As a follow-up to my post on understanding satellite pings, I thought it would be helpful to give a bit more detail on how the location of a ping can be identified. In my previous post I indicated that you could potentially measure range (based on timing) or angle (based on power). After some further thought, it is likely that the range measurement would be much more accurate, not least because a change in angle (e.g. a plane banking) would throw off the power measurement significantly. The determination of a “measurable distance” is also what David Coiley of Inmarsat described in an interview with the New York Times last week.
How does this measurement happen, and how accurate is it? The first thing to understand is that the pings are sent to the satellite in a specific “time slot”, which has a given frequency and start time, but the burst of energy in the signal might not always be exactly in the center of the slot. This is illustrated very well in a recent Inmarsat patent, which shows the variation between three different bursts B1 to B3 which are scheduled in the same frequency (f1) and successive time slots (T1-T3).
How much the burst is offset in time relative to the center of its designated timeslot gives a measurement of range, since the further the terminal is away, the longer the energy will take to reach the satellite. How much the burst is offset in frequency relative to the center of its designated timeslot gives a measurement of speed, since if the terminal is traveling towards the satellite, the frequency will get higher and if it is traveling away from the satellite, the frequency will get lower (this frequency offset is the Doppler effect).
So in the illustration above, B2 is shifted both in time (range) and frequency (speed), whereas B3 is shifted in frequency (speed) but not in time (range).
UPDATE: One complicating factor is that if the Doppler correction takes place only in the terminal itself, then it is possible that the network may not see much if any frequency shift for the ping that is returned from the terminal. I am trying to confirm how this aspect is handled.
I should also note that it would not necessarily be expected to be standard operating procedures for a satellite operator like Inmarsat to save the precise time/frequency offset associated with each burst received by its satellites. But since the precise time data appears to have been used in the range calculation, it seems logical to conclude that this information (and potentially the associated frequency offsets as well if these are available, although this was not mentioned in a CNN interview today) must have been recorded.
Key point 1: It is likely to be feasible to calculate the range and possibly also the speed relative to the satellite from the ping information via the time/frequency offset method described above.
What we’ve seen in terms of the arcs of possible locations so far just represent the range component of this measurement. It seems that there is no triangulation involved (which is consistent with the CNN interview), because in this particular coverage region the specific frequencies involved are only used on the Inmarsat 3F1 satellite and not on any other satellites.
Its much harder to interpret the speed component (if it is available), because it is the speed relative to the satellite. So if the terminal was moving along one of these arcs, it would not be getting closer to or further away from the satellite and there would be no frequency shift. So in that situation the signal would look the same as from a plane that was stationary on the ground at the time of the transmission. If this information is actually available would expect Inmarsat to have been able to interpret the frequency shift as well as the time shift, but even then there would be no easy way to illustrate “relative speed” on a chart like the one given above.
Key point 2: Speed relative to the satellite is not the same as absolute speed, so (even if this information were available) it would not be possible to determine with certainty if the plane was on the ground and stopped.
Similarly, comparable data has not been released for previous “pings” before the last one. Whether or not the frequency/speed data is available, I would expect that it should be possible to determine that some points on the arcs above are more likely than others, but even with both pieces of information it is unlikely to eliminate any points completely unless other information is known (or assumed). For example, if one assumed that the plane flew at a constant speed and bearing then it would be possible to narrow down the locations quite significantly (because the speed and range would change in a predictable way, although north/south ambiguity would remain). However, that may or may not have been the case.
UPDATE: Similarly, one could test the theory about “following another aircraft” because the track of the other aircraft is known and its position would have to coincide with the arcs calculated for intermediate pings while this “following” was in progress.
Key point 3: The combined information from multiple pings would potentially be fairly dispositive as to whether the plane flew at a constant speed and bearing (i.e. on autopilot), although there might still be some uncertainty in the ultimate location (and north/south ambiguity) unless speed information was also available. The intermediate pings would also determine whether the “following another aircraft” theory is feasible.
So now for the big question, how accurate is the location of this arc. Without the ability to triangulate between multiple satellites, then geolocation accuracy (i.e. the ability to identify where on Earth a signal is being transmitted from) is considerably reduced, but a single satellite geolocation detector from Glowlink is said to have an accuracy of 40-60 miles. However, that detector may use more measurements (of a static source) than is possible with this limited number of pings from a terminal that is moving around. So I would expect my initial estimate of say 100 miles is still fairly reasonable. Its also important to remember that the plane could have had enough fuel onboard to have flown as much as a couple of hundred miles after the last ping.
Key point 4: The range accuracy is unlikely to be much better than 100 miles, and perhaps more because the plane could have continued flying after the last ping.
UPDATE: This is the latest search area, as shown by Reuters Aerospace News, including up to 59 minutes of potential travel after the final ping (i.e. the full period before the next hourly ping, regardless of remaining fuel).
UPDATE (Mar18): The Australian Maritime Safety Authority has held a press briefing today at which they described exactly the procedure outlined above for the southern route, i.e. assuming a constant speed and heading and correlating the results from all of the pings. They have produced the following map based on NTSB analysis showing that there only two paths consistent with the set of arcs and a constant speed/heading assumption. They declined to speculate on the northern route but indicated in the press briefing that similar analysis had been conducted. Presumably therefore it is now known whether or not the “following another aircraft” theory is feasible.
