Report: Satcom wholesale nearing end of life?
November 17, 2022
By Chris Forrester
Satellite operators for many years welcomed their wholesale clients. Part of this was because many operators were initially owned by their national telcos who wanted hold onto their re-selling rights and their inherent profits. Indeed, almost all European telcos were perfectly happy to invest in satellites just so long as they retained their wholesale relationships.
That model has changed over the past few years as operators have cultivated a much closer relationship with their major clients.
A report from Northern Sky Research (NSR) confirms that the satellite communications industry is undergoing a reorganisation of business models in the face of maturing video broadcasting and the drum of disruption from mega-constellation players such as Starlink.
“Historically, the industry modelled a typical oligopoly with a few dominant global and regional players utilising critical orbital positions alongside solid barriers to entry and low exit. As a result, operators set and maintained prices in booming DTH markets, driving enviable EBITDA margins north of 80 per cent and IRR of sometimes over 35 per cent in hotspot video neighbourhoods. With the stable video segment maturing, operators began expanding into less profitable remote connectivity and mobility solutions while maintaining an EBITDA-friendly wholesale business model,” states NSR.
The NSR report continues: “Following the wave of recent acquisitions and consolidation in the industry, the value chain landscape is changing to reflect the evolution of business models and the entry of new players that have taken a different go-to-market approach. These approaches are broadly categorized under wholesale and service-focused business models. C-level executives across the industry and investors are evaluating the business model evolution and asking fundamental questions on the way forward. How do the business models compare on critical metrics such as top-line growth, turnover, profitability and return on investment?”
Over the past five years, says NSR, wholesale-focused and retail operators have seen significantly diverging trends in revenue growth, according to NSR’s Satellite Industry Financial Index, 12th Edition.
“While traditional wholesale operators averaged -3.3 per cent revenue declines over the last five years, service-focused operators recorded a high single to double-digit growth over the same period. For example, ViaSat Satellite Service and Hughes Services averaged 19.2 per cent and 8 per cent revenue growth y-o-y between 2017-2021 despite launch delays in ViaSat-3 and Jupiter-3 programmes. Other examples exist of regional operators with franchised retail or managed services business models with double-digit y-o-y growth. At the same time, regional wholesale operators such as Avanti struggled to drive fill rates,” suggests NSR.
“Over the last five years, the rest of the industry averaged $35.5 million in ARPOS, while ViaSat SS and Hughes Services recorded $299.8 million and $257.3 million over the same period, respectively. Admittedly, ARPOs could be a better metric if revenue from the utilisation or resale of leased capacity is excluded. Hence, turnover ratio comes closer to assessing $1 of invested assets to $1 of revenue earned on a comparative basis amongst operators. Again, ViaSat and Hughes outperform the rest of the market with 47.5 percent and 30.3 per cent, respectively, in turnover in 2021. For context, ViaSat is able to generate 47.5 cents for every $1 in assets. In contrast, Telesat, which runs a complete wholesale model, recorded a 12.7 per cent turnover in 2021,” says NSR.
NSR asks: “Are there indications that the service-focused business models will ever reach positive FCF and bottom-line profitability? The short answer is yes. Hughes Services’ y-o-y improvement in EBITDA, bottom-line and ROCE, alongside Iridium’s stellar performance across most critical metrics, corroborate that other service-focused operators could be on a path to benefiting from economies of scale. However, greater financial prudence and capital structure management are critical in accelerating the process.”