El Segundo, Calif.-based DirecTV Group’s [DTV] decision last week to provide high-definition (HD) satellite TV services via its two Spaceway satellites and two other spacecraft it plans to launch by 2007 to offer Ka-band satellite broadband services shows that rival terrestrial broadband technologies poise daunting competition that even well-funded companies are choosing to avoid. The four next-generation satellites also will give DirecTV more capacity for standard-definition television services.

DirecTV is continuing to evaluate whether to deploy a broadband service but the company has considered satellite TV to be its core business since its year-end 2003 acquisition by News Corp [NWS].

The switch in strategy is possible because DirecTV Group, the parent company of the DirecTV satellite TV service, reconfigured the Spaceway satellites to provide video services. The two Spaceway satellites, now under construction by The Boeing Co. [BA] and scheduled for launch in early 2005, will be able to offer both video and broadband services, said Bob Marsocci, vice president of communications at DirecTV.

“We don’t have a specific date or time frame to provide a broadband service,” Marsocci said.

Rainbow DBS, a startup satellite-TV provider that is focused on offering exclusive HD channels, is the market leader in the HD category in terms of the amount of programming it can offer but the venture has relatively few subscribers since launching commercial service earlier this year. The VOOM satellite TV service of Rainbow DBS, a subsidiary of Cablevision Systems [CVC], offers more than 35 HD channels to consumers across the continental United States, including 21 brand-new, exclusive, commercial-free HD channels that deliver hundred of hours of movies, sports and music.

VOOM is a factor in DirecTV’s latest HD thrust but not the cause. Said Jimmy Schaeffler, a satellite-broadcasting analyst who heads The Carmel Group in California, “DirecTV would have done this anyway as a response to cable offerings.”

HD Expansion

“One of the big question marks was how we would offer local HD channels,” Marsocci said. “This additional capacity will allow us to offer 1,500 local HD channels, more than 150 national HD channels, and to expand standard definition programming as well as launching new interactive and advanced services.” Those interactive services would include the kind of programming offered on News Corp subsidiary BSkyB in the United Kingdom that allows viewers to home shop, to play games and to request weather reports, Marsocci said.

The cost of retrofitting the two Spaceway satellites to provide video to DirecTV subscribers is “not material,” Marsocci said. One of those satellites is scheduled to be launched during the first quarter of 2005, while the other spacecraft is due to be carried into orbit during the second quarter, he added.

“We begin launching the first round of local HD programming during the summer of 2005,” Marsocci said.

Steve Blum, president of Marina, Calif.-based satellite-broadcasting-consulting firm Tellus Venture Associates, said the Spaceway project of DirecTV Group’s Hughes Network Systems subsidiary is the last of the big Ka-band systems to drop out of the broadband race.

“This was a race that started 10 years ago with the vision of using Ka-band capacity to provide two-way broadband service via satellite,” Blum said. “None of the systems that were originally proposed have launched yet in the United States. The one exception is a Canadian bird that WildBlue has access to use.”

Denver-based WildBlue Communications, a startup Ka-band consumer broadband service backed by Liberty Media [L], Intelsat and the National Rural Telecommunications Cooperative (NRTC), is the lone broadband provider to date, and it will use a portion of the transponder capacity aboard a recently launched Ottawa, Canada- based Telesat Canada Anik F2 satellite to provide its service. That Anik F2 satellite, by the way, is not a dedicated Ka-band satellite because it includes traditional C-band and Ku-band transponders that satellite operator Telesat Canada will use.

WildBlue plans to offer wireless high-speed Internet access services to virtually anywhere in the continental United States. It now faces no competitive threat from Spaceway, at least in the near-term.

Unfulfilled Promise

Such a modest effort to rollout a Ka-band service is “nothing like” the integrated satellite broadband networks that were envisioned in the 1990s, Blum said.

WildBlue’s offering is aimed at the estimated 25 million U.S. homes and small businesses that lack access to other broadband Internet options. The company built its platform on providing affordable, two-way wireless Internet access available to small cities and to rural America; testing is about to begin, and commercial ramp-up is schedule for early next year. WildBlue will use DOCSIS, reportedly the leading consumer broadband technology in North America, to keep its costs competitive with terrestrial services, said CEO Tom Moore.

WildBlue’s business model is essentially the same one followed by HNS-operated DirecWay and by the StarBand venture that went through a bankruptcy and a financial restructuring, Blum said. In all three cases, they are taking what amounts to generic satellite capacity and using it to provide limited SOHO (small office and home office) service.

The big integrated satellite broadband systems were abandoned before they were ever launched.

“The basic selling proposition of satellite Internet service is half the service at twice the price of the terrestrial competition, and that has not changed in the last 10 years,” Blum said. “If anything, it has gotten worse because terrestrial capacity is expanding at a much faster rate than satellite capacity. There are no updates possible for the laws of physics that only allow so much bandwidth to be derived from a given amount of spectrum and power.”

Satellite broadband is unable to compete with fiber-optic cable and DSL services in urban and suburban markets on either price or quality of service but it is fine for people who have no other option, Blum said, adding, “Those people are increasingly few and far between.”

(Steve Blum, Tellus Venture Associates, 831/582-0700; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Bob Marsocci, DirecTV, 310/964-4656)