While many eyes are looking at Wildblue Communications Corp. as a guinea pig of sorts for whether there will be market for direct-to-home satellite broadband services around the globe, Max Engel, industry analyst for the space and communications group at Frost & Sullivan, claims the market for providing last-mile connectivity to consumers and the small office/home office (SOHO) market already is slowly shrinking.

“Satellite’s place in broadband depends largely on the degree to which terrestrial build out continues,” Engel said during an Aug. 25 conference call. He cited basic economics as the reason for shrinking last mile consumer/SOHO market for satellite service providers.

“The basic problem satellites face in this environment of continued build out [of broadband technologies in general] is that regions that can’t afford build out [of broadband networks] also generally can’t afford a great deal in the way of individual broadband,” Engel said. “In the developed world, the market can afford individual broadband, but the problem is because it can afford [satellite broadband] and because there is sufficient resource to pay for that, there is also considerable build out” of terrestrial broadband networks, leading to a very crowded market for last mile connectivity.

The Speed Gap

From a technology perspective, satellite is facing competition from a variety of wired infrastructure, including digital subscriber line (DSL), cable, optical fiber and the emerging broadband-over-powerline technology, as well as wireless technologies such as Wi-Fi and WiMAX. What could end up being a key differentiator is the speeds at which these terrestrial technologies can offer service.

“In my review of alternate technologies, it is clear that within five years there will be considerable broadband coverage at the 100-megabits-per-second level,” Engel said. “This is already [available] in Japan via fiber and recent upgrades and planned upgrades for fiber in North America will bring it to similar levels. It is technically feasible to achieve these levels with both cable and DSL, and I believe broadband over powerline is approaching this level in some of the later chipset designs.”

On the other hand, Engel noted that Wildblue’s download speed is being offered at 2 mbps. “While this speed can be increasing the share of the satellite’s capacity an individual user gets, this puts real strain on the business model for these satellites,” he said.

Of course, there is the argument that with speeds in the megabit per second level, users will not notice a difference between 2 mbps and 20 mbps. Engel argued that if greater speeds are available, developers will find ways to use it. He compared it to the constant upgrades to of computer programs. New iterations of a program, such as Windows, are written with the processing speeds available at the time, and older computers have difficulty running new programs because they lack the processing speeds to handle the new upgrades to software applications.

For satellite providers of last-mile services, meeting the speeds could lead to a repeat of quality-of-service issues that plagued this industry in the past.

“Historically, the quality of service has been one of the major issues of satellite broadband,” Engel said. “In order to keep the price of the service at a point to were it could attract customers, it was necessary to oversubscribe satellites, often beyond the abilities to provide what customers considered to be reasonable service.” He did acknowledge that Wildblue has a much higher Ka-band capacity and will be able to deal with a much larger number of users with a single satellite while maintaining a high quality of service.

“But I am concerned that in five years or so, the quality of service will not be able to compete with that which is available from terrestrial alternatives and satellite may end up providing essentially a superior form of dialup,” Engel said.

The Exit Strategy

While Engel does not paint the brightest long-term future for the last mile consumer/SOHO market, he noted that in the short term, there is a market, along with a logical path for transitioning into other markets that can use current broadband satellite capacity. Engel stressed the importance of having “an exit strategy.”

For those that own their capacity, a successful exit strategy starts with making the right decisions regarding the kind of satellite that is placed in orbit.

“If satellites have a window of opportunity here that may close in five years, don’t buy a satellite that can only provide broadband service or one that is so heavily optimized that it can’t be turned to another end,” Engel said. “There is a market for five years and possibly considerably longer. Certainly there is some market for the considerable future. This is worth pursuing but develop flexible satellites that can be turned to something else.”

One area where Ka-band satellites in particular may have a future beyond broadband is in the growing high-definition (HD) video market. “If broadband is declining, certainly high definition will be on the rise,” Engel said. “There seems a very reasonable strategy to introduce Ka-band capacity for broadband and. as necessary, transition to video. Broadband is a market now. Video, HDTV video in particular, is growing and may have considerable need for this bandwidth.”

Other providers seeking to remain in the broadband space will need to find new markets to serve, Engel said. “Maintain disaster relief capability,” he said. “The same sort of broadband service provided by Wildblue to consumers would become tremendously important to someone in Florida after a hurricane. This may provide another place to go with some of the capacity that is freed up as terrestrial buildout continues.”

There also is an opportunity in a market that satellite already serves: providing backhaul services to terrestrial networks. Partnering with terrestrial providers also could prove to be a lucrative option.

“I foresee the possibility of Wi-Fi and other fairly inexpensively deployed technologies that can be deployed in remote regions as small networks and that network can be connected to the broader communications infrastructure via satellite,” Engel said. “The Ka-band capacity that today may be providing service to individuals, tomorrow, may be more useful providing service to demand aggregators who provide the last mile service on the ground but are still a long way from the actual fiber backbone.”

–Gregory Twachtman

(Max Engel, Frost & Sullivan, 210/247-2404)