Is there a ‘natural owner’ of satellite internet?
11 November 2021 | Chris Daehnick
New satellite internet concepts are moving ahead but are some types of companies better positioned to succeed in this growing market than others? Chris Daehnick, associate partner at McKinsey & Company, explores the prospects
Satellite internet has been a niche market for years, but a number of companies have recently embarked on ambitious plans to become leaders in this space. This sudden interest isn’t surprising when you look at the driving forces. First, the potential market is huge, if companies can get costs down and control them.
A recent analysis by the National Telecommunications and Information Administration indicated that the shortfall in high-speed connections in the US might be larger than previously estimated, opening even greater opportunity in a very large market.
Meanwhile, governments worldwide are upping their efforts to provide low-latency, high-bandwidth satellite connectivity, both for their citizens and for official use. So, the market has new momentum.
All of which raises the question: if satellite internet is to succeed and thrive, who is best positioned to make that happen? What combination of financial, technical and operational capabilities, and regulatory savvy does a player in this market need? Are there some company archetypes that are best suited to this, making them the “natural owner” of satellite internet?
High optimism and funding to match
The prospects for NGSO constellations were in doubt as the world entered the Covid-19 era and OneWeb filed for bankruptcy in March 2020. But a year later, the outlook is brighter; OneWeb was revived when the UK government and Bharti Global invested $500 million each. SpaceX, which began developing its Starlink constellation in 2015, has picked up the pace of launches and deployed more than 1,700 satellites as of June 2021.
It is now responsible for almost half of all operational satellites in earth orbit and claims 100,000 users in its “beta” programme. Others are moving forward. Beyond the big names, start-ups and smaller companies are in, or entering, the race.
Finding a business model that works
Deploying satellite internet is a capital-intensive activity; several billion dollars of investment are the table stakes before any significant revenue can be expected. To some degree, companies take funding based on what sources they can leverage most easily. But they must also consider several other questions that could affect their eventual success. How deep are their chosen investor’s pockets and will the funding suffice for expected capital needs? How patient and risk-tolerant are the investors? Are additional sources of capital available to leverage, if needed? Ultimately, funding decisions will affect elements of a company’s strategy.
Satellite internet operators may succeed by providing connectivity services alone, but some companies are likely to offer a range of value-added services and solutions, such as cloud computing, entertainment or other content – or other value-added services, either on their own or in partnerships with others. Cellular backhaul connectivity is another potentially significant market for satellite operators.
Connectivity also allows NGSO internet providers to develop or link to solutions and services that drive additional profits. These solutions would be in demand in areas where low-latency satellite connectivity provides distinctive value, and they might include bundled computing and connectivity, entertainment, consumer services, or solutions designs for businesses or governments.
The challenges ahead
While companies are clearly forging ahead with satellite internet, the road ahead is complicated. Let’s consider regulatory issues. As the market grows, governments may decide to regulate services, rates, and access. Although there is little that can be said concretely at this point, the potential exists for internet access to be regulated in the same manner as a utility. At a minimum, this implies that players wishing to succeed in the NGSO internet market should be prepared to closely monitor activities of regulatory and legislative branches of government and provide input, as needed.
Now think about operations. In the physical realm, the proliferation of satellites and the increased potential for collisions and debris-related problems will probably require government involvement. At present, governments have regulations about end-of-life deorbit, but these may not be sufficient if all current plans are realised and they will certainly be inadequate if more players enter the market. An international agreement, such as exists for the GEO belt, may eventually be needed to regulate access to and use of some LEO orbits or altitudes, as well as to provide for active debris and dead satellite removal.
To get the coverage required, companies must undertake an unprecedented deployment of LEO satellites. Starlink alone, at the time of writing, is now overseeing more than one third of all active satellites and is on track to have more satellites than all other systems – commercial or government, combined – within two years. No one has ever managed a constellation on this scale, and it will almost certainly require capabilities that go beyond traditional telemetry, tracking, and control, all of which is now performed manually. Network management – the routing of signals within such a large and moving set of communications nodes – represents yet another challenge.
Back on earth, a constellation with thousands of satellites and potentially millions of users will require an extensive ground segment. When building and operating these ground segments, operators will adopt different models. Some operators may own everything and even plan to sell excess capacity to other satellite operators. Others may choose a major partner or third party for at least part of their operations.
Is there a natural owner of NGSO satellite internet?
With the range and depth of challenges – funding, technological, regulatory, operational, and business – it seems unlikely that a single existing company archetype has everything it takes to succeed. But the advantages and challenges differ for each type of competitor. Put another way, companies hoping to succeed must secure sufficient (and sustained) funding, navigate a complex regulatory environment, develop a new kind of satellite communications system, procure an unprecedented number of satellites, launch them, operate a space network of – again – unprecedented size, manage a tremendously complex communications network, and obtain and service potentially millions of customers.
For many of the challenges ahead, companies do not have an existing model to follow, let alone a company that has mastered the segment. What’s clear, however, is that successful companies will require a new combination of the capabilities mentioned above. At the moment, the field is open and opportunities exist for all the players now involved, as well as for those not yet in the game.
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