The Bottom Line

Satellite and the Arrival of Telecom Pricing ?

The advent of bulk HTS satellite capacity has changed the satcom game. Irreversibly. What started as an alternative to FSS, an innovation with frequency re-use spot beams, has become mainstream and dictated price changes for at least the past 2 years. 60% wholesale price drop across HTS verticals, most prominently for backhaul and consumer broadband, is a telling factor for any industry. The data market is striving to achieve the holy grail of telecom pricing through capacity supply acceleration, led by players like ViaSat, Hughes,  SES and upcoming LEOs, among others. Compared to the addition of 600 Gbps in the first 10 years, the above companies will add more than 4.5 Tbps in the next 3 years alone till 2021.

The competition increases, but so does projected demand. And as demand increases, supply accelerates and takes advantages of lower cost/Gbps per satellite to register consumer focused pricing. However, satcom pricing is not telecom pricing yet. The speed/data package one receives for $50/month through satellite (~5GB) is still incomparable to telecom packages (~100GB to “unlimited”) of the same price. The economics are even more challenging in developing countries.

So how does satellite compete in countries where a couple of cents on the dollar are needed to even justify an Internet connection? Can price as low as $2/month generate consumer demand in rural areas or small towns that are not connected with fiber? Let’s compare this to a case study from India on the disruption by Jio telecom: 1.5 GB data per day at Rs 400 (or $6 for 3 months) has disrupted incumbents who merrily offer $4 per month for 1 GB data. To put this in context, Jio offers 45 times more data per month at half the price! Jio thereby managed to exponentially increase consumption of data and halved the price by leveraging network scale and thinking long-term to book profits.

Could this scenario be compared to satellite (say, a 1 Tbps HTS class satellite), and is it possible to assess whether satellite broadband can reach this price point at over a $1B lifetime cost? To match data consumption even at 45 GB per month (not considering the uptake in demand per customer until 2021), and at a $50/Mbps/month capacity pricing at 2021, a satellite broadband WI-FI business could make sense at $11 price per customer, offering an IRR of 14% over a 10-year period serving over 2,700 customers on each 1 Gbps beam. But matching the price with Jio would be extremely difficult for satcom, and in a location like India/Africa where food and electricity can be scarce, it’s hard to see customers paying anything more than Jio pricing in the age of video consumption. There is the case of supplying less GB’s per month and increasing customers by satcom players, but then the cost of ground systems is also expected to spiral up. The case for direct broadband to consumer via satellite logically would incur even more costs. This begets the question of not only feasibility, but the right price point to penetrate!

The above argument is not to say satellite backhaul is irrelevant, given Jio themselves buy capacity for satellite backhaul to support network operations and gaps in supply. But building a feasible business out of an enormous 1 Tbps satellite needs customers in large volumes – and a price capped at $8-$12 level probably won’t reach current telco pricing that is seen in India. Even with massive discounts offered, satellite operators must deal with regulatory issues, and fight against fiber and MNOs that get priority on ‘social inclusion’. Thus, the consequent question is whether retail business models can grow to even 10 million subscribers to enjoy economies of scale in the same way large telcos do at 100 million subscribers?

Driving growth from vHTS and subsidizing costs may only happen at pricing lower than $8 and through building an efficient bandwidth management system. It is a high risk option, but otherwise how would several 1 Tbps systems work in price conscious developing economies? Lastly, even if the ROI made sense, would shareholders overlook short-term pain and refrain from penalizing the company in share price?  

The answer of growth vs price likely lies in implementing a fundamental business model and testing its strength at scale. CAPEX/Gbps ratios per satellite under $10 from ViaSat-3, Jupiter-3, SES mPower and future LEOs may enable the companies to enter the mass market, but the embrace towards telecom pricing for aggressive market entry could determine the effectiveness of such capacity supply. If indeed this is disruption, annals of comparison towards Jio are not fallible. A competitor amongst them must be willing to take the risk of launching massive operations (not just capacity) in select countries (landing rights!), forgetting the sweet EBITDAs to strive to become the next generation telco. Maybe then, we can probably witness telecom pricing in the satcom industry. But, if the industry’s hands are tied due to financial market considerations, then only an outsider could enforce telecom pricing, as was the case with Jio.

Bottom Line: Beyond 2021

Disruption forces business models to move from comfort towards empathizing end-consumers. The dynamics seen today are bound to change the wholesale business, where FSS holds no clear advantage, long term video demand looks uncertain, and traditional data businesses are niche. The move towards mass market data pricing is happening, and bottoming-out predictions can only be compared to the nearest rivals; i.e. telcos. And the key to unlocking the ‘tens of millions’ of customers can only be a telco/MNO referenced pricing – that looks poised to pivot the satcom data market and make it extremely bi-polar on niche satcom vs. mass market demand.

Though, only scale and network efficiencies can achieve that pricing, and the industry should expect consolidation to achieve that scale and pricing level. Horizontal mergers and key operator-equipment provider partnerships will help in achieving the goal, and thus expectations of M&A are in order. The ride will be rough and gambled with a lot of risk money, but it’s hard to see the industry register long term growth otherwise.