Hughes Mulls Future of DirecWay

After the failure of its proposed merger with Echostar, Hughes Electronics' DirecWay satellite Internet service falters.

by Mark Berniker of internetnews.com [December 13, 2002]

In the aftermath of its failed merger with Echostar, Hughes Electronics says it is looking to get out of its DirecWay satellite Internet service.

"Satellite delivered Internet is a costly business model and we would only be able to continue in this business if the merger had gone through," said George Jamison, Hughes spokesman. He noted that DirecWay "loses money," and that while strategic decisions concerning the future of the DirecWay service have not been made, they "will in the not-so-distant future."

"The challenge for DirecWay is the upfront hardware costs and the monthly service charges make it tough for us to get to a price point that's competitive with cable and DSL," Jamison said.

Jack Shaw, chief executive officer of Hughes Electronics, told the Wall Street Journal Thursday that DirecTV may shelve plans to offer its 11 million residential satellite television customers access to the Internet through its satellite network.

In light of the termination of its merger plans with Echostar, Hughes is looking for new strategic partners, but Jamison would not say if it was in talks with other potential buyers.

Jamison said DirecWay Internet service has only around 150,000 subscribers, and it has become obvious that garnering satellite Internet customers has become more challenging than originally expected.

"DirecWay isn't doing well at all, neither are its satellite Internet competitors Wild Blue and Gilat. They all faced major technological problems that led to serious marketing, pricing, and eventually major financial problems," said Rich Macary, managing director of Fat Pipe Partners, a venture capitalist and consultant on broadband and satellite deals.

"It was tough for Hughes to make it economically viable and they seem unwilling to continue to subsidize it," Macary said, adding that "Hughes may pull back significantly on the marketing, R&D, and equipment subsidies for their DirecWay service, and just collect revenues from their existing customers."

"This isn't a good business to be in, because of the other forms of broadband, namely DSL and cable, which offer greater bandwidth, ease of installation, and lower costs for subscribers," Macary said.

Jamison said Hughes will continue to invest in the rollout of the company's $1.8 billion planned next-generation satellite broadband service, known as Spaceway, which is scheduled to debut in 2004.

Amidst federal inquiry about the details of the failed DirecTV-Echostar merger, regulators asked General Motors officials, the parent of Hughes' DirecTV unit, for its views on the prospects for the Internet over satellite market. GM officials told officials in Washington that the satellite broadband market had yet to materialize, and the focus of Spaceway will be on small, medium and large businesses.

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