Will LEO-HTS Be Winner-Take All?

by Blaine Curcio, Founder of Orbital Gateway Consulting

Lately, I have been giving quite a lot of thought to global satellite broadband and ride-hailing. This got me to thinking—the ride-hailing industry appears to be basically a winner-take-all industry, or close to it. While we still have two main global players (Uber and Didi), the general consensus is that the market is converging towards winner-take-all, due to a combination of scale, network effects, funding, and the subtle influence of the Godfather of ride-hailing, Masayoshi Son (Masa), who through his company SoftBank and its Vision Fund, has stakes in every major ride-hailing company, and appears to be nudging them into cooperation rather than direct competition. Might the same happen in the nascent LEO broadband industry?

It is no coincidence that Masa/SoftBank is also the biggest single investor by far in OneWeb (paywall), one of the two major companies aiming to offer universal broadband from the sky via a constellation of many hundreds/thousands of low-earth-orbit high-throughput satellites (LEO-HTS, and the other company is Elon Musk’s SpaceX). Masa has made it patently clear that the entire point of the SoftBank Vision Fund—a $93 billion tech fund from which the OneWeb and ride-hailing investments have come—is to build out our future technological infrastructure by connecting billions of machines to the Internet of Things (IoT), bringing about an era of superintelligence powered by AI, what Masa refers to as “singularity”.  

It is fairly clear how ride-hailing and LEO-HTS would play a role: a LEO-HTS constellation would provide a global Internet backbone across the roughly half of humanity that does not have Internet, and all the assorted “things” that would represent the IoT in these currently unconnected areas. A ride-hailing network powered by autonomous cars would likewise represent a treasure trove of IoT data, and could, in the long-term, allow for the winner-take-all in that industry to control a sizeable percentage of the global mobility market.  

So, if the ride-hailing is likely to be winner-take-all, the question is whether the same can be said about LEO-HTS? 

·       Network effect creates winner-take-all industries. Will LEO-HTS have network effect? Network effect refers to the idea that as a service gets more users, the value provided to each additional user increases, due to the existing users already on the network. The most apparent example is Facebook. If everyone you know is already on Facebook, then there is significant value for you to join Facebook, whereas if no one that you know is on the network, why would you join it? In the LEO-HTS realm, network effects are not expected to be a major factor, with this being one point in favor of oligopoly/competition.  

·       Massive subsidies create winner-take-all industries. Will LEO-HTS require massive subsidies? One of the reasons that ride-hailing has so quickly converged onto a few companies is because the industry sees massive subsidies being given to drivers. This inherently raises the barrier to entry, because it makes it very costly for new entrants to come into the market, and effectively becomes a contest of who can raise the most money while also telling investors that they can expect that very money to be set on fire for at least the next 2-4 years. LEO-HTS is likely to involve subsidies. With the whole LEO-HTS business model dependent on massive quantities of cost-effective satellite ground terminals, and with Internet inherently being a sort of ‘subscription model’, it is easy to envision subsidies being paid by LEO-HTS players to get more terminals into the market. If the cost of a ground terminal can be reduced to a few hundred dollars, and if a single terminal can serve a village of 1-2 dozen people in an undeveloped country at an ARPU of a dollar or two per person per month, the math behind subsidizing starts to look plausible. This could even be compared to the mobile phone model in places like the US, where a $700+ iPhone can be had for a down payment of ¼ of that (sometimes less), plus signing a 2-year agreement. Alternatively, it’s possible that governments would subsidize ground terminals for the purposes of universal broadband access. While Wyler’s story of helping connect parts of Africa is potent, Musk’s history with successful subsidies in Tesla, Solar City, and SpaceX launches give the edge to SpaceX.

·       Technology standards and economies of scale help to create winner-take-all industries. Economies of scale will likely be an important component of for LEO-HTS, insofar as the companies with the deepest distribution networks, and the capabilities to produce the most satellites/launch vehicles will be at an advantage. In this area, SpaceX and OneWeb have interesting approaches and core competencies. For economies of scale in the context of LEO-HTS, we can think of several things:

o   Satellite manufacturing: the LEO-HTS constellations are building far more satellites than have ever been launched before and doing so in a far more assembly line fashion than has historically been done. OneWeb appears to be further ahead in this area, with a manufacturing facility in Florida at advanced stages now.

o   Satellite launch: the often-overlooked launch component is one of the most challenging in the satellite industry, and is regularly the bottleneck in new satellites getting into service. Like manufacturing, these LEO-HTS players are calling for more launches than ever before. OneWeb has a deal with Ariane, the world’s most-reliable launcher, which puts the company in a good spot. However, SpaceX has developed impressive in-house launch capabilities (and is in fact principally a launch company), and has maintained an impressive launch pace despite some setbacks. Here, the edge here goes to SpaceX.

o   Distribution network: these LEO-HTS constellations are trying to theoretically provide broadband to everyone, globally. This means ~4.5 billion people in some very hard-to-reach parts of the world. Distribution here means two main things—distribution of ground equipment, and distribution of the actual Internet service (usually through a telecom company). In this department, OneWeb is the clear winner, due to partnerships with companies including Coca Cola (which you can already find in rural villages the world over), Bharti Airtel (one of the world’s biggest telcos), Intelsat (world’s largest satellite operator), and SoftBank itself (a major Japanese telco, and owner of US telco Sprint). If there is one area that appears to be a critical weakness for SpaceX, at least right now, it is distribution networks. 

Factors that would flat-out challenge the LEO-HTS industry converging to winner-take-all are few, but they do exist. These include the fact that in an industry as sensitive as providing internet connectivity, it is viewed as highly unlikely that China would allow a company like SpaceX or OneWeb to offer services in China. Indeed, the group of companies under China’s state-owned aerospace umbrella have plans to launch a LEO-HTS constellation, and under the country’s “One Belt, One Road” infrastructure initiative, it is entirely plausible that the Chinese government and its various subordinate aerospace companies would try to sell LEO-HTS connectivity services into developing countries that are within China’s orbit (for example, if China had a competing offering to OneWeb and the Chinese government was subsidizing it, does anyone really think that Laos would go with OneWeb?). Even this issue could theoretically be resolved—after all, Uber and Didi did basically merge in China after Uber raised a white flag—but given the sensitivity of Internet provision, this is not likely. Other factors, though, largely point towards convergence. 

The key takeaway here is that these LEO-HTS business models should, to a certain extent, be viewed as a whole system, and that it is likely that the best system will win. Given the convergence of other, somewhat similar industries towards winner-take-all, it is reasonable to assume that LEO-HTS will experience the same, with the possible exception of issues such as a ‘western vs. Chinese’ LEO-HTS system. One wild-card factor could be a possible move by Masayoshi Son to combine/partner parts of OneWeb with SoftBank.