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.
Without any hint of the PR blitz that I had expected, Intelsat has quietly updated its website to confirm my blog post in March, that it is about to order at least two new satellites, IS-29 and IS-33 to provide high capacity spot beam Ku-band service in the North Atlantic and Indian Ocean regions. These satellites will be in-service in 2015 and 2016 respectively, and are intended to “provide four to five times more capacity per satellite than our traditional fleet” with total throughput “in the range of 25-60 Gbps” (this appears to be a total not a per satellite figure – I would guess the throughput per satellite is around 12Gbps, roughly the same per satellite as Inmarsat’s GX, including its high capacity overlay beams).
UPDATE (June 7): Intelsat has now put out a press release and added more data to its website including a fact sheet, which states specifically that the throughput of 25-60 Gbps is per satellite. Obviously this figure is a wide range but it is clearly much greater than the Global Xpress per satellite capacity. I understand that one reason for Intelsat’s lack of publicity is the quiet period associated with its proposed IPO, but Intelsat definitely considers this a very important development and has been trumpeting it privately to distributors at its recent partner conference.
Intelsat is planning to integrate these new satellites into its existing maritime coverage as shown below (indeed there is less high capacity oceanic coverage than I expected, presumably because it will take time before Intelsat’s existing capacity fills up) and it appears that Intelsat will now be looking to compete head-to-head with Inmarsat’s Global Xpress as well as Viasat (both of which Intelsat appears to be referring to with its comment that “Unlike many new satellite operators, Intelsat is not constrained to Ka-band“)
What we haven’t yet seen are the details of Intelsat’s launch partners. It is clear that one partner is Panasonic, but the more important question is who Intelsat might have managed to secure in the maritime market. Inmarsat’s recent list of XpressLink distribution partners was notable for the absence of Vizada and most other major maritime VSAT providers, so if one or more of these maritime players now makes a substantial commitment to Intelsat, it will be another important sign that the transition to Ka-band in the maritime and aeronautical sectors is far from a foregone conclusion.
The biggest news of this week’s Satellite 2012 show was only hinted at in the background, with many elements of the announcement (which I’m told was originally scheduled for Monday March 12) apparently delayed while the final details are worked out. Panasonic hinted at their role in this deal on the in-flight connectivity panel, stating that they would be investing “more than any other player in the aeronautical sector” in a new network, while Inmarsat backpeddled on their recent aggressive approach to potential Global Xpress partners, by indicating that they would allow GX maritime distribution partners to keep their own VSAT services rather than being forced to resell Inmarsat’s XpressLink Ku-band service for the next 2-3 years.
What has shaken up the industry is that Intelsat apparently planned to announce additional elements of their global Ku-band maritime and aeronautical service, using new spot beam Ku-band satellites in the Atlantic, Indian and Pacific ocean regions. Although Intelsat did issue a press release on Monday, highlighting their focus on mobility, this largely reiterated existing commitments, and omitted both new satellite plans (including IS-29, which is expected to be a high capacity satellite in the Atlantic, and will likely be built by Boeing) and Intelsat’s anchor tenant(s). More details on both of these elements are expected soon. Panasonic will apparently be the anchor aeronautical tenant for this new network and is expected to make an upfront commitment (for purchase of capacity) to help fund Intelsat’s satellite program which could exceed $100M. Many maritime VSAT providers are also looking actively at potential use of the network, as an alternative to Inmarsat’s Global Xpress project, because Intelsat have promised to operate purely as a wholesale capacity provider, rather than competing with their own customers as Inmarsat is doing. The cost of Intelsat’s Ku-band capacity is said to be comparable to Global Xpress (though that will undoubtedly be disputed by Inmarsat), and with Intelsat’s numerous Ku-band mobility beams, coverage will apparently be nearly as great as on Global Xpress.
The repercussions of this development are far-reaching, not least because it will make Inmarsat’s already challenging GX transition plan even more tricky. Inmarsat have recently backed off their original plan to select Rockwell Collins as the aeronautical terminal and distribution partner for GX and now appear poised to use Honeywell (who were originally Panasonic’s terminal development partner before Panasonic opted to bring that work in-house). Up until this week Inmarsat were requiring potential GX maritime distributors to drop their own VSAT service and instead act as agents for XpressLink until GX was launched, but Inmarsat’s CEO indicated on Wednesday that this is no longer the case. And Inmarsat are raising their prices for FleetBroadband service to try and prevent maritime VSAT competitors from using FleetBB as a backup, driving some of them such as KVH into Iridium’s arms with their new (and very aggressively priced) OpenPort backup service, which can cost less than 20% of Inmarsat’s on-demand FleetBB price per Mbyte.
