11.15.19

Picking up the C-band pieces…

Posted in AT&T, Financials, Intelsat, Operators, Regulatory, SES, Spectrum, Verizon at 2:13 pm by timfarrar

It looks like the CBA’s offer today to make a (not particularly generous) defined contribution to the US Treasury may have come too late to rescue a private auction, with reports that FCC Chairman Pai will shortly lay out a plan for a public auction of the C-band spectrum. That comes after what I’m told was a call to Chairman Pai from President Trump, at the instigation of Sen. Kennedy, who has used increasingly heated rhetoric to demand a public auction in recent weeks.

The irony of that action will not be lost on those who remember Pai’s statement in March 2016 on the prior Commission’s net neutrality decision that “Moving forward, the Commission must recommit itself to being a truly independent agency that makes decisions based on the facts and the law, not on the whims of any White House.”

UPDATE (11/18): Chairman Pai has now announced that the FCC will conduct a public auction before the end of 2020. However, the FCC has also stated that the President “did not express an opinion” in his call to Chairman Pai, and it is “categorically false” that Trump drove the decision on a public auction. A bill to mandate a public auction, with at least 50% of the proceeds going to the Treasury, has also been introduced in the Senate, although it is unclear if it will be taken up expeditiously.

A great backgrounder on the issues involved was laid out by Harold Feld on Wednesday, where he points out that a major issue is that Congressional rules do not permit a “voluntary contribution” to be spent by Congress, unlike the proceeds from an FCC run auction. Moreover, Congress can spend whatever the CBO estimates the proceeds will be, and a ludicrously optimistic $50B-$60B figure is being widely banded about.

As Harold also points out, the FCC does have authority to repurpose the C-band spectrum in the public interest by only paying transition costs to the parties involved. However, he doesn’t note that in recent years Republican policy wonks such as Tom Hazlett have been encouraging private transactions to repurpose spectrum for its “highest and best use”, arguing (correctly) that FCC intervention has often directed spectrum to politically connected players rather than serving the public interest.

What the FCC does not have is authority to share the proceeds of a public auction with the satellite operators, unless it can contort the incentive auction statute (which requires at least two competing bidders) to fit this situation. However, if the FCC cannot share the proceeds with the satellite operators then not only will there be prolonged litigation, but the satellite industry may be plunged into even more of an existential crisis than it already faces from declining revenues and the loss of customers to terrestrial alternatives. Moreover, there will be no incentive for satellite operators to move swiftly to make the spectrum available for terrestrial use within the next three years.

As a result, there is a clear imperative for satellite operators to receive a meaningful proportion of the proceeds, which was recognized by the proposed Matsui bill earlier this summer. That bill would have allowed the satellite operators to keep 75% of the net proceeds if they had cleared 300MHz, as is now on the table (the current CBA offer is less generous to the government, despite specifying a minimum 30% voluntary contribution, because that contribution is “inclusive of all Federal income tax liabilities incurred by the CBA member companies as a direct result of the auction”). However, it is unclear whether any such legislation will be able to pass into law in the current fevered political climate, especially when Sen. Kennedy has railed against giving away “$60 billion that belongs to the people of America to two companies in Luxembourg and one other one in Canada”.

What options does that leave the FCC with? Well the most obvious possibility might be for the FCC to return to the original concept, before the October 2017 offer from Intelsat and Intel, and conduct a public overlay auction for spectrum rights in 300MHz of the C-band before the end of 2020. If the CBA can come up with a agreed, concrete price and timetable for clearing the spectrum for the benefit of the overlay rights holders, set at a level that is acceptable to the cellular operators, then the FCC can claim to have complied with the Congressional (and Presidential) demands to conduct a public auction, without needing new legislation or to work around the language of the incentive auction statute. Of course the public auction would then raise a much more limited amount of money, assuming the CBA is going to receive many billions of dollars for moving out of the spectrum and giving up its rights to this part of the band.

However, it is unclear whether the CBA is capable of agreeing to a specific clearing price in the short time remaining before Chairman Pai has to decide how to move forward. One of the biggest problems in this whole process has been how long it took to come up with a concrete commitment to clear 300MHz and now to publish a specific revenue share for the government. Of course the CBA has been worried that by publishing specific figures it would be bidding against itself. But by allowing the process the drag on for so long, it became possible for Sen. Kennedy and others to consolidate their opposition to a private sale.

