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.
Today’s announcement that SoftBank is investing $1.7B in Intelsat as part of a merger between Intelsat and OneWeb is eerily reminiscent of SoftBank’s investment in Sprint and subsequent purchase of Clearwire back in 2012-13. Then the motivation was acquisition of large amounts of 2.5GHz spectrum to be used with innovative small cells to revolutionize the cellular market. Today the motivation is acquisition of large amounts of NGSO spectrum to be used with innovative small satellites to revolutionize the satellite market.
There are certainly many synergies between Intelsat and OneWeb: Intelsat needs a next generation plan beyond Epic, to lower the cost of its capacity, and hamstrung by debt, it could not have afforded to build a new system on its own. OneWeb needs distribution and market access, as well as interim capacity so that it does not have to wait until the LEO system is fully deployed. So this deal makes a lot of sense, if you believe, as Masa clearly does, that new constellations will dramatically boost the future prospects for the satellite industry. On the other hand, if it doesn’t work out, would SoftBank get to the point where it is prepared to sell the assets and not even mention them in its vision of the future?
However, another potential parallel is that back in 2013, SoftBank faced a lengthy challenge from DISH, which mounted a bid for Clearwire and later made an offer for all of Sprint, and ultimately forced Masa to pay far more for Clearwire than he had hoped. Now EchoStar, which had made a $50M investment in OneWeb (then WorldVu) back in 2015, but has been far less prominently involved in OneWeb’s development efforts compared to Qualcomm (with DISH even objecting to OneWeb’s use of the MVDDS spectrum), has apparently seen its mooted partnership with SES put on hold.
Clearly Charlie Ergen needs to find a way forward for EchoStar to compete in the satellite broadband market on a global basis, building on the successful launch (and market lead) of Jupiter-2. Some analysts have been reiterating that this could involve a bid for Inmarsat, as I mentioned last summer, but the time for that has probably passed. So does Ergen use this development to revive the mooted SES deal, because SES will now need to compete more aggressively with Intelsat? Or does he want to be more actively engaged with OneWeb and get a larger slice of that development effort (and potentially use its capacity in the longer term)?
Either way it would not be surprising if DISH or EchoStar already holds some of Intelsat’s debt, and Ergen could even seek to maximize his leverage by acquiring a larger position in the company. Does Masa want a cooperative relationship with Ergen going forward (perhaps even with a view to collaboration between DISH and Sprint in the wireless sector), or is he still upset over what happened in 2013? And returning to the theme of Groundhog Day, will this movie end with the two protagonists eventually falling in love, or will we see a repeat of 2013, with yet another battle between Masa and Charlie?
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.
Probably the most surprising thing about today’s announcement that Softbank is investing $1B in OneWeb as part of a $1.2B funding round, is the lack of a spoiler announcement from SpaceX. That’s happened in the past on both of the two occasions when OneWeb made a major announcement, in January 2015 (when OneWeb announced its initial agreements with Qualcomm and Virgin) and in June 2015 (when OneWeb announced its initial $500M equity round).
In fact one of the more important fights that is going on behind the scenes is related to regulatory priority in terms of ITU filings, where SpaceX is some way behind. OneWeb is acknowledged to be have the first filing for an NGSO Ku-band system, but also needs access to the Ka-band for its gateway links. That led Telesat to request that the FCC deny OneWeb’s petition for a US licenses, based on “Canadian ITU filings associated with Telesat’s Ka-band NGSO system [that] date back to 2012 and January 6, 2015″ whereas “the earliest ITU filing date priority for OneWeb is January 18, 2015.” LeoSat also claimed that it had priority over OneWeb in November 2016, based on “French ITU filings for LeoSat’s Ka-band MCSAT-2 LEO-2 network [that] date back to November 25, 2014.”
