People aren’t just buying it to buy it. Those folks came and got it already.”

But even that market is improving with the increase in the number of vacation homes found in rural areas, Harvey says. “There is a huge market with second homes on ranches and farms and mountaintops. They want the same connectivity and may be miles from a central office and DSL point of presence.”

Another edge local phone companies have over satellite providers is that just like national telcos the locals have the ability to bundle services, adding the convenience of one bill for customers.  “We have to look at putting voice, video and data together as one component,” Moser says. “Bundling is our competitive edge, especially as we move into the high-definition market.”
      

Finally, rural telcos still receive the bulk of millions of dollars per year in federal subsidies. For 3 Rivers, the subsidies provided by the U.S. Agriculture Department’s Rural Utilities Service and the Federal Communications Commission’s Universal Service Fund, combined with the company’s intercarrier compensation revenues, amount to 65 percent of 3 Rivers’ annual revenue, Moser says. For some rural telcos, the percentage goes as high as 90 percent, he says. The federal subsidies were created some 80 years ago to help phone companies recoup costs from extending phone lines to the most rural parts of the United States. “This is like the farm subsidies,” Heyman says. “They would really have a difficult time staying in business without them.”

The issue of subsidies is politically volatile, and telcos have to “fight for them every year,” Moser says. Bills have been offered in Congress recently that would revamp the system and change eligibility for the subsidies. In a meeting with eight influential senators in July, the Rural Broadband Coalition asked that the subsidies be overhauled and include satellite service providers.

It is impossible to know what priority broadband extension will take as the new Congress convenes. But even without subsidies, satellite providers remain positive that they can rival in what is an increasingly competitive market.

Even with the growth of rival Wildblue, HNS remains focused on large telcos as its biggest competitor, Cook says. “There is inertia for users if they are already subscribing to a phone company that is going to bundle services,” Cook says. “But phone companies also have a broad reputation for being poor with service. In the end, the consumer is smarter than people give them credit for. If you offer them good value, there is a good chance they will sign up with you.”