The satellite industry is rapidly expanding, and we are starting to see the growth of new industry sectors and the implementation of new applications.
With global Low Earth Orbit (LEO) constellations such as OneWeb driving the development of the African market and Starlink announcing services in selected African countries, both awareness of, and demand for, satellite connectivity services are growing. The expected total available capacity in the southern Africa market is estimated at 200Tbps, which equates to a multi-billion-Rand industry throughout the region.
While the low latency (<50msec) and high data transfer rates (>150Mbps) of emerging LEO services can support cloud access applications, Telco trunk backhaul services and fibre restoration applications, it is also interesting to compare and contrast the attractiveness of the satellite business model and various investment opportunities.
Since I am neither an accountant nor a financial trader, it should be noted that this is a technology investment story and does not in any way constitute investment advice.
Why talk business models and investments?
Functions and features of new technology are always of interest, at least initially. Partly for innovators who appreciate new features, and partly for early adopters who seek enhanced social status through being the first to own the latest devices or technology. Once this early adoption phase of the bell curve has been passed, basic economic factors will determine whether the technology becomes sustainable and makes a meaningful contribution to society.
History is full of examples of great technology innovations that have failed to catch on due to poor business models or poor timing. For example, the Kodak Digital Camera. Kodak was always well known for its cameras and film. In the 1970s, they began researching digital photography and developed one of the first digital cameras in 1975. However, the company did not want to cannibalise its film business and did not pursue digital photography aggressively enough. This led to Kodak being slow to adopt digital photography and eventually losing market share to competitors.
Webvan is another telling example. This online grocery delivery service was founded in 1996 with a promise to deliver groceries to customers’ homes within 30 minutes of their order. However, Webvan’s business model was flawed, as it required the company to build large warehouses to store groceries and maintain its own fleet of delivery trucks.
Webvan struggled to keep up with demand and eventually filed for bankruptcy in 2001. Today we have multiple success stories based on Webvan’s original concept, but backed by more robust business models.
It is therefore clear that the long-term industry success of LEO, MEO and other emerging satellite services will be determined by the business models adopted by the leading providers, rather than purely by the features of the technology. A degree of context and understanding of satellite business models could prove valuable if past mistakes are to be avoided.
Will fibre make satellite obsolete? And why invest in satellite when fibre and LTE growth and network dominance is driven by regional Telcos and mobile network operators?
Sadly, questions like these tend to form the paradigm for most investors and industry leaders, and they are misguided. That’s because not only is fibre not on a trajectory that could make satellite obsolete, but also because it misses the fundamental point that satellite and fibre are not competing technologies; rather, they complement each other.
And the difference is…
To see why these questions effectively create a false premise, and also to better understand the different business model requirements, it would be instructive to briefly consider the technological differences between satellite and fibre networks.
Fibre is point-to-point, whereas satellite is point-to-multipoint. A national fibre network is effectively created by physically linking one location to another by means of the fibre cable, creating multiple point-to-point links. In contrast, a satellite network is created by broadcasting a service from a central location (a gateway) to multiple remote locations (sometimes thousands), with no physical link between the end user terminal and the central gateway.
Fibre networks include terrestrial backhaul links while satellite networks have no such requirement. To provide a fibre connection to an end user, their specific residence must be within a community that is part of the fibre network, then within a town that is on the same network with a fibre backhaul cable to the central network core.
For satellite, the picture is very different: any user, anywhere can be connected to the satellite service regardless of whether other nearby locations are similarly connected.
These are some of the principal differences between the technologies, and they help explain why fibre is the preferred option for primary service applications, while satellite is typically regarded as being the best alternative for back-up services. In addition, understanding these differences also provides context for comparing the two different investment models.
Fibre is like property
To install a fibre network in a residential area, the network provider needs to obtain wayleave approvals to dig trenches and lay cables to each location in the target footprint area.
To have each household counted as an addressable market, the fibre network must be installed to each household location. If a specific location is not reached by the fibre cable network, that location can’t be connected and cannot be considered as part of the target market footprint.
The network providers must carefully select target areas in which to install fibre cables as this will determine the number of potential users and of course the potential income over the lifespan of the fibre service.
If a specific area proves to be unprofitable, then that particular fibre network section can’t simply be removed and reinstalled in another prospect area. Fibre cable networks are also very capex intensive, with 10- to 15-year business model cycles. In other words, it’s a question of long-term investment, and location, location, location. Very much like buying property.
Satellite is like equity
From an investment point of view, satellite networks are very different. Firstly, satellite networks provide services to users at any location and at any time. Also, global satellite constellations are built, operated and funded by the global space network providers using global funding, while the regional and national service providers need to focus only on subscriber acquisition and service delivery.
Satellite network service footprints often span multiple countries and services can be delivered across multiple economies, making it possible to migrate services from poorly performing territories to more lucrative markets. While moving revenue from one territory to another does carry some cost, it is a feasible and practical way to hedge against macro-economic risks.
As a reference, the market success of the our Smart Satellite Service is equally due to the functional performance of the service, as well as some very specific business model engineering.
For example, the service was developed with advance content and time-of-use aware billing algorithms to provide attractive back-up options for the retail market and pay-per-use fibre standby service options.
As the first Smart Satellite Service in the African market, we provides an attractive alternative to LTE services while at the same time proving that GEO satellite service isn’t necessarily slow, expensive or prone to latency. This makes satellite business model investments much more flexible, with shorter 5- to 10-year life cycles, plus the option to effectively relocate investment from underperforming areas to more lucrative regions. To me, this sounds rather like equities trading.
Remember this is a technology investment story, not a fact sheet – so the absolute metrics are not what matters.
What does matter very much is that global LEO and MEO constellations have been designed, implemented, funded and are now operational across Africa. These networks make available massive amounts of capacity in the sky that can be delivered to any location, anywhere and at any time.
Equally, this capacity and connectivity are largely immune from terrestrial constraints such as load shedding, equipment theft or natural disasters. The next step is for regional Telcos and service providers to leverage this potential, and to ground the capacity available in sustainable long-term business models that offer real solutions, open new markets and deliver genuine, sustainable value for all.
When considering these new steps, it helps to think differently about the satellite business case, and to consider fibre as being analogous to property, while satellite is much more akin to equity.
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