Life interrupted: The COVID-19 pandemic rapidly spread around the world, leaving devastation in its wake and the way we lived and worked. In these extraordinary times, everything seemingly flipped upside down and uncertainty became the singular lens with which to view a volatile landscape. Surprisingly, amid the pandemonium, some stability existed. COVID interrupted the bandwidth pricing free fall, flattening the curve.
While COVID certainly had an immediate impact, with effect expected to linger on the medium term, the decline in bandwidth pricing slowed notably in 2020. While the near complete shutdown of the travel industry led to massive pains for satellite services providers — most notably those in the commercial aviation, cruise, and energy segments — the industry-wide price of bandwidth somewhat stabilized with around a 5 percent decline for 2020, according to Euroconsult figures. This is a notably slower decline than in the hard-fall period of 2014 to 2018, when prices tumbled 10 percent to 15 percent per year.
Mobility was certainly hard hit, however stay at home restrictions played out favorably for fixed data applications, as evidenced by recent financial reports released by Hughes, Intelsat, and others. While mobility markets seemingly came to a standstill, increased bandwidth requirements for broadband and wireless backhauling in several markets saw higher than expected and less asymmetrical traffic patterns measured at satellite-backhauled cell towers.
In the lead up to this pricing plateau, however, the early days of the pandemic saw heavy discounting, particularly in mobility. Many services providers were tied up with non-cancellable take-or-pay capacity contracts, and there was a frenzy of negotiations for temporary discounts on capacity pricing in order to help offset the loss of end user revenues from idle planes and ships. Satellite operators shared the pain with these service providers, by offering short-term price concessions in exchange for contract extensions, helping preserve future revenues during an uncertain recovery period. This dynamic played out with the likes of Gogo, Speedcast, and RigNet.
With this approach, satellite operators may have been able to maintain the volumes of capacity commitments with these early renewals or contract extensions, but they came with lower average pricing than prior contracts.
“The effect was an acceleration of declines in average pricing for the mobility segment in both the short term, which was more drastic, and medium term, which is more of an incremental reset, however one that came sooner than if contracts had been renewed at their original expiration dates,” explains Brent Prokosh, senior affiliate consultant at Euroconsult. “On top of this, mobility service providers have also sought to ‘right-size’ their capacity commitments against the level of end user activity. As such, they’ve likely let some capacity leases simply expire as opposed to renewing, effectively returning supply to the market which, in principle, adds downward pressure on bandwidth pricing conditions.”
Part of this stabilization of pricing declines is attributable to the slowdown in net capacity supply additions in 2019 and 2020, which has contributed to an improvement in supply/demand balances across a number of regions, notably for High-Throughput Satellite (HTS) capacity. It is because of this better balance in HTS capacity that the low end of Direct-to-Home (DTH) and video markets, typically dominated by HTS, saw greater price stability in 2020, with $600 per megahertz per month for regular capacity and less than $100 per megabit per second/per month for large-volume, long-term HTS capacity leases still prevailing, explains Prokosh.
This is in contrast to the high end of DTH and other video markets where pressure has been mounting. Here, satellite DTH platforms that have generally been losing subscribers to Over The Top (OTT) platforms have felt the need to reduce costs of satellite bandwidth, both through price negotiations and reductions in volume.
The expiration of this supply and demand balance and the stability it affords is approaching, and bandwidth pricing in general is expected to continue declining. The declines are likely to accelerate in line with upcoming supply rollouts of next-generation HTS capacity. The falling cost base of capacity is a primary driver of this dynamic, wherein new satellites offer significantly higher volumes of capacity per dollar invested.
“This provides operators the ability to drop pricing below levels of legacy satellite infrastructure in order to defend or capture market share as competition intensifies, including the entry of new players such as constellations and the regional expansion of existing players,” says Prokosh. “Generally, we observe this cost base of capacity to decline by up to 50 percent over each period of around five years – a dynamic which holds for upcoming HTS supply rollouts.”
One irreversible and accelerating trend is operators gravitating towards increasing levels and layers of managed services, now also with cloud tie-ins, adds Carlos Placido, senior analyst at NSR. “Operators are extending their roles in network infrastructure, management, and provisioning. So, outside broadcast, satellite bandwidth pricing is shifting away from megahertz and megabits per second denominations, and moving toward custom service level agreements with a multiplicity of bundled and blended options linked to ground networks, quality of service, installation, optimization, bandwidth growth, and portability.”
