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The VSAT Report

2003

VSAT INDUSTRY STATUS REPORT TO CLIENTS

Version 2.3

PROFILE & SUMMARY

HUGHES NETWORK SYSTEMS

This report has been prepared subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the prior written consent of Communication Systems Limited. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by

any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Communication Systems Limited.

Permission is granted to utilise the information in this report for the purposes of

analyst research reports on Hughes Network Systems and the VSAT Industry with the express permission of Hughes Network Systems. This copy is only intended to

be used by the company specified by Hughes Network Systems.

For more information contact: Simon Bull, Senior Consultant

COMSYS (Communication Systems Limited) 42 Holywell Hill, St Albans, Herts, AL1 1BX, England

Telephone: +44-1727-832288 Facsimile: +44-1727-810194

Internet: [email protected] Web: www.comsys.co.uk

© Communication Systems Limited, 2004

http://www.comsys.co.uk

comsys vsat report - 2003

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“Hughes’ presence casts a shadow over almost every player in the market .. Its

dominance of the enterprise VSAT industry is remarkable in the fact that the company has been able to sustain its lead for over fifteen years”

“Hughes Network Systems retains its position as the company to beat and the

company that a competitor ignores at its peril”

“Spaceway represents a step function increase over current generation VSAT services .. it is quite possible for it to achieve a virtual monopoly on the VSAT

enterprise networking business in the US”

“HNS has managed to walk the tightrope between innovation and proven reliability which service providers in the enterprise business require to the

exclusion of almost anything else.”

“Hughes is the only company which has been able to demonstrate sustained leadership in technology, market share and financial results in the VSAT

business.”

“The company continues to exhibit its trademark attributes – aggressive pricing, strong marketing and sales, continuous innovation in product development with strong system, hardware and software engineering – and this makes Hughes both impressive to the customer and scary to the competitors.”

“For the potential purchaser, the fact that buying Hughes is rarely a mistake

counts for a great deal.”


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table of contents 1. HNS – The Company.................................................................................. 1

1.1 Performance in 2001/2002............................................................................................ 1 1.2 Company Overview ...................................................................................................... 4

2. VSAT Industry Backgrounder .................................................................. 8 2.1 The Beginnings ............................................................................................................. 8

2.1.1 Regulation ............................................................................................................ 10 2.1.2 Industry Consolidation ......................................................................................... 11 2.1.3 Shared Services .................................................................................................... 12

2.2 Recent Events.............................................................................................................. 13 2.2.1 TDMA System Developments ............................................................................. 14 2.2.2 DVB-RCS, DOCSIS and Broadband Access....................................................... 15

2.3 Conclusion .................................................................................................................. 16

3. VSAT Market Shares ............................................................................... 18 3.1 Hardware..................................................................................................................... 18

3.1.1 Star Data TDMA .................................................................................................. 18 3.2 Services ....................................................................................................................... 24

3.2.1 North America...................................................................................................... 24 3.2.2 International ......................................................................................................... 27

4. VSAT Market Analysis ............................................................................ 33

5. HNS – Hardware....................................................................................... 38 5.1 Star Data Systems - PES & DIRECWAY .................................................................... 38

5.1.1 ISBN/PES............................................................................................................. 38 5.1.2 DIRECWAY DW2000......................................................................................... 42 5.1.3 DIRECWAY DW4000/DW6000 ......................................................................... 44

5.2 Mesh/Star Telephony - TES-Quantum/Quantum-Direct ............................................ 49 5.2.1 Performance ......................................................................................................... 49 5.2.2 Mesh Product Analysis ........................................................................................ 51

6. HNS – VSAT Service Provision............................................................... 58 6.1 Hughes Network Systems - North American Services ............................................... 58

6.1.1 Performance ......................................................................................................... 58 6.1.2 Enterprise Services............................................................................................... 59 6.1.3 DIRECWAY Consumer Services ........................................................................ 67 6.1.4 Spaceway.............................................................................................................. 71

6.2 Hughes Network Systems Europe - European Services ............................................. 75 6.2.1 Performance ......................................................................................................... 75 6.2.2 Additional Information......................................................................................... 76

6.3 Hughes Escorts - Indian Services ............................................................................... 82 6.3.1 Performance ......................................................................................................... 82 6.3.2 Additional Information......................................................................................... 83

6.4 Hughes do Brasil - Latin American Services .............................................................. 89 6.5 Shanghai Hughes Network Systems - China Services................................................ 91


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A1. Appendixes.............................................................................................. 93 A1.1. HNS Customer List ................................................................................................. 93

A1.1.1. Major Interactive Star VSAT Customers.......................................................... 93 A1.1.2. Major Interactive Star Shared Hub VSAT Customers...................................... 95 A1.1.3. Major Mesh DAMA VSAT Customers ............................................................ 97 A1.1.4. RTS VSAT Services ......................................................................................... 98

A2. Contact & Organisational Information ....................................................................... 99 A2.1.1 Investor Relations ............................................................................................. 99 A2.1.2 Press Relations.................................................................................................. 99 A2.1.3 Hardware Sales Contacts ................................................................................ 100 A2.1.4 Service Sales Contacts.................................................................................... 100

list of figures Figure 1 - Operator Growth 1988-2002 ................................................................................... 12 Figure 2 - Interactive VSAT Systems - Vendor Historical Enterprise Shipped Share ............ 19 Figure 3 - Major Manufacturer World Ordered Terminal Market Share by Year ................... 21 Figure 4 - Manufacturer Unit Shipments on Sales, World Market Share 2001 and 2002 ....... 22 Figure 5 - Shipped Consumer VSAT Terminals by Vendor - Historical................................. 23 Figure 6 - Consumer VSAT Shipments and Market Share by Vendor by Year ...................... 23 Figure 7 - N American Operator Service Market Share .......................................................... 25 Figure 8 - US Consumer VSAT Growth (Thousands) ............................................................. 26 Figure 9 - US Consumer VSAT Market Share ........................................................................ 26 Figure 10 - Booked Terminals on US Networks >500 Sites by Year ...................................... 27 Figure 11 - Indian TDMA Service Market Shares................................................................... 29 Figure 12 - Indian DAMA Service Market Shares .................................................................. 30 Figure 13 - European Shared Hub Operator Enterprise Share (Broadband SME Excluded) .. 31 Figure 14 - Shared Hub Market Manufacturer Shares ............................................................. 32 Figure 15 - Annual TDMA Enterprise Orders & Shipments 1985-2002................................. 33 Figure 16 - Cumulative Annual Growth for TDMA Orders 1985-2002.................................. 33 Figure 17 - TDMA Annual Enterprise Sales by Region, 1985-2002....................................... 34 Figure 18 - Interactive VSAT Sales by Industry Sector and Region ....................................... 35 Figure 19 - TDMA VSAT Sales by Industry Sector and Manufacturer .................................. 36

list of tables

Table 1 - Shipped TDM/TDMA VSAT Share by Manufacturer - Historical Enterprise......... 18 Table 2 - Shipped TDM/TDMA VSAT Shares by Manufacturer - Historical Consumer ....... 20 Table 3 - Interactive Terminals by Manufacturer - Historical ................................................. 20 Table 4 - Major Manufacturer World Market Share by Year - Orders with Renewals ........... 22 Table 5 - North American Shared Hub Operator Market Shares............................................. 24 Table 6 - Indian TDMA and DAMA Operator Market Shares ................................................ 29 Table 7 - Regional European Shared Hub Operator Market Shares ........................................ 30 Table 8 - SME Broadband Access Service, European Operator Market Shares 1Q/03 .......... 31 Table 9 - TDMA Manufacturer Shares by Industry Sector...................................................... 36

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1. HNS – The Company

1.1 Performance in 2001/2002 Hughes’ presence casts a shadow over almost every player in the market. Its dominance of the enterprise VSAT industry is remarkable in the fact that the company has been able to sustain its lead for over fifteen years and that it has rolled with the punches and constantly responded with new developments which has kept it at the forefront of an intensely competitive market. Customers purchase HNS VSAT systems because it is the market leader, but also because there is a confidence that the company will always overcome any problems and the system will work reliably. HNS has managed to walk the tightrope between innovation and proven reliability which service providers in the enterprise business require to the exclusion of almost anything else. Whilst others can criticise - in some instances justifiably, because the company is not perfect - they have to acknowledge that the proof is in the execution. Hughes is the only company which has been able to demonstrate sustained leadership in technology, market share and financial results in the VSAT business. Whereas GE, NEC, AT&T, GTE, Contel, Qualcomm and Scientific-Atlanta have all fallen by the wayside, HNS has powered on through both their successors and newcomers. This undoubtedly gives its customers a confidence which cannot be matched by others.

However, the challenge never abates and competition is growing. Hughes has once again managed to gain an early lead in the satellite broadband Internet access market with its DIRECWAY system and several successful service ventures. This market is one which feeds on volume and, once again, Hughes stands some way out in front of its current rivals. The standards-based DVB-RCS system vendors have only managed to peck at the company’s lead

Con50.57%

Ent23.55%

2002 Shipped TDMA Market Share Enterprise & Consumer

74.12%

53.48%

2002 Shipped TDMA Market Share Enterprise


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so far, but other companies, such as ViaSat have begun to emerge with strong offers. HNS is in the process of reinventing itself once again and it must now balance its resources between its current Internet access and enterprise VSAT business and what will become possibly its greatest success - Spaceway. 2002 saw Hughes re-affirm its position in the pure enterprise market and establish an early lead in the consumer business. The company recorded almost 60 per cent of all shipments to enterprise accounts and over three quarters of all shipments in the combined enterprise and consumer VSAT segments. Over the past two years it has not only added several important enterprise customers, such as Wendy’s Restaurants, Rite Aid and Yum!, it has renewed and extended contracts with major existing accounts including Exxon Mobil, Best Western and Chrysler. The company has managed to make the most of its conservative stance during the late 1990s when it walked away from shaky deals, which left it with a stable business whilst others stumbled in the “dot-bomb” environment. In addition, it has inexorably moved its business model from hardware sales to an integrated service, managing to enter markets at the right time and then pursuing its strategy aggressively and establishing a leading position in its chosen markets. Whilst HNS has managed to exploit the financial weaknesses of its primary competitors over the past two years, it has had to suffer through its own diversions as its parent’s DIRECTV business, to which it is tied, has been hawked around the market by General Motors.

Hughes Network Systems’ enterprise business is over-shadowed in financial circles by DIRECTV and its own manufacture of DIRECTV set-top boxes. However, it is the enterprise product line and service provision business which provide the core revenues for HNS and which will form the springboard for its Spaceway business. The company’s performance in straight sales of hardware continues to be extremely strong. Its bookings appear to be breaking out of the market’s own volatility and, despite the fact that business can hinge on a few key huge corporate networks, HNS has posted growth in bookings for the past seven years. In addition,

its combined consumer and enterprise VSAT orders in 2002 gave it a 34 per cent CAGR in bookings over the past five years. In Hughes’ case one must also remember that its huge installed base yields it an enormous amount of ongoing business in spares, upgrades, maintenance contracts and new terminals. This is something that any other company has yet to challenge because Hughes has a huge head start and the company’s product has proved to be of high enough quality that a good proportion of the networks it sold in the 1980s remain in operation today - generating much higher margin add-on business.

54.27%

Booked TDMA Enterprise Market Share Historical


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Historically, Hughes has booked over 60 per cent of all VSATs up to the end of 2002, with its performance in the consumer business extending this share from just under 60 per cent a few years ago. Everyone would like to see HNS’ future assured by whoever finally acquires Hughes Electronics, but it is hard to see that a company with the engineering resources, market leadership and ground breaking potential of HNS would be anything other than valued by a potential purchaser. One issue which will need to be resolved publicly in the short term will be the viability of the company’s consumer service. COMSYS has always struggled with the concept that the technology is ready for the mass market and we do not believe that any of

the satellite consumer Internet access services are profitable today. HNS informs us that its consumer DIRECWAY service is now close to breaking even and it can begin to see an outline of future viability. In the medium term, however, Spaceway is the key and the company has a huge amount riding on its success. It remains one of the last players left with the strength at all levels - technical, operational, marketing and financial - to make a real difference in the VSAT and the satellite marketplace. We continue to believe that Spaceway will be an order of magnitude more attractive to the enterprise market and hope that the company and its management has achieved sufficient momentum to carry its vision to a successful conclusion.

0

20

40

60

80

100

120

140

160

180

93 94 95 96 97 98 99 00 01 02

Booked Consumer

Booked Enterprise

All Shipments

Annual Terminal Bookings & Shipments (in Thousands)

Ent45.62%

Con16.62%

Historical Booked TDMA Market Share Enterprise & Consumer

62.24%


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1.2 Company Overview Hughes Network Systems (HNS) is a wholly-owned subsidiary of Hughes Electronics, itself formerly owned by General Motors Corporation, now 34 per cent owned by News Corporation and separately traded on the NYSE under the symbol HS. HS recorded almost $9 billion in revenues in 2002 and comprises three primary businesses of which HNS is one with DIRECTV and PanAmSat being the other two. DIRECTV now has over 11 million subscribers in the US and PanAmSat, which is 81 per cent owned by Hughes, is one of the world’s top three satellite operators managing a global fleet of 30 satellites, 23 of which are wholly-owned. HNS describes itself as a digital networking company specialising in wireless technologies. In 2002 it had revenues of approximately $1.2 billion and employed more than 2,500 staff worldwide. In addition to its enterprise product lines, HNS also manufactures a range of carrier-class microwave systems, mobile satellite terminals and is the largest manufacturer of set-top boxes for DIRECTV with 12 million units shipped to date. The company is also the largest provider of shared hub VSAT services in the world with leadership positions in the United States, Europe through HNS Europe and Asia through its Hughes Escorts joint venture in India. During 2003, the company also established service platforms in China (through a joint-venture with SVA) and in Brazil. The company quickly became the runaway market leader of VSAT systems in the world from the industry’s inception. Its exploitation and dominance of the United States market over its initial growth period then gave it tremendous advantages when recruiting partners and selling systems abroad. Since 1988, all of the VSAT vendors have faced heavy price pressure which has contributed to severe losses by several of the manufacturers and the withdrawal of big names including GTE, GE, AT&T, Scientific-Atlanta and NEC. As a result of its high volumes, Hughes has been in a better position than most to meet these price pressures head-on and to fund re-engineering developments which have enabled the company to stay one step ahead of the competition. Until 1998, no outsider knew whether HNS made a profit on its VSAT business or not because the company’s revenues and profits were not disclosed. However, during 1998, following a variety of sell-offs by its direct parent, HNS suddenly became almost one quarter of Hughes Electronics’ revenues and, as a consequence, of much more importance to the analysts on Wall Street. So, we now know a little more. The company disclosed that it did just under $1.2 billion in revenues in 2002 on which it made an operating loss of $77 million. In terms of this report, the most interesting aspects of the company’s financials are the facts that it continues to make money in its enterprise VSAT business - $48 million EBITDA on $522 million in revenues - that the DIRECWAY consumer service loses money and, hardly surprisingly, that the development of Spaceway contributes significantly to the company’s losses.


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HNS Financials1 1997 1998 1999 2000 2001 2002 2003 Revenues $1,011 $1,077 $1,385 $1,410 $1,326 $1,170 $1,322EBITDA $742 $7.1 ($156.5) $0.4 ($112) ($77) $23

Enterprise $71 $58 $66 $48 $573 Carrier ($243) $32 $23 $4 $63 DIRECWAY - - ($143) ($104) ($39)3 Consumer $45 ($50) ($9) $26 $363 Spaceway ($6) ($10) ($24) ($32) ($37)3 Other ($24) ($29) ($24) ($19) ($21)3

1. All figures in US$Millions 2. Operating profit, not EBITA 3. Operating profit, before depreciation and amortisation (OPBDA)

As market leader, the company theoretically has greater price latitude than any of its competitors. It led the way by winning the vast majority of networks of more than 1,000 terminals with an aggression which was a major barrier to its competitors building up their market share. Up until the end of 2002, Hughes had won over half of all the contracts greater than 1,000 sites and accounted for eight of the ten largest corporate networks in service. The company has built a momentum in the corporate networking sector which is hard to challenge and in certain areas, such as the gas/convenience store business, it almost monopolises the segment. This helps it build specialisation and recognition in a particular industry, gives it an advantage when bidding for that same company’s business abroad and gives it a great reference list which inspires confidence in other potential customers. Between 1999 and 2000 the battle in the United States was fought over the gas/convenience store market and the subsequent follow-on contracts. Hughes undoubtedly managed to marginalise Gilat during the first half of 1999 - not only did the company win both the Equiva and BP/Amoco deals, but it effectively took every single enterprise contract of any note in the US at that time. COMSYS believes that this was one of the primary drivers behind Gilat’s move towards the network dependent business (NDB) - a strategy which exposed it to far greater levels of risk and which ultimately came home to roost in early 2001. Hughes was also tempted by some of these deals and, whilst not totally immune, it managed to deny itself the luxury of assuming too much risk and avoided the types of investments which Gilat stepped up to. In the short term, this reflected badly on Hughes’ bookings, but once the froth was finally blown off the market with the slump in the stock market and major corrections in tech stocks, Hughes’ policy no longer looked conservative, but prudent and Gilat’s strategy looked far too risky rather than just opportunistic. Gilat’s financial struggles during 2001 and 2002 opened up an opportunity for HNS and the company began taking some significant market share from its primary competitor, especially in the United States where it took 62 per cent of the enterprise bookings and 90 per cent of the consumer market in 2002 against Gilat’s 25 and 10 per cent respectively. As we say several times in this section, HNS is an aggressive competitor and it doesn’t need a second look to exploit an advantage as large as the one Gilat’s faltering steps gave it. Some have suggested that HNS could have even done more, but the company has always been pragmatic and it declined to intensify the price war which has been raging between the two companies for almost a decade now.


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In the US, the market continues to pivot around several large deals year to year and the core demand is still driven from transactional applications in the gas/convenience, retail, casual dining and gaming sectors. In particular the casual dining industry has been the source of several large deals, but still the largest fast food businesses have not committed to the technology in any major way. A bright spot for the industry in general and HNS in particular has been the franchised chains at both national and regional levels. Hughes has been successful in several key accounts including Yum! (the owner of Taco Bell and KFC) and Cendant (the owner of Century 21, Avis, Quality Inn and Comfort Suites). However, these deals are complex because the parent company probably controls only a fraction of the total number of businesses - Cendant has 16,000 sites with only a few thousand company-owned and the remainder franchised sites. In these instances, Cendant endorses the HNS offer, but cannot force a franchisee to buy. Hughes began its international business by marketing from its base in Germantown, concentrating on recruiting local partners to represent the product to their local PTT. The regulatory environment meant that this was a time-consuming process, but as a result, the company gained significant inroads into two of the most conservative PTTs in Europe - Deutsche Telekom in Germany and Telecom Italia/Telespazio in Italy. And so when telecoms liberalisation came, HNS was the best positioned of all the US manufacturers. This commitment to be the first into a market, even if it needed years of development, has stood Hughes in good stead and it has also taken this tactic in China. However, unlike others which simply poured investment into China with no appreciable return in the hope of future positioning, Hughes has made money selling equipment and only recently engaged itself in the service business. This hardware lead with a service end game has meant that the company’s international business has always been firmly based ever since it first began to market outside the US. The company has also been willing to plough a lone furrow and it certainly did this in Africa where it committed resources perhaps four years before any other manufacturer. This is the primary reason behind its strong position in that region today. Hughes now has offices around the world and a well organised and professional sales force often based locally but supported out of its Germantown headquarters. The past two years have seen the company consolidate its position with its existing accounts and add almost 15 new operators to its list of clients. For some years now, HNS’ business has stretched across the world and there are few markets it has yet to penetrate in some form or another. Most recently the company has won significant deals in Korea, Russia, Brazil, Indonesia and the Netherlands and its existing customer base continues to grow across almost all regions with the possible exception of South America which has suffered more than most from the economic downturn. This has probably hurt HNS’ international business, because some of its strongest service channels were once to be found in the region. Over the years HNS has moved slowly but surely into the service business internationally, almost always in partnership with a company able to add local expertise and leverage. The standing joke in HNS is that these ventures only do well when they have Hughes in the name - Satelitron and Verinet never did very well, whilst Hughes Olivetti Telecom (now HNS Europe) and Hughes Escorts have been successful. The truth is that the defining factor seems to be control - HNS is able to build a viable business when it is relatively free to manage the


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venture and it only ever took a small stake in the ventures which faltered. The one exception to this is ChinaCast. Most recently, the company has invested in service platforms in Brazil and China, the latter being in partnership with a local company, SVA, with which HNS has had a long relationship. Having just finished a raft of new products in 2000, Hughes has spent the past two years refining each of its platforms rather than introducing new ones. The company will undoubtedly be increasingly challenged by the development resources required for Spaceway as that project nears launch, but it has been busy laying the ground of common elements and architecture between its new DW6000 terminal and the Spaceway system. Some parts of the product portfolio have become left behind as the company has concentrated on data networking and Internet access systems, with the TES platform the most obvious. The company has been seeing a decline in demand for this system as the DAMA market has increasingly moved either upscale towards broadband data centric meshed networks or down towards thin route, low margin rural networks. Hughes remains a significant player in the mesh DAMA segment, but the business seems to be less attractive to the company than it once was and it has justifiably walked away from many of the extremely risky rural telephony deals which had been on offer. To illustrate this point, if we divide the DAMA market into high value (where the TES Quantum plays) and low value (where the TES Quantum Direct competes), in 2001 Hughes took 41 per cent of the former and less than 3 per cent of the latter. The company continues to exhibit its trademark attributes - aggressive pricing, strong marketing and sales, continuous product development and high levels of software and hardware engineering - and this makes Hughes both impressive to the customer and scary to the competitors. As the market leader with a massive installed base, Hughes has come in for its fair share of criticism and, although it has often taken longer to address the valid complaints than perhaps it should have, it has pretty much always attended to the problems eventually. It took several years to recognise that it was guilty of neglecting customers’ needs for aftersales support and marketing assistance and that turn-around times associated with the repair and return of failed units was too long, but when it did react, it did so thoroughly. There are few complaints of this type now following actions taken a few years ago to guarantee turn-around times and establish a creditworthy customer services organisation. During the research for this report, we encountered few major criticisms of the company from its customers with none complaining about the reliability of the system and most informing us that they were happy with the level of support they are receiving. Other criticisms which have been levelled at the company include the fact that it is not concerned that multiple numbers of hubs in a single region or country severely devalues an operator’s service. However, the same can be said of any of the other system vendors and the fact is that an interested potential customer will buy from someone regardless. Another comment is that HNS is not above moving up the food chain and competing with its own customers - witness its service ventures with HNS Europe, Hughes Escorts, Hughes Shanghai and Hughes do Brasil. Hughes’ rationale is that if operators are not selling VSATs, it will take its own chances in the market and show how it should be done. A good example of the company’s attitude can be seen in Latin America where the company had an excellent


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relationship with Impsat and for many years both prospered on this, but when Impsat moved towards a fibre infrastructure and other operators slowed their investments, Hughes introduced its own service. At the time some of these initiatives happened, it was hard not to sympathise with the frustration of operators who felt they had been betrayed by their vendor and that they had no chance competing with the manufacturer of the system on which they based their services. In hindsight, most have survived, their business has probably not taken a different course because Hughes has moved into service and Hughes is vindicated in its actions to a large extent because it is now where we believe it should be - with a foot firmly in both service provision and hardware supply with the balance shifting increasingly to the former. The company finally decided that its structure, which previously revolved around product lines, needed to be reorganised to better reflect the way its business had evolved. Consequently, during the end of 2000 and the beginning of 2001, HNS was reorganised on the basis of geographic markets with product development being primarily driven from the market which forms the core demand. Thus, the DW2000, DW6000 and PES now receive their primary development guidance from the domestic business and the TES Quantum and Quantum Direct from the international business. Of course, international demand will also reflect on the enhancement and feature set of the enterprise data platforms, but the higher volume North American market determines the main direction and provides the budget. In some ways this might seem instinctively strange and suggest that international customers will find their hardware requirements marginalised and their service platform isolated. However, as Hughes points out, most development is driven from the US market anyway and international demands tend to parallel the US and Europe with a few years lag anyway. Thus, if anything, international customers are likely to see better response as development efforts are either already in place or the feature is available. The competitive environment has changed dramatically since 2000. Whilst HNS and Gilat remain locked in the bitter battle over the market which they have fought for years, a raft of new systems have been introduced. These come from two main sources - ViaSat and the DVB-RCS standard. ViaSat’s move into the commercial business was accelerated with its purchase of Comsat Labs and its LinkStar platform. LinkStar has been good for ViaSat, allowing it to capitalise on the sales organisation it obtained with its purchase of Scientific-Atlanta’s VSAT business, but it has possibly denied Hughes business more in terms of hub sales than terminals. However, ViaSat also established itself as the “arms dealer” partner for the major broadband platforms in development at that time. Whilst most of these have now gone to the wall, WildBlue remains and ViaSat is the principal platform supplier, aligning it almost directly against HNS in terms of VSAT supply. Today, Hughes’ largest single threat probably comes from a ViaSat in ascendancy rather than Gilat as it struggles with restructuring its business. In terms of DVB-RCS, there are several key players - EMS, Nera and Newtec and more - all throwing their hat into the ring as time progresses. However, none of these manufacturers has yet managed to put any kind of significant dent into HNS’ business and we cannot identify a single DVB-RCS hub sale which has been made at HNS’ expense.


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We continue to hold the opinion that Hughes has the edge on its competitors because of its organisation, depth of market presence, experience, vertical integration and the fact that, if it is ever behind with product features, it is never far behind. For the potential purchaser, the fact that buying Hughes is rarely a mistake counts for a great deal. Given all of this, there is every reason to suppose that Hughes’ strength in depth, greater developed services business and increased responsiveness to the market will be enough to maintain its lead in the near term. There is a move within the industry to consider higher uplink speeds at the remote terminal to be a requirement. HNS has maintained its stance that it is not uplink speed, but efficiency which really counts. Whilst there is a perception that increased transmission rates on a system directly result in increased data throughput for a customer, the fact is that a customer is paying for the data they use by and large, so the two are only really related in a very tenuous way. In addition, HNS continues to see the largest demand for thin route enterprise transactional services which have no need for high transmission speeds. Nevertheless, we believe that the company will be kept busy upgrading and refining its present platforms to meet both customer demands and the broader competitive threat from other vendors over the next few years. Longer term, even medium term, so much hinges on Spaceway. There remain several issues of concern to us - attenuation at Ka-band, the new technology the spacecraft carries and the standard risk at launch faced by all satellite systems - but given that these obstacles are overcome, we believe that Spaceway will lift HNS’ business in North America head and shoulders above its competitors (see the Spaceway section in the Operators volume of this report). The next question will be how and if Hughes can export the system to other regions of the world and there are some interesting strategies circulating within the company as to how this might be achieved. HNS is all the things that we have described it as - conservative, methodical, cautious, stable - but it is not above taking calculated risks and has managed to pull rabbits out of the hat to many people’s surprise a number of times. The potential for more rabbits remains with the company as long as it retains its current structure. The company’s challenges involve the need to maintain and nurture its current enterprise customer base and grow its VAR channels in the US in preparation for Spaceway. At the same time, it needs to ensure that its international business is not starved of attention or development resources. Local political influences, rapidly changing domestic and regional markets as well as hungry new competitors could quickly have an adverse effect on HNS’ position outside the US if the company is unable to sustain the same level of attention it has been able to provide over the past 15 years or more. The same is true for support, customer service and local presence - all of which are heavy burdens in the present economic climate. We currently see no evidence that the company is struggling in these areas, possibly helped by the fact that its business is structured along geographic lines. However, pressure in these areas will certainly grow as they have done for all companies in the business. Whilst the company does not make money as a whole, its breakout by segment seems to show that it does in its enterprise VSAT business and this is both encouraging and not so common in the industry at the moment, placing HNS in a very advantageous position relative to its immediate rivals.


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We commented in 1996 that Hughes Network Systems had managed its VSAT business almost faultlessly since the purchase from M/A-COM. We still believe this to be the case and feel that the company is viable within a group, such as HS/News Corp., or as a standalone entity. The company’s management has pursued a strategic vision (with a few diversions) for some years now and it almost has all the pieces in place today. The company has strong partners and a good level of consumer retailing experience tucked under its belt in comparison with so many others in the satellite services business that have never come near a consumer and yet seem to believe that this level of the market is merely an extension of the enterprise business. With its present position in the market and vertical integration within reach, Hughes Network Systems looks to be a company poised for growth, ready to pull that rabbit out of the hat again.

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executive summary The past two years have seen the VSAT industry adapt to the economic downturn, tighter financial conditions and intense price pressure through a combination of diversification, restructuring and innovation. Growth has been achieved - but at a price - as the changes and complexity underlying a simple market structure (identified in our 2000 report) have become manifest over the past two years. The advent of consumer services has led more naturally to a push towards broadband access targeted at small businesses and the need to find new channels to address these customers. This has been overlaid by positioning strategies on the part of existing satellite system operators and future broadband platform providers. Star TDMA Market Above all these undercurrents, the core enterprise networking business has continued to grow in most regions with the major exception being Latin America. North America has maintained its leadership role in sales, new segment penetration and application development.

Enterprise orders jumped in 2002 on the back of large enterprise network sales in the United States. This reversed the three year trend of falling compound annual growth rates which had been established as the industry adjusted to shake off the froth which had been accumulated as a result of the tech market boom of the late 1990s.

New features were developed in response to market demand, including turbo coding and higher power RF systems, which offer higher remote terminal transmit data rates. However, the volume market remains with traditional enterprise thin route transactional networks.

In the short to medium term, the continuing demand seen in the thin route transactional segment will favour the incumbent leaders with their ability to support legacy protocols side-by-side with IP.

