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Jerriett Brown, Jerry Frank, Moses Juwillie, Jiasi Li, Vikas Shah
Abstract
1
1998 Hughes Electronics Corp., 1998 Hughes Annual Report, pg. 6
1
geosynchronous satellites required to provide worldwide coverage, a global
network can be generated at a fraction of the cost of a wireline network of
equal connectivity. VSAT can provide telecommunications service to regions
that are inaccessible to the more traditional land-based communication
technologies. The combination of large service footprint, broadcast, multicast
and point to point capabilities make VSAT attractive in a number of
communications markets: distance learning, LAN/WAN relay services, point
to multi-point services, Point of Sales, telephony and multimedia
broadcasting. The balance of benefits and tradeoffs will be more fully
discussed in later sections.
Current VSAT network topology can be parsed into two classes: star and
mesh. The star topology is primarily used for data services. Remote units
such as PoS terminals or branch office LANs communicate to a central
processing site called a hub. Should remote to remote communication be
desired, the path would be from the point of origin, through the satellite to
the hub, and then back through the hub to the destination. This is known as
a two “hop” path. A mesh topology allows the remote stations to directly
communicate with each other via a single hop.
Because of the altitude of the geosynchronous orbit, the hop or round trip
delay for VSAT services is approximately 250 msec. In order to use VSAT for
voice applications, the long propagation delay must be minimized. The mesh
topology resolves this problem by using a two hop path only during the initial
call setup. After path initialization, a single hop is used, providing direct,
remote to remote communication. By using only one-hop delay, the mesh
topology provides near toll quality voice transmission with minimal
propagation delay.
The VSAT satellites operate in two sets of spectral ranges in the United
States: In the Ku band the uplink operates between 12.75 and 14.5 GHz. and
the downlink between 10.7 and 12.5 GHz.; In the C band the uplink operates
between 5.8 and 7 GHz., and the downlink will be in the 3.4 - 3.8 GHz. band.
It should be noted that there are technical tradeoffs between C and Ku band
operation. The higher frequency Ku equipment will allow for higher data
rates and reduced dish size. The signal integrity of C band equipment is less
effected by weather but experiences greater interference from terrestrial
microwave sources2.
2
Historical View of the VSAT Market
Scientific Atlanta
AT&T/Harris
AT&T/Tridom Sold to GE
Gilat/Spacenet
Network Systems (HNS) and Gilat/Spacenet control the majority of the VSAT
products and service market (Figure 2). The first two way VSAT network
was deployed by MA/COM which was subsequently acquired by Hughes
Network Systems. Since then, HNS has been a consistent presence in the
VSAT Industry. The mergers of another group of companies GTE Spacenet,
AT&T/Tridom, GE/Spacenet led to the emergence of Gilat/Spacenet
While the enormous capital investment made by both Gilat and HNS provide
a significant barrier to market entry, argument can be that market price
behavior in the VSAT market is very competitive rather than duopolistic.
Further pressures on prices is exerted by substitute technologies and will be
more fully discussed in later sections. For a complete example of the pitfalls
and realities of VSAT deployment, please turn to the appendix.
3
III. The VSAT Market
HNS
47%
Gilat
40% Other
13%
With the recent emergence of Gilat as a significant and strong contender, the
VSAT market is facing immense pressures on margin. This can be detected
by observing that officially, HNS and Gilat still practice 3rd degree pricing
discrimination, but because there are so many variables in the pricing
structure, they are able to charge different prices for each of their customers,
significantly enhancing revenues.
HNS, once having held significant market power, has been forced to
reevaluate it’s market structure because of Gilat’s relentless pursuit of
market share. This has resulted in the continual decline in the cost of VSAT
products and services with a commensurate increase in demand, both in
United States and globally.
4
Figure 3-The Demand Curve of VSAT Terminals
5000
1997
4000
Price/Unit
1998
3000
1999
2000
1000
0
58000 80500 115000
Quantity
With the rapidly rising demand for high-speed data and other
telecommunication services, the VSAT industry is facing a dramatic change
in pricing structures and service offerings. As reported by Comsys, the
demand for VSAT terminals has dramatically increased over the past few
years (Figure 4). The number of terminals deployed for the year 1998 were
80,000 with respect to 58,000 in 1997, which accounts for a compound annual
growth of 27% over the past three years. The Comsys 1999 VSAT report then
goes on to state that a total of 500,000 terminals are globally deployed.
Since the absolute value of η is greater than 1, the price is elastic for the
above demand curve. This is further evidence that the market is competitive.
100000
80000
60000
Sites
40000
20000
0
1995 VSATs Booked
1996
1997
1998
Year 5
Proving that the market is competitive does not necessarily account for the
rate of growth enjoyed by the VSAT industry. What does? A consumer
survey3 places the technology’s appeal in a more analytical light:
The case is far from unique. With increasing global trade, companies are
turning to VSAT to reach a particular location in mountainous terrain and
distant places, which prevent fiber or other lines from being laid cost-
effectively. And it’s usually the only choice for the maritime and oil
industries.
