June 21, 1999 12:55 PM PDT

AOL makes a $1.5 billion bet on satellites

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America Online is betting $1.5 billion that the sky really is the limit for its Internet and new TV services.

AOL said today it would invest $1.5 billion in Hughes Electronics, the parent company of satellite TV and Internet services DirecTV and DirecPC. The cash investment will be used to co-market satellite television and broadband versions of America Online.

The investment marks a new chapter in AOL's attempt to skirt traditional cable TV providers which still won't let the online giant use their broadband networks to reach consumers.

AOL, with more than 16 million members, is by far the largest online services provider in the dial-up world. But its ability to use that market dominance as a means to attract customers to high-speed connection alternatives has been called into question, as cable companies refuse to carry the AOL service over their networks. AOL is pressing Congress and the courts to open cable networks, but is also looking for other high-speed routes into consumers' homes.

As previously reported, AOL has been considering a deal with DirecTV for months. But news of a specific investment did not surface until last month.

Many analysts have predicted that more consumers will access the Internet through cable networks than though any other broadband medium over the next five years. With this in mind, AOL is scrambling to make sure it isn't left out of the broadband boom.

"AOL is saying, 'We've got a dead-end on cable, so let's go this route,'" said Sean Badding, senior analyst at The Carmel Group, a satellite communications consulting firm.

On a conference call with reporters today, AOL chief executive Steve Case stressed that Hughes's systems could offer coverage on a national level, in contrast to other high-speed technologies that are limited to certain areas where networks are in place.

"We'll be able to service the substantial part of the country not served by DSL [digital subscriber line] or cable networks," Case said. "One-third of the country will have no broadband options [other than this], even five years from now."

Space is the place
Hughes's most prominent satellite product is DirecTV, which is a direct competitor to traditional cable television programming. Early next year, AOL will broadcast its own interactive e-commerce and information services over this satellite feed, alongside its new, more traditional television programming.

"Part of the future is building the television business and building the Internet business, and then building bridges between these," Case said.

According to AOL's Interactive Services president Barry Schuler, the AOL television service will have many of the same interactive components found online, such as giving users the ability to chat about ongoing television shows, buy CDs, or trade stocks that are linked to television show topics.

The AOL Plus broadband service will initially be launched in other mediums, such as high-speed DSL, later this year. It will be offered over DirecPC's satellite service beginning early next year, the companies said.

But Hughes's DirecPC service is not as elegant as most traditional cable offerings, analysts noted. The service offers download speeds of about 400 kbps with uploads over a standard phone line with a dial-up 56K modem, according to Badding. But several newer satellite technologies, which will allow high-speed two-way digital communications, are about three to seven years away from the market, analysts say.

Among them is Hughes Network Systems's planned Spaceway service. Hughes plans to launch its Spaceway satellites in 2002, and then begin offering the two-way digital service sometime in 2003, chief executive Mike Smith said today.

"[AOL is] going to have some technical issues initially. But over the long-term, they see the huge possibilities of satellite," Badding said. "They want to get in on the ground floor."

Not the brightest star in the sky?
Some analysts still question how attractive the satellite service will be, even with AOL's marketing muscle behind it.

DirecTV is the leader in satellite television with more than 7 million users. But the DirecPC service has just 100,000 subscribers--largely, the company says, because Hughes has put little financial or marketing resources behind the product.

Much of AOL's $1.5 billion will go toward cross-marketing television and broadband services, the two companies said. That, combined with AOL's brand name, should help both products gain acceptance with subscribers.

But not everyone is convinced. Jupiter Communications has predicted that only about a million Internet users will go online over a satellite connection by 2003. Jupiter senior analyst Abhi Chaki doesn't think that AOL's brand name will accelerate that adoption rate much.

"DSL and cable services have better economics," Chaki said. "They can offer more services and lower prices." Most consumers will use one of those two technologies as their first home broadband connection, he added, at least for the next five years.

The television service also has been hampered by its inability to carry local channels, a key attraction for many television watchers, some analysts note. This could change if pending federal legislation is passed, but still marks a hurdle for Hughes and AOL.

In the meantime, analysts say, AOL's strategy is geared at making sure it can get on as many platforms that compete with cable as possible.

"AOL is playing a game of enemy-of-my-enemy is my friend," Chaki said. "Cable companies' biggest competitor are the direct broadcast players. So AOL, being rebuffed by cable, is now allying itself with them."

News.com's Corey Grice contributed to this report.

 

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