Is the Earth-observation industry consolidating, or just evolving?

by

This article originally appeared in the May 22, 2017 issue of SpaceNews magazine

Do three events constitute a trend?

For many in the Earth-observation industry, the answer seems to be yes.

Three deals in less than three months appeared to herald a new wave of consolidation among both established companies and startups. It started in early February when Google announced it was selling its Terra Bella satellite imaging company — originally known as Skybox Imaging — to Planet for an undisclosed sum.

Three weeks later, Canada’s MacDonald, Dettwiler and Associates (MDA) announced it was acquiring DigitalGlobe, itself the product of the merger of other remote sensing companies, for $2.4 billion. Two months later, in a far smaller deal, EagleView Technologies announced it was buying OmniEarth, a company that originally planned its own satellite constellation and later focused on analyzing satellite imagery.

Those events have created the perception that the sector is consolidating: companies are merging with or acquiring one another to shore up their positions in the market. In the eyes of many industry observers, there are more remote sensing companies than the market can support, making a shakeout inevitable.

Analysts weigh in

Dylan Taylor, a SpaceNews contributor and investor whose portfolio includes OmniEarth and Planet, sees consolidation going on in three dimensions. There is horizontal consolidation, as companies merge with their competitors; vertical, where companies merge with others to build up a more complete set of both imagery and analysis capabilities; and financial, where private equity companies “roll up” several companies to later sell or take public through an initial public offering (IPO) of stock.

“I see horizontal integration being the biggest driver near-term,” Taylor said, citing as a prime example Planet’s acquisition of Terra Bella. In such deals, he said, “Earth-observation firms look to achieve scale and position themselves to be more competitive and ultimately more attractive to a financial consolidation or IPO.”

Not everyone, though, is convinced that the Earth observation sector is consolidating. “It’s very convenient to think there’s a trend, but these deals have all been very company-specific,” said Chris Quilty, president of Quilty Analytics and a long-time financial analyst focusing on the space industry.

One example is the Planet-Terra Bella deal. While that deal is seen as key evidence of an industry consolidation, Quilty believes it should interpreted instead as part of a broader recent effort by Google to divest itself of projects that it no longer considers part of its core business. “Google was just trying to unload the company,” Quilty said.

Google, which paid an estimated $500 million to acquire Skybox Imaging in 2014, does not appear to have gotten much in return for selling it to Planet. Neither Google nor Planet provided specific terms of the acquisition when it was announced. Planet did note in April, when the deal closed, that Google had become a shareholder in Planet, but did not disclose the size of its stake. Google did not consider the sale material enough to mention it in filings with the U.S. Securities and Exchange Commission, including its most recent 10-Q quarterly statement in early May.

Quilty is also skeptical that MDA’s planned acquisition of DigitalGlobe, set to close later this year, is also a sign of consolidation. “The synergies are a little lacking,” he said, particularly of the potential to combine DigitalGlobe’s high-resolution optical images with radar imagery from MDA’s Radarsat 2. “The synergy of optical and radar is not proven.”

DigitalGlobe CEO and Dylan Taylor
DigitalGlobe President and CEO Jeffrey Tarr. Credit: Tom Kimmell/SpaceNews

He sees the deal as part of a larger effort by MDA to expand its American footprint, one that includes its earlier acquisition of Space Systems Loral and plans to trade its shares on the New York Stock Exchange. That effort is intended to help it win business from the U.S. government that, as a solely Canadian company, it would not be eligible for.

Earth observation’s evolving world

If the Earth-observation sector isn’t consolidating, though, it is evolving. When companies like Planet and Skybox started several years ago, the focus was primarily on collecting imagery and selling it to any and all takers. It was a business model that worked well in the past, particularly when government agencies were the primary customers for such images.

However, that business model is changing. Earth-observation firms realize than many commercial customers have neither the ability nor the interest to develop their own imagery analysis pipelines. Instead, they want the intelligence derived from those images.

Astro Digital sees that transition. The California company announced in March that it had raised a $16.65 million Series A round, which it will use to build an initial constellation of medium-resolution satellites. The company, though, has already developed its own software platform that processes imagery from U.S. Landsat and E.U. Sentinel satellites — and, eventually, its own — to extract information for use in various markets, such as agriculture. That information is then integrated into other software through a protocol known as an application program interface (API).

The company sees that as the wave of the future. “We don’t believe that anyone is going to be buying imagery anymore,” said Bronwyn Agrios, co-founder and head of product at the company, in a recent interview. “We believe that the future is a subscription to an API that will have information show up right in your applications.”

Quilty sees a similar transition in the industry. “Companies are trying to move closer to the customer and deeper into the analytics game,” he said.

Other companies are trying to do that as well. Orbital Insight announced May 2 it raised a $50 million Series C round to accelerate its growth. The company does not own satellites but rather purchases imagery from several companies, analyzing it to provide information ranging from global crude oil reserves to traffic patterns in shopping center parking lots.

The EagleView acquisition of OmniEarth is a similar case. OmniEarth originally planned its own satellite constellation, but switched its focus to analysis of satellite images from other providers. EagleView plans to apply that technology to its own data analytics business, which has focused on construction markets.

Threat meets opportunity

Such companies are thus an opportunity and a threat to Earth-observation satellite developers. They are an opportunity in that they are customers of satellite images in bulk. But, they also pose a threat as they provide the analysis that customers want, undercutting satellite companies’ plans to move up the value chain.

Moreover, since companies like EagleView and Orbital Insight can buy from a wide range of satellite companies, or even aerial or other non-satellite imagery, they can offer a kind of “one-stop shopping” for customers that individual imagery providers cannot.

This leaves Earth-observation companies trying to figure out who their customers, and their competitors, really are. “One of the great challenges for this industry is both discovering where the technology and data are most needed, and finding partners to monetize those opportunities,” Quilty said.

So even if there isn’t consolidation in the Earth observation sector now, the effort to find customers and partners may trigger a wave of such deals in the future.