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PanAmSat takes Net plunge

But the company' s stock dives on lower projected earnings 4/02/2000 08:00:00 PM Eastern

Satellite operator PanAmSat Corp. unveiled its long-awaited Internet strategy last week, announcing that it will invest up to $250 million over the next two years to distribute Internet traffic over its satellites.

The proposed service, NET/36, will rely on PanAmSat' s space capacity to bypass terrestrial Internet bottlenecks, a concept already being pursued by such companies as iBeam, Akamai and Vyvx. NET/36 will launch during the third quarter with US West and RealNetworks as partners.

Wall Street' s enthusiasm for PanAmSat' s IP (Internet Protocol) push was dampened by the Greenwich, Conn., company' s concurrent announcement on projected 2001 earnings. It expects them to be 75 cents to 85 cents a share and cites higher interest rates and depreciation costs. That was a significant drop from analyst projections of $1.49 a share, and the company' s share price tumbled 25% Wednesday, falling 15 1/4 to 47.

"It has nothing to do with their Internet strategy," said one equity analyst, referring to the stock drop. "It is this type of rapid change in guidance that we thought we were done with. The last two or three quarters have been excellent, and we' ve been given good guidance."

Rob Bednarek, PanAmSat executive vice president and chief technology officer, said the market was overreacting. "I think it's a modeling issue as opposed to anything else. There' s no change in the fundamental business."

But PanAmSat is trying to grow a new business with NET/36. The company has dedicated 24 of its Ku-band transponders worldwide to the service, roughly one gigabit in overall bandwidth. Internet content providers will send content via fiber to PanAmSat' s teleport in Atlanta, which will serve as NET/36' s headquarters (teleports in Napa, Calif., and Homestead, Fla., will also be equipped with IP transmission gear). PanAmSat will uplink the content to its satellites for broadcast. The IP content will be received and cached for quick access on servers at local POPs (points of presence), which could be ISPs, cable companies or telcos.

Most of PanAmSat' s investment in NET/36 will be spent on those servers, says Bednarek. In the U.S. alone, the company plans to buy roughly 1,000 receiver/servers this year for deployment to last-mile Internet providers.

NET/36 will be marketed as an efficient vehicle for distributing Internet content aimed at mass consumption, such as streaming video or popular Web sites. PanAmSat has partnered with RealNetworks to use its RealSystem G2 software to encode streaming media but has no deal yet to distribute its content. On the ISP side, it has signed up US West, which will use NET/36 to deliver content for its DSL service, beginning testing in the second quarter.

NET/36 will charge customers on "a bit-delivered basis" using a meter on the local server, Bednarek says. "It's a very young and uneven market, and it' s difficult for content providers to make multimillion-dollar transponder commitments."

Several analysts expect PanAmSat to spin off NET/36 to capitalize on the high valuations on Internet companies. Bednarek acknowledged the possibility.

"I think that' s a given," says Bear Stearns Managing Director Vijay Jayant.

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