Competition from IP VPNs, DSL and even Frame Relay over DSL has proven to be without teeth, but of far greater threat is the promise of MPLS based VPNs. However, VSAT retains the advantage of ubiquitous coverage and demonstrable delivery of one-stop shop service packages. This has become even more important as bankruptcies and cutbacks in the telecoms market have returned the US market to a similar state to that which was seen in 1985 when the RBOCs and the major carriers were the only viable options for most companies.

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TDMA service revenues from enterprise sales have consistently grown, largely on the back of falling hardware costs. VSAT terminal prices have continued to fall and have now reached $1,000 in some cases - predicted some years ago to be the tipping point for entry to new markets. This has meant that revenues from hardware sales have dropped by 25 per cent over the past five years whilst VSAT terminal prices have dropped by over 50 per cent.

Even well established and well managed businesses (in all regions) have had to work much harder just to maintain revenues, but many have remained profitable. Most of the shallow-rooted service ventures of the 1999/2000 Internet boom years have foundered.

Service businesses in the developing world are increasingly finding growth in application-specific networks similarly to North America and Europe. This makes up site and revenue losses from terrestrial competition, but yields thinner margins.

Consumer VSAT initiatives, which were embryonic in 2000, were launched in earnest in 2001 - only to be limited mostly to the United States and scaled back substantially in terms of marketing as actual (rather than predicted) transponder loading rates called their viability into question. StarBand’s bankruptcy stopped roll-out of Gilat’s platform, but Hughes has continued to sell its DIRECWAY consumer service (almost solely through its web site) with good take up rates.

Broadband access services targeted at SMEs and SoHos have been the primary focus for operators looking for higher subscription rates to counter lower contention ratios. Many broadband access platforms have been established to serve Africa, the Middle East and Latin America from European and North American hubs. The largest subscriber bases have been established by HNS Europe with services into Europe and the Middle East, Star One covering Brazil and Aramiska covering Europe.

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Low rate Frame Relay pricing is now reported to be rising - enhancing the value proposition of VSAT in some specific network opportunities.

So far, DVB-RCS systems have failed to gain traction in the market. Despite a clear demand from operators for a standard, few of them have been prepared to commit with a purchase and fewer still with a service.

The first generation of IP VSAT terminals fell short of requirements with the need for a host PC and the consequent complexities of networking the connection. However, the manufacturers - led by Hughes and Gilat - quickly addressed these issues with enhancements which almost seamlessly shifted gears and introduced self hosting platforms with new enterprise class platforms.

DAMA and SCPC Markets The DAMA market has polarised between

high-end, thick route and low-end, thin route systems. This definition has superseded the previous demarcation between mesh and star DAMA as some mesh capable systems have been deployed in star configuration whilst most low cost DAMA systems are now primarily sold as mesh networks.

Within this definition the thick route DAMA market has fragmented as a result of technology variations designed by multiple manufacturers to address niche markets.

DAMA and SCPC systems have taken the brunt of the attrition caused by the economic downturn of the past two years and the intensive investment in fibre infrastructure which was financed off the back of the high-tech bull market.

Underlying this trend, our analysis shows that sales to corporate networks have remained relatively stable and it has been combined sales of thick and thin route systems for rural telephony applications which has been the primary cause of the market’s fluctuations.

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Market Overview

2000 and 2001 were years of adjustment for the VSAT industry as companies restructured their businesses and strategies to meet the changed market conditions. Products and business prospects that had been driven by the high-tech boom had to take account of conventional realities and those which had started late quickly died whilst ventures which had some vestiges of business clung on, although roll-outs largely ceased. The collapse of the financial markets undoubtedly caught some players in the VSAT industry with their trousers down - leading to several bankruptcies and even more restructuring. Gilat was the first to show signs of trouble and it was not until early 2003 that it was able to find some level of financial solution. Consumer services had been launched during 2000, but 2001 saw the real push into the consumer market in the United States - only to be followed by deceleration as it became clear that neither the product nor the business model were sufficiently refined. For both Hughes and Gilat, adaptation of their initial platforms was a relatively easy task because most of the functionality was already part of their enterprise VSAT systems and they made the shift from PC-hosted subscriber terminals to full self-hosting devices without breaking step. On the market side, a clear decision was made by all vendors to switch focus from the consumer to new enterprise markets - the small business and SoHo sectors - with the provision of broadband access. Hughes was the first to understand the realities of this market and quickly began building a VAR network in combination with a neatly packaged service. This was in direct contrast to the customised services historically sold directly to large corporate networks. This process started in Europe and enabled the company to build up a good lead over later entrants. In the enterprise market customer expansion plans were initially put on hold, sales lead times extended and project budgets were cut. Most operators declined to invest in new equipment without firm customer commitments and it was clear that the risk profile of the business had to change. This occurred with vendors offering more flexible terms, thus allowing operators to establish business on facilities before final commitment, whereas space segment operators cut contractual commitments from years to months in some instances. By 2002 customers were clearly coming back to the market and delayed projects began to come through sales pipelines. The enterprise business in the United States emerged almost stronger in 2002 with solid sales to all the technology’s core customer segments and 2003 has seen this potential continue. Internationally the picture has been mixed, with the huge investments in fibre infrastructure heavily impacting high bandwidth SCPC and DAMA systems in Latin America and Asia. However, there are several significant areas of potential business across the world, with lottery networks and government sponsored broadband projects being the largest examples of common prospects. A new area of growth has been in broadband access services with high levels of demand in Europe, Africa, the Middle East, India and Latin America. Small businesses ranging from cybercafés and mines to individual hotels and farmers have taken up VSAT as their need for broadband has grown and the terrestrial network has simply not had the required coverage.

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As new IP VSAT products have been launched, operators have achieved greater penetration at all levels of the market and several have implemented multiple platforms allowing them to address different levels of demand. Management systems have been continually added by the system manufacturers and the operators themselves have established policies and systems to deal with the new demands placed upon service platforms by Internet and broadband access. New TDMA systems introduced to the market have all been understandably IP-centric, leaving only Hughes and Gilat with platforms with field-proven legacy capabilities - an ongoing advantage in the core enterprise business.

The past two years have also seen Hughes Network Systems assert its position as the leading manufacturer in the market with the company accounting for over half of the enterprise VSATs shipped. Gilat suffered from its financial difficulties and customers either held off decisions or chose alternatives in many instances, concerned that the company would declare bankruptcy. In the event, the company managed to restructure, but only at the cost of losing all of its senior management. This year (2003) has seen better results, but Hughes is able to demonstrate a strong business and, after so many cuts at Gilat, has far more strength in depth. In addition, Hughes is building towards Spaceway and has a clear vision of its future whereas Gilat needs to set out its strategy and, presumably, find partners to help it along this path. The danger for Gilat today is the rise of ViaSat, a company clearly on the ascendancy in the VSAT business and the only other major manufacturer today with a strategic vision of its future equally as clear as Hughes. Hughes is some way ahead of any of its competitors with its move into the service business which for some years now has been one of its strategic goals. In the United States it is the clear leader with over 60 per cent of the enterprise market and 75 per cent of the consumer market, in Europe it has 30 per cent of the pure enterprise and 50 per cent of the broadband access markets, in India its joint venture with Escorts is the market leader with a market share of almost 30 per cent, making it also the largest shared hub operator in Asia, and 2003 saw the company establish service businesses in China and Brazil as well. With almost 350,000

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TDMA VSAT Market Share Evolution, 1997-2002 World TDMA Market Share, 2002

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VSATs under contract to its services at the end of 2002 the company is so far ahead of its nearest rival (Gilat, which has 100,000 sites contracted to its services) as to be almost out of sight. This gives Hughes an incredibly strong base on which to build its various broadband strategies and, whilst it is possible that the broadband access business might grow to a similar size, few could hope to replicate Hughes’ achievement in the enterprise networking business. The Future The past two years have seen a fair degree of change in the VSAT business with the emergence of business-targeted broadband access services, the wholesale restructuring of companies and the introduction of new VSAT platforms. We believe that the industry has shown itself to be both resilient and adaptable and, whilst it has not been immune from the difficulties faced by the telecommunications sector as a whole, it has come through so far with fewer casualties and a far higher proportion of successful and growing businesses than the mainstream market. However, there are a number of challenges that will be faced in the near term: Bandwidth cost and efficiency of use remains a major problem for the industry,

particularly as broadband access and consumer Internet services grow. Consequently we believe that there will be more focus placed on subscriber traffic management and new bandwidth sharing and access schemes. As examples, we expect to see greater use of coding techniques and hub signal cancellation technologies

Service pricing is forecast to harden as terrestrial operators struggle with profitability and consolidation takes hold in VSAT services.

The role of value added resellers will rise in importance, but problems of control and management of these channels have already shown themselves and wholesale operators will have to work more closely with these companies to ensure that quality and customer service is maintained. Part of this will be related to helpdesk support of the customer which almost all levels of the market do their best to avoid. This is a major cost which has not yet been truly factored into service pricing.

In the longer term we believe that the changes since 2001 will be seen to be the actions of companies laying the foundations for growth into new markets based on advances in both satellite and ground station developments. The important of the broadband satellite platforms in the form of Spaceway, Telesat / Anik F2, WildBlue and iPSTAR cannot be underestimated. If they succeed they will change the landscape of the VSAT business beyond recognition, but if they fail the industry’s credibility in the financial markets will be even more seriously damaged than it was after Iridium and Globalstar’s fall to earth. COMSYS expects that the broadband satellite systems will be launched successfully, but there are many hurdles yet to be overcome - and still more to be faced in making a spacecraft launch into a successful long term service business. Of all the proposed systems, Spaceway will be a sea change in the enterprise networking business and will leverage Hughes’ massive advantage in the enterprise business into some major new opportunities and broader market segments. We believe that the system’s design will create a multiplier effect throughout the customer base acquired by the service. However, we also believe that take up will be slow as more conservative enterprise customers adopt a cautious, possibly incremental approach.

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In summary, the VSAT industry has far more challenges confronting it today than it had two or five years ago, but these are related to efforts to break out of the traditional market niches. First attempts are rarely successful in any industry and satellite consumer Internet services are classic examples. However, the major players in the business have proved themselves to be capable of taking calculated risks with limited liabilities and this is part of the learning curve. As a consequence, most businesses have weathered the severe economic conditions very well in comparison to many other sectors of the telecoms market and, because none of the players in the VSAT industry has the size which makes their absolute failure inconceivable, all of them have survived on merit. Today’s VSAT market is best understood as one of strategic positioning for the future, but now it looks as though that future might not be much more than a year or so away. We expect that those companies which prefer to ignore, or do not have the resources to meet, the potential threat of some of these developments are in for a nasty surprise.


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2. VSAT Industry Backgrounder

2.1 The Beginnings The United States led the way in competition policies for the telecommunications industry during the late 1970s and early 1980s. Restrictive legislation was cut back and the practice of minimum regulation and market forces was enacted. This resulted in a massive expansion of telecommunication service companies and a related explosion of entrepreneurial developments and products to meet new applications borne of increased demand. The rise of VSAT systems owe a great deal to these developments. Equatorial Communications Company was founded in 1980 to address a perceived market for low speed, one-way data communications via satellite. In the process the company became the pioneer of the VSAT industry. The divestiture of the Bell telephone System in the United States, the subsequent explosion of pent up demand for cheap and reliable data communications, coupled with the fact that Equatorial was without serious competition in the market for more than four years, led to a rapid rate of growth for the company. Equatorial packaged the technology as a business communication system whereby customers bought a single data communications product to solve their communication needs in the United States. The VSAT industry exhibited the following main trends during the early years of its development: Large corporate networks. Inherent software reliability problems with interactive TDMA systems. The domination by small entrepreneurial companies. A handful of anchor customers formed the basis of the industry. A great deal of forecasters’ hyperbole damaged the credibility of the industry. The world market was effectively the United States market.

In 1986, just as the industry was beginning to establish itself, the largest single disaster for the VSAT industry ironically occurred as a result of the largest single order ever placed. In 1984 Federal Express announced an order for “up to 50,000” VSAT terminals with M/A-Com (now Hughes Network Systems) for its Personal Earth Station (PES). The order, which was announced as part of the Fedex Zapmail project, contributed to the general view that orders for VSATs would run into tens (if not hundreds) of thousands by 1989. While the withdrawal from the market by Fedex in 1986 was not due to failure of the satellite technology, it did, in any event, result in a general loss of faith in the future for VSATs. All these factors led to a general slump in the industry between 1986 and 1987. Equatorial was one of the first companies to experience difficulties and towards the end of 1987, the industry began to streamline in a variety of ways. The major suppliers in the business underwent a consolidation between 1987 and 1991. The smaller start-up companies, often funded by venture capital finance, were not sufficiently strong to weather the long sales lead times which had become, and still remain, common in the industry. Between 1987 and 1988,


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several companies, even those of a reasonable size, had either divested themselves of their VSAT product line or been acquired by a stronger corporation whose business offered a good fit for VSAT technology. Initial customers of the technology were very often led by innovative companies such as K-Mart supermarkets and Days Inn hotels, and many of the initiatives came from companies with a centralised management structure such as WalMart and drugs and pharmaceutical distribution company McKesson. Without doubt, these companies paid for their pioneering rôle by playing their own part in the product’s early development, but they also gained an edge over their immediate competition with lower communications costs and greater flexibility. VSAT systems provided a relatively cost-effective and reliable means by which companies could bypass the local Telcos and offer connection direct to the end-user. This was the origin of the phrase “bypass” which so angered the monopoly telecommunication administrations outside the United States. The result was that the technology was able to offer one major unique selling point (USP) over other methods of connection - direct connection. Not only did this form the primary marketing focus of the VSAT service provider, it became the principal justification for the adoption of VSAT systems by users. Even today this remains a strong part of the rationale and VSAT services continue to offer end-to-end service level agreements in comparison to many frame relay offerings which exclude the last mile connection. By 1987, VSAT systems were able to offer:

Greater reliability; Independent networks; Greater flexibility; Proven systems; Additional facilities, such as voice and one-way video; Single source suppliers; Stable and predictable prices; and, Cost savings on terrestrial systems.

More reliable and proven software continued to consolidate the VSAT industry during 1988 and several very important anchor customers for the industry as a whole, such as Chrysler, Walgreen and Thrifty, were signed. The technology offered companies reliable, inexpensive, stable cost, flexible and innovative communications. During 1989, manufacturers began to expand and modernise the capabilities of their products, offering more protocols, greater network management flexibility, lower cost hubs and increasing standardisation with established network management software. A significant setback for the industry as a whole was the failure of the telecommunication administrations in Europe to adopt the technology or give it any serious consideration. This was partly due to the “bypass” tag with which the technology had been labelled and marketed in the USA. This led to the technology becoming isolated in the North American market with little or no marketing effort being concentrated in other parts of the world. Certain parts of Latin America were close enough to come under this umbrella but, in the early years, the sole


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outposts of marketing support outside the United States were held by two Equatorial joint ventures in Australia and Hong Kong. Other areas, which many felt held enormous opportunities, were barred to VSAT technology by regulatory, political or financial barriers. In a Catch-22 situation the industry required greater markets in order to achieve significant economies of scale to bring the system prices down and these same markets were too poor to consider the technology seriously. This was beneficial to the pioneer US companies because low unit sales discouraged Japanese companies. Even the NEC Nextar product was originally conceived and driven by NEC America. Lower cost was the most important driving force for later stages of the industry’s growth during 1987 and 1988. Many companies realised that the primary driving force would become cost savings over a comparable terrestrial system over time. The adoption of a VSAT system not only represents a departure from established technology (and therefore risk), but has also incurred major up-front cost to the user. It is so much easier to sell a concept to a company’s board with the final projection that such a system will make a positive contribution to the bottom line of the profit and loss account. In terms of price stability, it is somewhat hard to remember the time when telecoms prices tended to rise rather than, as is now so often the case, fall. In the late 1980s and early 1990s, users would queue up to sign a contract binding them to five years, but today the value of stability is not so clear cut. By 1992, each of the major system vendors had finally stepped out into the international arena. However, during the time that AT&T Tridom and GTE Spacenet had restricted the majority of their activities to the United States and Canada, Hughes Network Systems in particular had already been marketing and selling systems extensively in almost every region of the world. The company’s ability to risk early entry to foreign markets was based on its overwhelming success in the United States and this was consequently translated into dominance in virtually every regional market. This move not only changed the marketplace in terms of area and regulations, a number of other issues came as part of the territory. The major area of change for the vendors was the type of demand, both in terms of use and application, which the users placed on VSAT systems, in comparison to those in the United States. The final trend which became evident in 1994 was that more and more companies were beginning to offer some form of meshed demand assigned solution. In the past, these systems had been relatively limited, very costly and focused, almost exclusively, on voice. However, by 1994, a number of new companies either had, or were developing products which offered similar features at lower cost and the possibility of greater data functionality. We witnessed a rapid increase in these products from 1994 onwards and now there is a wide diversity of meshed systems capable of supporting the telephony needs for a small country right through to the broadband data needs of a dispersed multi-national.

2.1.1 Regulation The move towards a greater freedom within the telecommunication service industry, based on competitive policies, started in the United States and was key to the successful expansion of


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the business. However, these initiatives were not paralleled, in any form, in the rest of the world for several years. In terms of major industrial powers, the next country to follow this initiative was the United Kingdom which began to lead the way forward in Europe in the early 1980s. However, the immediate trend towards deregulation in Europe did not follow the US pattern. Rather than deregulating the market to allow more operators, the old PTT administrations were initially merely unshackled from the Government itself. It is unbelievable to think that the situation had developed whereby the administrations were not only monopoly suppliers, but were also responsible for their own regulation and that this situation was actually enshrined in legislation in most countries. The United Kingdom changed the status of British Telecom (BT) from a government department to a company and began a frustratingly slow crawl towards competition. However, in the rest of Europe, a com-bination of legal barriers, civil service mentality, force of habit and vested interest conspired to choke further progress for some years afterwards. The deadlock was broken by a series of deregulatory events including activities by the European Commission and the fall of Communism which opened new and chronically under-served markets. Elsewhere in the world, politics have moulded the shape of VSAT services in many countries. Competition in domestic services is one thing, but many governments maintained their monopoly on international services. 1994 saw Europe in the interim stages of liberalisation and this was only really completed by 2000. During the early 1990s, Latin America was probably exhibiting the fastest rates of deregulation. Services were relatively free in Chile, Argentina, Colombia, Ecuador, Venezuela and Mexico. There remained restrictions in some of these countries however, with barriers to international services. The Asia/Pacific market was much as it appears today - fragmented into its various domestic components. The market in the region was really held together by the large domestic markets of China, Indonesia, Thailand and India. In our last report we mentioned that there were definite plans which looked as if they would take the region towards competitive international services - sadly, this did not happen and regional services in Asia remain as difficult and expensive today as they have ever been. Africa has been hard for a number of reasons, but now many of the key economies in the region have liberalised, the market has begun to look more attractive and some limited regional services are possible.

2.1.2 Industry Consolidation A consolidation of the manufacturing companies started in 1990 and the primary period of activity was essentially capped in 1994 when GE Capital acquired GTE Spacenet. In 1997 GE Spacenet acquired the Tridom business from AT&T, ViaSat acquired Scientific-Atlanta’s satellite business in 2000 and NEC completed its quiet withdrawal from the VSAT business in 2003. However, several smaller manufacturers launched systems between 1992 and 1994. The largest splash was made in 1992 when the Skystar Advantage system was announced by Gilat and GTE Spacenet. This was followed by a number of others from smaller companies such as Intelesys (now TSI), Normarc (now Teamcom) and Link. Each of these systems was targeted at niche markets and none, quite frankly, appeared likely to set the industry ablaze. 1996 saw GE Americom acquire GTE Spacenet and then, in 1998, the Spacenet VSAT


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service business was sold to Gilat which finally took ownership of the entire intellectual property rights of its Skystar Advantage system. By 1992, we were predicting that there was likely to be a consolidation of service providers in the United States. Over the next few years this did indeed occur as the major operators, primarily Hughes and later Spacenet, intensified competition. Service and manufacturing consolidation has since continued internationally and for a while in 2000 and 2001 it was virtually mayhem with so many companies changing hands, but this settled down as many owners decided they were simply not prepared to sell at the prices buyers were prepared to pay. Many of the companies which disposed of their satellite or VSAT assets did so to concentrate on their core businesses and Deutsche Telekom, Telia and BT are prime examples. The COMSYS VSAT Report of 2003 lists almost 40 different mergers, acquisitions, restructurings and disposals which occurred between 2001 and 2002 in the VSAT industry.

2.1.3 Shared Services Meanwhile, the number of international operators has continued to grow apace. In 1992, we reported on 77 different service providers, in 1994 the figure was 100 - a substantial increase considering the US fall-out. Europe alone accounted for 22 different operators running 40 shared hubs and elsewhere in the world there was a proliferation of shared hubs in different countries, but not to the scale seen in Europe. The number of operators has continued to grow despite losses through natural selection and acquisition. Today, we cover 215 operators and are tracking a further 15 to make 240 in the world, up from 195 in 2000. In the international market most hub sales are to shared hub operators. Many international operators experienced difficulties as a result of not being able to put a sufficient number of terminals on their hubs sufficiently quickly. In the early days this was simply because the likely success was over-estimated and the new operator did not really understand the business they were in. The manufacturers and vendors also failed to examine the markets they were selling into and, consequently assumed that their customers knew what they were talking about. One area of issue is that of the actual traffic requirements of the customers. Required data rates were assumed to be similar to the experience low rate transactional applications seen in the United States, but in fact, many of the early international users, especially in Latin America and Asia/Pacific, traditionally loaded their remote terminals on a far greater scale. This is a feature which has since changed as developing

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world markets have evolved to reflect the more robust, application-driven deployments seen in the United States.

2.2 Recent Events The past two years have seen some major changes in the VSAT market. Difficult economic conditions and the swift market correction which took place in early 2001 left many operators and system vendors in a precarious position. Gilat’s momentum strategy of building bigger and bigger ventures finally caught up with it as the tech market collapsed and it was forced into a financial restructuring which was finally resolved in 2003 with a new share structure and the replacement of its founding management team. At the same time, many other companies went to the wall and even more others saw their businesses severely eroded. The huge build out of fibre infrastructure in Latin America and Asia took its toll on the higher bandwidth SCPC and DAMA segments of the VSAT business and customers either transferred technologies, went out of business or retrenched. Some of the real powerhouses of the VSAT service business - Impsat, Comsat International and Acumen suffered massive declines in their VSAT population whilst, in Impsat’s case, it struggled to manage its fibre business until finally succumbing to Chapter 11. In a great twist of fate, Impsat’s most profitable businesses are now its VSAT-based activities despite having been cannibalised to provide the first line customers for the fibre network. 2001 saw the real launch of consumer services in the United States - the only market with any major deployment - and then the consequent scaling back of ambitions as it became clear that the days of “build it and they will come” were over. Manufacturers and operators alike went searching for customers able to pay a commercial rate for a service and found them in the SME segment. Broadband access services targeted at enterprises - as opposed to enterprise networks which also connected IP services - finally became a reality and Europe in particular saw wholesalers begin to develop programmes for value added resellers in order to address smaller customer sales. All this helped refine the product set from a basic single IP device to a multi-user, self-hosting router. As the major markets of Asia and Latin America struggled, Africa suddenly assumed the role of golden opportunity and a gold rush ensued and, mostly, still remains. Volumes are still small, but the willingness to pay for a service coupled with increasing deregulation has released some of the potential of the market. Service models also changed as the local hub requirement of mainstream enterprise network services gave way to the need to locate a hub close to the Internet backbone - Europe and the United States became the preferred options. As broadband access became a reality, the DVB-RCS vendors struggled with meeting the price levels set by the mainstream proprietary vendors with systems with little or no volume. This situation was not helped by the fact that the first customers invested to test the technology rather than launch commercial services - a hub is a nice sale, but with five or ten terminals it is not enough. When commercial services were launched, deployments were slow as service models were tested and refined leaving the established players to pick the low


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hanging fruit. In amongst all this, the main enterprise network business continued to generate sales, sometimes orders of magnitude greater than the broadband access deployments - a fact which prompted many to realise that the enterprise market was far from dead. All these factors have conspired to move a relatively simple market driven by a few key players to an incredibly complex assortment of technologies, services, sales channels and players all driven to position the market for the next stage of growth.

2.2.1 TDMA System Developments It was Hughes which first started the ball rolling towards a low cost product line with the launch of its PES6000 model in 1991. In 1992, the game was joined by the other manufacturers with lower cost versions of their systems. But also in 1992, Gilat and GTE Spacenet announced the Skystar Advantage system which had just been sold to Rite Aid after an epic battle with Hughes. It was the Rite Aid contract which really set the tone for the forthcoming years and it is believed it was the first time that people in the industry started to believe that an all inclusive monthly price as low as $200 per site might be possible in the United States. Today, the price per site per month can be below $80 depending on network size and configuration and contract term. This has made the customer’s situation extremely interesting. A user, currently operating dial-up services to connect their business in the United States has a relatively high wall in front of them. If just one more application is to be supported, the choice is between another dial-up connection - effectively a doubling of present costs - which offers little in the way of an upgrade path, or a frame relay network - which could more than quadruple present costs. Alternatively, a VSAT network could approach, or be less than, two dial up lines and yet could offer higher reliability, greater bandwidth, improved response times, support for LAN (inherently, with no additional routers required) and a secure upgrade path. The catch has been that in most cases the customer has to sign a three or five-year agreement - something that many companies have not been prepared to do in the present climate of falling prices. Where VSAT platforms have moved on is in the integration of products around a core IP-centric design. The DW4000/6000 series from Hughes, SkyBlaster 360 and Skystar 360E systems from Gilat, LinkStar from ViaSat and others all provide a base IP platform. In the case of the two market leaders, their systems also support a few mainstream legacy protocols, such as X.25, ported over from their legacy systems. Having established IP as the primary element of the system architecture, all of the vendors have gone on to build router capabilities into their systems as an inherent part of their feature set. Hughes introduced its DW4020 and then the DW6000 - both systems which incorporated all the functionality of a router into the IDU of the VSAT and eliminated the need for a customer PC to host software. These are now multi-address machines capable of supporting numerous users connected through a LAN directly into the VSAT’s IDU. In addition, various other features have been added - acceleration, QoS, classes of service, encryption, web page acceleration (also known as pre-fetch) and, in some instances, support for VoIP. With increased processing power VoIP implementations have grown beyond the clumsy services of a few years ago and are now hard to distinguish from a toll-quality terrestrial line.


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2.2.2 DVB-RCS, DOCSIS and Broadband Access In 1995 SES/Astra made three filings at the ITU for a chain of Ka-band orbital slots and, although there are no specific plans for most of these, the company clearly saw the opportunity to expand its relatively simple “hotbird” broadcast business to an interactive broadband service. SES began working with various industry bodies (ETSI, DAVICS, DVB and others) to establish a standards-based return channel design for the DVB system (DVB-RCS or DVB Return Channel via Satellite). DVB-RCS was adopted as a standard by ETSI during mid-2000 joining a raft of DVB standards which include return channels for wireless, cable and other media. DVB-RCS promised high bandwidth on the forward and return links - with a 40 Mbps outbound channel and an inbound channel of 2 Mbps working with a multiple-frequency TDMA access scheme. The arguments for and against DVB-RCS have raged back and forth over the past two years, but the primary point of issue has been the value of a standard. Logically, a customer is interested in a standard for two reasons - it results in lower costs and allows for multiple sources of remote, interoperable terminals. Unfortunately for the DVB-RCS vendors neither of these items have been really true to date. Terminals have been generally 30 to 50 per cent more expensive than proprietary systems and, although basic levels of interoperability have been established between EMS, Newtec and Nera at Satlabs, we understand that as of August 2003 no compliancy certification had been issued. Part of the problem in the longer term is the need by vendors to differentiate their systems, and to tie customers to their product with value added features, such as VoIP, TCP/IP acceleration and routing capabilities. This desire on the part of the vendors is almost diametrically opposed to the idea of a standard, but the argument goes that these features are not necessarily required and are usually supported with devices separate from the core system. Another problem for DVB-RCS has been the cost of the hub system which most vendors designed to support consumer-scale markets. The second phase of the broadband satellite business is represented by the new satellite platforms which are now expected to come to market in 2004. These include Spaceway and WildBlue in the US, both of which bring with them their own VSAT platforms. Looking further forward, Spaceway in the US and iPSTAR in Asia also promise low cost, highly capable VSAT platforms. Hughes has already stated that it will register the Spaceway terminal as a standard with ETSI which theoretically will allow other manufacturers to build a terminal and the company’s latest product, the DW6000, is currently shipping as “Spaceway Ready” in the US. The system is now scheduled for launch in the second quarter of 2004 and looks the most likely of all the broadband systems to go into commercial service after so many delays. In addition, in March 2004, HNS announced its IPoS initiative. This is a standard ratified by the TIA in November 2003 which both allows the development of applications along a standard interface and opens up the possibility that other manufacturers can design and produce terminals interoperable with the DIRECWAY system. Hughes plans to encourage and assist other manufacturers on a non-discriminatory basis. There are three other projects worth of note. The first is Telesat Canada’s launch of Anik F2, also scheduled


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for 2004. This system is similar to WildBlue and, in fact, WildBlue will market a US service based on Anik as its initial offer. The second project is iPSTAR which is also expected in 2004 and which will cover most of Asia. Finally, there is SES’ Americom-2-Home platform, now endorsed to some degree by EchoStar. Thus, the choices for a potential broadband satellite services operator are many and varied. For an enterprise customer the decision is relatively simple because proprietary systems generally offer much lower price levels for lower quantities of terminals without much or any loss of functionality - perhaps even significantly more functionality depending on the application. For the broadband service provider, the decision hinges on their view of the size of their addressable market and what type of customer will be targeted.