The economic advantage of VSAT is not limited to usage. Unlike frame relay,
a VSAT network only has one piece of equipment to manage at the remote
site. Training and operational costs are significantly lower than a Unix based
system.
Annual Cost/Site
1.5/256K ASDL
Technology
Competing
1.5 M T-1
56K/128K Frame Realy
3
J.T. Johnson, Users Rate VSAT
512/128 VSAT, Data Communication Magazine, 1992
But what's most clear in terms of costs is that VSAT charges are coming
down--and fast. They're just a third of what they were a few years ago.
What's behind the price decline? Several factors, including reductions in
equipment prices and import tariffs, economies of scale as hubs handle
greater numbers of connections, efficiency improvements as operators gain
operational experience, and aggressive competion. VSAT operators as a rule
charge flat monthly tariffs--which is likely to be a welcome change for
customers tired of interpreting unpredictable, volume-based terrestrial
equivalents bills from PTTs and others.
Discussion is limited to VSAT data and video services offered in the United
States by the two principal players in the VSAT industry, Hughes Network
7
Systems, Inc. and Gilat Satellite Networks Ltd. These two companies
account for 88 % of the market. Telephony applications will be excluded from
this study as they are insignificant in the U.S4,5.
To support our thesis, we will examine the Hughes partial customer database
for hub based services as described in the Comsys 1999 VSAT report entitled
“VSAT INDUSTRY STATUS REPORT TO CLIENTS: HUGHES NETWORK
SYSTEMS: American Services”. This selection is made as the largest
application of VSAT is hub based data services6,7 and Hughes is the
acknowledged leader in hub services. Study of this data reveals that the
majority of users of hub services (1998) can be grouped into eight categories
as listed in table 2.
Category Installed
Retailers 35,402
Automotive Companies 2,825
Financial 1,736
Hospitality 1,587
Service Providers 1,561
SCADA 1,198
Telecom 542
Distance Learning 395
Table 1 : User Categories
Noting that retailers are the most prevalent group of users, which include
petroleum distributors, food and drug stores, it is easy to imagine that at
least one of these businesses will appear in relatively small towns. As the
time necessary to perform an adequate survey was not available, the data
will be simulated by postulating that at a population density of 500 per
square mile, there will be at least one VSAT user per jurisdiction. After this
point, we will model VSAT terminal population to scale linearly with
population density.
Note that the Hughes database has a little over 50,000 entries. Gilat’s data
indicates a similar number of sites that are serviced. As a first order check
4
http://www.gilat.com/gilat/
5
http://www.hns.com/
6
http://www.gilat.com/gilat/
7
http://www.hns.com/
8
on the previous model we note that there are significantly more than 100,000
business in the United States. According to the 1998 US Census8, there were
over 22.3 million corporations, partnerships and nonfarm proprietorships.
Even if we allow that only 30% of these entities have need for data services,
that number exceeds 100,000 by more than an order of magnitude. Therefor,
at some point, the VSAT density formula postulated in the preceding section
must fail.
Madison is a rapidly growing, medium size city. It is the State capitol, home
of the University of Wisconsin and a number of large insurance companies,
all of which depend heavily upon electronic data systems. Madison is also
nearly 90 miles from Milwaukee and 200 miles from Chicago. This
convergence of distance to communications hubs and a strong need for data
services make Madison a good candidate for providing the second critical
point of the population density function. According the 1998 US Census9,
Madison had a population of 198,000 living in a space of 57.8 miles, yielding
an average population density of 3,400 / mi2.
8
http://www.census.gov/prod/3/98pubs/98statab/sasec17.pdf
9
http://www.census.gov/prod/3/98pubs/98statab/sasec1.pdf
10
Bull, Simon, The VSAT Report, VSAT Industry Status Report to Clients, Communication Systems
Limited, 1999
9
Table 2: VSAT Users In Madison, WI
Company Number of Sites in Madison, Wisconsin
Bed, Bath & Beyond 1
Best Western 3
Beverly Enterprises 1
Blockbuster 7
Consolidated Freight 1
Hughes Mall Services 10
Kohl’s 3
Marathon Oil 1
Mobil Oil 7
NBC (affiliate station) 1
Pep Boys 2
Shell Oil 3
ShopKo 4
Target Stores 3
Texaco 4
TOTAL 51
We have assumed, for the purposes of the census that the VSAT penetration
rate for the businesses in Madison that correspond to the Hughes report, is
100%. Therefor we expect approximately 51 VSAT terminals inside of
Madison’s borders. This corresponds to a VSAT density of
This can not be considered a point of inflection and was not anticipated. We
had expected that the demographics would force an increase in VSAT density
with increasing urbanization up to some point of infrastructure development.
