HUGHES GAMBLES ON HIGH-TECH TV Two satellites should start beaming 150 channels of video to owners of special 18-inch, $700 dishes next spring. But how big is the market for an alternative to cable?
By Andrew Kupfer REPORTER ASSOCIATE Ani Hadjian

(FORTUNE Magazine) – HARD BY THE runways of Los Angeles International Airport stands a Hughes Electronics factory called High Bay. The reason for the name is immediately apparent: The brightly lit space is five stories high from floor to ceiling. The factory is unusual in other ways -- no assembly lines, no conveyor belts, and no grinding machine tools. Workers gather around a half-dozen shiny objects as if before totems: High Bay is where Hughes finishes satellites before launching them into space. Most of the satellites, like the one along the south wall that will handle international calls to and from Brazil, are old-fashioned ''spinners'' -- squat cylinders that rotate in space for stability, like gyroscopes. But the star of High Bay is a 14-foot cube suspended against the long north wall: model HS-601, a so-called body-stabilized satellite that has the spinning section hidden inside its core. With it, Hughes hopes to transform the television industry, and itself. Hughes, a subsidiary of General Motors, is bidding to join the communications revolution that is quickly melding the telephone and cable TV industries. The first satellite is scheduled for launch in December from French Guiana on an Ariane rocket. Together with a twin also under < construction, it will beam 150 channels of movies, cable TV programs, and sporting events directly to anyone in the U.S. or Canada with a special satellite dish and decoder initially priced at $700 -- far less than conventional satellite dishes, which cost up to $3,500. The new dish won't be one of those ten-footers that mar the landscape of rural America, either. It's only 18 inches across -- small enough to mount on the side of your house or even park right on the buffet, if your buffet happens to be near a south-facing window. Hughes's new DirecTv unit will market the service straight to the customer, just like a cable TV company, and for a comparable monthly fee. If all goes well, programs will start beaming earthward next spring. While most people aren't yet aware of the technology -- known as direct broadcast satellite TV, DBS for short -- it is sending shivers through the cable TV business. Industry experts say Hughes has been a galvanizing force, driving cable TV and telephone companies to embrace digital compression technology, which translates video images into computer language and eliminates detail that doesn't change from one frame to the next, letting the cable carry many more channels. However fast cable TV companies scramble, DirecTv's 150 channels should outdo what they can offer widely for several years at least. The large cable companies are experimenting with systems that can provide hundreds of channels, but only in limited areas. Some of the smaller cable operators, of which there are hundreds, may never be able to afford the fiber-optic cable network necessary to transmit so many channels. Even if Hughes doesn't snare a lot of current cable customers, it has a natural constituency: the ten million or so U.S. households still beyond the reach of cable TV. Hughes's brace of satellites, which will be parked in geostationary orbit 22,300 miles above the earth, are stirring a geopolitical tempest as well. Some Canadians are so worried about the cultural fallout from all those channels of U.S. programming that the Toronto Globe and Mail and the Ottawa Sun, among others, routinely refer to the DBS satellite as ''the Death Star.'' DBS shouldn't be confused with the TV pictures people get now by plucking network and cable company feeds from the sky. Because the Hughes DBS system is digital, it will deliver clear pictures and CD-quality sound. Since the signals will be compressed, the satellites can handle many more channels than existing communications satellites. These use uncompressed analog technology, so it takes 30 of them to carry the quotidian U.S. traffic. Today's home satellite dishes are motorized to let them sweep the sky to pick up different programs, which is why they are so expensive. The old satellites are also low powered, so the dishes must be large to capture an intelligible signal. What's more, dish owners are having a harder time getting free programming these days. Cable companies are scrambling their satellite feeds to thwart them, and as sports stadiums lay in fiber-optic cable, more and more games are transmitted by wire instead of by satellite. Hughes's gamble is a fascinating -- and risky -- attempt by a hard-core technology company to turn itself into an entertainment company. About $1 billion is riding on the nose cones of the launching rockets, and the hurdles don't stop there. First, Hughes's business plan depends on shifting the heaviest capital burden -- the cost of the satellite dishes and decoder boxes -- onto the customer. That may work with people in rural areas, where existing satellite dishes are so costly. But to be a megastar, DirecTv must do respectably in markets already served by cable. That $700 will seem like a lot to someone used to getting a TV-top box for free as part of basic cable service. (Of course, it's not really free; the cost is built into the monthly rate.) If Hughes fails to penetrate the cable strongholds, it