2.3 Conclusion With all potential markets - enterprise, SME, SoHo and consumer - now being addressed at one level or another and broadband satellite platforms looking likely to finally reach commercial service in the foreseeable future, the interactive VSAT environment has assumed a level of complexity never seen before. This has been exacerbated by the economic downturn and the erosion of historically stable businesses and changing enterprise network demands in developing regions. The VSAT industry has responded to the challenges presented to it by bringing down TDMA terminal prices by as much as half whilst increasing features and functionality. The industry has established and grown into SME broadband access services and adapted business models to better address the potential of the market. The core enterprise networking business continues to sustain the largest proportion of volumes sales in the industry, but broadband access services are growing in importance. The market continues to grow in volume of star data sales, but hardware pricing is falling faster resulting in declining hardware revenues. Despite reaching and even undercutting the nirvana of the $1,000 VSAT, the market is looking towards a unit less than half this price within the next few years. However, this will require greater scale of an order of magnitude to present levels. Many core enterprise markets continue to show good potential including the lottery, retail and casual dining segments. New potential segments are expected to provide areas of growth with interactive distance learning, employee, franchises and fast food networks likely to be the biggest growth areas. Competition from IP VPNs, DSL and even Frame Relay over DSL is largely hot air. Of far greater threat is the promise of MPLS based VPNs. However, VSAT retains the advantage of total national coverage and demonstrable delivery of one-stop shop service packages. This has become even more important as bankruptcies in the telecoms market has returned the US market to a similar state to that which was seen in 1985 when the RBOCs and the major carriers were the only viable options for most companies. Hughes Network Systems retains its position as the company to beat and the company that a competitor ignores at its peril. HNS has weathered the storm better than most as a result of its management’s focus on solid, but unexciting opportunities in the Internet boom years. It has


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doggedly continued to invest in its visionary Spaceway system, yet its leading engineering capabilities and strength in depth have allowed it to maintain the development of almost all of its other product lines and sustain its thrust into the consumer business at the same time. Whilst the company currently loses money, it does so in a controlled and calculated way as it positions itself for the future. In the meantime it has played to its strengths as a reliable and financially stable technology provider whilst Gilat has struggled with other problems, and has extended its lead in its core enterprise market. HNS is a company which only takes calculated risks and certainly in terms of its VSAT business, most of these have paid off. Its move to establish service platforms in China and Brazil begin to round off its long term strategy to shift its business emphasis from hardware to service - a strategy which will be complete with the commercial launch of Spaceway in 2004. Both Hughes and ViaSat have long term strategic directions into the future broadband business, but as of yet Gilat does not and this needs to be addressed. Spaceway represents a step function increase over current generation VSAT services. Not only will the system exponentially raise satellite networking capabilities, it will finally introduce cost competitive bandwidth. Several major hurdles remain to be negotiated ranging from the reliability of the OBP on the spacecraft to attenuation at Ka-band, but if the company overcomes these issues Spaceway will set the standard for enterprise networking and will be virtually impossible to beat. If Hughes is able to demonstrate reliability and sustained throughput along with the system’s inherent features, then it is quite possible for it to achieve a virtual monopoly on the VSAT enterprise networking business in the US and even give the terrestrial carriers a substantial competitive threat in the business market for the first time ever.


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3. VSAT Market Shares

3.1 Hardware

3.1.1 Star Data TDMA Hughes Network Systems established an early lead in the industry and has maintained it ever since through a combination of market strategy, product innovation, application support and, ironically, market share. In its simplest form, the sheer volume of numbers which Hughes commands has enabled it to build and order larger volumes of equipment and therefore, one would think, obtain a lower cost of manufacturing than its primary competitors. In part, this is undoubtedly the case, but it seems also true that higher volumes generally have benefited all of the system vendors, particularly in terms of antennas and RF systems. One of the primary differentiators however, is the fact that HNS is able to more accurately predict its likely requirements and can therefore gain benefits by placing advanced bulk orders with component suppliers. The primary market share calculation for this report is the number of shipped terminals for each of the interactive VSAT system vendors.

Terminals Market Manufacturer System Shipped Share Hughes Network Systems PES/DIRECWAY 365,981 54.9% Gilat Satellite Networks Skystar/SkyBlaster 181,979 27.3% STM Networks SpaceWeb/Olante/XStar 7,388 1.1% ViaSat LinkStar/ Skylinx/SkyRelay 29,418 4.4% DVB-RCS DVB-RCS 3,860 0.6% Others 7,420 1.1% Discontinued 70,930 10.6% Total 666,976 100.0%

Table 1 - Shipped TDM/TDMA Terminal Market Share by Manufacturer - Historical Enterprise Hughes’ early success and volume manufacture allowed it to enter long-term markets in advance of any of its competitors. For example, Hughes was the first to begin marketing in Europe, the Middle East and Africa. In addition, many of the company’s partners, operators and customers were wooed by its market share and sign up in the belief that when (or perhaps if) the US customer base moves internationally, it will take advantage of their system. In some instances, this has almost certainly been the case. Whilst undoubtedly having to win a contract on its merits, Telesat Canada has not suffered from the fact that the large parents of several Canadian subsidiaries have already signed up to Hughes. Operators also buy Hughes because they know it works - perhaps a trivial way to say this and something which also applies to other systems, but customers find comfort in the fact that the technology risk is minimal. In addition, the company has been able to build up application support for its product base funded by its customers whereas some of its competitors have been forced to develop their own products without an established demand simply in order to stay level with Hughes.


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This is not to say that Hughes has not been careful and managed its business well because it certainly has. Invariably its partners and operators have been strong, well connected and have sold well. Another advantage of being number one in the market and first into new regions has been that it has had the pick of the partners on offer. However, Hughes has also proved itself to be perfectly capable of managing foreign business on its own and in many of its ventures it has either bought out its original partner or assumed complete management control of the business. The only times when it has had an obvious problem have been when it only had a minority position and in most cases it has exited from these ventures. In terms of simply running its VSAT business from a basic value perspective, the company has managed the two parts - international and North American - almost flawlessly. It has made mistakes including taking its attention away from customer support, assuming an arrogant stance on many occasions and taking its foot off the development pedal when, we assume, the demands on resources of Spaceway and DIRECWAY increased during 2000. However, all these issues have largely been temporary and the company continues to march forward seemingly inexorably. Nevertheless, the huge advantage which Hughes enjoyed through its dominance of the market and the refinement of its VSAT platform was tested by the advent of IP as the de facto standard, wiping out many of the legacy-based advantages of the ISBN/PES platform. Hughes has responded with its own products - the DW2000 and DW4000 - which have now been consolidated into the DW6000 system. The company was the first entrant into the consumer Internet business with its DirecPC service and believes that, as painful as the venture was initially, it taught it some useful lessons about the nature of the customer, traffic patterns, sales channels and consumer management - all things in which an enterprise-led company is not necessarily well versed. Gilat beat it to the punch in the launch of a true interactive consumer Internet access service, but only by tweaking existing platforms and the two companies largely hit the market with their pure consumer platforms, the DW4000 and the SkyBlaster 360, at around the same time. Hughes’ long term strength then showed through as Gilat’s business started to unravel and StarBand was forced into Chapter 11. A combination of HNS’ stability and Gilat’s problems allowed HNS to, once again, build a significant lead over its nearest competitor in the consumer market - something that it has continued to do into 2003.

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Figure 2 - Interactive VSAT Systems - Vendor Historical

Enterprise Shipped Market Share


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Consumer Consumer/ Enterprise Manufacturer System Terminal

Shipments Market Share

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Hughes Network Systems DW4000/4020 307,959 65.0% 501,481 57.3% Gilat Satellite Networks SkyBlaster 360/180/PCI 73,063 35.0% 255,042 29.1% Total 666,976 100.0% 875,539 86.4%

Table 2 - Shipped TDM/TDMA Terminal Market Share by Manufacturer - Historical Consumer Part of the company’s stability was a direct result of its conservative approach to its VSAT business even throughout the Internet bubble. Hughes generally managed to avoid risky investments in the dotcoms (or network dependent businesses, NDBs as Gilat termed them) and we are aware of several deals which Hughes walked away from when the risk profile simply looked too bad. It took the same approach with rural telephony, avoiding service ventures and risky financing deals in a sector of the market which suffers from onerous regulation, tariff restrictions and currency fluctuations. Thus, Hughes’ customer base in all of its product lines, whilst not totally pure, is solid and bankable and has no nasty surprises of a scale which Gilat was forced to reveal from 2001 onwards. Terminals Sites No Longer Market Share Manufacturer Shipped Ordered in Service Sold1 in Service Shipped Sold Hughes 365,981 399,456 275,182 423,203 69,239 54.9% 55.1% Gilat 181,979 207,916 143,044 216,433 20,818 27.3% 28.2% STM 7,388 8,128 3,856 8,128 1,771 1.1% 1.1% ViaSat 29,418 34,310 12,358 34,427 13,087 4.4% 4.5% DVB-RCS 3,860 4,480 1,862 4,480 0 0.6% 0.6% Others 78,350 81,651 23,869 81,824 47,472 11.7% 10.6% Grand Total 666,976 735,941 460,171 768,495 152,387 100.0% 100.0%

Table 3 - Interactive Terminals by Manufacturer - Historical As the battle raged between Hughes and Gilat, the other major manufacturers also fought on, attempting to catch up in terms of features and cost reductions. For all of them this was hard because there was more room between EchoStar’s staff flying in economy class than there was between Hughes and Gilat in the marketplace. Inevitably the major players began to fall by the wayside - starting with AT&T and finally ending with NEC’s quiet withdrawal from 2001 onwards. ViaSat, which had purchased Scientific-Atlanta’s product line in 2000, quickly discontinued the SkyRelay product in favour of a new development it called ArcLight. ArcLight was one of these products you hope will be real, but ultimately suspect won’t be. To say that the product saw the light of day when a hub and five terminals were beta tested by TransTel in South Africa in early 2003 is pushing a point and it was little surprise when it was quietly mothballed later in 2003. Fortunately ViaSat had purchased LMGT’s Comsat Labs VSAT business in 2001 and obtained Comsat Labs’ LinkStar product as part of the acquisition. The combination of an extremely frustrated group of prospective ArcLight customers, a long suffering SkyRelay customer base and a brand new product

1. Includes renewals.


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catapulted the LinkStar into the market. 2001 and early 2002 saw the platform make great strides with hub sales, but frustratingly little penetration in terms of number of VSATs. However, by the end of 2002 ViaSat had won three major deals which really placed the company on the map for the first time in perhaps five years. Taking a historical view of the market, the obvious great battle is between Hughes and Gilat. Gilat’s Advantage product muscles its way into the market, effectively elbowing all of the other systems out of the way. However, at the same time, Hughes consistently maintains its share of the business. Figure 3 gives market share by units shipped by year - we have substantially refined our database to be able to track annual shipments in the years that follow an order. This cuts out any large orders which have not materialised as originally expected. In most instances we modify these orders retrospectively anyway and once past two years or so, the only excess this measure cuts out is frame orders which are called off over several years.

From year to year, Hughes has maintained a share which has rarely fallen below half of the market, despite relentless competition from Gilat. Figure 3 offers some interesting insights. The squeeze on NEC, Tridom and ViaSat’s SkyRelay product between 1995 and 1998 is clearly illustrated as these systems, now classified as discontinued, slowly become marginalised. At their peak, these systems were accounting for about 50 per cent of the annual market. Hughes’ domination clearly shows with its consistent performance year on year. Gilat did very well to first establish its product and then consolidate its position and maintain its growth. Up until 2001 the market was, in effect, a two-horse race although it should be born in mind that these shares are based on terminals ordered and not revenues.

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Figure 3 - Major Manufacturer World Ordered Terminal Market Share by Year


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Revenues would show a slightly different picture because the smaller manufacturers, whilst signing fewer terminals, have probably maintained higher prices on smaller volumes and as a result of operating in niche markets. It is only in 2002 that we begin to see ViaSat and others begin to make some small dent in the Hughes and Gilat duopoly, mostly at Gilat’s expense.

Figure 4 - Manufacturer Unit Shipments on Sales, World Market Share 2001 and 2002 Manufacturer 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total Hughes 58.53% 48.30% 52.23% 69.59% 52.27% 57.82% 52.23% 51.12% 55.38% 55.06%Gilat 16.52% 23.34% 31.84% 15.85% 32.34% 40.04% 41.97% 41.19% 30.98% 28.16%Others 24.95% 28.36% 15.93% 14.56% 15.39% 2.15% 5.80% 7.70% 13.65% 16.78%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Table 4 - Major Manufacturer World Market Share by Year - Orders with Renewals

3.1.1.1 Consumer & Broadband The consumer satellite Internet access business was launched in 2001 by Gilat with its StarBand venture. Hughes followed soon afterwards with its consumer DIRECWAY service. We do not believe that either of these service platforms currently makes money and could survive as a commercially viable stand-alone business. Nevertheless, both have contributed significant manufacturing volumes to the business and given Hughes and Gilat a scale which no other manufacturer has yet been able to equal. Both companies subsequently refined their products to support networking, removing the requirement for a computer to host software and creating fully self-hosting VSATs. These products, the DW4020 and DW6000 from Hughes and the Skystar 360E from Gilat, are better able to serve both consumers and business users, but both companies have wisely backed off the consumer market for the moment and now target their systems as broadband access platforms for small businesses and professional users. Gilat was so quick to the market that it almost tripped over itself. By the time it was clear that there were some fundamental difficulties with consumer services, the company had already concluded some deals in Europe, Asia and Latin America.

Hughes47.6%

Gilat47.5%

STM3.1%

2001

Hughes53.5%

Gilat36.3%

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DVB-RCS2.0%

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2002


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StarBand’s expansion came to an abrupt halt as financial markets tightened up, but Hughes has sustained its service, slowly expanding it without expending any significant marketing resources. The fact that the company has managed to grow its subscriber base to over 160,000 illustrates, we believe, just how much demand does exist for the right service. The company was shipping 8,000 units a month as of March 2003. 2004 is expected to be the year of the broadband satellite systems - Spaceway, WildBlue and iPSTAR. Hughes has been preparing for Spaceway for some years now and, we would judge, is the most likely to

successfully bring its service to market. The company’s latest version of its IP VSAT, the DW6000, is “Spaceway-Ready” and ships with a hybrid Ku/Ka-band antenna. It will require a swap-out of the RF and indoor unit sub-systems, but beyond this a customer of Hughes’ enterprise service in the US will have the option of a relatively straightforward transition when Spaceway comes online. These systems will change the face of broadband satellite and represent a step function increase in the capabilities of current generation systems.

Gilat35.0%

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Figure 5 - Shipped Consumer VSAT Terminals

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3.2 Services

3.2.1 North America In North America, by far the largest service providers are based in the United States - Canada now only supports one indigenous company. It has always been the case that the major manufacturers themselves represent the largest slice of the service business in the United States. Hughes has always led the pack by a significant margin and it continues to do so with more than 60 per cent of the market. In addition, the company provides the platform for another four operators which account for a further ten per cent of the shared hub business. Two trends we reported in previous years continue to dominate the North American shared hub marketplace - consolidation and outsourcing. The general consolidation which the market experienced over the past few years appears to have begun to reverse itself. The demand for service bids, even for large networks which could have (had they wanted to) justified a private hub has continued and deepened which is good news for the service providers. Over the past two years the only private hub sales we have recorded in the enterprise market have been from existing customers upgrading their systems in North America. Sites in Service Market Share Operator System Vendor Installed Ordered In Service Ordered Hughes Network Systems HNS 110,821 131,369 62.6% 62.0% DNS HNS 427 287 0.2% 0.1% EDS HNS 8,149 10,019 4.6% 4.7% Spacenet Gilat 41,121 46,389 23.2% 21.9% Telesat Canada HNS/Gilat 6,818 9,221 3.9% 4.4% USSC HNS 2,550 2,600 1.4% 1.3% Others 7,105 11,925 4.10% 5.60% Totals 176,991 211,810 100.00% 100.00%

Table 5 - North American Shared Hub Operator Market Shares The primary competition continues to come from Frame Relay, but even that service is rarely cost competitive on a like-for-like basis if the application fit is good enough. The crucial issue is the value proposition from the VSAT operator. For specialised, highly targeted solutions - such as credit verification - VSAT can often be half the cost of the equivalent Frame Relay proposal. However, as bandwidth requirements increase this differential can be rapidly wiped away, so “focus” is all-important. The up and coming credible threat is MPLS-based VPN services. With the promise of low cost and high quality, this seems to be an oxymoron, but everyone wants something for nothing and maybe this time the carriers can deliver something. However, this type of service will always suffer from a coverage issue and so we do not anticipate that this will have any greater effect on the market than previous terrestrial services have done. The huge threats which emerged from ISDN D-channels, business class DSL and IP/VPNs have all turned out to be hot air as a result of limited coverage, a lack of QoS and (when QoS was delivered in some form) high cost. Nevertheless, enterprises are intrigued by the possibilities and can muddy the waters considerably and delay their decision making process as a result. One VSAT project followed


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the business class DSL promise for about 18 months before the telco finally gave up and admitted that a nationwide network was simply not feasible. The customer returned to their previous choice and has since rolled out a 2,000 site VSAT network. The market remains hard for the surviving independent operators and with the increase in value added resellers for the Hughes DIRECWAY, Spacenet Connexstar and ViaSat Immeon services, life is likely to become harder still. Specialisation and vertical market knowledge is part of the answer, but even then some of the new VARs know their market well and are still quite capable of making an impact. There have been three new departures for the VSAT market in the United States since 2001. The first has already been touched upon and is the increased use of value added resellers (VARs). In part, this appears to be driven by a need to reach down and serve SMEs with a more standardised product offering. A good example is Spacenet’s Connexstar service which is sold as a packaged service directly and through VARs. The offering, which is very similar to Hughes’ DIRECWAY and ViaSat’s Immeon, has a number of “bolt-on” options, such as credit verification, which are meant to simplify the sale and the decision making process. The second driver behind the increase in VAR sales is all about building new channels to market for future services. The consumer services from Hughes/DIRECWAY and Gilat/StarBand understandably began the process, but now Hughes is building in anticipation of its Spaceway service platform. We have also seen Telesat begin to sign up a few VARs for its HSi (High Speed Internet) service in Canada and fully expect that WildBlue in the US will begin to take the same approach. The second major change in the US market has been the arrival of consumer satellite broadband Internet access services. StarBand ground to a halt and was pushed into Chapter 11 by EchoStar’s naked political manoeuvring for DirecTV and has not yet managed to push past its high of 40,000 subscribers. DIRECWAY, in contrast, has continued its low profile push into the market, neither actively chasing business nor turning it down, and is now signing approximately 8,000 subscribers a month through its web portal and the occasional advertisement on DirecTV. Now at almost 170,000 interactive broadband subscribers, Hughes claims it is close to operational breakeven as a result of its synergies with its

Avdata1.2%

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HNS62.6% EDS 4.6%

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Figure 7 - N American Operator Service Market Share


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enterprise business - we take this to mean that the revenues cover the hardware and space segment costs of the service.

Between them, the three consumer services (including Hughes’ original DirecPC) have grown to over ¼ million subscribers. Hughes has actively encouraged its DirecPC users to switch services, even to the point of putting prices up. Underlying these figures however, we believe is the fact that perhaps as many as 60 per cent of these subscribers are actually small businesses of one form or another. This suggests that Hughes and Gilat have managed to open the door on this market, although at a price point which makes the service questionable to some degree. How these services will fare from here is best understood by Hughes and StarBand because it is not clear whether Hughes will attempt to

transition its customers to Spaceway or whether StarBand might ally with WildBlue to find its next stage of growth. In the meantime, we do not believe that either of these consumer priced services has impacted sales in the core enterprise market, other than through the packaged services mentioned above. Nevertheless, they have provided scale - particularly for Hughes, which is now reportedly shipping 50,000 units a quarter - a figure that a few years ago would have satisfied the entire annual worldwide market. As it stands today, StarBand has been largely impotent as a consequence of its Chapter 11 status, although its impending emergence has been announced. Hughes has continued sell the service, but both companies have made fairly significant technical strides in enhancing their platforms with features like turbo coding, which have helped to address the efficiency of their systems. As time goes by more developments are expected which will take consumer services closer to viability. We know for a fact that Hughes is working on some interesting additions to its DW6000 system and have to believe that Gilat will follow with its own. In the meantime,

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Figure 9 - US Consumer VSAT Market Share


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DIRECWAY had about 80 per cent of the market as of March 2003.

The demand for fully outsourced telecoms and IT functions by large corporations has somewhat “bent” the definition of the term ‘shared hub’ over time. Nowadays some networks are a pure service, but the provider determines to provide a facility on the customer’s premises simply because that makes better economic sense to the provider. The hub remains the operator’s property and could be used for other customers, but probably never will be. Nevertheless, this is a true service and is becoming more common as the years go by. The change towards VSAT as a service rather than a hardware solution in North America has begun to draw in larger and larger corporations. The commonly

held belief that eventually these huge network opportunities would dry up has simply not occurred. From 1985 to 1993 the average number of networks greater than 500 sites signed to a service was six each year. From 1994 to 1997 the number grew slightly to eight, but in the years since then over 20 networks a year have been sold for more than 500 sites in the United States. In general, also, the average network size of these large deals has been rising. We should also point out that the Internet boom of 1999 saw some froth in the market with large orders effectively likely to go nowhere, but these have now been factored out and the trend remains clearly upwards. It is largely this effect which has contributed to the strong growth of the market over the past few years. The demand for an “inclusive” price (usually expressed as a cost per site per month) with all aspects of VSAT hardware, installation, service and maintenance, space segment, hub and backhaul rolled into one is now almost universal and customers often have no idea how much the VSAT itself costs.

3.2.2 International In Latin America there have also been some major changes. The investment in the broadband infrastructure in the region and the subsequent bursting of the bubble has left lots of cheap terrestrial capacity sloshing around the market. The roll-out across the region is far from complete and coverage was anyway concentrated on the major metropolitan areas, but it has caused a major erosion of the VSAT business in the region. The general economic downturn which the world, with the possible exception of Africa, has experienced has been exacerbated in Latin America with failures of entire economies, devaluations and ongoing financial difficulties. This further depressed the VSAT business as it relies largely on space segment purchased in US dollars, now perhaps three times as expensive as they were two years ago. Amidst this decline, the prospects for satellite broadband Internet access services look as good in Latin America as they look anywhere. Whilst many industries struggle, the primary

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Figure 10 - Booked Terminals on US Networks >500 Sites by Year (Line=All Sales)


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producers - mines, plantations, farmers, oil and gas producers - are thriving. These businesses are now obtaining sometimes as much as three times as they were as a result of devaluation and their products are very competitive in the world market. In addition, they are not typically located in the major urban centres where the terrestrial infrastructure is good and there is both a need and a willingness to pay for broadband access. We have been disappointed with the overall performance of the Asia/Pacific region for many years now. The financial crisis which began at the end of 1997 did not help and it hit the primary growth engine of the region - South-East Asia - hardest. The after effects of this event continue to hang over the market, even today. Nevertheless, CSM for one has been able to demonstrate profitability and is a great example of a well managed VSAT business which has carefully managed to invest in diversification whilst maintaining the standard of its VSAT service. Generally, VSAT operators everywhere across the region have shown themselves to be amongst the most resilient of businesses. China seems to be a continual quagmire for the VSAT business. Not only do operators seem to struggle in the market, bogged down by regulations and government dominance of the business sector, but information on the market is always difficult to obtain and verify. However, we now have far greater visibility on what is actually happening in the market and there has been a marked increase in activity, with initiatives coming from within the country and from well financed foreigners. The older, government-owned organisations have really been overwhelmed by the newcomers in large part, but pure Chinese operators have really cleaned up their act in the past few years and now facilities at companies like Orient Group and Beijing Worthope would give any company in North America or Europe a run for their money. The big growth in VSAT services over the past two years has been to serve interactive distance learning. Almost every operator in China we interviewed for this report saw IDL as a major are of expansion and most already operated substantial networks. The two leaders in this segment appear to be Orient Group and ChinaCast. Orient started with interactive services and now has over 200 links running, but ChinaCast adopted a one-way system from Hughes and, over the past two years, has established more than 10,000 downlinks for universities and schools across the country. The company has committed to an interactive system and plans to transition its primary offering to a pure satellite solution. The underlying promise of the Chinese market is real and, given the right solution and financial case, as proved by ChinaCast, the demand can almost be over-whelming. HNS plainly believes that it is time to start trying to move the market along and, in 2003, it established a service venture with its long time partner in Shanghai Hughes with SVA, the electronics manufacturer. India is almost completely different and has always had a raft of professionally run operations. The market continues to twist and turn with new service offerings primarily in the form of SME-targeted Internet access packages from HCL, Comsat Max, Bharti Broadband and HECL. Prices are now based primarily on a competitive market and are less dictated by a bureaucracy gone mad. The space segment crunch of 2000 caused by the authorities’ insistence that only Insat capacity (of which there was none left) be used undoubtedly held back the leaders Hughes Escorts (HECL) and HCL Comnet and allowed others to catch up,


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but use of Ku-band from both Insat and foreign operators is now permitted and this has removed restrictions and opened up the possibility for lower cost satellite broadband services.

TDMA Market DAMA Market Operator Service Ordered Share Service Ordered Share Hughes Escorts 4,952 7,915 29.44% 442 442 23.31% Bharti BB 2,877 2,877 17.10% 251 315 14.83% Comsat Max 3,155 3,155 18.76% 372 399 23.66% HCL Comnet 3,496 3,496 20.78% 339 339 14.40% Others 2,342 4,497 13.92% 439 448 23.80% Totals 16,822 21,940 100.00% 1843 1943 100.00%

Table 6 - Indian TDMA and DAMA Operator Market Shares

Once again, Hughes Escorts (HECL) has maintained its dominance, chased hard by HCL Comnet and Comsat Max. Whilst HECL now has a large element of momentum (as a result of its huge win to provide the hardware platform and half of the service, shared with Essel Shyam, for the PlayWin lottery) HCL has sold some large captive networks, particularly a 1,000 site network to Tata for its rural telephony services. All the operators are trying to move towards more value in their offering and the one furthest ahead must be HCL

Comnet, which started the process first, closely chased by Hughes Escorts. These two companies continue to compete at the leading edge of the business, but there are plenty of serious players emerging as actual and potential threats. In years past regulations favoured the creation of private hubs and so Hughes Escorts and HCL specifically saw some of their largest customers opt for a dedicated facility, but now this situation has reversed. Despite transitioning some of its largest accounts, Hughes Escorts continues to lead the market by a considerable margin and, indeed, retains its premier position as the largest provider of shared hub services in the entire Asia/Pacific region. Both HECL and HCL have also sold some large mesh DAMA networks, both based on service and dedicated facilities.

Bharti BB17.1%

Hughes Escorts29.4%

Comsat Max18.8%

Essel12.5%

HCL Comnet20.8%

Others1.5%

Figure 11 - Indian TDMA Service Market Shares


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The past year has also seen the rise of Essel Shyam, mostly due to its connection with PlayWin and its contract to operate half of that network. Essel is widely expected to purchase the business of Telstra V-Comm whose owners now seem to have scaled back their interest. We would contend that the current top five operators in India are as good a selection as you could find anywhere and any new entrant is bound to find penetration from nothing very hard. With the exception perhaps of the United States, India is the most competitive market in the world,

and even the US might have a hard time keeping up. Service is key and some of the operators could teach a thing or two to many other companies trying to achieve similar things. The major change in Europe has been the arrival of services specifically targeted at broadband access for small businesses. In addition to the established operators (HNS Europe and now Satlynx - previously Gilat Europe), a significant number of new services have been launched based on DVB-RCS and other systems. As these services are completely different in terms of application, pricing, target market and sales process, we have classified them separately from the pure enterprise sale. Sites in Service Market Share Operator/Country System Installed Ordered Domestic Regional HNS Europe HNS 11,867 16,484 31.0% 26.5% AT&T Global Network Gilat & ParaGea 7,501 8,001 19.6% 16.8% Plenexis HNS 3,025 3,145 7.9% 6.8% Satlynx Gilat 4,675 6,735 12.2% 10.4% Telefónica Data HNS, STM & ParaGea 4,001 4,424 10.4% 8.9% Telenor NEC & HNS 2,190 2,190 5.7% 4.9% Telespazio HNS & STM 2,125 3,875 5.5% 4.7% Other Regional Operators 2,906 3,057 6.6% Other Domestic 6,448 6,535 14.4% Totals 44,738 54,446 100.00%

Table 7 - Regional European Shared Hub Operator Market Shares

Hughes Escorts23.3%

HCL Comnet14.4%

Essel Shyam5.6%

Comsat Max23.7%

HFCL8.6%

Bharti BB14.8%

TVC9.2%

Figure 12 - Indian DAMA Service Market Shares


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Gilat’s unhappy experience with service in Europe was finally resolved by contributing its business as part of its share of the Satlynx joint venture with SES Astra (another company which had struggled with its BBI DVB-RCS based service venture) and Alcatel. Gilat had seen its European service primarily as a means to sell its equipment and SES’ primary interest was for BBI to sell space segment: so Satlynx is either the best or the worst of both worlds, depending on how you view it. Plenexis, the previous DeTeSat, is now owned by the venture capital fund, 3i, and has been fundamentally restructured. It has invested in a new DIRECWAY hub and claims that its “Satbooster” one-way Internet access service has been very successful with over 6,000 subscribers.

