12.14.09
Posted in Aeronautical, Broadband, Financials, Inmarsat, Operators, Services at 5:24 pm by timfarrar
Since we last wrote on the topic in September, skepticism about the future of in-flight Internet services has become even more widespread, and recently disclosed usage data from Aircell has not been particularly impressive – roughly 100K sessions per week (of which only a fraction are paid for), equating to about a 5% take rate on equipped aircraft.
The good news is that Aircell is now touting the “operational applications” of in-flight Internet: the obvious corollary being that it is going to try and extract some money from airlines to pay for these benefits, as we suggested it would have to back in September.
The bad news is that the business case for Row44′s Ku-band service looks even more questionable than we had suspected, and it faces a near term deadline (we understand January 2010) from Southwest to secure $100M+ of funding for its planned fleetwide rollout. We have been told that the Southwest-Row44 agreement calls for Southwest to pay Row44 a fee of $0.25 per passenger flown on each equipped aircraft, whether or not they use the service, and Southwest will then mostly likely give the connectivity away for free. With Southwest carrying about 170K passengers per plane per year, that would mean Row44 receiving just over $40K per plane per year (about $22M per year in total once fleetwide installation is complete), which it hopes to supplement with advertising revenue. However, we are doubtful that a dramatic increase could be realized from advertising: for example according to a recent article, in-flight magazines generate an average of about $1M per airline per year in gross advertising revenue, and a large airline such as Southwest would presumably therefore generate in the high single digit millions of dollars from its magazine. Given the lack of technology (and power outlets) required to read the magazine, then even if Southwest gives away the Row44 service for free, usage would be far less than the 80% of passengers that read the in-flight magazine, and we would view it as unlikely that advertising revenue could add more than a few million dollars to Row44′s income.
More to the point, a free service will put an unsustainably costly load on the Row44 network: we believe this was originally designed with an expectation of loading 100 planes onto each transponder (which can provide 18Mbps of capacity), but if 25% of passengers used the network for streaming video, and other high bandwidth applications (remember that these were the primary selling point of Row44′s solution compared to Aircell), then it is quite possible that 1 transponder would be needed for every 20-30 planes. With each transponder costing about $1.25M, Row44 could find itself coming close to spending all of the revenue from Southwest on bandwidth and never making any margin to even begin to pay for the $100M+ of equipment that it would have installed.
In this context, it is far from clear that a sustainable business model is available for large scale Ku-band passenger communications deployments (although a limited Panasonic service on Lufthansa could be viable, assuming Panasonic has some form of revenue sharing agreement with Intelsat and initial installations rely on the old Connexion antennas). Certainly it appears that Viasat, which was the primary equipment supplier to Connexion-by-Boeing (and was rumored to be in pole position to secure a deal with Lufthansa, prior to its recent shift to Panasonic) is emphasizing the lower cost of Ka-band capacity over a Ku-band only model for mobility services. Intriguingly, even Inmarsat may agree that Ka-band is the future: we understand that it has recently issued an RFI for one or more Ka-band satellites, which are likely to be part of its planned roadmap for future government and/or aero services (e.g. UAVs).
Permalink
11.16.09
Posted in Globalstar, Inmarsat, Iridium, LDR, LightSquared, Operators, Orbcomm, Services at 12:37 pm by timfarrar
Inmarsat revealed in its 2009Q3 results that it is in negotiations to acquire a satellite services provider that generated more than $50 million in revenue in 2008, is currently profitable and will have no material indebtedness at closing, in a purchase that would cost less than $150M. There are very few companies in the MSS space that fit the profile given by Inmarsat, but one that does is SkyBitz, which Inmarsat noted in its June 2009 investor day presentation was one of the “key competitors” in the satellite Low Data Rate (LDR) market. Inmarsat also noted that one of its objectives in investing in SkyWave was to “stimulate consolidation in the [satellite LDR] market”.
Indeed, back in July we speculated that a possible resolution to the fight between Inmarsat and SkyBitz over what SkyBitz characterized as “restrictive trade covenants included by Inmarsat” in its SkyWave investment would be for Inmarsat to facilitate a buyout of SkyBitz. An Inmarsat acquisition of SkyBitz would have the added benefit (for Inmarsat) of taking out another of SkyTerra’s key LDR customers, in addition to the 50K GlobalWave customers who were moved from SkyTerra’s satellites to Inmarsat’s I4 satellite network in October 2009.