Now that Eutelsat is on the sidelines (and has its own interests in worsening Intelsat’s financial position), it may be even more difficult to reach agreement. Investors’ unreasonable expectations about the price that could be realized in an auction, represent another barrier to agreeing a fixed clearing price with AT&T and Verizon. With 280MHz on offer, it is very hard to see how demand could significantly exceed supply, which would be needed for auction prices to rise to $50B or $60B. Verizon and AT&T are unlikely to spend more than $10B each to buy 100MHz per operator, and T-Mobile will not need to participate in a major way if its merger with Sprint goes through. Beyond that there are very few companies who will want to pay billions of dollars for C-band spectrum, because it makes little sense to start in that band as a potential new entrant. So I struggle to see the gross total raised from a C-band spectrum sale getting to more than $30B (~$0.30/MHzPOP).

More importantly, a fixed clearing price certainly could not exceed the amount AT&T and Verizon are collectively prepared to pay for their share of the spectrum (i.e. $20B), since they would be instrumental in negotiating that figure. More likely, AT&T and Verizon would be unwilling to agree to a clearing price above about $15B (if not less), leaving net proceeds after ~$3B of actual costs at roughly $5B each for Intelsat and SES. Compared to where we stood two years ago, when no value was attached to C-band spectrum, that seems like a pretty stunning achievement. But at this point in time, after two years of declines in the core satellite business, it would be unlikely to make Intelsat shareholders happy.

02.09.19

Splitting the C-band baby

Posted in AT&T, Financials, Intelsat, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 2:02 pm by timfarrar

It’s now just over a year since I first wrote about the possibility of a “pioneering market-based transfer of [C-band] spectrum to higher value uses” which could allow satellite operators to sell part of the C-band to boost Verizon’s 5G network capacity. In that time, the process has moved forward significantly, with the FCC issuing an NPRM in July, to which comments and reply comments were received late last year.

Opposition from the cable companies has been growing, as they’ve become scared by the prospect of new wireless broadband competition, with Verizon, T-Mobile and AT&T all admitting that they have no better plan than to use the huge amounts of capacity that their new 5G networks will create, to compete in the fixed broadband market.

But it was truly ironic to see New America and Google team up with the cable industry last week to claim that the plan put forward in the NPRM for a private market transaction represents “The Great Airwaves Robbery” because satellite operators rather than the Treasury will receive the proceeds. Not only are these very odd bedfellows, but Google has traditionally been on the side of freeing up more spectrum and encouraging broadband competition, rather than trying to block such an effort.

However, it now seems that if Google can’t get what it wants in the C-band (meaning essentially free access to the band on a shared basis), it will seek to derail the plan for a market-based approach. While one reason for Google to mount this effort is to prevent C-band from undermining interest in the CBRS band in which has invested a lot of time and resources, a cynic might also say that Google would prefer a “Political Spectrum” where the FCC would be able to insert policy provisions that suit Google, especially since an FCC-run auction wouldn’t take place until after the next Presidential election in November 2020.

That’s certainly been the case in the past, when Google persuaded (Republican) FCC Chair Kevin Martin to include Open Access provisions covering the upper C-block into the rules for the 700MHz auction in 2008. Of course, despite the fact that the Open Access conditions ultimately proved to have no effect on the wireless market, Google didn’t care that these provisions meant that the C-block spectrum sold (to Verizon) for less than half the price of the unrestricted paired A and B blocks, costing the Treasury something like $6B in auction proceeds.

Nevertheless, it is clear that the various sides of the C-band debate appear to want to capture all of the benefits for themselves, without looking for a compromise solution. This includes the satellite operators, where Preston Padden of the C-band Alliance (CBA) has claimed that there is “no alternative” to the CBA Plan, which gives all of the control and sale proceeds to the satellite operators. In fact there is a fairly simple compromise option, which follows the traditional FCC model of splitting the baby, so everyone gets something out of the process. That was followed back in 2003, when the initial approval of Ancillary Terrestrial Component (ATC) flexibility for MSS operators was given in exchange for 30MHz of the 70MHz of 2GHz band MSS spectrum being reallocated to terrestrial services (this ultimately became the G block and H block spectrum).