The long-term leader of the enterprise VSAT business has been HNS Europe ever since it debuted as Hughes Olivetti Telecom. The company has always set the pace in the market and it continues to do so. The past two years has seen the company concentrate less on pure enterprise sales and more on

refining its satellite broadband offer to SMEs sold through a network of VARs. HNS Europe was the first to take this approach, eschewing Gilat’s signing of high profile names like BT Openworld and Tiscali. HNSE was proved right and the company has gone on to build a large base of subscribers - over twice that of Satlynx - based on its VAR relationships. HNS Europe was smart enough to avoid the consumer business and go straight for the small business market and, as a result, obtained a significant first mover advantage. However, success in this business is all about pricing and packaging in the first instance. HNSE got the packing right, way ahead of anyone else, but its competitors are catching up fast. More important is whether the calculations are done correctly to ensure the service actually makes money. Again, HNSE has had more time to refine this and we also find it hard to see how those operators which have made very large investments in hub facilities and yet only have a

Telespazio4.7%

OtherRegional

2.7%

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BT2.3%

Spaceline1.5%

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HNS Europe26.5% AT&T Global

Netw ork16.8%

Telefónica Data8.9%

Satlynx10.4%

Telenor4.9%

Figure 13 - All European Shared Hub Operator Enterprise Market

Share (Broadband SME Excluded)

Operator Primary Platform Subs Share HNS Europe HNS/DW4020 5,360 50.1% Satlynx Gilat/Skystar360E 2,015 18.8% Aramiska Newtec/DVB-RCS 1,500 14.0% Others 1,825 17.1% Total 10,700 100.0%

Table 8 - SME Broadband Access Service, European Operator Market Shares 1Q/03


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few hundred terminals in service can make money, even in the longer term. HNSE’s performance is well illustrated by the fact that it remains the third largest shared hub service provider in the world behind its own parent, Hughes Network Systems in the US and Gilat’s Spacenet business in the US. In terms of sites in service with operators, Hughes retains a significant lead over Gilat - 63 to 28 per cent - and clearly dominates this part of the market. Gilat however, has performed strongly in this area over the past two years and now the two companies share the ten largest shared hub operations in the world equally. Of these, both Hughes’ and Gilat’s own service businesses in the US and Europe rank number one and number two in the list respectively and their European service businesses, HNS Europe and Satlynx, rank number three and four.

Hughes63.1%

Gilat28.7%

ViaSat 3.0%

Others 4.2%DVB-RCS

0.6% Figure 14 - Shared Hub Market Manufacturer Shares


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4. VSAT Market Analysis

Without question, in terms of product shipped and orders booked, the enterprise VSAT market has grown strongly and consistently over the past eight years. There was a surge in shipments in 1999, probably related in some way to the need to quickly deploy Y2K networks for replacement of legacy systems as well as back-up networks. Prior to

1995 every year seemed only to be predictable in that it would reverse the direction of the previous year.

However, the cumulative ordered market total has hovered around the 20 per cent annually since the market stabilised and began the process of maturity (Figure 16). Three year rolling compound annual growth rates have also remained remarkably stable since 1990, dropping from about 15 per cent in the early 1990s to 12 per cent today.

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Figure 15 - Annual TDMA Enterprise Orders & Shipments 1985-2002

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Figure 16 - Cumulative Annual Growth for TDMA Orders 1985-2002


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The VSAT market has grown steadily in cumulative terms, but it suffered in the early years from erratic annual sales. This reflected the contract-led nature of the market; for example, out of the 24,000-odd units booked in 1990, the General Motors and Chevron contracts accounted for more than 15,000 terminals. The market remains contract-led, but as the technology has established itself and consolidated its position in the general data communications business, year on year sales appear to have settled down. As already discussed earlier, the number of large scale networks using TDMA VSAT shows no sign of petering out.

To date over 735,000 VSATs have been sold in the world market - the vast majority in North America and western Europe. However, whilst North America continues to account for the lion’s share of VSAT sales, the past three years have seen increasing volumes in the developing world. The US and Europe have historically accounted for the largest corporate networks in contrast to the developing regions of the world which have largely demanded smaller, shared hub networks, but this is changing. The number of large contracts greater than 500 sites has grown strongly in Asia and Latin America. Non US markets accounted for over 60 per cent of all VSAT terminal sales in 2001 and about 50 per cent in 2002. Together with a major upturn in orders in North America, this contributed to a strong year in sales in 2002.

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Figure 17 - TDMA Annual Enterprise Sales by Region, 1985-2002


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In the past, there were striking differences between the sector breakdown between regions characterised by a dominance of automotive and retail customers in North America and the financial and services sectors in the developing regions. However, as the old mode of terrestrial replacement in developed countries has slowly been replaced by far more of a solutions, application-specific business model, these differences have been whittled away. Today the major distinguishing factor remains only the strong market for financial networks in Asia, Latin America and Africa/ME.

When we consider the breakdown of each manufacturer’s sales by industry sector it becomes clear that Hughes’ history has yielded a relatively balanced portfolio. The company’s sales are distributed very evenly between most segments probably due to the fact that it has actively competed in each segment of the market as that segment has embraced the technology. Gilat’s business has also become far more evenly distributed over the last four years where it was once completely dominated by the company’s focus on particular markets. The information sector made up more than 40 per cent of the company’s historical sales in 1996 as a result of its partnership with GTECH for lottery applications and the GSAT derivative - today it has a much broader-based set of customers.

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Figure 18 - Interactive VSAT Sales by Industry Sector and

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Sector Auto Fin Govt Mfr/Dist Utility Retail Svces Info Travel Other Hughes 83.6% 60.6% 34.6% 45.3% 67.8% 60.8% 34.0% 43.9% 67.5% 53.0% Gilat 6.8% 14.0% 41.8% 14.9% 23.1% 25.7% 41.6% 47.8% 10.0% 23.0% STM 0.0% 1.4% 2.7% 1.9% 0.1% 0.3% 2.8% 0.4% 0.4% 0.9% ViaSat 5.5% 3.6% 8.0% 8.2% 0.8% 7.1% 4.5% 4.7% 0.8% 7.3% DVB-RCS - - - - - 3.2% - - - IDirect - - 0.2% - 0.1% - 2.4% - - - Others - 0.1% 0.7% 0.1% 1.3% - 3.7% 0.2% 0.1% - Discnt. 4.1% 20.2% 12.0% 29.6% 6.8% 6.1% 7.7% 3.0% 21.2% 15.8% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Table 9 - TDMA Manufacturer Shares by Industry Sector At one time it was possible to see clear areas where different manufacturers had targeted particular sectors of the market. NEC was traditionally strong in the services sector, STM with government customers and ViaSat in the retail business. However, due to the overwhelming dominance by Hughes and Gilat, many of these subtleties have been wiped from any analysis. What is however clear, is that Gilat has performed best in the government and information sectors, but elsewhere Hughes has a marked lead over Gilat and indeed the whole market, particularly in the key automotive and utility sectors, but also in the travel and financial areas. Leaving aside the services category, with the exception of the government sector the company has more than 40 per cent in every sector of the market. With its sales to Chrysler, GM and Ford in the US and elsewhere, Hughes has really made the automotive dealership market its own and is only really challenged by the IBM & Gilat Peugeot/Citroen deal in Europe. In the utility and retail markets the company is also exceptionally strong and has now won almost every major gas station deal in the US.

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Figure 19 - TDMA VSAT Sales by Industry Sector and Manufacturer


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The overwhelming dominance of services for the DVB-RCS manufacturers, iDirect and others is primarily due to the fact that these companies are relatively new to the market and, in trying to establish themselves, have targeted service providers as their main channel to market. As mentioned elsewhere in the report, the struggle in the DVB-RCS business today is to sell as many hubs as possible in order to build some form of advantage in the future through value added features, rather than be constrained only to compete on price in a terminal replacement situation. The highlights of 2002 were in the information and services sectors with each, ironically, being driven by the technology’s cost effectiveness as a transactional system and its broadband access capabilities respectively - almost a case of two opposites.


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5. HNS – Hardware

5.1 Star Data Systems PES & DIRECWAY

Hughes has a range of star data VSAT platforms running from the long established PES system, through the enterprise DW2000 and the IP-based DIRECWAY DW6000. The technical details and product discussions of each of these systems are covered individually in the following section.

5.1.1 ISBN/PES The Hughes PES TDM/TDMA VSAT system was originally developed and launched by M/A-Com Telecommunications after that company’s purchase of Linkabit and DCC Limited. The original owners of Linkabit who had contributed significantly to the design, Dr Irwin Jacobs and Dr Andrew Viterbi (of decoder fame), left M/A-Com and started Qualcomm, known for its OmniTRACS mobile satellite service and CDMA cellular systems. Hughes purchased the M/A-Com VSAT business in 1987 just as the VSAT industry turned the corner from being a telecoms cul-de-sac to a technology with a future. The system is known as the Integrated Satellite Business Network (ISBN). It typically uses remote terminals of between 0.75 and 2.4 metres, depending on the EIRP and G/T of the satellite, frequency band and type of remote terminal, which are known as Personal Earth Stations (PES). The PES has been constantly revised, refined and upgraded over time. Since the Type I terminals, which required A/C power at the antenna, the company has increased the functionality of the product, made it easier to install and operate and reduced the cost of the remote terminal. However, uniquely amongst the pioneers of the industry, the original design of the product remains true to its origins and, whilst backwards compatibility and exactly what criteria this is based upon is a grey area, Hughes’ system does retain a significant degree of compatibility between its product generations. The backwards compatibility issue is an important one for Hughes and, whereas this must give the company some difficulties when redesigning its product, Hughes cannot be accused of ever leading its customers into a technological dead-end. The strategy also has its advantages, because every new option which HNS introduces for its customers can be sold to any one of its existing users. A classic example was the case for the company’s LAN card which it introduced in 1992 and immediately sold to WalMart which originally purchased its 2,000 site network in 1985. Today, the ISBN/PES product represents the refinements added to the original system over a period of more than ten years since its forerunner was installed at Schlumberger.


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The ISBN has a wide variety of TDMA protocols including a stream mode assignment during which time no other user is allowed to access the inbound channel. Transaction reservation access is suited to transactions that are too often longer than the aloha slot sizes. Capacity is reserved for a specific user via the Aloha slots or by a request packet transmitted in parallel with a current data packet. Hughes states that reservation access uses capacity most efficiently and offers the most stable response time, but does incur a one-time additional delay of 500-600 msecs (a double satellite hop) for the initial request and assignment of packets. This method of inbound assignment is most suited to users with a widely variable range of message lengths or traffic rates. A “stream” access technique is also offered for high bandwidth applications and all access options are supported on each individual VSAT port enabling customisation on an application rather than a VSAT basis. The system is configurable to switch automatically between any two access methods and in this way the choice of access method is optimised in real time for the particular type of traffic offered to the system. The company also supports traffic prioritisation on the system whereby, for example, a credit verification packet will jump the queue past less critical file transfer traffic. This feature looks into the customer's data and makes a decision based on a set of operator defined rules and is something that Hughes claims is unique to the PES. The system is able to run a variety of other access techniques, many of which Hughes regards as a major competitive advantage for its product over others. When it was first introduced, the ISBN system was the only mainstream system which supported an inherent voice capability. This was initially based on a 16 kbps rate, but over time voice support has been improved and, in 1999 it added VoIP capability to the PES5000 system. This is supplied as an additional card which supports up to two VOIP channels. The system has not been without its fair share of problems over its ten year plus history, but these have been minor and have been dealt with as they have arisen. By and large customers report to us that the equipment is well made, functional and reliable and functions as one would expect a product of this lineage to do. Criticisms have been directed towards areas other than the hardware and its functionality and these are dealt with later in this section. Early complaints regarding the network management system were addressed with the introduction of the graphically-based network management system, IllumiNet, in 1992. This facilitated the use of the ISBN system in a shared hub environment with support for remote network management terminals and multiple customers on a single inbound channel. The system is certainly impressive and costs approximately $25,000. There have been criticisms of the fragile nature of the power supply in the remote terminal, particularly from Asian users and operators, and these do continue to a minor degree, but often the problem lies with the fact a UPS has not been installed at the remote site - an essential requirement for all systems as most operators in Asia and Latin America have discovered. One of the fun parts of this report in the past has been speculating on what Hughes’ latest PES terminal development was likely to bring. Today, with the Spaceway system looming on the horizon, this is less a matter of speculation and more one of fact. However, another of Hughes’ amusing little habits (although the company claims to be totally innocent) was its tendency to label its PES model at the price it intended to sell it for in standard Ku-band form (PES8000, PES6000, etc.). When the PES5000 was launched, that number happened to


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correspond to the general price of the terminal in C-band and the DW2000 seemed to maintain the trend. With the launch of the DW4000 and now the DW6000 the company has put an end to our nonsense once and for all. The PES6000 system was launched in January 1991 and was compatible with the PES8000. In the outbound direction, the standard ISBN configuration uses either a 128 kbps or 512 kbps packetised TDM satellite carrier with variable length addressed packets. Multiple remote terminals share an inbound channel which operates either a 64 kbps, 128 kbps or 256 kbps packetised random access TDMA carrier using slotted Aloha. The PES5000 model was officially launched in 1996 and, we are pleased to say that, our predictions of 1995 were very accurate. The 5000 probably came close to halving the cost of a PES6000 without compromising the design or functionality. It did trade a lower hardware cost and smaller antenna size for decreased space segment efficiency, but backwards compatibility with the other members of the PES family was substantially maintained. The software remains the same across all platforms and the outbound channel is also common to all generations. However, the inbound carriers are not compatible and so an existing user of the PES6000/8000 version would have to purchase new Burst Channel Demodulators (BCDs) to upgrade to the PES5000. The 5000 is also completely compatible with the IllumiNet NMS and simply appears as an additional terminal, albeit on a different carrier. Some of the other major features of the system are as follows:

Two ports as standard, with options to expand to a further four. An Ethernet LAN interface is now built into the IDU. Optional support for two VoIP channels. Different inroutes. The PES5000 can operate on the standard PES8000/6000 series

outbound, but it cannot operate on the standard inbound channel. 64, 128 or 256 kbps inbound channels are supported. The system has no uplink power control.

The PES5000 was immediately pitched head to head with Gilat’s Advantage product and even Hughes would probably admit that it would not have reached this price/functionality level had it not been for the competition from Gilat. From its introduction, the PES5000 proved to be a match for the Advantage - both products have certain strong points, but the few users which have experience of both systems inform us that there is very little to chose between the two in functionality or reliability. The only comment that some have made is that they have chosen the Hughes system because Hughes has a greater level of experience with customer application protocols on its system and the PES5000 maintains all of the protocol suites which have been developed over almost 15 years on the ISBN system. During 1998, Hughes introduced its DW1000 (DPC/EE) broadband overlay system which, when deployed in combination with the PES5000, is known as the IPAdvantage. This is now supplied as a set-top box incorporating the DW1000 hardware and an MPEG decoder. It can either operate as a standalone system or integrate with the PES system and provides a high speed IP broadcast channel running at rates between 1.15 Mbps and 48 Mbps. The product is


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an evolution of the consumer DW3000 (DirecPC), is able to interface with a customer’s LAN or television set and the company has found that users find this to be definitely preferable to having to add third party cards to a PC. Ironically, both Hughes and Gilat began their products as non-DVB compatible systems, but both now have adopted the standard - a sensible approach considering the market generally has signalled that standards are the way to go as illustrated by the way it has wholeheartedly embraced IP. Hughes has also taken the standards approach one step further by incorporating an SNMP network management system with the product - something that Gilat has not yet done. The company has had some SNMP functionality built into its IllumiNet system for some time, but this is rarely used to our knowledge. The ISBN also offers other facilities, such as Quickpoint in which backup satellite capacity and details of azimuth, elevation and polarisation for each remote terminal are pre-defined so that in the event of a catastrophic failure of the satellite or a planned re-point a relative novice is able to re-point the antenna. The space segment complement of Quickpoint is a comprehensive transponder/satellite contingency plan co-ordinated with each of the major FSS providers. Hughes believes that it is uniquely able to accomplish such arrangements because of the size of its business. Galaxy 4 was HNS’s primary satellite for the largest number of its VSAT networks and when it suffered its catastrophic failure, Hughes immediately organised a massive operation to re-point thousands of VSATs across the US. Quickpoint was not fully developed, but once again experience is a tough school and Hughes now believes that it has the most extensive contingency systems and procedures in the industry. These systems have since been tested and honed in a minor failure and a planned re-point. The company introduced a LAN interconnection card early in 1992, termed LANAdvantage. Initially, this unit was largely protocol transparent as a result of its bridge-based design, but during 1996 Hughes introduced increased support for TCP routing and now the system is able to support both bridging and routing functions as well as a serial interface depending on the type of applications required at the remote site. HNS distributes an updated software release every six months, based on requests for improvements from existing and new customers and in-house initiatives. A great deal of its direction is derived from its two user groups which are made up of dedicated and shared hub users respectively. Some customers inform us that they find the costs involved with software upgrades a heavy burden, but that Hughes has been very responsive when bugs or problems are reported. Hughes offers two options for software: the customer may either contract for “software maintenance” or purchase separate upgrades. The network management computer (NMC) is not redundant in normal supply, primarily because it does not actively control the network; if it fails, the network will continue to operate normally, but will effectively be static until the computer is repaired. Despite the launch of the DIRECWAY platforms, which effectively take over where the PES leaves off, the PES platform continues to remain an important business for the company. The system is tried and tested and extremely feature rich and, as fast as the enterprise networking business is moving towards IP as a generic standard data protocol, the ability to support a wide variety of legacy protocols is likely to remain for many years yet. In particular, there are many parts of the world, including markets in well developed economies, where support for SNA and X.25 will remain a major requirement for some time and users will be reluctant to


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incur higher transmission overheads by encapsulating legacy protocols in IP just for the sake of a “pure” IP environment. In its native form, i.e. without the addition of the DPC/EE, the PES5000 remains slightly more cost effective for users with relatively well-defined applications, such as support for ATM banking systems and POS/credit verification. An initial simple network implementation can also be upgraded to provide a similar level of functionality to the DW2000 in its present form at a later date if required. For all these reasons, the PES system will remain a significant workhorse for HNS and there are no plans to cease production in the foreseeable future. As mentioned earlier, PES8000 and 6000 systems continue to be manufactured even today, albeit in very small quantities. The downside is that inevitably the ISBN/PES platform will obtain less share of the available development resources within HNS as time progresses, but it should be noted that there are now something like 310,000 PES VSATs in operation around the world and Hughes has no intention of abandoning this customer base which provides a huge ongoing additional revenue stream from spares, replacements and minor expansions. There is also a great deal of comfort in knowing that the PES, in all of its forms, has now been around for approaching 20 years and there are still a few users with the Type I system still in service. The attraction of a system able to support a suite of services which many developing country PTTs struggle to provide reliably, is extremely large for an emerging operator looking to establish a new service platform.

5.1.2 DIRECWAY DW2000 The DW2000 was officially announced by Hughes in October 1999 as the DIRECWAY Multimedia VSAT (DMV). The system was slightly late in arriving and had some customers tapping their feet with impatience as they awaited its shipment, but Hughes managed to ship the first version in the latter part of 2000. The DW2000 represented the next step for Hughes’ enterprise product line and the fact that, for the first time, the company has developed a product which is not backwards compatible with the ISBN/PES system illustrates the scale to which IP and the demand for multimedia applications has taken hold in the corporate networking business. Originally codenamed “Snowbird”, development of the DW2000 began in late 1998 and was based around the increasing demand which was being seen for multimedia services largely driven by the revolution in applications caused by the Internet. Browser interfaces, IP convergence and corporate Intranets coupled with an irreversible trend towards the adoption of IP as a universal protocol caused all of the manufacturers of VSAT systems to stop and consider the huge baggage of legacy protocols they were carrying around. Hughes had been meeting this need by an ongoing program of adaption of its long serving PES platform with the addition and enhancement of LAN support, the introduction and integration of the DW1000 and the direct support of TCP/IP and its variants. However, it was becoming clear that a significant segment of customers required a multimedia satellite platform and the various combinations of the PES were essentially incurring costs which could be eliminated with a completely new design. In addition, whilst the product had been re-engineered and


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new features introduced, the PES retains its backwards compatibility and its basic design features can still be traced back to the early 1980s. The DW2000 essentially created a lower cost VSAT terminal by taking two actions - removing legacy protocol support and the replacement of the 512 kbps outbound with a high speed IP broadcast/multicast channel. The system is slightly more expensive than the basic PES5000 terminal, but offers substantial cost savings in comparison to the PES5000/DW1000 combination. Its outbound channel is a DVB IP stream, in which IP packets can be multicast as well as designated to individual remotes, and a series of contentious access inbound channels which essentially remain unchanged from the PES platform. Indeed, Hughes always maintained that one of its competitive advantages was the range and dynamic nature of its inbound access schemes and there would be little point in re-inventing those. The system is targeted purely at the enterprise customer and, as such, the indoor unit incorporates two Ethernet LAN RJ45 ports supporting both 10BaseT and 100BaseT connections as well as an S-video interface for MPEG and RCA jacks for video and audio. The enterprise nature of the product is completely given away by the provision of two RS232 serial ports which are able to support asynchronous traffic. In addition, since the introduction of the platform, Hughes has already ported some legacy protocols to the DW2000 - something that the company considers on a case by case basis as required. Alternatively, support can be provided through external devices, but the company does not anticipate that there will be a large demand for this. Initial versions of the system made it look primarily like an IP-centric PES5000, but HNS always planned that the platform would have a wide range of features designed to support enterprise application demands. Accordingly, the company has added additional memory and processing capabilities to the IDU and built-in storage in the form of a high capacity hard disk which allows for caching and delayed playback of video content. These features are the primary differentiators between the DW2000 and its consumer-originated DW4020/6000 sister products. Today, HNS sells both of these platforms into the enterprise market depending on a customer’s application requirements. The first customers for the DW2000 were in the United States and include Donatos (a subsidiary of McDonalds), Jack-in-the-Box and Albertsons. During 2000, Hughes booked orders totaling over 10,000 DW2000 units and by the end of 2002 this figure had risen to over 30,000. In 2000 the product accounted for 12 per cent of the company’s shipments and seven per cent of the entire market, so Hughes must have been well satisfied that its introduction was extremely successful despite the initial delays. The primary application for the DW2000 are point of sale and corporate multimedia operations, such as micro-advertising (video or audio delivery to locations such as gas station pumps or convenience stores), corporate training networks, automated menu and pricing displays, promotional displays as well as vanilla IP data and standard intranet and internet access for corporations. Customers we have talked to who use the DW2000 inform us that they have been very happy with the functionality and reliability of the system. Back in 2000, it seemed likely that competition for the DW2000 would come from Gilat’s Advantage system, but in fact Hughes itself has developed the largest competitive threat in its DW6000 platform. The DW4000 was and is a consumer orientated product, but its variants,


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the DW4020 and DW4010 took this line of the family tree into the enterprise market and the DW6000 extends these capabilities still further. Whilst we believe the DW2000 will continue to find a home with a good number of customers as a result of its integrated caching and serial port features, it is clear that the central thrust for HNS will now come on the DW6000 system. The good news for customers is that the two systems share many common elements and so most of the developments done for the DW6000 will be easily ported over to the DW2000.

5.1.3 DIRECWAY DW4000/DW6000 DW4000 is the interactive version of Hughes’ DW3000 Internet broadcast/multicast system which the company launched in 1996. The system is primarily targeted at the high volume consumer Internet access market and was announced during 1999. First shipments of the terminal for beta tests were made at the end of 2000 and the US service was brought into operation in June 2001. The DW4000 system was initially named DirecPC 2-Way and followed a similar design timescale to the DW2000 (DMV) under the codename Shannon. Hughes had concluded a venture with AOL for provision of a satellite-based Internet access service in the US, named “AOL, Powered by DirecPC”, in 1999 and this was subsequently followed by other “Powered By” ventures with Juno and Earthlink as well as a service packaged with Pegasus, the rural-based reseller of Hughes’ DIRECTV service. The DW4000 was designed to specifically address the consumer market, although the only market in which it is actively sold on a true consumer service is North America, where HNS operates its own DIRECWAY offer. In the US the DW4000 is offered with a 74 centimetre antenna with coverage of three satellites - two for reception of DIRECTV programming and one for the Internet access service - via a transceiver and two LNBs. The indoor consumer unit consists of two boxes, one for receive and one for transmit, which are clipped together in an integrated package. It supports a single USB connection to a user’s PC and requires software support and processing from the PC in the same way that the SkyBlaster from StarBand does. In its consumer form, DW4000’s hub and network management system operates a service which has learnt much from Hughes’ experience with its one-way DW3000 service. TCP/IP spoofing and acceleration software is incorporated, caching servers and the ability to enforce throttling and quality of service standards on the network which ensure that no one user is able to monopolise network resources. Although the DW4000 system was targeted at the consumer business, it was quickly adopted for internet access services in the SME and SoHo markets. In Australia Telstra operates a service to the outback which primarily serves small businesses and farms and in Europe, HNS’ own subsidiary, HNS Europe, launched a service targeted at small enterprises through a network of VARs. It seemed that, unlike Gilat, HNS quickly learnt that the technology was not yet quite ready for the mass market in terms of price points and bandwidth efficiencies. We also believe that HNS saw many of the users of its US consumer service coming from small businesses rather than true consumers. Coupled with the fact that networking a broadband connection suddenly became commonplace in both the SoHo and residential markets this led HNS on to the next stage of the DW4000’s development. As a single USB device requiring a PC as a software host, the DW4000, like the SkyBlaster 360, was not


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ideally suited to networking. Whilst these systems can be networked, a third party proxy program is needed, substantially complicating the system from both the user and the operator perspectives. Consequently, the next stage of development involved adding full routing functionality to the platform allowing it to be independent of the user’s PC - what is known as self-hosting. In Hughes’ case this was a relatively trivial task (as far as these things can be) because it already had much of this technology in its DW2000 system as well as a design which allows for an additional box to be clipped to the existing two receive and transmit boxes - an elegant and quick upgrade. By contrast, Gilat’s move in the same direction with its SkyBlaster 360E product required a complete re-packaging of its system. Hughes’ new product was introduced in early 2002 as the DW4020 and, as suggested above, a standard DW4000 can be quickly and easily upgraded to this product by adding the third box and connecting a few cables. The DW4020 supports four Ethernet ports, as opposed to one USB, and functions as a router which is simply connected via a standard Ethernet cable into a low cost hub, wireless LAN base station or directly to up to four PCs. Towards the end of 2002, the company began to work on a integrated solution which consists of one IDU package - this is known as the DW6000 and is essentially the same in terms of functionality as the DW4020. The DW6000 was soft-launched during the first half of 2003 and comes with several options, known as “appliances”, which plug into the base IDU and support additional services, such as VoIP and legacy serial ports. These appliances can also be used with the DW4020 system and are packaged in the same housing as the standard DW6000 IDU (which now looks like a toaster as many of these systems do). With these appliances and integral support for VoIP and a limited range of legacy protocols, the circle is almost squared for Hughes and the DW6000 has become the primary platform for both consumer and enterprise solutions for the company, essentially dead-ending the DW2000. Additionally, the DW6000 and its appliances are based on the same chassis as the Spaceway VSAT terminal and, in the US are being shipped with Ka/Ku hybrid antennas, allowing for a smooth upgrade for a DW6000 user to the broadband Spaceway system due to be launched in February 2004. Once again, Hughes is carefully nurturing its customer base and ensuring that it cannot be accused of leading its users into a technological dead end. This entire branch of Hughes’ VSAT family tree - the DW4000, 4010, 4020 and 6000 - operate on the same hub equipment, network management system and back office (OSS and BSS) software. The architecture is loosely based around HNS’ long established experience with its PES product line, but differs from the PES and DW2000 in several important ways. The outbound channel is a high speed DVB carrier which incorporates Hughes’ own encryption system and which is scaleable from 1.15 Mbps to 48 Mbps. The inbound channels consist of a series of burst channel demodulators, as in the other TDMA platforms, but the access scheme is optimised for Internet access. In the PES system, a number of access schemes are deployed depending on the specific customer application. With the DIRECWAY system operating as an Internet access platform, one or more contentious access channels are used by the VSAT to signal to the hub that it has traffic to send - the terminal is inactive until the user clicks on a link or sends an email. The initial request over the contentious access channel prompts the hub system to allocate the VSAT to a TDMA inbound traffic carrier and


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assigns it a low rate channel within the carrier. The VSAT then frequency hops to its allocated channel and from then onwards, more requests for bandwidth are piggy-backed on the traffic so the VSAT’s channel is constantly dynamically re-sized up or down as determined by the type of service it is running and the priorities and QoS for that user, as set by the operator. This ability to frequency hop - MF-TDMA - allows for traffic to be balanced across the system and some services to be prioritised or shifted to reserved capacity. However, the platform can also support pure transactional services running traffic over a number of contentious access TDMA channels - essentially by allocating more carriers to this traffic scheme. Each of the major manufacturers, including the DVB-RCS standard, have their own method of supporting Internet access services, but HNS believes that its approach is more efficient than its competitors. In the first instance, the fact that the terminal is inactive when not used for a long period of time means that the system overhead is low in comparison with systems such as the DVB-RCS design which require the transmission of regular timing bursts. Also, whilst the immediate move to a reservation-based mode leads to a slight delay in the first traffic a user sends, Hughes believes that this is more than made up for by the overall bandwidth efficiency of the system. The company claims efficiencies in excess of 90 per cent - in contrast to the theoretical maximum loading of 36 per cent and practical limit of 20 per cent for a contentious access TDMA slotted Aloha scheme. It believes that systems which use a mix of contentious access and reservation modes cannot reach its level of bandwidth efficiency. Recently, the company has been working on a range of features which will substantially improve the operational cost of owning its system as well as further enhancing its efficiencies. In the first instance it has introduced turbo coding for the inbound channel which will allow customers to choose between smaller antennas at the remote station or increased data rates for the same sized antenna/RF combination - essentially lowering the cost of the terminal. Turbo codes can be chosen over the conventional ½ rate convolutional scheme which remains an option. For the first time in many years, HNS has also completely redesigned the system’s burst channel demodulators. An action of this type is always carefully considered because it is often preferable to keep an older, perhaps slightly more expensive, but proven and robust design rather than continually upgrade components for marginal advantages. In this instance, HNS decided that a new BCD design merited the change and these new sub-systems, known as Turbocode BCDs, are lower overall cost and a fraction of the size of the previous design. The Turbocode BCDs are capable of supporting the same number of remote terminals in less than half a chassis that the previous product could manage with a whole rack. One of the major drivers of this development was real estate - HNS was beginning to run out of space in its own DIRECWAY facility in Germantown having reached more than 160,000 subscribers on the service. Another important feature currently in development is a hub outbound carrier cancellation scheme. This will allow multiple inbound channels to be overlaid on the same bandwidth as the outbound channel, thus considerably increasing the efficiency of the system. In this scheme, the power and size of the outbound channel more than compensates for the noise the inbound channels add to what the remote terminals see, so there is no need to modify


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anything at the receive side in the field. At the hub, the system cancels out its own signal leaving behind the inbound channels. Hughes informs us that this principal has been well known for many years and that it has some patents on research developments it made several years ago - the practical difference today is that processing power has become cheap and plentiful enough to make such a scheme commercially and technically viable. This feature is expected to be released at the beginning of 2004 and will be backwards compatible with systems already in operation because it will involve a separate component to be installed at the hub only. The one-way DirecPC service was a steep learning curve for HNS and its first real experience with the consumer market. Much of what is now taken for granted about the characteristics of the Internet were yet to be discovered and COMSYS was one of the companies which suggested that HNS had simply taken on too much, too early and without being properly prepared. Privately, Hughes would probably agree with this, but it has made the most of its five years of consumer Internet experience and the fact that it was the first to launch a service of this type. The DIRECWAY family and the services which it supports owe a considerable amount to the lessons of load balancing and customer demands which Hughes has learnt the hard way - the company has plenty of arrows in its back to prove it. COMSYS has learned from its interviews of operators considering an SME/SoHo Internet access service that they clearly understand Hughes has incorporated several years of experience into the design of DIRECWAY and this has made the Hughes platform far more attractive to them. Nevertheless, the learning curve continues and user traffic patterns continue to change over time. Hughes is maintaining its constant development of the platform, driven by both the experiences of its customers and its own service ventures in the US, Europe and Asia. The back office systems behind the platform are sophisticated and able to automatically provision a customer from the last click of an order on the web. With the receipt of a valid request, an account is set up, a VSAT is provisioned and shipped through the distribution partner to the installer and the work order to install is issued. The service is authorised and bandwidth and class of service is established at the hub. It is this expertise which HNS will also bring to its Spaceway platform due to enter commercial service in the second half of 2004. Additional Note: In March 2004 HNS announced the IP over Satellite (IPoS) standard which was ratified by the Telecommunications Industry Association as TIA-1008 in November 2003. IPoS represents a strategic initiative on the part of Hughes to leverage its market leadership in the business with a standard which enables the possibility of multiple manufacturers of the company’s DIRECWAY VSAT product line as well as providing a universal air interface for application developers. The unique aspect of IPoS is that it recognises that, even in a standards environment, manufacturers need to be able to differentiate their products and so Hughes has incorporated ETSI’s Broadband Satellite Multimedia (BSM) protocol architecture into IPoS. BSM provides for a differentiation between functions which are satellite dependent and those which are not, through the Satellite Independent Service Access Point (SI-SAP). This allows a manufacturer to draw a line between the standards-based features of their product and additional functionality and application support which they offer as a value added feature.


