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STREET WISE By Amey Stone May 20, 1999


Is Satellite Finally Set to Strike Digital Gold?
The industry's TV business may be ready to explode. But the AOL-Hughes deal hasn't convinced everyone that satellite's rich broadband future is near

Telephone, cable, and media companies have exchanged millions of dollars in high-profile deals in recent months. They've been in a mad scramble to gain a piece of the high-speed network from which consumers will one day access Internet, phone, and TV services. Until recently, satellite companies, despite their potential to send data at superfast speeds, were largely left out of this digital gold rush. But on May 11, America Online Inc. (AOL) announced a partnership with Hughes Electronics Corp.'s (GMH) DirecTV satellite broadcast unit (BW--May 14, 1999, "America Online and on the Air"). The deal was a clear sign that AOL thinks broadband access can eventually be beamed into homes via satellite.

So where have satellite companies been during the broadband stampede? Mainly trying to come up with a product that works for consumers. Satellites are great at sending data, but without prohibitively expensive equipment, consumers can't send data back. Hughes's DirecPC, the sister to DirecTV, is really the only offering for consumers currently, but it requires subscribers to use telephone wires as the return path, says Zia Wigder, an analyst with Jupiter Communications. With high startup costs, this cumbersome setup has only attracted about 80,000 subscribers worldwide, she says. Meantime, companies such as Teledesic (funded by Bill Gates and Craig McCaw) are working on billion-dollar broadband schemes that rely on satellites that orbit much closer to the earth than traditional geostationary satellites 22,000 miles up.

COLOSSAL DISAPPOINTMENT. Satellite companies have also been struggling with a wave of bad publicity. A series of failed satellite launches in recent years has raised doubts about the underlying technology and hammered some stocks, such as Loral Space & Communications (LOR). And Iridium's (IRID) global satellite-based wireless phone system has been a colossal disappointment. The stock has fallen from higher than $70 a year ago to around $9 recently, and the company is now facing a cash crunch. Most recently, PanAmSat (SPOT), which provides commercial satellite services, warned on May 18 that 1999 earnings would be significantly lower than expected because of delays in launching new satellites.

Satellite TV -- which so far has nothing to do with broadband Internet access -- has been one bright spot for investors. EchoStar Communications (DISH), the purest play on interactive TV, has nearly quadrupled in the past six months. Hughes, a unit of General Motors that trades separately as a tracking stock, has gained 40% in the past six months largely thanks to its DirecTV division.

 

Will satellite broadband be viable in the next few years or only "deep into the next century"?
 

Despite the potential for broadband to be delivered via satellite, some analysts advise investors to stick to the sidelines. "I would be hesitant as an investor to step up to the plate and make a big investment, especially at these price levels," says Robert Friedman, an analyst with Standard & Poors equity research group. "The satellite industry is very capital-intensive and prone to malfunctions and failed launches," he says. Plus, "cable is a very, very formidable competitor." Broadband via satellite won't be viable until "deep into the next century," says Nicholas E. Moore, a technology analyst at investment management firm Jurika & Voyles. "It is outside a traditional investment time horizon to even think about it."

Not so fast, says C.E. Unterberg Towbin analyst William B.F. Kidd. Satellite is still the only way to bring broadband to consumers that doesn't require laying cable or phone lines directly to the home. That leaves a large market in rural parts of the U.S. as well as vast reaches of the less developed world. "The bottom line is that there are a lot of situations where satellites are absolutely the best communications infrastructure," says Kidd. He expects total revenues to the commercial satellite industry to grow from about $55 billion today to $140 billion by 2005.

INVESTING IN GEAR MAKERS. And those numbers include huge growth in satellite broadband. He thinks satellite broadband revenues (virtually all from corporate customers) will grow from $140 million currently to $2.4 billion by 2003. Satellite companies, including Loral and Hughes, are working on new systems to bring high-speed two-way broadband access to the corporate market. Kidd recommends that investors play this theme by buying companies that make the equipment, such as VSATs (very small aperture terminals), that will be part of this strategy. These are the expensive ground stations that communicate with satellites in two-way broadband systems. "People don't grasp that there is already big VSAT business out there that has been two-way for a long time," says Kidd. Hughes Network Systems, a division of Hughes Electronics, is the largest VSAT manufacturer. Gilat Satellite Networks (GILTF), No. 2, is profitable and much less risky than investing in the services side, says Kidd.

"I try to avoid investing in companies that are having to spend all the money and pay attention to who they are spending it on," says Kevin Landis, a portfolio manager at Firsthand Funds. In this vein, he owns TriQuint Semiconductor (TQNT), which makes high-performance gallium arsenide chips, which go into satellites as well as wireless communications and telecommunications systems.

 

An end to curbs on the broadcast of local channels should juice up pure satellite-TV plays
 

Kidd has a Buy rating on Hughes, mainly as a play on satellite television. "We feel that satellite television is really poised to explode," he says. That's mainly because companies will soon be able to start broadcasting local channels. Congress is expected to pass a bill this summer that will lift local programming restrictions. Broadband Internet access in the future is also part of that story. "It does give you the broadband upside that some retail investors are curious about," he says of Hughes. EchoStar has performed better than Hughes because it is a pure play on satellite television. It could potentially deliver more channels than Hughes's DirecTV and has shown impressive subscriber growth in the past two quarters, but is much higher priced, says Kidd.

Moore is staying away from Hughes at current price levels (the stock closed on May 19 at 58 7/8). He says he considered buying Hughes as a play on satellite TV, but the stock ran up before he got in. Meantime, he's keeping his eye on Hughes's broadband potential. Investors may be overestimating cable companies' ability to roll out broadband, he says. "If anything the capabilities of DirecTV are underestimated."

Amey Stone is an associate editor of Business Week Online


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Amey Stone covers the markets and investing for Business Week Online




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