LEO Constellation Models: Act…Don’t React!

Small satellite constellations have become a hot topic (again) in the past two to three years, and the top question on the minds of many is: Why now? In keeping with its practice of analyzing markets to help the industry stay ahead of the curve, NSR analysts have been polled to answer some of the most pressing questions asked at the recent Hosted Payloads/Small Satellite Summit in an installment of “Ask the NSR Analyst”.

The investments flowing into LEO constellations today are in the $B. Why is that, and what is attracting investors? 

Carlos Placido, Senior Analyst thinks it’s a combination of factors coming together such as 1) The insatiable appetite for bandwidth and the need to connect the world with lower latency than in GEO. 2) The low interest rate environment after the 2008 financial crisis, pushing investors to seek higher returns 3) GEO-HTS, particularly with Ka-band now proven technically and with maturing business models and the O3b Networks MEO constellation showing HTS Ka-band does not need to be confined to GEO 4) Developments in electronically-steered antennas pointing to less complex customer premise equipment (CPE) and 5) the threats to the Net neutrality principle prompting giant Internet players like Google and Facebook to eye satellites for transport independence/hedging.

For Research Director Jose Del Rosario, the satellite industry is “sexy” again.  While nations launch Pridesats, individuals want to be associated with or be pioneers in the “whizbang”, on the technological cusp of the “final frontier”, the space industry.

Claude Rousseau, Research Director views the capabilities brought about by smaller satellites through a 'standard', namely the Cubesat, that can be scaled for applications not possible ten years, is the main reason. He points to the example of 3 to 5 m. resolution imagery acquired by PlanetLabs using hundreds of satellites each weighing 5 kg (12 lbs). Carolyn Belle, specialized in manufacturing and launching markets said, “Space is becoming more approachable - for consumers of data/services and investors.” She noted that companies winning investments are modern and make space seem “easier and more manageable” than traditional space companies did. 

For Prashant Butani, Senior Analyst who looks at the satellite supply side of the house, what we see today is “old news”. Investment has been consistently available for the satellite industry, he said, and added “Why else would so many private equity firms have pumped money into the Big 4 operators (and smaller players) in the past?” He mentioned the good ROI and for a telecom company to operate on (erstwhile) EBITDAs of ~40% and above is pretty attractive.  The fact that there is so much debt on GEO operator books also says that investors have pumped in money in the past even if they are struggling with recovering it today (via sales of assets). Not to make LEOs sound like the “flavor of the month”, but Prashant thinks the fact that they are trying to disrupt an already well-financed industry gives them good access to the monies. 

How is the situation today any different from the heyday of LEO satcom in the 1990s?

“Firstly, the telecom world is very different now,” says Carlos Placido, and the internet has evolved tremendously and so has satellite technology. Secondly, he added, the appetite for bandwidth is now much higher. Coupled to this, Carlos believes the key technological enabler now has to do more with the user terminals than with the spacecraft, more specifically electronically-steered antennas and the expected price points, which will make new constellations more viable than before. 

Claude Rousseau muses that the experience of constellations such as Iridium, OrbComm, and Globalstar provides lessons that planning for the right market is a pre-requisite, and that the knowledge of how to run constellations has taken a quantum leap ahead. 

For Prashant Butani, cellular/fiber and LEO constellations were more at odds with each other while today, mixing them to complement each other is more accepted. He indicates that providers using terrestrial options saw that there is little benefit in going after the last 10% in the developed world. Plus, the cellular companies would rather spend that money in moving up to 5G for the lucrative urban markets. His conclusion is that LEOs are entering today a very different competitive and collaborative landscape from a larger telecom perspective.

In answer to identifying the keys to success for today's systems, Carlos Placido said that a rather long-term and more strategic assessment of the market potential and disruptions is needed, and not so much the ability to be profitable with the first generation of HTS constellations. He adds that as coordination will get more complex for new LEO constellations, there is a race to deploy. Lastly, he points out that a strong focus will be key as well as a well-structured and virtuous distribution chain. Claude Rousseau agreed that distribution is key, as was the case for the first successful HTS broadband offering, namely WildBlue. 

For Jose Del Rosario, as capacity becomes commoditized and prices drop, moving up the value chain in a retail offering in order to gain higher revenue streams will be key.  Prashant said “Getting the ground system right, for both consumer premise equipment and gateway, whether technically (via flat panel), economically (with sub-$100 pricing) or operationally (as in distribution channels) will be a huge factor for success”.

When ask how will new LEO constellations affect the business models of established satellite operators?

