Next-Generation Satellite Technology to Become Viable Market

Technology Analysis Next-Generation Satellite Technology to Become Viable Market Abstract: A new generation of Ka-band satellites is expected to advance the market for broadband wireless services, which will result in more successful business models. By Patti Reali and Jay Pultz Strategic Market Statements The market for satellite services will be in transition as new satellite network technology platforms emerge. Technology advances and movement toward standards are expected to change the market dynamics and underlying economics of satellite-delivered communications services. Partnerships and aggressive marketing will be key to success in the market for satellite services. Publication Date: 11 July 2003

2 Next-Generation Satellite Technology to Become Viable Market Satellite Industry The satellite industry has not escaped the economic troubles gripping the telecommunications sector. The satellite industry is coming off some of its worst-performing years. However, despite the past turmoil, the satellite industry is investing in next-generation satellite systems with Ka-band transponders whose high-capacity, high-throughput capabilities and costeffectiveness are expected to move the industry into a new frontier of profitability and growth. The use of satellite networks for fixed satellite services (FSS) has focused on a few key applications, such as television broadcasting, transmission of Internet backbone traffic, value-added connectivity services for the enterprise and business market, and consumer Internet access. Demand for Internet backbone services has been dampened by severe overcapacity in the terrestrial fiber market, and, in general, where fiber connections start to spring up, the market witnesses a seismic shift away from the use of satellites. The market for value-added connectivity using very small aperture terminals (VSATs) has matured but has continued to grow slowly. VSAT networks are used primarily by retail, automotive, financial and other sectors. VSAT networks are valued for a number of reasons, including the following: Low cost Ubiquity Security Ease of deployment and ease of maintenance Providing a single point of ownership The best models for revenue growth for the FSS industry, however, have come from the increase in television broadcasting, especially the growing direct to home (DTH) satellite television market, streaming media and other video transmission services. In fact, the broadcast of video content streams to the edge of networks, where they are cached, is one of the key ways that satellites make sense for the Internet. ISP traffic, if not transported over undersea cables or other fiber-based infrastructure, also uses satellites. Furthermore, with the growing demand for broadband connections in the residential, small office/home office (SOHO) and telecommuter markets, satellites can also be used to connect users in rural areas, which are not served by either of the predominant wired access modalities cable or DSL. Satellite-based Internet services to the residential/soho segment have achieved a very small market penetration after several years of availability. This lack of success is because of several factors, not the least of which have been the technology limitations and costs associated with present-generation technologies. Starband and DirecWay by Hughes Network Systems are the only U.S. providers in this market with approximately 200,000 subscribers combined. Both Ku-band (and limited 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

3 Ka-band) Internet services are also offered in Europe, and their business models are also being tested. Increasingly, satellite-based Internet access services are appearing in the Asia/Pacific and Latin American markets. However, it is to the next-generation satellites, with higher-capacity, higher-performance Ka-band transponders, that the market is moving. Market inhibitors for successful satellite broadband connectivity to consumers include the following: Overambitious network designs High cost of implementing satellite networks, both space and ground segments High customer premises equipment (CPE), installation and network operation costs Overestimating the size of the addressable market Tight capital markets Poor cost/performance of the services being offered, and poor business case for offering Internet access via satellite to a cost-sensitive residential market Technical incompatibilities for use with corporate virtual private network (VPN), despite a number of software fixes Next-Generation Satellite Platforms The first proof of concept for robust, high-bandwidth satellite communications was demonstrated by National Aeronautics and Space Administration (NASA) and the U.S. Military, which both operate Ka-band satellites. The NASA Advanced Communications Technology Satellite (ACTS) program was launched in September 1993 with satellites located at 100 degrees west longitude. Since that time, the ACTS program has led the way in proving effectiveness of offering two-way broadband via satellite in the Ka-band. The Ka-band satellites will operate at different frequencies than Ku- or C-band satellites 20GHz or 30GHz. After significant attrition among dozens of proposed Ka-band satellite players and competing platforms, market rationalization seems to have taken hold. The Federal Communications Commission (FCC) has issued dozens of licenses for satellite broadband networks since 1997. Many proposed systems have either died, such as Teledesic and SkyBridge, or morphed into other entities, such as Liberty Media's purchase of AstroLink. Many others have given back their licenses or their licenses were pulled by the FCC International Bureau for lack of compliance to construction milestones. A select few remain standing as viable market endeavors. Hughes Network Systems' Spaceway is one of the remaining original survivors of the more than 15 Ka-band players granted licenses in North America. With market rationalization almost near completion, there has been renewed, but selective, investment in Ka-band satellite broadband ventures in North America, Europe and Asia/Pacific. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

