The fixed satellite services industry has been an anomaly in the communications sector, with stable, even increasing, pricing while prices for other forms of bandwidth fell dramatically.
Stability allowed satellite operators to manage heavy financial leverage and plan capital expenditure for assets with 15-year expected lives.
High-throughput satellite technology’s recent disruption of the fixed satellite services industry is rendering heavy financial leverage unsupportable, and may render the traditional satellite design life of 15 to 18 years — similar to that of a pick-up truck — antiquated.
Rapidly evolving industry
A look at the history of satellite capacity is revealing.
In the 1980s and 1990s a typical satellite had a throughput of one to two Gigabytes per second. Circa 2005, WildBlue and Spaceway launched five to 10 Gbps spotbeam satellites. Thailand’s IPSTAR shook the market with a 45 Gbps satellite. In 2011/2012, ViaSat-1 and Jupiter-1 launched with roughly 130 to 140 Gbps of capacity each. ViaSat-2, scheduled for launch in the first quarter of 2017, is expected to have 350 Gbps of capacity. ViaSat-3 satellites, targeted for 2019 or 2020, are expected to have approximately one Terabit per second of capacity.
This rate of capacity growth is approximately 500 to 1,000 times over 20 years — remarkably close to Moore’s law, which predicts a doubling of data density every two years.
Improvements in high-throughput satellite technology will continue, with investment in solar power and batteries, computer technology and advanced antenna design. Launch costs are likely to fall as well. As satellite technology competes with terrestrial options for some point-to-point applications, the growing market will justify further high-throughput satellite investment.
Business models no longer allow for stable lifetime revenue
A 15-year satellite life was likely designed to match 15-year orbital slot authorizations, and to allow maximum time to amortize the expensive and risky launch process. The goal was to minimize the cost per transponder equivalent per year of operation.
This made sense when pricing was stable and an operator could reasonably expect similar revenue per transponder equivalent in the later years. It does not make sense in the high-throughput satellite era.
A satellite operator today can’t expect stable revenue from a high-throughput satellite over the course of its life. After initial ramp-up, the revenue will be front loaded in the early years. In the later years of a satellite’s life, revenues will sharply fall. Future satellites, with even greater efficiency, will come to market and drive prices lower. Hence, the value of a rapid time to market is higher, and the value of extended satellite life is lower than in the past. The WildBlue satellite, for example, only has a fraction of the customers (and revenue) it had at its peak. End customers’ expectations of increasingly improved performance requires lighter customer loading to meet today’s higher performance expectations.
With prices falling 10 percent a year, the first five years of a 15-year satellite generates 52 percent of the lifetime revenue, while the last five years generate only 18 percent — even less if the revenue is discounted for time. In this context, a 15-year-old high-throughput satellite isn’t like a farmer’s 15-year old pick-up truck — perhaps beaten-up, but still fully functional. It’s more like a 15-year old laptop that can’t run today’s software applications. It’s hard to see how a new high-throughput satellite will be viable in the market for more than five to 10 years. Operators who chose less-aggressive high-throughput satellite designs have systems that appear nearly obsolete before they enter service.
Falling launch costs allow amortization over a shorter period. In an increasingly competitive market it seems foolhardy to spend the extra money, and delay time to market, to build and launch an asset to last well beyond its expected economic viability. Hughes and ViaSat would be happy to trade the last few years of life on their next-generation satellites in return for even six months earlier delivery.
New satellite technologies don’t address the issue
The satellite industry has developed numerous technologies to increase satellite flexibility and useful life, including flexible payloads with on-board beam formation, flexible power sub-systems and wideband travelling wave tube amplifiers.
These advances are likely to be of greatest benefit to wide-beam applications by allowing the satellites to adapt to meet evolving needs of certain customers whose throughput requirements are not significantly different. None address the particular challenge of high-throughput satellites — that the total throughput is largely fixed upon launch. And shortly after launch, technology advancements will enable satellites with much greater throughput to be launched and drive prices down further thus putting downward pressure of the future revenue stream.
It’s hard to predict how much construction time and money could be saved with shorter life satellites. Presumably they would be lighter, reducing launch cost. Payloads might be less complex as they are less likely to be reconfigured for applications at end of life. They might have fewer redundancies, and use cheaper materials. Perhaps less testing would be necessary, helping reduce time to market. It’s time to consider such re-designing of high-throughput satellites, making them more like laptops and less like pickup trucks.
Armand Musey is president of Summit Ridge Group, LLC where he provides valuation and financial consulting services in the communications sector.