The business world changes rapidly, but the space industry changes at warp speed. Just six years ago, in 2012, ViaSat came online with a world record capacity of 140 gigabits per second (Gbps). That same year, there were only 19 orders for commercial geosynchronous satellites, Falcon 9 had only two launches, O3B satellites had not been launched yet, and OneWeb had just been founded as WorldVu.
Compare that to 2017. ViaSat 2 was launched with 300 Gbps of capacity,5 orders for commercial GEO satellites dropped to 10,6 Falcon 9 had 18 launches,7 O3b put 128 satellites in orbit, and OneWeb was developing its first satellites (currently scheduled to launch in May). Based on the programs being planned and under development, the next five years is shaping up to be equally transformative—potentially even more so.
What will that future look like for space commercial communication? Setting aside military applications, space tourism, and asteroid mining because those other industries have such different dynamics, AlixPartners has six predictions:
1. AMAZING TECHNICAL ADVANCES SHOULD CONTINUE
Looking at what is currently planned or in development, five years from now we will likely see multiple satellites in orbit with terabyte capacities. Launch vehicles could routinely be reused. The largest constellation ever—by an order of magnitude—could be deployed, and existing spacecraft will benefit from in-orbit servicing to extend their operational lives. With so much entrepreneurial interest—$5 billion9 in venture capital investment in space opportunities over the last five years—the flow of additional achievements will continue. The downside, of course, is that today’s systems will become obsolete quicker.
2. SOME PLANNED CONSTELLATIONS MIGHT NOT GET OFF THE GROUND
Not all non-geostationary orbit (NGSO) constellations currently in development will get built and launched. Current Federal Communications Commission (FCC) applications for NGSO constellations total an estimated 16,00010 spacecraft. The cost of these systems includes not only satellite design and manufacturing, but also launches, gateways, satellite and network operations centers, and end-user terminal costs, along with sales, marketing, and administrative costs. Business plans for all of these constellations are not publicly available, but a rough estimate points to a total investment of $50 billion to $100 billion11 to successfully develop and deploy all 16,000 satellites. Many of the proposed lower- earth orbit constellations have targeted lifetimes of five years, requiring a new set of satellite production and launch costs every five years. With the entire worldwide satellite manufacturing and launch industry currently at $20 billion,12 the sheer magnitude of the investment makes it unlikely that all constellations will be funded.
3. AVERAGE REVENUE PER USER (ARPU) MIGHT REMAIN FLAT—AT BEST
Even with exciting new markets like driverless cars, the Internet of Things, and commercial airline connectivity all increasing the demand for satellite broadband, ARPU will most likely remain stubbornly flat over the next five years. Consumers are only willing to spend so much per month on bandwidth. The number of bytes they transmit and receive will greatly increase, but the price per byte will decline, maintaining the typical consumer’s average ARPU.
4. COMPETITION FROM TERRESTRIAL PROVIDERS WILL REMAIN FIERCE
Communication service is largely a commodity, and price will rule. Current satellite broadband service in the US costs $2 to $1013 per megabit per second per month, with greatly reduced speeds if customers exceed their data limits. By comparison, terrestrial services from cable or fiber optics are often less than $114 with no data limits, especially when bundled with TV and phone service. Unless satellite broadband services can match the prices of terrestrial providers, they will be relegated to the customers of last resort—i.e., those where land options are not available. Worse, that market will continue to shrink as terrestrial telecom providers continue to invest in infrastructure and chip away at the consumers only available to satellite providers. Price will rule even if commercial satellite communication providers partner with terrestrial telecom companies to provide seamless communication services to their customers, whether by land or space.
5. SATELLITE BANDWIDTH CAPACITY COULD OUTPACE DEMAND
Even though bandwidth demand will increase over the next five years, those increases could be smaller than projected, due to price sensitivity and other factors. Rural consumers will have trouble affording satellite broadband, unless those providers can match the prices of urban terrestrial providers.
Plus, satellite providers will have trouble holding off terrestrial providers that are continuing to
broaden their networks. The adoption rates of new applications, such as Internet of Things, will be slower than expected. The demand for commercial aircraft broadband service will be dampened by customers’ unwillingness to pay more than $5-$10 per flight.15 Finally, the impact that autonomous vehicles will have on demand is difficult to assess.
6. BILLIONAIRE AND SOVEREIGN INVESTORS WILL CONTINUE TO PRESSURE COMMERCIAL PROVIDERS
Space captures the imagination of the general population more than many other human endeavors. It is a source of both individual and national interest and pride, and it transcends factors such as net present value and return on equity. Billionaire and sovereign investors will continue to invest, not necessarily for short-term financial return but based on interest. Because these investors are willing to ride out lower returns for longer periods, they increase competitive pressure on commercial providers.
POSITIONING FOR SUCCESS
In the aggregate, these six factors could lead to major changes in the industry via consolidation, restructurings, and even exits. Some companies will struggle to meet their financial commitments to lenders and investors and be forced to consider dramatic measures.
What could companies do to thrive in commercial space over the next five years? We offer two priorities for how companies can position themselves for success.
First and foremost, they must focus on affordability in terms of satellite and ground system CAPEX, operating costs, and SG&A costs. Even a 5%-10% cost reduction could have tremendous impact on competitiveness, as well as cash flow. In particular, legacy satellite systems have been designed with large performance and safety margins, and additional process steps have been layered on for years. This approach has led to exquisite systems but less competitive costs.
A clean-sheet approach to identify, prioritize, and test against risks would allow companies to more effectively allocate time and resources, leading to reduced costs at current—or even lower—risk levels. Spacecraft manufacturers and customers must work together on this objective, which will require rethinking deep-rooted organizational cultures. We are seeing some companies starting to embrace this concept; more should do so.
Second, as many segments become increasingly commoditized, companies must offer more than just generic communications capacity. A basic commodity service offering is problematic. Companies can differentiate by providing additional services that competing players cannot, or by targeting markets that others—including terrestrial communication providers—will have barriers to entering and serving.