However, OneWeb now appears to have attempted something of an end run around these objections, acquiring rights to the French MCSAT LEO with an ITU advance publication date of April 2, 2013 network from Thales Alenia Space. That’s particularly odd because LeoSat, which states specifically in its FCC application that it “will deploy the LeoSat System in conjunction with Thales Alenia Space,” might now find TAS’s own filings being used against it.
UPDATE (12/20): I’m told that the relevant ITU coordination dates for the different Ka-band NGSO proposals are as follows:
Telesat (Comstellation): December 20, 2012
LeoSat (MCSAT2 LEO2): November 25, 2014
OneWeb’s newly acquired MCSAT LEO filing: December 3, 2014
SpaceX: December 27, 2014
OneWeb’s original Ka-band filing: January 18, 2015.
That would imply that OneWeb has now jumped ahead of SpaceX at the ITU, but remains behind Telesat and LeoSat, although I’m sure there will be many arguments to come.
All this fighting to be first in line at the ITU will also have to take into account the FCC’s attempt to clarify the rules for new NGSO systems in an NPRM released on Thursday, December 15. The FCC’s rules state that NGSO systems should share spectrum through the “avoidance of in-line interference events” and the NPRM proposed new language in an attempt to make this more explicit. However, this language is far from clear about whether the sharing of spectrum is required on a global basis or just in the US, specifically the key paragraph in the newly proposed §25.261 states:
(a) Scope. This section applies to NGSO FSS satellite systems that communicate with earth stations with directional antennas and that operate under a Commission license or grant of U.S. market access under this part in the 10.7-12.7 GHz (space-to-Earth), 12.75-13.25 GHz (Earth-to-space), 13.75-14.5 GHz (Earth-to-space), 17.8-18.6 GHz (space-to-Earth), 18.8-19.4 GHz (space-to-Earth), 19.6-20.2 GHz (space-to-Earth), 27.5-29.1 GHz (Earth-to-space), or 29.3-30 GHz (Earth-to-space) bands.
whereas the existing language states:
(a) Applicable NGSO FSS Bands. The coordination procedures in this section apply to non-Federal-Government NGSO FSS
satellite networks operating in the following assigned frequency bands: The 28.6-29.1 GHz or 18.8-19.3 GHz frequency bands.
The pertinent question here, which is left unresolved by the proposed changes shown in the italicized text above, are whether a “satellite network” consists of both an FCC-licensed satellite system and the earth station it is communicating with, and if so whether both of these or just the satellite system itself must “operate under a Commission license or grant of U.S. market access” according the new text. If it is the former, then the new rules will clearly apply only in the US (where the earth station is licensed by the FCC), whereas if it is the latter, then the rules could be taken to imply that any recipient of a satellite system license from the FCC in the current processing round may have to agree to comply with these sharing rules on a global basis.
It therefore seems that regulatory lawyers will have plenty of work for the next year arguing on behalf of their clients. However, OneWeb will have the money to move forward quickly and extend its lead over other NGSO systems, apart from O3b, which is currently building its next batch of 8 satellites. It remains to be seen if other systems will catch-up, but Telesat (which has already ordered two test satellites) is potentially best positioned to be a third player, especially if it can secure Canadian government backing for universal service in the Arctic region.
Then we need to see how the market evolves. Greg Wyler highlighted his ambitions for OneWeb to serve 100M people by 2025 and after the alliance with Softbank, this will most likely be in the form of cellular backhaul from tens or hundreds of thousands of small cells in remote areas, just as Softbank already does at over 6000 cell sites in Japan using IPStar capacity. In contrast, O3b should continue its plans to serve highly concentrated demand hotspots, like remote islands needing connectivity to the outside world and large cruise ships.
Most of the other NGSO proposals, including Telesat and SpaceX, appear to have a fairly similar plan to O3b, with small beams used to serve a select number of demand hotspots. So the question then becomes, how much concentrated demand exists for satellite connectivity? O3b will generate roughly $100M of revenues in 2016 and has a clear path to growth into the $200M-$300M range. But is it a multi-billion dollar opportunity and is there room for one or more additional systems in this niche? And can new systems overtake O3b, given its multi-year lead in this market? Only time will tell, but if OneWeb can maintain its focus on low cost cellular backhaul and gain anchor tenant commitments from Softbank, Bharti Airtel and perhaps others, these competitive dynamics are going to be much more of an issue for O3b.
