Denver-based satellite broadband hopeful WildBlue received its best Christmas present ever this holiday season with a $156 million equity investment. Now, the company needs to finish building its system and find a way to become the world’s first profitable satellite broadband service.

The money came from a consortium of investors that included Intelsat, Liberty Media Corp.’s [L] Liberty Satellite & Technology Inc. (LSAT) unit, and the National Rural Telecommunications Cooperative. They joined existing investors Kleiner Perkins Caufield & Byers and WildBlue’s own chairman, David Drucker. The money is expected to be enough to fund the company until it can launch service in 2004.

In a tough market for consumer-oriented broadband satellite services, WildBlue has focused on a niche that may payoff – rural consumers. WildBlue is banking on satellite’s ubiquitous coverage to give it a mass-market subscriber base beyond the range of competing terrestrial broadband services.

To some, that plan seems reminiscent of earlier ideas to provide satellite-based handheld mobile phone service. Those plans ultimately were dashed on the rocks of unanticipated terrestrial progress. Satellite phone services sounded great when they were first devised — when cellphones cost $1,500, airtime was priced in dollars per minute, and coverage was only available in a few major cities. But it took time to build the satellite systems, and when they launched services in the late 1990s, terrestrial competition had totally reshaped the landscape. Cell phones were $100, airtime was priced in pennies per minute, and there was vastly more terrestrial coverage.

There are significant differences between the mobile voice and broadband markets. But there are also some hints that that scenario could repeat itself.

One thing working in WildBlue’s favor is that its system will be much cheaper to deploy than a global low-Earth-orbit satellite constellation. The company’s Ka-band technology promises to be much more efficient than existing Ku-band satellite services, largely thanks to its suitability for multi-spot beaming as opposed to blanketing the United States in a single beam. The bad news, according to WildBlue Vice President Brad Greenwald, is that “there are no large commercial Ka-band satellites up there, and that’s why we’ve had to work on getting financed to put up our own.” The company has leased all of the U.S. Ka-band capacity on Telesat Canada’s Anik F2 satellite. The Anik F2 is set to launch in late 2003, and WildBlue can’t offer service until it does. The company also has ordered its own satellite, the WildBlue 1, although prior to the cash infusion, construction by Space Systems/Loral (SS/L) had been suspended.

WildBlue appears to be doing everything it can to keep prices down. One example is its use of a simple “bent pipe” design in which the satellite simply receives and retransmits signals instead of doing more sophisticated on-board processing. Competing broadband system SpaceWay, under development by Hughes Network Systems (HNS), will use on-board technology to re-route and mix packets aboard the spacecraft, a technology Greenwald said WildBlue considers “an expensive proposition compared to the value it creates.” It would allow the SpaceWay system to do things like point to point communications between dishes. But Greenwald says WildBlue’s target customers “just want to connect to the Internet and let it do what it does best.” Perhaps more importantly, the bent pipe design allows WildBlue to do its processing on the ground, making it much easier to change things as needed. The technique also offers greater flexibility to respond to changing business conditions.

Another factor against a repeat of the satellite mobile phone scenario is that broadband pricing is less volatile than cellular pricing was in the 1990s. WildBlue expects its prices to be competitive with current DSL and cable offerings — in the $50 a month range. And, while wired broadband prices may very well come down by the time WildBlue gets to market, they don’t have room to decline as drastically as cellular prices did. DSL isn’t going to cost $4.99 a month next year.

But WildBlue isn’t planning to go head-to-head against DSL and cable. “Our plan is to serve those customers that don’t have access to terrestrial alternatives,” Greenwald said.

There, the company may find itself in for a surprise. As with the satellite mobile phone contenders, it’s taken WildBlue longer than expected to get up and running. It was originally supposed to be in the market in 2001–and time isn’t on its side.

Granted, fixed wireless broadband has had its troubles getting to market, and the major players continue to move slowly, while focusing on urban areas. But small wireless ISPs are already going after the same market WildBlue wants. Entire towns are beginning to deploy wireless broadband to serve their residents. Most of these are small operations, using inexpensive equipment and unlicensed spectrum. But there are a lot of them, and more are appearing all the time.

Roswell, Ga.-based systems integrator Tri-State Broadband is a two-man shop helping small towns in the southeast deploy wireless broadband. Tri-State’s Vice President of Sales John Overley said existing satellite services haven’t been much of a factor in their work. “We see a lot of satellite dishes for TV,” Overley said. But Tri-State isn’t hearing concerns from potential operators that the early adopters in their markets have already put up satellite broadband dishes.

For his part, WildBlue’s Greenwald is equally dismissive of fixed wireless, expecting the small operators to merely “nibble around the edges.” According to Overley, Tri-State is “seeing more and more wireless competitors come on the landscape.” A year from now, when WildBlue gets into the market, he expects it to have a real foothold.

In-Stat/MDR Senior Analyst Mike Paxton comes down on the side of fixed wireless. Paxton is skeptical about WildBlue’s economics to begin with, and thinks the future for satellite services remains in the long term. “I don’t want to call it a race,” he said, “but a lot of that market has already been staked out.” Paxton sees the best shot for satellite services in even more poorly served markets like Africa or Latin America. Domestically, he sees satellite operators having a hard time keeping up with terrestrial pricing. “That whole industry has been saying ‘we’re going to drive our prices down and we’ll be competitive with other broadband technologies next week, next month, next year,’ and it’s never happened,” he said. “Meanwhile, fixed wireless is already out there and has already driven its costs down, and is specifically targeting rural communities and households.”

Overall, both Greenwald and Overley seem unconcerned about the other’s technology because they know their newest equipment is better than what the other side already has in the market. In other words, it looks like both satellite and fixed wireless operators are ready to win the last war.

There is room for WildBlue. For one thing, the small scale of fixed wireless deployments means, even with large numbers of them entering the market, there will still be plenty of customers without that option. And with satellite service, customers don’t have to wait for a wireless ISP to come along. They can simply put a dish on the roof and be done with it. If the company really can match DSL speeds and pricing, it will do a much better job of attracting rural households than existing offerings. But WildBlue is clearly going to face more competition in the market than it anticipates. The ultimate questions for WildBlue are how much of an impact fixed wireless will have, and just how large and uncontested a market the company needs to make it into the black.

–John Sullivan