Northern Sky Research

O3b Turning a Corner

Jun 24th, 2015 by Jose Del Rosario   More from this Analyst | Profile

A lot can change in a year, and for O3b, early success in 2015 may wipe away memories of challenges faced in 2014.   In 2014, O3b faced technical hurdles leading to service provisioning delays, which also led to a more conservative business outlook for the company. In 2015, however, the company has announced a host of deals that could indicate O3b may be turning a corner.

Progress has been so positive that SES, an investor in O3b, recently stated they may take a majority stake in O3b faster than expected due to O3b momentum. SES indicated that O3b’s backlog stands at $530 million where the maritime sector represents 30% of backlog, energy represents 5%, and government 1%. Trunking services accounts for 60% of backlog and backhaul comprises the remaining 4%.

The years 2015-2019 should see ramp-up of O3b capacity utilized and revenues gained with contracts in the pipeline providing growth and stability over the short/medium term. CEO Steve Collar also projected EBITDA breakeven in late 2015/early 2016, yet another significant milestone.

In terms of O3b’s prospects over the long term, contracts (to NSR’s knowledge) are multi-year with options to renew and expand, so there is some semblance of stability over the horizon. NSR especially likes the diversity of customers and sectors where, although trunking accounts for the majority of backlog, key verticals including oil & gas, maritime and government are beginning to gain traction as well.

Some issues or further challenges come to mind, however:

  • In terms of the trunking and backhaul business, which are at the core of the O3b proposition, macroeconomic challenges may limit O3b’s potential going forward. For instance, the contracts in the Solomon Islands, Papua New Guinea and Palau, nations which together comprise over 1,000 Islands and an extremely dispersed population make connection by terrestrial fiber extremely difficult. This is a natural fit for O3b and satellite services overall, but there is also the challenge of ARPU levels as these Island Nations have a relatively low population base, which limit growth potential.  In African countries where O3b has likewise gained customers, macroeconomic conditions as they relate to ARPU levels will be a continuing challenge as well. As such, although contracts are multi-year and renewable, growth prospects may be a bit tempered based on targeting countries and Island Nations with the best fit and best need for satellites or O3b.
  • Competition is looming, and this is coming on three fronts:
  1. GEO-HTS, specifically Intelsat EpicNG also has a substantial backlog that could limit the pie for O3b in terms of future growth. Competition within HTS will likely lead to price pressure and although O3b currently has the advantage, the response of GEO-HTS could match if not better O3b’s current offerings, albeit with higher latency.
  2. LEO-HTS is coming as well and will likely attack the low latency proposition of O3b, which could diminish O3b’s pie further. LEO-HTS will likely engage in price competition as well, adding complexity to the competitive mix.  Additionally, while O3b only covers between 45° north/south latitudes, proposed LEO-HTS systems offer global coverage, another distinct advantage.
  3. Equipment pricing currently favors GEO-HTS and will be used in the CAPEX/OPEX and total cost of ownership (TCO) equation.  O3b is known to be working on the technical aspects of equipment pricing to bring this component down substantially.  This is perhaps THE biggest issue that could curtail O3b’s growth over the long term.

NSR is certainly not raining on O3b’s parade. NSR’s latest research, Wireless Backhaul via Satellite, 9th Edition actually improved O3b’s growth prospects over the 2015-2024 time frame compared to its 8th Edition forecasts.  The Non-GEO-HTS camp where O3b belongs is expected to dominate usage compared to other platforms, and O3b will lead the charge until 2019 or 2020 before LEO-HTS systems are operational.

Also, the O3b proposition of “high bandwidth – low latency” will still have a lock on the non-GEO market for many years, as NSR believes other non-GEO constellations have significant issues (technical, regulatory, funding) before they become true commercial competitors.  In the next 3-5 years if low latency is indeed a critical selling principal, O3b will be the only game in town and thus benefit handsomely.  And while there is quite a bit of debate on the need for ultra-low latency bandwidth, in the end, no one complains about less latency.

The forecasts above give O3b the edge with the assumption that the issues or challenges outlined by NSR – competition, pricing and equipment costs – will be surmounted by O3b.  However, the market is not static and competition will certainly change the industry dynamics that could likewise lead to a revision of usage forecasts and market leaders.

Bottom Line

From a wireless backhaul and IP trunking perspective, congratulations are in order for O3b. As an analyst firm following the satellite industry, NSR welcomes the recent accomplishments of O3b and supports the success of companies that have risked and are bringing change to the industry.

However, we note that –

  • On the supply side, competition is on the horizon within the satellite industry as well as from terrestrial services that continue to increase their footprint and thus encroach on the satellite value proposition.
  • On the demand side, macroeconomic factors and population demographics on the end user front may likewise stagnate or limit growth over the long term.

These factors will continue to add and create new challenges, not just for O3b but for other next-generation programs as well.

NSR has covered the Wireless Backhaul via Satellite market for over a decade and has conducted multiple consulting engagements and advisory services for various satellite platforms including Traditional FSS, GEO-HTS, MEO-HTS and LEO-HTS.  Please contact Christopher Baugh for more information.