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Company betting big on satellite broadband with upcoming launch

McClatchy-Tribune Information Services

Feb. 20, 2017


SAN DIEGO ó About eight years ago, ViaSat Chief Executive Mark Dankberg bet the company he co-founded on satellite broadband, eventually spending $1 billion to transform a technology considered barely better than dial-up into a service that smoothly streams YouTube video.

At the time, the space industry didnít believe ViaSat could build a satellite with more capacity than all the other internet satellites in orbit combined.

And even if it did, there wasnít enough demand to justify the cost of the satellite and distribution network needed to sell satellite internet service, which, while better, still fell short of cable and many telephone company alternatives.

Today ViaSat-1, which launched in 2011, is full with 700,000 internet subscribers. In addition, the satellite powers in-flight Wi-Fi on more than 500 commercial aircraft from JetBlue, American Airlines, United Airlines and Virgin America, delivering video streaming speeds to each seat. ViaSat-1 also provides in-flight Wi-Fi to Air Force One and other government VIP aircraft.

The uptake for ViaSat-1 affirmed Dankbergís belief in satellite broadband. So the company has doubled down, and then some. It plans to launch ViaSat-2 in late March or early April. The satellite will blast off from French Guiana on an Ariane 5 rocket.

At around 300 gigabits per second capacity, the new satellite has about twice the bandwidth of ViaSat-1. The added horsepower will enable faster speeds and bulked up monthly data allowances so subscribers can watch more online video.

"There are more and more over the top services ó DirecTV Now, HBO Now," said Dankberg in an interview. "There is just an enormous demand for bandwidth."

The new satellite also will expand coverage beyond North America and into Mexico, Central America and the Caribbean, parts of South America and over the Atlantic Ocean.

ViaSat-2 represents the latest test to Dankbergís strategy of engineering satellites to maximize speed and economical bandwidth in hopes of mitigating the Achilles heel of satellite internet ó costly ground equipment and installation, data usage caps, and latency.

"We are not perfect but we are markedly better than (satellite internet) used to be," said Dankberg. "With ViaSat-2, we will be a lot better than ViaSat-1."

If ViaSat gets it right, the market for satellite internet might expand beyond its traditional niche of farms and mountain cabins.

"The better we can make our service, the bigger our market," said Dankberg. "But that doesnít mean we are going after people who have Google Fiber. What we are trying to do is go after a bigger segment of people who donít have those speeds."

ViaSat-2 is the second act in ViaSatís plan to dramatically expand bandwidth in orbit. The third act is being pieced together at a company-owned facility in Arizona, where workers are assembling payloads for ViaSat-3 ó a three satellite constellation slated to begin launching in 2019.

Each ViaSat-3 satellite will have 1 terabit-per-second maximum capacity ó more than triple that of ViaSat-2. When all are in orbit, the company will have near global coverage. Boeing will build the satellites to carry ViaSat-3ís broadband payloads into space.

According to ViaSat, the first two ViaSat-3 satellites will have twice the combined capacity of the 400 communications satellites in orbit today

Meanwhile, the all-in cost of building, launching and insuring each ViaSat-3 satellite is expected to be the same as the all-in cost of ViaSat-2, or around $625 million.

In theory, that should allow ViaSat to deliver more bandwidth to customers at good prices.

"I think the pace of innovation has been faster in satellite than in terrestrial communications," said Michael Crawford, an analyst with B. Riley & Co. ViaSat "has been very disruptive."

Some analysts are skeptical of ViaSatís broadband ambitions, however. Wilton Fry of RBC Capital Markets wrote in a research report that the company initially believed it could pack 1.5 million subscribers on ViaSat-1. It ended up filling the satellite with just 700,000 subscribers ó perhaps signaling that the company had to serve up more bandwidth than expected to subscribers to counter competitive pressure from non-satellite alternatives.

Dankberg said the company is "far more concerned with the financial results than the number of customers we have. One of the things that has worked well for us is we have given more bandwidth to fewer people."

ViaSat faces direct competition from Hughes, owned by EchoStar. Hughes launched its second high capacity Jupiter-2 satellite in December, with an estimated throughput of roughly 200 gigabits per second. It will be delivering internet service months before ViaSat-2 is up and running.

Longer term, skeptics contend cable and fiber optic lines eventually will branch out beyond cities and into satelliteís rural stronghold.

In addition, the roll-out of 5G cellular will beef up download speeds and capacity on terrestrial wireless networks, providing an alternative to satellite.

And there are new competitors such as OneWeb, which in December got a $1 billion investment from Japanís SoftBank. It proposes a constellation of 900 small, inexpensive low-orbit satellites globally with 10 terabits per second total capacity. They would offer low latency compared with bigger, high orbit satellites such as ViaSatís. San Diegoís Qualcomm is an investor in OneWeb.

"ViaSat faces a triple whammy over the next 15-plus years, the lifetime of a satellite: Fixed-line coverage build-out, mobile technology (7G by 2030?) and low earth orbit satellite systems designed to bring global broadband coverage," said Fry, the RBC analyst.