must be ready to change its strategy, perhaps offering to rent dishes and decoders in some markets -- which could ratchet up the company's capital outlay by billions of dollars. Second problem: When cable and telephone companies do roll out their information highways and start sending streams of video over them, Hughes's advantage of extra programming will vanish. Next year, for example, Time Warner, parent of FORTUNE's publisher, hopes to begin a five-year, $5 billion push to build an advanced system, but will need three or four years to reach half its seven million subscribers; at the end of the five years, about 15% of them still will not be served by the new system. While Hughes will be able to offer lots more pay-per-view movies than cable in the meantime -- which it considers a big selling point -- it will eventually be at a disadvantage. Unlike the cable systems, the satellites won't have the capacity to offer video on demand, which will let customers order movies from a catalogue whenever they wish. Third: Another selling point with prospective viewers, including existing cable customers, will be so-called out-of-market sports programming: single- game and season tickets to professional sports matches that take place outside the viewer's hometown. But Hughes has yet to solidify any deals with the sports leagues, and if it does, nothing will prevent cable companies from negotiating similar arrangements -- once they beef up the channel capacity of their systems so they can handle the extra traffic. Finally, Hughes will face other satellite competitors. On July 26, Tele- Communications Inc., the largest U.S. cable TV operator, announced that it had ordered two high-powered satellites from Loral of New York City and will use them to deliver digital programming to its cable systems around the country and direct to viewers at home. That will let TCI broaden its reach quickly without a lot of rewiring costs. The TCI satellites won't be launched until June and October of 1996, though, so Hughes will have a jump of more than two years. THE PROJECT began eight years ago, when the FCC set aside part of the radio spectrum for TV programs to be beamed directly to viewers. Satellites would be assigned designated parking spaces; Hughes applied for one of only three spots from which a satellite signal can cover the entire continental U.S. (Each spot can accommodate several satellites.) But digital compression was not in the lexicon then, and satellites were more primitive. Hughes would have had to launch four satellites to get just 32 channels of TV, and it couldn't figure out how to make the investment pay. So it waited. In recent years, DBS satellites have revolutionized communications overseas, even though no service offers more than a handful of channels. Since 1986, Rupert Murdoch has been challenging the state television authorities of Europe with his British Sky Broadcasting telecasts. One satellite launched by Hutchison Whampoa of Hong Kong began beaming signals -- Star TV -- into China and other Asian countries in 1991, and thousands of dishes bloomed. But Murdoch, who just bought control of Star TV, and Hutchison have the luxury of competing where relatively few TV channels are available to viewers even now. In the U.S., while satellites have become the main medium for distributing programs to local TV stations and cable operators, attempts to start satellite services that broadcast directly to customers at home have been stabs in the . dark. Several Hollywood studios, including Paramount and MCA, backed a satellite pay-per-view movie service called TVN Entertainment in 1991. But it signed up only 100,000 customers, perhaps because it offered only ten channels of movies and no TV shows, and viewers needed to buy a large satellite dish too. Last year the studios pulled their backing because they weren't getting enough of a return. TVN survives, but it's struggling. Catered to by entrenched broadcast and cable industries, Americans aren't exactly starved for viewing entertainment. Something else would have to happen before DBS could succeed. THE FIRST 6,000-pound DBS satellite, now almost completed, is crammed with stuff: power amplifiers, radio wave propagators, titanium fuel tanks, navigational gear, explosive charges for deploying solar panels, azure-blue glass solar cells, thruster jets, antennas. Workers peer inside, one of them prone on a raised forklift platform that edges him closer and closer as if he were docking with the satellite in space. The solar panels have just been attached -- one folded accordion style against the side of the satellite, the other partly open. In a few days the panels will be fully extended to check the springs that will deploy them in space. That will be the only chance for human eyes to see the satellite in the glory of its 86-foot wingspan. The anticipation in the room is palpable. The combination of great stakes, exotic technology, and painstaking effort by many people, culminating in a single event that may bring the instant and total disaster of launch failure -- three of the 58 Ariane launches so far have failed -- is what makes satellite building the most tension-laden manufacturing industry in the world. Once testing is finished, how will the satellite get to French Guiana? Why, by UPS or Federal Express. ''They'll ship it down overnight,'' says communications director Tom Bracken. When each spacecraft reaches its orbital