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Hughes believes that this is a significant step forward and a major new direction in its strategic approach to the market. In addition, it represents one further step within the process of establishing the Spaceway air interface as a standard – something which the company is currently pursuing through ETSI. Ultimately, Hughes expects to see other manufacturers of DIRECWAY VSAT terminals come forward and has stated that it is willing to licence its intellectual property on a non-discriminatory basis.


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5.2 Mesh/Star Telephony TES-Quantum/Quantum-Direct

Hughes Network Systems has now sold almost 21,000 TES Quantum and 1,700 Quantum Direct systems which together support more than 67,000 telephony channels around the world. The company has also shipped additional CUs, some of which are with the Intelsat system and therefore not covered here. In total the COMSYS database lists contracts with over 365 different accounts serving over 500 different end user networks.

5.2.1 Performance Hughes was the first to introduce a mesh telephony product which could realistically be called a VSAT. In true form, the company led from the front and maintained this leadership role both in terms of its marketing and its product features. For many years there were few who really competed in any serious form with the TES. From the mid-1990s onwards far more products came to market from competing suppliers and Hughes’ share was eroded as much through the sheer diversity of supply in what has always been a semi-custom market.

22.50%

Historical Booked Market Share Channel Units

34.05%

Historical Booked DAMA Market Share Heavy Route


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However, Hughes consolidated its position through the fact that its TES system is both reliable and functional. Whilst others were forced to find niches within this niche business, Hughes maintained a steady course in the mainstream and, in effect, became the standards bearer for this market. The company’s continued position as one of the leaders in this sector of the market is due in no small part to the TES system’s ability to cost effectively support one channel per site right up to many tens of channels. The company’s horizontally integrated product line also assists it significantly but, as with the PES system, its marketing and strategy placed it at the right place at the right time with the right functionality. However, over recent years, the TES product line has become less of a focus to HNS and the proliferation of systems from other vendors has continued to erode the position of the TES. The product remains solid and functional, but Hughes has not spent any great time adding

0

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2,500

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TES-QD Bookings

TES BookingsAll Shipments

Annual Terminal Bookings

15.97%

2002 Booked DAMA Market Share Heavy Route

39.47%2001 Booked DAMA Market Share

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new features, not least because its development resources were consumed with so many other projects, including Spaceway.

The company’s share of the market and its annual sales have also been impacted by the fact that it has generally chosen to walk away from most service related rural telephony ventures. The company’s judgement that many of the deals in Latin America were simply not viable in the long term have largely proven to be true and its refusal to become caught up in the USO gold rush has been vindicated as others have struggled. Nevertheless, when a deal is worthwhile, HNS has competed aggressively and has built a share of the rural telephony market which would be considered substantial by any other player. Hughes has introduced a low cost, star-based version of the TES Quantum, but

largely as a result of its policies towards rural telephony ventures, its sales have generally stayed focused on its higher end TES unit which means that its average prices per terminal are higher.

5.2.2 Mesh Product Analysis The company’s Telephone Earth Station (TES) was first shipped in February 1990, but the announcement of the first sale to Taiwan was made some time previously. The system has been designed to offer fully functional, toll quality voice services via satellite. As a result the system design is based on a mesh network topology thus avoiding a star system’s double hop through the hub, and is able to be connected directly into the PSTN. A 1.2 metre antenna can be used at Ku-band, although this is dependent on satellite power. Several of the newer and planned satellite systems will support 1.2 metre operation but generally 1.8 or 2.4 metre antennas are required for Ku-band operation and between 1.8 and 3.8 metres for C-band. The network control is located at what Hughes terms the “Gateway” earth station which typically serves as the interface with the PSTN as well as the network management system host. The number of terminals which can be supported is dependent on the maximum number of channels which the system can operate and currently stands at 100,000 - “enough for a small country”. The real limitation is the satellite. The TES offers both voice and data services. Voice services are voice activated, giving both greater bandwidth efficiency and potential savings in the cost of the equipment. Three voice coding rates are currently offered - 8, 16 or 32 kbps and data is carried at rates between 4.8 kbps and 64 kbps on a clear channel basis using V.25 bis signalling. Emulation of the voice protocols, R1, R2, DTMF and Pulse Dial, is only used for the interface with the PSTN. Each channel is implemented on its own card, termed a channel unit (CU). The CU incorporates a voice coder and decoder, FEC, echo

20.22%

Historical Booked Rural Telephony Channel Units


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canceller, ring generator for telephone handsets connected directly to the unit and multiple modulators and demodulators. By implementing everything on a single card, Hughes claims that the system is easily upgraded and requirement for spares is minimised. In addition, the failure of a single card only affects the voice channel which it supports, not the entire station. Each CU also carries its own processor and therefore has the capability of collecting call statistics, such as number of messages received or lost, number of call requests and calls not completed, number of commands and call duration. The TES network management and billing systems are based on a centralised control with distributed processing, known as the Network Control System (NCS). In 1996, Hughes announced the TES Quantum which incorporated a new hardware design, a new channel unit, a primary T1/E1 trunk card and a new chassis with an extended chassis option. Additions and improvements included uplink power control, automatic frequency adjustment and the ability to download new voice coding algorithms. The system was developed in conjunction with a contract which Hughes was awarded by Intelsat to develop the Intelsat DAMA product. Intelsat recognised that its own business was moving from trunk routes to thin route traffic and decided that it needed a product able to meet the needs of both of these markets and assist in the transition of its business. Hughes won the contract to develop this system, which initially took the form of a voice channel unit which can be mounted in a major earth station, but which can also be deployed in a remote VSAT. Intelsat used this platform to offer a complete service for its signatories which it managed, monitored and billed from one or more central earth stations. The TES product line is geared towards its support of, and integration with, the public switched telephone network. Hughes emphasises the system’s PSN features which include its emulation of multiple signalling schemes, ability to generate its own distance sensitive metering pulses for billing purposes and Hughes’ “DialWare” software which allows the terminal to intelligently interpret any local numbering plan. The TES system also supports national emergency numbers and can resolve these calls on a per payphone basis. In addition, it is capable of running automatic number identification (ANI) features, such as caller identification, and maintains a comprehensive network management and billing system. The system supports integrated SS7 signalling as well as a V5.2 standard interface between central office switches and the gateway. The problem is that the public telephone network is not standard. Every country has a different flavour and payphone operations, signalling and interfaces differ the world over. However exhaustively a company attempts to specify a system of this type it will always find the one situation which causes a problem and results in a new development effort. Hughes’ TES system is one of a handful of products which has already endured this baptism to a large degree. Costs of the TES system have fallen substantially over the years, with new features and upgrades added. In 1993 the company announced a variation on the TES - the PhoneLink. Initially, this terminal was limited to a single voice channel and was designed for very low cost, whilst attempting to maintain the same levels of voice functionality as the TES terminal, with which it is fully compatible. It used elements of the PES system in its design to reduce cost, but remained a full mesh product only limited in some of its interfaces and the fact it was a one channel unit. The PhoneLink low cost terminal still exists today, but Hughes has


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since expanded it to be able to support up to 14 channels. However, in 1996 the first star DAMA systems began appearing in the market from Titan, Gilat and STM. These systems begin with the design principal that not all users necessarily have to be able to connect with every other terminal in the network directly and that many rural calls are actually made to a regional centre or the capital city. A star DAMA system is, therefore, able to serve the vast majority of demand with a single hop solution with a minimal amount of traffic having to be bypassed through the hub in a double satellite hop. In Hughes’ case the development was a relatively straightforward cost reduction exercise and the company announced the Quantum Direct terminal in mid 1997. The TES Quantum Direct (QD) integrates the high volume RF and chassis components of the PES5000 TDMA system with the voice channel unit of the TES Quantum and comes in two main forms - Quantum-Direct S (QDS) and L (QDL). The system works to a TES Quantum gateway and was initially limited to a one channel non-upgradeable unit. However, during 2000 the company completed an upgrade to the QD which allows for multiple lines per terminal. No fixed limit appears to have been set, but we understand that up to four channels are today being supported in some networks. There are also restrictions with respect to the physical and signalling interfaces at the subscriber terminal which cannot act as a network gateway, but can support public voice services, such as coin and card payphones. Aside from that, the Quantum-Direct has all the features of the TES Quantum. With prices below $3,000 per remote terminal, the system is able to take rural telephony services to places which could not be economically justified with a full TES terminal which costs more both in terms of hardware purchase and installation. Hughes also added a “sleep” mode for the single channel unit which reduces the remote terminal power consumption and allows the cost effective use of solar power for remote installations, a feature particularly relevant to the rural telephony market. The price of these terminals is roughly compatible with the price of a TDMA star data remote VSAT, but none of the vendors has reached the cost per line where individual subscribers can really be served economically. These systems are really intended to serve payphones and public calling offices (PCOs) in small villages. Whilst all the products of this type were introduced to the market as star systems, most (including the QD) have actually been deployed in full mesh configuration - something that the QD is easily able to handle given its architecture and TES heritage. In this market, Hughes primarily faces Gilat and STM. Titan, which also offered a system at one time, has since withdrawn from the market. As time has progressed all of these systems have moved closer together in terms of capability and most of the weaknesses of one system or another which could be traded off in the past now no longer apply. The decision process for a rural telephony network often primarily focuses on the reliability of the hardware, its signalling and public network support features and, of course, the price of the remote terminal. Certainly, in terms of sheer experience of interfacing with public networks, Hughes holds a major advantage over most of its competitors, but its major problem in the rural telephony market has been the need for creative financing. As a conservative systems manufacturer, Hughes has avoided taking gambles in what, by their nature, are risky public telephony deals based on universal service obligations rather than commercially viable established demand. The risks of national tariffs dictated by politics, currency fluctuations and very remote rural locations are all reasons why Hughes has kept an arms length from


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some deals and this has allowed other players, particularly Gilat, to take deals by assuming greater financial risks. From 1996 onwards Hughes recognised that there was greater demand for data traffic on mesh systems and that several competing systems had identified this trend and had targeted this niche. The TES lacked sophisticated data capabilities and, in pure form, was limited to providing rates greater than 64 kbps only with an external modem2. It had addressed this to some degree with the Hybrid Earth Station (HES) option which allows the PES and TES systems to share the same RF and antenna. The HES system allows a mix of star TDMA data and meshed voice and Hughes was the first of any of the mainstream manufacturers to introduce this capability. Meanwhile, others have worked more closely to integrate frame relay and IP support including routing and other data network functions into their systems and Hughes had really let this part of the market slip further away than we would have expected. It really began to address this in 1998 with the introduction of the TRunking Earth Station (TRES) product which, despite its terrible name, is an extremely economical SCPC earth station capable of supporting rates from 32 kbps to 2 Mbps. Initially, this product was launched in a basic form able to support permanently assigned links, but the company has since added support for bandwidth on demand and DAMA and is expected to integrate its capabilities into the TES product portfolio. All of the company’s products also gain an advantage from the new RF units introduced in 1998 which Hughes now builds itself. Thus, in summary, Hughes has a range of products which come under the TES banner in one form or another: TES Quantum: Fully featured, full mesh terminal in the TES family able to support trunk

networks and act as a PSN gateway to other members of the TES family. TES Quantum-Direct S: S is for “Saturated” and refers to the fact that a very low cost

L-band RF unit is used to support a single channel. Originally, the QDS was restricted to operating to one or more gateways in star topology, but at the beginning of 2004 Hughes launched a second generation development of this terminal which is lower cost, has a lower power consumption and operates in full mesh mode.

TES Quantum-Direct L: L is for “Linear”. The QDL RF allows for operation of multiple channels at a site with a single IDU.

HES5000: A Hybrid Earth Station which combines the TES QDL indoor unit with a PES5000 TDMA indoor unit.

TRES: An SCPC earth station with support for scheduled and demand assigned bandwidth on demand channels between 32 kbps and 2 Mbps. The TRES can also be integrated with the HES products to provide BOD functionality in a star or mesh environment.

More recently, Hughes is known to have begun to address the converged need for voice and data in a single network with its DW6000 platform combined with its VoIP appliance. The voice quality on this system is outstanding and the system is also able to offer a high level of support for Internet access services in combination. However, we are not aware of the PSTN interface capabilities of this solution and, of course, it is not able to support fully meshed voice. Nevertheless, the combination of the TES Quantum and Quantum-Direct is a potent one and Hughes has more experience than anyone in the thin route satellite public telephony

2. The TES is able to interface with the company’s Universal Modem product to support rates up to 8 Mbps.


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market. The company has supplied the bulk of the single largest satellite rural telephony network in the world located in Thailand through its partner, Acumen. This network now supports over 12,000 lines at almost 5,000 sites and was the first of this size. Thin route rural telephony was the initial target market for the TES system when it was first developed, but the rural telephony business was embryonic at that stage and Hughes consequently focused its marketing on private network and trunk voice sales. There was a brief period when meshed systems were deployed extensively in rural telephony networks, but shaky economics quickly led to star DAMA systems like the Quantum Direct and this dramatically decreased the shipments of all mesh systems. As a consequence, the corporate and carrier network business has once again regained its position as the core customer base for the TES with users generally employing the system for their own internal networks, PSN bypass, disaster recovery and backup. In terms of rural telephony, from 1995 onwards, increasing deregulation in all regions of the world led to licensing bodies granting competitive licences with the proviso that the operator provide connection to rural areas. Rural voice (or the lack of it) became politically very sensitive and the need to provide service to some areas as quickly as possible remains a primary aim of many PTTs. As a result, the small trickle of private business finally began to turn into more of a flow with the growth in the number and size of rural, thin route voice networks demanding support for between one and four voice channels at each location. Whilst cost has been and continues to be important, in some cases it has been secondary to speed of deployment and this has played to the strengths of a satellite-based solution. Nevertheless, these networks have to be fully interoperable with the public switched network of the country and this has placed the advantage with those companies which have developed their products over some time and are able to offer a greater range and expertise in signalling and PSTN interfaces. This is one area that Hughes, along with a few others, was ahead of the pack in terms of expertise and functionality - a functionality which the company has transferred to the Quantum-Direct. The TES product has been sold to countries in all regions of the world, often to extend the reach of the terrestrial infrastructure, even in developed markets, and often because it was a solution which could be deployed quickly. The United States has not proved to be a core market, but sales have been made to US West, AT&T Alaskom and Northwestel in Canada. However, it was the Asia/Pacific region which formed the core of the business. The Asian business suffered badly as a result of the financial meltdown which was seen at the end of 1997 and the company had to switch its concentration from South-East Asia to China and the developed markets of Japan and Australia. Like all of the manufacturers in this business, Hughes also began to place more emphasis on other regions, particularly Latin America. This strategy yielded some results, but not enough to counter the loss of a core market which accounted for between 50 and 90 per cent of all sales between 1994 and 1998. From 2001 onwards the deteriorating economy then eroded the business in Latin America and 2003 saw the Chinese market suffer as a result of the SARS epidemic. All of the manufacturers have suffered, some more than others, but the biggest problem has been the loss of momentum in the business as growth has levelled off.


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With respect to direct competition to the TES Quantum, for a long time Hughes had the bulk of the market to itself and only faced one major competitor, NSI (then Spar), which generally tended to stick to network opportunities which required an average of eight channels per site or more. However, as evidenced by the number of vendors in this report, there has been a increased level of interest in this market since 1995 HNS now faces competition from several large and many smaller, very nimble rivals, such as STM’s Solante, Gilat’s FaraWay, ViaSat’s StarWire, Skylinx and Linkway, ND Satcom’s SkyWAN and several other systems from smaller or start-up vendors. In the star data marketplace, Hughes has mostly faced one major competitor, Gilat (although this situation is changing now), whilst in the TES business it faces a multitude of them, but the company has managed to retain its leading role and has performed well over the past two years with its TES product, taking almost 40 per cent of the market in 2001 and 16 per cent in 2002. This variance shows how just a few contracts can influence sales performance in this market - actually a feature of the VSAT market as a whole, but particularly so in the DAMA segment where one or two very large rural telephony deals dwarf the corporate business. Hughes continued performance, however, is impressive given the huge problems it has had to contend with in Asia and Latin America. In 2001 and 2002 the company was also able to demonstrate the strength of its TES platform with good sales in both the corporate and the public telephony segments of the business - with enterprise networks accounting for almost 40 per cent of its total sales in the period. Over the past two years Hughes has really only maintained the TES platform, adding only a few minor enhancements, such as the upgrade of the system’s data capability from 64 kbps to 128 kbps. This is probably consistent and sensible given that it makes little sense for the company to commit large-scale development resources to a system for which sales generally have been weak and show no major signs of improvement. The question really is whether this is a function of the TES’ capabilities in a changing market or whether the market as a whole is just weak. We would probably suggest the latter, although the former has not helped. In addition, there is the whole question of the influence and potential change in the market driven by the move to VoIP systems. As we mentioned previously, HNS has already taken a step in this direction by offering its DIRECWAY system as a solution in some opportunities and we would guess that this will be an increasing feature of the market in the future. Given this and the fact that all of these markets show tremendous prospects for future growth, any company would think twice about throwing investment at a product as stable as the TES. We are not suggesting by any means that Hughes might be thinking of abandoning the TES platform and the company itself informs us that believes that there will remain significant demand for the product over the next few years. However, we would suggest that there is a better case to maintain the platform rather than significantly expand its capabilities. For carriers and small corporate networks with high voice traffic and a requirement to interface seamlessly with the PSTN, the TES platform will remain a natural choice. At the same time, volumes seem destined to level off or offer only a marginal increase over the next few years and, as other companies increasingly focus on advanced needs of corporate users with frame relay, ATM and high speed, high end systems, it is likely that the core TES market will contract to the small scale carrier opportunities with which it started.


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Meanwhile, we believe that Hughes will have moved its strategy on by enhancing and integrating the technology in its DIRECWAY platforms. In the terrestrial corporate and public networks there is undoubtedly greater acceptance for the idea of packetised voice services, whether this be IP-based or not. It makes perfect sense to presume that Hughes will also move in this direction and leverage its huge technology expertise to customise these platforms to mirror the market’s direction. This is the long-term scenario, but in the shorter term the company will continue to support its TES platform with all its associated toppings. Hughes has always been the greatest advocate of backwards compatibility in its systems and the company’s strength in depth will also provide customers with a long-term migration path which will undoubtedly help. We believe that it will continue to be one of the leaders in this segment of the business and, as with its PES system, its large installed base of TES networks provide a great ongoing revenue stream of expansions, upgrades and replacements that will be hard to shift.


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6. HNS – VSAT Service Provision

6.1 Hughes Network Systems American Services

Hughes Network Systems operates the largest shared hub service in the world - by some margin. Currently, the company is believed to have almost 220 different customers on its various shared hub facilities accounting for almost 120,000 sites in service. In addition, the company also operates a service for shopping centre and mall-based speciality retailers in the US based on shared VSATs. This service supports two main industry associations - Retex and SpecNet (the National Retail Federation) - as well as customers Hughes signs directly. The Mall service represents quite a triumph for Hughes, pitted as it was against AT&T to provide the same service. Hughes informs us that it has over 8,000 mall stores connected today via more than 2,500 VSATs installed on both enclosed malls and shopping centres. During 1998 Hughes introduced the DW1000 as the DirecPC Enterprise Edition - not to be confused with the DirecPC consumer service. It has been a worthwhile business for the company both in the form as an add-on to a new or existing VSAT network and as an overlay to a terrestrial service. The company has signed some major accounts, including General Motors for 16,800 sites, Best Western Hotels, AGF and Wal-Mart. It is believed to have over 46,000 locations under contract for this service.

6.1.1 Performance Over the past two years Hughes Network Systems has managed to grow its shared hub service against the market conditions and against its competitors. From a 60 per cent share in 2000, the company has grown to almost two thirds of the business in 2002 with a 63 per cent market share. Its progress is inexorable and its customer list a testament in itself. It now has almost three times as many sites in service as its closest competitor and may well be positioning itself for the killer blow to all of its immediate rivals when it introduces Spaceway. The company continues to outperform in all aspects of the business - new sales, major upgrades, overlay networks and contract extensions. One of its major achievements has been to maintain its levels of customer service despite the growth in its business. Whilst there have been lapses as management restructures the service

62.60%

USA TDMA Enterprise Service Market Sh


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to deal with change, the company has always found the solution and maintained its momentum. As the market leader for almost 20 years now Hughes Network Systems has been charged with almost every fault imaginable by its various competitors at various times, but the results can be judged on their own merit - dominance of this magnitude does not come from doing things wrong. Hughes has extended this dominance in the enterprise sector to the consumer market. Its only direct rival is StarBand whose service stalled as it had to deal with its own financial and political problems from the safety of Chapter 11 US bankruptcy protection. HNS’ DIRECWAY consumer service shows the value of market strength as the company is able to carry its consumer service through the resources that it has in place for its enterprise business. That in turn feeds off the volume generated in the consumer business. We believe it to be a fact that, at the current time, a satellite-based consumer Internet access service is not able to stand alone as a viable business. However, this might not be the case in the longer term and Hughes maintains the service for a reason. One thing is clear, the company is proving the market’s worth because with virtually no effort it continues to add net subscribers at a rate of approximately 25,000 a quarter to the service.

6.1.2 Enterprise Services Hughes Network Systems’ shared hub VSAT services were originally offered by Hughes Communications Inc., but were moved to HNS’ responsibility in 1990. The company took over all account management and programme engineering aspects and now controls and operates all aspects of the shared service. It has four shared hubs located in Brooklyn (New York), Minneapolis, Las Vegas and Detroit, with another facility located in Germantown running temporary services for networks before they are moved to their final destination in addition to serving as an engineering and test hub. HNS also offers 24-hour control and monitoring services with Hughes staff located at the customer site for customers with private hub networks. In addition to this, Hughes’ PanAmSat operates a fleet of US domestic and international satellites and, therefore, notionally the company has a vertically integrated business, although the two are operated as separate companies. This excludes installation, sub-contracted to a multitude of installers, and remote maintenance which is sub-contracted to Qualexserve, previously known as Wang. Hughes is able to tie into that company’s database and network so that it is able to monitor and assist on any aspect of a customer’s call-out. HNS also has an in-house installation management team which manages the company’s installation sub-contractors around the country. All sub-contractors are trained by HNS and must be certified on HNS equipment.