***We’ve now been reliably informed that Inmarsat’s current acquisition target isn’t SkyBitz. We understand it is most likely a system integrator focused on government business. We don’t have a name at this point, but one company in this area that would fit the disclosed parameters is Segovia. There are likely several other similar possibilities as well.***
We’ve lamented previously that no-one ever seems to leave the MSS industry, but if Inmarsat does eventually follow through on its stated ambitions to stimulate consolidation in the LDR market, then perhaps that sector could be one place where much needed MSS industry consolidation finally begins.
In that context, with Orbcomm having yet another disappointing quarter, we wonder if now is the time for a competitor to make a bid for Orbcomm. After all, the company expects to settle the $50M insurance claim for the failure of all of its QuickLaunch satellites “imminently”, at which point Orbcomm will not have spent too much on its second generation constellation and will still have a reasonable amount of cash on its balance sheet. That might be particularly attractive to Globalstar or Iridium, either of which would benefit greatly from moving Orbcomm’s subscribers over to their own networks (albeit with significant costs for terminal upgrades), and could allay investor concerns about whether Orbcomm can fund the rest of its second generation satellite constellation (which would be exacerbated if the company fails to receive something close to $50M from its insurance claim in the near future). With its partners postponing some new service offerings until messaging delays are resolved, Orbcomm will need these new satellites sooner rather than later if it to build a sustainable business and generate the rapid growth that has been promised ever since the company’s IPO in 2006, but to date has failed to materialize.
Permalink
09.14.09
Posted in Aeronautical, Financials, Inmarsat, Operators, Services at 12:26 pm by timfarrar
It seems that people are now coming round to the view, which we’ve expressed since 2006, that there won’t be enough paying users of in-flight broadband for both network providers and airlines to make a profit on the costs of deploying equipment and running a network (as Boeing found out after spending somewhere between $1B and $2B on Connexion). Our view was that only airlines who are interested in offering a differentiated service would be able to justify the costs involved. However, to date the leading service providers (Aircell and Row44) have apparently not only been installing the equipment for free, but have also been offering a cut of revenues to the airline. Its no wonder that this “no lose” proposition has led to fleetwide installation commitments from most of the major US airlines. In comparison, installations of Inmarsat equipment for in-flight cellular services on aircraft in other parts of the world have slowed dramatically over the last 18 months, as most airlines no longer have the money to pay for fleetwide upgrades (with the possible exception of Ryanair, which we suspect may have a similarly attractive deal from OnAir).
Lost in the noise of Southwest’s commitment to install Row44 service across its entire fleet of 540 aircraft was the footnote that there isn’t “a solid timeframe for [installation]” because “certain specific details concerning the cost and financing of equipage are still being worked out”. From what we’ve heard, Row44 needs to raise a lot more money very soon in order to move forward with full-scale deployment (pretty obviously, since fitting equipment on 500 planes at $250K+ each would cost $125M), and presumably Southwest’s announcement was timed to help them secure that funding. However, with Southwest also demanding “control [over] the price point that our customer sees”, it seems a pretty unpalatable deal for potential investors if Row44 must front the installation costs and pay for the network and then let Southwest set the pricing to maximize its own return (probably more dictated by customer loyalty) rather than Row44′s revenues. Similarly unreasonable expectations appear to have been the reason why the oft-mentioned return of Connexion service on Lufthansa (who refused to provide any revenue guarantee to the network provider but wanted to make the provider liable for any future equipment deinstallations) has not happened to date.
What is the solution to achieving a sustainable business model for in-flight broadband? Whether it lies in airlines providing connectivity for free as a differentiator for their customers, or airlines using the link to the aircraft as a means to reduce their own operating costs, what we’re ultimately going to have to see is a change in the direction that the money flows. Instead of airlines getting the equipment for free and receiving a share of the service revenues, the airline is going to have to pay for the equipment and maybe in some cases even offer a revenue guarantee to the network provider (particularly on long-haul international routes where the cost of providing Ku-band coverage is much greater).
How palatable will in-flight connectivity be then to airlines that are currently losing hundreds of millions of dollars a year? At the very least we’d expect them to be a lot more discriminating in deciding whether to provide connectivity or not (who needs it on a one hour shuttle flight?). Perhaps its only if one of the providers goes bust that we’ll see a return to rationality in pricing (of course, it would be very unlikely for the service itself to disappear completely as Connexion did, because the costs of operating either Aircell or Row44′s networks domestically aren’t that high). Until that point is reached, expect airlines to continue to scramble to get something for nothing with their in-flight connectivity installations. In the meantime we’ll be watching carefully to see if the discussions over “cost and financing of equipage” between Southwest and Row44 get resolved and if investors are willing to put more money into in-flight connectivity providers.