slot, a command from the control center on earth will detonate explosive charges, shearing off bolts and releasing the springs. Thermal blankets protecting the sunward face of the satellite from heat and the rear from cold look like gold-colored Reynolds Wrap stuck to the satellite with Velcro. Pulling together a handful of technological breakthroughs has brought Hughes to the edge of success. In the world's first major application of video digital compression technology, Hughes will at least quadruple the capacity of satellite transponders. A transponder receives a radio signal from an earth station and then rebroadcasts it on a designated frequency. A single satellite can carry up to 32 transponders, depending on the design. Each can handle many telephone calls simultaneously, but only one video program -- until recently. Digital compression will let the 16 transponders on each Hughes satellite transmit several channels of video at the same time -- initially four or five but eventually up to ten each. After the stream of programming signals from an earth station reaches the satellite, the transponders generate radio waves for broadcast and bounce the signals back. Since the signals will be digital, the TV-top decoder boxes will be able to translate them into nearly flawless sound and image as long as they are discernible when they reach the earth, even if they are weak. Hughes also perfected the design for a high-powered satellite that enables the receiving dishes to shrink to a more palatable size. A spinner satellite is stable and reliable, but inherently inefficient. Its solar cells are arrayed around the circumference of the cylinder; because it rotates continuously, only about a third of the cells face the sun at a time. The newer body-stabilized satellites, introduced by Hughes in 1987, hold a constant pose. Once the solar panels unfold they face sunward 24 hours a day, generating far more power. The signal strength from spinners is typically ten watts per transponder; those on an HS-601 will broadcast at 120 watts each. The higher power means a smaller dish will suffice. To avoid a marketing nightmare, Hughes wants everyone to be able to use the same size dish. Normally signal strength varies with distance from the satellite, making larger dishes necessary as the signal weakens. Heavy rainfall also attenuates signal strength. Hughes must make sure that its signals will be of comparable strength wherever they are received across North America, regardless of climate or distance. Two meticulously engineered reflector antennas mounted on the satellite give the signal shape, focusing more power on rainier and more distant regions. Fancy as they are, each of the $200 million satellites is really a data pump in the sky that catches a radio signal from a single point on the ground and sprays it back nationwide, like the batter in a game of pepper, except here the ball goes not to one player at a time but to everyone at once. Much of the intelligence in the Hughes system will live atop each subscriber's TV. Housed in the decoder box will be a special MPEG (for Motion Picture Experts Group, a standard-setting body) chip that decompresses the signal and translates it into sound and image. The box also has a slot for a ''smart card'' with subscriber information on an embedded chip, and an outlet for plugging in a telephone line. To activate service, viewers must insert the card into the box and leave it there. A signal travels from the box via your regular phone line to the DirecTv billing center, verifying that the box has not been stolen or otherwise moved from its assigned address. The box also keeps track of each customer's pay-per-view selections; once a month a kind of E.T. memory chip will automatically phone home to the billing center with a list of charges. The RCA division of Thomson, which is developing the electronics along with Murdoch's News Corp., has exclusive rights to make the boxes and the antennas for 18 months or until it sells a million units, whichever comes first. Then other manufacturers will start making the gear under license, and the price should start coming down. Viewers will buy the boxes and dishes in electronics stores. For a July satellite industry trade show in Nashville, DirecTv brought along 1,000 applications for dealers interested in selling the dishes -- enough, the company thought, for the three-day show. They were gone within 3 1/2 hours. The proof will be in the viewing. DirecTv will serve up a mix of familiar and novel programming. It has signed deals with 35 basic cable channels, including ESPN and CNN, and will charge customers around $18 to $25 a month, depending on how many stations they order. (They may choose to order none if all they want to see is pay-per-view movies or sports.) Hubbard Broadcasting of Minneapolis will also be signing up DBS viewers. That company has long held the rights to five of the 32 transmission frequencies in Hughes's orbital slot and will buy the corresponding transponders on the Hughes birds. Most of Hubbard's programming will be premium cable channels like Showtime and HBO. Hughes will try to steal a march on cable company plans to inundate viewers with the fruit of Hollywood by serving up 50 to 60 channels of pay-per-view movies. The most popular titles will start every 15 minutes. Viewers who are interrupted in the middle of a film will be able to surf over to a later showing on another