The Future of Satellite Broadband

I blogged about cable and telco broadband last week, which leaves us a third significant broadband source—satellite.  The advantages of satellite broadband are obvious; you can get it anywhere in the world.  The disadvantages have been equally obvious—higher cost and performance issues on at least some delay-sensitive applications.  There are rumors that NFV or 5G or both will promote satellite, and also rumors that 5G could deal it a mighty blow.  As usual, we’ll have to wade through the stories to get a realistic picture.

Satellite broadband for commercial applications (leaving out military, in other words) consists largely of three categories—fixed satellite broadband, mobile broadband to ships, aircraft, etc., and “leased line” broadband offering point-to-point bandwidth.  We can expect demand in all these spaces to increase over the next five years, and for some specific markets demand could easily triple.  All that is good news.

The bad news, for the satellite players at least, is that there’s been a rampage of launch activity and scheduled activity, and most of the new birds are the HTS (high-throughput satellite) variety.  How much?  Start with the fact that current satellite broadband capacity is on the order of a terabit per second.  One satellite (ViaSat-3), which will see multiple launches, has a per-bird capacity that’s more than the total capacity of all the current broadband data satellites in use, more than that terabit.  The industry will probably see capacity grow by five times or more by 2020, and then double or triple again by 2022.  The result is that the Street expects the cost of satellite bandwidth to decline to about a quarter of current levels by 2020, and full HTS deployment alone could drive it down to half again that level by 2022.

All of this is the familiar geosynchronous market, too.  Low- and medium-earth-orbit (LEO/MEO) plans are even more ambitious, and they could add four or five terabits capacity by 2022, and offer lower latency for real-time communications and other applications that are sensitive to geosynchronous propagation delay.  It’s harder to estimate the total impact of the LEO/MEO satellites because the usage and geometry of the path can involve multiple satellites and thus make load predictions difficult.  Suffice it to say that if the plans are carried out, thousands of new LEO/MEO satellites could be up there by 2022.

Obviously, the big question is how the demand growth and the supply growth will play together.  Satellite data service pricing tends to be negotiated for the longer term, so the biggest changes in price will probably begin in 2020 when current data carriage contracts are expiring in significant numbers.  Current contract pricing already shows a steep discount, and so it’s reasonable to expect to see signs of price/demand elasticity by the end of this year.  However, you can’t judge how that will impact the market without knowing what the total addressable market is.  A lot of that depends on rather subtle aspects of geography, demography, and consumer behavior.

The consensus of the Street’s positive analysts on the space is that all three of the satellite broadband commercial data opportunities have large upsides.  The negative analysts all say (of course) just the opposite.  I’ll look at the segments and try to sort out a realistic view of each.

Satellite fixed consumer broadband is the potentially most interesting of all the spaces because of price/demand elasticity.  A sharp increase in capacity and a corresponding drop in prices would enable as much as 30x growth in this space, most of it coming from emerging market areas.  The challenge is that the equipment needed on the ground side is still costly for these markets, though there may be an opportunity to “hybridize” satellite broadband with other (fixed wireless access) services to reduce per-household cost.

Some Street analysts say that there could be a billion new satellite broadband customers unlocked at the new price points.  I’m doubtful.  A billion new users, meaning a billion new VSAT terminals?  I don’t see the data to prove that such a market exists, and I’m particularly doubtful that the initial cost of the terminal fits developing-market budgets.  FWA would lower the cost of access but reduce the number of satellite users by sharing the VSAT.  Then there’s the fact that concentrations of population that inevitably follow if you presume a billion new users would be attractive enough to justify looking at terrestrial solutions.

I think that the realistic growth opportunity for this space is on the order of 5x by 2022, the time when the pricing curve will be declining the most.  That’s good, but the interesting thing is that my model suggests that the cost reductions needed to boost satellite broadband in developing markets would reduce the revenue from current satellite broadband applications by down-pricing bandwidth, to the point where in the pre-2022 period you’d see a slight decline in revenue.  This means that you’d need to make up the revenue loss by increasing deployment in major markets, and for satellite broadband that doesn’t seem to be in the cards.

The aircraft and marine broadband space looks more promising, and could even provide some of that revenue relief.  As people get more dependent on their phones, they come to expect to be able to get WiFi anywhere they’re spending time.  Today we see an uptake rate of less than 10% on most aircraft broadband services, and slightly less for maritime services.  The model says that maritime broadband could attain 100% penetration if it were free, and could achieve 40% penetration if costs were half what they are today.  That is within the range of reduction possible with HTS and LEO/MEO technology.  This could make every cruise ship a candidate for significant bandwidth—hundreds of megabits even for mid-sized ones.  This is probably the opportunity that has the best chance of creating demand enough to sustain overall revenue for the industry in the face of slipping bandwidth cost.

