03.10.17

Eccentric orbits…

Posted in Broadband, Financials, Intelsat, Iridium, Operators, Regulatory, Services, SES, Spectrum at 3:40 pm by timfarrar

I’m unashamedly stealing the title of the book which chronicles the Iridium bankruptcy, because not only did John Bloom give a talk at this week’s Satellite 2017 conference, but discussion of new LEO satellite systems dominated the conference itself. The proposed merger of OneWeb and Intelsat is only the most visible sign of this return to the 1990s, when Iridium and Globalstar’s satellite phones and Teledesic’s proposed broadband system fascinated both the satellite industry and the wider investing community.

But below the surface there is an even more radical shift going on, as most leading operators are cutting back on their investments in high throughput GEO satellites for data services, and many of them are focused instead on the potential of LEO and MEO systems. Intelsat has already indicated that it is cutting GEO capex, and the merger with OneWeb will mean most of its future capex will be devoted to LEO, in line with Masa Son’s vision of a huge new opportunity for LEO satellites.

However, SES, whose CEO stayed away from the conference, is also hinting at a reallocation of its priorities towards O3b’s MEO system, probably accompanied by a sizeable reduction in overall capex. Telesat is also focused on developing its Ka-band LEO constellation for next generation data services, leaving only Eutelsat (which has already announced that it will cut capex substantially) amongst the Big 4 focusing solely on GEO.

This is deeply worrying for satellite manufacturers, and even the indication by Boeing that GEO demand will “remain soft” at “between 13 and 17 satellites in 2017″ may prove to be overly optimistic. All satellite manufacturers now need to play in the LEO/MEO world, with Thales constructing O3b and Iridium, and Airbus taking the lead role on OneWeb, with SS/L as a major subcontractor.

That leaves Boeing, which is not part of any announced LEO satellite contract, but has its own proposal for a V-band LEO system, which is under consideration at the FCC, along with several rival filings. While Boeing has suggested in the past that it was open to partnerships to develop this concept, most people in the industry are convinced that it already has funding from a potential customer, given the amount of effort that Boeing is putting into developing V-band service rules at the ITU and FCC. Boeing has also indicated to these people that it does not need export credit funding for the project, which supports the idea that this project is backed by a deep pocketed US entity.

There aren’t many possibilities for such a backer, and of the four large technology companies Boeing mentioned two years ago, Google and Facebook have apparently lost interest in satellites (although Google did invest $900M in SpaceX and Facebook tried with Amos-6), and Amazon is pursuing its own efforts in the launch market through Blue Origin. That only leaves Apple as never having discussed publicly its potential interest in space.

This aligns with the chatter I heard from a number of sources at Satellite 2017 that Boeing’s V-band development work is being funded by Apple, which is clearly trying to find the next big thing and has been exploring cars, TVs and other large market opportunities. Its not hard to discern why Apple might want to consider a satellite constellation, when SpaceX came out with a business plan last year that suggested SpaceX alone could generate $30B in revenue from satellite internet by 2025.

Just as in the car market there’s no guarantee that Apple would take this project forward to full deployment, but with SpaceX, SoftBank and now apparently Apple becoming enthusiastic about non-geostationary satellite systems, in addition to most of the main satellite operators, it seems that a dramatic reshaping of industry priorities is underway.

It remains to be seen whether this enthusiasm will last, or whether, like at the end of the 1990s, the pendulum will eventually swing back towards geostationary orbit. However, over the next few years, until we find out whether the ambitions of these visionaries can be realized, non-GEO satellite systems are likely to be the most important contributor to driving satellite communications technology forward.

02.17.17

Cold feet?

Posted in Aeronautical, Broadband, Echostar, Eutelsat, Operators, Services, SES, ViaSat at 10:47 am by timfarrar

As we get closer to Satellite 2017, where major new deals and partnerships are often announced, it looks like a number of players may be getting cold feet about their future satellite plans. This may be partly attributable to fears that OneWeb will contribute to a eventual glut of capacity, now it has secured SoftBank as a lead investor and raised another $1.2B. Even though capacity pricing may have stabilized somewhat for now, its certainly the case that a satellite ordered now is likely to enter the market at a point when pricing is set to decline much further.

We’ve already seen a delay in Panasonic’s XTS satellite order, which was supposed to happen before the end of 2016. Ironically enough, Leo Mondale of Inmarsat said at the Capital Markets Day last October that he believed “Panasonic in Yokohama are a little wary of getting into the satellite business” and in the wake of the recent FCPA probe, Panasonic Avionics now has a new Japanese CEO.

Moreover, one way of viewing the recent announcement that Eutelsat will take its ViaSat JV forward (and include aero mobility, which was not part of the original agreement) is that Eutelsat no longer believes it will strike a deal to operate Panasonic’s XTS satellites. That’s a much better explanation than bizarre speculation that ViaSat is going to buy Eutelsat, especially when ViaSat is still struggling to fund its third satellite for Asia and is openly hinting that it will need US government contracts to close the business case. Eutelsat also seems to be cutting back elsewhere, with some speculation that the Ka-band broadband satellite previously ordered for Africa may now be repurposed for other (non-broadband) applications.

But the biggest news appears to be a pull back on SES’s part from the long rumored global Ka-band GEO system that I noted last summer. SES announced only a single satellite (SES-17) for the Americas in partnership with Thales last September, but had plans for two additional satellites, and it seemed increasingly likely that a partnership with EchoStar would be announced soon to fund this development. Now it seems that effort is on hold, leaving EchoStar without an obvious way forward to achieving global coverage (as it seems EchoStar considered but rejected the idea of buying Inmarsat last fall).