Depending on the application and satellite operator, the relationship with end users differs. Yet even with an indirect customer relationship through specialized service providers, operators are increasingly doing more than just providing capacity, which affects pricing.
Then there are the Low-Earth Orbit (LEO) constellations and Very HTS (VHTS) programs to consider. Placido says that these point to renewed downward pricing trends, and NSR expects this pressure to be felt more strongly in the next two to three years.
“Delays in the launch of VHTS programs by Viasat and Hughes, together with OneWeb’s restructuring likely contributed to such deceleration in price erosion rates by shifting supply expectations to the right,” he says.
Beyond assumed downward pricing pressures, it’s difficult to gauge the actual impact that LEO will have. Many announcements have been made, yet there have been relatively limited firm customer commitments. SES’s O3b mPOWER Medium-Earth Orbit (MEO) constellation has some backlog, but this is largely attributable to customers who are using legacy O3b capacity today.
“It takes time for customers and partners to understand the full potential of game-changing solutions, and O3b mPOWER is no different. In fact, we at SES have even undergone a period of discovery as we engaged the entire stakeholder community in exploration of what’s possible with our next-generation MEO constellation. Today, customer expectations for flexibility, volume, and performance are growing quickly, increasingly lining up with the potential of O3b mPOWER,” says Andrew Ruszkowski, vice president of O3b mPOWER Commercial Development.
While SES sees the consumer price for broadband connectivity certainly declining as LEO operators jockey for market share and resources to reinvest in their constellations, Ruszkowski notes the possibility of pricing increasing in markets where satellite proves relevance. It is here that satellite must bring something new to users in order to hold pricing steady or increase it.
“By new, I mean offering wholly new solutions to connectivity requirements previously not addressable by satellite. For SES, this isn’t about competing with fiber or other well-established networking solutions. It’s about complementing those solutions or bringing solutions never offered by anyone previously,” he says.
Placido says the impact of LEO constellations on satellite broadband will be both major and multi-faceted. Starlink, although currently in beta mode, will compete directly with established Geostationary Earth Orbit (GEO) HTS players, OneWeb seems focused on partnerships to reach end users, while Telesat Lightspeed will target B2B applications.
“We have to wait and see how Amazon enters the market with Project Kuiper, which could seek synergies with its cloud AWS ecosystem. As an established MEO player, SES O3b is expanding capabilities via mPOWER satellites, and other LEO/MEO players, including the Chinese, could enter the picture ensuring that impact on bandwidth will be major and multi-sided,” says Placido.
While most LEO constellations haven’t publicly divulged pricing, Euroconsult has done detailed analysis on the minimum viable capacity pricing required to close the business case based on a number of parameters such as CapEx, sellable capacity, fill rates, and satellite lifetimes. Based on this analysis, it’s conservatively concluded that “breakeven” pricing of less than $100 per megabits per second/per month – and as low as $60 – can be supported by certain LEO constellations.
“This pricing threshold has only been achievable through large-scale lifetime leases of HTS capacity to date, so the implication is that LEO constellations will be highly disruptive to legacy HTS infrastructure, notably in mobility markets where pricing is typically higher than terrestrial broadband markets,” says Euroconsult’s Prokosh.
The truly global nature of LEO constellations means that all satellite operators and service providers with exposure to broadband markets are having to factor LEO competition into their strategy. Many GEO operators are responding to this uncertainty by investing in flexible or digitally reprogrammable satellites, which provide the opportunity to pivot end user or geographic market focus.
While capacity to be generated is enormous, LEO constellations are very CapEx-intensive enterprises. Therefore, it’s important to consider two aspects driving supply-demand dynamics for LEOs, explains NSR’s Placido.
First, hundreds to thousands of satellites orbiting at low altitude produce high levels of frequency-reuse spotbeam capacity. Yet, at the same time, LEO’s limited visibility of the Earth’s surface modulates addressability for all such capacity supply. This creates different localized opportunities that both the operator and the end users could leverage with various degrees of bargaining power. There may be areas such as ocean regions, where the bulk of capacity goes to waste, but there could be areas where the only way to sell capacity is through a single end user or gatekeeper. So low altitude not only increases network complexity but limits addressability. Second, Fixed Satellite Service (FSS)-band GEOs have regulatory priority, so LEOs need to operate on the basis of non-interference. Therefore, supply-demand impact on pricing becomes more complex and granular in LEOs compared to GEOs.
