Northern Sky Research

Battle Lines Drawn in EO

Mar 3rd, 2017 by Claude Rousseau   More from this Analyst | Profile

Redirected to subject matter Research Director - original author no longer with NSR

The month of February 2017 saw two important mergers that will shape the fight for greater market share in the satellite Earth Observation (EO) industry for years to come. First, Planet bought Terra Bella – a Google company, and then Canadian company MDA announced its purchase of Colorado-based Digital Globe. The latter news came as a shock for many as DigitalGlobe has been the leader of the satellite EO market for years now. These sales follow important industry M&As throughout this decade, like that of BlackBridge, Deimos Imaging, and GeoEye, which leads us to ask the question: Is the upstream satellite EO industry becoming a ‘natural monopoly’, where a single firm can offer products and services and crush its competitors with more cost efficiency than multiple firms?

NSR’s Satellite-Based Earth Observation, 8th Edition report looked at the market structure of the satellite EO industry, by estimating the market shares of satellite operators, regionally and in six vertical markets. It was found that a whopping 74% of the EO data market was concentrated between three players, namely Digital Globe, Airbus D&S, and MDA – with the rest split between roughly a dozen players, including the likes of Telespazio and Planet. With the merger of MDA with DigitalGlobe, this market will get even more concentrated as two firms now have that same 74% of the global market share, providing them tremendous control over the EO data market, and subsequently on data pricing.

NSR observed the pricing pressure percolate from low resolution EO data at the beginning of this decade, to high-resolution EO data by end of 2016. The impact on data pricing was discussed in a previous article, and NSR believes this merger will help both DigitalGlobe and MDA protect their turf when it comes to pricing, especially for government customers, which NSR believes will be the prime focus of the resulting geospatial company, as per the investor presentation made last week. The vertically integrated structure of the combined firms will help increase their margins further in government markets, while a mix of high quality optical and SAR EO data will enable them to service complex mission needs of more sophisticated users in the same market.

However, a sizeable impact of these M&As will also be on the downstream Information Product (IP) and Big Data Analytics segments, which NSR estimates will bring in 55% of the annual revenues for the satellite EO industry by 2025. In previous articles, NSR predicted consolidation in both the data and analytics segments of the satellite EO industry, as smaller platforms rapidly bring down the CAPEX and performance gap with larger platforms such as the RADARSAT or Worldview satellites. The merger of DigitalGlobe with MDA should not be taken lightly by the satellite operators who were looking at the bigger pie of the market in these downstream segments, where the demand is elastic unlike the EO data segment, where the demand mostly comes from government clients and is quite inelastic by nature.

Despite the clear focus of MDA and DigitalGlobe on horizontal growth in the upstream part of the satellite EO industry, the duopolistic nature of the market will provide them tremendous control over EO data pricing, which could subsequently lead to data dumping in the downstream segments where the potential for growth is higher, leading to faster erosion on the data prices in this segment and reducing margins of the rest of the players. NSR believes that this would create artificial entry barriers to the smaller players and new entrants, essentially leading to further consolidation across the value chain.

Bottom Line

Clearly there are two paths that can be taken by incumbents in the EO markets to succeed:  Consolidate the data business to keep better margins or service the faster growth IP and Analytics segments at lower costs with cheaper data for greater market penetration.

While recent consolidation will result in more encroachment of players on each other’s turf more frequently, the demarcation between the two directions the satellite EO industry players can take has never been more obvious. Industry analysts will now be eagerly waiting for a response from other major EO industry players like Airbus D&S and Telespazio, to see where they side in the battle for supremacy   in the satellite EO markets.