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.
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.
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.
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.
As I predicted back in January, American Airlines has now selected ViaSat over Gogo to equip its next batch of 200 new 737 aircraft. However, Gogo rejected American’s notification that “ViaSat offers an in-flight connectivity system that materially improves on Gogo’s air-to-ground system” which led American to file a petition for declaratory judgment to enforce its rights under the contract with Gogo.
The clause in dispute is 13.5.2 which reads as follows (with certain confidential information redacted):
With respect to each of the Fleet Types, if at any time after the [***] of the Trigger Date for such Fleet Type (A) an in-flight connectivity services provider other than Aircell offers a connectivity service (B) that provides a material improvement in connectivity functionality [***] (C) such that American reasonably believes that failing to offer such service to passengers on such Fleet Type would likely cause competitive harm to American by [***], (D) such competitive system is installed and in commercial operation on [***], and (E) American has completed sourcing processes with respect to the competitive offering sufficiently rigorous such that American can validate the technology, functionality and feasibility of the competitive offering and provide objective system performance and functionality criteria to Aircell for its use in determining whether it wishes to submit a proposal as contemplated below, then American may provide written notice thereof (including such criteria) to Aircell. In such event, Aircell will have the opportunity to submit a proposal to provide such service to American, which proposal will include, without limitation, proposed terms regarding pricing, system functionality and implementation dates, within [***] after receipt of such notice, and if Aircell timely submits such proposal then American will in good faith consider such proposal. If American reasonably determines that Aircell’s proposal is at least as favorable as the competitor’s offering, this Agreement will be amended to incorporate such additional or replacement offering or functionality and the agreed upon terms. If Aircell declines or fails to submit a proposal to American within such [***], or if American reasonably determines that Aircell’s proposal is not as favorable as the competitor’s offering, then American may elect to termination this Agreement with respect to such Fleet Type. Such election must be made by providing at least [***] advance notice thereof to Gogo, and in such event this Agreement will terminate as and to the extent and otherwise in accordance with American’s termination notice. Notwithstanding anything to the contrary contained herein, American shall not be required to provide to Aircell any information that American may not disclose pursuant to confidentiality obligations to any third party.
It seems that Gogo could only have based its rejection of American’s notice on an assertion that either ViaSat’s service is not a “material improvement” (over basic ATG!) or that it is not in “commercial operation” but neither rationale appears likely to hold up in court. Moreover, the competition to equip American’s next gen 737 fleet has been going on for the last six months or more and Gogo has already offered 2Ku to American in this competition. In fact, according to Runway Girl Network, American told Gogo some time ago to stop working on the STCs needed to install 2Ku on American’s new planes.
UPDATE (2/18): According to Runway Girl Network (although not specified in Gogo’s public filings), the suit “covers approximately 200 of the carrier’s 737 aircraft known as the ‘pre-Apollo’ fleet”, which are older aircraft (delivered before 2009) “flying with ATG today and no in-seat IFE screens.” A key difference between these older aircraft and American’s decision to desire to use ViaSat on future deliveries, is that Clause 13.5.2 references a different “Trigger Date” for each “Fleet Type” and so it seems likely that the time period, after which a termination notice can be issued for the new aircraft deliveries, has not yet expired, and American may therefore not have the right to terminate the Agreement in respect of its new aircraft fleet at this point in time. Conversely, American certainly has the right to terminate the older aircraft even though for some of them, with limited remaining lifespan, it may not be economic to retrofit with satellite communications.
So I’m forced to conclude that in reality, Gogo is simply trying to delay American’s decision to select ViaSat for future aircraft, probably threatening litigation as it initiated (and lost) against Southwest when it purchased AirTran and switched that fleet of Gogo-equipped aircraft to Global Eagle (Delta ultimately purchased 88 of the 128 aircraft which remained on Gogo). And in response, American seems to have decided that it would go nuclear by issuing a termination notice on older aircraft, and a public lawsuit, in order to force Gogo’s hand. However, Gogo made a further filing on Tuesday Feb 17, stating that it had rescinded its prior letter which had questioned American’s termination notice (on the grounds of “system performance and functionality of the competitive technology”), and claimed that as a result American’s suit was now “moot,” presumably in an effort to limit the public airing of the two companies’ disagreements.