UPDATE (Mar 19/20): This evening, CNN put the image below on screen, showing purported ping arcs and the overlap with one of the projected southern tracks. It is not known if these are accurate locations, or if the image was purely illustrative. However, if the arcs are accurate, then (if the debris is a false lead) the “shadowing” hypothesis can be ruled out because the plane would not have gone far enough out into the Bay of Bengal. Moreover, if the plane is found in the southern search area having traveled along one of the projected paths, then it was flying in a straight line at constant speed (as AMSA and NTSB previously assumed in making these projections) and so was not likely to have been under active pilot control when it crashed. In addition, if the plane is found in the identified search area so quickly, it will intensify the scrutiny of the delays in making use of the ping information which Inmarsat provided very early in the investigation.
UPDATE (Mar 20): As noted by a commenter, the Washington Post published 3 of the earlier ping arcs in a graphic shown below. These are quite similar to the ping arcs depicted by CNN, suggesting that if the 4.11am ping arc is as close to the 5.11am arc as suggested by the CNN graphic, the “shadowing” hypothesis for the northern route is likely to be infeasible.
There’s so much confusion about the satellite communications aspects of the MH370 incident that I thought it would be useful to give a little bit of background and an analogy to aid understanding of what we know and what we don’t. As with all analogies, this is perhaps oversimplified, but may help those without a detailed knowledge of satellite communications. I’m not a satellite designer, so I may also have overlooked some of the intricacies – please feel free to chime in with any corrections or amplifications.
Firstly, it needs to be made clear that the radar transponder “squawks” and the satellite communications “pings” are from completely separate systems (just because its talking about a transponder, that is nothing to do with satellite transponders). The radar transponder sends an amplified signal in response to reception an incoming radar transmission, which has much more power than a simple reflection from the metal skin of the plane, and has additional information about the plane’s ID. If turned off, less sensitive civilian radar will struggle to pick up the plane’s reflection, though military (air defense) radar should still be able to see the plane. But military radar systems are looking for hostile forces and have missed civilian aircraft in the past (e.g. the Mathias Rust incident).
Key point 1: The transponders are nothing to do with the satellite communications system.
So let’s turn to the satellite communications system. There has been talk about ACARS transmissions for monitoring the status of the plane. That is a communications protocol, separate from the underlying satellite (or VHF radio) link. Think of ACARS as like Twitter. I can send a message from my cellphone, which may or may not include my location. When I’m at home, on WiFi, the message goes to Twitter via my home broadband connection. Similarly, when the plane is over land, the ACARS message goes over VHF radio to SITA, who then send it on to the destination (e.g. Rolls Royce if the purpose is engine monitoring, Malaysian Airlines if its an internal airline message, or the Air Traffic Control center if its a navigation related message). [ACARS messages can also be sent over long distances via HF radio, but its not been suggested that was the case on MH370.]
With Twitter, when I leave home, my cellphone connects to the cellular network, and my Twitter messages go over that. But it makes no difference to the message and Twitter doesn’t care. Somewhat similarly, when the plane goes over the ocean, the ACARS system sends its messages over the plane’s satellite connection instead, but it doesn’t affect the content of the message.
Just like I use AT&T for my cellphone service, the plane’s satellite communication system is from Inmarsat, but so long as I have bought the right data service from AT&T, Twitter will work, and so long as I have an Inmarsat data service, ACARS will work fine.
Key point 2: ACARS is an “app” (communications protocol) which can operate over different (satellite and VHF) communications links.
I can sign out of Twitter on my cellphone and then won’t be able to transmit or receive Twitter messages. But that has nothing to do with whether my cellphone is connected to AT&T’s network. Similarly, the pilots can terminate ACARS sessions and stop reporting their position or other data (see for example this document), but that doesn’t affect whether the satellite terminal itself is connected to the Inmarsat network.
Key point 3: ACARS reporting can be disconnected without affecting the underlying satellite communications link.
On my cellphone, even if I’m not sending any data, AT&T needs to know if I’m registered on the network. When I turn on my phone, or move from cell to cell, the network exchanges data with the phone to make sure the network knows which cell the phone is located in. More importantly, even if I stay in one place with the phone in my pocket, the cellphone network checks in occasionally to make sure that the phone is still active (and say the battery hasn’t run out without the phone signing off from the network, or I haven’t gone into an underground car park and the connection has been lost), so that it knows what to do with an incoming call. You don’t normally notice that, because the timescales are pretty long (you don’t usually go into a car park for an hour or two). As another example, if I go to France with my AT&T phone, when I turn the phone on, it is registered in the Visitor Location Register (VLR), but eventually, after I stop using the phone there, my details are purged from the VLR.
Similarly with the Inmarsat connection, the network needs to know if it should continue to assign network resources to a particular terminal in case a communications link needs to be established. Not every aeronautical terminal in the world will be active simultaneously, and indeed there are quite a few that are rarely if ever used, so Inmarsat doesn’t provision resources for all terminals to be used simultaneously. However, once a given terminal are turned on, it needs to be contactable while it is inflight. So the Inmarsat network checks in with the terminal periodically (it appears to be roughly once an hour), to ensure that it should continue to be included in the list of active terminals and gets a message back to confirm that it should remain registered. These are the “satellite pings” that have shown that MH370 was still powered on and active after the ACARS messages and radar transponder were turned off, because the terminal was responding to the requests from the Inmarsat network to confirm it was still connected.
Key point 4: The “satellite pings” are due to the Inmarsat network checking that the terminal on board the aircraft is still connected to the Inmarsat satellite system and the terminal responding in the affirmative.
So now the question is how accurately does the Inmarsat network know where the plane is located? To go back to my cellphone analogy, when the network is checking my phone is still connected, it looks in the last cell it was registered. If I move to a different cell, then my phone should check in with the network to request a new assignment. But AT&T doesn’t need to know my precise position within the cell, it just needs to know where to route an incoming call. Similarly with Inmarsat, there isn’t a need to know exactly where in a cell the plane is located, just that its there and not somewhere (or nowhere) else.