We then anticipated a decreasing function that would asymptote, to some
number greater than zero because of point of sale (PoS) operations. To
further develop the model, a data point at the other extreme will be
developed, New York City.
10
Company Number of Sites in New York, New York
Bed, Bath & Beyond 1
Best Western 1
3
Beverly Enterprises 4
0
Blockbuster 1
27
Consolidated Freight 13
Hughes Mall Services 13
Kohl’s 0
Marathon Oil 1
Mobil Oil 5
NBC (affiliate station) 1
Pep Boys 78
Shell Oil 6
ShopKo 0
Target Stores 12
Texaco 73
TOTAL 233
Table 4: VSAT Users In New York, NY
This highly representative census yields 233 VSAT terminals inside of the
borders of New York City. According to the 1998 U.S. Census11, NYC had
7,381,000 inhabitants living on 308.9 mi2. This corresponds to a VSAT
density of
233 VSAT / 308.9 mi2
or
0.75 VSAT / mi at a population density of 23,900 / mi2
2
1.1
VSAT Term / sq. mile
1
0.9
0.8
0.7
0.6
0.5
500 3400 23900
Population Density
11
http://www.census.gov/prod/3/98pubs/98statab/sasec1.pdf
11
VSAT / mi2 = -10.68 x 10-6 ( Pd) + 0.916
Where Pd = Population Density
12
Financial Times, Perspective: The heart of the new world economy, October 1 1997
12
afford to have in this country a digital Dark Ages where some people are just
cut off from all this technology… There's a real danger in the country that
some Americans have all this wondrous technology and it makes them
smarter and more competitive in the workplace and others are left
behind…13" Without doubt, other PTT and communications bureau chiefs
have come to the same realization; access to communications technology for
all is essential to the economic well being of a country. Having access to
knowledge and markets can very well be the difference between a growing
economy and a backwater. Many of the developing countries face the double
burden of small GNP and formidable natural barriers. The combination
makes the development of standard telecommunications infrastructure
impossible. VSAT, with the capability of leaping tall mountain ranges in a
single bound, is a solution that is being exercised with greater regularity.
While telephony is a moot point for VSAT in the United States, it is not in the
rest of the world.
The last trend that requires the capabilities of VSAT is the concentration of
market power and scope by acquisition and merger.
Vodaphone/Mannesmann, Atlantic Telecom/Marconi, American Home
Products/Warner-Lambert, the list of mergers and acquisitions is large,
growing larger and is global in nature.
We can see by examining the top ten customer list for Hughes and Gilat that
the common denominator is continental or larger network diameter.
13
http://www.cnn.com/1999/TECH/computing/12/07/fcc.chief.profile/index.html
13
V. Conclusion
14
Appendix
15
This example14 is the result of a VSAT RFP (request for proposal) for a 200-
site installation, spanning Eastern and Western Europe, Africa and the
Caribbean over a five year period. Nine operators responded to the request.
Among the nine schemes evaluated, there was a wide range of overall project
costs, from a low of US$3,002,400 to the US$7,498,842 figure submitted by
France Telecom Transpac (see Table 1).
So what goes into overall VSAT service costs? Per-site monthly charges—
which can account for up to 90 percent of the total—and one-time charges like
installation costs. IBM came through with the lowest monthly rate at
US$194, but its installation charge of US$1.1 million bumped up the overall
project cost. HOT's per-site monthly charge of US$250 was third lowest, but
it waived installation charges altogether.
At the other end of the scale, Transpac had the highest per-site monthly
charge: US$578. Infocom's rate of US$538 was slightly less—but its
installation charge of US$3 million was astronomical. (It should be noted that
Banknet Data Communications Kft [Budapest, Hungary] and Infocom levy
usage rates based on traffic volume. To make their bids comparable, these
costs were added to the per-site monthly charge in the table.)
When prices vary that widely, network managers need to make sure they
know what they're paying for. Basically, there are more than installation and
per-site fees that go into the overall cost. There's also equipment,
maintenance, satellite capacity, and licensing fees (see Table 2). And each can
have an effect on an operator's bid.
Network managers also should keep in mind that the VSAT being used could
affect the operator's ability to accommodate new apps or added traffic.
Spaceline, for instance, says a 25 percent increase in traffic over five years
would result in a US$516,000 increase in project cost. That's because all of its
Nexstar VSATs would have to be replaced. The Nexstar IV doesn't have the
capacity to accommodate higher traffic rates. It peaks out at 64 kbit/s
according to Director of Sales and Marketing.