UPDATED Feb 5, 2017
There’s been a lot of recent news about Chinese investments in satellite companies, including the planned takeover of Spacecom, which is now being renegotiated (and probably abandoned) after the loss of Amos-6 in September’s Falcon 9 failure, and the Global Eagle joint venture for inflight connectivity.
There were also rumors that Avanti could be sold to a Chinese group, which again came to nothing, with Avanti’s existing bondholders ending up having to fund the company instead in December 2016. The latest of these vanishing offers was a purported $200M bid from a Chinese company, China Trends, for Thuraya in mid-January 2017, which Thuraya promptly dismissed, saying it had never had discussions of any kind with China Trends.
Back in July Inmarsat was also reported to have approached Avanti, but then Inmarsat declared it had “no intention to make an offer for Avanti.” I had guessed that Inmarsat appeared to have done some sort of deal with Avanti, when the Artemis L/S/Ka-band satellite was relocated to 123E, into a slot previously used by Inmarsat for the ACeS Garuda-1 L-band satellite (as Avanti’s presentation at an event in October 2016 confirmed).
However, I’m now told that the Indonesian government reclaimed the rights to this slot after Garuda-1 was de-orbited, and is attempting to use the Artemis satellite to improve its own claim to this vacant slot before these rights expire. I also understand that with Artemis almost out of fuel, various parties were very concerned that the relocation would not even work and the Artemis satellite could have been left to drift along the geostationary arc, an outcome which thankfully has been avoided.
The action by the Indonesian government seems to hint at a continued desire to control its own MSS satellite, which could come in the shape of the long rumored purchase of SkyTerra-2 L-band satellite for Indonesian government use, similar to the MEXSAT program in Mexico. If that is the case, then presumably the Indonesians would also need to procure a ground segment, similar to the recent $69M contract secured by EchoStar in Asia (although that deal is for S-band not L-band).
Meanwhile Inmarsat still appears to be hoping to secure a deal to lease the entire payload of the 4th GX satellite to the Chinese government, which was originally expected back in October 2015, when the Chinese president visited Inmarsat’s offices. That contract has still not been signed, apparently because the Chinese side tried to negotiate Inmarsat’s price down after the visit. Although Inmarsat now seems to be hinting to investors that the I5F4 satellite will be launched into the Atlantic Ocean Region for incremental aeronautical capacity, last fall Inmarsat was apparently still very confident that a deal could be completed in the first half of 2017 once the I5F4 satellite was launched.
So it remains to be seen whether Inmarsat will be any more successful than other satellite operators in securing a large deal with China or whether, just like many others, Inmarsat’s deal will vanish into thin air. China has already launched its own Tiantong-1 S-band satellite in August 2016, as part of the same One Belt One Road effort that Inmarsat was hoping to participate in with its GX satellite, and Tiantong-1 has a smartphone which “will retail from around 10,000 yuan ($1,480), with communication fees starting from around 1 yuan a minute — a tenth of the price charged by Inmarsat.” Thus Inmarsat potentially faces growing pressure on its L-band revenues in China, and must hope that it can secure some offsetting growth in Ka-band.
Although there have been plenty of news articles describing the proposed 4000 satellite constellation that SpaceX filed with the FCC last week, to date there has been no analysis of how technically plausible this proposal actually is. That is perhaps unsurprising because the Technical and Legal Narratives included with the submission omit or obscure many of the most salient points needed to analyze the system and determine how realistic the claims made in SpaceX’s Legal Narrative actually are.
