Japanese multinational conglomerate SoftBank last month purchased a 350 million USD equity stake in UK satellite internet provider OneWeb, in return for a 25% stake. This not only marked a milestone in the satellite industry, which for the first time received investment from a state-backed entity but also showcased a continued interest in an industry with a number of high-profile failures in recent history. Morgan Stanley recently predicted that the satellite internet industry will worth 400 billion USD by 2040, a six-time increase from 62.6 billion USD in 2020. This report will analyse the industry and shed light on plausible future developments.
The first commercial communications satellite, Telstar 1, was launched in 1962 by Blue Labs, a firm previously a subsidiary of AT&T, a telecommunications giant. Telstar 1 was one of the first medium-earth-orbit (MEO) satellites launched, providing optimum telecommunications and GPS services given its distance from Earth. The advancement of technology prompted the commercialisation of low-earth-orbit (LEO) satellites, which are cheap and easy to build and launch. Given their short distance from Earth, with an altitude of less than 2,000 km, LEO satellites have to form a “constellation”, which allows a group of satellites to work together, to cover the desired regions. The constellation of LEO satellites allows faster internet connection by shortening the relaying time of signal between the satellites and users. In 2020 alone, there were more than 1,000 satellites launched for communications purposes, compared to only 167 in 2019.
One of the reasons behind this expected six-fold increase in the number of communications satellites is the emergence of Starlink, a satellite constellation subsidiary of Elon Musk’s SpaceX. Thanks to 1 billion USD in equity funding through a share issue in May 2019, the constellation launched more than 900 satellites in 2020 alone, adding to the around 4,500 satellites already in space. With a bullish view on his company’s satellite operation, Mr Musk predicted that Starlink could generate 30 billion USD a year in revenue by providing fast internet connection to consumers. Nevertheless, there are huge maintenance and operations costs tied to building a sizable constellation. Starlink’s constellation is expected to constitute 2.5 billion USD annually of SpaceX’s expenditure until 2025, and a number of firms in the industry in the past have failed to generate a profit.
The enormous costs involved in building and operating a constellation of LEO satellites have historically brought some firms abruptly back down to earth. Iridium Communications, a US satellite company, spent 6 billion USD on building a satellite constellation only to find itself filing for bankruptcy in 1999. Another example is ORBCOMM, a US communications company that launched a number of LEO satellites, which filed for bankruptcy in 2000 after its funding was withdrawn. Avanti, a UK satellite company that has raised 1.2 billion USD to build and launch geosynchronous satellites in 2014, also faced financial difficulties when its debt-to-income ratio mounted. The company eventually had to restructure through a debt-for-equity swap scheme, in which creditors cancelled some of the company’s debt in exchange of its share.
The failed attempts of the satellite companies to successfully build constellations signal the immense hurdles that such companies have to overcome, but SoftBank’s injection of money in OneWeb manifested fresh optimism around the satellite industry. The investment came after OneWeb filed for bankruptcy; this helped SoftBank secure a seat on its board, alongside with the UK government and Indian telecommunications titan, Sunil Bharti Mittal, which respectively rescued OneWeb with an investment of 500 million USD each. Softbank’s decision to invest in a bankrupt company is probably due to its potential to compete with Starlink in what is likely to be a significant growth industry in decades to come. The company signed an agreement with Telesat, a Canadian communications satellite company, last month to launch the LEO satellites constellation. Therefore, in spite of evidence suggesting that the satellite industry has crashed to Earth, new players in the industry attested its resilience.
To conclude, despite the rough history of the satellite sector, the recent market events may have provided the industry with a long-awaited source of enthusiasm. Time will tell whether SoftBank’s investment in OneWeb will mark a turning point for the sector, much of which depends on whether OneWeb and firms within the industry in general can reduce some of the costs associated with satellites, and in turn become more economically sustainable.
By Sam Cheng
Sector Head: Daniel Regan