Carlos Placido stated that “There is an opportunity now to disrupt traditional models”. The HTS paradigm is opening doors for new players to compete with large traditional satellite operators, particularly against those more exposed to the data business but he said that “Video distribution and satellite TV are not, in principle, exposed to this threat”.  For Jose Del Rosario, if the LEO constellations can offer an affordable broadband access service bundled with an OTT (Over-the-top) offering, the core video markets of traditional models could be severely disrupted.

“Today's HTS systems are already affecting the traditional FSS model as we know it”, said Claude Rousseau and he continued, “the price points, on a cost per bit basis, can only go in one direction for established players and that is down.” Prashant Butani agrees and adds that “Pricing is the big change and it affects EVERYTHING in the long run, hence the opportunity to disrupt.”

When it comes to the difficult question about launchers, the new space ecosystem’ reliance on the development of price competitive small, dedicated launchers seems to be a must and not a 'nice to have. Is this true?

Carolyn Belle, NSR Analyst who follows launcher markets said “It depends on how developed you want that ecosystem to be”. She adds that “With available launch capacity, small sats and constellations will continue to be put into service, but for the amount of announced plans to come into effect and for new projects to emerge, more and more tailored launch capacity is required”. Carolyn concluded: “There just isn't the launch capacity at the right time and price and orbit for what the market wants to do”. 

And in relation to that, Prashant Butani asked: “Who's to say bigger isn't better for launching LEOs?” and indicated OneWeb has an option to use Ariane 6 even if they do launch on smaller rockets (Virgin Galactic’ LauncherOne). In his view, the business models of price competitive, small, dedicated launchers rely on the new space ecosystem as much, or more than the other way around.

On the subject of the types and motivations of investors in the space arena now, Jose Del Rosario noted that traditional players are managing the threat posed by new programs by getting involved (ex. Intelsat investing in EpicNG and OneWeb) and that their motivation is risk management and diversification of offerings. For venture capital, he views their intent as high returns, and for ‘pioneers and game changers’ such as Elon Musk, Richard Branson, they have more philosophical intents: disrupt the market and change the world...and Mars. For Claude Rousseau, there is too much money in the markets today and many do not know what to do with it, so they are looking for 'the next big thing" and space could be it!  In his analysis, Prashant Butani noted that "Sound" investors will want to fill in the gaps left by cellular/fiber and connect the ‘have-nots” and that most will want to build something that the big names (such as Google, Facebook, Apple) can ‘buy-out’ longer term (or ‘buy-in’ in the short-term)”.

Asked what has surprised them most about planned LEO constellations, Carolyn Belle was surprised by how much attention these plans get before actually delivering on anything. She spoke of the much higher number of mainstream media article about LEO HTS grand broadband plans and cheap pervasive imagery from EO LEO constellations.

Carlos Placido said that the sheer number of LEO-HTS announcements and the players driving these, many of whom do not come from the satellite industry, which reinforces the notion of potential disruption to the business. 

For Jose Del Rosario, it was SpaceX' plan to launch 4,000 satellites by the 2020-ish time frame. Claude Rousseau observed however that he felt a lot of money is going into really weak business plans and that could spell a “SatBubble 2.0”.  In Prashant’s mind, that there are still people out there who would attempt a multi-billion dollar LEO venture after the last big one that launched went bankrupt and was sold for a few million. He pondered: “Human perseverance or human fallacy...whether there is a very fine line between the two, 2020 will tell”

In term of technology drivers that are most important, most NSR analysts believe that for LEO satcom, flat panel antennas’ would be it, depending on costs and capabilities.  Claude Rousseau said that for EO (Earth Observation), it is Cubesats and the greater use of consumer-market electronics for onboard systems. Prashant Butani believes also that the sheer manufacturing volume of launchers and satellites will be a huge driver. But in relation to expectations of reducing costs by accepting reduced reliability or other performance limitations in certain areas, Carolyn Belle reflected that “Already COTS components - phones as on-board computers, cameras as optical payloads, etc. are changing the dynamics of the supply chain”. She said that there is not necessarily a reduction in reliability or performance, since some satellites are expected to work for only 1 year. But she adds that “The supply chain would shift from dedicated space component manufacturers to mainstream electronics companies, and introduce new specialty space suppliers such as Tyvak and Blue Canyon Technologies”. 

Bottom Line

Finally, NSR analysts were asked to give their #1 piece of advice to smallsat ventures and investors to enhance success.  Carlos Placido’s suggestion is “Realistically assess market potential and challenges in the short to medium term, smartly navigate the waters of coordination and country regulation and develop efficient sales pipelines”. For Claude Rousseau, it is the same but also the industry should “Understand what is already out there so as to avoid making the same mistakes twice”.  And in conclusion, Prashant Butani’s fact check, which is so true in many other markets, sums it all up: “Know your customer and anticipate your competition”.