What ROI on big HTS GEO satellites is expected? Large GEO HTS satellites are still very competitive with LEO constellations in terms of both cost base of capacity and minimum viable capacity pricing. Hughes’s Jupiter-3, Viasat’s ViaSat-3 and Eutelsat’s KONNECT VHTS satellites, while all upcoming boast cost bases of capacity in range of $5 per megabit per second/per month, which is very similar estimates for the most capital efficiency LEO constellations.
“It is clear that profit margins are falling, due in part to the combination of lower pricing and the inclusion of more managed services. Recent long-term, large-scale capacity leases aboard Eutelsat’s KONNECT VHTS to Orange in France and TIM in Italy, totaling nearly 100 gigabits per second of capacity are estimated to carry pricing levels in range of $40 to $60 per megabits per second/per month, which is likely to be very competitive with expected LEO constellation pricing. As such, certain big GEO satellites can definitely generate positive ROI, although not all operators can be sure to find enough demand in certain regions for such large-scale satellites,” says Euroconsult’s Prokosh.
SES’s Ruszkowski sees the value of non-HTS wide-beam capacity services holding steady in the markets where it remains relevant, including where customers have limited throughput requirements and are willing to take on the burden and risk of assembling solutions themselves.
“HTS satellites hold the promise of a different value proposition, bringing greater throughput and flexibility to bear. For SES, the real value of GEO, particularly HTS, comes when it is combined with MEO. This combination is increasingly the key to bringing greater value to the customer and enjoying healthy economics,” he says.
In a data-addicted world, COVID has pushed demand for high-speed broadband even higher. As satellite continues to make its case as a key enabler of broadband connectivity, especially in rural areas where terrestrial broadband networks are not efficient, LEO announcements offer some promise that fulfilling this insatiable demand may just be possible. LEO will help with the world’s coverage gap crisis, taking broadband access to the areas where fixed broadband, whether via DSL, cable or fiber optic, along with mobile networks cease to exist. While this is wonderful news for those who can afford fast internet everywhere, LEO will disrupt the broadband access market. Its lower latency will likely cause some pains for the players using GEO satellites to serve broadband users.
“The disruption will lead to improved user experiences and more efficient usage of specific applications,” explains Khin Sandi Lynn, industry analyst at tech market advisory firm ABI Research. “LEO satellites, with latency of 30-50 milliseconds compared to 600 milliseconds in GEO, enable the use of latency sensitive applications, such as live video streaming and online gaming. Applications such as telehealth and telemedicine, which require interactive video, can now be used more efficiently with LEO.”
Initially, LEO’s impact will likely be felt most in the rural areas of North America, mainly through Starlink, which has committed to provide broadband service to more than 600,000 homes and businesses in the U.S. since it won $885.5 million in the first phase of the Federal Communications Commission’s (FCC) Rural Digital Opportunity Fund (RDOF). While still in beta operation, Starlink is providing a 100 megabits per second package for $100 per month, with hardware costs of $500 – another reason ABI Research sees Starlink having a bigger impact in North America than in emerging markets.
“Starlink is planning to expand service in Europe and emerging markets. However, considering the cost of hardware and the monthly fee, it is likely to have more impact in developed markets,” says Lynn.
In developed markets, LEO services’ addressable market is limited by the reach of terrestrial systems, as fixed broadband services have reached more than 80 percent of households. The majority of households without fixed broadband services can get Fixed Wireless Access (FWA) broadband services via LTE, 5G mobile networks or local FWA operators.
“As 5G deployments expand, the competition from FWA services will intensify, since 5G can support high speeds and low latency. Therefore, the ability to provide higher bandwidth and competitive pricing will be required to gain mass adoption,” explains Lynn.
While fixed broadband penetration is relatively low in emerging markets, the key challenge for LEO is cost as consumers are price sensitive. Broadband’s Average Revenue Per User (ARPU) is usually around $20-$30 per month. LEO broadband services will need to provide low-cost packages, hardware, and different business models to gain adoption. VS