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US Consumer 2-Way VSAT Market Share


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At the inception of the VSAT business in the early to mid 1980s, Hughes targeted the market for dedicated hub systems whilst others designed and sold their systems to serve in a shared hub environment. Hughes got it right - it was the private hub customer which formed the bedrock of its sales through the 1980s and into the beginning of the 1990s. However, the market began to change and the trend towards outsourcing, rather than diverting resources from the core business, began to take effect in the United States as it had done in Europe. Hughes shifted gear and the company moved inexorably into the provision of services rather than hardware in the US. In many parts of the world Hughes remains a very hardware orientated business, but in the United States the reverse has become the case. The old charge that Hughes was simply not interested in small networks because it was out to sell boxes cannot be justified and Hughes itself vehemently denies that this was ever the case. In fact, we believe it probably was a valid point in the early days, but it is certainly not true today and has not been so for many years now. As time has progressed, the company has begun to work the issues of service far more into its business than ever before. Its introduction of the DW1000 was something that had become an important requirement for its PES platform as a result of increased multimedia applications. The company has aggressively marketed this broadband broadcast overlay system as part of its service portfolio and has been extremely successful with it. In hindsight, Hughes would probably prefer to have taken this route first rather than its rather ambitious approach to the consumer market with the first generation DirecPC service in 1995. However, even this illustrated that the company was beginning to think more of service than of hardware. In 2001 the company introduced its DW2000 (DMV) system into its service platform. This product offers a legacy-free IP-based VSAT service with several additional features, including the option of storage in the IDU with a built in hard drive. However, now it is the enterprise derivatives of the DW4000 which form the primary platform for the company services going forward. The hardware products side of the business is inherently tied to customer applications because the DIRECWAY platform, indeed all TDMA VSAT systems, interfaces directly with the customer’s applications and networking equipment. However, in the United States, Hughes has been moving proactively to incorporate new technologies into its offerings so that it is able to add greater levels of value to the services it provides. In 1998 it formed a partnership with Apollo Group, Inc. to form a new distance learning company. Apollo is said to be one of the largest providers of higher education programs, certification and training in the United States. The joint venture is majority owned by Hughes and one of its first deals was the purchase of One Touch Systems, a company specialising in interactive distance learning systems. The intention was to leverage the networking expertise of HNS with the content of Apollo. The result has been that HNS has been able to find opportunities with several large accounts for specialised IDL services based on its VSAT technology, such as Shoney’s, but the integration of Apollo’s educational courses has taken a little more time to bear fruit. Nevertheless, this integration of applications has moved into the mainstream of HNS’ core service strategy and the company has been working with various providers of content, vertical industry specialists, software companies and application providers to build its next generation of service platform. Whilst corporate networking retains primary position in the company’s


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business, Hughes increasingly believes that it has to provide a fuller service based around a suite of value added solutions in order to maximise the potential of its business. The company plans to ensure that its value proposition is feature rich to the extent that one of its customers will buy networking and access services, but will also buy into a seamless solution which will deliver key applications, ranging from audio and video delivery systems to credit verification and security features. This process is in active implementation, not just in North America, but also in HNS’ other major service businesses in Europe (HNSE) and India (Hughes Escorts). This is not something which can happen overnight, but the company has been working on transforming itself to think services, rather than hardware for well over three years now. It believes that the mind set within its staff has now taken hold and it is proactively moving to build upon its international service capabilities with services launched in Brazil and China during 2003. The system which is planned to become the cornerstone of Hughes’ future service will be Spaceway, the company’s broadband satellite service system which is scheduled for launch commercially in 2004.3 The project is so radical and its design so advanced that, inevitably, it raises a raft of questions such as the viability of Ka-band in a commercial environment, whether the ATM switch in the spacecraft will perform to plan and how well Hughes will be able to execute on the establishment of a new service platform. However, if we assume these and other issues will be overcome, the key advantage that the platform will bring to Hughes’ US service is that for the first time VSAT technology will be able to match enterprise terrestrial telecoms services in terms of bandwidth provision and network configuration. With return path speeds of between 512 kbps and 2 Mbps for a generic, low cost terminal and actual receive throughput rates up to 30 Mbps in a full connectivity network, the potential is enormous and represent a step function advance over the current levels of technology. In its core enterprise networking business, the company does not target its service at any particular industry segment. When asked what type of accounts it does target it answered - VSAT users. It segments the business into two - those customers which have already made up their minds that they want a VSAT service for which the competition is other VSAT system operators, and those which simply want a solution, for which the primary competition is usually terrestrial services. Since the introduction of frame relay services, Hughes’ experience is that of any other VSAT operator. Frame relay is the first public data network available to users in the United States and the terrestrial operators sell future capabilities and upgradeability, but the technology is weak in areas in which there are few local nodes or they are hard to reach. Hughes sells its VSAT service on several fronts. The company agrees that there is a strong threat from frame relay services, but maintains that there are significant advantages to a VSAT solution. The basic trade off is satellite latency versus higher prices for frame relay. VSAT networks can be half as expensive as frame relay and the first question is whether the customer is prepared to accept this greater cost. If they are, then they are not a prime target - the banking market sector is an example of a type of customer which has chosen the terrestrial route in the US. Hughes avoids highly technical arguments and instead its message is that

3. Spaceway is also dealt with in more detail later in this section.


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customers have to look more closely at what the terrestrial service offers contractually. Most frame relay services offer Service Level Agreements, as does Hughes on its VSAT service, but the VSAT network SLA is from end to end, including the router which is built into the VSAT, whereas most frame relay operators exclude the last mile which is often beyond their control. In addition, terrestrial operators often require that the customer pay to monitor their own network in order to be able to document and notify the operator for a service credit. In a VSAT environment it is the operator which proactively monitors the network and informs the customer of any problems and the resulting service credit. There are also often a wealth of exclusions in frame relay SLAs, but Hughes claims its only exclusions are scheduled maintenance and Acts of God. The fundamental issue highlighted by Hughes is that the customer must decide on the best quality of service at the best price and the lowest risk. The company also sees other terrestrial technologies as actual or potential competitors, such as ISDN D-channel services and DSL. However, ISDN lacks coverage and DSL penetration also continues to be patchy. In addition, there are few DSL services which are able to guarantee quality of service to enterprise levels. Low price and theoretical high bandwidths are no substitute if a service is not able to consistently deliver a reliable connection. Even when competition is strong from frame relay or DSL, HNS has found that some customers remain prepared to pay for the reliability which VSAT brings and it has sold several networks over the past few years where VSAT is not the primary solution, but which backs up a frame relay network. In addition, the company informs us that there is also a very strong play in augmenting terrestrial locations by using both interactive and one-way solutions to provide broadcast/multicast services and training, in addition to back-up and disaster recovery. Perhaps the main advantage of VSAT networks is that they can be deployed very fast, the mean time to repair is low and the capabilities of the product grow constantly. Hughes works with Qualexserve to provide installation, maintenance and repair services and it has begun to maintain a close watch on monthly statistics which are generated (it informs us that this is a senior management overview responsibility) to monitor call out rates and response times - all are said to be on a downward path. A few years ago, the company took a hard look at the quality of service it was providing in these areas and found itself wanting. As a consequence, it introduced a web-based Extranet service which allows customers to monitor the status of their installations and repair call-outs, view trouble tickets, obtain real time status updates and even open new trouble tickets. HNS informs us that this has been extremely well received by its customers and that it dramatically cut down the calls to the helpdesk, freeing up resources and improving the first level support to trouble shoot real-time problems. The company also points to its long experience with VSAT networks and the expertise which it has developed from its current customer base. For example, it claims that it has probably seen more applications, protocols and customer problems than any other VSAT operator and it is therefore in a better position to assist its users. If there is a secret to the company’s success in the US market for both shared and private hub business, it is its approach to sales and marketing. Hughes has over 20 sales people across the country whose job it is to follow the major accounts in their area and build relationships and knowledge on each. It operates primarily in a geographical organisation, but it also has


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specialised sales teams for specific areas of business. When an account comes up for renewal, whether it is specifying a VSAT service or not, Hughes is already positioned and informed. A specialist technical sales team is then sent in to close the sale in combination with the sales person. Thus, it is not uncommon for Hughes to sign contracts which its primary VSAT competitors never even see. All of the other operators are either locally based and industry focused or, in the case of the main manufacturers, only have a small group of two or three sales people. Frankly, Hughes’ professional approach marks it head and shoulders above the rest and it is no secret that it is the model which Spacenet adopted after being acquired by Gilat. A large area of shared business for Hughes has been its mall-based services - named RTS – where the Hughes-financed venture installs VSATs on the roofs of shopping malls across the United States. Each VSAT then acts as a node from which several stores are served for low volume applications, such as credit card verification. Initially, Hughes led with an alliance with a retail consortium named SpecNet and was in competition with AT&T Tridom and another retail consortium named Retex. The competition between the two approaches hinged on an early mover advantage and in the straight race Hughes was the first to sign up subscribers, obtain roof rights and deploy a system. All in the industry always agreed that there was only room for one, considering the fact that the investment required was probably in the order of $100 million or more. Rumours ran rife, but the essential difference between the two approaches was that Hughes was able to deploy its standard product in extended-chassis form whereas Tridom went into a new product development. The delays in Tridom’s Mallsat deployment finally resulted in the defection of the company’s partner, Retex, to Hughes. Everything else was simply a matter of form as Hughes has gone on to install its VSATs on approximately 2,500 malls and shopping centres around the United States and serves approximately 13,000 stores based on 30 different brand types. RTS was an ambitious project for Hughes and it had to invest heavily, but it was really the company’s first taste of an infrastructure investment which it had to recover over time with service revenues. The company informs us that it charges between $70 and $90 per month per port to the stores making this approximately a $7.5 million a year business in its base form. However, two other issues have also come to the fore to make the business an even better prospect. The first is that customers are signing up beyond their original five year term and the second is that, having established the infrastructure, Hughes is beginning to sell additional services through the network such as email, Intranets and video delivery. The company is now improving this service to add broadband to the mix and informs us that several of its customers are interested in delivery of rich content video and marketing information to their stores. This upgrade to the service involves the installation of DW1000 receivers and additional software at the client sites. However, it does not require any upgrade of the wiring in the mall because HNS anticipated this move when it first deployed the service. Hughes contends that its organisation in the United States is inherently service orientated, that there has been a change of culture within the company and that it now is an issue of service revenues, not of number of terminals. Of course the company is right in many ways, particularly so in the US, but then again the company does not break out its service business in any of its financial disclosures.


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Having said that, the chart illustrates the same point, but in numbers of terminals. Since 1995 the company’s business in the US has been growing far more strongly in VSATs sold in its shared service as compared to private networks to the extent that it now sells far more VSATs as part of its shared hub services than for dedicated hubs. Bear in mind that these figures do not include any equipment Hughes has sold to other shared hub operators in the US. Interestingly, in 2002 the company recorded a jump in sales to private networks as several of its largest dedicated hub customers replaced their networks with new systems. These major upgrade customers included Toyota, TJX and Chrysler, but also saw two breakthroughs

for HNS in its battle with Spacenet when it won the key Rite Aid account and was awarded the lion’s share of GTECH’s California lottery network. Both were major wins for the company, particularly GTECH which prior to the California award had been exclusively a Gilat customer. Hughes continues to believe that significant opportunities remain in the US marketplace in several areas. In the traditional business, the big nut to crack has long been the fast food (quick service restaurant or QSR) segment. COMSYS is aware that many of the major chains - McDonalds, Burger King and others - continue to look at VSAT technology, attracted by the broadband capabilities of the new products the manufacturers have introduced. The issues with these businesses revolve around the percentage of company-owned versus franchise stores, the former being far smaller in number than the latter, but the part of the business which makes central decisions. In addition, as the technology has evolved, so have the potential applications which range from debit card authorisations and standard back office tasks to automated menu updates and kiosks. The company made its initial penetration of this market with its contracts with Jack-in-the-Box and Carl’s Jr, and has continued to develop the opportunity with its more recent closure of several key accounts including Wendy’s and Yum!, the owner of Taco Bell, KFC and Pizza Hut amongst others. The company believes that its development of a customisable web portal allowing online ordering and fulfilment for the connection of an individual franchise is one of the drivers behind its success in this area. Hughes still sees mileage in the low rate transactional markets, such as the gas/convenience sector, of which it has almost 100 per cent market share and now, with its penetration of the GTECH account, lottery applications. Other segments which have begun to emerge as customers include the leisure industry - networks have been deployed for bowling alleys and cinemas, two businesses which have very different application profiles - and small footprint retailers - Dollar Tree was signed in 2002 for 1,000 sites.

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The second area of business opportunity lies with additional services and upgrades to existing customers. For example, there have been talks about video and audio to gas stations, even to the pump, supporting advertising funded information and display screens. Hughes is now very focused on Internet technology applications as many of its customers move to browser-based applications and this can involve IP-related upgrade programs and bandwidth enhancements. The company is working with various vertical industry specialists and expanding its sales channels to address more granular markets made up from SMEs and even SoHos and attempting to standardise its service products to allow greater scalability. It believes that its consumer initiatives, first through DirecPC and now through its DIRECWAY services, have allowed it to bring significant cost advantages to the enterprise market through the enterprise derivations of the DW4000 platform. The DIRECWAY consumer service is dealt with later in this section, but the enterprise versions of the DW4000 - the DW4010 and DW4020 - have increasingly played a part in the some of the company’s larger enterprise wins. One area in which it is expanding is the use of value added resellers and it has an active programme to develop an established VAR network. The company is still feeling its way around the value proposition for this business, but its DW4000 platform coupled with its growing expertise in web-based applications is one of the major enablers behind the programme. Hughes Network Systems has led the VSAT market from its inception. The company dominated the manufacturing sector for many years and moved smoothly into a full service model - hardly breaking stride in the process. Today, the sheer size of its enterprise service business raises issues of long term customer management and ongoing resource allocation for which the company has faced criticism in the past. We believe that Hughes’ review of its business during 1999 and 2000 was a very beneficial exercise for the company and its recognition of the problems and subsequent positive actions to correct these issues with its increased post sale services and facilities was even more important. The company’s path towards a service culture as opposed to its historical hardware outlook has continued to develop, but it remains an engineering company at its core. This is no bad thing because its technology truly drives its competitive position in its services business as typified by Spaceway which will take the company on to its next generation service platform. During 2001 and 2002, HNS was able to take maximum advantage of the troubles which Spacenet, its primary competitor, experienced as Gilat hovered on the edge of bankruptcy. In 2001 the company took 77 per cent of the enterprise service market in terms of number of sites and, in 2002, 75 per cent to Spacenet’s 9 per cent. These are important years for Hughes because the company needs to maintain its existing service base and expand into new accounts because these will also be future prime Spaceway prospects. Its ability to prise key accounts from Spacenet was also significant because, for the first time, it was Hughes which was able to prospect on Spacenet’s accounts rather than Spacenet mining the vast HNS installed base. However, during this period Hughes Network Systems has had to endure the process of first EchoStar’s attempt to purchase its parent, Hughes Electronics, and now News Corp. Coupled with a weak global economy, this has resulted in several administrative reorganisations of HNS and a general downsizing to bring the company’s cost base more in line with its


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revenues. At the time of writing (July 2003), it appears that News Corp’s bid, driven by its desire for DIRECTV, is likely to be successful and the question which arises is the future intentions of a new parent with respect to Hughes Network Systems and, more specifically, Spaceway. Our considered opinion is that the strength of HNS in the enterprise business, its strong engineering capabilities and the huge potential which Spaceway offers to New Corp outweigh any potential or perceived lack of synergy between the two businesses. Most of the investment for Spaceway will have been sunk by the time News Corp takes control and this leaves it with the decision of whether to sell an unproven business at depressed market rates or risk GM’s investment and see if it has a major success. Not only does the combination of Spaceway with HNS’ enterprise business offer a unique opportunity to revolutionize the enterprise telecoms market, it might also hold the key to some major issues which continue to plague the DTH satellite television businesses - those of bundling of television with broadband access and how to deliver local-into-local services. In its base form, this is the equation and we have little doubt of the final outcome. The company’s move to upsell its position in the networking business is a natural one and, although the method by which this can be successfully achieved has yet to be perfected, we believe that it represents the future for HNS. COMSYS has long held that, of all the potential providers, VSAT operators have a far greater skill set and longer term expertise than almost any other company to exploit the opportunities for application outsourcing and content contribution in many of its forms. As the largest and most successful operator, it therefore follows that Hughes occupies the best position of any to achieve success with applications-based solutions. Hughes managed to deny the temptation of most of the network dependent business opportunities which subsequently came home to cripple Gilat. It has had one or two bad experiences, but has also avoided making costly investments in companies with little more than a business plan. As a consequence, its customer list looks pure and very strong and will be a substantial asset for the Spaceway/DIRECWAY service when it is launched. HNS is an impressive business whichever way it is viewed. The company has led the market in terms of sales, services and technology now for almost 20 years and it is no mean feat to maintain a leadership role whilst also sustaining high levels of customer service and account retention. The company’s US service business has not only managed to hold its ground, but pull away from its competitors under extremely trying economic conditions. This is partly due to the business’ strength in depth from engineering to sales, but also to the conservative course its management has steered during both boom and bust years. The net result is that HNS’ management can feel validated in many of the hard decisions it took in the past, for which it did suffer criticism. From the earliest days, HNS was prepared to take calculated risks in a venture in one area of the market based on its strength in another. Spaceway represents one further step in this process because it is visionary, it is a calculated risk, but it does have a fundamental business off which to leverage. Hughes’ shared hub service is key to this and the company has done a great job in executing its strategy and continuing to re-examine and maintain the fundamentals behind its success. If the company is correct, and we believe that it is, its enterprise service of today has no long-term future. Spaceway will be the future and other VSAT-based enterprise focused service providers have a major problem on their hands.


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6.1.3 DIRECWAY Consumer Services Hughes’ first venture into the consumer Internet access market came with the launch of its one-way, high speed DirecPC service in 1996. The DirecPC system required the user to install a receiver card in their PC and worked with a telephone return channel. In its initial form the service ran into a number of difficulties related to poor performance of the system caused by so-called abusers, bad publicity as a result of Hughes’ FAP (Fair Access Policy) which attempted to cure the problem by throttling back abusers’ data volume, difficulties in supporting a PC-based solution and high prices - initial user hardware cost in excess of $1,000. It soon became clear that the consumer market into which HNS had launched DirecPC offered a different set of service challenges that the company had experienced in its enterprise business. In addition, the broadband access customer was, and to some extent still is, an enigma as usage patterns change with experience, new applications and new services. Nevertheless, Hughes stayed with its DirecPC service trying to exploit the market with different service packages as part of its “Powered By” programme with companies like AOL and Juno, introducing the DIRECTV/DirecPC service as DirecDuo and continually reducing hardware costs. The DirecPC platform was sold as a hardware package internationally at several accounts, but nowhere was it as successful as it was in the United States - and it was not successful even there. The company became defensive in its information on the service and outside observers could only speculate that DirecPC had not been the success which had been hoped for. From the COMSYS viewpoint, our concern with DirecPC and the many imitators it spawned was borne out of the PC-based installation of the receiver card which, we continue to believe, invites trouble in a Windows environment. Another major issue is that the return path is provided via a dial-up line and an independent ISP was not able to offer the user one of the most important features of a broadband service - always-on connectivity. Hughes began to work on the solutions to these problems with a two-way version of DirecPC platform which was eventually to be launched as the DW4000 system. Having experienced the problems of a PC-based approach, the DW4000 took the form of a stand-alone unit – and only relying on the PC for some of the operating software. There then appeared to ensue a race between Gilat and HNS to bring a two-way consumer Internet access service to the US market, although Hughes did not seem to actively participate in the process. Gilat launched its huge 10,000 site trial during the first part of 2000 and announced its StarBand service in November 2000. Hughes seemed in no hurry to react to StarBand and whilst its competitor cobbled products together to fill in for its SkyBlaster 360 consumer terminal while it finished development, HNS finished the development of the DW4000, ran a small 500 site trial and commercially launched the DIRECWAY service in June 2001, perhaps no more than a few months after the SkyBlaster 360 was deployed. DIRECWAY had several major advantages over StarBand. It is an integral part of Hughes Network Systems and can therefore take advantage of all the resources and synergies available from a company with largest VSAT service and hardware business, it could learn from the experience gained from the DirecPC service, it had an established dealership network to tap and it had 116,000 DirecPC subscribers as potential upgrade customers. Hughes had already signed up several resellers for the service including Earthlink and


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Pegasus and has since gone on to add many more, including LinCsat which provides services into Canada. The DIRECWAY consumer service held some key advantages over StarBand and StarBand’s early mover advantage really backfired as it was forced to swap out many of the interim SkyBlaster 180 units it had in the field. However, the economics behind a two-way satellite Internet access service business are as real for DIRECWAY as they are for StarBand. Considering the rivalry which has always existed between HNS and Gilat, it was interesting to note that one of the few things that both CEOs of the two companies agreed on was that a service of this type needed to be able to load 15,000 users on a 36 MHz transponder. In neither case has this been the outcome and, although both companies avoid talking about their experiences in this area, the general belief is that the actual subscriber loading that can be achieved is closer to a maximum 8,000 to 10,000. This means that without either a doubling in bandwidth efficiency or a substantial increase in price, neither service is able to meet its full costs and make a profit. A combination of the economics of the service and various other problems forced StarBand into Chapter 11 bankruptcy protection in May 2002. This is where Hughes’ strength in depth makes the telling difference because DIRECWAY has been able to maintain its momentum whilst StarBand has stagnated. Like StarBand, Hughes has rationalised its business, introduced better and more efficient CRM, OSS and automated online ordering systems and concentrated on reducing the cash drain of the service. It now informs us that DIRECWAY is

financially about neutral, in that it pays its direct costs, but relies on Hughes’ larger resources to take the burden of other indirect costs. The DIRECWAY consumer service has also cut back significantly on active marketing of the service, relying on its partners, its website and the occasional advertisement on its parent’s DIRECTV network to sell the service. Given these factors, it would be understandable to expect growth of the service to have slowed to a trickle and perhaps even to have stopped as new additions are eaten away by churn of the existing base. However, this has not been the case and the service has continued to grow quite strongly over the past two years. Hughes built a new 40,000 square foot network operations centre at its headquarters in Germantown

which it opened in July 2001, but today one of the DIRECWAY’s biggest problems is that it is running out of floor space and this is one of the drivers behind the development of some of

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Estimated DirecPC/DIRECWAY Subscriber

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the company’s new additions to its product lines. The company informs us that it had approximately 130,000 two-way subscribers at the end of 2002 and is adding new subscribers at the rate of about 25,000 per quarter. It has 27 transponders in use to support all of its broadband access services and is experiencing a ‘download to transmit ratio’ of about 3:1. The DirecPC one-way or “Classic” service was discontinued at the beginning of 2002 and HNS has increased the price of the service as part of its active encouragement to its original DirecPC customers to move or upgrade. From the little information we have, it would seem that those users who are going to move have already done so and the remaining subscribers are now the hardcore which will be harder for the company to shift so we expect the rate of decline on DirecPC to slow down over the next year or so. Perhaps the biggest question which needs to be answered is why Hughes continues the service given the fact that it is unlikely to be able to stand on its own in the near future. The answer to this question is probably complex, but would undoubtedly include the fact that the manufacturing volumes the consumer service demands have a positive cost implication across all of the company’s VSAT product lines. Additionally, these shipments are relatively predicable, unlike the enterprise business which remains very project driven, which also leads to lower manufacturing costs. With the DIRECWAY consumer service, HNS’ quarterly shipments reached 50,000 VSATs in the first part of 2003 giving the company a huge edge over the rest of the market. In the near future, it is expected that the primary DIRECWAY consumer platform will become the DW6000 model, expected to first ship in August 2003. The DW6000 is “Spaceway Ready” with a Ka/Ku antenna and a predefined path for users toSpaceway. This will allow HNS to both ramp up its manufacturing for Spaceway based on the DIRECWAY service and to stress test the product in a less stringent market than the enterprise. Bandwidth efficiency is now the key to DIRECWAY’s immediate improvements and, with the introduction of turbo coding on the platform expected in the near future, the company is clearly working to this objective at all levels of the system. In summary, however, the service has not lived up to expectations in two ways - it is not able to support the number of subscribers per MHz which was predicted as a requirement for a viable business and it has not generated the huge subscriber numbers which some suggested it would. In some senses, given the former point, the latter is actually a beneficial one and is probably the reason why Hughes has not actively marketed the service for some time now. From the perspective of the VSAT business, rather than from a consumer viewpoint, DIRECWAY has been a great success - the sale of 200,000 units in less than two years is a major step forward in production terms and it is our view that, as the service grows, it is beginning to sketch out what will be a future model for many satellite businesses of this type. We also believe that Hughes has learnt valuable lessons from DIRECWAY. For example, the DW4000 requires software to be hosted on a subscriber’s PC, but the designs which have followed this - the DW4020 and DW6000 - have been self hosting to avoid the reliance on a platform as unreliable as a Windows-based PC. Lessons have also been learnt on the marketing side. Although we do not have direct reports on this, we believe that both DIRECWAY and StarBand have experienced a much greater proportion of small business users that they had originally anticipated and this will undoubtedly influence future hardware designs, pricing plans and value added service programs.


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Clearly, the end game is Spaceway and it is perhaps indicative that Hughes’ first generation Spaceway terminal already incorporates an additional two offset Ku-band LNBs to enable a user to receive DIRECTV programming as well as an interactive broadband service. Despite this, we are not aware of any programs under consideration at Hughes to actively transition DIRECWAY customers as a matter of priority when Spaceway is launched. It looks as though the DIRECWAY consumer service will be with us in one form or another for some time to come. The only “what if” we are left with, therefore, is how different the situation might have been if Hughes had continued to actively market and promote the DIRECWAY service and how many subscribers might have been captured.


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6.1.4 Spaceway Spaceway was partially born out of Hughes Network Systems’ involvement with NASA’s Advanced Communications Technology Satellite (ACTS) programme, but the company had been known to be considering the use of Ka-band for domestic services at least since the early 1980s. The first Spaceway filing was drawn up in 1993 and publicly filed with the FCC in December of that year. The Galaxy/Spaceway system, as filed with the FCC in September 1995, combined two systems: a Ka-band broadband services system and a largely Ku-band global satellite TV service. The same approach was also used in the company’s later Expressway application, which combined Q/V-band (60-80 GHz) with Ku-band services. The Spaceway concept began as the first Ka-band system for North American markets, providing domestic “low cost, ubiquitous, high speed, video and videotelephony communications services”. This was amended into a global system filing in July 1994. Instead of two satellites, the company announced that it would build nine - two each for the North American, Central and South Americas, Europe and Africa and the Asia/Pacific regions. The ninth spacecraft was to be located to handle high traffic demands between Asia/Pacific and the United States. Further orbital slots were requested with the Galaxy/Spaceway amendment, filed with the FCC in September 1995. This seemed to reflect Hughes’ strategy to expand globally on the success of both its TV distribution service, offered over its Galaxy satellites, and DIRECTV, launched in the USA market in December 1993, the same time as the first Spaceway filing. The technical amendments to the system included a new 500-800 MHz Ku-band DTH platform, with additional Ka-band video back-haul capability and an increase in the capacity of the inter-satellite links at Ka-band and V-band, enabling rapid global video distribution. The Galaxy/Spaceway plan also specified scope to co-locate more satellites where demand requires. If imitation is the sincerest form of flattery, Hughes executives must have been delighted as many subsequent FCC Ka-band filings from the likes of Lockheed Martin, GE and AT&T bore a close resemblance to the Spaceway filing. When proposed as a global system the budget for the Spaceway system was set at $5.088 billion with each insured and launched spacecraft projected to cost $230 million. During the late 1990s it became clear, however, that there was a regionally-based priority deployment plan and as time progressed certain regions - North America - grew more important, whilst others - Asia and Latin America - became less of a priority. Nevertheless, as late as 2000 Hughes was still negotiating with interested investors in Europe and it was not until the full scale of the stock market collapse and the weakening economy became clear that the company consolidated the project on North America … for the time being. Today, the budget to build the Spaceway system for North America consisting of three satellites - two operational and one in-orbit spare - two network operation centres and gateway facilities, development of the four types of terminal and the preparation and launch of the service is $1.8 billion. Spaceway incorporates onboard processing in its satellite design - essentially a fast ATM-based packet switch - which allows traffic to be dynamically switched between spot beams. This is important because it enables a user terminal in one spot beam to communicate directly


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with another user terminal in another spot beam without using a double hop. Other bent pipe designs constrain connectivity because a user terminal in a spot beam is only able to communicate with a specific gateway set up to serve a defined group of spot beams. A bent pipe spot beam spacecraft is a good design for an application like Internet access where the destination of the traffic is known - the Internet backbone - but it is not optimised for terminal to terminal connectivity. To give a practical example, a business with locations spread across the United States could, with Spaceway, enable full connectivity between all of their locations. With a bent pipe spot beam satellite however, traffic would have to be routed through a set of gateways forcing connections to either be delivered via fibre from the gateway directly to the destination or via fibre to another gateway and over the satellite again in a double hop.4 One Spaceway satellite has 10 Gbps of capacity which, according to Hughes, means that the cost per bit on the system is approximately one third that of a typical Ku-band system. Coupled with Spaceway’s connectivity capabilities, this makes for a powerful business proposition. Nevertheless, there are potential pitfalls associated with the technology. Ka-band satellite services have been subject to a great deal of experimentation over the years - ACTS was one of many Ka-band experimental satellites launched across the world - and the issue of rain attenuation - loss of signal through atmospheric absorption - remains a question mark. Even Ku-band systems in high rainfall areas in Asia suffer severely degraded performance and many suggest that Spaceway and its only viable competitor at the moment, WildBlue, will suffer in parts of North America in the same way. Hughes informs us that it is confident of achieving enterprise levels of availability and states that the system compensates for attenuation through a combination of uplink and downlink power control and adaptive coding techniques.5 Despite this, rain fade remains an issue which will only be answered completely when the system is in commercial service. The second major concern is the sheer scale and complexity of the technology which Spaceway proposes to place into orbit. There will be no second chances to get it right and so the onboard processing must effectively work perfectly first time, if the switch fails then we have to assume so does the business case. Having highlighted these concerns and on the assumption that they will be proven unfounded, Spaceway will mark a revolution in the functionality of satellite communications. The system’s full mesh architecture and lower cost per bit represent a step function increase in the current generation of C/Ku-band VSAT platforms. When described as “full mesh”, the true impact of this connectivity can be lost in a generalisation. Spaceway will enable the interconnection of any terminal or group of terminals with another site or group of sites. Networks will be able to take the form of a mesh, star, multi-star or even simply point-to-point links, but by virtue of the fact that they are part of the Spaceway system, any point in the network may be reconfigured and adapted, the private network of a manufacturer can be interconnected with a supplier’s network for example, access privileges can be added or changed all on a single platform. Deployment of intranets, extranets and VPNs will almost be a standard feature of the system making new

4. This is essentially the architecture being used by iPSTAR. 5. However, the use of these fade countermeasures at Ka-band will almost certainly mean that overall link availability will be less

than at Ku-band.


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application introductions in and between companies faster, smoother and less costly. Spaceway describes the service as “Broadband Dialtone”. As of mid 2003 the project had reached a stage whereby the design stage was complete, the spacecraft were essentially built, the terminal design had been completed, the gateways and network operations centres - one in Las Vegas and one in Germantown - were under construction and pre-marketing of the service had begun. The service will support four types of terminal - three of which are defined as user terminals, these are: ST 200 capable of a supporting a 512 kbps transmit speed; ST 300 2 Mbps transmit; ST 400 16 Mbps transmit; ST 500 which will support multiple 16 Mbps transmit channels.

All of the ST versions are capable of receiving 440 Mbps of which approximately 30 Mbps can be processed by the terminal. The ST500 is essentially a major gateway terminal and will be the terminal used by HNS at its two NOCs for system control, connection of user traffic to the Internet backbone and by major corporate headquarters. The largest antenna required for the system - even the major gateways - is 3.5 metres, although coupled with a 100 watt RF system these will be capable of transmitting at rates of between 150 and 200 Mbps. A typical user terminal will require an antenna of between 74 cm and 1.8 metres. The terminal design, which we have seen, incorporates dual feed Ku-band LNBs which will allow a combination of DIRECTV and Spaceway service from a single antenna in much the same way that DIRECWAY already does with DirecDuo. This configuration will also allow enterprise customers to deploy business television networks on a Ku-band satellite - something which they might choose to do because of the CONUS footprint of a traditional satellite - and is capable of receiving Ku-band signals from over a 20° arc. Hughes has several experiences on which to draw as it plans for commercial launch of the system in 2004. DIRECWAY will remain the service brand for Hughes, regardless of the platform. In continuance of Hughes’ move to service, the Spaceway team has already begun to build support for value added services into the system. As a consequence, the company has been working at the hardware level on appliance devices to extend the capabilities of the terminal to support high quality VoIP links and at a service level has established its “Broadband Alliance” programme which encourages and assists application and technology developers to build products which take advantage - and are enabled by - the Spaceway platform. These include applications from the basic transport level through to value added services and content delivery and soon after the services are commercially launched Hughes expects to offer a suite of additional features as options on the platform. This programme is assisted by the fact that the company’s new DW6000 platform, launched in August 2003, is “Spaceway Ready”, with a predefined migration path for existing users to the Spaceway terminal, compatible appliance devices and a hybrid Ka/Ku antenna. Users of the DW6000 will be able to upgrade to Spaceway with the swap out of the RF and IDU sub-systems and a re-point of the antenna.