14
GLOBAL NETWORKS ( www.data.com) , Vsat Services: Keep An Eye On The Skies
16
And adding voice also could add to costs. The PES5000, for instance, doesn't
accommodate voice at all. The PES6000 accommodates voice but not while
configured to route LAN traffic. The Nexstar IV can handle voice but not very
well. The more expensive PES8000 answers the voice call, but so does the
bargain-rate Skystar—something networkers should keep in mind.
Besides the initial investments on the hubs and earth stations, and the VSAT
terminals costs, We also found out that dish size can make for substantial
differences in price, scalability, and reliability. Operators determine the
appropriate size by calculating a number of variables to arrive at the link
budget. The key variables are data rate, availability, and BER (bit error
rate). Unfortunately, operators that want to lower their bids can tweak these
results —often at the expense of network performance.
Having this system is the ideal thing to do, but we discovered that no matter
how good the system is technically, it could all be undermined by poor
customer service. It's crucial for network managers wanting to build a VSAT
network need to find out the particulars on maintenance. Response time and
Repair time, should be specified as separate items in the SLA (service-level
agreement).
When comparing prices, network managers also should find out whether
licensing fees are included. Sometimes an operator does not include them?
This is due to the commonly stated reason that charges vary too widely
among countries. Where deregulation has taken hold, licenses can run about
US$10 per site per year. But fees are much higher in some other countries.
Fees aren't the only licensing issue. Some operators may not hold licenses in
a given country—and that could make for longer time
17
to deploy. This is particularly true in countries where regulations have not
been lifted.
A comparable terrestrial frame relay for the network we spec'd, for instance,
would have A bid, from Orion Network Systems Europe [London], made use
of a fully meshed frame relay network capable of handling voice and data.
Such functionality has its price: The Orion proposal was priced higher than
the TDMA proposals at a cost of at least US$10 million—or 33 percent to 233
percent more expensive than the VSAT bids.
18
Table 1: VSAT Operator Bids
IBM Global Paris, +33-1-41-885-840 http://www.ibm.com/glob NS VSAT Paris $1,100,000 $194 $3,428,000
Services alnetwork
Infocom Satellite Kiev, +380-44-543-7191 http://www.ukrpack.net Infodata Kiev, $3,000,000 $258 $6,090,000
Communications Ukraine Ukraine
Inc.
Joint Stock Kiev, +380-44-416-5592 igor@romukr.kiev.ua Romantis- Kiev, $1,490,000 $209 $3,992,000
Company Ukraine Ukraine Ukraine
Romantis ISBN
Ukraine
1. All prices in U.S. dollars; prices do not include insurance, shipping taxes, local taxes, licenses fees, or terrestrial
leased-line link.
19
Table 2: What the Bids Include
Banknet PES6000 99.9% per 4 hours/ 3 hours/ 256/128 2.5 seconds/ $132,632 Yes (except in
month/ 99.9% 4 hours1 3 hours 2.5 seconds Russia And
per month Ukraine)
Belgacom PES6000 99.9% per 4 hours/ 4 hours/ 256/140 2.2 seconds/ $55,683 No
month/ 99.8% 8 hours2 8 hours2 2.2 seconds
per month2
Detesat PES6000 99.5% per 4 hours/8 hours 4 hours/12 hours 192/150 4 seconds/ $620,155 Yes
month/ 99.5% 4 seconds
per month
France PES6000 99.9% per 4 hours/ 4 hours/ 128/80 Not $420,000 No
Telecom month/ 99.8% 8 hours 8 hours disclosed
Transpac per month
HOT PES5000 99.75% per 8 hours/ 2 hours/ 138/76.8 2 seconds/ $96,000 Yes
month/ 99.75% 8 hours 2 hours 2 seconds
per
month
IBM Skystar 99.7% per 4 hours/ 4 hours/ 38.4/256 2.5 seconds/ $120,000 Yes(except
Advantage month/ 99.5% 8 hours 8 hours 2.5 seconds Eastern Europe)
per month
Infocom PES6000 99.9% per 4 hours/ 4 hours/ 384/512 2.3 seconds/ $320,000 Yes
month/ 99.8% 12 hours 8 hours 2.3 seconds
per month
Joint PES8000 99.9% per 12 hours/ 24 hours/ 64/64 2.5 seconds/ $132,000 Yes
Stock month/ 99.9% 12 hours 24 hours3 2.5 seconds
Romantis per month
Spaceline Nexstar IV 99.5% per 4 hours/ 4 hours/ 256/128 2.5 seconds/ $516,000 Yes
year/ 99.5% 8 hours 4 hours 3 seconds
per year
1. Except in Ukraine and Russia, where it's 8 hours within 150 kilometers of the capital
city and 24 hours beyond.
2. The operator says it meets requested SLA values but did not actually submit these
values. 20
3. 4 hours in Kiev.
4. Western Europe/Eastern Europe
21