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INSIGHT - NSR — Avoiding A Repeat Of History
by Patrick French

Early this year, Eutelsat made a critical announcement that was somewhat overshadowed by its news from a week earlier that the Company had ordered KA-SAT, a next generation spot beam Ka-band satellite for its Tooway satellite broadband service. The January 15th press release detailed Eutelsat’s new agreement with Swisscom, which had recently won a tender from the Swiss Ministry for Telecommunications to provide universal broadband services to all residential Swiss customers, regardless of where they live. Following a detailed assessment of different technologies to provide broadband services to households beyond the reach of terrestrial broadband services, Swisscom settled on the Tooway satellite broadband product as the best service to meet its needs.

The same day, SES Astra reported that it had signed new French and Italian distributors for its ASTRA2Connect satellite broadband product. In the same press release, SES Astra stated that it had commitments as of that date for more than 200,000 consumer terminals to be installed in three to five years, which equated to future revenues amounting to 165 million euros. This was followed by a key contract with Deutsche Telekom announced in early April and other distribution agreements for Belgium, the Netherlands, and again France, that have all certainly added further to the consumer terminal and revenue commitments for the ASTRA2Connect product.

At last report, ASTRA2Connect was available in 10 European countries from 11 different distributors, while 12 distributors were making Eutelsat’s Tooway service (Ka-band and Ku-band versions) available in 14 European countries. In NSR’s view, establishing strong distribution channels is essential to the development of the consumer-class single site satellite broadband market. However, this is a real challenge, given the fragmented nature of the European market and
difficulties in obtaining economies of scale for individual distributors.

There are parallels to the U.S. single site satellite broadband market where there are a few large distributors, but most of the distributors are small. In the U.S market there are literally hundreds of individual distributors and resellers compared to less than 30 in all of Europe. Distributors in the U.S. market can benefit from nationwide and regional marketing campaigns conducted by the major satellite broadband service providers. Conducting pan-European marketing campaigns is much more difficult, and expensive, due to language differences and the limited (typically national) reach of many of the traditional media channels such as television, radio, and print advertising.

Still, NSR considers the agreements with Deutsche Telekom and Swisscom as critical to the success of the European satellite broadband market. While most of the current distributors of ASTRA2Connect and Tooway are small, tier 2 or tier 3 ISPs, Deutsche Telekom and Swisscom are major PTTs and the largest ISPs in their respective countries. For other major tier 1 ISPs in Europe, the decision by DT and Swisscom to sign distribution agreements for consumer-class single site satellite broadband services adds substantial credibility to the respective satellite broadband product lines.

In particular, Swisscom’s careful evaluation of several technical options to meet its universal service agreement and their decision to settle on satellite as the best option paints satellite broadband in a particularly positive light. In Germany, SES Astra signed on DT despite already having three other distribution agreements in that country. While NSR would guess that the initial reaction of the original German ASTRA2Connect distributors to the Deutsche Telekom announcement was chagrin at best, the simple fact is that DT’s active participation in the satellite broadband market in Germany will raise awareness of the satellite service and probably aid all distribution players in the end.

A short history lesson on the single site satellite broadband market must be undertaken in order to sound a note of caution. In 2002, both Tiscali and BT made major waves in the satellite industry when they introduced two-way satellite broadband Internet access services targeted at the consumer market. The companies already had one-way satellite offers in circulation, and their two-way products were heralded by many inside and outside of the satellite sector as a major turning point.

Unfortunately, an “anomaly” occurred during the launch of these services and the BT and Tiscali two-way single site satellite broadband services never made it into orbit. A major issue at the time was the price of the two-way satellite broadband offers. For example, the entry level BT product was priced at 59.99 pounds excluding VAT per month for a 500/150 Kbps service, and equipment and installation was another 899 pounds, excluding VAT. Various government subsidies were available to help underwrite the cost of the BT equipment, but still the two-way satellite service was priced well above aDSL services at a time when a 500 Kbps “Broadband Basic” aDSL package could be obtained for 17.99 pounds.

More insidious and detrimental to two-way satellite broadband services was the fact that companies such as BT and Tiscali never truly embraced the product. In hindsight, it appears BT and Tiscali agreed to offer two-way satellite services in order to tell consumers, and as importantly regulators, that “yes, we can offer broadband to anyone anywhere.”