In particular, SpaceX claims that it has “designed its system to achieve the following objectives”:
High capacity: Each satellite in the SpaceX System provides aggregate downlink capacity to users ranging from 17 to 23 Gbps, depending on the gain of the user terminal involved. Assuming an average of 20 Gbps, the 1600 satellites in the Initial Deployment would have a total aggregate capacity of 32 Tbps. SpaceX will periodically improve the satellites over the course of the multi-year deployment of the system, which may further increase capacity.
High adaptability: The system leverages phased array technology to dynamically steer a large pool of beams to focus capacity where it is needed. Optical inter-satellite links permit flexible routing of traffic on-orbit. Further, the constellation ensures that frequencies can be reused effectively across different satellites to enhance the flexibility and capacity and robustness of the overall system.
Broadband services: The system will be able to provide broadband service at speeds of up to 1 Gbps per end user. The system’s use of low-Earth orbits will allow it to target latencies of approximately 25-35 ms.
Worldwide coverage: With deployment of the first 800 satellites, the system will be able to provide U.S. and international broadband connectivity; when fully deployed, the system will add capacity and availability at the equator and poles for truly global coverage.
Low cost: SpaceX is designing the overall system from the ground up with cost effectiveness and reliability in mind, from the design and manufacturing of the space and ground-based elements, to the launch and deployment of the system using SpaceX launch services, development of the user terminals, and end-user subscription rates.
Ease of use: SpaceX’s phased-array user antenna design will allow for a low-profile user terminal that is easy to mount and operate on walls or roofs.
What is particularly interesting is that the application says nothing whatsoever about the size of the user terminal that will be needed for the system. One hint that the user terminals are likely to be large and expensive is that SpaceX assures the FCC that “[t]he earth stations used to communicate with the SpaceX System will operate with aperture sizes that enable narrow, highly-directional beams with strong sidelobe suppression”. More importantly, by analyzing the information on the satellite beams given at the end of the Schedule S, it is clear that the supposed user downlink capacity of 17-23Gbps per satellite assumes a very large user terminal antenna diameter, because there are only 8 Ku-band user downlink beams of 250MHz each per satellite, and thus a total of only 2GHz of user downlink spectrum per satellite.
In other words this calculation implies a link efficiency of somewhere between 8.5 and 11.5bps/Hz. For comparison, OneWeb has 4GHz of user downlink spectrum per satellite, and is estimated to achieve a forward link efficiency of 0.55bps/Hz with a 30cm antenna and up to 2.73bps/Hz with a 70cm antenna. Put another way, OneWeb is intending to operate with twice as much forward bandwidth as SpaceX but with only half as much forward capacity per satellite.
That’s because OneWeb is intending to serve small, low cost (and therefore less efficient) terminals suitable for cellular backhaul in developing countries, or for internet access from homes and small businesses in rural areas. In contrast SpaceX’s system appears much more focused on large expensive terminals, similar to those used by O3b, which can cost $100K or more, and are used to connect large cruise ships or even an entire Pacific Island to the internet with hundreds of Mbps of capacity. While this has proved to be a good market for O3b, it is far from clear that this market could generate enough revenue to pay for a $10B SpaceX system. Even then, an assumption that SpaceX could achieve an average downlink efficiency of 10bps/Hz seems rather unrealistic.
SpaceX is able to gain some increased efficiency compared to OneWeb by using tightly focused steered gateway and user beams, which the Technical Narrative indicates will provide service in “a hexagonal cell with a diameter of 45 km” (Technical Annex 1-13). But there are only 8 user downlink beams per satellite, and so the total coverage area for each satellite is extremely limited. A 45km diameter hexagon has an area of 1315 sq km (or 1590 sq km for a 45km circle). Taking the more generous measure of 1590 sq km, over 5000 cells would be needed to cover the 8 million sq km area of the continental US. And SpaceX states (Technical Annex 2-7) that even in a fully deployed constellation, 340 satellites would be visible at an elevation angle of at least 40 degrees. So this implies that even when the constellation is fully deployed, only about half the land area of CONUS will be able to be served simultaneously. And in the initial deployment of 1600 satellites, potentially only about 30% of CONUS will have simultaneous service.
