SATCOM OPERATORS: SATELLITE MOBILITY MARKET: A TEMPORARY SLOWDOWN?
A Satcom industry struggling to renew growth
More than half a year after the start of the Covid-19 crisis, it has already had a significant impact on the world we live in overall and a large number of industries have been negatively impacted, including the satcom industry. Except for JSAT (Japan), all other operators have reported lower revenues in 1H 2020 vs. 1H 2019. Revenues have been hit by the crisis which has led most operators to revise their revenue targets downward for 2020. Operators with a strong mobility business have overall been more impacted than others. Given the recent COVID-19 indicators, there seems to be no end in sight to the health crisis and the global economy could be impacted for months and potentially years to come.
This health crisis started at a time when the satcom industry had just gone through a transitioning period for the past few years that had a negative impact on capacity revenues which have been on a downward trend since 2014. The pre-COVID-19 trend could mainly be explained by the growing HTS competition and the strong impact it had on the industry, with an increasing amount of telecom traffic moving from widebeam to cheaper HTS capacity. This has contributed to lower regular capacity fill rates and has also had a negative impact on ARPUs and on overall industry capacity revenues. The pricing environment has shown signs of more modest declines in the past 12-18 months, but this has not stopped the average capacity ARPU from decreasing by more than 60% between 2014 and 2019. As the erosion of capacity ARPU was only partly offset by increases in capacity leased, the wholesale market value has continuously declined in the past half-decade.
Prior to the start of the current health crisis, Euroconsult had anticipated a return to capacity revenue growth in 2020. This return to growth will now be delayed in large part due to the impact of COVID-19 on the industry. The impact of the latter significantly varies by satcom market vertical with aero IFC and the maritime markets among the most severely impacted in 2020 and with uncertain recovery timelines. The other data applications such as consumer broadband and cellular backhaul have been less impacted so far and are expected to see capacity demand ramp up delayed by 12-18 months.
The impact of COVID-19 has led to a significant revision in our short-term forecast with a return to revenue growth now not expected before 2022.
Impact of COVID-19 on the satellite mobility market
The COVID-19 outbreak and its aftermath have had an adverse impact on mobility markets (aero and maritime) globally and satellite players across the value chain have been strongly impacted. Debt loaden service providers in particular have been heavily hit, leading to two of the largest players, Speedcast and Global Eagle to file for Chapter 11 bankruptcy protection in 2020. Another key player in the industry Gogo, sold its commercial in-flight business to Intelsat this summer, as the company was financially struggling due to the ongoing pandemic.
When looking at aviation, the efforts made to limit the spread of the virus on a global scale had major consequences on the whole ecosystem. From the Original Equipment Manufacturers (OEM) to the connectivity service providers, the whole value chain is going through an unprecedented crisis. This will likely lead to a consolidation of market players, with other bankruptcies than the ones mentioned above and probable acquisitions at different levels of the eco-system. While take-or-pay agreements could limit near term exposure for satellite operators, they will have to renegotiate lease contracts to ensure longevity of the service partner and end-users.
The maritime market was impacted in a similar way, with some sub-segments hit harder than others. Some subsegments like Cruise should see a decrease of almost 50 % in 2020 in terms of active terminals due to several months of lockdown that strongly impacted the tourism industry. The Leisure segment should also be severely impacted in 2020 but expected to recover in the next couple of years.
In the aero market, Commercial Aviation is the most impacted sub-segment, due to its nature of proximity among passengers. Commercial aviation suffered from an international shutdown of air traffic with uncertain recovery time, likely to be staged differently across regions. European airlines suffer from a very high seasonality, whereby the majority of their annual revenue is made by the summer travel which was limited in length and number of customers this year because of the ongoing crisis. On the other side, markets with strong domestic demand like in North America and China could benefit from a quicker recovery. Connectivity revenues will follow the evolution of the air traffic. Most equipment orders have been delayed or cancelled in order to save cash to weather the difficult times ahead.
In the maritime market, the hardest hit verticals include merchant shipping, the cruise industry and the oil & gas market. The Merchant shipping market relies heavily on international trade. The limitation of traded resources will have consequences on the numbers of new vessels built and will likely result in a lower ARPU for connectivity services.
The Cruise industry will be one of the most impacted segments. Cruise companies have very little visibility over the next months and potentially years, resulting in fewer new vessels built, and a huge decline in connectivity revenues. Euroconsult expects a reovery to 2019 levels by 2025. The Oil & Gas market experienced a strong downturn as well with geopolitical tensions and very little oil consumption leading to negative oil prices earlier this year. Satellite connectivity revenues could be impacted for several months until the global market stabilizes.
A return to Satcom revenue growth in 2022?
Despite the previously mentioned short term headwinds, underlying market drivers (e.g. growing requirements for broadband connectivity “anywhere, anytime”, introduction of higher bandwidth for end users at a reduced cost per bit with new generations of satellites…) are expected to enable long term growth projection. We expect that from 2022, the satcom market should return to revenue growth and quickly expand in the second half of the decade, with the market value increasing by more than 75% by 2029 to just under $19 billion, up from $10.8 billion in 2019, driven by anticipated demand elasticity in price-sensitive verticals, such as broadband access, rural connectivity, aero IFC and trunking/backhaul.
The return to growth is conditional on a number of conditions including the need for significant advances in NGSO user terminal technologies, production volumes and capabilities that will be required to help drive higher penetration of addressable markets, and significant decreases in the cost base of satellite capacity to be translated into lower capacity prices and related services. The end of the COVID-19 crisis is also a key condition for this return to growth, particularly as the maritime and aero markets, which are impacted the most in 2020, are expected to be two of the main driving forces for the Satcom industry in the middle to long term. If this crisis continues well into 2021, it would not be surprising to see a return to revenue growth delayed to 2023 which would not bode well for a Satcom industry that has made significant investments in recent years to adapt to the new market environment.
Total satellite capacity leased in Gbps
About the Author:
Dimitri Buchs is a Senior Consultant at Euroconsult, based in Montreal, Canada. Since joining Euroconsult in 2007, he has managed and contributed to more than 50 consulting missions for a wide range of international clients including satellite operators, service providers and investment funds.
Dimitri is also an editor and key contributor to our premium research report in satellite communication and broadcasting markets. Prior to joining Euroconsult, Dimitri participated in several consulting assignments on mobile TV services and social media marketing. Dimitri has a Master’s Degree in International Management and a Bachelor of Economics from the Pantheon-Sorbonne University in Paris.
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