Not very happy holidays for the MSS sector…

Posted in Aeronautical, Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Orbcomm, Services, TerreStar, VSAT at 12:20 pm by timfarrar

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.


Is Viasat trying to challenge Inmarsat’s Global Xpress?

Posted in Broadband, Inmarsat, Operators, VSAT at 3:24 pm by timfarrar

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.


Rumorwatch: Will Inmarsat buy Thrane & Thrane?

Posted in Broadband, Financials, Inmarsat, Maritime, Operators, VSAT at 5:12 pm by timfarrar

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.


Guaranteeing a competitive future for MSS

Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar

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.


Ku-band flights of fancy

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).


Inmarsat’s hybrid satellite network plans

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.

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