So a relatively simple solution at this point would be to allow the satellite operators to sell the 180MHz of spectrum at the bottom of the C-band, and keep the proceeds (part of which would be used to pay for new satellites and filters to enable continuation of video delivery in the remaining 300MHz of spectrum), while the FCC conducted an overlay auction of terrestrial mobile licenses in the rest of the band (excluding a modest guardband of perhaps 50-100MHz below 4200MHz to preserve key services and protect aeronautical users in the 4200-4400MHz band). Purchasers of the overlay licenses (which would cost considerably less than the spectrum being sold by the CBA) would then be able to pay C-band earth station owners to move their earth stations away from major cities or migrate them to fiber, in order to clear the spectrum in high demand areas, with no additional compensation due to the satellite operators (since the satellite operators would already be receiving a windfall from the spectrum they sold).

All parties could then be compensated: the satellite operators would receive proceeds from selling 180MHz of spectrum (potentially worth $11B-$18B at $0.20-$0.30/MHzPOP), the Treasury would receive proceeds from the overlay auction (potentially worth $4B-$5B from selling 270MHz at $0.05/MHzPOP) and the earth station operators would receive compensation if they decided to migrate to fiber or relocate their earth stations to clear the overlay spectrum. And both the FCC and the wireless operators would be happy, with T-Mobile’s demand for 300MHz+ to be made available being met if they bought the overlay licenses and paid to clear the spectrum in the areas where they needed spectrum, while Verizon and AT&T could get the spectrum they need in the near term by agreeing a deal with the CBA. Even Google could acquire spectrum in the overlay auction, if they really did want to buy spectrum, rather than just prevent others from getting hold of it.

Of course the cable operators might not be happy with the additional competition for their broadband business, but they would also have the option to acquire spectrum in the overlay auction, and compete in the wireless market themselves, especially since they would have an easier time clearing their own earth stations out of the band. And if they didn’t want to do that, they could hold out for compensation from the holders of the overlay licenses.

Will the CTIA and the wireless operators now be prepared to push for such a compromise? Will the satellite operators accept that they can’t have it all? And will the cable operators and Google accept that blocking the reallocation of C-band spectrum to terrestrial is an unacceptable outcome? That depends on whether the FCC is willing to rule that none of the parties should get all of what they want, but everyone can get something.

05.22.18

Please don’t throw me into the briar patch!

Posted in Intelsat, Operators, Regulatory, SES, Spectrum at 4:50 pm by timfarrar

It took a while, but it seems that in April investors in Intelsat finally noticed my January blog post, and started to believe in the potential for a windfall from C-band monetization, causing the share price to jump from well under $5 to over $14 now. That’s brought out a lot of new skeptics, who are highlighting differences in both the share price performance and results call commentary at Intelsat and SES.

Some even appear to believe that SES is opposed to ever monetizing more than 100MHz of spectrum, when in fact Intelsat and SES have jointly conveyed the opposite message to the FCC, stating in April:

“For these reasons, Intelsat and SES have proposed an amount of spectrum clearing – 100 MHz available for terrestrial mobile use plus additional transition band spectrum needed to ensure that 5G operations are compatible with ongoing Fixed Satellite Service (“FSS”) to customers in the uncleared spectrum – that they believe can reasonably be accomplished within 18-36 months following a final Commission order. The Parties stated that if the terrestrial demand for mid-band spectrum is as robust as claimed, their market-based approach could result in additional spectrum being cleared in the future – but in a manner and timeframe that protects Intelsat’s and SES’s customers and their businesses.”

So it’s hard to understand why people would see Commissioner O’Rielly’s remarks that “To make this worthwhile, an adequate amount of spectrum – at least 200 or 300 megahertz to start – needs to be made available in this band” as a sign of opposition to a private transaction. That’s especially true when he also said that “This method provides an attractive option that should be thoroughly considered, particularly because of the speed in which it could bring the spectrum to market” and it aligns perfectly with Republican ideals, as described in Tom Hazlett’s book “The Political Spectrum”, that the FCC should allow market forces to reallocate spectrum to the highest and best use.

Certainly there are concerns about the pace of reallocation, given the complexity of moving current users around, and ultimately unwinding the substantial cross-subsidies from large to small cable companies that are inherent in the way distribution of content via satellite is paid for today. However, an outcome along the lines of “sell 100MHz now, then another 200MHz+ within 5 years” (with the option to clear the remainder within say 10 years), is certainly plausible.

