The satellite industry has witnessed a meltdown over the past few years with capacity prices falling over 30-60% across most verticals. This decline doesn’t just stem from increased supply and competition, but also from critical intertwined factors: increased bargaining power of service providers (SPs) as operators dilute their market positions for aggressive selling and a correction for high-throughput capacity to account for CapEx/Gbps cost proportionate to end-lease price. These drivers essentially mark a sharp transition in the satellite industry, one that shifts from premium lease models (barring Government segment) towards a telecom or service industry ARPU-influenced requirement. This fundamental change due to price declines underpins the question on sustainability – which we answer by looking at both historical price drivers and the modus operandi available to satellite operators.

As described in the figure above, NSR’s report sheds light on the Global Mean Price Index and the performance of individual verticals over the past 3 years. As with any industry, buyer-seller dynamics play a strong role in influencing price changes along with supply-demand, though the current industry faces key challenges on several fronts.  Key changes to price drivers over the past 2 years include:

• Decreased focus on duration of lease contract period, and much higher focus on the bulk amount for lease

• Plateau in video demand, increase of discounts in backhaul influenced by low fill rates and increased market share competition in mobility

• Price declining not only due to high regional competition but also from impact of OTT in developed countries, higher efficiencies for selling Mbps and extensive fiber deployment programs in unserved areas

These changes indicate the industry must counter the over reliance on FSS capacity attributes of fill rates, large contract periods and associated backlogs, regional rivalry on ‘similar’ capacity, and selling MHz on legacy satellites that are not CapEx/Gbps competitive anymore. There have been strategies proposed and deployed to counter this, which are apportioned to a Growth vs Business model exhibit (as below) to gauge sustainability from a birds-eye point of view.

The need for sustainability stems from both aggressive future price decline predictions and the induced forced shift in business models. The inflexion point appears still far away with the industry awaiting more GEO bulk leases and competition intensifying with pre-anticipation of LEOs. Dissecting the exhibit above, key points start to emerge:

1. Industry conundrum on operator-service provider dynamics – does a clear winner here create additional value for the satellite industry amongst the wider telecom business? Selling Mbps or managed service or selling severely low-cost CapEx/Gbps seems to be the winning criteria – business models that both plug the gap in connectivity demand through satellite architecture and can elastically scale.

2. If the above is true, how sustainable are FSS operators, as there seem to be more revenue decline factors for a pure B2B play compared to top-line growth. Cannibalizing legacy fleets is no more a distant dream as it continues to happen with C-band in the data vertical; and with tight sales positioning, short term strategy guidance for regional operators and high bargaining power with SPs, prices are tumbling faster than expected.

3. If the B2B strategy is not fool-proof, then do operators have the bandwidth, experience or willingness to go downstream and fundamentally change their organizational structure to a service-centric business? With a shift towards indirect B2C play and LEOs, high EBITDA margins will increasingly become passé for the industry, as both operators and service providers grapple with high costs of network management on under-utilized capacity.

 

Bottom Line

Some options appear more satisfactory than others, and many apply to regional and global operators differently based on a variety of strategies.  Though, where it seems that an indirect B2C play may be a winner in the longer term, the question is whether operators are doing enough and fast enough to move to the top right quarter of the graph and embrace this fundamental shift? The long-term sustainability hinges on integration – IP for video, ground equipment for broadband and mobility, retail play via own satellites to save OpEx, or consolidation (back-end video services or front-end verticals addition) to create scale. With prices falling, the industry will be harsh on laggards, and will reward those who innovate both on fleets and a fluid organizational structure to adapt to the ‘new customer’ and survive in the next phase of competition.