Permalink
09.09.09
Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services, TerreStar, Thuraya at 12:43 pm by timfarrar
Unfortunately its not new services, but the prices of current and future satellite phones and airtime that seem to be headed upwards. The last year has seen Iridium introduce its new, improved 9555 handset at a higher price than the 9505A that it replaced, with phones now selling for about $1500, while Thuraya has “simplified” (i.e. increased) its airtime pricing and introduced the more expensive ruggedized XT phone. Inmarsat admitted in June that its new GSPS handset may sell for up to $750 at launch in 2010, compared to the $500 retail price point it suggested previously. Even TerreStar has now indicated that its new handset may cost up to $800, with airtime pricing at “less than $1 per minute”.
We’ve commented before on how satellite phone revenues have been falling since 2005, and competition has certainly diminished as Globalstar has experienced problems with its two-way services over the last couple of years. However, it seems the consensus amongst current participants in the handheld MSS market is that there is little if any growth potential still left in satellite phones, and the actions of Iridium and Thuraya appear to indicate that their remaining customers are relatively price insensitive.
Even more surprising is that so far, at least, the new entrants do not seem to be particularly keen on shaking up the existing “premium price” paradigm for satellite phones. In the case of TerreStar this is rather worrying, given that their objective is to greatly expand the satellite phone market, and bring satellite-cellular roaming to a mass market, which seems very unlikely to happen with an $800 phone. Is TerreStar simply trying not to give too much away about its future pricing plans, while it focuses on developing all the other elements needed for a commercial service, such as distribution channels, billing systems, etc.? Will TerreStar actually be able to convince a cellular operator to subsidize its phone (which would require a significantly greater commitment from a partner than its current roaming agreement with AT&T)? We should find out soon, as TerreStar intends to launch commercial services at the end of 2009.
Permalink
07.03.09
Posted in Inmarsat, LDR, LightSquared, Operators, Regulatory, Services at 9:12 am by timfarrar
In April 2009, Inmarsat announced that it would be taking a 19% stake in SkyWave, facilitating SkyWave’s acquisition of Transcore’s satellite communications assets. However, SkyBitz, Wireless Matrix, XATA and Comtech Mobile Datacom [the Commenters] jointly objected to SkyWave’s FCC application for the transfer of these assets, citing “numerous and substantial negative impacts on MSS Providers and other end-users using L-band capacity”. Although the submission is heavily redacted, it appears that one of their primary concerns relates to the “restrictive trade covenants included by Inmarsat” in the Transaction and they demand an explanation of how Inmarsat “will ensure non-discriminatory treatment of all MSS Providers and other end-users with respect to capacity, availability and contractual terms and conditions”. The Commenters “believe in fact that the Transaction will (i) actually eliminate competition for end-users (as a result of the Covenant), (ii) delay deployment of advanced satellite services to end-users other than SkyWave’s customers, (iii) result in higher pricing to end-users at the expense of higher margins for SkyWave and Inmarsat, and (iv) ultimately reduce the affordability of MSS services for end-users.”
While it remains unclear exactly what is contained in the “Covenant” referred to in these comments, Inmarsat noted at its recent investor conference that one of its motivations for investing in SkyWave was to promote consolidation in the Low Data Rate (LDR) industry, and that more than half of the investment comes in the form of future airtime credits. The Transaction also “provides for a fully funded development programme for new products and services” and will drive “traffic growth on Inmarsat satellite network”, we assume at least partly as a result of SkyWave and Transcore committing to use Inmarsat’s capacity exclusively (Transcore currently uses SkyTerra’s L-band capacity in North America). The airtime credits and development program certainly give SkyWave an advantage over other providers using leased L-band capacity, and this financial and commercial advantage is presumably what would induce the “consolidation” that Inmarsat seeks.
What is particularly interesting is that on June 29, SkyWave withdrew its FCC application to undertake the Transaction and on June 23, Inmarsat (in conjunction with other MSS operators) sought an extension of time until July 14 to respond to the FCC’s consultation proceeding for its Third Annual Report to Congress on Status of Competition in the Provision of Satellite Services in which the only meaningful concern was also expressed by SkyBitz.
With SkyBitz (which currently uses leased SkyTerra capacity) cited by Inmarsat as one of the “key competitors” in the LDR market (and the only plausible one that could switch to Inmarsat capacity, since the other key competitors listed, namely Iridium, Qualcomm and Orbcomm, all use incompatible technologies), it will be very interesting to see what happens over the next few weeks: will Inmarsat restructure (or even abandon) the SkyWave Transaction to eliminate the “restrictive trade covenants” that SkyBitz is concerned about (presumably making it more difficult to promote the consolidation Inmarsat seeks), or will Inmarsat actually facilitate a deal between SkyBitz and SkyWave to fulfill its market consolidation objective and eliminate the most prominent source of objections?
