Profile | Chris Quilty, Senior Vice President of Equity Research, Raymond James and Associates
A New Investment Landscape
The recent flood of investment in audacious commercial space projects is spookily reminiscent of the late-1990s satellite gold rush, which famously turned into a rout.
Google stepped up last year with its nearly $500 million purchase of satellite imaging startup Skybox and followed that up with a $900 million investment in SpaceX’s newly announced plan to deploy a 4,000-satellite Internet-delivery constellation, which is also being backed by Fidelity Investments. Meanwhile, chipmaker Qualcomm and Sir Richard Branson’s Virgin Group have cast their lot with the 650-satellite OneWeb Internet venture led by O3b founder Greg Wyler.
These proposed mega-constellations bear a striking resemblance to the Teledesic and Skybridge Internet-in-the-sky ventures of yesteryear, which never got off the drawing board. By contrast, mobile telephony ventures Globalstar — Qualcomm was a ground-floor investor — and Iridium, along with machine-to-machine (M2M) messaging service provider Orbcomm, did manage to launch large low-orbiting constellations, only to declare bankruptcy shortly thereafter.
The new crop of financiers, a combination of venture capitalists, institutional investors and well-heeled technology giants, are not oblivious to the history — clearly they are betting that a different set of circumstances will carry the day this time around.
These new circumstances include growing demand for ubiquitous Internet access and situational awareness, improved technology and lower costs, says Chris Quilty, who tracks satellite companies for investment banker Raymond James. The time is particularly ripe, he says, for Iridium and Orbcomm, which along with Globalstar emerged from bankruptcy under new ownership and managed to scrape together enough financing to deploy second-generation constellations.
Quilty spoke recently with SpaceNews Editor Warren Ferster.
Commercial space projects suddenly seem attractive to venture capital firms these days. Why do you suppose that is?
What has attracted the venture capital community is the fact that the model is changing in certain sectors of industry, primarily on the service and software side. It’s closer to what their traditional investment models have been. It’s still fairly hard to entice investors to put money into a long-term, capital-intensive, high-risk venture like building rockets or starting up a new satellite manufacturer. But if it involves big data, software as a service or other, less capitally intensive investments, the investment hurdle is much lower.
Are Skybox and fellow satellite imagery startup Planet Labs examples of the less capitally intensive investments you’re referring to?
Were you surprised at the price Google paid for Skybox?
I was not surprised, but only because it was Google and they’ve consistently shown a willingness to make big bets. Is it reflective of a fundamental value that I could calculate using a spreadsheet? Not really. But certainly it has helped the investment climate for the industry as a whole. It’s raised awareness. It’s probably raised some unrealistic expectations of what companies think they’re worth and it may not be as broadly applicable as people may think.
How would you explain the interest of Silicon Valley investors in particular in the space sector?
Until very recently, it was very difficult for your typical Silicon Valley investor to look at the space industry and see anything other than a monolithic industry dominated by government contracts, legacy fixed satellite services and big-iron hardware. Today, what they see is gobs of data from imagery, sensors and M2M. And let’s be honest, it’s becoming a crowded trade in social media. Space investments offer the potential to add some alpha to the portfolio.
Does the renewed popularity of space projects among investors have staying power?
We’ve seen this rodeo before in the 1990s. The question is whether this time is different. I’m inclined to believe that what is different this time is that there’s a clear path for successful commercial models. With regard to some of the efforts that were undertaken in the late 1990s, there was less evidence that these projects could be supported by real commercial activity.
What’s driving the resurrection of large constellations for Internet connectivity?
I think there are different motivations. Clearly Greg Wyler of OneWeb, as evidenced by history, is principally motivated by altruism and a heartfelt desire to deliver Internet to the unwashed masses. Alternatively, [SpaceX Chief Executive] Elon Musk has stated quite bluntly that his effort is driven by a desire to generate cash to fund Mars colonization. The bigger question is what is the motivation and staying power of the investors that both companies are seeking to attract. One could argue that Virgin Galactic is motivated by the opportunity to use their launch platform. And for Fidelity, is their investment motivated by actually participating in this constellation or is this simply the only way for them to make a sizable investment in Spacex?
SpaceX the satellite company or SpaceX the rocket company?
From an investment perspective, if you buy one, you get the other. For better or worse.
