ViaSat on New Trajectory Following Deal to Create Satellite-Based High-Speed Internet

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It was a big deal in October when ViaSat (NASDAQ: VSAT), the Carlsbad, CA-based specialist in satellite-based communications technologies, announced it was acquiring WildBlue Communications, a suburban Denver, CO-based internet service provider. The acquisition, once revealed, made a lot of sense. As a satellite-based provider of high-speed Internet service in mostly rural communities, WildBlue made a good fit with ViaSat’s broadband networking business.

But the size of the transaction, a cash-and-stock deal valued at $568 million, was a sign that ViaSat has attained a higher plane of corporate existence. While it did not rank among the 10 biggest M&A deals of 2009 (or even among the tech industry’s 10 biggest M&A deals), it was among the biggest venture-backed M&A deals in the last three months of last year. It serves as one more indication that the 24-year-old company that prides itself on its steady growth and stability changed its trajectory dramatically two years ago when it announced plans to build and launch its own $450 million communications satellite to provide high-speed Internet service.

To get a better understanding of ViaSat’s changing strategy, I recently sat down with chairman and CEO Mark Dankberg, who co-founded the company in 1986 with Mark Miller and Steve Hart. (When we met last month, Dankberg told me the ViaSat-1 satellite, which is being built by a subsidiary of Loral Space & Communications, remains on schedule for launch in 2011.)

The ViaSat co-founders’ initial strategy was to parlay their expertise in military satellite communications into contracts for engineering and proposal support with defense prime contractors on major satellite programs. Over time, they expanded beyond government communications by developing a variety of satellite-based equipment, software, and services for commercial customers.

By 2007, the year ViaSat’s revenue surpassed $500 million for the first time, Dankberg says the company was on the threshold of deciding whether or not to build its own satellite. As Dankberg explains it, the company had been in the satellite business all along, so the core issue that emerged was bandwidth, and the realization that satellite-based Internet users—like Internet users everywhere—have a voracious appetite for more of it.

But the bandwidth that ViaSat could provide its ISP customers was constrained because the company could only do so much with its ground-based receivers, software, and related equipment to increase the data rates transmitted by orbiting satellites. And as Dankberg puts it, “Broadcast TV is what makes the satellite industry go ’round.” Among the handful of companies such as Hughes Communications and AT&T that own and operate dozens of communications satellites, data bandwidth has been secondary to television service.

“What we saw was an opportunity to make a satellite optimized for unicast—for Internet data” at the extremely high data rate of more than 100 gigabits per second, Dankberg says. “But to do it, we had to basically design and buy our own satellite.” Before making a decision, however, ViaSat had to decide if it could be done, if it was affordable, and whether any alternatives offered a better solution.

“Once we did it—once we said we’re building a 100 gigabit satellite—people didn’t know what that meant,” Dankberg recalls. “So we had to go through and explain all that with our customers and investors. In a ViaSat-1 FAQ fact sheet, the company explains its satellite is “designed to be the highest capacity satellite ever built,” and is projected to operate at 140 Gbps (gigabits per second) total throughput (that’s not the data rate for home satellite Internet users). That’s more total bandwidth capacity than all current Ku-, Ka-, and C-band satellites over North America combined—enough for 1.5 million subscribers—and at a capital cost per bit that is expected to be one-tenth of current Ka-band satellites.

“Now, even if you do all this, and even if you bring it to market,” Dankberg says, “How do you monetize it? How do you distribute the service? So that was when we realized that we could acquire WildBlue and sort of solve all those issues. That was the missing piece.”

WildBlue already was a ViaSat customer, but Dankberg says the buyout was not a foregone conclusion. ViaSat considered other ISP business partners. “It wasn’t totally obvious that [WildBlue] would be the outcome, Dankberg says. “But all that stuff worked out. You could see the forces at work and they were all on our side.”

Before the WildBlue purchase was completed in December, roughly 60 percent of Viasat’s revenues were generated by its defense business, Dankberg says. Since the deal closed, he estimates that commercial customers are now generating about 55 percent of ViaSat’s revenues. He also says, “Our fastest-growing businesses are selling our defense customers high-speed satellite connection equipment they can’t get on the defense side.”

It helped seal the WildBlue buyout when Tom Moore, WildBlue’s co-founder and longtime CEO, joined ViaSat shortly after ViaSat made its satellite announcement in 2008. “We’d been talking to him about the design of a 100 gigabit-per-second satellite,” Dankberg says. “The thing he was waiting for was whether we’d actually pull the trigger on it.”

Another factor that helped ViaSat seal the deal was that Colorado’s Liberty Media, which held a 37 percent stake in WildBlue through its Liberty Entertainment unit, wanted to spin off some of Liberty Entertainment’s assets. Liberty Media announced on Nov. 19 that it had completed its split with Liberty Entertainment, which was forming a new company through its combination with the DirecTV Group.

“You basically had to have the right sequence of events, and the timing was crucial,” Dankberg says. It all began, though, once “we decided that bandwidth was the key.”

The importance of bandwidth has become especially clear in the two years since ViaSat made its announcement, as digital media—especially digital video and television programming—moves increasingly online through websites like Hulu. Dankberg notes that several other satellite companies have endorsed ViaSat’s move by announcing their own plans to put high-speed Internet satellites into orbit.

As the lines between traditional TV broadcasts, cable TV, and Internet-based video blur even more, Dankberg says, “These are all really, really fascinating issues. The potential is really exciting.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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