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The company says that it has yet to set the price of the terminal, but has commented publicly that it expects the ST200 to be priced at similar levels to the current generation of Ku-band VSATs. This would suggest that the launch price will be in the order of $1,000 - possibly less for the ST200 with its higher powered brethren priced accordingly. In theory Hughes has an integrated satellite and VSAT services business through PanAmSat as does Telesat and as once did GTE Spacenet. However, in practice, these businesses were operated as separate stand-alone entities. Spaceway will integrate space segment with ground services in the same way as DIRECTV and EchoStar use their satellite assets. In effect, Spaceway cuts out the middle-man and brings the margin which is currently handed over to the satellite operator to the basic business of providing service to the end customer. Coupled with its intrinsic lower cost of bandwidth, Spaceway is therefore designed to meet price points with margins which HNS and its VSAT service competitors in the traditional business have only dreamt about. In terms of marketing and service products, Spaceway will have an enterprise focus, at least initially. The company believes that the system will expand the available market for VSAT services significantly. Small businesses with a few tens of sites which would have found the cost of backhauling their data to a hub site prohibitive with the current service, will be able to configure a private network within the system itself. Hughes also plans to support a tariffed service, which is currently named FramePlus, as well as tailored network services along the same lines as it provides today. There will also be multiple classes of service ranging from a constant rate to on-demand bandwidth allocation and service products will be directly aligned with terrestrial service offerings, such as frame relay and IP VPNs. The company expects to gain approximately 660,000 users on its system by 2008, each paying between $60 and $250 per month implying an annual revenue stream of approximately $1.4 billion. Initially these customers will come from its current enterprise service base which, as we describe above, currently numbers approximately 220,000 sites in North America. However, in the longer term, HNS sees Spaceway’s potential as being far greater than the current addressable market and even believes that its service will be able to meet and beat many terrestrial services in terms of both cost and functionality. If the onboard processing works and if rain attenuation has been adequately designed into the system, Spaceway undoubtedly will change the nature of the VSAT market in the United States. In fact, we believe that it has the capability to change the broader enterprise telecommunications business. As potential customers begin to understand the capabilities that the system design offers, we expect that a combination of the “community of interest” efficiencies - effectively the telecoms equivalent of the television ‘hotbird’ or neighbourhood concept - and the domino effect which has been a feature of enterprise VSAT sales for many years in the US as competitive advantage is gained by one company leading others to follow suit, will ensure that the service will be successful. There are also additional issues which are now coming to the surface with the acquisition of DIRECTV by News Corp, including the possibility of using Spaceway to provision local-into-local television service and, possibly, bundling broadband access with television. As we have described in the main enterprise section above, those who doubt that News Corp will see value in HNS and Spaceway, to our mind, underestimate the wide ranging value proposition which the combination of HNS’ expertise and Spaceway’s capabilities offer to News Corp.


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6.2 Hughes Network Systems Europe European Services

HNSE has expanded its services over the past two years with additional contracts and expansions to existing networks. The company now has over 23,000 terminals under contract with nearly 40 different accounts, not including at least ten value added resellers. Of this total, 4,500 sites are contracted to HNSE’s Internet access satellite broadband service. This service is sold through resellers across Europe and elsewhere and the subscribers themselves could be as far apart as Scandinavia or the Middle East. HNSE also operates a DIRECWAY/DirecPC service in Europe which is now firmly aimed at the enterprise market. The company has at least two major DW3000 network contracts, one as an overlay for 3,200 Volkswagen sites and another standalone network of 650 sites for United Screens in Germany. We also believe that several other corporate customers signed to the service. COMSYS understands that the company now has approximately 1,500 stand-alone DW3000 sites on its service today.

6.2.1 Performance HNSE has spent most time consolidating its position in the enterprise market and building its satellite broadband Internet access business over the past two years. The company remains the market leader in the European enterprise network business - a full 10 per cent ahead of its nearest competitor. Whilst it has won a few smaller accounts since 2000, it has signed two very big deals which has kept its lead in the market. However, its biggest effort in the enterprise sector has been to spend time analysing its value proposition and enhancing its capabilities for value added services.

26.50%

European TDMA Service Market Share


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The company’s biggest effort, however, has come with the launch of its satellite broadband product. Very sensibly it side-stepped the consumer market and concentrated on defining a package which a value added reseller could easily sell to SME and SoHo users. It was the first to market with a product of this type in Europe and has its pick of the VAR community as a result. As a consequence, HNSE gained a considerable head start on its opposition and has managed to take half of the market to date. We doubt that this level of market share can be defended in the longer term, simply because there are so many operators now targeting this segment, but clearly, once again, the company has managed to set itself up as the standard to beat.

6.2.2 Additional Information The service part of Hughes Network Systems Europe (HNSE) is what once was Hughes-Olivetti Telecommunications. This satellite communication service joint venture between Hughes Network Systems (HNS) and Olivetti was announced on 23 June 1994 as an “alternative to the present telecommunications infrastructure”. Hughes and Olivetti each owned 50 per cent of the venture, but during 1998 Hughes purchased all of Olivetti’s shares and renamed it HOT Telecommunications. HOT was rolled into HNSE as a single operating entity in 2001 and now HNSE provides both service based on the HNS VSAT platforms and hardware sales. HNSE began with the intention of offering pan-European interactive VSAT services taking advantage of the sales, marketing, service and maintenance resources of Olivetti in combination with the VSAT technical, design and sales expertise of the HNS VSAT business. It uses Getronics, which took over some of Olivetti’s businesses, for service and maintenance, but its horizons have since expanded and it now bids all types of contracts for customers based in Europe, even those with a worldwide network, such as CTBTO. HOT took over Hughes’ VSAT operations in the UK and signed the France Câbles et Radio subsidiary, Maxat, as its first “external” partner to cover the UK. The venture’s press release stated that HOT would develop innovative broadcast and interactive communication systems, such as software distribution and personalised newspapers. However, this was perhaps ambitious press talk and the company really had pan-European enterprise networking services as its primary business focus. The company came out of the starting gate targeting the most obvious market sectors - petroleum retailers, hotels, car rental companies and automotive dealerships all with pan-European businesses. Wisely, it largely avoided the retail sector which has tended to be very fragmented and domestically based. It was pan-European automotive dealership networks and government networks which provided HNSE’s core customer base over the first years of its operations. Many of these first customers - GM and TK Maxx for example - were largely gifts from the HNS business in the US. However, this

50.10%

European TDMA Service Market Share


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has not been the whole story and HNSE has also signed contracts with European enterprises unrelated to its parent’s business, such as the UK Post Office and Volkswagen. Hughes has run its shared hub service in the USA since it entered the business, and had participated in service joint ventures in Turkey, India and Mexico, so HOT was a logical extension and a consolidation of HNS’s position and long term strategy for the VSAT business. The resources at the venture's disposal are really quite substantial - Hughes has a long-established sales and marketing effort in Europe and offices in Milton Keynes (UK), Rome (Italy), Prague (Czech Republic) and Frankfurt (Germany) staffed by over 150 people. The initial hub facility was located at a third party site on the Brookmans Park teleport to the north of London, but Hughes subsequently moved this to its own facility in Milton Keynes at the beginning of 1999. The centre of gravity for the company’s network operations has, however, shifted to its Greisheim facility in Germany as it has expanded facilities and added its DIRECWAY hub and NOC to its service. Some network operations are still run from Milton Keynes, but this provides more of a back-up facility today. Both NOCs offer multi-lingual support to each of the customers on the service and the primary location runs a 24x7 service and operates the “night shift” for other hubs in the European network. At the time of embarking on the enterprise, HNSE clearly believed that the European market had matured to the extent that deregulation had reached a stage which allowed the company to feel confident in its ability to provide service across the continent. That said, the regulatory barriers continue to present a problem for HNSE and its direct competitors. The problem is far less than it was five years ago, with problem countries like Greece having effectively deregulated, but licence fees and procedures remain a bone of contention and HNSE continues to lobby for more equitable access. Another issue was that of the market demand and its comfort with the technology - something which HNSE felt content with, believing the pioneering phase had finished. Finally, there was the issue of price. Several large networks had proved that the technology could be cost effective even on a domestic basis and even more so in a regional configuration. HNSE believed that price was clearly a catalyst and stated its intention to make every effort to deliver a service which is “very attractively priced”. This it has done. However, the acceptance of the technology remains a problem which all operators face and there remains a considerable amount of education and intelligent marketing to be done, particularly for certain domestic customers. The stranglehold of the ex-PTTs and now dominant operators remains a problem and customers continue to be very conservative, unlike many of their counterparts in the United States. This situation has been part of the reason behind the company’s more recent changes of strategic direction. In the beginning, this service initiative from Hughes initially clearly upset some of the vendor’s existing customers, although Hughes claimed at the time that only those companies which had stopped actively marketing their services should have cause to worry. It was always possible that some operators of Hughes hubs might find themselves facing their own vendor in a bid, but there was little that could have been done to avoid that. Over the years this situation has indeed arisen, but to be fair to HNSE the company has mostly targeted the major opportunities in the region, leaving the smaller networks to the local shared hub


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operators. The major operators which have suffered have been those which harboured ambitions to provide similar regional service platforms - GlobalOne and Unisource Satellite Services (USS) are the two main ones which come to mind. No one relishes the thought of competing against an operator which is also the manufacturer and this made life particularly hard for USS although the company seemed to find the market hard enough without major competition. Despite the complaints about this situation, the fact is that HNSE did appear to catalyse the market in many ways and it is highly doubtful that HNS could have achieved the volumes it has without the presence of a committed service subsidiary in Europe. HNSE’s major breakthrough was when it sold a 3,500 site network to General Motors/Opel. This was always likely to be a good prospect for the company as GM is (was) Hughes’ parent company and is a Hughes VSAT customer in the USA. Since that time, HNSE has been successful in winning a good proportion of the major accounts which have come up for bid in Europe and has established itself as the leading shared service provider in the enterprise segment in the region with almost one third of the terminals in service. However, the company does have a harder time of things than in the United States. Politics, national alliances and service platforms take on a different meaning in Europe and it has had to fight hard in several contracts, some of which it has lost out to the likes of BT, Telenor, Plenexis, AT&T Global Network (AGN) and Satlynx. The last two represent HNSE’s largest competitors - AGN has won large deals with Peugeot/Citroen and GAN Insurance amongst others and Satlynx, which struggled under GE, has managed to gain greater traction under first Gilat and now the tripartite ownership of Gilat, SES and Alcatel. In terms of its selling points, HNSE emphasises the facts that interactive data VSAT services have proved to be extremely competitive with terrestrial services in North America and Europe, that the technology offers greater dynamic flexibility and a proven upgrade path coupled with longevity of service. The company also trumpets its leading market position and the fact that it is more competitive in scale than its rivals. It is more likely than not that HNSE will continue to be successful. The company lays a heavy emphasis on its ability to work with the customer to optimise its applications for the VSAT technology and contributes intensively in almost a consultancy role to ensure that the LAN and WAN platforms perform to their best - a cradle to grave service. IP is now almost the exclusive protocol of choice and, as a consequence, the company has been able to develop a clear understanding of most customers needs and believes that its expertise in this area is crucial. In the initial phase, customers are signed up for a pilot network for which they are expected to pay because HNSE, like most others, believes that some level of commitment is required to qualify a customer’s interest. On the successful completion of the trial, judged by a number of pre agreed tests, the full network deployment begins. HNSE contracts to provide a minimum of 99.5 per cent availability - end to end - targets 99.7 per cent and claims to achieve 99.8 per cent. This is measured over three monthly segments and there are penalties tied to non-availability of the service (including hardware down time) so field service response is also critical for the company. As a complement to its interactive services, HNSE also brought its DirecPC high-bandwidth one-way service into operation during October 1996. The first customer on this service was


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ACS in Germany which supplies services to Volkswagen and which uses the DW3000/DirecPC system, integrated into the VW service, to download files. It has since added several other customers to this service, the most high profile of which have been United Screens in Germany, which is using the system to deliver digital video-based services to 650 gas/convenience stores across Germany, and Store Channel in the UK. Initial indications of a consumer service were quickly dispelled although the first system deployed was a consumer edition version of DirecPC. The service struggled for the first few years, but once the company refocused it entirely on enterprise accounts we believe that it was able to turn it around. On the vanilla enterprise VSAT side, several areas of activity are worthy of special mention. During 1998 HNSE signed a contract with the United Nations Comprehensive Nuclear Test Ban Treaty Organisation (UN CTBTO) to provide communications to 340 sites. Not a huge contract, but extremely significant because the network is quite literally worldwide with sites ranging from the Himalayas to the middle of the Atlantic ocean. This was the first network of its type and allowed HNSE to truly claim to be a global, rather than a regional, operator which is forced to use infrastructure outside its control as is the case with most of the so-called global partnerships. Two years ago, the company was focused on building new business around value added services and proving the benefits which the technology could bring with support for a variety of different applications. These included things like video and data multicasting and music and audio delivery which, HNSE believed, needed to be sold individually into different parts of a customers corporate structure, obtaining buy-in from each. Largely this was a result of the company’s frustration with the lack of vision by many potential users and the conservatism seen in many European businesses. Much of this strategic direction towards a greater emphasis on service based solutions is mirrored in the intentions of HNSE’s parent in the US, especially as it moves to its Spaceway-based DIRECWAY service. HNSE is smaller and more nimble than its parent (and arguably has less to lose), but it has what is possibly the most important ingredient - the willingness to take ownership of the project and bring all the elements together in a comprehensive solution from the LAN and WAN to the applications and hardware. We have certainly been impressed by the level of integration we have seen offered by the company. More recently, HNSE’s primary thrust has been on focusing its sales teams, better establishing processes and disciplines, training and standardising solutions. The company believes that a more systematic approach is needed and that, in order to turn one of the regions largest problems - fragmentation - into an advantage, it must have a greater focus on exploiting particular vertical segments of the market. The company concedes that the economic slowdown has affected its business similarly to all others in the telecoms industry, but also believes that the worst is now over and that prices in the market have bottomed out. For the first time, the company informs us that it sees real potential in the retail sector of the market and has a belief that some of its activities, which have added a richer level of application support to its platform, will convert some key accounts. HNSE believes that globalisation is leading to standardisation in operational functionality and that pan-European networking across what have been diverse groups is now in greater demand. It is building


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more standardisation into its own service products to meet this need in the form of a single SLA, standard tariffs across the region, a single point of contact as well as standardisation of back-office applications. Whilst HNSE did sign several key deals in Europe in 2001 and 2002 as well as several smaller ones, it spent far more time working with its existing customers to expand their networks, grow their applications and sign renewals - a key event being the renewal of its GM contract in 2003. In 2001 both Hughes and Gilat launched consumer satellite broadband access services in the United States. In Europe, HNSE was fortunate and smart enough to observe this experience before following this lead. In contrast to Gilat, which set about targeting large ISPs to market to the consumer in Europe, HNSE decided to put the consumer business to one side for the moment and concentrate on the smaller, but higher value small business and SoHo segment. Realistically, the company knew that it could not employ its traditional direct sales model for this business and so began to sign up individual value added resellers. In order to do this, HNSE also crafted a series of packages for the service which are modular and built into a scheme which is flexible and yet simple for a VAR to understand and sell. Thus, HNSE’s approach is to wholesale hardware coupled with a minimum number of network system units (NSUs). Each NSU is defined as the system resource - space segment, backhaul, Tier 3 support and hub operations - which a particular grade of service requires per subscriber per month. The VAR then sells or rents the hardware to a subscriber and then sells a number of NSUs depending on the grade of service the customer requires. This approach has proved to be very successful and enabled HNSE to quickly establish quite a considerable service. There have, of course, been problems along the way. The company has had to think more seriously about training its VARS and find better ways to control their activities ranging from overselling to pricing. Additionally, like everyone else in this business, HNSE did its best calculations on usage, but has still had to refine its model, particularly for the definition of the NSU. Nevertheless, the company has had a considerable degree of success with its approach which was well thought out and which gave it a real first mover advantage over almost all of its major competitors. HNSE now informs us that it has over 4,500 subscribers on its DIRECWAY service in Europe, all sold through its network of VARs. This is some 2,000 more than its nearest rival, Satlynx, which concentrated on signing up the largest ISPs it could find. Ironically, two of the largest ISPs in Europe have taken delivery of fewer terminals than HNSE’s most successful VAR. This part of the business is the fastest growth area for HNSE and probably the one which shows the greatest predictability. Part of the problem with the large corporate enterprise networking business is the fact that it remains largely contract led and therefore prone to huge peaks and troughs. By contrast the Internet access business is far more predictable and, more importantly, can command better margins - provided it is priced correctly. Already this segment represents almost one quarter of HNSE’s VSAT terminal base and the company expects that a large proportion of its future growth will come from this area in the future. The only dark spot, however, is the fact that almost all of HNSE’s competitors have realised their mistake and have now begun to adopt very similar strategies. This leads us to think that it will be hard for HNSE to maintain its level of market share as more and more operators join the fray, but then the market will be much bigger.


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Another area which has proved a challenge is the allocation of capacity for this service. To some extent HNSE has suffered from its own success as its subscriber base quickly outgrew the initial transponder it had allocated for the service. One might consider this a high quality problem, but with less successful services lightly loaded and therefore giving customers the experience of less contention before their service filled, HNSE had to scramble fast to bring on more capacity in order to retain the levels of service which its service is designed to provide. The company brought new capacity online in the second quarter of 2003. In summary, HNSE is a different company from that which it was two years ago. The business in Europe has changed in terms of how, when and what customers are buying. Market conditions are more harsh and expectations from shareholders are more concerned with sustainable growth and margins than with growth at all costs. In some ways, this is much better for HNSE because its heritage from HNS is one of calculated risk and sensible deals. At the same time, HNS’ business in Europe is now very much service orientated and HNSE has refocused its enterprise strategy more towards core networking capabilities and stronger application support value propositions. At the same time, it has begun to restructure a hardware and service business which has grown over time, sometimes haphazardly, into a more cohesive operation with mutually supporting units and offices. The company has managed to achieve most of this with a minimal disruption to its business and believes that it now has a better base on which to grow. During all this it has not lost focus on its core enterprise business, although some deals it would have liked to have won have slipped through the net. However, we believe management has been particularly adept with its strategy for the Internet business and has gained an early lead through its professional approach and accurate forecasting of the requirements for a successful service deployment. In particular its VAR strategy and the product package it put together have been more successful than any of its competitors which have since been forced into catching up. Once again, HNSE has managed to establish itself as the market leader and now sets the pace in both the large enterprise networking and the SME broadband access businesses. The company has considerable advantages which come as its birthright but equally it has had to be an aggressive pursuer of business as well as a high quality provider of solutions in its own right. HNSE has the scale in its operations and customer base that only a few competitors can come close to, but its challenges continue to be large because it needs to consolidate and build on its lead in the broadband access market which is still at an early stage in an economy which can only best be described as soft. Nevertheless, it has all the components needed to achieve this, its management has proved its ability and it has the resources and expertise to continue to be the operator everyone else has to catch.


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6.3 Hughes Escorts Indian Services

Hughes Escorts is the most successful of the Indian VSAT operators and its service remains the largest in the country even after seeing several very large accounts go to dedicated facilities as a result of the regulations which favoured that approach. These dedicated customers, or “captive” accounts as they are known in India, amount to over 4,400 sites with several large customers. On its own TDMA shared facilities, the company currently has over 110 enterprise accounts with almost 5,000 VSATs in service. In total, as of mid 2003, Hughes Escorts had almost 7,500 sites under contract. Hughes Escorts also operates a mesh DAMA service based on the TES Quantum system. After several years of high growth, this appears to have begun to mature for all of the operators over the past two years. Nevertheless, it has continued to grow for Hughes Escorts which now has almost 400 TES terminals with nearly 80 customers plus a further 50 TRES systems. In addition, the company also has a number of captive customers of this type which number another 160 sites plus pure SCPC accounts on both its own managed services and dedicated facilities which add almost 80 sites.

6.3.1 Performance Not only is Hughes Escorts the current market leader in terms of VSAT services in India, but it has held this position since deregulation first allowed private operators into the market. The company has always been aggressive and proactive in terms of its approach and the types of services it has introduced. It has led the way into almost all of the new segments of opportunity which have opened up in the enterprise market, most recently with its major contract with PlayWin, an online lottery system. As a vertically integrated business, the company’s ability to manage a hardware business alongside and complementary to its service has been impressive and its more recent moves towards establishing more content-orientated services through strategic partnerships in the distance education and training market seem also to have been well timed.

29.44%

India TDMA Service Market Share


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During 2000 its single largest account of the time, the Bombay Stock Exchange, moved to a private hub because licence fees encouraged private systems at that time. We are not aware if this influenced BSE’s decision, but it certainly impacted HECL’s market share quite considerably - BSE has over 2,000 VSATs in service today. HCL Comnet has the only other major captive account with the NSE, but HECL has six, not including the systems sold to NICNet and DoT which are used for services. If these dedicated systems were factored into the service market statistics, then the company’s share of the market rises to over 37 per cent. The company has clearly managed to sustain both its value proposition and its levels of customer service over time because competition is fierce in the country and customers are almost spoilt for choice. Part of its strength must be that it controls the major elements in the chain of distribution and part is probably due to the fact that the company is both committed to VSAT technology and to the Indian market. Whatever the reasons, Hughes Escorts has constantly kept one step ahead of its competitors and leads a group of only five operators in India with sufficient scale to continue building and investing proactively in new services and platforms. Hughes Escorts leads this pack by a not inconsiderable margin. The company looked briefly vulnerable when DAMA systems were first introduced into the market in 1996, but quickly remedied this with its own service based on the TES platform. After several years of strong demand, the growth in this sector of the market has undoubtedly slowed for all of the operators over the past two years. However, even in this maturing market, Hughes Escorts has managed to outperform its competitors by a small margin and increase its market share and leadership position - its closest rival has almost five per cent less share. We would expect that the company’s revenues in this business remain important, but diminishing in significance as its TDMA business continues to grow strongly and more and more customers use this platform for back-up rather than primary services.

6.3.2 Additional Information Hughes Escorts Communications Limited (HECL) is a joint venture company between Hughes Network Systems of the United States (the manufacturer of the ISBN/PES and

37.24%

India TDMA Service Market Share (Shared & Captive)

23.31%

India Mesh DAMA Market Share


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DIRECWAY VSAT systems and TES mesh products amongst others) which owns 49 per cent and Escorts Limited, a multi-industrial company involved in telecommunications equipment manufacture which owns the remainder. Hughes began looking at the possibility of entering the Indian VSAT service market as far back as 1989. It talked to several potential partners, but eventually reached an agreement with Escorts because the company appeared aggressive and willing to move forward. Both companies were already considerably involved in the telecoms business in India and elsewhere - Escorts with its manufacturing activities and Hughes with its worldwide wireless telecoms business and a subsidiary geared towards software production in India. The two companies spent some time lobbying for a licence to operate, but it was not until July 1991 that the situation began to change and the company then applied for a licence from the Ministry. A provisional licence was granted in June 1992 and the first draft was issued in October 1993. The final agreement was eventually signed in August 1994. The company’s licence allows it to operate data services up to 64 kbps and non-interconnected voice services with both star TDMA and mesh SCPC technologies. All of the satellite service licences have been extended over the past few years to allow operators to offer hybrid terrestrial and satellite networks, but the prohibition on international services remains with the exception of the deregulation of direct international Internet gateway links in 2000. Naturally the company opted for Hughes’ own ISBN/PES system and a nine metre, extended C-band antenna (for operation with the Insat domestic satellite system) was installed at a site in New Delhi. The company chose New Delhi as its base mainly because Hughes already had an established business located there. Hughes Software Systems now employs over 700 staff in product support and software engineering activities so it made sense to co-locate. Hughes Escorts’ VSAT business currently employs approximately 250 staff responsible for all aspects of the business ranging from sales and marketing to hub operations and service and maintenance. The company maintains 13 service centres6 and handles all service and maintenance tasks with its own personnel - something that it believes is important to ensure the level of quality it contracts to provide its customers with. It also undertakes some of the more basic repairs to the chassis and power supplies in India rather than returning the unit to the US. Following the opening up of Ku-band services by the Government in 2000, HECL installed a 9.3 metre Ku-band hub system at its headquarters offices in Gurgaon to support a Ku-band PES system. During 2001 it also implemented the latest generation DIRECWAY platform and operates both the DW4000 and the self-hosting DW4020 VSATs from this facility. From the start, the company always intended to offer MCPC and mesh networks and, following the award of its mesh networking licence at the end of 1996, it installed a TES system to complement its PES system. This also gives it the ability to offer the HES hybrid solution (a single antenna supporting both products) which it has sold to several customers. This service has also been marketed aggressively both as a demand and permanently assigned solution. Initially, only a few operators concentrated in this area, but now all the primary service providers offer both mesh and star systems. This helped alleviate the initial market

6. Delhi, Mumbai, Calcutta, Chennai, Bangalore, Hyderabad, Pune, Nagpur, Ahmedabad and Chandigarh.


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demand for voice connections, but there has also been a significant amount of requirement for data as well and HECL also uses its UMOD and TRES systems to provide these types of links. These DAMA and PAMA services grew very strongly for the company, but growth rates have begun to tail off as new terrestrial facilities have been laid and prices have fallen for leased lines. The business continues to be a significant one for HECL, but the company recognises that it does not offer the same potential as it did a few years ago and has already been looking at ways in which it can retain its customers by transitioning them to a managed terrestrial solution. However, even in this softening market our figures show that HECL has actually managed to increase its market share and move from the number two position to number one. With the initiation of marketing activities, Hughes Escorts claimed high levels of interest. It was the first to market and quickly signed several accounts - the most important of which was Hindustan Lever, which remains one of the company’s largest accounts. It has subsequently gone on to build the service significantly year-on-year. The number of terminals on its shared service has grown consecutively, despite the fact that it has hosted several networks for major customers which have subsequently been transferred to private hubs. Examples include the Reserve Bank of India which operates a dedicated system supporting over 60 state banks and the Bombay (Mumbai) Stock Exchange which now has approximately 2,000 VSATs on its system and which was transferred to a private facility in 2000. However, the licence fee structure, which once favoured the implementation of a dedicated facility for large customers was reversed in 2002 and this might have a beneficial effect on all of the Indian operator’s service bases. Hughes Escorts initially expected that the primary demand would come from the financial, government and manufacturing sectors of the market and it believed that it would be able to sign up to 1,000 sites within the first three years of operation. These predictions have largely proven to be the case - most customers did come from the manufacturing and distribution sectors, often led by MNCs. Business in the financial sector has grown at a healthy rate and continues to do so, particularly now for ATM networks which more recently have become a feature of the modernisation of banks in the country. The past two years have nevertheless seen come major changes in the Indian VSAT market as private enterprises, in particular Reliance, Bharti and Tata, have embarked upon some ambitious plans to establish their own, independent terrestrial infrastructure. Coupled with lower prices mandated by the Government’s regulatory agency (the TRAI) in September 1998 this has significantly increased the quality and coverage of fibre-based services in the major metropolitan areas. One of the results is the slowing of the growth in higher bandwidth SCPC and mesh DAMA services noted previously and a shift in demand from the manufacturing sector as this has encouraged the implementation of more data intensive applications, particularly ERP systems. On the positive side, the retail segment of the market has begun to grow, with restaurant chains, convenience stores and online lotteries all developing and expanding their businesses. HECL believes that the whole VSAT value proposition is beginning to look far more comparable to the application-based solution seen in the United States and Europe than with the typical developing market pure connectivity offering. Whilst the company believes that there is some way yet to go before credit verification becomes a mission critical application in


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the retail points of presence seen in other countries, such as gas stations, it has also begun to experience demand from the retail segment. The company believes that this will grow strongly as additional applications, such as inventory control, become more widespread and combine to make VSAT a more viable solution. As things stand today, the company informs us that a VSAT network for point of sale transactional services can be between 80 and 50 per cent less than the terrestrial equivalent and so the purchase decision is a relatively straightforward one for prospects in this area. HECL contends that demand for this type of connectivity is only likely to grow with time because the terrestrial network continues to be concentrated in and between the main cities. The online lottery business is another market segment which offers huge potential in the country as new lottery ventures are springing up to replace the older paper-based systems. The first major opportunity in the industry emerged with the PlayWin account which Hughes won in 2001. PlayWin has ordered 8,500 VSATs from HNS today, of which half are contracted to HECL’s service and half are being operated by Essel Shyam, another company in the same business group as Playwin. At the moment PlayWin is the only business with scale, but there are 28 states in the country all with lottery licences to give out so the potential is huge. From 1999 onwards the major drivers were related to the Internet. India has an enviable software business community and one of the Government’s priorities has been to encourage it. As part of this policy, access to the Internet forced its way onto the agenda and the Government reacted by allowing independent international Internet connections via satellite from ISP sites. HECL has responded to this in its typically aggressive fashion by establishing its own ISP business and teaming with 11 other ISPs to provide their infrastructure on a one-stop-shop basis. It established facilities to support value added services, ultimately which were expected to be delivered via the Internet. It introduced its own DW3000 based DIRECWAY service as an overlay for its existing customers as well as a stand alone platform, and initiated VPN and VPDN services. An Internet Services Group also began to implement a data centre to host a business portal providing information services to the company’s enterprise customer base. With the cooling of the Internet business, HECL has moved its emphasis from the Internet per se and more towards the provision of integration and managed services. This takes two primary forms. The first is a measure clearly designed to protect the long term interests of the business and retain ownership of the customer. It has partnered with Data Access to use their terrestrial facilities to provide managed hybrid services for its clients. It has begun to establish its own frame relay nodes in key areas and will no doubt attempt to transition customers to networks which it integrates from the various technologies available to it as and when it makes sense. At present the company plans to cover 17 major cities in the country through its partnerships and informs us that it has received a high degree of encouragement from both its customers and the terrestrial resellers. HECL is positioning itself as an end-to-end services supplier and has built the capability to manage and control multiple technologies beyond just the network connection right down to the customer premises equipment - all based on SNMP compliant devices.