After all, if American did not exercise its rights under Clause 13.5.2 of the agreement, it appears that it would have to use Clause 13.5.1, which contemplates a payment to Gogo apparently equal to at least a year’s revenue per plane:
American will have the right to terminate this Agreement at any time on or after the [***] of the Trigger Date for the last retrofitted Fleet Type, by giving [***] written notice and paying Aircell an amount equal to the amount obtained by multiplying (A) [***] by (B) Aircell’s [***] from Connectivity Revenues earned by Aircell in the year ending on the applicable anniversary of the Trigger Date.
Gogo has declared that it now plans “to submit a competing proposal to install our latest satellite technology – 2Ku – on this fleet”. However, given that American has already considered 2Ku with regard to “system functionality and implementation dates” for its newer aircraft, Gogo’s only option to improve its offer would be to reduce the pricing significantly. As I’ve noted in conference presentations, ViaSat is providing significantly better service, to 4-5 times more passengers, with a revenue per boarded passenger of around $0.50, compared to the $0.80 that Gogo currently generates from its ATG network. In other words, ViaSat’s revenue per Mbyte is something like a factor of 10 lower than Gogo generates at present (and remember Gogo has told investors that the cost of capacity for 2Ku is similar to ATG-4, albeit with future reductions expected as Ku HTS satellite capacity becomes cheaper).
It therefore seems that Gogo will lose either way: it either loses American’s old and/or new aircraft, setting the scene for a complete termination of the existing contract if ViaSat proves to offer a significantly superior service, or it wins the deal by offering dramatically lower pricing, which will reduce its revenue per boarded passenger and increase its capacity costs on these new aircraft, and would presumably provide a benchmark for a renegotiation of the deal covering the rest of the American fleet. That would be a far different trajectory from the increases to as much as $4-$5 per boarded passenger that Gogo set out as its long term objective in previous analyst days.
However, it remains to be seen how and whether American will ultimately be able to proceed with its original plan to install ViaSat on new aircraft deliveries, or whether we are set for a long and ugly stalemate between American and Gogo over how these aircraft will be equipped.
Its been interesting to see Inmarsat’s stock price rising recently based on excitement about the prospects for its inflight connectivity business, as well as the fourth GX satellite (which Inmarsat hopes to lease to the Chinese government as the Financial Times also reported in October).
We published our new Inmarsat profile in December which highlights the company’s prospects for strong revenue growth from GX over the next few years, although since then Inmarsat has faced a few setbacks, with the Intelsat appeal of Inmarsat’s US Navy contract win being sustained and Apax finally emerging as the purchaser of Airbus’s Vizada division, despite Inmarsat telling people before Christmas it expected to buy this business in early 2016.
However, there is the potential for an even more worrying development in the near future, with ViaSat expected to give more details of its ViaSat-3 project in early February. This seems to represent something of an acceleration in ViaSat’s plans since last November, and it now looks possible that this announcement could include deals with some large new airline customers to provide advanced passenger connectivity services.
If it can be realized, ViaSat’s proposed 1Tbps capacity for ViaSat-3 would have a dramatic impact on bandwidth expectations and more importantly the low cost of capacity would make it feasible to offer low cost or free Internet connectivity, including streaming video, to airline passengers, even as data consumption continues to grow rapidly in the future. ViaSat could potentially do deals with Southwest and/or American, the first of these sounding the long awaited death knell for GEE/Row44′s connectivity business and the second proving disastrous for Gogo, which currently gets about 40% of its passenger connectivity revenues from American Airlines (though any fleetwide migration to ViaSat wouldn’t happen until after the current 10 year contract expires in 2018, just as seems likely for Virgin America).
That really would represent an explosion in the inflight connectivity market, though not one which would be welcomed by other satellite operators and service providers, many of whom have a difficult relationship with ViaSat. Indeed its notable how ViaSat is now also throwing its one-time partner Thales LiveTV under the bus, claiming that they mounted “a campaign of whispers…alleging that Exede did not meet its advertised performance.”
