Hughes Looking At Rural Internet

By Ellen McCarthy
Washington Post Staff Writer
Monday, March 27, 2006

Hughes Network Systems LLC, a Germantown satellite service company trying to reposition itself after the sale of its DirecTV satellite television business, plans to announce a campaign today aimed at selling Internet access to small businesses and consumers in rural parts of the country.

The Hughes Communications Inc. subsidiary, which has 1,500 employees, already has about 275,000 customers in what it considers "underserved" parts of the country. But after a recent restructuring, Hughes officials say they see the company's future more tightly tied to providing Internet access, Web sites and other services to the estimated 10 million to 15 million households without access to a high-speed broadband connection.

The new retail emphasis comes after Hughes Communications' quiet conversion in recent weeks into a publicly traded company.

The developer of the DirecTV satellite service, Hughes was taken over by Rupert Murdoch's News Corp. in late 2003. Murdoch moved DirecTV to a separate company and in January sold his remaining interest in Hughes for $100 million to SkyTerra Holdings Inc., already a major Hughes investor. SkyTerra, which formed Hughes Communications, is a subsidiary of Apollo Management LP, a New York private equity firm.

Apollo is retaining a 70 percent share in Hughes Communications, but it has offered 30 percent of the company's stock for public sale on the Over the Counter Bulletin Board.

Shares of Hughes Communications began trading at around $25 in late February and closed at $31.35 on Friday, down 65 cents. Company chief executive Pradman P. Kaul said there was a "good possibility" that the company would attempt to move to the Nasdaq market in the coming months.

Hughes's main business today is managing satellite networks for companies with disparate locations around the country, such as hotels, retailers, restaurants and gas stations. That business took off in the mid-1980s when Wal-Mart Stores Inc. hired Hughes to connect its stores.

But in recent years, according to Kaul, that business has been "relatively flat." To add new customers, the company is concentrating on sales to businesses and individuals in regions where traditional broadband is unavailable.

Today the firm will roll out its new brand, HughesNet, along with a new line of managed services for small businesses. "The growth today is coming from consumers and small and medium-sized businesses," Kaul said. "We saw that grow very well last year, and we expect to see it continue to grow this year."

According to Northern Sky Research, there are as many as 15 million households without access to broadband service.

"We're seeing a market that will pay what we need to be paid in order to make an economic case" for the business, Kaul said.

Hughes will never compete with traditional broadband and DSL service providers because satellite services are much more expensive. While "terrestrial" high-speed Internet packages are $30 to $40 a month, Hughes's basic monthly services start at about $60.

The company is also expanding its services to include applications to help businesses build and maintain Web sites, e-mail systems and other online functions. The typical business customer the company will target, Hughes executives said in a news briefing Friday, is likely to be a medical or legal practice that needs access to high-speed Internet services but doesn't have the option to use a cable network.

In 2005 Hughes generated about $800 million in revenue, according to Kaul, but he declined to say how much of it came from Wal-Mart and other large businesses and how much was from small businesses and consumers. In 2004, according to a filing with the Securities and Exchange Commission, the firm lost about $1.43 billion on $789 million in revenue.

An agreement with DirecTV Group prevents Hughes from offering satellite television until 2010, but Kaul said that is unlikely to become a major part of its business even after the clause expires.

Hughes's satellites remained with Murdoch's company, so the firm currently leases satellite services from providers like Intelsat and PanAmSat. In the first quarter of 2007, however, the firm plans to launch a new satellite of its own, and it will be conserving cash this year to pay for the launch.

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