While Northern Sky Research (NSR) will not claim to have predicted the recent purchase of WildBlue Communications Inc. by ViaSat Inc., the early October announcement of the acquisition deal did not come as a complete surprise. In fact, the fit between WildBlue and ViaSat is exceedingly complementary and has been justly lauded both on Wall Street and within the satellite community. More importantly, this deal is a harbinger of where the commercial satellite communications industry could be headed in the future.
Many will say that Ka-band satellites have been talked about for more than a decade and this deal is, after all, just a logical step in the business forward. While true, a certain mindset has so settled over the satellite industry that many people have become blind to the entire set of implications of the event. First, one must break the myth that only Ka-band satellites make satellite broadband services possible. The Thaicom-4 (IPSTAR) satellite was launched in August 2005 and, today, still represents the single largest commercial telecommunications payload on orbit with about 45 gigabytes per second of capacity. Yet Thaicom-4 uses Ku-band on the user terminal end of the IPSTAR service.
In order to break this first existing mindset, NSR has introduced the terminology “high throughput satellite” or HTS in order to designate any satellite or satellite payload (Ka-band or Ku-band) that uses very small spot beams and substantial frequency reuse in order to obtain multiple orders of additional throughput compared to classic fixed satellite services (FSS) satellites. A further feature of how NSR defines these HTSs is that the end-user equipment has to be relatively low cost such that HTS capacity can essentially replace FSS capacity, where appropriate, for any commercial service within the industry.
NSR has introduced this distinction between classic FSS and HTS capacity because it has become increasingly important in the commercial satellite services industry to be able to illustrate trends in how capacity leasing can shift between, for example, Ku-band and HTS capacity. A perfect example here is the impact of reduced Ku-band transponder leasing in North America that comes from the transition of HughesNet clients from Ku-band provisioned satellite broadband services to services provisioned using Hughes’ Spaceway-3 satellite.
Also at issue is how to assess market trends that justify an investment in the launch of an HTS and which do not. Again, a real life example of the difficulty in this issue is illustrated by Eutelsat pursuing its KaSat high throughput satellite while SES has steadfastly refused to follow suit even though both operators are offering services in exactly the same market in Europe.
As a starting point, NSR’s view is that an HTS is only financially justifiable when there is a core market, usually satellite broadband Internet access services, which requires substantial amounts of low cost capacity. While a seemingly obvious answer, today it cannot yet be said that satellite broadband Internet access services are a long-term given in any market — even in the United States — and investment in a HTS still carries substantial risk.
Conversely, a good bet can also bring real rewards. NSR has heard estimates that the breakeven point for an HTS can be as low as a 20 percent fill rate. This is no doubt highly contingent on one’s initial assumptions about what constitutes “break even,” yet once the HTS is justifiable from a financial point of view a whole new horizon of opportunities open up.
Taking the ViaSat purchase of WildBlue as an example, ViaSat’s Chairman and Chief Executive Mark Dankberg stated in the teleconference announcing the acquisition that WildBlue currently had about 10 gigabytes per second of in-orbit capacity with a bit over half of this capacity being used to provision its more than 400,000 clients. Moving several years into the future, NSR contends that WildBlue could well double their subscriber base and will start offering service plans on ViaSat-1 that will have three to five times the throughput of the current plans. This conservatively (and roughly) implies that WildBlue will need at least 30 gigabytes per second of on-orbit capacity to underpin what is today a positive free cash flow company. As such, more than 20 percent of ViaSat-1’s over 125 gigabytes per second of capacity in high-demand markets could be used solely for satellite broadband Internet access services within a few short years, and the company will be well on its way to the breakeven point for the investment in the satellite alone.
It is at this point that NSR needs to break the second common mindset in the industry, that of satellites like ViaSat-1 or WildBlue-1 being applicable only to the satellite broadband market. In fact, once the HTS is financially justifiable based on its core market, then the satellite operator can look to serve a whole slew of additional applications.
The first obvious one is the corporate VSAT (very small aperture terminal) networking sector, which is something that Hughes is doing today with its Spaceway-3 satellite.
Another could be backhaul services, especially for WiMAX and other broadband wireless access networking services. Few realize, but one of the biggest costs of rolling out a WiMAX network, especially in rural areas, is the cost of backhaul from the WiMAX base stations. And, in fact, Thaicom is already offering cell and wireless network backhaul services on its Thaicom-4 satellite.
A third market, notably being touted by ViaSat, is serving various mobility applications for government and commercial users. For example, it is well-known that the U.S. military is already migrating to multiband unmanned aerial vehicles and this could present just one interesting possibility for mobility applications using HTS capacity.
A fourth market could be satellite news gathering services and again Thaicom already delivers these services in Asia and companies like ND Satcom have recently announced new dual Ku/Ka band equipment for satellite news gathering vehicles. More speculatively, but nonetheless very interesting, could be video distribution or even direct-to-home services using HTS capacity. Thaicom is once again leading the way here and already has a channel distribution contract in South Korea using Thaicom-4 HTS capacity and Eutelsat has made no secret about its ideas for video services in Europe using capacity on its future KaSat.
What makes all of these additional applications so interesting is that even if the HTS capacity is leased at half the price of more traditional FSS capacity, the margins are higher on the HTS capacity leasing than what a satellite operator can typically get on their FSS capacity. This implies that while these secondary applications will be niche, they could be some of the most profitable services offered on high throughput satellites. In fact, NSR’s latest estimates from its “Global Assessment of Satellite Supply and Demand 6th. Edition” study are that by 2018 these secondary applications could account for up to 15 percent of leased HTS capacity in any given market with the remainder of the capacity going to provision the core satellite broadband Internet access services market.
Does NSR predict that HTS will replace FSS in the future? Absolutely not and the high financial hurdle to justify a high throughput satellite means they will only represent a small fraction of future satellite launches. The simple fact is that classic C- and Ku-band FSS capacity is and will remain the core of the commercial satellite telecoms market for the foreseeable future. Yet, HTS capacity where is it justified can be very complementary to C- and Ku-band FSS services and, more importantly, have the potential (not without some risk) to become quite profitable. And much of the profit comes about when the industry mindset is broken and people look beyond what is assumed to be the traditional market of satellite broadband to create new market opportunities for high throughput satellites.
Patrick French is a senior analyst and head of the Singapore office for NSR LLC. He can be reached at pfrench@nsr.com
