Commentary | The Big Satellite Shakeout

by

The satellite communications industry is in an expansive phase. Fixed satellite service (FSS) revenues have grown at a compounded annual rate of 5.8 percent per year for the past 10 years. Mobile satellite service (MSS) revenues have grown at a rate of 3.6 percent, and direct broadcasting revenues in the United States have grown 11.6 percent per year over the same period. The growth of U.S. broadband satellite service revenues has been even more dramatic, with a compounded annual rate of more than 25 percent over the past seven years.

Revenue growth has led to an acceleration of capital expenditures. About 115 geostationary communication satellites were procured in the past five years, and most of these have been much larger satellites than in the past. Satellite operators have ordered nearly 30 high-throughput satellites (HTS), and most replacement satellites have substantially greater capacity.

Between 2000 and 2013, the number of C- and Ku-band FSS transponders grew from 6,319 to 10,126, an increase of 60 percent. If we assume that a standard transponder can support 40 megabits per second then the global FSS throughput has increased from 253 gigabits per second to 405. The HTS that have been launched or ordered add an additional 1,532 gigabits per second, or nearly quadruple the FSS capacity.

On the surface, it appears that the enormous expansion of capacity will lead to a glut. However, the figures are theoretical. Not all capacity could be used efficiently, and clearly not all capacity is equivalent. Much of the HTS capacity is intended for broadband consumer access rather than conventional FSS for video distribution, private very small aperture terminal networks, or cellular backhaul. Consequently, an industry assessment must consider each satellite service individually.

Direct broadcasting of television appears to be a healthy business in most regions of the world with distinctive satellites and fully utilized capability.

Prospects for the conventional FSS industry depend on whether new HTS systems will cannibalize the existing business. The FSS industry already may be experiencing the effects of excessive capacity. Anecdotal evidence suggests that satellite transponders have become a commodity and are leased for the lowest price. Some FSS operators are reporting lower total revenues. All of the major FSS operators reported lower earnings per share at the end of 2013.

Broadband access has created the greatest industry excitement in the past decade. The evidence is clear that consumer appetite for data is doubling about every three years. Forecasts by Cisco show data throughput increasing in all regions at rates of 20 percent per year or more. Aggressive forecasts predict a surging need for ultra-high-speed broadband connectivity. North America seems to be an idea market for satellite broadband since the continent has high per capita gross domestic product and regions of unserved population. EchoStar/Hughes and ViaSat have attracted more than 1.6 million broadband subscribers, but recent subscriber growth has slowed significantly.

The broadband satellite market outside of the United States is less compelling. Eutelsat’s Ka-Sat was launched nearly a year before ViaSat-1 but has attracted only 152,000 European users as of June 30. Europe has high population density, and most homes have ready access to broadband services. This suggests that similar regions like China, India and East Asia might find that terrestrial solutions are more cost effective than satellite service. Avanti and other operators have launched satellites for broadband service to the Middle East and Africa. Avanti reports slower than expected revenue growth, and its satellites have low fill factors. Australian demand might be similar to North America’s.

The distinction between MSS and FSS has been fading away. Inmarsat is building the HTS Global Express network in Ka-band that can provide global coverage and concentrated service with steerable spot beams. Furthermore, ViaSat has extended its Ka-band footprint over the North Atlantic. Intelsat is building the Epic series of satellites in Ku-band to serve both the MSS and FSS markets. This should provide ample transmission capacity for ship crews and airline passengers. Hopefully, these new ambitious systems will find a lucrative market.

The MSS plain old telephone service has provided a limited set of subscribers for satellite phone operators. Revenues have not been sufficient to pay the bills at LightSquared, which is in bankruptcy. In October, a hedge fund prepared an extensive report on Globalstar and declared that its assets are essentially worthless. Iridium continues to operate with meager earnings and huge capital expenses. Inmarsat has also started a satellite phone service. Thuraya is recovering from earlier setbacks. Unfortunately, there do not appear to be enough users to go around.

One of the dilemmas in satellite communications is the gap between optimistic forecasts and authentic demand. Actual demand for satellite bandwidth has grown much slower than expected.

It seems likely that the explosive growth of capacity will lead to some difficult adjustments throughout the satellite industry. Excess capacity will lead to significantly reduced transmission prices. Total FSS revenues will drop while capacity is absorbed. Shorter transponder lease contracts will be written as prices drop. Satellites will operate with lower fill factors. Weaker players will not lease all available capacity, and there will be cash flow issues for some operators. Nonetheless, new entrants might capture most of the new business if they are more agile and aggressive. Big operators’ market share will probably continue to fall. Thus far, less than half of the HTS satellites have been launched so the full impact of this capacity insertion has not been felt. At some point the satellite operators might decide to reduce satellite procurements until supply and demand are in better balance.

A common misconception is that satellite communications is an elastic market. Actually, communication services are relatively inelastic. In other words, the mistaken belief is that revenues will increase when the market expands in response to lower unit prices. Unfortunately, the market primarily expands in response to greater demand, which is driven by user needs. Consequently, total revenue growth will be modest at best.

The development of HTS is undoubtedly good news for commercial satellite services in the long term. Greater efficiency will make satellite services more competitive with terrestrial alternatives. New opportunities will appear for entrepreneurs.

 

Roger Rusch is president of TelAstra Inc., 

a firm that consults for investors in satellite communications.