If you fancy someone, but the person doesn’t seem interested, do you give up or try to get closer in other ways in the hope that eventually you will win round the object of your desire?
Luxembourg-based satellite operator SES is clearly not one for giving up. Chief executive Steve Collar believes that even if it is difficult to drive consolidation in the traditional satellite industry — and it is — there are other ways to nurture relationships. But, ultimately, consolidation would definitely improve the industry. “The big call is the return on capital. We would all benefit,” he told the Financial Times recently.
Consolidation makes sense in an industry that requires billions in capital investment, and where the traditional core market of video services is declining. Capital could be optimised and operating costs shared.
It is even more compelling when you consider that the cosy high margin world of satellite services is being upended by new, deep-pocketed competitors such as Elon Musk and Jeff Bezos, who are targeting the market that many incumbents are looking to for growth — satellite-based broadband.
Morgan Stanley estimates global space industry revenues will expand from $350bn in 2016 to more than $1tn by 2040, driven by space-based internet services.
The problem is that few executives believe there will be any wedding bells for incumbents in the near future. The obstacles that have hindered consolidation in the past — national interests, technology and spectrum differences, and ego — have not disappeared, despite the disruption being caused by low earth orbit (LEO) constellations such as Musk’s Starlink, the UK’s OneWeb, or soon Bezos’s Project Kuiper.
Some quietly hope that many of the announced LEO projects will fold long before they become a threat, due to the vast investment required.
That is likely. But not all will collapse. And while it is still not clear just how disruptive LEO constellations will be to the traditional satellite industry, it would be brave to bet against Musk. The entrepreneur has cleverly used government support to build businesses that have torpedoed established business models and Starlink might be no exception.
So the pressure is on the fragmented industry to review options. In recent months, some have opted for vertical consolidation — buying businesses serving end users and reducing reliance on wholesaling capacity.
Others are looking to join Musk and Bezos by exploiting the potential of low earth orbit to deliver connectivity with a faster response than traditional satellites at higher altitudes. Eutelsat recently paid $550m for 24 per cent of OneWeb, becoming an equal shareholder with the UK government and India’s Bharti Global.
Industry rumours now have SES eyeing up Inmarsat, a combination that would serve video, wholesale and government markets, as well as rapidly growing mobility segments such as in-flight and maritime connectivity.
But its private equity owners show no sign of wanting to sell and Collar insists he is not waiting for the right moment to propose — to Inmarsat or anyone else.
Instead, he wants the industry to come together through sharing infrastructure. The SES boss looks to the telecom industry where the cost of mobile towers or fibre lines has been shared across operators. That not only optimised costs but also bolstered coverage as rivals extended networks by a smarter use of capital rather than investing in excess capacity. The satellite industry needs to do the same, he argues. “We see lots of networks being built independently of each other,” he told the FT. “That doesn’t make sense.”
Some network sharing between users of the same spectrum already happens, but it is limited. Satellite operators have long differentiated themselves by developing bespoke systems. But wouldn’t satellite services be cheaper and more efficient if standards were common and systems interoperable? After all, these satellite networks are the modern equivalent of electricity grids. Sharing infrastructure would leave operators free to focus on value added services, the argument goes.
It is a seductive theory. But the problem is that there are still big commercial incentives for satellite operators to steer clear of network sharing; not least the fact that if open systems are adopted, differentiation disappears and, with it, the operator’s edge.
Collar may dream of network sharing as the first step towards consolidation. But it is hard to see it happening in any significant way soon. At least, not until the new disrupters make such headway that change becomes inevitable.
This Article firstly Publish on www.ft.com