Satellite services - prepare for a bumpy re-entry
07 October 2016
Despite being a $127bn market with strong fundamentals and growth prospects, the satellite services sector is facing significant headwinds. These headwinds come from rapid growth in supply capacity and increasing competition from alternative technology, such as internet protocol television (IPTV) and fibre networks.
As a result, some incumbent operators are coming under pricing and margin pressure. This creates stress when combined with highly geared balance sheets. Those with high exposure to regions and markets where utilisation pressure is combined with other macro-economic headwinds face the prospect of financial restructuring and possible merger and acquisition (M&A) activity.
Current market conditions
To date in 2016, several operators have suffered declining revenue and EBITDA. This is driving an increase in leverage pressure across the industry. Equity markets have recognised these pressures on the sector and, in recent months, the share prices of the leading satellite service groups have dropped by more than a quarter.
Specialist challengers increase competitive pressure
The four leading global satellite coverage operators still account for 35% to 40% of the addressable revenues in the non-consumer satellite operator market, but competitive pressure is emerging from fast-growing specialist challengers. These challengers offer higher capacity satellites and have a lower cost base. The leading operators are responding to these competitive pressures by developing or acquiring high throughput satellite (HTS) technology.
Competition is also increasing from terrestrial networks (IPTV and fibre), with the rapid spread of 3G/4G cellular mobile and fibre broadband negatively affecting demand. For example, some pay TV operators have shifted their TV distribution from satellite onto fibre.
In the near-term, defence budget cuts in key countries such as the US and reduced military activity has also resulted in slower demand growth for satellite services. But in the longer-term military data usage may increase due to on-going political instability and unrest.
Outlook: Big bulge in supply set to drive down prices
We expect to see market growth slow from 4.7% compound annual growth rate (CAGR) as seen in 2011-15 to 4.2% CAGR from 2015-22. Whilst this is relatively moderate, the real driver is that price compression is expected to increase. The big bulge in upcoming supply means that capacity is likely to increase faster than utilisation leading to downward pressure on prices. To maintain top-line growth operators will have to increase volumes at lower market prices.
Growth will also not be evenly distributed as different satellite operators focus on different technologies, customers and geographies.. A contributory factor of this lower utilisation and oversupply has been the downturn in the O&G sector, which has reduced the use of seismic and drilling data.