4 Next-Generation Satellite Technology to Become Viable Market The remaining crop of broadband satellite service providers will offer services over 20GHz or 30GHz platforms that are more robust, have higher-capacity technology, and use either bent-pipe satellites or more sophisticated onboard processing capabilities a virtual switch router in the sky. Network operations and end-user CPE terminals are expected to be less expensive and based on standards. Moreover, many, are also operating on multifrequency (Ka- and Ku-band) platforms that will enable a wider range of services to be offered from the same satellite location. Many in the industry think it may not be prudent to put all of one's eggs into a single Ka-band basket. As a matter of fact, this thinking follows the cable industry infrastructure model, which provides multiple services over a single platform, thus allowing network operators/service providers to spread the cost of providing services over multiple offerings. While Ka-band systems are a work in progress with what appears to be a strong future, Gartner Dataquest believes the migration of satellite services to Ka-band transponders and the evolution to high-bandwidth, multimedia services will happen gradually, but it will happen with 2004 as the realistic starting point. Success will be about execution, the right equipment, the right partners and a service support network that is equal to or better than the model developed by the other successful model of satellite service delivery, that is, the DTH or direct broadcast satellite (DBS) TV providers. Overview of Next-Generation Satellite Service Providers Hughes Network Systems Hughes Network Systems' Spaceway system will break away from the bent-pipe approach to satellite signal transmission and will employ highcapacity, high performance, all-ka-band satellites, with onboard digital processing, packet switching, phase-array antennas, and spot-beam technology to offer single-hop (antenna to antenna) connectivity, regardless of location. Hughes is expected to launch the first of its four Spaceway "birds" in late 2003, with commercial services beginning in 2004 to North America. The company says it will migrate its enterprise VSAT customers over to the Spaceway platform and will address the small and midsize business (SMB) market as well. Hughes has been exact in defining Spaceway's target markets and has no definitive plans to attack the consumer/residential marketplace. With the changing ownership of Hughes Electronics Corp., the parent company of Hughes Network Systems and DBS service provider DirecTV, over to News Corp., it is unclear whether this policy will change. Gartner Dataquest believes the idea is not without merit by bringing the assets of Spaceway together with the satellite television platform of DirecTV, DBS could provide a more-effective weapon in its arsenal to counter cable industry's "triple play" of video, data and voice services. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

WildBlue Denver, Colorado-based WildBlue's plans to deliver competitive two-way satellite broadband access to residential and SOHO markets were put back on track as a result of investment by Intelsat, National Rural Telecommunications Cooperative (NRTC), Kleiner Perkins Caufield & Byers, and David Drucker, WildBlue's chairman, with Liberty Satellite, KPC, and Drucker as existing shareholders. Using leased satellite capacity from Telesat Canada's Anik-2 at a 111- degree location, WildBlue plans to operate throughout the contiguous United States, starting in 2004, serving what it believes to be a vast underserved market where wired broadband access technologies do not reach. WildBlue will subsequently launch its own satellite, WildBlue 1, into a 109.2-degree WL orbital location. WildBlue's approach is different from the present satellite offering for the U.S. market in that WildBlue will use high-powered spot beam technology and standards-based end-user CPE terminals that leverage the Data-Over- Cable Service Interface Specification (DOCSIS) technology employed by the cable industry. While the air interface and advanced modulation schemes have yet to be decided, WildBlue expects to drive down the cost of its CPE technology to below $400. Low-priced customer equipment and installation costs are critical requirements for success of any future satellite-based consumer services. Telesat Canada Telesat Canada will launch a multifrequency-band satellite Anik F2 in early 2004. Using a Boeing 702 satellite, one of the largest and most powerful "birds" in the world, Telesat's Anik F2 will offer 38 Ka-band transponders,32ku-bandtransponders,24c-bandtransponders,45spot beams and broadband interactive terminals transmitting to six terrestrial gateways. Three of these gateways will be in the United States. Anik F3 will augment existing services, allow expansion into new markets and provide backup within the Telesat fleet. WildBlue will lease all of Anik F2's U.S. Ka-band transponders. Telesat, as with SES Americom, is hedging its bets on a multifrequency satellite, enabling it to make money from a variety of different services over a multiuse platform. It will offer a range of other broadband services spanning the entire North American market. Because of Anik F2's wide satellite footprint and two-way capability, Telesat expects to commercialize high-bandwidth, multimedia services throughout its own remote and less-populated areas, having the benefit of smaller, more costeffective terminals. Key among these initiatives are high-speed Internet connectivity, telemedicine, distance learning, telecommuting and e-commerce. 5 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