Now the question is whether Inmarsat will have to engage in a further rethink of their maritime distribution strategy (prior to their hastily arranged maritime partner conference in May) as they look to assuage the widespread anger amongst distributors. Many distributors are openly delighted about Intelsat’s move, after they were told at Inmarsat’s January 2012 partner conference that they would just have to accept Inmarsat’s terms, and hand over their VSAT customers for XpressLink, because there was no other choice available. Inmarsat will also have to consider whether their revenue forecast for Global Xpress (of $500M in wholesale revenue by 2019 and $200M-$300M in 2016, based on their 8%-12% p.a. wholesale revenue growth target in 2014-16) is still achievable, especially if some of the key potential partners for maritime GX want to continue to use well-proven Ku-band services and therefore opt to stay with Intelsat for their maritime VSAT capacity.
Over the last couple of weeks I’ve thought about the value proposition for Viasat’s new Exede satellite broadband service on several occasions, but I still fail to understand what on earth Viasat were thinking when they came up with their new price plans. These plans all offer the same speeds (up to 12Mbps downstream and 3Mbps upstream) and differentiate only on the amount of data you can consume each month (7.5GB for $49.99, 15GB for $79.99 or 25GB for $129.99).
Viasat have been trying to highlight the superiority of their new service to earlier generations of satellite broadband and potentially also to “low end” DSL, and clearly hope that the new service will dramatically increase the potential market for consumer satellite broadband. However, by focusing on monthly data caps as the only difference between their price packages, when those data caps are precisely their weakness compared to DSL and the major problem as far as customers are concerned, Exede’s price packages appear to violate one of the cardinal rules of marketing, that you should sell your strengths not your weaknesses.
By providing direct price comparisons to 3G and 4G wireless data pricing (at $5-$7/Gbyte), Exede have also given up control of its future pricing (because 4G data could easily drop by 50% on a per Gbyte basis within the next year or two) and highlighted the relative unattractiveness of the service itself (because with 3G/4G wireless you can offload to WiFi for free and usually have a portable device that you can carry around). Although the comparison is certainly a little harsh, if Iridium in the 1990s was a business plan dreamt up by people who were international business travelers and thought everyone else was like them, this looks to me to be a business plan dreamt up by people with a weekend cabin in the mountains who think everyone else is like them.
None of this is to discount the potential of the consumer satellite broadband market, which could certainly expand to roughly double its current 1M users, just by serving consumers as the “last resort” option. However, Viasat has much bigger ambitions (with targets of 5M+ subscribers mentioned) to compete with at least some terrestrial alternatives and is making investment plans for a Viasat-2 satellite on this basis.
To have any chance of success in this endeavor, it seems to me it would have been much better to use traditional price differentiation by data rate (or simply have a basic capped plan and upsell to an “unlimited” plan with a Fair Access Policy) and focus instead on controlling the data consumption of the highest users (as AT&T does with the “unlimited” iPhone users). Of course Exede would then face complaints from those “power” users about how they had not been honest and upfront about the data caps, but at least Exede might then have a more compelling marketing message about how it is superior to low end DSL for the “typical” consumer.
Back in 2008, the decision of Maersk to choose Inmarsat’s FleetBroadband service for 150 (later increased to 370) vessels was described by Inmarsat as “a ground-breaking deal” which represented “the strongest possible endorsement of our revolutionary FleetBroadband service”. As a result, this week’s revelation that Maersk is now going to shift 400 vessels to VSAT must be a correspondingly earth-shattering blow to Inmarsat, because not only has Maersk decided to move away from FleetBB, but it has opted for a Ku-band solution from Ericsson and Thrane & Thrane (with a 7 year service agreement), rather than the XpressLink service from Inmarsat which would provide an upgrade path to the Ka-band Global Xpress service.
Maersk’s average spend for the 370 ships using the FleetBB service was about $2600 per ship per month retail, implying that wholesale revenues to Inmarsat in 2011 were between $8M and $9M (and making them Inmarsat’s biggest single maritime customer for L-band service). While Maersk will presumably keep Inmarsat as a backup, its safe to say that the vast majority of this revenue will likely be lost once the transition is completed. The decision to make this change comes after Inmarsat’s move to impose usage caps on maritime vessels in October 2011 (with the data rate limited to 20kbps once the cap is reached), because Maersk had apparently been generating as much as 25% of all I4 (BGAN+FBB+SBB) traffic under its former unconstrained deal, and Inmarsat was worried about the saturation of its I4 network in regions such as the Middle East, which could impact higher value traffic from defense and media users.
