Too Many Satellites Means Sky-High Margins Under Pressure
(Bloomberg) -- Satellite operators are launching more high-powered communications rigs into space, with two more set to join about two-dozen already in orbit by the end of the year, crowding the skies and threatening the industry’s fat profit margins.
The new orbiters being launched at a cost of as much as $500 million each are forcing established operators to embark on costly upgrades of their fleets at a time when their business outlook has darkened.
Four companies -- Intelsat SA, SES SA, Eutelsat Communications SA and Telesat -- that have dominated the business for decades earn margins of more than 70 percent by beaming television across the globe. Now the added supply is boosting services like satellite phone calls, in-flight Wi-Fi and internet access in remote areas, but driving down prices.
“There’s certainly a lot of supply coming online,” said Blaine Curcio, senior analyst at Northern Sky Research. “Operators are launching huge satellites with overcapacity.”
Investors got a taste of the Big Four’s vulnerability in May, when Eutelsat lowered its profit estimates for this year and next, sending the shares down 28 percent in a day. Intelsat, weighed down by more than $14 billion in long-term debt, has seen its stock slide by more than 80 percent since the start of 2014. SES is down 12 percent this year.
“There is excess supply for sure in certain markets and there has been for at least a year now,” Telesat Chief Executive Officer Daniel S. Goldberg said on a conference call in July. While demand is still growing, “the industry is going to have to digest the excess capacity that folks have collectively launched over the last couple of years.”
The explosion this month of a rocket carrying a satellite for Facebook Inc. has barely dented surging global capacity, which has more than quadrupled over the last decade to 1.5 terabytes per second, according to Northern Sky. That’s enough to transmit 3.6 million digital photos. The consultancy expects growth to accelerate, with a jump to nearly 8 terabytes in 2020.
The increase has been driven by companies like London-based Avanti Communications Group Plc, Carlsbad, California-based Viasat Inc. and Thaicom, a Nonthaburi, Thailand-based provider partially owned by Singapore sovereign wealth fund Temasek.
Lower costs could help companies like Panasonic Corp. and Global Eagle Entertainment Inc., which buy excess capacity on some of the 450 geostationary satellites orbiting Earth and sell it as services like airline Wi-Fi.
Others, such as Facebook and Alphabet Inc.’s Google, want to use satellites to expand internet connectivity in places like Africa, where they’re also used to ease burdens on phone networks. Facebook planned to work with Eutelsat to get more people online in sub-Saharan Africa.
“We know that broadband deployment increases economic development,” said Camille Mendler, lead analyst at research firm Ovum. “The young Steve Jobs of Cote d’Ivoire might well benefit if we had this kind of glut.”
So far, new services haven’t caught up with increases in the number and power of satellites. Jeremy Rose, senior consultant at research firm Comsys, said the situation reminded him of the 2001 crash in rates that fiber-optic carriers experienced after a building boom in the 1990s.
While satellite use varies by region and type, some of those orbiting over regions like Africa and the Middle East have as much as 80 percent spare capacity, Curcio said. Services like residential broadband are less consistent than television, creating peaks and valleys in demand.
Prices of some services have fallen by as much as 20 percent over the last few years, Eutelsat spokeswoman Vanessa O’Connor said. The company expects prices of satellite data transmissions to fall 50 percent over the next five years.
Many of the new services, which involve transmitting digital data rather than video signals, are less profitable, analysts say. More reliance on communications services means current profit margins are “not sustainable for a company selling mostly data services,” Northern Sky said in a report this month.
The Big Four, which still generate the bulk of their revenue from television, including pay-TV offerings that bounce signals back to homes, have different plans to counter the threat.
SES, which gets 70 percent of its revenue from video, is moving to accelerate adoption of ultra-high-definition television, spokesman Markus Bayer said. Ultra-HD uses more satellite space than traditional TV.
Eutelset, with 64 percent of sales coming from video, expects a rise in Internet video to offset lower prices, O’Connor said. Video provides 52 percent of revenue at Telesat and 38 percent at Intelsat, spokesmen said.
Intelsat’s data business is “under a lot of price pressure,” CEO Stephen Spengler said in an earnings call in February, though he added that the launch of a new satellite would help the company counter falling prices “with differentiated capacity and differentiated services.”
The Big Four are underestimating the threat, which will be compounded by advances in technology, said Tim Farrar, a consultant in Menlo Park, California. The push to upgrade to faster satellites gives operators less time to recoup investments.
“If prices crash, satellite operators won’t have 15 years to earn their money back,” Farrar said. “They will have 3-5 years. That’s the fundamental issue."