Key point 5: The “satellite pings” indicate the plane is in a cell, but do not intrinsically give specific position information.
How big is a “cell” on the Inmarsat network and why the confusion? First of all, we need to recognize that there are different Inmarsat network architectures for different generations of aeronautical terminals. Think of it like 2G, 3G and 4G phones. If I have a first generation iPhone then I can only use 2G (GSM+EDGE), an iPhone 3G can use 3G, and an iPhone 5 can use LTE. AT&T supports all of these phones, but in slightly different ways. Inmarsat introduced a new SwiftBroadband aeronautical service in 2010, using its latest generation Inmarsat 4 satellites (like AT&T’s LTE network). That has much smaller spot beams (“cells”) than the older Inmarsat 3 satellites. And the Inmarsat 3 satellites (like AT&T’s 3G network) in turn have regional spot beams as well as a “global” beam (covering an entire hemisphere) to support the oldest aeronautical terminals.
As an aside, part of the SwiftBroadband communications protocol (essentially identical to BGAN) conveys (GPS-based) position information to the satellite when establishing a connection, so that the satellite can assign the terminal to the right spot beam. But it isn’t clear that GPS data is required as part of the “pings” which maintain registration on the network. That was one additional source of confusion about whether the specific position was being reported.
In any case, it appears that MH370 had a Swift64 terminal onboard (or possibly an older Aero-H or H+ terminal), not one of the latest SwiftBroadband terminals (that’s hardly surprising since SwiftBroadband is not yet fully approved for aeronautical safety services and is mostly used for passenger connectivity services at the moment, which don’t seem to have been available onboard). This is the equivalent of the iPhone 3G (or the original iPhone), not the newest version.
In the Indian Ocean, Inmarsat’s Classic Aero services, which are provided over both Swift64 and Aero-H/H+ terminals, operate on the Inmarsat 3F1 satellite located at 64E (equivalent to AT&T’s 3G network not its latest LTE network), and can use both the regional and global beams, but it appears that Inmarsat’s network only uses the global beam for the “pings” to maintain network registration. Otherwise it would have been possible to rule out a location in the Southern Ocean.
Key point 6: The “satellite pings” were exchanged with the Inmarsat 3F1 satellite at 64E longitude through the global beam.
So how can anyone find the position within this enormous global beam? There are two potential ways to measure the location:
1) Look at the time delay for transmission of the signal to the satellite. This would give you a range from the sub-satellite point if measured accurately enough, which would be a circle on the Earth’s surface.
2) Measure the power level of the signal as received at the satellite. The antennas on the satellite and the plane amplify the signal more at some elevation angles than others. If you know the transmission power accurately enough, and know how much power was received, you can estimate the angle it came from. This again would produce a similar range from the sub-satellite point, expressed as a circle on the Earth’s surface.
[UPDATE: I believe that the first of these approaches is more likely to produce an accurate estimate. See my new blog post for more information on locating satellite pings.] We can see in the chart below (taken from a Reuters Aerospace News photo of the search area posted at the media center) that the search locations are based on exactly these curves at a given distance from the sub-satellite point. However, it is unlikely that the measurements are more accurate than within say 100 miles.
We can also see that the arcs are cut off at each end. The cutoff due east of the sub-satellite point may be due to the fact that the transmissions would also potentially be received by Inmarsat’s Pacific Ocean Region satellite at that point, and if they weren’t, then that region would be ruled out (although others have suggested that military radar plots have already been checked in these regions). Its possible that the boundaries to the north and south have been established similarly by the boundaries of Inmarsat’s Atlantic Ocean Region satellite coverage, but they may instead be based on available fuel (or simply the elapsed time multiplied by the maximum speed of the plane), rather than the satellite measurements per se.
UPDATE (Mar 18): I originally attributed the picture below to a Malaysian government release, based on information from a journalist in Kuala Lumpur. As a commenter below notes, the diagram was put together based on an interpretation of what was stated in a briefing (indicating that the ends of the arcs were determined based on the minimum and maximum speed of the aircraft, rather than being based on the overlap of the Inmarsat satellite coverage areas) and is not an official document. Apologies for any confusion.
Key point 8: The position of the aircraft is being estimated based on the signal timing/power measured at the satellite. Its not based on the data content of any message and is not highly accurate.
ADDITIONAL POINT (Mar 17): Many have asked why it took so long to figure out where these satellite pings were coming from. Taking an extension of the analogy above, assume you have a friend staying in a hotel. The hotel catches fire and burns to the ground and your friend’s regular Twitter updates cease. For the first few days, the fire department is trying to find his body in the hotel. When he can’t be found the police check to see when his iPhone was last turned on. It turns out the phone was still connected to AT&T’s network hours after the fire. So then the police ask AT&T to figure out where the phone was operating by looking at their database of network records.
That’s exactly the sequence of events here. The plane’s ACARS (and radar) communications suddenly ceased and in the first few days, everyone assumed there had been a crash and was looking for the crash site. After no debris was found, investigators started to look at other possibilities. Inmarsat discovered the plane’s terminal was still connected to their network even after the ACARS messages ceased. Then it took a bit more time to calculate the location of the pings from Inmarsat’s network data records.
Finding missing people this way using cellphones is well known, but no-one’s ever had to do it before in the aeronautical satellite world, so its hardly surprising that this would be not be standard practice in an air accident investigation. I’m sure it wasn’t standard practice for cellphone companies in the 1980s either.
UPDATE (Mar20): The WSJ is reporting that Inmarsat had this information very quickly but the Malaysian government delayed making use of ping arc data to revise the search area for several days.