6 Next-Generation Satellite Technology to Become Viable Market The Bottom Line Liberty Media/Astrolink Plans by Liberty Satellite for its investment in AstroLink are not defined at this point. However, key executives have indicated they will target services toward the government and military sectors, as opposed to commercial or residential/consumer markets. EchoStar Its plans for the satellite Internet market are ill-defined at this point, but EchoStar's founder and chairman and CEO Charlie Ergen is lining up his space segment capabilities nevertheless. EchoStar will launch ES-9 and lease the entire capacity of SES Americom's AMC-15 for the next push into advanced services such as high-definition channels and satellite-based broadband access services. EchoStar will also use these transponders to extend local channels into local markets, as well as serve Alaska and Hawaii, which don't have either DirecTV or the DISH network. Eutelsat Eutelsat is offering Ka-band services through Skyplex, which uses a multifrequency satellite with onboard processors to couple the uplink and downlink segments. Skyplex uses standards-based terminals, which reduce costs and increase flexibility. ViaSat will be its ground segment/gateway and terminal supplier. SES Americom/SES Global SES Americom plans to extend its European model of being a satellite capacity provider to the national/regional service providers in the United States. It is leasing its hybrid Ku- and Ka-band satellite, AMC-15, to EchoStar. Technology advances are expected to change the market dynamics and underlying economics of satellite-delivered communications services. Reduced space segment costs and standardization of CPE terminals should enable more cost-effective delivery of high-bandwidth applications and services over satellite and meet the price-sensitive targets for broadband Internet access services to the consumer/residential marketplace. Partnerships and aggressive marketing will be key to success. Some satellite network operators are planning a mix of satellites, both hybrid Ku- and Ka-band. Others, such as WildBlue and Spaceway, are entirely Ka-band. Gartner Dataquest believes satellites have a vital communications role to play in enterprises of all sizes especially in meeting their growing needs for managed capacity, as opposed to dedicated bandwidth, and in providing cost-effective transmission of the growing video-centric, multimedia application and bandwidth-ondemand needs. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

However, critical questions remain. Can their business models support the consumer marketplace? And, with the rapid adoption of cable and DSLbased connections, and the aggressive movements by broadband wireless industry, independent telcos, municipalities, utilities, and others rushing to fill the broadband void in underserved areas, will the remaining market for satellite access providers be big enough for all players to share? 7 The Market The market for satellite services will be in transition as new satellite network technology platforms emerge. Satellite networks fill a core niche, enabling data transmission to central locations, remote access, secure VPN connectivity, IP multicast video, and a range of multimedia applications for multilocation corporate enterprises, government and other users. TheVSATmarkethasacorebaseofusers,includingtheretailindustry, financial companies, the lodging/hospitality industry, natural resource exploration, automotive, manufacturing, transportation, the military, and federal, state and local governments. The satellite industry is now facing serious competition from higherbandwidth terrestrial options, including fiber and broadband wireless. Many enterprises are dismantling or downscaling their satellite networks because of bandwidth constraints and other competitive issues. In some markets of the world, next-generation Ka-band services are already launched or starting to emerge, meeting the higher bandwith requirements of a wide spectrum of end users. Traditional satellite network operators (Telesat Canada, Eutelsat and SES Global) are launching both hybrid Kuand Ka-band platforms that will enable them to transition into a market for more-robust, higher-bandwidth networks. Providers to the consumer market must avoid the pitfalls of present satellite broadband offerings, as the residential/consumer market is highly price-sensitive and can be volatile. There are two emerging approaches to the market: hybrid satellite networks that mix multiple frequencies and thus allow a range of services, and new platforms that are totally Ka-band. The future success of next-generation satellite networks requires serving a mix of consumer, enterprise, SMB, and government/military customers, the offering of bundled services, and flexible, on-demand bandwidth options. Both will coexist side by side as the move to next-generation platforms will likely be evolutionary. Service providers would do well to consider the cable model with anchor tenants or core service offerings and a stable customer base and grow customers and revenue by the layering on of new, multiple higher-bandwidth services over multipurpose satellite platforms. Key Issue Which mobile technologies will significantly affect the industry, and what is their likely adoption rate? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003

8 Next-Generation Satellite Technology to Become Viable Market This document has been published to the following Marketplace codes: TELC-WW-DP-0564 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 116188