SpaceX could use beamhopping technology, similar to that planned by ViaSat for ViaSat-2 and ViaSat-3, to move the beams from one cell to another within a fraction of a second, but this is not mentioned anywhere in the application, and would be made even more challenging, especially within the constraints of a relatively small satellite, by the need for avoidance of interference events with both GEO and other LEO constellations.
In summary, returning to the objectives outlined above, the claim of “high capacity” per satellite seems excessive in the absence of large, expensive terminals, while the “worldwide coverage” objective is subject to some question. Most importantly, it will likely be particularly challenging to realize the “low cost” and “ease of use” objectives for the user terminals, if the phased array antennas are very large. And the system itself won’t be particularly low cost, given that each satellite is expected to have a mass of 386kg: taking the Falcon Heavy launch capacity of 54,400kg to LEO and cost of $90M, it would take at least 32 Falcon Heavy launches (and perhaps far more given the challenge of fitting 140 satellites on each rocket), costing $2.8B or more, just to launch the 4425 satellites.
Instead one of the key objectives of the narrow, steerable beams in the SpaceX design appears to be to support an argument that the FCC should continue with its avoidance of in-line interference events policy, with the spectrum shared “using whatever means can be coordinated between the operators to avoid in-line interference events, or by resorting to band segmentation in the absence of any such coordination agreement.”
This continues SpaceX’s prior efforts to cause problems for OneWeb, because OneWeb provides continuous wide area coverage, rather than highly directional service to specified locations, and therefore (at least in the US, since it is unclear that the FCC’s rules could be enforced elsewhere) OneWeb may be forced to discontinue using part of the spectrum band (and thereby lose half of its capacity) during in-line events.
OneWeb is reported to be continuing to make progress in securing investors for its system, and it would be unsurprising if Elon Musk continues to bear a grudge against a space industry rival. But given the design issues outlined above, and the many other more pressing problems that SpaceX faces in catching up with its current backlog of satellite launches, it is rather more doubtful whether SpaceX really has a system design and business plan that would support a multi-billion dollar investment in a new satellite constellation.
Yesterday was an eventful day, not only for the US as a whole, but also for the inflight connectivity sector when both ViaSat and GEE announced their quarterly results at the same time. We’ve all been waiting for Southwest Airlines to make a decision about their future connectivity choices, so when ViaSat announced that “Subsequent to the end of the second quarter of fiscal year 2017 (i.e. since September 30), ViaSat was selected by a North American airline to retrofit more than 500 aircraft from its existing, mainline domestic fleet with ViaSat’s highly advanced in-flight internet system” it was natural to assume that this was Southwest.
Coming after Inmarsat and Rockwell Collins’ recent win of Norwegian Airlines for GX, which is GEE’s second biggest connectivity customer, this would also have helped to explain GEE’s announcement of a Chinese investment and joint venture which will serve over 320 planes in China.
However, GEE has now denied that the ViaSat’s new customer is Southwest and when asked about the progress of the Southwest RFP on their results call, GEE stated that investors should “stay tuned” for an announcement but that GEE “expect[s] to continue to enhance the product and services that we provide at Southwest. And our expectation that we will remain a major customer of our connectivity business well beyond the current commitments.”
What this doesn’t say is that GEE is likely to retain anything like its current business with Southwest, indeed this statement is eerily reminiscent of Gogo’s assertion in February that it hoped to “retain a strong and lasting relationship” with American, when American ultimately split its orders between Gogo and ViaSat. And a conclusion to the Southwest competition appears imminent, with either Panasonic or ViaSat expected to capture a major share of Southwest’s fleet. Panasonic certainly think they are still in the game, but others (not just ViaSat itself) appear to believe ViaSat is now in the lead on the back of aggressive terminal pricing.
