Bankers see a growing industry shift to smallsats

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PARIS — Investment bankers increasingly believe that the satellite industry is fundamentally shifting from large geostationary spacecraft to constellations of low Earth orbit smallsats, forcing existing companies to respond while creating opportunities for investors.

During a panel session at Euroconsult’s World Satellite Business Week here Sept. 10, a panel of investment bankers said it was clear to them that the future of the industry was in small satellites for communications and Earth observation.

Manufacturers of large GEO satellites “have started to realize that the pipeline for new orders has started to dry,” said Vaibhav Lohiya, director of technology, media and telecommunications investment banking at Deutsche Bank. “They’re realizing that smaller satellites is where the world is moving.”

Lohiya said that realization has led companies traditionally known as GEO satellite manufacturers to put more attention into smallsats. One example he cited was Thales Alenia Space’s joint venture with Spaceflight Industries to develop a smallsat production capability, initially for the BlackSky constellation of remote sensing satellites. “With those investments,” he said, “they’re trying to look for where their own business model could eventually evolve to.”

Much of that interest in smallsats is driven by projections of tens of thousands of small satellites proposed for launch in the next decade for LEO communications constellations. Many of those satellites, though, will likely remain on paper.

“I think in the final analysis a fraction of those satellites will actually see the light of day,” said Jim Murray of PJT Partners. However, “I do think we’re going to see a shift” to smallsats, he added.

Another factor driving that change is growing government interest in smallsats, particularly constellations that could be more flexible and more robust to potential attacks than large spacecraft. That government demand, he argued, is driving some of the deals involving smallsat companies, such as Lockheed Martin’s investment in Terran Orbital and Boeing’s acquisition of Millennium Space Systems.

“I think there has been a shift towards a smallsat paradigm, certainly within the U.S. government and other governments as well,” he said. “I think that concept of distributed architecture capabilities in space is driving large aerospace primes to beef up their expertise and capabilities around military and intelligence space with smallsats.”

“The industry as a whole is reading the tea leaves and saying that customers are not ordering the big GEO comsats right now,” he concluded. “There’s probably a shift away from GEO as the anchor of the architecture and we’re going to move towards smallsat-based systems and a smallsat-based ecosystem.”

That shift to smallsats has created new opportunities for investors, with a lot of interest emerging for Earth observation systems, and means to extract insights from satellite data. “The real value-add is how you interpret it, how you allow people to manipulate it,” said Dominic Ashcroft of Goldman Sachs.

Investors, said Murray, “are willing to fund the platforms because they think the data and the insights that come out of it are going to be the Bloomberg of the next generation.”

One topic that came up in the discussion was a recent report by Morgan Stanley that suggested its customers were not interested in investing in the space industry. Bankers on the panel had a different view.

“I had a very different perspective from everything that’s been said in that report,” said Lohiya, who said large telecom companies are showing increased interest in the satellite sector. “There is a lot of investment opportunities, it’s just finding the right one.”

Murray said one problem with the Morgan Stanley report is that it tried combine too many separate fields under the single umbrella of the space industry. “Part of what the industry suffers from is the perception that it’s a homogeneous group, when in reality you’ve got a media business, you have a technology business, you have data analytics business, traditional aerospace and defense, and you have communications,” he said.

“Those businesses don’t have a lot in common in terms of end users or fundamental economic models. Trying to lump them together can be very difficult.”