It’s been 20 years since the last big round of satellite bankruptcies that included Teledesic, Iridium, Globalstar, and many others. With Intelsat, OneWeb, Speedcast, and Global Eagle filing for bankruptcy, and several others teetering, 2020 will be known as the new year of reckoning for many satellite companies.
While it’s tempting to see 2020 as another part of the satellite industry’s boom and bust cycle, with history repeating the same mistakes, these two cycles are different. Terrestrial competition was the primary driver of the 2000 satellite bankruptcy cycle. The 2020 cycle, by contrast, was primarily driven by new satellite technology rendering old satellite technology obsolete, which is a side-effect of the satellite industry’s increasing ability to harness technological innovation. The satellite industry is undergoing a process that the late Austrian political economist Joseph Schumpeter referred to as “creative destruction,” whereby continuous innovation revolutionizes an industry from within, destroying existing businesses and creating new ones.
2000 SATELLITE BANKRUPTCIES DRIVEN BY RAPID TERRESTRIAL WIRELESS BUILDOUT
The massive failures of Iridium and Globalstar were primarily the result of outside forces. The rapid terrestrial wireless build-out occurred during Iridium and Globalstar’s roughly decadelong development cycle. By the time Iridium and Globalstar launched service, the available market for satellite telephony had shrunk dramatically. Of the remaining population that by 2000 was unserved by terrestrial wireless, most were in remote areas, unable to afford the services, and often without anyone to call. Moreover, by 2000, the comparable circa-1990 cellular per-minute rates Iridium and Globalstar built into their business models had fallen to a fraction of those high early rates. Likewise, the prospect of an expensive 200 Kbps internet connection would not have been competitive by the time Teledesic’s “broadband” service would have launched. Simply put, the satellite industry’s long development lead time allowed terrestrial technology to leapfrog it.
2020 BANKRUPTCIES DRIVEN BY NEW SATELLITE TECHNOLOGY LEAPFROGGING THE OLD
The 2020 satellite bankruptcy cycle coincided with the COVID-19 pandemic. Certainly, COVID-19 hit the satellite mobility markets hard, but that’s not the full story. A closer look shows the seeds for these bankruptcies were sown much earlier and rooted in individual players’ inability to change and adapt to other developments from within the satellite industry itself. Like the dinosaurs before them, failure to adapt led to extinction.
The die for Intelsat’s bankruptcy was cast years ago when a succession of private equity firms managed to convince banks and bond-buyers to accept massive debt levels, apparently believing in the fixed-satellite services (FSS) industry’s long-term stability. In fairness, at that point, satellite innovation had been slow over the preceding 20 years, keeping transponder pricing stable. Intelsat was caught off-guard by rapidly declining transponder prices made possible by new high-throughput satellite (HTS) technology. Reliant on declining revenue from its legacy wide-beam satellites to pay its debt service, Intelsat’s Epic satellite initiative was a half-measure fitting the proverbial phrase “a day late and a dollar short.”
Epic arrived in the market a few years later than it should have and did not sufficiently push the technology envelope to be competitive. As a result, Epic could not compete with today’s extremely high-throughput (xHTS) satellite designs on a capacity or a cost per bit basis. Intelsat management and its advisers did an admirable job juggling debt and extending maturities. But at the end of the day, Intelsat’s $15 billion of debt required more cash to service than its semi-obsolete satellite fleet could generate.
OneWeb’s woes were likewise rooted in inflexibility, allowing competitors to surpass its technology design. The OneWeb system was designed circa 2012 but suffered numerous delays while awaiting declining prices for the flat-panel antennas necessary for customers to use the service. As the trajectory of more affordable flatpanel antennas became clearer, OneWeb found itself competing with deep-pocketed competitors, including SpaceX and Amazon’s Project Kuiper, with newer technology approaches and creative business plans. Because it was too entrenched with older technology, OneWeb’s business model was anchored with limited capacity per dollar of capital expenditure compared to its newer competitors. Softbank got cold feet about putting additional money into the project, and OneWeb was forced into restructuring.
Speedcast’s and Global Eagle’s businesses were also rooted in the past. Much of their debt was related to bandwidth agreements with outdated (higher) pricing leaving them unable to compete with lower-cost bandwidth. In some ways, Speedcast and Global Eagle were similar to Intelsat, anchored with debt and handicapped with a high bandwidth cost structure based on older satellite technology. Ill-fated acquisitions of similarly struggling companies did not provide sufficient synergies to overcome their higher cost structures.
Rapid industry change impacted the satellite ground segment as well. Flat-panel antenna manufacturer Phasor, for example, filed for bankruptcy after being outmaneuvered by Kymeta and others who were earlier to market. Recently, SpaceX appears to have made massive progress driving down the cost curve of Starlink’s ground terminal to an estimated $2,000 to $2,500 manufacturing cost per unit (subsidized to $500 retail). Other manufacturers, with flat-panel antennas advertised at prices nearly 10 times higher, will need to quickly adapt to compete with SpaceX technology or risk suffering a fate similar to Phasor’s.
THE FUTURE IS BRIGHT!
On the surface, the idea of satellite industry players effectively killing each other off seems like an additional negative for an industry already under pressure from terrestrial technologies. However, nothing could be further from the truth. The satellite industry is finally innovating and developing new markets. It is as if the satellite industry just recently discovered Moore’s Law! In only a few years, the satellite industry revolutionized consumer expectations for mobile connectivity. Technology developed for xHTS geostationary satellites is now revolutionizing rural consumer broadband connectivity — something few would have imagined just 10 years ago. And the benefits of rapid changes in the satellite industry are just beginning. Low-latency non-geostationary-orbit broadband systems, built by 3D printing technology, and launched by less expensive reusable launch vehicles, will expand the satellite industry market beyond its current small, transforming markets such as telemedicine, autonomous driving, and IoT.
J. Armand Musey, CFA is a satellite industry analyst and founder of Summit Ridge Group, a New York-based valuation and consulting firm specializing in the satellite, telecom, and media sectors.
This article originally appeared in the March 15, 2021 issue of SpaceNews magazine.