I hope that’s helpful. Let me know of any questions or need for further explanation.
An interesting debate has ensued about whether the cost of inflight connectivity services will increase if airlines can provide service from gate to gate rather than being restricted to operating above 10,000ft. Obviously on a short flight the extra time might be quite substantial as a proportion of the total flight length, although even if the increased availability is as much as 30%-75% more time (which I think is a little on the high side), the increase in data consumption per user will be far lower, because:
a) longer flights see much greater usage (especially when its paid-for) – the figure quoted by Delta was that take rates for Gogo service were 4 times higher on flights of more than 1500 miles, and
b) laptops consume a lot more data than tablets and phones, and laptops will not be able to be used during take off and landing (because they are too heavy to be safe in the event of an incident).
As a ballpark number, I’d suggest the actual increase in bandwidth consumption per paying passenger might be at most 10%-15% for Row44, given its exposure to Southwest, and much less for Panasonic and Gogo’s Ku-band service, given their different mix of customers. Note that total bandwidth consumption might increase more, because increased availability will stimulate higher take-up, but that’s a good problem to have, because more customers means more revenues as well.
I was quoted in the article offering a cost estimate of “10-20 cents per Mbyte” for traditional Ku-band services (while LiveTV’s Ka-band service will be “single digit cents” – that statement was not referring to GX). I’ve received considerable pushback from one Ku provider that my cost estimate for Ku is far too high and that the number for LiveTV/ViaSat’s Ka-band service is far too low.
I’d note that the retail rate for ViaSat’s consumer broadband service is $5-$7 per Gbyte (i.e. 0.5 to 0.7 cents per Mbyte), so it hardly seems implausible that the number for mobility services (which have a less efficient antenna and bandwidth utilization) would be a few cents. Last time I saw it, LiveTV’s customer pitch said 3 cents.
In terms of Ku-band, I derived my estimate from the cost of Ku-band transponders and the average likely utilization. Row44′s average cost of buying capacity from Hughes is about $2M p.a. for a 36MHz transponder, although that figure might be a bit lower for Panasonic and Gogo when they buy direct from a satellite operator (though there are teleport and backhaul costs to add onto raw transponder lease costs). Then you need to consider the number of bits you get from each Hz of satellite capacity. I assumed around 0.75 bits/Hz for a relatively small aero antenna, though that could go up if you have a very asymmetric usage profile (the aero antenna is far less efficient on the uplink than the downlink) and will certainly improve for High Throughput Satellites which offer a more powerful signal in their small spot beams. Then you look at the peak to average ratio – i.e. how much capacity you need for peak traffic. I assumed usage for around 10 hours per day and 5 days a week, due to the concentration of flights at peak times, the focus on business travelers and the lack of usage on overnight flights, giving a peak to average ratio of 3.36:1 (24/10*7/5). Providers might squash that peak a bit, but only at the cost of increased customer dissatisfaction when their service slows to a crawl (not an infrequent occurrence, implying providers probably do that at the moment).
That means that the underlying cost of capacity, if you had perfectly efficient capacity purchases, is around 6.3 cents. However, to provide global coverage, you need to lease a lot of transponders you don’t use very efficiently, especially at the moment when there are only a few aircraft flying on numerous different long haul routes. At best the efficiency (i.e. usage of purchased capacity) is likely to be no more than 50% today, though perhaps that will get a bit better in the future. So if you’re a provider, you could offer a reasonable service at cost to an airline at around 12.6 cents a Mbyte. And if you actually want to make a profit, then you ought to charge something closer to 20 cents per Mbyte.
Of course that’s not what providers do charge right now: Row44′s service revenues are only about half what it pays for capacity, and I doubt Panasonic’s revenue to capacity cost ratio is much better. So put another way, Row44 is probably getting paid about half of its per Mbyte cost (estimated as 12.6 cents per Mbyte above) or 6 cents per Mbyte, rather than the 20 cents it needs to have a decent business. Does that mean my 10-20 cent estimate is wrong? I think it really means that the current business plan is unsustainable.
That seems an appropriate title, as I head off to London and Paris this week, to hear MSS and other satellite operators talk about their future opportunities. I found it interesting to note that Euroconsult released their updated MSS market assessment a couple of weeks ago, cutting their projection of future wholesale revenue growth from 7% p.a. (in the previous version of their analysis) to 5% p.a. over the next 10 years, getting back much closer to my forecasts from a couple of years ago.
However, by my estimate, MSS wholesale service revenues only grew at 2% in 2011 and 3% in 2012 (not 5% as Euroconsult estimates, perhaps due to double counting of Orbcomm’s revenue growth from resale of Inmarsat and now Globalstar services) and the majority of this growth in 2012 came from Inmarsat’s price rises. While it originally looked like 2013 was shaping up to see a bit better growth, Iridium has reduced its guidance, Globalstar’s second quarter results were nothing to write home about and Inmarsat is again seeing a significant part of its modest revenue growth being driven by maritime price rises. So its now far from clear that we will get even to Euroconsult’s lowered 5% growth projection in the near term.
While spectrum is a wildcard that could provide incremental revenues for Globalstar (through a potential deal with Amazon) and Inmarsat (through a resumption of lease payments from LightSquared), progress here may not be as fast as expected. Globalstar’s hoped for NPRM is not on the tentative agenda for the FCC’s September Open Meeting, presumably meaning that although the NPRM has now been placed on circulation this issue may be left for incoming Chairman Wheeler to finalize. The recent application by Oceus Networks for an experimental license to test TLPS for DoD users also suggests that a partnership with Amazon is far from set in stone as the way Globalstar will be able to realize value from its spectrum assets.
