Spaceway Setback Shows Satellite Shift

Updated from 12:11 p.m.

DirecTV's (DTV) reported decision to drop its Internet-via-satellite venture shouldn't come as too much of a shock to investors -- even if the report, which DirecTV dismissed Friday, turns out to be true.

In recent months, satellite TV operators have been far from enthusiastic about the business prospects of satellite-delivered broadband. They've focused instead on enhancing the video experience for subscribers. And instead of chatting up how they'll compete with cable operators in the Internet business, they've been happy to let telcos handle the job.

Nor have Wall Street's analysts been too wrapped up in the satellite broadband business. On recent conference calls, interest in DirecTV's proposed broadband business, called Spaceway, has focused mostly on what DirecTV could do with its Spaceway satellites other than delivering the Internet.

Furthermore, the prospective Spaceway doesn't appear to be highly valued among investors. After The Wall Street Journal reported Friday that DirecTV would be dropping Spaceway, one analyst -- Vintage Research's William Kidd -- wrote in a note, "No change to valuation. We continue to value Spaceway at zero." Kidd has a buy rating on DirecTV.

In a statement issued Friday afternoon, DirecTV CEO Chase Carey specifically denied that the company had scrapped plans to offer broadband access via its Spaceway satellites, which are due to be launched starting early next year: "In fact, the satellites are being designed specifically so they can be used for video or broadband."

DirecTV's shares dropped 21 cents to $17.54 Friday.

While DirecTV has spent more than $1.5 billion to develop Spaceway, the impetus came from the company's prior management. Carey, who took charge after Rupert Murdoch's News Corporation (NWS) gained control of DirecTV in December, has been not quite so enthusiastic about Spaceway.

Speaking on the company's conference call for the fourth quarter of 2003 -- when DirecTV was still known as Hughes Electronics -- Carey said the costs of satellite broadband were materially higher than those of the wired broadband alternatives of cable modems and telcos' DSL. The only place where satellite might commercially work, he said, was in the 20% to 25% of U.S. homes where wired options don't exist.