channel and pick up the action at no extra charge. So far DirecTv has signed deals with Paramount, Universal, and Columbia TriStar for current films, and with Turner Broadcasting for the oldies in the MGM library. A recent release like Sleepless in Seattle will cost $4, a classic such as The Big Sleep just $1. DirecTv also hopes to lure fans from cable TV systems by carrying up to 40 channels of sports programming -- enough to broadcast every professional game played at any given moment, and then some. A Mets fan marooned in Los Angeles will thus be able to wallow in futility all summer long. Single games will cost $2 to $6, depending on the sport. A season ticket may go for $150. Using the telephone hookup to the decoder boxes, Hughes will be able to black out games for subscribers who live in areas covered by existing telecast agreements. On quiet evenings and during the day, some of the sports channels will carry movies instead. Hughes is negotiating the deals now, but the leagues worry that showing a lot of out-of-town games may hurt the audience for home games. ''We've made no decision,'' says Doug Kirk, manager of business development for NBA Television Ventures. Eddy Hartenstein, 42, DirecTv's president, remains confident. ''I fully expect to have sports deals done with all the leagues by the end of this year,'' he says. Since its satellite will cast a wide net, DirecTv will troll for people interested in relatively specialized fare -- Canadian news, for example. DirecTv also wants to air cultural events such as Broadway shows or rock concerts for $15 to $30 each. The box would black out the broadcast to subscribers living near the event. Hartenstein says, ''Artists ranging from Sinatra to the Grateful Dead to Sonic Youth would all have a tremendous opportunity to bump up their grosses without hurting their gate.'' What you won't find on the satellite is programming that would satisfy certain less esoteric desires -- for example, the Robin Byrd Show, which features dance artistes of various genders (''She probably has an audience,'' says Hartenstein, ''but we're also part of GM''), or the Ugly George Show, in which the host roams the streets of New York City asking young women to disrobe for him on camera. Hartenstein says, ''He sent us a demo tape. It's still in the bottom of my drawer.'' Before becoming an arbiter of taste, Hartenstein was a physicist and satellite jock. In the 1970s he was a mission planner for the Viking and Voyager spacecraft programs at the Jet Propulsion Laboratory and NASA. But | when he was a kid in Los Angeles, his parents owned a Swiss restaurant. ''That's the ultimate customer-oriented business,'' he says. ''If we're successful here, we'll have a relationship with ten million customers with a menu they can serve up to themselves.'' The customers had better have a big appetite. The nearly $1 billion cost of getting the service up and running includes that $200 million for each of the two satellites plus a spare in case of a launch disaster, $100 million for each launch and insurance, and $50 million for the control center in Castle Rock, Colorado. If the first two satellites make it, Hughes will eventually launch the third for extra channel capacity. Hubbard will ante up something over $100 million. The National Rural Telecommunications Cooperative of Herndon, Virginia, which finances telephone systems in thinly populated areas, will invest $250 million in return for some of the programming revenue. Hughes will put up the remaining $600 million or so. The big question for Hughes: How long does it have before the cable TV and telephone giants build megasystems that will make 150 channels seem like chicken feed? Paramount Pictures video division President Robert Klingensmith thinks Hughes will have enough time to make a big profit. He says: ''They're years ahead of what's going to be available on any electronic superhighway. They are extremely levelheaded. They really have their stuff together.'' Hartenstein says that Hughes will break even if by the end of the decade it has three million customers spending $25 to $30 a month. He expects to have three times that many. (Nearly four million Americans now own the big satellite dishes, and 42% of them live in areas served by cable.) Nothing is forever, though. Once Hughes launches its satellites, their run will last about 12 years, depending on how well the ground technicians play a high-stakes electronic game. Each satellite must stay within a 40-square-mile zone. The force of the solar wind will cause the satellites to drift slowly. So every two weeks the thruster jets must fire to bring them back where they belong. The better the engineers play the game, the longer the fuel, and the birds, will last. After the dozen years are up, will it pay Hughes to put up more satellites? Hartenstein says he doesn't have a big enough crystal ball to know what will happen beyond the year 2000, but if Hughes has ten million customers, it will probably relaunch. Even if it doesn't, Hartenstein and Hughes will have played an intriguing part in the communications revolution. Associate director Andy Lippmann of MIT's Media Lab says, ''You've got to give credit to Hughes for being a motivator. The other distribution channels have to make the transition to digital TV much more quickly. Hughes forced everybody's hand.'' And got the big players in the communications business to look over their shoulders.