The investment community likes to avoid risk, and thus loves the satellite industry for its stability and predictable revenues. However, the impression one got the other week at Satellite 2011 in Washington was that a lot of the future growth in the sector will come from “disruptive technology,” and these new, innovative applications will add risk to the industry’s outlook.
After a strong 2010, the overall mood of industry executives attending the conference was very positive, with operators, bankers and service providers expecting even better results in 2011. Funding for growth is supported by very favorable debt and private equity markets, on top of strong ongoing support by export credit agencies. This could lead to more M&A and the return of LBO-type deals. Beyond private equity, many people in the industry seem to believe that the large telecom operators will reinvest in the satellite sector in the years ahead.
The FSS sector continues to be driven by TV broadcasting and strong demand in emerging regions such as Latin America and Asia. But future growth is believed to be increasingly found in broadband applications, both for the consumer market as well as for enterprise, government, maritime and aeronautical markets. As capacity in traditional frequencies such as C- and Ku-band becomes scarce, operators are expanding to the Ka-band in fixed as well as mobile satellite markets. While promoters of Ka-band believe the abundant capacity of so-called high throughput satellites will find its market, skeptics at the conference voiced doubts about whether the optimistic outlook of satellite’s role in consumer broadband and backhaul (e.g. O3b) will lead to unused real estate in orbit over the coming years.
Also in the mobile sector, where providers of L- and S-band services are diversifying their product portfolios and trying to get into high-volume markets including the machine-to-machine market and even consumer applications, the revenue engine of the future seems to be broadband, also using Ka-band capacity. Thus, the lines between FSS and MSS are continuing to blur.
Much of the future growth and profitability in the satellite sector will require reducing costs. More efficient frequencies such as Ka-band and frequency reuse should help drive down the cost per bit. At the same time, operators are trying to find smart ways to reduce and/or share initial investments. Two issues appear predominant here. First, the cost of satellite manufacturing and launch services has satellite operators pushing for more alternatives, as illustrated by SES’s announcement to launch a satellite aboard a SpaceX rocket in 2013. Second, hosted payloads are emerging as a potential win-win strategy for the public sector and commercial operators to reduce capital expenditures and optimize the use of real estate in space. Intelsat, Iridium and SES are heavily promoting hosted payloads as an alternative for government investments which could lead to some interesting announcements over the next 12-24 months.
While new technologies and applications will certainly contribute significantly to growth in the sector — rewarding those companies that adapt and potentially punishing those that miss the shift in the market — the satellite industry as a whole will continue to have strong business fundamentals, and increasing diversification should make it even more attractive for investors and provide resistance to any impacts from the global economy.
Richard Roithner is Senior Consultant at Euroconsult in Paris specializing in the strategic analysis of satellite operators and service providers. He is expert in the assessment of the business models of satellite operators and involved in commercial due diligence and business planning for Euroconsult clients. Richard is a graduate of the University of Economics & Business Administration in Vienna, Austria, holding a Master of International Business Administration with a specialization in International Strategic Marketing and Management Accounting.