So what did ViaSat actually announce? Most have assumed that if it wasn’t Southwest, it must be the outstanding mainline aircraft at American Airlines, which American has the option to move away from Gogo’s ATG service. But those orders were expected to be decided in two separate batches and not necessarily in the immediate future, since American has still not even received the first installations for either of the existing contracts with Gogo 2Ku and ViaSat.
UPDATE: So its a big surprise that American has now confirmed that it will be moving essentially all of its mainline fleet to ViaSat (other than the pending 2Ku installations). I had wondered if the order might instead be for upgrades at United (where ViaSat already serves 360 planes) combined with United’s rumored pending order for 100-120 new planes. And that might very well still be another win for ViaSat in the next month or two.
FURTHER UPDATE: Back in late May, Gogo signed a term sheet with American Airlines which specified that its “terms will form the basis for transition to a new unified agreement to be negotiated in an effort to sign no later than October 1st, 2016.” Curiously, Gogo’s Q3 10-Q filed on November 3, makes no mention of a new agreement being signed with American Airlines either before or after the end of the quarter, which raises the question of exactly what is the status of this relationship right now, and whether the companies were unable to finalize the agreement because American decided to move the remaining mainline aircraft off Gogo’s ATG network without making any further commitment to 2Ku. However, we may not get much clarity on this issue for some time, perhaps not until Gogo’s Q4 report at the end of February.
Sorry I jumped the gun on Southwest, but things still look bad for GEE, and may in fact be even better for ViaSat than I expected if they win both American and much of Southwest’s fleet, not to mention another possible win for 100+ new planes and 360 upgrades at United.
In the meantime, we face more intrigue with respect to SmartSky and Gogo’s unlicensed ATG plans, with Microsoft filing with the FCC for tests to “develop channel models for air-to-ground operations in the 2.4 GHz ISM band” and to “examine various techniques that might minimize the potential for the air-to-ground link to disrupt Wi-Fi communications on the ground in the area surrounding the ground station.”
After Microsoft tested Globalstar’s proposed TLPS solution (which incidentally may have been administered the coup de grace by Trump’s win last night) and claimed a “profound negative impact,” it would not be in the least surprising if they now propose that the FCC should commence a rulemaking on where these ATG ground stations should be located (presumably not in the vicinity of Xboxes!), similar to the work on LTE-U (which also complies with existing FCC rules for unlicensed spectrum).
While those rules would not necessarily prevent deployment (ATG ground stations would simply be located in rural areas away from other buildings), any rulemaking could result in delays of 1-2 years before the network can be deployed. The consequence of that would potentially be to accelerate the migration of mainline commercial aircraft away from ATG and towards satellite solutions, in order to free up more capacity on Gogo’s network for smaller aircraft and business jets.
Overall, my concerns about continued ruinous competition in the inflight connectivity market have now been amplified further. Inmarsat has achieved key wins with Norwegian and IAG, which have put it firmly back in the game. ViaSat continues to grow its market share and now GEE’s refocusing on China and new investment from ShareCo could allow it to continue to compete in some international markets as well. Thales may be able to take JetBlue away from ViaSat (as Inmarsat suggested at its Capital Markets Day last month) and move these aircraft onto AMC-15/16 and ultimately SES-17. And Gogo and Panasonic still have a massive backlog of orders to work through. So despite all the talk of potential consolidation, it looks like airlines (and hopefully passengers) will continue to benefit from terminal subsidies, lower wholesale session costs and increasing bandwidth for some time to come.
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.
In late July, EchoStar raised $1.5B in debt, to add to its existing $1.5B in cash and marketable securities. Echostar’s lack of obvious need for these additional funds has led to considerable speculation about what the company’s intentions are, including the possibility of an Avanti acquisition.