The implications of deals that could ultimately bring ViaSat’s number of served aircraft in North America up to as many as 2000 planes (i.e. half the equipped fleet) would be wide ranging, not least for inflight connectivity service providers, who’ve become used to seeing Gogo and Panasonic as the market leaders, and passengers, who’ve become accustomed to a market where “Inflight Wi-Fi Is Expensive, and No One Uses It.”
Even amongst satellite operators there could be some upheaval, with Inmarsat having just ordered $600M of I6 satellites (actually $900M+ including launch, insurance and ground segment costs) carrying what looks, in comparison, like a puny ~30Gbps per satellite, SES having signed a ten year $290M bandwidth contract with GEE in November 2014, and Intelsat potentially set to lose some of its claimed “73% share of today’s aeronautical satellite communications market.” Most importantly, if passenger expectations of free or low cost inflight WiFi start to spread beyond North America, then Inmarsat’s estimate that its European Air-To-Ground network will generate $300K per plane per year (more than double Gogo’s current run rate) would look even more questionable.
Widespread angst about the effects of new HTS satellites and slowing revenue growth is already weighing on the outlook for the satellite industry, but if ViaSat really does have one or more big deals to announce next month, then it would take concerns over future capacity and pricing trends to a whole new level. In that case we’d better all buckle in and get prepared for a very bumpy ride.
Often I wonder whether some companies understand how the FCC works and what they really shouldn’t say in an FCC filing. Gogo has just provided a classic example in its August 26 ex parte filing that tries to counter SpaceX’s recent intervention in the 14GHz ATG proceeding, where Gogo has been trying to get 500MHz of spectrum auctioned for next generation ATG networks.
Unfortunately for Gogo, it has been left as virtually the sole active proponent of this auction, after Qualcomm laid off the team that developed the original proposal and stopped participating in the proceeding. While I’m sure Panasonic and Inmarsat would take part if an auction was held, undoubtedly they are relishing the prospect of Gogo struggling to improve its “infuriatingly expensive, slow internet” service with 2Ku capacity that Gogo itself admits is roughly the same cost per Mbyte as its existing ATG-4 network (at least until it can renegotiate its current bandwidth contracts).
So when Gogo makes submissions that directly contradict those it previously put into the record, it shouldn’t be surprised if the FCC regards these rather skeptically. In particular, in July 2014 Gogo told the FCC that it “supports the proposed §21.1120 requirement that interference from all air-ground mobile broadband aircraft and base stations not exceed a 1% rise over thermal” whereas now “Gogo concurs with Qualcomm in that a 6% RoT has a negligible impact on the cost and performance of an NGSO system while creating an additional and disproportionate level of complexity or loss of performance for the AG system” and “Gogo supports the 6% RoT aggregate interference levels initially proposed by Qualcomm”. So suddenly Gogo thinks that its a perfectly acceptable to have six times more interference than a year ago.
Even more of a hostage to fortune was Gogo’s September 2013 comment about the unacceptable problems that an ATG network (referred to as Air to Ground Mobile Broadband Service or AGMBS) would cause for NGSO systems like that proposed by SpaceX:
“In its initial comments, Gogo expressed its concern that Qualcomm’s assumptions regarding the operating parameters of the hypothetical NGSO satellite systems were not representative of typical or worst case system configurations, and that the interference between a future system and AGMBS systems could be far greater than indicated by Qualcomm’s estimates. Gogo is not alone in this view, as the Satellite Industry Association (“SIA”), ViaSat, EchoStar and Hughes all raised similar concerns in their comments. SIA included an analysis within the Technical Appendix attached to its comments which illustrates the potential for much greater interference than had previously been calculated by Qualcomm. In Gogo’s view, some aspects of the analysis are subject to challenge because it overstates the level of interference that may be expected. Nevertheless, the overall conclusion remains valid – an AGMBS system operating consistent with the proposed rules would cause unacceptable levels of interference to many, if not most, possible future Ku-band NGSO system configurations. The analysis of EchoStar and Hughes, provided in Annex B of their comments, provides additional support for this conclusion. Similarly, ViaSat’s comments indicated that the NGSO analysis presented by Qualcomm is not representative of the range of potential Ku-band NGSO systems which have been previously proposed.”