Permalink
07.01.09
Posted in Financials, Globalstar, Handheld, ICO/DBSD, Inmarsat, Iridium, LightSquared, Operators, Services, Spectrum, TerreStar at 10:25 am by timfarrar
With apologies to the Eagles…its a lovely place, for MSS consumers at least. However, for MSS operators it seems to be somewhere you can check out [or go bankrupt] anytime you like, but you can never leave.
Today we’ve seen confirmation that Globalstar is now fully funded to complete the construction and launch of its first 24 second generation satellites by the end of 2010, while TerreStar has launched its new S-band satellite from Kourou, French Guiana and intends to initiate commercial services at the end of this year. Iridium also looks increasingly likely to complete its deal with GHL, since GHL’s shares and warrants are now trading well above the $10 value that would be refunded to investors if they voted down the deal. While there has been much speculation about potential mergers in the last two years, these now look less, rather than more, likely to occur in the near future (with the sole exception of SkyTerra’s Harbinger-backed bid for Inmarsat, which should be decided one way or another later this year).
Thus by early 2011, it looks like we will have at least four and more likely six voice and data MSS systems providing service in North America (Inmarsat, Iridium, Globalstar and TerreStar plus ICO and SkyTerra) and four systems (Inmarsat, Iridium, Globalstar and Thuraya) providing service in most of the rest of the world. With new advanced satellites, consumers will benefit from improved data capabilities and smaller, cheaper handheld satellite phones.
However, the development of at least three new systems (ICO, TerreStar and SkyTerra) and to some extent Globalstar as well (based on financial analysts’ comments at the time of its IPO in November 2006) has been justified largely by the value of MSS spectrum, due to the FCC’s rules enabling deployment of Ancillary Terrestrial Components (ATC), rather than by the intrinsic potential of the market for mobile satellite services itself. Thus, unless and until demand for MSS spectrum and ATC materializes, we run the risk of overcapacity for land-based MSS services, particularly in North America. This will certainly benefit end users, and price reductions (especially in conjunction with cheaper, more attractive terminals) may help to stimulate significant market growth, but it remains to be seen whether this will enable all the MSS operators to deliver a return for their investors or whether we’ll see more of them “checking out” with a bankruptcy filing as ICO North America did in May this year.
Permalink
06.19.09
Posted in Broadband, Government, Inmarsat, Services, Spectrum at 11:27 am by timfarrar
We’re not referring to hybrid satellite-terrestrial (ATC/CGC) networks, but to the details of Inmarsat’s long term satellite development plans for its Inmarsat-5 constellation revealed at today’s investor meeting in London. Though its fifth generation satellites are not due to be launched for nearly ten years, Inmarsat is already actively developing plans for satellites which include both L-band and higher frequencies, not just a “cheap and cheerful” low cost evolution of its current satellites.
Inmarsat doesn’t plan to develop what it characterized as “high risk” L-band satellites with ground-based beamforming (which is being employed by ICO, TerreStar and SkyTerra, with no apparent problems that we can discern), but instead is looking at including other frequency bands in the I5 constellation. In addition to indicating that S-band is not needed for its core business (but would instead be used mainly for terrestrial applications), Inmarsat suggested that standard FSS frequencies (i.e. Ku-band) were not particularly interesting. Thus we conclude Inmarsat may have a preference for including military Ka and/or X-band capacity on the I5 satellites. With the US government deploying its own Wideband Global System (WGS), there will be many thousands of DoD terminals in the field capable of using these frequency bands by the time the I5 constellation is launched.
Potentially the I5 satellites could provide surge capacity for the DoD (and other defense agencies) to supplement the government-owned WGS satellites, and provide incremental revenue opportunities for Inmarsat. Alternatively, Inmarsat could carry a hosted WGS-derived payload, in the same way as Intelsat recently agreed to carry a hosted UHF payload for the Australian Defense Force. According to figures provided at the conference, Inmarsat already receives 37% of its revenues from government services, and either approach would cement or even increase the proportion of revenues from government in the future.
Permalink
06.15.09
Posted in Financials, Globalstar, Handheld, Inmarsat, Iridium, Operators, Services at 11:53 am by timfarrar
As Inmarsat moves towards commercial launch of its new Global Satellite Phone Service (GSPS) some time in 2010, expectations have been building in the analyst community about the potential of GSPS to gain 10%+ of the $500M satellite phone business. In reality, the $500M market estimate (given by Inmarsat in 2006 when it acquired ACeS) represents retail service revenues and is an overestimate given the significant revenue declines experienced by Globalstar and Thuraya, two of the three principal handheld satellite phone providers, in 2007 and 2008. By our estimate, Globalstar, Thuraya and Iridium generated only about $270M in wholesale service revenues from handheld satellite phones in 2008, including a significant amount from Iridium’s US government contract.
