Challenges of Maritime Connectivity at Dawn of a New Satcom Era
The Covid-19 crisis has forced billions of citizens throughout the globe to experience a lockdown situation. This has highlighted our constant need to be connected. This need for broadband links is not only for leisure or welfare purposes but also to maintain a business continuity. It has proven to be true at sea as it is on the ground.
The current Covid-19 outbreak being rather recent and, most importantly, not yet over in many countries at the time we are writing this article, the overall extent of the impacts on the industry are still difficult to assess. Nevertheless, we can highlight some immediate consequences.
In the merchant shipping segment, the global decrease in the economic activity, and the closing of some borders have instantly resulted in a drop in commercial exchanges. Indeed, the Baltic Dry Index dropped by 36 % in Q1 2020, reaching 420 points at its worst around mid-February. In order to reassure customers and to facilitate the smooth functioning of the global maritime trade, the International Maritime Organization has taken measures in ports to ensure health protection, to facilitate crew changes and to provide access to berths.
The cruise segment should be deeply impacted for at least this year, even if we are not currently in the peak season. In the early stages of the outbreak, a cruise liner, the Diamond Princess, was quarantined in the ocean with its crew and passengers after confirming Covid-19 contamination on board. Other cases have followed. As a result, some of the leading cruise operators have cancelled or postponed their ship deployment: many cruise liners cancelled their sailings dedicated to the North Americans through May 11th 2020, including the major liners such as Carnival and Royal Caribbean. Facing major revenue losses, top cruise companies have started dry stocking a part of their fleet. The postponement of certain new ship deliveries appears likely, as companies will have to focus on fixing their financial situation, and as demand may not be as strong as previously anticipated,
The oil & gas segment will be one of the most impacted segments due to two simultaneous crises: the Covid-19 and the price war between oil producers. The Brent plunged 62 % in Q1 2020 and started to increase slightly again in April as the OPEC and its partners stroke a deal to cut the global petroleum output by a tenth. However, a $30 barrel and a low demand will continue to affect offshore companies in the months to come. Indeed, the market is already over flooded and there is at least a one-month delay to cut the supply.
The leisure segment is already affected but the full impact of the Covid-19 is to be experienced throughout the summer as it is the peak season. Tourists will not be able to go to their usual vacation spots as some borders will be closed until September – the European one for instance. Moreover, many new superyachts (the highest bandwidth consuming boats in this segment) that were to be delivered before the summer will be delayed, thus impacting the VSAT systems activations and the whole value chain.
In addition to these global and macro-economic factors, some several internal ones are affecting the Maritime connectivity market. While the majority of connectivity contracts would be for a fixed volume and with fixed payments, certain segments and/or offers can be more flexible, including in the oil & gas segment or in the leisure segment. And in general, service companies may have to give some support and/or to renegotiate certain terms with their clients. This would at least temporarily weight on new installations and ARPU for service companies.
This being said, and since the start of last decade, connectivity at sea has increasingly relied on VSAT networks, while the share of MSS (including “MSS broadband” services) peaked and then started to erode.
The deployment of High-Throughput Satellites has accelerated that trend in the last five year by bringing more capacity to the end-users at a lower cost per unit. This growth story remains far from over and should resume after a potential temporary dip. Thanks to continuous technology improvements by the satcom industry, a transition towards the next generation of VSAT connectivity should occur in the coming years and it should have the effects of a small revolution for the Maritime connectivity market.
One trend should be a further democratization of the VSAT connectivity, with now VSAT service offers targeting customers willing to spend less than a thousand dollars per month for their connectivity. This should typically increase the penetration among vessels with a limited crew size, especially as they should be the ones less impacted by the global economic situation.
Another almost opposite trend should be the need for the largest cruise ships to satisfy thousands of passengers expecting the same internet experience as on shore. For these high bandwidth consumers, the standard at Year-End 2019 was about to reach up to several hundreds of megabits per second (Mbps). The decrease of the number of passengers might lead to a stagnation of this standard. Looking at the cruise segment more broadly (including smaller ships with a capacity of few hundreds of passengers), we expect that the average revenue per ship will remain relatively stable at around $25,800 per month but with a significant drop in terms of number of active VSAT, therefore leading to a decrease in service revenues in 2020 and likely 2021.
Source: Euroconsult analysis
This appetite for VSAT connectivity services has linked to an important erosion of the MSS market share, in particular when talking about the primary connectivity link to the ship. Nevertheless, MSS connectivity still addresses several needs of the maritime industry. Hence, many consumers who are satisfied with less than 700 kbps shall continue to rely on the MSS solutions and their guaranteed quality of service. These services also satisfy users with occasional or specialized needs. Another growing application is asset tracking, either for ships or for containers, in particular for reefers. Finally, a wide number of VSAT systems are backed up by MSS broadband solutions thanks to the reliability of MSS links. This variety of applications has led Iridium to launch its Certus solution in 2019 following the deployment of its Iridium NEXT constellation. Inmarsat, the incumbent and global MSS leader, has also announced that L-band payloads will be embarked on its future satellites in order to maintain the current MSS capacity supply. Despite these use cases of MSS solutions, the number of installed broadband MSS terminals has recently decreased alongside with the global service revenues, with the average revenue per unit (ARPU) decreasing as well to around $7,300 per year.
The upcoming VSAT service should be supported by new generation High/Very High-Throughput Satellite systems designed with significantly larger bandwidth of up to several hundreds of Gbps, more flexibility features and in general improved economics, as well as constellations of satellites in low- and medium-Earth orbits. Concerning the latter, the cancellation of the Leosat project in 2019 and the bankruptcy declared by OneWeb in March 2020 show that uncertainty reigns in this race between the various players. However, some advantages are linked to the constellations of satellites, such as the better latency compared to geostationary satellites thanks to the lower orbit altitude. For instance, “Internet of Things” applied to the Maritime market could benefit from the constellations of satellites in non-geostationary orbits.
Source: Euroconsult analysis
Based on the public announcements made by the different companies involved in these new systems, we could foresee that a significant volume of additional satellite capacity will come live within two to three years. Even if that is subject to uncertainty, that could lead to a situation where the satellite capacity supply is largely more important than the demand, therefore impacting negatively the fill rates of the various systems during the time needed by the market to adopt new equipment and usages adapted to the new supply.
In conclusion, the Maritime Connectivity market is in a transitioning phase between legacy and next generations of connectivity solutions. The adoption of new solutions, and the ability of service companies to navigate through the major challenges resulting from the Covid-19 crisis, should ultimately benefitthe entire ecosystem of maritime connectivity, from equipment suppliers to service companies and operators of satellite infrastructure.
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