Yet now Gogo, having previously claimed that Qualcomm’s calculations were flawed, suddenly decides that after “incorporating [SpaceX's] stated parameters into the Qualcomm interference calculation methodology” everything is fine and “the resultant RoT from an AG system into the SpaceX NGSO system is far less than [its newly relaxed] 6%” interference criteria.
I can only conclude that Gogo must be truly desperate to get the 14GHz ATG proceeding completed, because it needs the capacity ASAP. However, making contradictory filings is certainly not going to help the company to get a favorable ruling from the FCC anytime soon (especially when politics is lurking in the background, in the form of the Association of Flight Attendants expressing concern about the FCC taking action on this matter).
I’ve often wondered if Global Eagle’s founders experienced the same dilemma as Benjamin Franklin when deciding which bird to choose as their emblem, and I’ve noted my opinion on several occasions that they appear to have chosen poorly.
Now it seems that Global Eagle is up for sale and is trying to entice other inflight connectivity providers such as Panasonic, Gogo and Thales to buy the company. Its therefore not surprising that Global Eagle has recently cut a somewhat lonely figure when maintaining that the inflight connectivity sector is not in a bubble, while Panasonic is hinting strongly that “The supplier with insufficient subscribing aircraft would likely need to exit.”
Global Eagle will obviously be pointing to the $400M that Thales paid for LiveTV as evidence that it should command a premium price, but Global Eagle itself was the main cause of that high price. Global Eagle came in with a last minute knockout bid and on Tuesday March 11, when John Guidon presented at Satellite 2014, Global Eagle clearly thought it would win, because Guidon hinted at the possibility that Global Eagle would soon have a new Ka-band modem. However, Thales countered with an even higher bid and was announced as the winner on Thursday March 13, at what appears to have been almost double that price that Thales had on the table a week earlier.
The bid for LiveTV was indicative of Global Eagle’s desperate struggle to achieve critical mass in its Row44 connectivity business, and after that failure, Global Eagle now seems to have decided to try and escape by selling the company while the going is good. Global Eagle also faces added time pressure from the potential expiry (at the end of the year) of DISH’s sponsorship deal for the Southwest “TV Flies Free” service, which is critical to Row44′s current business model.
My presentation at the GCAS conference in early June (where Global Eagle were conspicuous by their absence), highlighted some of the difficulties that standalone connectivity providers will face in the next year or two, and now Par Capital, which has been Global Eagle’s main backer, has taken a clear step towards selling the company, by converting its non-voting stock to common equity last month.
The challenge is that none of the potential buyers have an incentive to pay a high price for a vulnerable connectivity business (heavily dependent on Southwest Airlines who are widely rumored to be unhappy with service performance) and a slow growing content packaging business (which is reaching the limits of the gains that can be made through consolidation of smaller companies in the sector).
Thales has just paid a large premium for LiveTV and now needs to integrate that acquisition, while Gogo has had challenges in its past relationship with Southwest (which enabled Row44 to win that deal in the first place) and might not be sure of retaining the Southwest contract. Thus, although a Gogo-Global Eagle merger would make sense, Panasonic is potentially the IFC player that is most likely to consider taking over Global Eagle, although again it probably wouldn’t be willing to pay a large sum in cash (as seen in Panasonic’s apparent attempts to publicly talk down Global Eagle’s prospects).
Perhaps the only plausible deal that might make sense for both sides is if Panasonic decided to proceed with a spin-off of its Avionics division, and injected it into Global Eagle to gain a public listing for what should be a very valuable business. However, if that isn’t deemed feasible, then several people in the industry have told me that they expect Global Eagle will ultimately have to be sold at “fire-sale” prices.
