Northern Sky Research

Is the Sky Falling for Capacity Pricing?

Mar 4th, 2016 by Jose Del Rosario   More from this Analyst | Profile

NSR’s recently released Satellite Capacity Pricing Index, Q1 2016 Edition, (SCPI) published in February 2016, utilizes real world operator rate card pricing inputs to understand the current pricing paradigm. Up to this point, we heard from some that the sky is falling in the industry, with bandwidth costs declining by at least 60% worldwide, while others have claimed to maintain the status quo. NSR’s SCPI finds that the truth is somewhere in-between, with some regions and applications seeing price drops over the past 5 years of over 5 percent annually, and others seeing greater resilience and, in some relatively isolated cases, price increases.

At a high level, the application most strongly negatively impacted by new capacity over the past few years is Enterprise Data, a phenomenon coming about due primarily, but not limited to, two key reasons: increased FSS capacity—particularly when launched by new/regional entrants—and an increase in GEO-HTS capacity.  Some regions and applications—such as video markets in general, and hot spots in WEU/CEEU more specifically, have seen these factors play a very small to negligible role; however, other regions have seen a convergence of these factors wreak havoc on the current pricing paradigm. One such region is the Middle East & Africa, which has seen region-wide competition from GEO-HTS offerings (Avanti, YahSat, among others) that have brought down average data pricing to just over $2,000 per MHz per month for Ku-band, and just under $2,500 per MHz per month for C-band. These figures have been brought down over the previous years by new entrants, and to some extent an oversupply in Sub-Saharan Africa that has come about due to relatively slow-to-develop demand over the previous decade.

Overall, NSR’s figure of approx. $2,200 per MHz for Ku-band data in Sub-Saharan Africa, for example, corresponds to just under $1M per TPE per year, a figure that is still relatively far from what NSR believes to be the “breaking point” for FSS operators, but also considerably lower than years’ past.

The business model of downward pricing to expand the pie certainly has potential to grow the market in terms of overall demand; however, history tells us that growing the market on a revenue basis is more difficult. Consider, for a moment, the explosion in the amount of data consumption on terrestrial & wireless networks over the past decade. As the chart below shows, this has been met with stagnant revenues by the world’s biggest telcos. Conclusion? It’s extremely hard to grow the market—from a revenue perspective—when pursuing a strategy of driving down cost.

Ultimately, however, pricing is a variable metric, and there are sometimes operators willing to sell capacity for unusually low prices due to market circumstances at the particular point and time of a contract signing. SCPI finds that pricing in recent years has seen contraction across a broad spectrum of applications. While there will for the foreseeable future remain high-value applications that are more suitable for satellite, a significant chunk of demand will start to view fleets as “dumb pipes”, joining the not insignificant camp that already does.

Bottom Line

The satellite telecom industry is currently undergoing a rapid change, as GEO-HTS and eventually Non GEO-HTS continue to pour unfathomable amounts of capacity into regions that oftentimes do not have sufficient demand to soak up this supply. This has thus far led to generally slow and stable downward pressure on pricing up to 2016, with these drops only expected to continue to gather steam. While this outcome will certainly accelerate the creation of winners and losers in the industry, the alternative is for satellite to remain relatively costly and see its addressable market continue to shrink in an age of bandwidth commoditization.

NSR’s SCPI, Q1 2016 Edition offers the only analysis that includes real world operator rate cards to show the current spot pricing, supplemented by additional data which shows specific pricing trends over the previous year. The report further provides future pricing guidance on factors such as elasticity of demand and price stickiness, allowing the reader to understand not just the current pricing picture, but the future pricing picture based upon the drivers and restraints we see today, and will continue seeing tomorrow.