Teledesic and Skybridge never got off the ground, and the original Iridium and Globalstar went bankrupt shortly after their constellations were deployed. Have people simply forgotten?
There’s a dichotomy. There are a number of old hands throughout industry that remember the history and are loath to make the same mistake again. On the other hand if you look at the breadth of portfolio managers on Wall Street, they tend to be fairly young. So they might not be as aware of the industry’s history. But this is a brutally profit-driven industry where investors are willing to overlook history if they believe they can make money.
Could it be that Teledesic and Skybridge were simply ahead of their time?
Absolutely. A classic example is Connexion by Boeing, which aimed to deliver Internet service to airline passengers. It was a legitimate concept, if a somewhat clumsy implementation. But fundamentally the market was not ready for it. The number of people carrying personal electronic devices on aircraft was relatively small, and the desire to be connected wasn’t there. Fast forward a decade and the dynamics have turned 180 degrees out. People are carrying multiple devices and kids have to be connected. And the technology has advanced — more satellite capacity is available. That could bode well for the OneWeb and SpaceX-Google efforts. Another interesting market is M2M communications. There are hundreds of millions — maybe a billion — of terrestrial telematics units deployed today. And the sum total of satellite M2M units is less than 2 million. Satellite is the missing link to cover the 90 percent of Earth’s surface where there is no terrestrial wireless coverage. Why has that industry not blossomed? Part of the answer is commercial and industrial users haven’t reached the tipping point where it becomes an expectation that they should have global seamless coverage and tracking of their assets. My kids will throw a fit when they can’t connect. Why is it that the transportation manager at Wal-Mart has no idea where his containers are? It makes no sense. The technology is there, the cost has come down but the expectation just hasn’t fully developed.
I take it you’re bullish on Orbcomm?
I’m extremely bullish on Iridium and Orbcomm. Both companies can sustain high rate of growth, the end markets that they’re serving are immense and lightly penetrated, and the technology that they’re providing has improved dramatically over the last 10 years. Just as an aside, Orbcomm late last year got an order from the Hub Group to track 28,000 intermodal [shipping] containers. An intermodal container costs $25,000 to $28,000 and the thing will move around the country or the world for years and you could have millions of dollars worth of goods in it. None of the major intermodal transportation companies track their containers. Sometimes a container with valuable cargo will go missing for days, weeks or months. As someone who’s less familiar with the cargo transport industry, I was somewhat shocked. It’s the year 2015 and of 250,000 intermodal domestic containers none are tracked. How is that? Hub Group is the No. 2 or No. 3 player in the transportation logistics industry. If they achieve some degree of success, others will sign on, that particular niche will hit a tipping point and it will become standardized. That has already happened in heavy construction equipment market. They all use satellite M2M to track their equipment — it’s standard and it’s expected.
You didn’t mention Globalstar. Was that a deliberate omission?
I don’t view Globalstar as a major threat today in either the voice or M2M market because of the limitations of their constellation. However, investors are interested in the company primarily for the potential value of their spectrum. They’re primarily viewed as a spectrum play.
Can Iridium and Orbcomm both be successful in the M2M market?
I think the M2M market is so immense that collectively the two companies don’t have enough capacity to serve it. Historically there has been very little direct competition between the two companies. Fundamentally they have different technology platforms, different advantages and disadvantages, and customers can find value in both networks. More recently the two companies have diverged paths: Iridium continues to hew to a wholesale indirect model and Orbcomm, through a series of acquisitions, has become a vertically integrated telematics solutions provider and not simply a satellite operator.
Export credit agency financing has become a standard feature of satellite projects. Is this a good or bad thing?
From the investment community’s perspective export credit agencies are a double-edged sword. Clearly for companies like Iridium and Globalstar, the availability of low-cost export credit agency money was a godsend. But for industry as a whole the argument can always be made that the artificial supply of capital creates an unnatural surplus.
Is the market being distorted by export credit agencies?
There are certain projects or companies that might not have been funded by the public markets. But remember there’s a pretty deep well of capital in the world that is looking to find yields and trying to diversify. So if the export credit agencies didn’t step in that money could have come from the private-equity industry, sovereign wealth funds or other sources. Do I think it’s good policy for government to pick sides? No. But I’m also a little befuddled by Congress’ drive to shut down the Export-Import Bank when other countries are unlikely to reciprocate.