Northern Sky Research

CAPEX Strategies: A Tale of Two Operators

Nov 16th, 2016 by Blaine Curcio   More from this Analyst | Profile

NSR’s recently released Satellite Operator Financial Analysis, 6th Edition does significant digging into one of the most important metrics for satellite operators: capital expenditure (CAPEX). The CAPEX cycles of regional satellite operators tend to be highly cyclical. A satellite operator with only a few satellites with 15-year lifespans will only replace a satellite every few years, leading to several years of limited CAPEX, and spikes when replacements come about. Big Four operators, on the other hand, have historically had more stable CAPEX cycles. When a fleet has a few dozen satellites of 15-year lifespans each, a couple of satellites will be replaced in a given year, and CAPEX will correspondingly be somewhat more consistent.

In the age of GEO-HTS, however, this dynamic appears to be witnessing a shakeup. Operators can replace 2-3 FSS satellites in terms of raw capacity with one GEO-HTS, and some operators are seeing opportunities to focus on specific markets and launch huge amounts of capacity for a low cost per Gbps, hoping that low cost capacity will be a strong enough value proposition to sell itself.

 

What Does this Mean for Satellite Operators?

These “CAPEX workarounds”, whereby an operator is no longer obliged to launch a satellite that will offer dozens of TPEs in C-band or Ku-band, pay for a launcher that was guaranteed to cost a certain amount, and load up the satellite with video contracts, have allowed operators to pursue much more unique fleet management (and subsequent CAPEX management) strategies, such as launching dedicated GEO-HTS at specific regions or verticals as a growth strategy. In the age of new opportunities on the manufacturing and launching side, NSR is seeing operators launch more purpose-built satellites, trimming (or as some would call it, optimizing) CAPEX in the process. This has allowed operators who have had fairly similar business models thus far to pursue radically different CAPEX trajectories, with both holding strengths and weaknesses.

Trimming the Fat at Eutelsat

Eutelsat has recently gone on a mission to streamline operations and focus on the company’s core competencies. These include the Hot Bird video market in Europe, which makes up the majority of Eutelsat’s revenues on a yearly basis, as well as the company’s video hotspots over Middle East and Africa, and to some extent the data business. The streamlining has also seen Eutelsat exit from their ownership of the WINS service provider, make it clear that the company’s stake in Hispasat is for sale, and trumpet its satellite orders as ‘design-to-cost’ so as to indicate a high degree of CAPEX optimization. Ultimately, this has saved Eutelsat CAPEX up to this point, and should save the company tens of millions in CAPEX per year for the coming few years. Eutelsat’s GEO-HTS CAPEX has targeted somewhat more Greenfield markets, with Eutelsat’s Africa broadband satellite and the company’s YahSat payload both aiming to address markets where there is undeniably latent demand, but at an uncertain price point.

SES Thinking on a Global “Scale”

Today, SES is a fairly similar company to Eutelsat. Both companies derive around 60-65% of their revenues from the European video market from a handful of prime orbital slots, with both companies having expanded abroad fairly aggressively over the past 5-10 years, SES doing so earlier through M&A, and Eutelsat expanding more organically until the acquisition of Satmex in 2013. The two companies will likely look quite different in 5 years, with SES pinning its growth strategies—and placing its CAPEX bets—on wholly different markets to Eutelsat. Whereas Eutelsat has trimmed the fat and looked to minimize CAPEX risk, SES flexed its considerable financial muscle with brash regularity. From the acquisition of O3b for $730M to the announcement of no fewer than four GEO-HTS payloads, SES has made it very clear that having been a global traditional FSS widebeam operator, the company has every intention of being a global GEO-HTS player.

Bottom Line: Comparing the Two

SES’s growth strategy is viewed as higher risk than Eutelsat’s, with the company targeting a number of applications (Aero) that will see significant competition among satellite operators, and doing so with quite a lot more CAPEX spend than Eutelsat is forecasting. With more skin in a higher risk game, SES has more to lose if the downward pressure on pricing—particularly in the mobility markets—is here to stay. This could be exacerbated by further consolidation among service providers, which may alter the bargaining power equation.

However, if prices stabilize and demand tightens the supply in the market, SES is targeting much higher-ARPU verticals in markets that have a much clearer revenue structure. Eutelsat’s strategy of shoring up their video business and ensuring long-term cash flows there, while optimizing non-HTS CAPEX and targeting very low-ARPU broadband is definitely lower risk in the short-term, but it could prove precarious if the somewhat more speculative African broadband markets do not develop as forecasted. Ultimately, in the day and age of GEO-HTS, operators are faced with a lot more choice in how to spend their CAPEX dollars. On the capacity side, we are seeing similar operators take vastly different approaches, and only time will tell who has placed the right bet.