In reality, anyone trying to sign up for the satellite broadband services faced major hurdles in terms of wait times for the equipment and were often encouraged to be put on waiting lists for aDSL services. In effect, the companies were delaying satellite installs in many areas in order to pool together enough potential subscribers so as to justify further rollouts of their DSL services, which at the end of the day were much more lucrative for the service provider than the satellite product. The net result was that two-way satellite services fell flat. By 2005, neither BT nor Tiscali were offering satellite products.

In retrospect, it is easy for the satellite industry today to dismiss this period as part of the “learning curve” and to claim that the latest generation of single site satellite broadband services are now priced (both for plans and equipment) at a level that is much more acceptable for consumer services. Further, it will be claimed, and not without justification, that major European ISPs have finally come to realize that aDSL is not the “be-all” and “end-all” of broadband services. Satellite, as well as terrestrial wireless, each have a proper niche to fill in the overall broadband market.

The last statement is especially true as governments have started to view broadband services as an essential domestic utility, just like electricity or telephone services, and have begun to oblige service providers to offer competitively priced broadband services to every household, no matter where they are located.

There are lessons to be learned from the early failed efforts to introduce satellite broadband services into Europe. Most important in NSR’s view is ensuring that the cost benefits for the distributors of offering a satellite broadband service are, and remain in line with, their overall business objectives (i.e., it has to be a win for the satellite operator and a win for the distributor). This is especially important when looking toward the future and ensuring satellite remains the most profitable way for an ISP to deliver services to rural clients.

Today’s satellite broadband offers appear to meet these criteria, but as Internet usages changes and the average Internet user expects to obtain ever more content from the Internet, satellite broadband services

must be able to keep ahead of the curve. These services must continue to be profitable for distributors, even when average monthly downloading of content from the Internet triples or quadruples over the coming four to five years. This clearly underscores the decision to move to spot-beam satellites that dramatically increase potential throughput at price points well below what can be obtained on today’s typical television broadcasting satellite.

The risk remains that the crossover point where satellite becomes the best solution for serving rural populations will be difficult to find and, just as importantly, a moving target in the future. The industry has its work cut out and will constantly need to demonstrate to distributors its relevance as a product today as well as its relevance as a product for many years to come. Otherwise, major tier 1 distributors will do just as they did in the past — gravitate quickly away from two-way satellite broadband services, should they fail to meet internal rate of return objectives.

NSR remains positive that the European two-way satellite broadband players are on the right track, even if the main players might be taking somewhat different approaches. There is more than one road that leads to Rome, after all. Should the challenges that remain in the future be successfully overcome, NSR has conservatively predicted in its recent Broadband Satellite Markets 7th Edition study that service and customer premises equipment (CPE) revenues could reach nearly US$800 in Europe by the end of 2017. Success, after all, is as much hard work as it is remembering to learn your history lessons.

Article Information was extracted from NSR’s Broadband Satellite Markets, 7th Edition, report

About the author
Patrick French joined Northern Sky Research in September 2003 and has since authored numerous studies, the most recent being the Global Assessment of Satellite Demand, 2nd. Edition and Broadband Satellite Markets 5th. Edition. He has sought to expand NSR’s coverage of the satellite industry into areas such commercial satellite supply and demand modeling, video distribution and contribution, DTH, telephony and narrowband VSAT networks. In addition, he has undertaken client specific projects in diverse satellite applications and intends to broaden NSR coverage of the European satellite industry.

From 1990 to 1999, Patrick was a staff member of the International Space University (ISU), first in Cambridge, Massachusetts and then six years at ISU’s Central Campus located in Strasbourg, France. He held numerous positions within ISU organizing conferences, short courses, and workshops. In parallel, he was responsible for managing the development of the new ISU Central Campus facilities that were completed in mid-2003. Following his work at ISU, Patrick joined Frost & Sullivan, where he rapidly advanced to the position of Strategic Analyst for the Satellite Communications group. While at Frost & Sullivan, he authored eight studies, led numerous consulting projects, and tracked other diverse markets such as satellite television, launch services, emerging satellite applications and content delivery networks.

Patrick French is based in Strasbourg, France. He holds a Bachelors of Science in Aerospace Engineering from Boston University and attended the 1999 ISU Summer Session in Nakhon Ratchasima, Thailand. He is fluent in French.