In contrast, it looks increasingly like DISH will succeed in its bid to buy LightSquared’s satellite assets later this year, and DISH has agreed to assume the Inmarsat Cooperation Agreement as part of its stalking horse bid. But buying LightSquared is a sign that DISH is unlikely to move forward quickly with its entry into the wireless market, because it would take until late 2014 or beyond before the FCC could approve any change to downlink use for the 2000-2020MHz AWS-4 uplink band. At the moment it seems that interim FCC Chairman Clyburn doesn’t want to take a decision even on LightSquared’s uplink band (let alone address the purported “swap” of downlink spectrum, which Ergen doesn’t want or need – leaving MAST Capital Management stuck holding a largely worthless lease of the 1670-75MHz spectrum band), because the FCC will not receive reply comments until September 23 (shortly before Clyburn relinquishes the chairmanship). So even if DISH buys the satellite assets, and drops the request to get hold of the 1675-80MHz band, reaching any resolution of the current regulatory issues in the L-band will undoubtedly be a lengthy process.
Charlie Ergen hinted on DISH’s Q2 call that he doesn’t anticipate simply continuing the Cooperation Agreement in its current form, so it would not be at all surprising to see a fight between DISH and Inmarsat over renegotiation of the Cooperation Agreement in the early part of 2014. One possible compromise could be in the form of a partnership between DISH and Inmarsat to use the TerreStar-2 satellite to preserve Inmarsat’s S-band license in Europe, in exchange for further postponement of any cash payments under the Cooperation Agreement.
Despite (or perhaps because of) the challenges that the MSS market faces, M&A continues apace. Recent agreements include Inmarsat’s sale of its energy sector assets to RigNet and Rockwell Collins’ acquisition of ARINC. I understand a number of additional notable transactions are in the works. Rumors persist that SITA has put OnAir up for sale (only six months after buying Airbus’s stake in the business) and Honeywell appears to be the most likely buyer, while Orbcomm continues its acquisition of satellite M2M service providers and may now be in negotiations to buy Comtech Mobile Datacom.
UPDATE: According to an OnAir spokesperson “SITA has no intention to sell OnAir to Honeywell or to anyone else and remains OnAir’s sole shareholder.”
It will be particularly interesting to see the valuation put on OnAir, given the recent disastrous public offerings of Gogo and Global Eagle/Row44, because if OnAir attracts a much lower valuation than Gogo and Row44 it could be a sign that SITA is pretty pessimistic about the future of the inflight connectivity market. That would be a surprise to many, because after all inflight connectivity is seen as one of the major areas for growth in the MSS market going forward, but at present making an operating profit, let alone a return on investment, is a pretty distant prospect for most if not all of the service providers. So if now is the time for SITA to get out, will this turn out be the age of wisdom for the sellers and the age of foolishness for the buyers, or the reverse?
As readers of this blog know, I’ve not been a fan of Row44′s content-focused strategy for inflight connectivity, and I pointed out how ludicrous Global Eagle’s forecasts were last November. However, the meltdown of this strategy has come even sooner than I expected, with today’s announcement that instead of charging for streaming video content on Southwest planes, the service will instead be sponsored by DISH Network and made available for free to passengers, in exchange for watching a 30 second commercial.
The fact that Row44 has struck this deal now, only a few months after launching the inflight TV service, suggests that the paid take-up has been dire (which is hardly a surprise, given the Southwest customer profile, their average flight length and the lack of onboard power outlets). Even worse, according to DISH’s CMO, the sponsorship has no announced end date (although it will run at least through the end of this year), suggesting that instead of being a temporary deal to boost awareness (like Gogo’s Thanksgiving to New Year 2010 free inflight WiFi offer, sponsored by Google), it may never be possible to get many passengers to pay for the service. This move may also be a pre-emptive counter to JetBlue’s plan to offer free inflight WiFi to its passengers, but will do nothing to boost take rates for Row44′s paid internet service, and will more likely undermine them now that Southwest passengers can instead watch video content for free.
The business projections presented by Global Eagle last November (setting out their supposed “highly visible” 2014 adjusted EBITDA forecast) estimated that the TV/VOD/IPTV service would have a take rate of 5.75% and generate $5 per user in 2014 (i.e. $0.29 per passenger opportunity), plus a further $0.15 per passenger in portal services. Although DISH has not revealed its sponsorship payment, according to my calculations based on Gogo’s S-1 filing, Google paid $7M for its 6 week sponsorship, or roughly $0.28 per passenger carried (about $2.50 per Internet session) during the period. Its a safe bet that DISH is paying a lot less than that for an ongoing deal: I’d estimate roughly $1M per month (~$0.10 per passenger carried), or about a third of Global Eagle’s projection for revenues from these services in 2014.
UPDATE (7/1): It was pointed out to me that the sponsorship deal is between DISH and Southwest, so it’s not clear how much of DISH’s sponsorship payments are being passed on to Row44 or indeed if Southwest will be making additional payments to Row44 to subsidize the TV service. That is possible, but its hard to believe that Southwest would want to provide a large subsidy to Row44 for an indefinite duration, when Southwest originally expected to be receiving a share of revenues, just like from inflight WiFi (and when Gogo is offering airlines a ~30% revenue share from its Gogo Vision services).
UPDATE (7/3): Global Eagle confirmed in a press release that “its Row 44 subsidiary has entered into a groundbreaking content and connectivity partnership with its customer Southwest Airlines” or (without the spin), that Row44 has changes the terms of its TV services agreement with Southwest, presumably to a flat fee rather than a revenue share. Undoubtedly this means a reduction compared to Row44′s projected 2014 revenues, although when the next set of financial results come out, look for further spin describing the change as providing a significant boost to revenues in 2013Q3 (compared of course to the near total absence of content revenues in Q2).