At that point any complaints from satellite operators about being forced to clear too much spectrum would be reminiscent of Brer Rabbit saying to Brer Fox “please don’t throw me into the briar patch” because even skeptics like FT Alphaville indicate that the C-band spectrum should be worth more than the ~$0.13/MHzPOP paid in the recent UK spectrum auction (£1164M for 200MHz of spectrum from 3400-3600MHz), putting a valuation in excess of $20B on the entire 500MHz spectrum band.

Another concern expressed by skeptics is that any proceeds would take years to be realized, which is hard to comprehend for the first 100MHz of spectrum (worth $4B+ according to the FT’s assumption), since as in all spectrum sales, the buyer pays upfront and only then is the spectrum cleared. Indeed, if Intelsat and SES were to accept a pre-emptive offer for this initial slice of spectrum (as suggested in my January blog post), a deal could be even in hand at the time that a final FCC order is issued, rather than a process being run after the order is approved. Assuming the initial NPRM is issued soon (plausibly at the July FCC open meeting), that could advance the timing of receipts to the middle of 2019 rather than the very end of 2019 or more likely some time in 2020.

One remaining question raised above relates to the divergent performance of Intelsat and SES’s share price in recent months. But I think this is easily explained by investors believing that SES might well re-invest any windfall into more O3b satellites (where the ultimate return on capital is far from certain), while Intelsat will pay off its debts, stop spending money on new satellites, and return capital to shareholders.

Indeed if you believe that the future of large parts of the FSS industry could look a lot like the dial-up internet business in the mid-2000s, the best bet for Intelsat might then be to sell off its Ku-band data satellites to OneWeb and run the company purely to generate cash from running its legacy satellites and from monetizing its spectrum over time.

So despite me being one of the most skeptical people around on the ability of DISH, Ligado or Globalstar to realize a windfall from their spectrum holdings, I simply don’t understand why investors who apparently don’t know much about spectrum issues think now is a good time to be shorting Intelsat. In early 2017, I didn’t believe that Straight Path would find a buyer that was desperate to establish a leadership position in 5G spectrum in the shape of Verizon, let alone draw AT&T into a bidding war (not least because much more mmWave spectrum will be auctioned in the future). Though at least I wasn’t alone, because even Straight Path’s management was left in disbelief about the result.

But with that as the example, and the C-band now representing the most obvious (and perhaps only) opportunity to acquire a very large block of spectrum for high power mobile use, with much better propagation characteristics than mmWave spectrum and at a fraction of the price of DISH, Ligado or Globalstar’s spectrum, I think it would be foolish to assume that a Straight Path-like outcome won’t happen again.

03.10.17

Eccentric orbits…

Posted in Broadband, Financials, Intelsat, Iridium, Operators, Regulatory, Services, SES, Spectrum at 3:40 pm by timfarrar

I’m unashamedly stealing the title of the book which chronicles the Iridium bankruptcy, because not only did John Bloom give a talk at this week’s Satellite 2017 conference, but discussion of new LEO satellite systems dominated the conference itself. The proposed merger of OneWeb and Intelsat is only the most visible sign of this return to the 1990s, when Iridium and Globalstar’s satellite phones and Teledesic’s proposed broadband system fascinated both the satellite industry and the wider investing community.

But below the surface there is an even more radical shift going on, as most leading operators are cutting back on their investments in high throughput GEO satellites for data services, and many of them are focused instead on the potential of LEO and MEO systems. Intelsat has already indicated that it is cutting GEO capex, and the merger with OneWeb will mean most of its future capex will be devoted to LEO, in line with Masa Son’s vision of a huge new opportunity for LEO satellites.

However, SES, whose CEO stayed away from the conference, is also hinting at a reallocation of its priorities towards O3b’s MEO system, probably accompanied by a sizeable reduction in overall capex. Telesat is also focused on developing its Ka-band LEO constellation for next generation data services, leaving only Eutelsat (which has already announced that it will cut capex substantially) amongst the Big 4 focusing solely on GEO.

This is deeply worrying for satellite manufacturers, and even the indication by Boeing that GEO demand will “remain soft” at “between 13 and 17 satellites in 2017″ may prove to be overly optimistic. All satellite manufacturers now need to play in the LEO/MEO world, with Thales constructing O3b and Iridium, and Airbus taking the lead role on OneWeb, with SS/L as a major subcontractor.