As an aside, Avanti is clearly in serious trouble, having leaked the possibility of an Inmarsat acquisition on Friday, in order to try and drum up more interest in its sale process, only to be rebuffed by Inmarsat today, with Inmarsat stating that “it has withdrawn from Avanti’s announced process and it is not considering an offer for the shares of Avanti.”
It seems very likely that there is no potential buyer for the company (otherwise the leak would not have been needed) and therefore Avanti will be forced to file for bankruptcy on or around October 1 when its next bond interest payment is due. Inmarsat would clearly be interested in certain Avanti assets, including Ka-band orbital slots for its I6 and I7 satellites and possibly the Hylas-1 satellite for additional European capacity, but these can be picked up in bankruptcy, likely for no more than $100M. And it is hard to imagine other mooted potential buyers, such as Eutelsat and EchoStar being more generous: Eutelsat has made it clear it does not intend to invest more in Ka-band satellites until they reach terabit-class economics, while Charlie Ergen’s past adversarial relationship with Solus and Mast (in DBSD, TerreStar and LightSquared) makes him very unlikely to bail out Avanti’s investors. At this point, it is therefore probable that there will be no buyer for Hylas-4, forcing Avanti’s bondholders to continue to fund its construction, if they want to avoid a NewSat-like situation, where the nearly completed satellite is simply abandoned and handed over to its manufacturer.
Returning to the question of what EchoStar intends to do with its $3B of cash, it seems that a response to ViaSat’s global ViaSat-3 ambitions is likely to emerge in the very near future. After all, Hughes announced Jupiter-1 in 2008 in response to ViaSat-1, and then pre-empted ViaSat-2 with its own Jupiter-2 announcement in 2013. EchoStar could do this in one of three ways:
1) EchoStar could build its own global satellite system. This seems like the least plausible option, because there will already be at least three global Ka-band systems (from ViaSat, Inmarsat and SES). However, if EchoStar decides it does not believe the fully global opportunity is large enough, it could decide to just build a North America focused Jupiter-3 satellite (which would likely have a capacity of at least 500Gbps, and would have competitive economics to ViaSat-3).
2) EchoStar could partner with another operator. This is very plausible, especially as SES seems poised to announce its own GEO system soon, and would be keen to offload risk to an anchor tenant. Its even possible that EchoStar could build Jupiter-3 for North America, and partner in a separate global coverage effort with somewhat lower capacity.
3) EchoStar could buy another operator. This would be the most radical option, with Inmarsat the obvious candidate. There are many challenges here, not least that EchoStar might not be able to afford to buy Inmarsat, but the fit would be perfect, enabling EchoStar to leapfrog ViaSat to fully global coverage today, while being able to backfill Inmarsat’s limited GX capacity with its own HTS satellites. Moreover, Ergen would clearly attach significant value to Inmarsat’s L-band spectrum assets, not least in the leverage he could obtain over Ligado’s efforts to become a competing source of terrestrial spectrum to DISH in the US.
There remain other possibilities, but these seem less likely to emerge in the near future. EchoStar could build out a terrestrial network to meet the buildout deadline for DISH’s AWS spectrum holdings, and lease it to DISH, but it would be odd to announce that before the incentive auction has finished. EchoStar also changed the disclosure about new business opportunities in its SEC filings earlier this year, noting that:
Our industry is evolving with the increase in worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, low-earth orbit networks, balloons, and High Altitude Platform Systems (“HAPS”) will likely play significant roles in enabling global broadband access, networks and services…We may allocate significant resources for long-term initiatives that may not have a short or medium term or any positive impact on our revenue, results of operations, or cash flow.
However, this new language appears to have related to Ergen’s discussions about a partnership with Google, which I noted previously, and Google appears to have opted for an alternative path for its wireless broadband buildout, with its recent acquisition of Webpass.
