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EchoStar Buys Stake in Gilat's Internet Venture
By
Richard McCaffery (TMF Gibson)
April 10, 2000
Satellite television company EchoStar Communications (Nasdaq: DISH) said today that it's investing $50 million for a 17.6% stake in Gilat-to-Home, a joint venture that will offer consumers two-way broadband Internet service starting later this year.
EchoStar's partners in the venture are Isreal-based Gilat Satellite Networks (Nasdaq: GILTF) and Microsoft (Nasdaq: MSFT). Under terms of the deal, EchoStar will distribute the service via its satellite television network. Gilat will provide the Internet connection services, and Microsoft, which is also investing $50 million in the new venture, will provide Web portal software as well as its MSN Internet brand. Trials of the service, which is the first two-way consumer satellite broadband service, have already begun.
A little explanation would probably help right about now. Current satellite Internet offerings aren't two-way. This means the signal travels straight from the satellite to a rooftop antenna on the downlink, then back through terrestrial wires for the uplink. This slows the process down. Therefore, the two-way nature of the Gilat system, which doesn't use terrestrial lines on the uplink, speeds up the service and provides two other advantages -- the link is always on and consumers don't need a second phone line to get it.
So how fast is the system? Well, information varies. Gilat says it's up to 10 times faster than creaky old dial-up modems. That's not hard to believe, but it's trickier comparing it to cable modem or DSL lines.
A Morgan Stanley analyst figures the Gilat system will offer downlink speeds around 400 Kbps and uplink speeds of 128 Kbps. This compares to downlink speeds of about 2,000 Kbps and uplink speeds of 300 Kbps for cable modems, according to a recent Merrill Lynch report. The Merrill report, however, estimates the Gilat system will perform better -- at downlink speeds from 1,000-2,000 Kbps, and uplink speeds of 128-300 Kbps. Who knows, though it's clear terrestrial has the edge. (For handy definitions of Kbps, bandwidth, and other nasty technical terms, check out whatis.com).
Investors need to get a feel for themselves what role satellites will play in delivering broadband services. It's not an easy question to answer, especially in light of what the cellular phone industry did to satellite telephone companies. Just ask Iridium. Is there a place for broadband Internet delivery services?
A handful of high-profile companies certainly think so. Gilat is betting its future on broadband Internet services. EchoStar is launching at least one additional satellite for broadband delivery. Other projects include:
- Satellite manufacturing and services company Loral (NYSE: LOR) plans to build and launch a constellation of broadband satellites called Cyberstar.
- Aerospace defense company Lockheed Martin (NYSE: LMT) is building a system called Astrolink.
- Hughes Electronics (NYSE: GMH) plans to operate Spaceway.
- PanAmSat (NYSE: SPOT), majority owned by Hughes, just unveiled its Internet strategy and already operates the world's largest fleet of commercial satellites.
- Cellular telephone billionaire Craig McCaw still plans to build Teledesic, his Internet-in-the-sky venture.
Can all these companies be wrong about the potential?
Absolutely. Technology, financing, and marketing issues won't be easy to overcome. Satellites cost about $250 million to build, launch, and insure, often a lot more. Spectrum is expensive, rockets blow up, satellites malfunction, and broadband terrestrial systems are making rapid progress. The risks of investing in satellite companies are big.
Still, where there isn't any terrestrial infrastructure, satellites are the way to go. One spacecraft in the right orbital slot can offer coverage to the entire U.S. -- including regions DSL and cable modems will never reach. There's room for a few players to succeed, but I believe many of the planned systems will fail.
Investors, therefore, should focus their research on the companies experienced at operating systems -- Hughes, EchoStar, Gilat, and perhaps Loral. Pay close attention to the Gilat-to-Home venture this year to see if the system is rolled out smoothly and if the offering generates subscriber interest.
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