Dankberg has doubts about the business models, timing and capabilities of some rival solutions. Even so, he thinks there is plenty of demand for bandwidth to go around ó not only from households but also from airlines for in-flight Wi-Fi, high-speed connectivity for cruise ships at sea, oil and gas exploration data streaming, border surveillance video monitoring and other government demands.

"In 2020 if things go well, weíll have three or four terabits up there," he said. "The world market for bandwidth is probably going to be over 1,000 terabits."

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At the cavernous Boeing Commercial Satellite Systems factory in El Segundo, Calif., everything seems super-sized: Ceilings seven stories from the floor, a 100-ton door guarding a thermal chamber that mimics the extreme temperatures in space, a pool size vibration table to simulate the violent shaking during launch.

Even here, ViaSat-2ís size stands out compared with the other satellites under construction. It weighs as much as 4.5 Toyota Camrys. When fully deployed, its solar panels equal the wingspan of a 767 airliner, generating power equivalent to 300 60-watt light bulbs. It contains 23 miles of electrical wiring.

ViaSat forbid pictures of the satellite. Four years ago, the company filed a lawsuit against the builder of ViaSat-1, Space Systems Loral of Palo Alto, Calif. It charged Loral with copying ViaSatís patented payload designs and giving them to arch rival Hughes.

In 2014, a San Diego jury found in ViaSatís favor and ordered Loral to pay $283 million in damages. After a federal judge called for a new trial on the damage award, the companies settled for $100 million.

ViaSatís current residential internet plans start with 12 megabits per second download speeds for $60 a month.

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For residential subscribers, there are usually data usage caps for satellite internet hovering in the 10 to 30 gigabits per month range, which can be gobbled up quickly for subscribers who stream Netflix regularly.

Still, satellite internet is winning market share in rural areas, where speeds for wire line DSL can top out at 2 megabits per second, said Llluc Palerm, senior analysts with Northern Sky Research.

About 14 million U.S. households are outside the cable and DSL footprint or have slow DSL service, according to industry estimates.

ViaSat and Hughes combined have only about 1.7 million subscribers on their current ViaSat-1 and Jupiter-1 satellites.

"The market penetration is still tiny compared with the total addressable market," said Palerm. "ViaSat-2 and Jupiter-2 might be able to support 1 million extra subscribers each. So even after these new launches, there is still more market to cover."

ViaSat hasnít disclosed details of the internet plans it will offer with ViaSat-2. But analysts speculate they could start at 25 megabits per second. As for monthly data caps, Dankberg said the company hopes to have enough bandwidth so usage limits wonít be an problem for most subscribers.

"We would like to make it where 85 percent or 90 percent of people would never go above them," he said.

One way ViaSat aims to ease the data-cap problem is with flexibility. It has designed ViaSat-2 so some of its bandwidth can be directed where there is peak demand, which usually occurs between 7 p.m. to 10 p.m.

"The bandwidth in the evening rolls across the country from East Coast to West Coast as people watch Netflix," said Crawford, the B. Riley & Co. analyst. "You can move some beams around to where there is demand."

ViaSat is more than an internet service provider. Its Satellite Services division accounts for just 40 percent of $1.48 billion trailing 12 months revenue as of Sept. 30.

The company also has large government and defense communications hardware and services arm, which provides 43 percent of revenue. And it designs airborne antennas and ground equipment for itself and other commercial satellite operators globally.

Satellite internet and defense, however, have been the main drivers of the companyís 52 percent increase in revenue since ViaSat-1 entered orbit in the fall of 2011.

There is a pent up appetite in the U.S. for satellite internet, since existing satellites have been full for more than a year, said Tim Farrar of Telecom Media and Finance Associates.

"The purpose of the ViaSat-2 launch is to get back on track where they can add customers and also improve the service to keep pace with the improvements in terrestrial technology," he said.

With the upcoming ViaSat-3 launches, however, itís less clear if there is a market globally, said Farrar.

Some 470 million people worldwide donít have good internet access, according to industry estimates. But many of them canít afford to pay hundreds of dollars for ground equipment and installation, plus a $50-$60 per month subscription fee.

"Maybe they only have $20 a month," said Farrar. "So a lot of things ViaSat has done in the U.S., it is really unclear whether they can take those lessons and apply them directly to the broadband market in other parts of the world."

The first two ViaSat-3 satellites ó aimed at the Americas and Europe/Middle East/Africa ó are slated to launch six months apart starting in 2019. These satellites will be able to deliver 100 megabit per second residential internet service ó enough to power 4K video streaming.

The third satellite is targeting Asia with an undetermined launch date.

ViaSat-3 satellites are expected to have a lower cost per bit than ViaSat-2. That could benefit ViaSat as it figures out how to serve global markets where affordability is key, according to analysts.

One example of a potential business model is creating satellite Wi-Fi hotspots in villages. Residents could tap into the hotspots using their smartphones, prepaying for data use in a way similar to prepaid cellular plans, said Dankberg.

"You can see in the poorest towns in Mexico, the kids have smartphones," he said. "They want to do the things that other kids do. The underlying demand is universal. The way you package and fulfill that demand will be different than in other markets. But to me those are more tactical issues than fundamental issues.

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