The history of the MSS industry, like most other parts of the telecom and technology sectors, has revolved around a theme of “faster, better, cheaper” as technological advances have dramatically improved satellite throughput and enabled significant reductions in the price per minute and per bit of voice and data communications. However, it seems that at least in L-band, we may have reached the limit of economically justifiable technological advances, and the future for the traditional MSS market could now be one of slower development cycles, simpler satellite systems and more expensive services.
Some of those technological dead ends are obvious, like the huge satellite antennas built for LightSquared and TerreStar, which did nothing whatsoever to make their satellite services more viable. However, more importantly, Inmarsat sets the tone for the entire MSS sector and could now make it much clearer that we have reached the end of the historical development pattern for this industry.
We’ve already seen Inmarsat pushing up prices this year, and with its new focus on the Ka-band Global Xpress system, Inmarsat has also indicated that it expects to delay capital expenditures on a next generation L-band (I6) satellite system and that the system itself will be cheaper and simpler than the I4 satellites. After feeling a backlash from distributors and customers, Inmarsat has been at pains to suggest that this year’s price rises represented a one-off adjustment, rather than the start of regular yearly price rises. Nevertheless, Inmarsat has seen little if any impact in terms of maritime customer losses because Inmarsat holds such a dominant position in the market and Inmarsat’s 2012 wholesale revenues are likely to be boosted by at least 2%-3% as a result of the price rises.
Looking forward, the outlook in most parts of the MSS market is fairly depressed, with M2M services providing the main source of growth, and overall wholesale L-band revenues are only likely to grow by perhaps 4% p.a. in the next few years. Although we’ll find our more specifics on Tuesday about Inmarsat’s expectations for Global Xpress, it also remains hard to see how GX will meet the original target of $500M in incremental wholesale revenues within 5 years, suggesting that Inmarsat’s move to Ka-band will not move the needle on overall MSS market growth very far. Reasons for this include the apparent lack of military Ka-band frequencies (which were supposed to be secured by Boeing and would be needed to allow GX to operate as a seamless supplement to WGS), the fact that XpressLink customers are being given the option but not the obligation to upgrade to GX when it is launched and, most importantly, the threat posed by Intelsat’s new Epic satellites, which have secured some key anchor customers (Panasonic, MTN and Harris Caprock) and caused many distributors and end customers to reconsider the “inevitability” of a move to Ka-band.
As a result, it seems there is now a fairly clear case for Inmarsat (as the price leader in the MSS sector) to push through regular annual price rises on the 50% or so of its wholesale L-band revenue base that is least likely to move to alternative solutions and has the lowest price elasticity. This would mean price rises for low and mid range maritime customers plus many land customers, while leaving aeronautical and high end maritime customers (who are more at risk from VSAT competition) largely untouched. Today there is an essentially flat outlook for L-band revenues, as modest growth in M2M and handheld is being offset by the migration of high end maritime and aeronautical customers to XpressLink (and other VSAT solutions), together with reductions in defense spending/event revenues. However, a price rise of 5%-10% p.a. would potentially allow Inmarsat to grow its L-band business at 2%-4% p.a. for the next several years.
Other MSS operators would also benefit through (modest) gains in market share and more pricing freedom, and the overall MSS sector could perhaps then return to something closer to the 7% p.a. revenue growth rate seen before the downturn of the last couple of years. Even distributors, who have seen their margins pressured over the last decade, would appreciate some ability to increase their overall revenues (given that demand elasticity is quite low), if margins can be sustained or even increased.
However, in order to execute such a change in strategy, Inmarsat would also need to repair its relationship with independent distributors, which has taken a significant knock from Inmarsat’s acquisitions of Segovia and Ship Equip and its decision not to pass on some wholesale price increases through its own direct distribution channels. There have also been several instances where Inmarsat has made its own bids for key contracts which massively undercut the bids from the incumbent independent distributors providing the same services. Indeed it often appears that Inmarsat has the explicit intention of driving its leading independent distributor, Vizada (now owned by Astrium Services) into the arms of other satellite operators such as Intelsat and Iridium. It seems to me that only with the cooperation of independent distributors can Inmarsat present a united front to end customers, and explain that price rises are necessary for a healthy market, as opposed to having their assertions undermined not only by (the expected) sniping from competitors, but by distributor dissatisfaction (and potential defections due to increased margin pressures) as well.
Is Inmarsat willing to change this dynamic and restrain its direct distribution arm, or will it resort to a “bunker mentality” and either miss the chance to boost revenues or push further price rises onto its independent distributors, amidst a rising tide of opposition? Time will tell, but its perhaps worth remembering that the full title of the book was “The End of History and the Last Man”, the last man being someone who “is tired of life, takes no risks, and seeks only comfort and security“.