That leaves Boeing, which is not part of any announced LEO satellite contract, but has its own proposal for a V-band LEO system, which is under consideration at the FCC, along with several rival filings. While Boeing has suggested in the past that it was open to partnerships to develop this concept, most people in the industry are convinced that it already has funding from a potential customer, given the amount of effort that Boeing is putting into developing V-band service rules at the ITU and FCC. Boeing has also indicated to these people that it does not need export credit funding for the project, which supports the idea that this project is backed by a deep pocketed US entity.

There aren’t many possibilities for such a backer, and of the four large technology companies Boeing mentioned two years ago, Google and Facebook have apparently lost interest in satellites (although Google did invest $900M in SpaceX and Facebook tried with Amos-6), and Amazon is pursuing its own efforts in the launch market through Blue Origin. That only leaves Apple as never having discussed publicly its potential interest in space.

This aligns with the chatter I heard from a number of sources at Satellite 2017 that Boeing’s V-band development work is being funded by Apple, which is clearly trying to find the next big thing and has been exploring cars, TVs and other large market opportunities. Its not hard to discern why Apple might want to consider a satellite constellation, when SpaceX came out with a business plan last year that suggested SpaceX alone could generate $30B in revenue from satellite internet by 2025.

Just as in the car market there’s no guarantee that Apple would take this project forward to full deployment, but with SpaceX, SoftBank and now apparently Apple becoming enthusiastic about non-geostationary satellite systems, in addition to most of the main satellite operators, it seems that a dramatic reshaping of industry priorities is underway.

It remains to be seen whether this enthusiasm will last, or whether, like at the end of the 1990s, the pendulum will eventually swing back towards geostationary orbit. However, over the next few years, until we find out whether the ambitions of these visionaries can be realized, non-GEO satellite systems are likely to be the most important contributor to driving satellite communications technology forward.

02.28.17

Groundhog day…

Posted in DISH, Echostar, Financials, Inmarsat, Intelsat, Operators, Regulatory, Spectrum, Sprint, VSAT at 10:17 am by timfarrar

Today’s announcement that SoftBank is investing $1.7B in Intelsat as part of a merger between Intelsat and OneWeb is eerily reminiscent of SoftBank’s investment in Sprint and subsequent purchase of Clearwire back in 2012-13. Then the motivation was acquisition of large amounts of 2.5GHz spectrum to be used with innovative small cells to revolutionize the cellular market. Today the motivation is acquisition of large amounts of NGSO spectrum to be used with innovative small satellites to revolutionize the satellite market.

There are certainly many synergies between Intelsat and OneWeb: Intelsat needs a next generation plan beyond Epic, to lower the cost of its capacity, and hamstrung by debt, it could not have afforded to build a new system on its own. OneWeb needs distribution and market access, as well as interim capacity so that it does not have to wait until the LEO system is fully deployed. So this deal makes a lot of sense, if you believe, as Masa clearly does, that new constellations will dramatically boost the future prospects for the satellite industry. On the other hand, if it doesn’t work out, would SoftBank get to the point where it is prepared to sell the assets and not even mention them in its vision of the future?

However, another potential parallel is that back in 2013, SoftBank faced a lengthy challenge from DISH, which mounted a bid for Clearwire and later made an offer for all of Sprint, and ultimately forced Masa to pay far more for Clearwire than he had hoped. Now EchoStar, which had made a $50M investment in OneWeb (then WorldVu) back in 2015, but has been far less prominently involved in OneWeb’s development efforts compared to Qualcomm (with DISH even objecting to OneWeb’s use of the MVDDS spectrum), has apparently seen its mooted partnership with SES put on hold.

Clearly Charlie Ergen needs to find a way forward for EchoStar to compete in the satellite broadband market on a global basis, building on the successful launch (and market lead) of Jupiter-2. Some analysts have been reiterating that this could involve a bid for Inmarsat, as I mentioned last summer, but the time for that has probably passed. So does Ergen use this development to revive the mooted SES deal, because SES will now need to compete more aggressively with Intelsat? Or does he want to be more actively engaged with OneWeb and get a larger slice of that development effort (and potentially use its capacity in the longer term)?

Either way it would not be surprising if DISH or EchoStar already holds some of Intelsat’s debt, and Ergen could even seek to maximize his leverage by acquiring a larger position in the company. Does Masa want a cooperative relationship with Ergen going forward (perhaps even with a view to collaboration between DISH and Sprint in the wireless sector), or is he still upset over what happened in 2013? And returning to the theme of Groundhog Day, will this movie end with the two protagonists eventually falling in love, or will we see a repeat of 2013, with yet another battle between Masa and Charlie?