As a result, I think EchoStar is likely to push forward with its satellite broadband efforts in the next month or two, presenting a serious challenge for ViaSat. That means its certainly not the case, as Jefferies wrote in its coverage initiation on ViaSat today, that “ViaSat-2/3 will give [ViaSat] the best bandwidth economics in the world (for now) and a de facto monopoly in residential broadband”. Indeed, I’d predict that although ViaSat will undoubtedly grow its satellite broadband business in North America very substantially (by as much as a factor of two) over the next 5 years, its extremely unlikely to pass EchoStar in the total number of subscribers, especially given the lead to market that Jupiter-2 will have over ViaSat-2 during 2017.
Its been interesting to hear the feedback on my new ViaSat profile that I published last weekend, especially with regard to ViaSat’s supposed technical advantages over the HTS competition. As I noted in the report, ViaSat has apparently been struggling with its beamhopping technology, reducing the capacity of its upcoming ViaSat-2 satellite from an originally planned 350Gbps (i.e. 2.5 times the capacity of ViaSat-1) to around 300Gbps at the moment.
However, even that reduced target may require extra spectrum to achieve, with ViaSat asking the FCC in late May for permission to use 600MHz of additional spectrum in the LMDS band. Fundamentally this appears to be due to the reduced efficiency that ViaSat now expects to achieve relative to that set out in its original beamhopping patent. The patent suggested that for a ViaSat-2 design (with only 1.5GHz of spectrum, rather than the 2.1GHz ViaSat now intends to use), the efficiency could be as high as 3bps/Hz on the forward link (i.e. 225Gbps) and 1.8bps/Hz on the return link (i.e. 135Gbps) for a total of 360Gbps of capacity. But at Satellite 2016, ViaSat’s CEO indicated that an efficiency (apparently averaged between the forward and return links) of only 1.5bps/Hz should be expected, no better than existing HTS Ka-band satellites and nearly 40% lower than ViaSat originally estimated.
A notable side-effect of this additional spectrum utilization (even assuming approval is granted by the FCC) is that new terminals will be required, including replacement of both the antenna and the modem for aircraft that want to make use of the extended coverage of ViaSat-2. That’s why American Airlines is waiting until the second half of 2017 for this new terminal to be developed, before it starts to install ViaSat’s connectivity on new aircraft.
While the FCC’s Spectrum Frontiers Order yesterday does contemplate continued use of the LMDS band for satellite gateways (though utilization by user terminals appears more difficult), it looks like other Ka-band providers intend to shift more of their future gateway operations up to the Q/V-band, rather than building hundreds of Ka-band gateways as ViaSat will need for its ViaSat-3 satellite. That decision could reduce the costs of competing ground segment deployments substantially, while retaining continuity for user links. Thus, as a result of the lower than expected beamhopping efficiency, it remains to be seen whether ViaSat’s technology will now be meaningfully superior to that of competitors, notably SES and Inmarsat who both appear poised to invest heavily in Ka-band.
SES gave a presentation at the Global Connected Aircraft Summit last month, depicting its plans to build three new Ka-band HTS satellites for global coverage as shown above, and the first of these satellites could be ordered very shortly, because as SES pointed out in its recent Investor Day presentation, it has EUR120M of uncommitted capex this year and nearly EUR1.5B available in the period through 2020.
Meanwhile Inmarsat is hard at work designing a three satellite Inmarsat-7 Ka-band system, with in excess of 100Gbps of capacity per satellite. Although the results of the Brexit referendum may complicate its efforts, Inmarsat is hoping to secure a substantial European Commission investment later this year, which would replace the four proposed Ka-band satellites that Eutelsat had previously contemplated building using Juncker fund money.
So now it appears we face (at least) a three way fight for the global Ka-band market, with deep-pocketed rivals sensing that ViaSat may not have all the technological advantages it had expected and Hughes poised to secure at least a 6 month (and possibly as much as a 9-12 month) lead to market for Jupiter-2 compared to ViaSat-2. Victory for ViaSat is far from certain, and perhaps even doubtful, but beyond 2020 Ka-band therefore appears very likely to be the dominant source of GEO HTS capacity.
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