U.K. Analysts See Tipping Points for Incumbents and Disruptors

The satellite business is at a double fulcrum, U.K. market analysts say — both incumbents and would-be disruptors face their own moments of truth in the next few years, and neither has a clear path to success.

For the European incumbents, SES and Eutelsat, the Direct-to-Home (DTH) video market, long the satellite industry’s cash cow, will struggle to get back to positive revenue growth globally, and only very slowly. At the same time, both companies have to deliver on the golden age of high bandwidth they promised investors a few years ago when they sunk big money into a new generation of technology.

“The satellite industry in 2020 has now launched more or less all of its first generation of High Throughput Satellites,” explains Jeffries analyst Giles Thorne. “They are in orbit, they are sold, they are generating revenue. ... So we are at a point where you would expect to see the great promise of [those investments in] 2016-17 really coming through.”

But questions surround new entrants into the market, Thorne says. The new small sat, Low-Earth Orbit (LEO) constellations “look very exciting. But they are yet to be proven technically, commercially and financially viable.” That, he adds, is why “At this point, the only people funding these LEO constellations are maverick visionaries, who have a lot of money — people like Elon Musk and Jeff Bezos and the Softbank Vison Fund."

“It might be that these LEO constellations are just a big science project that won’t mean anything,” Thorne warns.

Paul Sidney, an analyst with Credit Suisse, is also “very skeptical” about the new LEO constellations. He points to the example of Iridium, the LEO pioneer that first developed a plan for a next generation LEO multiple satellite constellation as far back as the late ‘90s and completed its final plan in 2010.

Iridium CEO Matt Desch publicly painted a portrait of the company’s struggles to launch its new generation constellation, Iridium Next, Sidney said.

“It took them the best part of 10 years, the best part of $3 billion, getting the financing in place, successfully executing on eight or nine successful launches, just to get 76 satellites in the Next constellation up there and working. … Desch joked at SATELLITE 2019 that he and his company needed monumental effort and a large slice of luck for the Iridium Next stars to align,” Sidney recalls.

And the constellations SpaceX and OneWeb are putting up are orders of magnitude larger than that, he points out. “Launch is very safe, but it’s not 100%. You can get delays ... every additional launch adds risks to your timeline.”

Sidney predicts that small satellite constellations will not be delivering global connectivity for at least four or five years, and will then face steep competition from market incumbents.

“Are you going to compete with SES’s O3B for the cruise market, or with Inmarsat for the maritime market ... or with Iridium for its differentiated global connectivity? That would be hard to do now, let alone in four or five years,” Sidney says.

He argues that existing Geostationary (GEO) and Medium-Earth Orbit (MEO) satellite constellations are delivering good connectivity to end users, and smallsat companies are launching capacity “without necessarily having the end users that want that capacity over and above what is already available.”

But that ignores a key feature of the new constellations, says Sarah Simon, an analyst with Berenberg, who points out that these businesses are funded by deep-pocketed backers who may not want or need a quick return on their investment. And that means, Simon says, they could pose a serious threat to the incumbents "as long as they keep getting that backing. They don’t need to be making a profit."

Sidney says LEO operators have a long list of issues to address, including ethical ones around the disposal of satellites falling out of orbit; questions about whether the thousands-strong constellations will make space too crowded; and about light pollution.

The would-be disruptors may be engaged in a high-stakes gamble, but if it pays off the incumbents don’t look well positioned to fight back.

“The rhetoric and the body language suggest the incumbents don't see LEO constellations as a threat,” Thorne says. “We have yet to see any kind of reactive or proactive response to any potential threat from LEO. ... They really kind of dismiss it."

Incumbents have non-GEO plays, like SES’s O3B MEO constellation that covers the tropics, and Eutelsat’s LEO constellation. But Eutelsat is aiming at an Internet of Things (IoT) network.

“That’s very very different from what the [market entrants’ LEO constellations] are trying to do” notes Thorne, who says that out of all the satellite operators, only Telesat has a LEO plan similar to OneWeb and SpaceX.

Nor does the industry’s history provide any confidence about its ability to weather approaching storms, Thorne warns. Despite the wise investment in new High Throughput Satellite (HTS) technology, “The satellite industry has not showered itself in glory … it has experienced repeated execution issues, which is analyst-speak meaning they didn't do a very good job of getting the satellites up and running, getting an effective strategy for selling capacity, and for converting that capacity into dollars of revenue.” Thorne calls the sector a “pretty hairy place” for investors.

In addition, Simon says new HTS supply a “crazy amount” of bandwidth, but the key differentiator in the market is likely to be price, which is bad news for operators. “It’s going to vary from operator to operator, obviously, but globally is everyone going to make the return they expected from HTS? No,” Simon says.

So, what of the video market — long a revenue mainstay for the industry, but now a drag on growth? The outlook is mixed, according to Credit Suisse’s Sidney.

“With video, I think there is respite on the horizon. … Direct-to-Home linear delivery of TV via satellite is being challenged globally by alternative ways of viewing TV content,” Sidney says, pointing out Over-the-Top (OTT) competitors in the U.S. like Netflix and Hulu, who offer high quality video much more cheaply than the prices consumers there pay for pay TV.

In emerging markets like Russia and Turkey, Sidney says, the incumbents face similar challenges, “It’s just that there is less pressure in those countries because the terrestrial networks, both wireline and mobile, aren’t really able to deliver, either in terms of the bandwidth or the geographical coverage” to support OTT.

“DTH remains a hugely efficient way of providing multi-channel TV over very large areas with low population density, like Russia. But these pressures, now that we’ve rolled out 4G over so much of the world, mean we will likely get stable to low-single-digit video revenue declines globally going forward rather than the slight growth you might still expect from an emerging market.”

Sidney predicts video revenues for the bigger satellite operators will become less in 2020, and the drag from the declining U.S. market will lessen as it shrinks.

“SES now say the U.S. market is less than 10% of their video revenues, so even though it will continue to be a very difficult market, the impact is diminishing,” Sidney notes. “We see Europe as more or less stable in revenue terms, although Eutelsat does face a major renegotiation with Sky Italia, one of its biggest European customers.”

Berenberg’s Simon is more pessimistic on video. “Video will be a cash cow for quite a while, but I don’t think we’ll see a return to growth. There’s so much competition and increasingly I think consumers will be moving straight to OTT,” which she says is one of the threats posed by the new smallsat LEO constellations. Simon predicts that if LEO and 5G make real high-speed broadband a global reality, then consumers will leapfrog DTH and move directly to OTT services.

Incumbents and would-be disruptors are both facing a moment of truth, Thorne says.

“It might be that traditional incumbents can coexist with these disruptive new market entrant small satellite operators with their Low-Earth Orbit constellations. It might be that there is enough latent demand out there that they can just coexist if not be complementary to each other and you might see partnerships.” Thorne argues. “I for one don’t have a good answer to what’s … going to happen, but it does make it a very interesting time to be an analyst.” VS