Based on Gogo’s published data, revenue from portal services is also going to be vastly less than Global Eagle estimates, while there has also been “an increase in license fees paid for the content delivered to airline customers” (which are unlikely to reduce, even if revenues are lower than expectations) and bizarrely, Global Eagle appears to have ignored any revenue share that may be payable to Southwest in its assumption of a 87% gross margin on content services. By my estimates, even ignoring any negative impact on Row44′s connectivity revenues from the free TV offering, that could leave a $30M to $40M hole in Global Eagle’s projected $75M of adjusted EBITDA in 2014. Put another way, it seems that this business really wasn’t “highly visible” after all.
Gogo’s IPO roadshow is taking place this week (with completion apparently expected next Tuesday) after the company filed a revised S-1 on Monday June 10 indicating that it is seeking to sell 11M shares at between $15 and $17, giving the company an enterprise value (at the midpoint of this range) of approximately $1.3B (or even higher if you assume, as Gogo does, that the cash it raises needs to be spent on upgrading Gogo’s network to ATG-4, including doubling the number of cell sites by 2015). That seems pretty optimistic given the modest revenues that Gogo generates at present ($235M in 2012) and the losses that the company is making outside its well established Business Aviation segment.
I’ve not yet completed my forthcoming aeronautical communications market report, but I know a lot of people will be looking for some realistic numbers to value the company. So I decided to pull together my detailed estimates for Gogo through 2017, into a 21 page profile and analysis which I’ve published today. You can find a report summary and contents list here, and an order form here. And if you decide to buy my aeronautical market report when its available later this summer, you’ll receive a full credit for the price of the Gogo report.
Feel free to contact me for more details. As a taster, here’s the latest quarterly growth breakdown including 2013Q1. The last quarter is quite significantly short of my estimates, as despite the improving take rate trend line, Gogo took a significant hit on Average Revenue Per Session compared to 2012Q4.
UPDATE 6/13: And here is a comparison with the various analyst forecasts for Gogo which were given out at the roadshow. I’ve left off the names, to spare people’s blushes, but the bank that forecast this to be a $1.6B business in 2017 has clearly been drinking the same Kool Aid as Global Eagle.
No I’m not talking about Intelsat’s current IPO! Although some might raise questions about the company’s debt levels, its also pretty clear that Intelsat’s mobility strategy and its high throughput Epic satellites are the envy of its FSS competitors. What I’m actually referring to is Row44, which went public at the end of January through a merger with Global Eagle, which had raised $190M in a blank check IPO. The end of year results from Row44 and Global Eagle have gone completed unreported, but were filed with the SEC last month, and highlighted just what a disastrous business Row44 really is.
In particular, as installations of the Southwest fleet neared completion, Row44′s revenues in Q4 dropped by 27% compared to Q3 (from $20.1M to $14.8M). Moreover, Row44 only generated total Internet connectivity revenues of $11.4M in 2012 while spending $19.6M on buying bandwidth from Hughes, and produced no revenues from its much ballyhooed content and portal services (despite spending $1.9M on video licensing fees).
In 2013, Row44′s satellite connectivity commitment to Hughes will go up to a minimum of $28M (and more likely well over $30M, because of additional commitments made in early 2013 to add coverage in Russia, and additional trans-Pacific coverage planned later this year). Row44 has also changed its deal with Southwest, so it now only receives fees for passengers using connectivity (between $5 and $6 per user, while Southwest charges $8 for the service), rather than Southwest paying for every boarded passenger under the original agreement, and as part of the new contract, Row44 is adding more capacity, apparently to counter passenger complaints about “slow or restricted services”.
At an investor conference on March 13, Global Eagle’s CFO suggested that paid take rates for other providers “range from high single digits to high teens” and that inferences could be drawn from that for Row44′s take rates on Southwest. Of course that is completely untrue: take rates for Gogo are around 5%, and Global Eagle itself said back in November that the targeted take rate on Southwest was 6.5% in 2014, so its hardly likely that the take rate is higher than that today. I therefore have to wonder if Global Eagle’s CFO actually understands this business at all.
Indeed, the company seems to have a hard time predicting the outlook for its business even in the very short term: this March 13 presentation indicated that the 2012 adjusted EBITDA from Row44 and AIA respectively was -$26M and +$18M respectively, whereas on November 27, 2012, with just one month left in the year, Global Eagle forecast that the full year adjusted EBITDA results for Row44 and AIA would be -$25M and +$22.3M respectively.
If we look forward to 2013, then it seems certain that Row44′s revenues will decline sharply, because of the slowdown in equipment installations (from $61M of equipment revenues in 2012 to ~$35M in 2013, and potentially to only $20M in 2014, based on Row44′s current business plan). More importantly, the company is set to make another significant loss on provision of connectivity services: I estimate $20M-$25M in revenues, depending on the take rates that Southwest achieves, compared to connectivity costs of well over $30M and more likely close to $40M (just in payments to Hughes, ignoring Row44′s own operational costs). In addition, content revenue is still minimal (Global Eagle described the product as “brand new” in mid March), with a very limited selection available, and by my estimate content and portal revenues will be no more than ~$5M this year.
In the longer term, Row44′s new deal with Southwest has locked the airline into a deeply unfavorable competitive position vis-a-vis JetBlue, who intend to offer Internet access for free. Southwest can’t possibly do the same, if they have to pay Row44 at least $5 for every passenger who uses the service, despite the two airlines competing very actively on other passenger amenities (like free checked bags). Moreover, if Row44 is ever to break even, it may have to cut back on the amount of capacity it buys from Hughes (rather than boosting capacity as Southwest currently plans), making Southwest’s Internet service even less attractive compared to JetBlue, which uses much cheaper Ka-band capacity.
