What Happens Next in the Smallsat Revolution?

An estimated 18,500 smallsats will launch between 2022 to 2031, yet the smallsat market presents a growing number of challenges such as limited market addressability, difficult profitability, oversupply, and concentration of the commercial market by a handful of established players.

In Euroconsult’s eighth edition of the report, Prospects for the Small Satellite Market, the firm anticipates that about 18,500 smallsats, measured at less than 500 kilograms will be launched from 2022 to 2031. This represents about 365 tons per year, i.e., on average, one ton launched per day over the next 10 years.

Despite challenges, smallsats still represent a significant capability building opportunity for new entrants in the space sector, and the war in Ukraine has put the spotlight on the value proposition enabled by satcom and Earth observation smallsat constellations, showcasing their merits around the world. A growing number of governments and commercial ventures alike are ramping up their investments in small satellite systems and services, as well as manufacturing and launch capacities.

Demand addressability is a consideration. For example, due to geopolitical considerations, U.S.-built satellites (55 percent of the future market in number of satellites) will not launch on Chinese launch vehicles, and vice versa.

As China represents a significant share of the market (17 percent of the future market in mass), this adds to the market which cannot be addressed by non-Chinese manufacturing and launch providers, in addition to the many constellations (81 percent of future smallsats to be part of a constellation) that are manufactured in-house and therefore not part of the addressable market.

This is even more true for satellite manufacturing, where the demand is lower than it is for launch services, as more countries own a domestic smallsat manufacturing capability, rather than have an autonomous launch capability. This strengthens regional preference and the contracting of local industries when they exist. Regional demand retention rates will only increase in the future as more emerging countries develop their own manufacturing or launch capabilities, further limiting the addressable markets of many players.

As another example, smallsats in the less than 10 kilogram mass category, such as 3U cubesats, will only account for a mere 2 percent of future total market value over 2022 to 2031, despite accounting for 18 percent of smallsats to be launched. This is because of their low mass and thus manufacturing and launch value compared to larger smallsats. Therefore, it is important to go beyond raw “satellites to be launched” numbers and dig into the market breakdown.

Challenging Profitability

Following the wave of special purpose acquisition company (SPAC) listings and IPOs that have occurred over the past few years, many smallsat players are now required to file quarterly and annual reports. These reports publicly confirm previous warnings that revenue generation and profitability were challenged in a highly competitive and low-margin business environment that is aggravated by high inflation and supply chain issues linked to the pandemic and war in Ukraine. Many emerging launch providers now seek to diversify into subsystems and satellite manufacturing, as well as into operations and downstream services, which have proven to be higher margin businesses.

Yet public companies are only the tip of the iceberg as many private entities and smallsat flagships like Starlink and OneWeb also have yet to be profitable. Securing government agencies as anchor customers is and will remain key to the New Space sector. Long-term contracts like the National Reconnaissance Office’s (NRO) recent 10-year deals with Maxar, Planet, and BlackSky give visibility to investors.

Inflation

A typical recent example of the impact of inflation is not in the smallsat sector. Telesat reduced the scope of its Lightspeed constellation from 298 to 198 satellites, despite an unchanged CapEx. This will also apply to smallsat constellations which may have to reduce their ambition due to the growing costs of semiconductors, raw materials such as metals or propellants, as well as supply chain issues. While well-funded and established/government players like Amazon and China will likely be less affected than others, emerging players that have yet to raise significant amounts of capital will likely face a difficult situation, leading to smaller constellations, canceled projects, as well as consolidation between players.

The Quest for Performance

Despite miniaturization and growth in the number of nanosatellites, the quest for performance and the addition of sensors, thrusters, and hardware results in steady growth in average smallsat mass. Following initial demonstration missions with cubesats, many smallsat operators move to larger smallsats as they seek to improve their value proposition via increased performance or a longer lifetime.

For example, Starlink satellites have grown in mass with the addition of optical laser links. Elon Musk has mentioned a mass of 1,250 kilograms for the next-generation of Starlink, aiming for better economics and to make the most of Starship’s launch capacity and diameter. Similarly, following its historic contracts with multiple launch providers, we now anticipate Amazon's Kuiper satellites to be above 500 kilograms — out of the smallsat realm. This potentially means less smallsats to be launched towards the end of the decade and a peak to be reached in the next few years, as Starlink 2G and Kuiper are non-smallsats.

War in Ukraine Vindicates Smallsat Constellations

While the war has severe consequences on players that have part of their supply chains in Russia or Ukraine, like OneWeb with Soyuz and Fakel, it has demonstrated the value of smallsat applications, enabling commercial operators to showcase their capabilities and the merits of their constellations. Resiliency and responsiveness are key in the conflict, as SpaceX demonstrated by rapidly shipping Starlink terminals to Ukrainian armed forces and NGOs. In EO, demand for images with a focus on synthetic aperture radar (SAR), due to cloud coverage, has drastically increased since the beginning of the conflict. Satellite images have also been used by mainstream media to gather information on civilian casualties and potential war crimes. Consequently, a growing number of government agencies are considering investing in their own smallsat systems or dedicating a budget to the commercial procurement of third-party smallsat-based services, supporting growth of the sector.

Subsystem Level

Euroconsult’s report only considers the addressability of the entire spacecraft without considering the market shares at the subsystem level. The reality is more complex. While satellites are always launched as a whole, the manufacturing addressability model only considers the addressability of entire satellites (considered to be manufactured by their final integrator), when in reality subsystems and components can be purchased from third-party vendors. Therefore, some satellites are in reality addressable on a component/subsystem-level, as equipment manufacturers (thrusters, reaction wheels or antennas for example) could sell subsystems, even in some cases to vertically-integrated manufacturers, and thus acquire some market shares. VS

Alexandre Najjar is a senior consultant for Euroconsult. He focuses on launch vehicle and satellite market studies, smallsats and constellations, and the manufacturing industry.