There are also other more speculative projects that need to show some progress to remain credible. When it was disclosed by the WSJ last month, SpaceX’s business plan for its satellite internet service was widely dismissed as laughably unrealistic. However, I believe that in fact this is not the business plan that corresponds to the current system design, and instead SpaceX will be seeking a large amount of US government money to fund its constellation. Compared to SpaceX and OneWeb, Telesat’s constellation ambitions have largely been ignored by commentators, despite Telesat’s priority claim to the Ka-band NGSO spectrum band. So Telesat therefore also faces pressure to secure external investors in the near term so that it can keep pace with OneWeb.

Now the question is whether caution amongst major existing players will make it harder for new entrants to move forward. Will it signal to investors that they should be cautious about investing in any satellite businesses? Or will it be perceived that new opportunities will face less competition from existing operators? The NewSpace community certainly seems to still be living in a bubble, despite the deeply negative implications of Google’s decision to abandon its efforts in satellite and hand over Terra Bella to Planet (not least because a sale to Google or other internet companies was seen as the most plausible exit for VC investors). So I look forward to seeing how much reality intrudes on the discussions at Satellite 2017.

11.02.16

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.

05.14.16

Stepping off the precipice…

Posted in Aeronautical, Eutelsat, Financials, Inmarsat, Intelsat, Operators, Services, SES, VSAT at 1:49 pm by timfarrar

Back in March I noted that the Satellite 2016 industry conference “felt like 2000, as attendees peer over the edge of the precipice.” Yesterday, it seems the industry stepped off into the void, as Eutelsat’s profit warning proved to be the catalyst for a wholesale re-evaluation of the outlook for FSS/HTS data services.

Everyone is worrying about capacity pricing, where according to Eutelsat’s CEO “the outlook for data delivery is bad.” Just how bad hasn’t been obvious to many observers, not least Northern Sky Research, who in March dismissed suggestions that the sky is falling and instead claimed that so far there has only been “generally slow and stable downward pressure on pricing up to 2016″ though these drops were “expected to continue to gather steam.” Moody’s struck a similar positive note about European satellite operators in January, suggesting that “A Rebound in Revenue Growth, Stable Margins and Plateauing Capex to Support Credit Quality in 2016.”

In reality, a look at some of the largest deals shows just how much of a price decline has already taken place. Traditional wide beam transponders have been priced at $3000-$4000 per MHz per month, which made Intelsat’s offer to IS-29 anchor tenants in 2012 of about $2000 per MHz per month look like a bargain (Intelsat said it leased 20% of the capacity, i.e. about 2GHz, for $50M p.a.).

However, in February 2016, Gogo struck a deal with SES for “several GHz of both widebeam and spotbeam capacity in total” on its new SES-14 and 15 HTS satellites, followed by another agreement with Intelsat and OneWeb in early March. Gogo’s latest 10-Q has now revealed the impact of those agreements which represent commitments “to purchase transponder and teleport satellite services totaling approximately $29.5 million in 2016 (April 1 through December 31), $41.9 million in 2017, $40.4 million in 2018, $45.3 million in 2019, $58.6 million in 2020 and $309.2 million thereafter.”

Although the split between Intelsat and SES is not given, its a fairly good bet that they will be paid roughly equal amounts in 2020 and beyond. This is consistent with Intelsat renewing and extending its existing contract with more capacity being delivered at about the same revenue level (Intelsat claimed last September it had an 73% share of the aeronautical satellite communications market and Gogo had $37M of lease obligations in 2016 before these deals were struck) and also consistent with the Intelsat deal running through Dec 31, 2023 (as stated in the 8-K) and the SES deal running for “ten years from the applicable commencement of service date” for the SES-14/15 satellites (implying 7-8 years of the respective terms remaining in Jan 2021).

So if SES is leasing at least 2GHz of bandwidth to Gogo, which is the minimum amount consistent with the use of the word “several”, then the price of this capacity is no more than ~$1200 per MHz per month, and very plausibly the price may be as low as $1000 per MHz per month if Gogo is leasing say 2.5GHz. Given that the deal also represents a combination of wide beam and spot beam capacity, it certainly seems that SES’s HTS spot beam capacity is now being leased in (very!) large quantities for as little as $1000 per MHz per month, about 50% less than Intelsat’s original IS-29 deals.

That makes it pretty clear why Eutelsat has decided to step away from the HTS Ku table and limit its HTS investment “to providing broadband access to consumers and small businesses”, presumably via its European and African Ka-band satellites (and its partnership with ViaSat). Back in March I also suggested we could be in for a re-run of 2001 with “a sharp fall in satellite orders” and Eutelsat has confirmed there will now be a “downward review of our capital expenditures”.

So what comes next? Intelsat has just ordered a 9-series replacement satellite (a necessary step given that a large part of its C-band capacity reaches end of life in the next few years). But how much more Ku-band capacity is needed in the near term, given the looming threat of further price pressures from new Ka-band satellites like ViaSat-3? After all, despite large contracts with Gogo and Panasonic, there’s still a way to go just to fill up the HTS satellites that Intelsat and SES already have on order. And can Intelsat afford to match or beat SES’s price levels and still generate an adequate return on capital from the Epic satellites?

Most importantly, how much repricing is still to take place for existing Ku-band data services, and what will C-band users do if their C-band capacity becomes significantly more expensive than Ku (let alone Ka)? In addition, though Inmarsat believes (correctly) that its a very different company from Eutelsat, it has far more exposure to the data services business, and Inmarsat will now have to reconsider its pricing (and capacity provisioning) for GX services, as this low cost Ku HTS capacity impacts the aeronautical and maritime markets.