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The second element is a move by HECL to sell more applications-based services which are both provided in-house and on a dealership basis for third party application providers. This was something that the company initiated in 2000 and is based on HECL’s core VSAT technology as well as the data centre the company constructed in 2001. The latter provides hosting, housing and back-up services for its customers with the usual data centre facilities including firewalls, intrusion detection and emergency power. HECL informs us that it already has 30 customers contracted for this service and has filled its initial capacity which is now being expanded. As well as offering this as an additional service for its networking customers, the company also markets it as a standalone product. In terms of its own application business, HECL has established an interactive distance learning network in partnership with several content providers. This comprises a studio which produces content and programming for clients and a network of classrooms around the country each of which has an average of 20 PCs. The system is based, naturally, on Hughes’ own OneTouch system and uses a video broadcast with audio return channels. HECL is a strong believer in the IDL and corporate training market which allows corporations to conduct training sessions during the day and then correspondence and degree programs in the evening. It informs us that the business achieved breakeven in 15 months from launch and that it foresees a considerable expansion through a franchise model which it has developed. The company now has over 175 different customers on its various VSAT services and dedicated facilities accounting for over 10,000 individual sites. Its customer list is a Who’s Who of India and spans a range of different industries, although about the manufacturing and financial sectors account for half of the total and now the lottery business accounts for over 40 per cent. This gives it both scale and an important position from which to leverage its newer business initiatives. HECL believes that this along with its ability to capture and retain customers is the main reason that its terrestrial partners have given it the level of support that they have. From a competitive perspective, the big four which had drawn away from the pack of all licensed operators by 2000 have now been joined by Essel as a result of that company’s contract with PlayWin, but HECL now appears to see its largest direct competitor as HCL Comnet which has equally been pursuing a strategy of telecoms services coupled with managed and integration services. Arguably, HCL Comnet is further down the road of managed services than HECL, but has a less well developed telecoms business in general and VSAT business in particular. These issues aside, HECL and HCL are clearly direct rivals for this type of business. The company is keen to point out just how committed it is to the Indian market. Of Escorts’ commitment there can be no doubt and Hughes Network Systems itself, and through its parent GM, also has considerable investments in the country. Additional unique selling points are the fact that it has the considerable experience and expertise of Hughes Network Systems’ various other shared hub operations in the United States, Europe and elsewhere. In addition, its close link to the manufacturing process ensures software development is continuous. HNS’ software development subsidiary employs 700 engineers experienced in the PES system and they are available for support to Hughes Escorts. The company believes that VSAT solutions will continue to grow in India because they are independent of the public network and, importantly, there is a single point for network management, control and responsibility - something it is now trying to extend to the larger network. In addition, it


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believes that the growth in applications which will increasingly require reliable connectivity across all of India and the technology’s falling cost of ownership will help drive this growth. Hughes Escorts appears committed to an aggressive approach to the market and the fact that it continues to be successful with many of the largest contracts awards is testament to it. The company has consistently challenged the regulatory barriers in the country and has implemented the latest services whenever any form of deregulation has been passed. It has been this determination and proactivity which has helped it build its lead in the service business. HECL has sustained the momentum of its business and, even with increased competition, has maintained and even extended its leadership. The industry has undergone some consolidation, but more can be expected in the future, although HECL is expected to maintain its policy of organic growth rather than growth through acquisitions. Its most recent initiatives have been into managed services and application driven business models. In summary, it is hard to see how HECL could have managed its business much better or achieved much more. The company has faced up to, and largely held off, some major competitors by staying at the forefront of the business, always pursuing opportunities with aggression and being willing to push the edge of the market’s boundaries. During this time the market has undergone a continuous evolution and HECL has adeptly managed its way through these changes. Its latest set of challenges primarily involve how to defend its customer base against the rising threat of terrestrial services whilst at the same time, maintaining the growth of its business. The company’s response has been a swift move into positioning itself as an integrator and manager of network services, rather than a pure technology enabled service provider. This takes HECL into new territory, although it appears to have made a good start and established a firm foothold. The company is able to feel confident in the long term prospects for its business because VSAT technology will continue to be a core element of its product portfolio and one which it is able to control probably better than any of its competitors. In addition, VSAT services and the experience of managing both applications and networks for a large customer base establish HECL as a valuable partner for any network provider.


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6.4 Hughes do Brasil Latin American Services

Hughes Network Systems has traditionally sold its products through a number of strong partnership agreements in Latin America. The company has relationships with all of the major telecoms carriers in the region as well as most of the strongest independent service providers. In particular, Impsat has been a key strategic provider of services on the Hughes platforms with both companies staying loyal to each other for over ten years. Through its partnerships, HNS has built a large market share in the continent, but by 2001 several factors were beginning to come together which meant that the established order was fast disappearing. Many of the major VSAT providers had been lured by the prospects of terrestrial services which had been substantially deregulated from 1998 onwards across the region. None more so than Impsat, which had completely re-invented its strategy and carried through an IPO based on an aggressive plan to roll out thousands of kilometres of fibre. The collapse of the tech market and the economic downturn which followed consequently caught all of these companies off-guard and several, including Impsat, went bankrupt. Coupled with a lack of willingness to invest on the part of many of the smaller service providers this led Hughes to re-evaluate its strategy in the region. The company has long had a strategy of moving its business more towards a service base and with leading service operations in Europe, India and the United States, Latin America was another logical step. The path had not been so clear in previous years not least because there existed regulatory barriers and a lack of appropriate space segment. With deregulation allowing new licences and PanAmSat achieving landing rights for Ku-band capacity in Brazil, the way was open for HNS to establish its own service as a natural progression of its business. HNS’ wholly owned subsidiary, Hughes do Brasil (HDB) applied for its own licence at the end of 2002, having already discussed various partnership possibilities with several potential companies. Rather than re-invent the wheel it negotiated an agreement with Impsat in Brazil to host, man and operate an HDB-owned hub at its teleport site in São Paulo. Consequently, a DIRECWAY hub was brought into operation in Brazil in the first half of 2003 and Hughes now markets its own service in the country based on Ku-band capacity on the PanAmSat system. Impsat is HDB’s outsourcing agent and is able to sell services through the hub as a VAR, but the service belongs to HDB. Whilst the base platform exists in Brazil customer care support functions will be provided from the company’s infrastructure in the US. HDB has moved to a new location in Alphaville and is currently in the process of adding to its local staff compliment to support sales and marketing as well as some operations. Initially, the service will only be sold in Brazil, but in the longer term, as it becomes established, Hughes plans to extend its offering further out to other neighbouring countries.


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In terms of marketing, Hughes intends to sell its service directly and target the enterprise sector - large corporate and government organisations. The company does not rule out the possibility that it might also package a service for the SME/SoHo customer to be sold through VARs, but this is not its primary strategy and it has no intention to compete with Star One for the consumer Internet access market. The company expects to be able to offer its latest generation technology to some its existing partners and believes that carriers offer one potential opportunity as do some of the more specialised transactional applications, such as lotteries, education and governance. It believes that the Brazilian market has matured to a state that the high level value proposition that it sells in the United States can be relevant locally. The market in Brazil has become intensely competitive over the past five years, although the country’s economy has weathered the global and regional slowdown better than its neighbours. Hughes believes that the demand for VSAT is still evident and that, even with the large terrestrial build out in the south of the country and the ensuing price war that has followed, a smart VSAT provider will be able to sell its value in coverage and reliability. It believes that the banking sector - long a mainstay of the business in Brazil - continues to need the technology and, indeed, it has already signed its first customer, Primesys, which will operate a network for Banco Bradesco on a private hub, backed up by HDB’s service. HDB has other immediate prospects as well, as a result of the regional networks for which it already has contracts and which, up until now, it has had to outsource to other operators. Given this and the fact that it has already added some smaller customers to its service, HDB believes the prospects are good. It expects that its focus and commitment to the technology, coupled with its ability to control most of the value chain, will allow it to build a business with scale in the same way as it has done in the past in India and Europe.


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6.5 Shanghai Hughes Network Systems China Services

Hughes’ history in China goes back a long way. The company first began some activity after it accompanied President Nixon on his ice-breaking visit in 1972 and quickly established itself as a supplier in the country. By 1990, HNS had almost become the de facto standard for VSAT technology in China with observers reporting that the PES system had become the safe choice - the platform one selected not least because you knew it would work and would never get fired for making the wrong decision. HNS grew the business from this solid base and, over time, sold millions of dollars of its PES and TES equipment into the country. In 1995 it established Shanghai Hughes Network Systems (SHNS) in partnership with SVA, one of the largest consumer electronics manufacturers in China. Originally, the two companies hoped that the market would grow large enough to establish a manufacturing plant, but excessive regulation, amongst other things, has conspired to limit this ambition. Nevertheless, SHNS became an important sales outlet for HNS and has provided in-country repair and maintenance facilities for the company’s many customers. In 2000 it invested in ChinaCast, a Beijing-based privately funded company which now operates more than 10,000 DW3000 terminals in support of an interactive distance learning business. HNS holds a minority stake in ChinaCast which also recently introduced a DW4000 system to its offering. As the market has changed and customer demand has evolved with greater levels of foreign investment, the impact of China’s entry into the WTO and the a small amount of deregulation, Hughes has been considering its strategy for the country. In 2002 HNS and its partner, SVA, decided that the time was right to introduce a service to China in the same way as Hughes has already done in India and Europe. From HNS’ perspective the initiative is somewhat more complicated than in other parts of the world because a foreign company is still not allowed to hold a telecoms operating licence. As a consequence, SVA will hold the licence with HNS taking the rôle of technology partner. Service will be sold through SHNS and two hubs are in the process of being commissioned - both in Shanghai, one at SHNS’ facility in Pudong and one at SVA. The SVA hub will be the primary service platform, probably running from a 9.2 metre antenna operating to AsiaSat-4, whilst the SHNS system will primarily be used for training and testing, and possibly to provide back-up services in the future. SHNS will have the primary responsibility for sales and marketing as well a technical support. HNS will also provide the operational personnel to run the hub at SVA. As the service was being prepared and SHNS was busy hiring new staff during the first half of 2003, the SARS epidemic in China brought all progress to a virtual standstill. However, we now understand that the venture is back on track and that commercial launch of the service will take place in the autumn of 2003.


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Hughes believes that it will be successful in China where many others have failed for several important reasons. Firstly, it holds that the market has not until now been sufficiently ready for a full-scale independent service provider. It believes that customers are now looking for a higher level of service and that, despite the fact that the regulatory environment still has not managed to catch up, the country is preparing itself for the full impact of the WTO. Certainly, there are many large, state-owned enterprises which are frantically re-organising and modernising in preparation for the onslaught of competition which is expected to come from US and European companies entering their hitherto protected market. The company believes that there are three clear areas of opportunity. These include the support of its existing US-based customers as they expand into China, regional government networking opportunities and new prospects thrown up by the influx of Chinese non-nationals as they move back to the country and invest in new businesses. The company also sees that there might be other opportunities in the pipeline emerging from eGovernment initiatives and other modernisation projects, but it does not yet feel sufficiently confident in these possibilities to base any plans on them. SHNS says that it will work with ChinaCast to establish a mutually complementary strategy in the market. The fact that ChinaCast is very focused on its IDL business model and the two companies are based in completely different economic spheres of influence might also minimise the chances of conflict. HNS is obviously trying to maintain the momentum of its long term corporate strategy to move its business more into services and become less dependent on hardware sales. Service is in many ways a more complex business with a greater risk profile. However, a hardware sale is generally one-off and HNS has been working on the systems and processes which will allow it to begin to add greater value to its basic networking product and achieve longer term and higher margin revenue streams. In addition, as the company has developed its business, it has increasingly found its customers demanding service across more regions and, in some cases, globally. With its feet firmly planted in North America, Europe and India it has now ventured out into China and Latin America - almost completing its coverage. HNS has always been a cautious company only willing to take carefully calculated risks - it is usually evident where it believes the risk to be too large because its investments lack scale and commitment and then rarely come to anything. Where the company has been committed, its judgement has usually been sound. Despite this, China is probably the largest challenge HNS has had to date and will prove a more difficult market to succeed in than any other, including Latin America.


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A1. Appendixes

A1.1. HNS Customer List

A1.1.1. Major Interactive Star VSAT Customers

Company Region Al-Harbi AM BCEAO AM BT AM General Telecom AM Gulfsat AM IAM AM IntelCam AM Iran Telecommunications Company AM ISC AM MCI AM Nitel AM P&T Zimbabwe AM SAOC/Omantel AM Telkom SA AM Telnet AM Acumen AS AstroGraphia AS BNI 46 AS BSE AS BTA AS CAAC-ATC AS CBT AS Ceycom AS China Customs Service AS China Orient AS China Satcom AS China Tobacco AS ChinaCast AS Citra Sari Makmur AS Civil Aviation Authority AS Department of Telecommunications AS Educational Research Network AS Essel-Shyam AS Essel-Shyam AS Fascom AS Fujitsu AS Guo-An Electric Company/CITIC AS HNS Escorts AS HNS Escorts AS Katelco AS Korea Telecom AS Lintasarta AS Maxis AS MCI AS Ministry of Water Resources AS

Company Region NICNet AS NSS Australia AS Optus AS People's Bank of China AS PrimaCom AS PT Telesindo Mulia (BDNI) AS Reserve Bank of India/IDRBT AS Samsung SDS AS Shanghai Gaozhi (Stock Exchange) AS Shanghai VSAT Service Co AS Shenzhen Stock Exchange AS SuperNet (Pakistan Data Service) AS SVC AS Tanjing Stock Exchange AS Telekom Malaysia AS TNS-Plus AS WorldSat (Sahaviriya) AS Worthope AS BankNet EU Belgacom EU BioChim Bank EU BT EU Datasat EU Delta Telecom EU DigiCom EU Elsacom EU France Télécom EU GiTy EU Intralot Prono Lotto EU IPNet EU MCI EU Pagi EU Plenexis EU Retevisión EU Telecom Italia EU Telefónica Data EU Telenor EU Telepac EU Telespazio EU Tofan Group EU Ukos Oil EU UkrSat EU Union Fenosa EU Unitel EU Verinet EU


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Company Region Xantic EU Advance LA Amazon Tech LA AT&T Colombia LA Banco do Brasil LA Banco ITAU LA Banco Real LA Banrural LA Bantel LA BT LA Chrysler Mexico LA Comsat International LA CTC LA Embratel LA Enlaces Satelitales S. de R.L. LA EnTel Bolivia LA EnTel Chile LA Exxon Mobil LA Ford (Mexico) LA General Motors Brazil LA Impsat LA interDirect LA MCI LA Pemex LA Petrobras LA Satel LA Satelitron LA Sivam LA Telecom Argentina LA Telecom Mexico LA Telefónica Data LA Union Fenosa LA Vicom LA Abbey Healthcare NA ACS NA ADP NA ADS (Alliance Data Systems) NA ADS/Unocal NA AG Edwards NA Aldi's Grocery NA Amerada Hess NA American Cancer Society NA American General Finance (AGF) NA American Racing Equipment NA American Tower (ATC) NA Aquila/Peoples Natural Gas NA Arco NA Arkansaw Freightways NA Army Air Force Exchange NA Associated Bancorp NA Associated Wholesale Groceries NA Atlantic & Pacific Tea Company NA Auto Zone NA Bashas NA

Company Region Best Western NA Beverly Enterprises NA Blockbuster NA BMW NA BP Amoco Pipelines NA BP/Amoco NA Brookshire Grocery NA Buckeye Pipeline NA Cargill NA Case New Holland NA Cenex NA Chevron NA Choice Hotels NA Circuit City NA Colonial Pipeline NA ComCoTech NA ComData NA Commercial Fueling Network NA Concord Computing NA Consolidated Freight (Confreight) NA Cracker Barrel NA CSK (Northern) Automotive NA DNS NA EDS NA Edward D Jones NA Electronic Payment Systems (EPS) NA Embassy Suites (Promus) NA Enterprise Rent-a-car NA Equiva (Texaco/Shell) NA FLEMA NA Ford NA Ford (Canada) NA General Motors NA Geomet Data NA Global Atmosphere NA GolfSwitch NA Grand Union NA Grossman's NA Herman Miller NA Home Base NA Honeywell Avionics NA HSI/Brooks Drugs NA Hughes Information Training Company

NA

Ingles Markets NA Interstate/Johnson Lane Corp NA Keystone Financial NA Kohl's NA K-VA-T Food NA Les Schwab/Midway NA Lowes Hardware Stores NA Mailboxes, Etc. NA Marathon Oil NA MCI NA


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Company Region Melville NA Merrill Lynch & Co NA Michaels Arts & Crafts Stores NA Mobil/Exxon NA Murphy Oil NA Musicland NA Nabor's Drilling NA Nissan Infiniti NA O'Reilly Autoparts NA Outback Steakhouse NA PACCAR NA Pathmark NA Payless Drugs NA PBS NA PEMA NA Pep Boys NA Phillips 66 NA Piper Jaffrey NA PMI/Hobart NA Promus Hotels NA Rack Room Shoes NA Radiant Systems NA Raymond James NA Ross Stores (Dress for Less) NA Roundies NA RTC (Real Time Communications) NA Ryder NA Safeway NA Schlumberger Well Services NA Sheetz Stores NA Shell Oil NA Shell Pipeline NA Sherwin-Williams NA Shoney's Restaurant NA ShopKo NA Sinclair Oil NA

Company Region Smith & Barney NA Smith's Food & Drug NA State of Texas, Dept of Public Safety NA Storage USA NA Suncor NA Supervalu NA Telenergy NA Telesat NA Telesat NA Teppco NA Texaco Pipeline/Communications NA Texas Eastern NA The Associates NA Thrift Drug/JC Penney NA TJX NA Toyota Motor Sales/Lexus NA Ultramar Diamon Shamrock NA Union Pacific Railroad NA Univar NA Unocal Pipeline Company NA Uplinx NA USSC NA Video Jukebox NA Video Venue NA Virginia Farm Bureau NA Volvo NA Vons NA Vortech Data NA Walgreen Company NA Wal-Mart Stores NA Weathermetrics NA Weis Supermarkets NA Wickes Lumber NA WSI Satellite (Wincom) NA WW Grainger NA

A1.1.2. Major Interactive Star Shared Hub VSAT Customers

Company Region ADP NA ADS (Alliance Data Systems) NA ADS/Unocal NA Advance America NA Aldi's Grocery NA Amerada Hess NA American Tower (ATC) NA Arco NA Army Air Force Exchange NA Associated Bancorp NA Associated Wholesale Groceries NA Bashas NA

Company Region Best Western NA Beverly Enterprises NA Big 5 Sporting Goods NA Blockbuster NA BMW NA BP/Amoco Pipelines NA BP/Amoco NA Brookshire Grocery NA Brunswick Bowling NA Buckeye Pipeline NA Cargill NA Carl's Jr. Restaurants NA


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Company Region Case New Holland NA Caseys General Stores NA Casual Male NA Cendant NA Cenex NA Choice Hotels NA Colonial Pipeline NA ComCoTech NA ComData NA Commercial Fuelling Network NA Concord Computing NA Consolidated Freight NA Cracker Barrel NA CSK Automotive NA Dollar Tree NA Domino's NA Donatos NA EDS NA Electronic Payment Systems (EPS) NA Equilon Enterprises NA Equiva (Texaco/Shell) NA FLEMA NA Geomet Data NA Global Atmosphere NA GolfSwitch NA Grossman's NA Herman Miller NA Home Base NA Hughes Information Training Company

NA

Ingles Markets NA Jack-in-the-Box NA Jiffy Lube NA K-VA-T Food NA Kohl's NA Les Schwab/Midway NA Mailboxes, Etc. NA Marathon Oil NA Marsh/Village Pantry NA Michaels Arts & Crafts Stores NA Mobil/Exxon NA Murphy Oil NA Musicland NA Nabor's Drilling NA National Cable Communications NA National Cinema NA O'Reilly Autoparts NA Outback Steakhouse NA PACCAR NA Pathmark NA Pennsylvania Emergency Management Agency

NA

Pep Boys NA

Company Region Phillips 66 NA PMI/Hobart NA Premier Retail Networks NA Promus Hotels NA Public Storage NA Pulte Homes NA Quizno's NA Rack Room Shoes NA Radiant Systems NA Raymond James NA Red Technologies LA Regal CineMedia NA Ross Stores NA Roundies NA Real Time Communications NA RTS (Mall Services) NA Ryder NA Safeway NA Schlumberger Well Services NA Sheetz Stores NA Shell Oil NA Shell Pipeline NA Sherwin-Williams NA Shoney's Restaurant NA ShopKo NA Sinclair Oil NA Smart & Final NA Smith & Barney NA Smith's Food & Drug NA Sonic Restaurants NA Storage USA NA Suncor NA TCI NA Telenergy NA Teppco NA Texaco Pipeline/Communications NA The Associates NA Thrift Drug/JC Penney NA Ultramar Diamond Shamrock NA Union Pacific Railroad NA Uno Restaurants, Inc. NA Uplinx NA Verdisys NA Video Jukebox NA Video Venue NA Volvo NA Weis Supermarkets NA Wendy's Restaurants NA Wickes Lumber NA World Communication Center NA WSI Satellite NA Yum! Brands, Inc NA


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A1.1.3. Major Mesh DAMA VSAT Customers

Company Region Acumen AS Afrilink Belgium S.A. Ltd. EU Al-Harbi AM Alkan AM AT&T NA Bohai Oil Corp of CNOOC AS Brilliant Electronic Industry AS CAAC-ATC AS China International Travel Service AS China Meteorology Administration AS China National Coal Corporation AS ChinaSat AS Codetel - QD LA CSM AS CTC LA Embratel LA EnTel Bolivia LA EnTel Chile LA Ford (Mexico) LA GabTel AM Globe Telecom AS GSSTC AS Gulfsat AM Guo-An Electric Company AS HNS Escorts AS HNS Escorts AS IAM - QD AM Indian Airforce AS Indian Army AS Indonesian Police AS Intsat EU IPNet EU Jusco AS Kensat AM Long March Publishing House AS LRNG AS Ministry of Energy (MoE) AS MPT China AS North East Energy AS Northwestel NA PakDataCom AS PanAmSat NA Penguras Besar AS People's Liberation Army (SSC) AS PLDT AS Plenexis AS Plenexis EU PrimaCom AS RBI/IDRGT AS SAOC AM

Company Region SAOC - QD AM Satcom-Tel EU Sattel EU Shanghai HNS AS Shijiazhuang SC AS Southern California Edison NA Star India AS Telemar LA Telemar - QD LA Telesat NA Telespazio EU Telkom SA AM Telnet AM TNS-Plus AS TNS-Plus AS Turk Telecom EU Turkish Army EU UTE LA Vicom LA Vietnam P&T/Telstra AS WBSEB AS Xantic EU


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A1.1.4. RTS VSAT Services In addition to its hardware business and corporate closed user group services, Hughes also operates its Retail Telecommunications Service (RTS) a service for shopping center and mall-based speciality retailers in the United States based on shared VSATs. This service supports two main industry associations - Retex and SpecNet (the National Retail Federation) - as well as customers Hughes signs directly. The following companies are contracted to the service:

RTS Customers C&J Clarke (Hannover/Bostonian) Circuit City Express Eddie Bauer/Spiegal EPS Gantos General Growth Management Homart Development Corp. Kerr Drugs Melvin Simon Musicland Trader Joe's Venator Walden Books Warner Bros. Williams Senoma Woolworth/Venator


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A1.2. Contact & Organisational Information

A2.1.1. Investor Relations HNS: www.hns.com

Judy Blake Director, Public Relations & Marketing Communications Hughes Network Systems 11717 Exploration Lane Germantown Maryland 20876-2799 United States of America

Tel: +1-301-601-7330 Fax: +1-301-428-1672

Email: [email protected]

HS:


Tel: +1-301-601-7330 Fax: +1-301-428-1672


A2.1.2. Press Relations HNS:


Tel: +1-301-601-7330 Fax: +1-301-428-1672


http://www.hns.com


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A2.1.3. Hardware Sales Contacts North America: www.hns.com

Mike Gorsuch Vice President Sales and Marketing North America

Tel: +1-301-428-1641 Fax: +1-301-428-7066


International: Dr Vinod Shukla Senior Vice President and Assistant General Manager International Division Hughes Network Systems 11717 Exploration Lane Germantown Maryland 20876-2799 United States of America

Tel: +1-301-428-5606 Fax: +1-301-428-5588


A2.1.4. Service Sales Contacts North America: www.hns.com

Mike Gorsuch Vice President Sales and Marketing North America

Tel: +1-301-428-1641 Fax: +1-301-428-7066


Spaceway: www.spaceway.com

Mike Cook Senior Vice President, Spaceway Hughes Network Systems 11717 Exploration Lane Germantown, Maryland 20876 United States of America

Tel: +1-301-428-7083 Fax: +1-301-428-2828


http://www.hns.com

http://www.hns.com

http://www.spaceway.com


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Europe: www.hnseu.com

Mike Darcy President Maurizio Caruso Director of Marketing Hughes Network Systems Europe Saxon Street, Linford Wood Milton Keynes Buckinghamshire, MK 14 6LD United Kingdom

[email protected]

Tel: +44-1908-326-262 Fax: +44-1908-326-265


India: www.hughes-escorts.com

Partho Banerjee President and Managing Director Amit Tripathi Vice President, Enterprise Group

Maria Antony Revenue Assurance (DES) Hughes Escorts Communications Limited Plot No 1, Sector 18, Electronic City Gurgaon (Haryana) 122001 India



Tel: +91-124-239-8834 Fax: +91-124-239-8840


Brazil:

Delio Morais President Hughes do Brasil Eletronica e Comunicacoes S.A. Alameda Rio Negro, 911,3o andar conj. 312 CEP 06454-000 Alphaville, Barueri Brazil

Tel: +55-11-4191-9171 x210 Fax: +55-11-4193-1935


China:

K C Kuo Vice President, China and Asia/Pacific Hughes Network Systems 11717 Exploration Lane Germantown, Maryland 20876-2799 United States of America

Tel: +1-301-428-7159 Fax: +1-301-428-2804 Email: [email protected]

http://www.hnseu.com

http://www.hughes-escorts.com


comsys

About comsys www.comsys.co.uk Communication Systems Limited (comsys) is a specialised telecommunications consultancy company which was founded in 1982. comsys performs a range of consultancy services in many areas of the telecommunications industry, but has concentrated its resources in the field of satellite technology and has developed expertise in business planning, regulatory, administrative, competitive and operational analysis. Clients range from users and governments to operators and manufacturers. Over the past nineteen years, comsys has earned a reputation for objective, empirical analysis and is known in the industry as a primary source of market information. This reputation has been hard-earned by constant monitoring of the world telecoms market, primarily through extensive foreign travel and on-site visits to approximately 70 countries. comsys is known by its clients to be ethical, discreet, reliable and accurate. The company’s emphasis is on a fast response to client requirements which it is able to achieve as a consequence of continuous monitoring and contact with the market. The company’s client list spans the globe. comsys has recently worked on a number of projects for clients in Africa, Asia, Europe, the USA, Latin America and the Middle East. These studies have included issues relating to satellite television broadcasting, VSAT, mobile satellite services, broadband switched multimedia services and the provision of expert witness advice to the English High Courts. Clients of record include:

Europe/Middle East Asia Pacific/Africa

Luxembourg Government Mitsubishi Corporation Société Européenne des Satellites Fujitsu Corporation MBB-ERNO NEC Corporation Tadiran Electronics Telstra (Australia) Alcatel Telspace KDD Japan EUTELSAT Indosat Commission of the European Communities Multichoice (MIH)

United Kingdom The Americas

London Stock Exchange Bear, Stearns and Co. Inc. British Aerospace Space Systems Comsat Corporation Cable and Wireless plc Donaldson, Lufkin and Jenrette INMARSAT Scientific Atlanta Matra Marconi Space GTE Spacenet British Airways plc AT&T Communications Ferranti Communications plc Space Systems / Loral British Telecom plc Hughes Network Systems Electronic Data Systems Harris Corporation British Petroleum INTELSAT British National Space Centre BellSouth Corporation Department of Trade and Industry CBS News



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The company’s leading role in the VSAT business was affirmed in 1997 when it played the intrinsic part in creating the Global VSAT Forum, incorporating over forty of the leading organisations in the industry. Simon Bull, a senior comsys consultant was appointed by a vote of the members to the position of Chairman of the Board. About the VSAT Report The VSAT Report is now in its eighth edition having been published by comsys every two years since 1988. It is based on primary global research by comsys - involving site visits and interviews with companies from Australia to Argentina and from Pakistan to Peru. Whilst being written in an informal, easy-to-read style, the report uses consistent formats for each company enabling direct comparisons between vendors, systems and operators. It provides an effective reference manual, as well as expert opinion on the technology, services, strengths and weaknesses of vendors. Comprising over 1,500 pages of tightly packed information with more than 200 charts and tables, the study is a unique reference source of information on all aspects of the VSAT business covering: Evolution of the market New hardware developments Service platform initiatives Market trends Historical explanations Pricing of services and hardware Sales strategies

A comprehensive statistical analysis by: Sales, bookings and shipments Sites in service Geographic region and sub-region Technology Industry sector Revenues

Publication Data Principal Author: Simon Bull Released: September 2003 Details: 1,500 Pages, 4 Volumes Price: UK£2,500

comsys 42 Holywell Hill, St Albans, Herts, AL1 1BX, UK Telephone: +44-1727-832288 Facsimile: +44-1727-810194 Email: [email protected] Web: www.comsys.co.uk



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