(Editor’s note: This is the second article in a two-part series that examines the satellite broadband market in Europe. Part one of the series appeared in the May 2 issue of Satellite News.)

To turn a profit in the satellite broadband market in Europe, companies have looked at a variety of business models. For example, Hughes Network Systems Europe is shifting toward a direct marketing approach to reach subscribers while Aramiska is targeting enterprises rather than consumers to drive its business (SN, May 2). For Italy-based Netsystem, the model that is working for them is partnering with a telecom service provider.

But as these companies search for the right formula to develop or maintain a profitable business, there are challenges that they all face, namely cost. And until those challenges are met, satellite broadband will continue to remain a niche player in the overall broadband market.

Netsystem

Netsystem is a key player in the Italian broadband market, offering unicast satellite broadband service through two channels. Its main offering is in conjunction with Telecom Italia (TI), providing Internet access to TI’s customers who are out of reach of the telecom service provider’s DSL network. Netsystem also has a direct retail offer. The two businesses combined have generated more than 100,000 customers.

“We signed a deal at the end of 2002 with TI and we supply them with wholesale access to our satellite platform in order for them to provide an Internet via satellite service to their residential end users,” Pier Luig Corvi-Mora, COO of Netsystem told Satellite News “When [TI sells] broadband services in Italy, they can sell ADSL and satellite where ADSL is not available. All the services, whether retail or wholesale, are unicast services. We do not provide two-way services. A two-way service is still too expensive for wide residential usage.”

While the deal with TI has undoubtedly been a key reason for the operator’s success, he believes the lack of progression in satellite technology has been a key reason for the difficult market conditions facing operators. “We made it, but it has been difficult,” Corvi-Mora said. “Using expensive [technology] like a satellite to provide connectivity, which today is so cheap in terrestrial terms, has been a huge challenge. Costs for terrestrial operators have gone down while costs for satellite operators have not moved. We are more or less at the same level of costs for satellite capacity than we were two to three years ago.”

Corvi-Mora added, “It is really a shame that the bandwidth you have available on a transponder today is the same you had available five years ago. It means that the industry overall has not made any kind of research or investments to increase the output of those satellites. We think there is a niche for satellite connections and operators like us, Aramiska and SatLynx, to keep that niche alive. Satellite is the only technology that really has not moved on. In satellite, the technology we have is DVB-S and there are many upgrades that can be done to that standard. Those upgrades have not been pushed to the limits.”

Despite this, Netsystem has managed to build itself a profitable business, although Corvi-Mora conceded that the unique dynamics of the Italian market have been a factor as well as its agreement with TI.

“For the first time, a satellite broadband service is offered at the same price for the final user as a terrestrial service,” he said. “This is possible in Italy because the majority of users subscribe to pay-per-use offers, which are perfect for satellite because you very seldom have flat [always on] connections to the Internet. The combination of this aspect with other variables, such as the specific nature of [TI’s] relationship with the customer who does not need to set up a new contract due to the existence of the phone bill, have determined our success in Italy. On top of this, the customer management know-how we developed in our retail activity enables Netsystem to offer to TI not only an excellent service but also a full outsourcing of the customer care and back-office issues.”

Market Challenges

Patrick French, a satellite industry analyst at Northern Sky Research, echoed, in part, Corvi-Mora’s thoughts on the challenges that satellite broadband providers face in terms of costs. But French offered a different perspective on the cost issue and how that is hampering the growth of satellite broadband.

“The challenge in successfully offering solutions for smaller satellite networks is the need to lower your terminal costs and lower your monthly service costs,” French told Satellite News. Satellite broadband service providers “have had some success in driving those prices down but they have not driven these prices down at the same rate that terrestrial business network services have been dropping. So, the industry needs to keep working. I think slowly they will be able to increase their market, but you always have to remember that terrestrial service providers are able to drop their prices at a quicker rate.”

French believes satellite operators will need to refocus their efforts if they want to be successful. Specifically, satellite broadband operators need to be willing to go head- to-head with terrestrial broadband service providers, not shy away from competition.

“In many ways, I am frustrated with the satellite industry saying their key strength is providing services to rural areas where no one else can. To really compete, satellite needs to be able to play directly in areas where there are alternatives. In order to expand the satellite market, you need to be able to offer a viable alternative where the customer has a choice.”

French added that satellite broadband service providers need to take a more proactive approach in educating potential customers to the services they are offering. “Most smaller enterprises under 100 people are not necessarily going to have a group of networking experts who are up to date on the latest satellite technologies that can make satellite a very competitive solution for small networks even where terrestrial alternatives do exist,” he said. “But most satellite service providers don’t have the scope to do the essential market education.”

French is still hopeful that satellite operators will be able to carve out a niche for themselves, both on the enterprise side and for single site business/consumers in remote locations.

“The industry is working very hard to push down on terminal costs for enterprise networks. In the longer term, there are two ways to get the price down on space segment side,” French said “One is just for the satellite operators to charge less money for transponder space, and the other is to use the same amount of bandwidth more efficiently by cramming more bits through. We remain relatively positive that for the enterprise market you will see continued growth coming from successfully penetrating more and more into these smaller networks.”

–Mark Holmes

(Stefano Caratelli, Netsystem, stefano.caratelli@netsystem.com; Patrick French, Northern Sky Research, Pfrench@northernskyresearch.com)