Over the last week a great deal of useful data has been accumulating in the comments section of my previous blog post on locating satellite pings from MH370 and I’ve greatly enjoyed all the input from many dedicated contributors across various fields of engineering and aviation. If you’re visiting for the first time then you might want to read my original primer on pings first.
In this post I’m going to try to distill this information and explain what we’ve been told today, since there is still plenty of confusion out there, and address one thing that we haven’t yet been told, but which should be able to be determined from the analysis that has been conducted. Note that the diagrams shown below aren’t mine – I’ve provided links to original sources in the supporting text.
Almost immediately after the plane disappeared, Inmarsat discovered that the satellite terminal on the plane had continued sending “pings” to the satellite every hour. This was in response to the Inmarsat network checking in with each terminal that it had not seen traffic from, in order to check that it was still connected to the network, just like the cellular network checks every so often that your phone is connected. In technical terms (from the Classic Aero specification), commenter GuardedDon described it well:
The ‘ping’ is a component of the Aero-L [or Aero-H] protocol where the GES [Inmarsat's Gateway Earth Station] attempts to check the ‘log-on’ state of previously logged on but apparently idle AES [the plane's Airborne Earth Station]. The GES determines the AES to be idle if a timer ‘tG6′ expires, tG6 is obviously the hourly period.
The GES transmits to the AES over the P channel & receives over the R channel. The initial response burst on the R channel is the timing datum transmitted by the AES ±300 μs of receiving the incoming frame on the P channel. All very deterministic to give us the range to AES from satellite using the Round Trip Timing.
The delay can be measured fairly accurately, since as noted above, the timing is specified to within ±300 μs. This calculation, from PPRUNE [Professional Pilots Rumor Network], shows that the difference in round trip delay between ping arcs 1 degree apart is around 600 μs at the relevant angle for MH370. Thus the location of each arc is known to within 1 or 2 degrees, depending on whether the satellite actually measures the round trip or one way delay to the aircraft.
The arc information was released to the public on March 15 and there was some confusion at that point about why part of the arc close to Malaysia was excluded. Possibilities included:
1) that the area had been checked by radar
2) that the plane’s minimum speed would have meant it could not have been that close to Malaysia
3) that another Inmarsat satellite over the Pacific would have received the signals in this excluded part of the arc.
This issue has still not been clarified, but of these it appears that a combination of the first and second explanations is the most plausible.
Inmarsat measured the arc positions each hour from 2.11am to 8.11am and the possible routes taken by MH370 can be estimated by assuming that the plane was flying at a constant cruise speed, and then noting that the distance between the points at which the plane crossed each successive arc is equal to the distance the plane traveled in one hour. That led to the NTSB’s two potential tracks for the southern route, published by AMSA on March 18, which included two different assumptions for the speed at which the plane was flying.
Several news organization have published purported ping arcs for the intermediate ping times, including CNN and the Washington Post. However, its important to realize that these arcs are not based on real data, and are purely illustrative, like the chart produced by Scott Henderson.
What was not stated initially by Inmarsat or the investigators was that each of the hourly arcs is further away from the satellite than the previous one. In other words the plane was moving away from the satellite continuously from sometime soon after the 2.11am ping. This statement was made by Inmarsat on Friday (and I have also confirmed it). Once this sequence becomes clear, then it becomes impossible for the plane to have flown out over the Indian Ocean and later have returned to the vicinity of Malaysia. It also has significance for additional reasons that will be discussed below. As Jeff Wise noted, this means that the plane flew only between the green arc (the pink dot where it was at 2.11am) out towards the red arc where the last ping was recorded.
To be more precise, since Inmarsat has indicated that the plane was outside the green arc by 3.11am, the plane did not continue on its northwesterly course for long at all after contact was lost by Malaysian military radar at 2.22am (enabling it to return outside the green arc before the 3.11am ping). That would be consistent with avoiding Malaysian radar, but heading south the plane would have very likely crossed Indonesian radar coverage (something that the Indonesians have denied).