This news also comes in the wake of Inmarsat’s major reorganization, which was revealed in early January, and has led to the exits of a number of senior managers in the government and maritime business. Despite Inmarsat’s claims that it “does not intend to change its policy of distributing its services primarily through independent channel partners”, the new management structure will have both direct and indirect sales reporting to the same people, which has been very poorly received by Inmarsat’s distributors, who clearly expect Inmarsat to cut them out of the business in the future, as Inmarsat emphasizes its own direct sales channels and gets “closer to our partners and customers” as the new CEO describes it.
I’m told another part of the reorganization is that Inmarsat’s financial reporting will be realigned from Q1 2012 so that the four new business sectors (Inmarsat Maritime, Inmarsat Government US, Inmarsat Government Global and Inmarsat Enterprise) will report their own results on a total (retail) basis, rather than breaking out wholesale L-band revenues in land, maritime and aeronautical sectors separately. This will mean that a maritime customer transitioning from a FleetBB L-band service to a resold Ku-band service such as XpressLink will bring in the same (or more) retail revenue (albeit with a much lower gross margin), whereas previously Inmarsat would have had to take a hit to its wholesale L-band revenues to facilitate this transition.
However, this is going to make financial analysts even more confused about the prospects for the company than they already are. Most analysts have maintained a very positive view of the company, and apparently the consensus view is that Inmarsat should continue to derive value from its North American spectrum assets, whether or not LightSquared files for bankruptcy. With the triple threats of continuing bad news in the maritime sector (where there is a pretty bleak outlook for shipping companies), reductions in defense spending (including the pullout from Afghanistan) and that Inmarsat might ultimately end up paying money to LightSquared’s creditors rather than receiving future lease payments, Inmarsat’s next results call is definitely going to be worth listening to.
As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.
This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.
Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.
If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.
On its results call last night, Viasat said that it is soliciting preliminary technical proposals from manufacturers for a ViaSat-2 Ka-band satellite to complement the ViaSat-1 spacecraft set for launch in the first half of 2011. Viasat is also aiming to sell around 10% of its Viasat-1 capacity to government users and another 10% of the capacity for mobile applications. With the possibility that the Viasat-2 satellite could add beams to target areas such as the North Atlantic ocean and/or various oilfields, it now seems plausible that Viasat will seek to challenge Inmarsat’s Global Xpress project directly, in several of its Inmarsat’s planned target markets (government, energy and maritime).
This would not be particularly surprising, because it is our understanding that (despite significant efforts earlier in the year) Viasat is not on the list of bidders for the Global Xpress ground infrastructure contract, which Inmarsat is expected to award early next year (and for which bids were received in mid-October). Inmarsat has a major advantage in that Global Xpress will provide coverage around the world, including hotspots for UAV demand such as Afghanistan. However, Viasat has dramatically more capacity on its satellite and so it could potentially cherry pick some high revenue opportunities in North America and the surrounding areas.
On balance I think Inmarsat is better placed to win this battle, because we have projected for many years that the satellite consumer broadband market would not live up to Viasat’s very high expectations. Indeed I still expect that the most that Viasat and Hughes can hope for in the North American consumer broadband market is 2-3 million customers between them, with growth stalling in 3-4 years time as terrestrial buildout continues. Fundamentally, I have a hard time seeing satellite broadband as anything other than a last resort technology, however much capacity Viasat throws at the customer, because the constraining factor is the need to install a relatively costly terminal, which then requires ARPUs of $50 per month and up, far above expectations for terrestrial alternatives (especially in less wealthy rural areas).
As a result, Viasat could well be left with excess capacity if it does decide to contract for Viasat-2 before Viasat-1 has proved its commercial potential, as was stated on the call. Of course that could lead to some destructive price cutting to capture the limited number of regional customer opportunities, but just as in the MSS market when regional players have made inroads in certain areas, Inmarsat could well emerge relatively unscathed.
In recent discussions we’ve heard rumors that Inmarsat may soon make a bid to take over Thrane & Thrane, its biggest equipment supplier. Inmarsat has certainly been in acquisition mode over the last year, taking over Stratos and Segovia and investing in SkyWave. Nevertheless, such a move would still be quite a shock for many in the MSS industry.
