Satellite distributors (including resellers/systems integrators) have long been considered the black sheep of the satellite industry. Low margins, slow growth, low barriers to entry and dependence on large FSS operators have all kept returns down. But this may be changing.
High throughput satellites (HTS) are poised to increase satellite capacity roughly 250-500% over the next several years. Utilizing this capacity will require the FSS industry to expand beyond its traditional customer base to reach enterprises and consumers with whom it currently has no relationship. ViaSat’s Excede and Hughes’ Jupiter services are examples of how such new capacity can be sold. Each of those super high throughput satellites (over 100 gbps each), had capacity nearly equal to the total North American FSS capacity prior to their launches. ViaSat and Hughes filled these satellites by targeting new consumer markets at a fraction of traditional FSS pricing, and, more recently, new enterprise customers in the mobility sector.
How will this be replicated around the world? It’s not clear that large untapped consumer broadband markets at $50/month+ exist in other parts of the world (although Facebook appears poised to try in Africa with its acquisition of Ka-band capacity on Spacecom’s AMOS-6 satellite). Furthermore, historically, the satellite industry has been poor at developing new customer segments. It has left distribution in fragmented markets to resellers/systems integrators. Inmarsat has been an exception. Inmarsat acquired a significant portion of its distribution channel including Globe Wireless, Stratos and Ship Equip – although it sold its energy broadband business to RigNet. Another exception is the US government market. The relatively consolidated nature of the government market increasingly allows FSS operators to address it directly. These exceptions aside, as the FSS industry continues to increase capacity without a simultaneous distribution channel to sell the new capacity, it will become increasingly dependent on third party distributors with customer relationships.
The changing industry dynamics improves the outlook for satellite distribution channel participants for five main reasons:
1) Distribution Channel Consolidation Increases Purchasing Power
Distributors are further increasing their purchasing power leverage over FSS operators by consolidating. Notable examples include EMC/MTN, Panasonic/ICT and Rignet (NESSCO, Technor and Inmarsat’s energy broadband business and others). Airbus has announced it intends to sell its SatCon division – most likely to another reseller. The reseller/systems integration consolidation creates obvious economies of scale in operations. But consolidation also enables them to obtain greater leverage negotiating large capacity agreements with FSS operators. Examples of such large capacity purchases include presales on Intelsat’s upcoming Epic satellites totaling over $500 million from Harris CapRock, MTN (now EMC/MTN) and Panasonic aviation alone. As these distributors continue to consolidate, their purchasing power, and consequently their profit margins will likely increase further.
2) Increase Bits per Hz Trends Help Resellers
Satellite operators typically sell capacity in MHz while resellers generally provide customers a certain amount of Mbps to meet the needs of their application. Historically, the ratio of bits per hz was relatively stable. But recent developments in antenna and compression technology enable resellers to meet customer needs with fewer MHz. Savvy resellers can design customer networks to increase the bits per hz ratio for customers. As a result, they can get more revenue from a given about of MHz they purchase in bulk from FSS operators. In other words, the distribution channel and end customer realize a disproportionate share of the benefit of improving bits per hz ratios.
3) The FSS industry is Becoming Increasingly Fragmented
While the satellite bandwidth distribution channel is consolidating, the FSS industry is fragmenting. New entrants, many quasi-state companies have emerged including new operators from Bolivia, Bulgaria, Turkmenistan to name a few. According to Euroconsult, nine new operators emerged from 2010-2014 and ten more are expected to launch their first satellite between 2015 and 2018. In the past ten years, the market share of the five largest FSS operators has fallen from nearly 85% to approximately 70%, a trend that is likely to continue. Many of the new operators have non-commercial objectives, including national pride, which makes future consolidation difficult.
4) New Growth Markets for Distribution Emerging
The decline of the oil and gas markets is well known. But the energy market is cyclical and it is likely to return within a few years. More importantly, lower satellite capacity pricing is creating new mobility markets – aviation and maritime in particular. Airline announcements of agreements to provide new or improved passenger connectivity appear almost weekly. While public announcements with cruise lines are less frequent, the cruise lines are likewise aggressively ramping-up customer connectivity options. It’s unclear if these new markets will grow large enough to support a reasonable return on the new HTS satellite capacity. But it is clear FSS operators will need to fight to get their share of these markets if they are to have a chance.
5) NGSO Entrants Will Only Exacerbate the Above Trends
To the extent planed LEO projects are built they will add even more industry capacity and further fragment the sources of satellite bandwidth. This will exacerbate the trends discussed above.
Private Equity Has Noticed
These industry dynamics have not gone unnoticed by private equity firms. We see little new investment by private equity in FSS operators and underperformance in FSS stock prices. But we are seeing a distinct increase in PE investment in resellers/systems integrators. Examples include Gilat (FIMI), Globecomm (Wasserstein), RigNet (KKR) and SpeedCast (TA Associates).
How does this PlayOut?
Broadly speaking, the FSS industry is left with two choices 1) allow their distribution channel to keep an increasing share of the value of their HTS investments; or 2) buy their distribution channels, likely at a large premium. Either way, the PE firms are likely to win again!