ING: The only way is up for satellite services
“The satellite industry is booming but companies need to innovate, both in terms of technology and financing, to succeed,” writes Wim Steenbakkers, global head of Satellite Finance at ING Commercial Banking on TMT Finance on the occasion of World Satellite Business Week in Paris.
From guiding our cars via GPS to accessing the latest ultra-high definition video-on-demand blockbuster, the services enabled by satellite have become an integral part of our daily lives. We now expect up-to-the-minute local weather forecasts on our tablets and assume we’ll be able to communicate by phone even when we are in the most remote corners of the world. Ideas that were science fiction just a couple of decades ago are now commonplace thanks to the satellite revolution.
The pace of change in satellite services is accelerating. Increasingly, people want minute-by-minute courier tracking of their latest online purchase; and taking a flight no longer means being offline: in the coming years, high speed in-flight Wi-Fi will become ubiquitous. Recent announcements have highlighted the use of satellites by Unesco to monitor the destruction of antiquities in Syria and Iraq and by the World Resources Institute to predict (using algorithms) areas at risk of deforestation.
One growing driver of demand for additional satellite coverage and capacity is the provision of satellite broadband to internet providers in developing countries (by companies such as O3b), which use medium-earth orbit satellites to connect the half of the world’s population that cannot currently access high speed internet. Space X and, most recently OneWeb, also aim to deliver global, high-speed satellite internet to previously inaccessible locations using low-earth orbit satellites.
Meanwhile, advances in mobile telecoms, such as the 5G standard, will further increase demand for satellite capacity: 5G envisages always accessible, faster communication services. Satellite capacity will be essential to achieve these goals and address challenges associated with traffic growth from multimedia and internet-connected appliances. Indeed, 5G could spur the convergence of fibre broadband, wireless and satellite infrastructure.
The resources required to power these services are immense. At the end of 2014, there were 1,261 operating satellites – 57 countries currently have at least one satellite in orbit (some as part of regional consortia)1. Industry observers expect this number to double in the next decade.
Robust growth fuelled by innovation
The proliferation of satellite services has enabled the industry to grow throughout the economic uncertainty of the last decade. The Satellite Industry Association says industry revenues grew by 4% in 2014 – outpacing global GDP growth of 2.6% – up from 3% in 20132. Globally, 2014 revenues for the satellite industry totalled $203 billion, up from $195.2 billion the previous year. The industry has grown by 2.3 times in the past decade.
Revenues grew in all four sectors of the satellite industry: satellite services, the largest segment, grew by 4% (the largest part of which is consumer services) to $122.9 billion, while the launch industry grew by 9% compared to 2013 (the other sectors are ground equipment and satellite manufacturing).
The satellite industry has responded to increased demand by innovating. New entrants have miniaturised components, facilitating so-called nanosats that weigh less than 10kg. Nanosats can be joined together to make larger devices and are cheap to make. Meanwhile, increased competition in the launch business – from SpaceX and others – is also lowering costs. Companies, including Rocket Lab and Virgin Galactic, hope to trim costs further by developing new launchers for small satellites.
The lower cost of nanosats is changing the business model of some parts of the satellite industry by substituting multiple small, low level satellites (around 300km above the earth) for individual huge and expensive geostationary satellites (around 36,000km above the earth). However, geostationary satellites will remain an important part of the satellite world. Indeed, the average size of the biggest geostationary satellites is increasing as demand for communications bandwidth continues to rise.
One longstanding problem with large geostationary satellites is that, despite their high cost, they are essentially disposables repair is physically impossible 36,000 kilometres above the Earth’s equator. The high investment costs, over a 3-year prior to start of operations, prior to cash flow commencing is another important hurdle to overcome. Innovation is also delivering results in this area, however. This has led to a significant decrease in the “cost per bit”, as satellite operators are adapting to the overall globally expected increase in demand for data transmission. This has led to a generic increase in average size of geostationary satellites and the introduction of high throughput satellite technology (HTS), which allow the launch costs to be spread over larger capacity than was previously possible.
Meeting the challenges of the future
Despite impressive growth and a great capacity for engineering its way out of problems, the satellite industry faces challenges. At operational level, the space business remains technically challenging, as demonstrated by the failure since October 2014 of three rocket systems (Russia’s Progress spacecraft and others from US firms Orbital ATK and SpaceX) that were bringing supplies to the International Space Station.
Another hurdle for satellite companies is the scarcity of orbital locations. Innovations, such as HTS, often using the Ka frequency band, help by providing greater capacity than traditional satellites for the same amount of allocated orbital spectrum and at a fraction of the cost: a gigabit of HTS throughput costs less than $3 million compared to over $100 million for regular satellites3. However, ultimately capacity is limited by the fixed number of orbital locations.
One of the greatest challenges for the satellite industry is financing. Despite falling costs, firms in the sector require high upfront capital investment while projects have lengthy deployment periods. Newer entrants necessarily face more difficulties in accessing finance than well-established players. These challenges are exacerbated by a fragmented regulatory landscape. The lack of an all- encompassing international regulatory framework requires companies to address competitive and legal issues at country-level.
To overcome these challenges, it is essential that satellite companies work with an experienced banking partner with a proven commitment to the sector. ING has more than 20 years of experience of satellite financing, including working with export credit agencies – which are important in satellite financing – and in rapidly growing emerging markets, and has made available a total of €5 billion risk capital through 65 transactions.
ING’s industry knowledge allows us to help clients navigate the complex and changeable regulatory environment. And our expertise enables us to model companies’ business plans and accurately assess credit risk. As a result, we can create more efficient, flexible and cost effective structured and non-investment grade financing solutions. Like our clients, we take a global and long-term view of the satellite industry, which is reflected by our lending commitments to clients.
1 2015 State of the Satellite Industry Report, Satellite Industry Association
2 2015 State of the Satellite Industry Report, Satellite Industry Association
3 The Future of High Throughput Satellites for Service Providers, www.newtec.eu/article/article/the-future-of-high-throughput-satellites-f..., accessed July 3, 2015
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Author contact details
Managing director/global head of Satellite Finance
Sector head Technology
ING Commercial Banking, Amsterdam
Phone: +31 20 576 8393
Mobile: +31 6 2958 4473