While Inmarsat will start to compete in this market during 2010, what appears to have been completely overlooked by analysts are the significant limitations of the GSPS handset. As with the current SPS phone (see p17 of the user guide), we believe that customers will be advised to use the handsfree earpierce and physically point the phone antenna at the Inmarsat satellite. Some level of user cooperation in using satellite phones is not unprecendented, since Thuraya advises customers to ensure the antenna is pointed at the satellite when operating at low elevation angles, such as in south east Australia. However, Thuraya has never achieved much success in areas where this level of user cooperation is required, and the feedback we’ve heard on the first generation SPS phone that’s in use today has been pretty negative.
Inmarsat will certainly be able to improve the performance of the GSPS service within the EMEA region, to a level comparable with Thuraya, once its more capable Alphasat satellite is launched in 2012. However, Inmarsat will be constrained in the size of the antenna that it can use on future satellites, due to the need to maintain its existing levels of maritime coverage, so Inmarsat is unlikely to be able to extend similar levels of handheld performance globally without very substantial incremental capital expense.
Thus it does not appear that GSPS will be a realistic challenger to Iridium as a global satellite phone, and it may not be easy for Inmarsat to reach its target of a 10% market share within two years of launching the product, especially if Globalstar completes its next generation system and re-enters the market as a low cost handheld provider by early 2011. More importantly, as Iridium seeks to fund its next generation system (a prospect of which Inmarsat has been openly scornful), it will be able to make a very strong argument to the US government that Iridium NEXT is a necessity to maintain support for global handheld satellite services, on which US soldiers are increasingly reliant.
Permalink
05.18.09
Posted in Inmarsat, Maritime, VSAT at 7:22 pm by timfarrar
In January 2009, we questioned whether KVH and Viasat could afford the investment needed to complete their 2009 coverage expansion plans, as shown below.
Now the planned coverage expansion shown on KVH’s website has changed, with the South Pacific coverage expected in Q4 2009 dropped (at least for now), and the East Asian expansion delayed. Is the current economic slowdown beginning to impact miniVSAT demand, or is it just that with other parts of KVH’s business suffering, the company is now trying to be more cautious with its investment?
Although Inmarsat has not yet seen any impact from the downturn, we should find out in the next few months how widely the current economic pain is going to be felt in the maritime satcom market. Given the high capital cost of maritime VSAT equipment, it wouldn’t be surprising if VSAT suffered more than Inmarsat from any slowdown in maritime communications spending.
Permalink
05.14.09
Posted in Financials, ICO/DBSD, Inmarsat, Regulatory, Spectrum, TerreStar at 2:07 pm by timfarrar
The European Commission has announced the result of the S-band MSS selection process: as expected the two winners are Solaris Mobile and Inmarsat, with ICO and TerreStar’s applications rejected.
In response to the announcement, Inmarsat said it was “delighted to be the recipient” and “will look to pursue the commercial partnerships necessary to ensure that the returns from the required investment in our S-band programme will generate acceptable returns on capital without undue risks or uncertainties”.
However, it may not have much time to establish these partnerships, since the EC has stated that “within 30 working days of the publication of the list of selected applicants they shall inform the Commission in case they do not intend to use the radio frequencies”. If applicants decide to move forward (i.e. do not return the license) then they “will be bound by the commitments that they have undertaken, including commitments made concerning consumer and competitive benefits and geographic coverage” and all new systems must have “development and deployment completed” by May 2011 “at the latest”. A two year deadline for deployment is extremely tight, and Inmarsat would have to start spending serious money in the very near future (probably close to $100M in the next 12 months and $300M over the next two years) to complete and launch a satellite in this timeframe.
It will be very interesting to see if Inmarsat can find partners to come up with this amount of money (or enter into some alternative form of capacity purchase contracts) in the next 30 days. Given that Solaris already has a satellite in orbit (albeit with more limited coverage) and has not yet announced any meaningful capacity commitments, it would be quite a surprise if Inmarsat was successful, especially in the midst of an economic downturn.
It remains unclear what sanctions the EC can impose on operators who fail to live up to their “commitments” and ultimately do not complete an S-band satellite on the promised schedule. We would have thought it unlikely that fines or other monetary penalties would be imposed, but coming a day after Intel was fined more than 1 billion Euros by the EC’s Competition Directorate, this may not be a good time to get on the wrong side of the Commission.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
