Op-ed | An unexpected effect: the industry’s recent challenges prove the importance of space
The world has suffered countless tragedies over the last two months in the wake of the COVID-19 pandemic, worst of all, widespread human loss of life and suffering. We are only now beginning to understand the economic toll, as the initial decimation across many travel and consumer-facing sectors ripples across the economy at large. The ecosystem that we support, the satellite and space sector, represents but a tiny sliver of the wider economy, but it has also seen more than its share of challenges in recent months.
Bellwethers Intelsat and Speedcast are now operating under the protection of Chapter 11 bankruptcy, as is once-highflying startup OneWeb. A host of other companies are currently stressed or facing restructuring. And as we concluded in our wide-sweeping recent analysis of the venture space ecosystem, we expect that more than half of today’s flock of more than 800 space startups will fail. Based on these grim observations, it is easy to conclude that space is simply “hard,” or, perhaps, that it represents a poor sector for investment. But these characterizations would be unfair — and wildly incorrect.
While the proximate cause of Intelsat’s bankruptcy was its need to pre-fund much of the C-band clearing process and the pandemic-induced pain in mobility markets, the root cause was the company’s aggressively leveraged capital structure, originally established in a private equity buyout well over a decade ago. Speedcast’s fall into bankruptcy was likewise driven by a collapse in demand (cruise and energy) exacerbating company-specific challenges including a levered balance sheet. Here again, COVID-19 simply lit a match to the tinderbox of aggressive M&A-induced capital structure decisions of the past.
And in the parallel world of venture space startups, failure is OK, and in fact, it will be necessary to achieve a healthy long-term industry structure. Studies have consistently shown that the majority of venture-backed startups fail in any industry, and the venture capital investment model is built to withstand these losses. It is not a contradiction to state that launch is both a lucrative market opportunity and one where we should expect widespread failure across its 100+ startups. As the venture space ecosystem now transitions from childhood into adolescence, a key question becomes whether the satellite and space industry will play an increasingly important role in the economy and our lives going forward. The answer is a resounding yes.
Space-based systems are adding value while improving the quality of life worldwide. Evermore integrated into the global technology and telecom fabric, satellite systems now enable us to remain cost-effectively connected even in air and at sea. They bridge the digital divide and will play a greater role in the 5G-enabled world. And the unique power of satellite-based Earth-observation can deliver previously unimaginable insights by monitoring an ever-changing world. Vast economic opportunity awaits the companies that successfully innovate, profitably expanding the range of satellite- and space-derived markets.
In light of recent events, we are also now seeing just how important the satellite and space industrial base is to major governments around the world. OneWeb, conceived and designed to be a commercial low-Earth-orbit broadband provider, now sits at the center of a geopolitical power struggle between Chinese, European, U.S., and U.K. economic and military-industrial interests. The debate is no longer about providing rural broadband; instead, it reflects national interest and the ability to stimulate next-generation satellite manufacturing, proliferated LEO constellation capabilities and highly skilled jobs. Similarly, we hear a growing cacophony of voices across Western countries and their adversaries concerned with ensuring the long-term viability of their national space industries throughout the downturn. Space will be a crucial twenty-first century warfighting domain.
Space also offers an unmatched source for scientific discovery and human inspiration. The civil space arena is bustling in pursuit of the moon, Mars, and other scientific and exploration targets beyond GEO, and commercial companies will play a key role in helping to shape these important endeavors. Finally, commercial human spaceflight is just over the horizon.
We believe that there is an important silver lining to today’s challenging times. Rationalization of the startup landscape and the right sizing of company balance sheets is inevitable, paving the way for “Space 3.0,” which will see the profitable and sustainable exploitation of entirely new market opportunities, backed by a growing base of enlightened stakeholders.
As a firm dedicated to advising the satellite and space industry, we are very pleased to participate in this unique time for the industry, and we have never been more excited about the prospects for its future.
Justin Cadman is a partner of Quilty Analytics LLC, a boutique firm providing research, strategy, and investment banking advice exclusively to stakeholders across the satellite and space ecosystem. He has been advising clients in the satellite and space industry for well over a decade.