This sequence of ping arcs led inexorably to either a northern or a southern track, but there was still some uncertainty about which one was correct. The analysis that Inmarsat undertook over the last week took into account that the I3F1 satellite is in a slightly inclined orbit, which moves north and south of the equator each day. In other words it is only station-kept in the east-west direction, not north-south. While this situation is often the case for old FSS satellites, where the fuel is nearly exhausted, even new MSS geostationary satellites do not use strict north-south stationkeeping because the beam width of a small L-band antenna is pretty wide and so accurate pointing is not required.
DuncanSteel noted that the satellite was actually north of the equator at the time in question and Inmarsat was able to use the fact that the satellite was moving relative to the aircraft to calculate the resulting Doppler effect that shifted the frequency of the ping as measured at the satellite. If the satellite was moving towards the south, then the frequency of pings from airplanes flying in the southern hemisphere would be shifted up in frequency, while the frequency of pings from airplanes in the northern hemisphere would be shifted slightly down in frequency.
Last week Inmarsat performed an analysis of pings received from other aircraft flying in the Indian Ocean region to confirm that this effect is consistent across all of these planes and therefore concluded that MH370 must have been to the south of the satellite at the time of the last ping, not to its north. This led up to today’s announcement that the plane must have crashed in the Southern Ocean.
Now for an interesting piece of information that does not appear to have been considered in detail. A pilot on PPRUNE pointed out that there are two different modes of operation of the 777 flight management computer. A programmed route will take a straight line (great circle) route to the next programmed waypoint, but if there is no longer any waypoint in the computer, then the plane will fly on a magnetic bearing. While this is not material around Malaysia, it becomes highly significant in the Southern Ocean.
As a result, a magnetic heading would need to start out going significantly further west (and would also fly much further) to end up at the same point as a great circle route.
It is easy to see that in combination with Jeff Wise’s chart of the ping lines, a magnetic bearing heading is highly unlikely to have resulted in the 3.11am ping arc lying outside the 2.11am ping arc. Once this is realized, the hypothesis that the plane suffered an accident that left it flying on autopilot becomes rather less likely than the plane being deliberately directed towards a part of the southern ocean where presumably whoever was in charge believed the aircraft would never be found.
Indeed the NTSB tracks appear to implicitly assume an absolute not a magnetic heading, so would require the plane to be flying in a pre-programmed direction. Of course we need to see the ping arcs themselves (or at least get absolute confirmation about the trend in the ping arcs) before reaching a definitive conclusion, but this issue appears quite significant for any assessment of what might have happened onboard MH370.
UPDATE (Mar25): The Malaysia government has just released this full picture of the potential southern route tracks. The red track appears to be a magnetic bearing heading which would have required a slower speed (400 knots) and would result in a location far to the northeast of previous estimates. The yellow track is apparently the originally assumed programmed heading at cruising speed of 450 knots and is consistent with the current search area. There is clearly an enormous difference in where the plane ended up.
UPDATE (Mar25): The Doppler shift data release by the Malaysian government gives full details of the ping times (note that they are in UTC so add 8 hours for local Malaysian time which is used above). Several pings were received at just before 2.30am, then at 3.40am, 4.40am, 5.40am, 6.40am and 8.11am, not at 2.11am, 3.11am, etc as surmised above.
It seems clear from the Doppler information that the plane made a sharp turn very shortly after it was lost from Malaysian radar coverage at 2.22am. There is also much more time for the plane to move outside the 2.30am arc by 3.40am so this does not impose as much of a constraint on the possible routes of the plane.
The question has been raised about the apparent “partial” ping shortly after the 8.11am ping was recorded. Was that a partial ping because the plane lost power during the course of that handshake? Its hard to tell, but I note that there were several pings quite close together around 2.30am after the “possible turn”. Those appear to have occurred for a different reason than the regular pings (and also from the more frequent earlier handshakes after take off which I assume relate to regular ACARS messages being transferred).
So an understanding of why those occurred is likely to shed some light on why a ping might have been attempted so soon after 8.11am. In particular, could it have been initiated from the plane’s terminal rather than the satellite network? And if so why – for example, could it be due to the plane’s terminal trying to re-establish contact with the satellite after a sharp change in direction?
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