However, it would be a logical accompaniment to Inmarsat’s Ka-band strategy: Inmarsat would be able to reduce the price of L-band equipment (particularly FleetBroadband terminals) and thereby help to fend off the threat from Ku-band VSAT for the next few years until its new Ka-band satellites are in orbit. Thrane could also play an important role in development of mobile Ka-band terminals, which are clearly the biggest technical risk in Inmarsat’s entire Ka-band plan.
Though the threat from Ku-band has been hyped up recently, most notably in Comsys’s recent maritime VSAT report, our view continues to be that L-band has a very sustainable market position, outside the highest spending ships. To date, Ku-band VSATs have achieved only limited penetration within Inmarsat’s core maritime commercial transportation market (which incidentally is much smaller than 100,000 ships), and most of these ships spend far too little to ever contemplate a move to VSAT.
By reducing the cost of L-band equipment, in concert with its aggressive moves on airtime pricing over the last year, Inmarsat has a very viable opportunity to hold off Ku-band VSAT incursion. Even the recent concerns about shortfalls in Inmarsat’s maritime revenue growth during the first quarter of 2010 appear to stem much more from the price reductions that Inmarsat and its distributors have used to remain competitive on high spending vessels, rather than any substantial loss of market share to VSAT in the commercial transportation business. Indeed many maritime VSAT service providers had a very disappointing year in 2009, and quite a number of them are now up for sale, in what we would view as an attempt to exploit the perception of rapid future market growth before they actually need to fulfill these expectations.
So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.
Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.
We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.
The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.
The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.
In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.
Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.
Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.
So how many passengers will be willing to pay for in-flight Wi-Fi service on domestic routes? We’ve always agreed that there is “‘there is zero proof’ that a significant number of passengers are willing to pay for in-flight Wi-Fi service on domestic routes”, as noted in a recent NY Times article?
Certainly airlines are “rushing to install Wi-Fi” but its far from clear that they are “banking on a viable market” since it is rumored that Aircell is funding most if not all of the cost of installations. Instead its clear that airlines see very positive passenger reactions to WiFi availability and want to gain a competitive advantage, especially amongst high revenue business travelers. It appears that airlines are receiving a share of revenues, but unless a substantial part of these payments are being held back until the equipment costs have been covered, then the number of planes needed for Aircell to reach break even may be even higher than the 2000 planes previously indicated.
Current usage largely reflects take-up confined to this business traveler segment, with Virgin America reporting that “20 to 25 percent of its passengers use it on the San Francisco-Boston route, heavily used by business travelers” with an across the board “average of 12 to 15 percent”. That’s slightly better than our experience of 15%-20% take rates (20-25 users) on cross country daytime flights between San Francisco and Washington DC with only a handful of users on short West Coast flights, and its not clear if Virgin America is including night flights in its overall estimate. Although WiFiNetNews suggests “that’s not a bad ROI”, even if 25% of the revenue goes to covering the installation costs it will still take at least a couple of years before these have been covered, and Virgin has by far the best selection of routes (about 50% of flying hours cross country) and airplanes (all with at-seat power) and this ignores the fuel cost of flying the equipment around.
For Delta, it remains far more doubtful whether a fleet-wide installation makes economic sense (although it appears the risk is likely to be borne by Aircell rather than Delta) given the prevalence of short flights in most network carriers’ schedules. Indeed, Aircell is now experimenting with lower prices on these short flights ($5.95 on one recent flight we took from San Diego to San Francisco) in an attempt to stimulate demand. As a result, as the NY Times highlights, incremental revenues from Internet-enabled smartphones may be important to closing the Aircell business plan. However, we remain skeptical as to whether it will be possible to attract substantial usage from the average consumer, unless through consumption of video entertainment, which would likely overload the Aircell network, and its far from clear what is the compelling reason to consume sports or movies, which are already available from the entertainment system built into Virgin America’s planes.
Even if it proves difficult to generate a return on its original investment, Aircell is likely to dominate in-flight communications in North America, simply because its capex is a sunk cost and it is going to be installed on 1000+ commercial aircraft in the next 18 months. We hold out far less hope for VSAT-based services such as Row44, which believe will struggle to gain critical mass and justify their rather more expensive terminal installations. The most interesting airline to focus on will be Southwest, which is currently trialling the Row44 solution. Will it decide to proceed with fleetwide installation of in-flight WiFi, and if so will it decide to switch to the much lower cost AirCell solution?
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