In recent days, we’ve seen yet another report predicting rapid growth for in-flight connectivity deployment and revenues. However, none of these reports have got to grips with the issue of what services can be profitable for providers but still affordable for the airlines. Of course, if there’s one lesson to be learned from the Connexion-by-Boeing debacle, its that you can’t just assume companies will be able to continue providing service at an enormous loss indefinitely. After scraping through 2012, raising money at effective interest rates of up to 421%, Row44 has escaped for the time being by capturing Global Eagle’s cash balance. Perhaps unsurprisingly, given its management’s apparently tenuous connection to reality, Global Eagle now intends to “use its balance sheet” to pursue consolidation of the in-flight connectivity business, which might provide some relief from Row44′s current unsustainable business model, but on the other hand may simply drag down other companies in the sector.
We’ll be publishing our own detailed report on the in-flight connectivity business next month, which takes a very different approach to the analyses we’ve seen so far: instead of simply projecting how many planes might be fitted out with each technology, we’ll look at both the revenue and cost base of the various IFC providers, and discuss which of them may be able to find a sustainable long term business model.
As Inmarsat approaches its end of year results presentation, scheduled for March 7, the company’s stock price has been surging in the expectation of continued strong progress in the maritime market, which is likely to lead to full year wholesale MSS revenue growth for 2012 (excluding LightSquared payments) somewhat above Inmarsat’s 0%-2% target. This has been driven primarily by Inmarsat’s 2012 price rises, which have been so successful that Inmarsat announced further price rises of around 10% for E&E services last month.
I estimate that these new price rises could boost wholesale maritime revenues by a further $10M (roughly 3%) in 2013, on top of the pull-through from the mid year price rises in 2012, and as a result, it is plausible to imagine that Inmarsat’s wholesale MSS maritime revenues might rise by as much as 10% in 2013. Thus, unless there are severe cutbacks in government usage this year, overall revenue growth for 2013 may again come in quite a bit above the 0%-2% target. Our updated profile of Inmarsat provides full details of our forecasts by product, and will be released shortly.
That revenue upside perhaps explains why Inmarsat has become notably more aggressive in recent weeks, for example telling its sales team that commission will no longer be paid for selling Iridium products and services (historically Stratos has sold over $10M of Iridium equipment each year). In addition, the IS-27 launch failure appears to have given Inmarsat more confidence that potential partners will need GX for maritime and aeronautical services, rather than continuing to rely on Ku-band services in what may now become a capacity-constrained North Atlantic Ocean Region over the next couple of years.
One intriguing issue to watch in terms of Inmarsat’s relationships with its distributors is the ongoing dispute in Russia, where I’m told Morsviazsputnik has refused to pay for Inmarsat capacity for a substantial period of time (note that Inmarsat’s trade receivables have been increasing by about $10M per quarter during 2012, excluding LightSquared payments), unless all Inmarsat-equipped vessels going into Russian waters use a Russian SIM. This dispute has apparently extended to the Russians modifying their call routing gateway (which sends all traffic within 200 miles of Russian territory to an intercept point in Russia) to give them the ability to cut off the communications on foreign vessels. I’m told that in response Inmarsat has considered terminating the routing of traffic to the Russian intercept point, which would of course escalate the dispute even further and make it even more difficult to recover the withheld revenues.
Beyond this year, Inmarsat is guiding that its 8%-12% revenue growth in 2014-16 will be backend loaded, and so growth in 2014 will not need to increase sharply (which would be difficult prior to achieving global GX coverage). Indeed, a combination of continued price rises on L-band services and a release of some of the cash previously received from LightSquared (and never spent on installing filters) could help to meet expectations in the next few years, even if GX does not live up to Inmarsat’s projected $500M in wholesale revenue by 2019.
With respect to GX, I have been cautious about the $500M target because I have always assumed that maritime would account for the largest share of the GX business and it is very hard to see how Inmarsat could hope to generate $200M-$300M of wholesale maritime GX revenues by 2019, when Inmarsat itself estimates that only $145M was spent on maritime FSS space segment capacity in 2010.
However, I understand that Inmarsat is now suggesting that the GX government business will generate more revenue than the maritime market. Of course that is much harder to prove or disprove, especially as Inmarsat gave very little insight in the October 2012 investor day into whether the government business is expected to rely mainly on the dedicated HCO beams in military Ka-band frequencies or on the standard wide area coverage beams which only use civil Ka-band frequencies.
An additional GX question that may soon be answered is the potential for a fourth backup satellite to be ordered. Inmarsat certainly has ample justification for placing a near term order, given its reliance on Proton launchers for all three GX satellites, and the run of problems that Russian rockets have had in recent months. Although Inmarsat would presumably portray an order as a sign of increased confidence in the market for GX, this would also add up to $200M of additional capex to the $1.2B GX program, even if no commitment was made to a fourth satellite launch at this stage.
Given Inmarsat’s more assertive stance in the market, it will now be particularly interesting to see whether Inmarsat can persuade distributors to share its positive view of the overall GX opportunity, and make revenue commitments similar to the $500M that Intelsat has achieved from Caprock, MTN and Panasonic for its EPIC system. Time will tell, but at least so far, my assertion last October that we had reached a turning point in MSS history has come only partly true: while it certainly appears that the next few years will bring regular price rises, an improvement in Inmarsat’s relationships with its distributors still seems like a distant prospect.