Aircraft is another big opportunity for satellite, because there are already airlines that offer satellite-based WiFi free and because consumers who are able to slake their thirst for social media on planes could well become even more dependent on broadband, and thus demand it any time they travel or stay anywhere.  Early data suggests that the uptake rate for broadband on aircraft is only about 30% even when it’s free, and while my model says that changing social trends could bring in-flight WiFi use to 100% on all flights, that wouldn’t be likely until after 2022.  Some consumer survey data suggests that the greatest near-term opportunity would lie in flights between 3 and 6 hours’ duration.  This would equate to a trip of about 1,500 to 2,500 miles, which is a bit higher than the average flight mileage in the US.  International market data seems to show a slightly lover mileage per flight.

One important trend in the airline space is the move to offer consumer broadband and video streaming as an alternative to in-flight entertainment.  Airline policies on entertainment vary widely by market, but in general the airlines offer it on longer flights, flights falling into that 3-to-6-hour sweet spot.  By deferring the cost of entertainment systems, airlines can justify subsidizing WiFi onboard, which then gets the airlines closer to the “free” WiFi that could bring radical changes to the market.   However, we can be fairly certain based on terrestrial content delivery practices that aircraft would end up caching their feature videos aboard, reducing the need to support a separate satellite stream per viewer.

Satellite “leased line” services, point-to-point broadband, is in my view the most problematic of the opportunities.  There are absolutely locations where industrial operations or tourism demand broadband service but are too isolated to build out terrestrial infrastructure.  However, we all know that fiber optic cables span most of the world’s oceans today, and multiple times.  I think there is a clear disaster recovery opportunity here, and I also think that beyond 2022 we could see satellite leased line services supplementing terrestrial services for mobile coverage, etc.  I don’t see this application contributing much before that date.

The challenge we have here is that even if we saw total satellite broadband use double by 2020, which is possible, that would still represent demand equal only to about 40% of the bandwidth that will be available by then, neglecting any contribution from LEO/MEO.  Remember that one future HTS satellite could provide as much capacity as everything we have in orbit now.  The big question is whether anything else could come along.  What that might be falls into two categories, one a “supply-side” story and the other a “demand-side” story.

The supply-side theory is that modern virtualization initiatives (SDN, NFV, 5G) will level the playing field with respect to including satellite services into a higher-level retail (or MVNO) framework.  The problem with this is that like all three of these named technologies have proven in their own spaces, just making something technically possible doesn’t mean you’ve made business sense of it.  Absent a demand driver that suddenly makes a technology an impediment in making a boatload of money, I don’t see supply-side initiatives opening any meaningful opportunity.  However, the principles of these three initiatives might help operationalize evolving satcomm infrastructure more effectively, which as we’ll see could be important.

The demand-side story runs up against the reality that the really good broadband markets are served today with terrestrial technology because they are really good.  Satellite is not going to get cheaper than terrestrial options, particularly if we do start deploying FWA to enhance FTTH, starting just beyond 2020.  The aviation and marine markets are significant in terms of number of VSAT terminals, and both will likely contribute to considerable demand growth after 2020, but unless the pace of HTS deployment slows (unlikely) the gap between demand and supply will expand as we move into the next decade.

From a technology/equipment perspective, as opposed to a satellite provider/capacity perspective, the picture we’ve painted generates some interesting shifts and opportunities.  As unit bandwidth cost falls and satellite provider profits are pressured, the role of operations efficiency grows.  That’s particularly true when what satellite networks have to deliver is in effect what a terrestrial ISP delivers, with all the subnet addressing, gateway definitions, DNS/DHCP, video caching and CDN, and so forth.  The demand growth we’re seeing is all going to happen in spaces where even more IP management is linked into satellite service management.  There are definitely things emerging from SDN, NFV, and (in the future) 5G that could help control and even reduce the cost of creating and sustaining IP connectivity rather than just satellite connectivity.

So where do we end up here?  Leading up to about 2020, I think it’s clear that supply of satellite bandwidth will outstrip demand, and at the same time operations costs for the terrestrial part of the link (including onboard aircraft) will rise with the complexity of the delivery models being adopted.  The result will be profit compression on the part of the satellite providers, which is consistent with the negative thesis of the Street.

Beyond 2020 things get more complicated.  The negatives will continue to pile up unless there are steps taken to radically increase the delivery demand in the areas of aircraft and marine satellite broadband; no other options offer much.  5G will kick in here, but in my view 5G offers more negatives to the satellite industry than positives, because the FWA hybridization with FTTN will lower fiber-infrastructure delivery costs further and make it nearly impossible to extend satellite usage significantly except in the rural parts of developing economies, which clearly have fairly low revenue potential.  We could see satellite play a role in things like IoT, but absent a clear and practical IoT model (which we don’t have) we can’t say how much of a role that will be.

The net, in my view, is that satellite broadband will face trying times and profit compression for at least five years, and very possibly longer.  That will start to impact the launches planned beyond 2022, unless we figure out a new mission.  If that’s to be done, then we need to start thinking about it pretty quickly.