Telecoms

The event of 2015

One of the most important developments of 2015, in my view, was a successful attempt to land the first stage of SpaceX’s Falcon 9 rocket on 21 December 2015.

The full video here.

The importance of this is the potential to significantly reduce the costs of delivering stuff into space. Currently, the total launch cost is split as 1% fuel, and 99% the booster rocket. If you bring the rocket back and reuse it, the total launch cost can drop up to 2 orders of magnitude. This is significant not only for the SpaceX founder Elon Musk’s mission to colonise Mars (in the long term), but also for a number of more mundane applications (in the medium term).

Fleets of satellites in space

There have been at least two announcements of the plans to roll out a space satellite fleet capable of providing high speed internet throughout the planet. One from SpaceX, another from a competitor OneWeb.

Here is what the economics of OneWeb proposition looks:

• The plan is to launch 900 small satellites (150kg each) to Low Earth Orbit (LEO) => total weight is 900*0.15=135 tons.
• To send 1 ton of cargo to LEO costs about 4mm$ (SpaceX’s Falcon 9) => total launch cost is about 135*4=540mm$. (Falcon Heavy, the next generation of the Falcon rocket, would halve this cost, and reusability of the rockets, the concept gaining more credibility after the recent landing success, has further potential to shave at least an order of magnitude from the launch price).
• The fleet is to be assembled on a conveyor line reducing production costs. Each satellite would cost 350,000$ => total production cost is 900*0.35=315mm$.

The costs are falling both on satellite manufacturing and satellite launch sides, reflecting the general trend of technology driven cost deflation.

The estimated total cost of OneWeb project is about 540+315=855mm$ (and none of the cost components, manufacturing or launch, has bottomed yet). The figure is in the range of hundreds of millions of dollars, as opposed to tens of billions invested by traditional telecom operators. In other words, the aim is to provide global broadband internet at the projected cost of 2 orders of magnitude smaller than what has been spent by the industry so far. (And what not you get with broadband internet?)

Satellites vs. Telecoms: to complement, or to challenge?

Mobile telecom industry has unusual investment characteristics. It provides a commodity type of service, but priced as a branded service (with corresponding margins and return on invested capital). Such mismatches are rarely sustainable in the long run, but can happen during the early stages of the new industry development.

Profitability normalisation may happen naturally as a result of the industry getting more mature, or be expedited by new disruptive players. Are the early days of the mobile telecom industry coming to an end with the new technical possibilities brought about by the global satellite networks?

So far the talks are about complementarity with the traditional telecom services. Traditional telecoms operate both the trunk communication lines, and the last mile (landline or mobile). New satellite networks effectively provide an alternative for the incumbents’ trunk lines, but would still need the last mile connection. (Apparently, your smartphone is capable of communicating with GPS-satellites directly transmitting limited geopositioning data, but would need a nearby intermediary (incumbent mobile telecom’s cell tower?) to get full scale data stream from space). A terrestrial last mile partner would be preferred.

I don’t know how the cooperation between the incumbents and the new satellite companies plays out, but one thing is certain. More options means more competition, which means faster normalisation. The ultimate potential of the new satellite fleets is probably more than to be just an additional trunk data carrier hidden within the incumbent telecom operators.

Implications for telecoms

If cheap, global, satellite, fast data transmission is for real we may see the following developments with the incumbent telecom operators.

• Significant pressure on the tariffs. Not only the prices would go down, but the tariff structure would simplify. Sophisticated tariff designs would go, electricity industry-type of tariffs (“price per kWh”) would emerge as a single tariff (“price per megabyte”).
• Pressure on revenue would require the incumbents to cut costs. Elimination of the marketing function (as per above) would come handy, but more fat will need to be cut.
• Consolidation across the countries would help the incumbents to match the “global” proposition of the satellite companies (that are global by construction).
• Roaming will be gone. (Digital services, like Gmail, are naturally global. Non-digital services not always. But if the disruptive players provide global scale, incumbents will have to follow).

• Consensus assumptions about the telecom industry, specifically on the terminal year return on capital, will prove too optimistic. A lot of goodwill will have to be written down from the balance sheet of the consolidators of the past.

In the end, telecoms will exhibit the features of the utilities industry, providing commodity services and generating returns on invested capital comparable to the cost of capital.