The turning point?

Posted in Aeronautical, Financials, Inmarsat, Intelsat, Operators, SES, VSAT at 8:42 am by timfarrar

Earlier this year I warned that the satellite industry seemed to be stepping off the precipice, as a Ku HTS price war culminated in the very attractive pricing (of around $1000 per MHz per month) that Gogo and Panasonic secured from SES in February 2016. What has followed over the last six months or so has been rampant negativity in the press about overcapacity and price crashes. Even NSR, who in March were noting the “generally slow and stable downward pressure on pricing up to 2016″ are now asserting that “satellite capacity pricing [is] in a prolonged freefall for most applications.”

In reality, the last six months have seen the first signs of stabilization in satellite capacity pricing, as SES and Intelsat pull back somewhat from their price war which was the proximate cause of the dramatic price declines seen from late 2014 through early 2016. In particular, SES predicted a “strong growth outlook” at its June investor day and presented a slide at the GCA Summit earlier that month showing three Ka-band HTS GEO satellites for global coverage. One of the ways SES was expected to deliver on this strategy was by “focusing on value-added, end-to-end solutions” in each of its verticals.

However, since then, SES appears to have dramatically reduced its exposure to Ka-band GEO capacity, putting virtually all the risk of the single SES-17 Ka-band satellite onto Thales, and may also have pulled back on its plans to provide “end-to-end solutions” for mobility, letting Speedcast win the bidding for Harris Caprock and indicating that it will not go direct to airlines in the inflight connectivity market. Intelsat has also won a couple of key contracts for Epic, with TIM Brazil and Global Eagle.

Its therefore interesting to see the contrast between Gogo’s assertion at its investor day on September 29 that there will be an “ample and diverse supply” of Ku-band capacity (totaling nearly 1Tbps globally by 2019) with Inmarsat’s position a week later that “Ku-band supply could be limited,” especially in North America.

At this point in time, it looks like the “unexpected softness” of satellite orders in 2016, caused by fears about a price crash will mean very few new C- or Ku-band GEO satellites being ordered in the near future without an anchor tenant. Panasonic may well follow Thales’ lead with its XTS satellites, but that won’t result in any (let alone “ample”) incremental supply for Gogo. And Gogo is not in a position to order a dedicated Ku-band satellite of its own to provide more capacity on top of its existing commitments.

Operators may well be justified in fearing dramatic erosion in pricing from new Ka-band satellites with hundreds of Gbps of capacity, but outside North America, there simply won’t be any of that capacity available before 2020. As a result, stabilization of pricing (albeit at considerably lower levels than those in historic contracts, many of which still need to be rolled over) seems plausible for 2017-18.

Instead I’m much more worried about whether substantial growth in revenue really will be stimulated by these lower prices. TIM Brazil (which is one of Intelsat’s biggest customers for cellular backhaul) is a good example, with their move to Epic Ku-band capacity giving them three times the capacity (partly from improved bps/Hz efficiency) compared to their previous C-band solution, with no increase in spending. And at least part of the fall in enterprise revenues seen by Intelsat and SES in the last two years appears to be due to less bandwidth being used by these customers, rather than simply price declines on existing (let alone incremental) capacity.

Some of that reduction in capacity utilization may be due to more efficient modems, which could be a one-off effect, but I believe that the question of demand elasticity (in the face of competition from terrestrial alternatives) is going to be much more important challenge for the satellite market in 2017 and 2018 than a supposed “freefall” in bandwidth prices. If satellite operators can identify untapped opportunities where they can be competitive with terrestrial, as O3b has done in various Pacific islands, or where there is substantial demand elasticity as passengers create on commercial airplanes and cruise ships, then revenue growth will result.

But if spend is relatively inelastic, as seems plausible for many enterprise VSAT (and perhaps some government) customers, then terrestrial competition may lead to continued market erosion. The biggest wild card is cellular backhaul: huge amounts of capacity are needed as mobile operators move from 2G to 3G to 4G in developing countries, so if these terrestrial players commit to satellite, there could be substantial revenue upside. On the other hand, if mobile operators focus on microwave as their backhaul solution of choice in Africa and Asia, it will be much more difficult to achieve significant growth in the satellite business.

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