The latest Global Eagle investor presentation, which was filed with the SEC on November 27, makes for some pretty entertaining reading, much like the script for one of those Hollywood disaster movies that Row 44′s new owners may be fond of. Of course it requires some pretty convoluted logic to argue that Row 44, which is selling equipment at cost and losing money on every megabyte of data carried across its network, is worth $250M.
That’s especially true when the company fully intends to continue to sell equipment at cost and intends connectivity to be a “lower margin” service. In addition, despite a new contract with Southwest, which is expected to lead to a near 50% increase in connectivity revenue per passenger by 2014, the connectivity service is projected to produce less than $5M of gross margin (not EBITDA) that year. Instead, Row 44 and Global Eagle “believe the next frontier for growth will be providing quality entertainment, vast entertainment, first through the airlines into a projected multi-billion-dollar marketplace in the air” and so are projecting that Row 44 will make $49M of gross margin in 2014 from “TV/IPTV/VOD” and portal services.
What’s wrong with this picture? At its simplest, Row 44 is projecting that the take rate for connectivity on Southwest will grow to 6.5% (not outrageous, but perhaps ambitious given recent trends for Gogo and the predominantly leisure orientation of Southwest’s customer base) and the take rate for the “TV/IPTV/VOD” service will be 5.75% in 2014. Recall that passengers are paying $5 for internet connectivity on Southwest, which is the same as Row44′s assumed $5 per passenger fee for TV/IPTV/VOD. That’s all well and good if this was seatback IFE, available (and very visible) to all passengers with attractive early window content (very few people pay for live TV onboard planes in the US today), but remember that the only way to get access to the “TV/IPTV/VOD” service is through an Internet-enabled portable device.
Why on earth would almost as many passengers decide to pay (the same amount) for access to just the walled garden “TV/IPTV/VOD” service as pay for access to the rest of the Internet (where they might expect to have access to any content they choose – unless Row 44 decides to cripple the Internet service, which of course will lead to its own problems)? Will Row 44 have some incredibly compelling early-window content? Well studio executives apparently “Lol’d” when asked about whether they would allow early window content to be streamed over wireless IFE networks. And remember that while you might happily access email and social media on your iPhone, its far more difficult to watch long form video on a phone for an hour or two, so in reality even less devices may be suitable for watching the content services than for accessing the Internet.
Row 44 also intends to generate $19M ($0.15 per passenger carried) from its portal business by 2014, even though it has “only nominal revenue from the portal business today”. As another point of comparison, Row44 expects to make more than half of its passenger revenue from the video and portal services by 2014, when today Gogo only generates 2% of its Commercial Aviation revenue from “Gogo Vision, Gogo Signature Services and other service revenue” (i.e. video and portal services combined, plus other services such as VOIP for flight crews).
Fundamentally, I simply can’t understand why on earth Global Eagle think that this business is a good investment (though lack of understanding might be one reason). The history of inflight connectivity is littered with failures, and even Gogo, the market leader, is facing challenges in getting a return on its investment, let alone completing a successful IPO. In every respect, Row 44 is a worse business than Gogo: it has substantial ongoing bandwidth costs, far more expensive equipment, and (in Southwest) probably the least attractive airline in the US from the point of view of demand (few business travelers, short flights and no power outlets). I can only conclude that, as in the picture above, Global Eagle is suffering from the Icarus Syndrome, and flying too close to the sun for its own good.
It seems that most if not all commentators have ignored Gogo’s Aug 14 S-1 amendment containing the company’s results for the first half of 2012, instead picking up on Gogo’s Aug 28 press release that Gogo has been approved to operate in Canada (which in fact according to Gogo’s SEC filing was actually approved back in mid July).
That’s a shame because the six month results are pretty fascinating: they show that in Q2 of 2012 Gogo’s take rate and (more significantly) the average revenue per passenger carried both fell compared to Q1. If the revenue per passenger carried does not grow after the price increases Gogo implemented during the second quarter of 2012, then this raises the question of whether we may already be close to the point at which Gogo’s average revenue per plane cannot be increased much further. In addition, Gogo’s average revenue per session fell from the previous year, despite the price rises. Gogo’s filing attributed the decline in revenue per session to more (lower revenue) sponsored sessions compared to the same period in 2011. However, this simply highlights that a major contributor to Gogo’s (rather modest) increase in take rates over the last year has been the growing use of sponsorships, which are counted as part of the “take rate” even when passengers do not pay anything to use the service.
The chart above shows how Gogo’s take rate has developed by quarter since its launch, and how much it has been driven by promotional activity, with take rates at an all time high during the Google promotion in Q4 2010, and falling quite sharply when there was very little promotional activity in Q2 2011. Q1 2012 saw another boost to take rates, again coinciding with high levels of sponsorship revenues.
Though there is clearly some underlying growth in the take rate, during the remainder of 2012 this is likely to be diluted by the increasing number of Gogo installations on regional jets (where usage is much lower than on longer flights) and the (more marginal?) deterrent effect of recent price increases. As a result, I now expect that barring some large scale sponsorship, Gogo take rates for 2012 as a whole are unlikely to exceed 6%, and if we only count paid usage by passengers, then the true take rate may remain below 5%.
That’s pretty scary given the $1B valuation supposedly being mooted for Gogo’s IPO and the $200M valuation put on Row44 in its recent fundraising transactions. Its also interesting that Gogo’s bankers insisted that their recent $135M loan should be secured against Gogo’s profitable Business Aviation subsidiary, with cashflows from that operation potentially devoted to pre-payments on the loan, so that their loan recovery would not depend solely on the success or otherwise of Gogo’s commercial aviation business.
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