11.02.16

The turning point?

Posted in Aeronautical, Financials, Inmarsat, Intelsat, Operators, SES, VSAT at 8:42 am by timfarrar

Earlier this year I warned that the satellite industry seemed to be stepping off the precipice, as a Ku HTS price war culminated in the very attractive pricing (of around $1000 per MHz per month) that Gogo and Panasonic secured from SES in February 2016. What has followed over the last six months or so has been rampant negativity in the press about overcapacity and price crashes. Even NSR, who in March were noting the “generally slow and stable downward pressure on pricing up to 2016″ are now asserting that “satellite capacity pricing [is] in a prolonged freefall for most applications.”

In reality, the last six months have seen the first signs of stabilization in satellite capacity pricing, as SES and Intelsat pull back somewhat from their price war which was the proximate cause of the dramatic price declines seen from late 2014 through early 2016. In particular, SES predicted a “strong growth outlook” at its June investor day and presented a slide at the GCA Summit earlier that month showing three Ka-band HTS GEO satellites for global coverage. One of the ways SES was expected to deliver on this strategy was by “focusing on value-added, end-to-end solutions” in each of its verticals.

However, since then, SES appears to have dramatically reduced its exposure to Ka-band GEO capacity, putting virtually all the risk of the single SES-17 Ka-band satellite onto Thales, and may also have pulled back on its plans to provide “end-to-end solutions” for mobility, letting Speedcast win the bidding for Harris Caprock and indicating that it will not go direct to airlines in the inflight connectivity market. Intelsat has also won a couple of key contracts for Epic, with TIM Brazil and Global Eagle.

Its therefore interesting to see the contrast between Gogo’s assertion at its investor day on September 29 that there will be an “ample and diverse supply” of Ku-band capacity (totaling nearly 1Tbps globally by 2019) with Inmarsat’s position a week later that “Ku-band supply could be limited,” especially in North America.

At this point in time, it looks like the “unexpected softness” of satellite orders in 2016, caused by fears about a price crash will mean very few new C- or Ku-band GEO satellites being ordered in the near future without an anchor tenant. Panasonic may well follow Thales’ lead with its XTS satellites, but that won’t result in any (let alone “ample”) incremental supply for Gogo. And Gogo is not in a position to order a dedicated Ku-band satellite of its own to provide more capacity on top of its existing commitments.

Operators may well be justified in fearing dramatic erosion in pricing from new Ka-band satellites with hundreds of Gbps of capacity, but outside North America, there simply won’t be any of that capacity available before 2020. As a result, stabilization of pricing (albeit at considerably lower levels than those in historic contracts, many of which still need to be rolled over) seems plausible for 2017-18.

Instead I’m much more worried about whether substantial growth in revenue really will be stimulated by these lower prices. TIM Brazil (which is one of Intelsat’s biggest customers for cellular backhaul) is a good example, with their move to Epic Ku-band capacity giving them three times the capacity (partly from improved bps/Hz efficiency) compared to their previous C-band solution, with no increase in spending. And at least part of the fall in enterprise revenues seen by Intelsat and SES in the last two years appears to be due to less bandwidth being used by these customers, rather than simply price declines on existing (let alone incremental) capacity.

Some of that reduction in capacity utilization may be due to more efficient modems, which could be a one-off effect, but I believe that the question of demand elasticity (in the face of competition from terrestrial alternatives) is going to be much more important challenge for the satellite market in 2017 and 2018 than a supposed “freefall” in bandwidth prices. If satellite operators can identify untapped opportunities where they can be competitive with terrestrial, as O3b has done in various Pacific islands, or where there is substantial demand elasticity as passengers create on commercial airplanes and cruise ships, then revenue growth will result.

But if spend is relatively inelastic, as seems plausible for many enterprise VSAT (and perhaps some government) customers, then terrestrial competition may lead to continued market erosion. The biggest wild card is cellular backhaul: huge amounts of capacity are needed as mobile operators move from 2G to 3G to 4G in developing countries, so if these terrestrial players commit to satellite, there could be substantial revenue upside. On the other hand, if mobile operators focus on microwave as their backhaul solution of choice in Africa and Asia, it will be much more difficult to achieve significant growth in the satellite business.

05.14.16

Stepping off the precipice…

Posted in Aeronautical, Eutelsat, Financials, Inmarsat, Intelsat, Operators, Services, SES, VSAT at 1:49 pm by timfarrar

Back in March I noted that the Satellite 2016 industry conference “felt like 2000, as attendees peer over the edge of the precipice.” Yesterday, it seems the industry stepped off into the void, as Eutelsat’s profit warning proved to be the catalyst for a wholesale re-evaluation of the outlook for FSS/HTS data services.

Everyone is worrying about capacity pricing, where according to Eutelsat’s CEO “the outlook for data delivery is bad.” Just how bad hasn’t been obvious to many observers, not least Northern Sky Research, who in March dismissed suggestions that the sky is falling and instead claimed that so far there has only been “generally slow and stable downward pressure on pricing up to 2016″ though these drops were “expected to continue to gather steam.” Moody’s struck a similar positive note about European satellite operators in January, suggesting that “A Rebound in Revenue Growth, Stable Margins and Plateauing Capex to Support Credit Quality in 2016.”

In reality, a look at some of the largest deals shows just how much of a price decline has already taken place. Traditional wide beam transponders have been priced at $3000-$4000 per MHz per month, which made Intelsat’s offer to IS-29 anchor tenants in 2012 of about $2000 per MHz per month look like a bargain (Intelsat said it leased 20% of the capacity, i.e. about 2GHz, for $50M p.a.).

However, in February 2016, Gogo struck a deal with SES for “several GHz of both widebeam and spotbeam capacity in total” on its new SES-14 and 15 HTS satellites, followed by another agreement with Intelsat and OneWeb in early March. Gogo’s latest 10-Q has now revealed the impact of those agreements which represent commitments “to purchase transponder and teleport satellite services totaling approximately $29.5 million in 2016 (April 1 through December 31), $41.9 million in 2017, $40.4 million in 2018, $45.3 million in 2019, $58.6 million in 2020 and $309.2 million thereafter.”

Although the split between Intelsat and SES is not given, its a fairly good bet that they will be paid roughly equal amounts in 2020 and beyond. This is consistent with Intelsat renewing and extending its existing contract with more capacity being delivered at about the same revenue level (Intelsat claimed last September it had an 73% share of the aeronautical satellite communications market and Gogo had $37M of lease obligations in 2016 before these deals were struck) and also consistent with the Intelsat deal running through Dec 31, 2023 (as stated in the 8-K) and the SES deal running for “ten years from the applicable commencement of service date” for the SES-14/15 satellites (implying 7-8 years of the respective terms remaining in Jan 2021).

So if SES is leasing at least 2GHz of bandwidth to Gogo, which is the minimum amount consistent with the use of the word “several”, then the price of this capacity is no more than ~$1200 per MHz per month, and very plausibly the price may be as low as $1000 per MHz per month if Gogo is leasing say 2.5GHz. Given that the deal also represents a combination of wide beam and spot beam capacity, it certainly seems that SES’s HTS spot beam capacity is now being leased in (very!) large quantities for as little as $1000 per MHz per month, about 50% less than Intelsat’s original IS-29 deals.

That makes it pretty clear why Eutelsat has decided to step away from the HTS Ku table and limit its HTS investment “to providing broadband access to consumers and small businesses”, presumably via its European and African Ka-band satellites (and its partnership with ViaSat). Back in March I also suggested we could be in for a re-run of 2001 with “a sharp fall in satellite orders” and Eutelsat has confirmed there will now be a “downward review of our capital expenditures”.

So what comes next? Intelsat has just ordered a 9-series replacement satellite (a necessary step given that a large part of its C-band capacity reaches end of life in the next few years). But how much more Ku-band capacity is needed in the near term, given the looming threat of further price pressures from new Ka-band satellites like ViaSat-3? After all, despite large contracts with Gogo and Panasonic, there’s still a way to go just to fill up the HTS satellites that Intelsat and SES already have on order. And can Intelsat afford to match or beat SES’s price levels and still generate an adequate return on capital from the Epic satellites?

Most importantly, how much repricing is still to take place for existing Ku-band data services, and what will C-band users do if their C-band capacity becomes significantly more expensive than Ku (let alone Ka)? In addition, though Inmarsat believes (correctly) that its a very different company from Eutelsat, it has far more exposure to the data services business, and Inmarsat will now have to reconsider its pricing (and capacity provisioning) for GX services, as this low cost Ku HTS capacity impacts the aeronautical and maritime markets.