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  • Starlink - How Musk’s satellites may force Telecoms into 5G-overdrive
Blog:

Starlink - How Musk’s satellites may force Telecoms into 5G-overdrive

10 May 2021

Original content provided by BDO

For a clear sign of how disruptive technology and unforeseen risks often appear from unexpected places, telecoms companies need only look up.

In the sky above us, SpaceX rockets are busy deploying the Starlink satellite network. Today, more than 1,000 Starlink satellites circle the planet. The number is expected to grow well into five digits soon. Via the satellite constellation, Elon Musk & Co. offer high-speed internet access. All you need is a subscription and paying a one-time fee for a small satellite dish (aptly named ‘Dishy’).

Starlink profess that they do not see themselves as a direct competitor to telecoms; a statement that sounds like ‘move along, move along - nothing to see here,’ when looking closer at the business model and opportunities.

Upon closer inspection, it seems that beaming internet from space could turn into a major business risk and put a serious spanner in the works for telecoms’ plans and future opportunities. A fact underlined by several telecoms preparing to launch a Starlink rival.

Beam Me Up, Elon

In late 2020, SpaceX began offering internet access with speeds up to 300 Mbps via Starlink to its first 10,000 customers. The company also launched a pre-order reservation system with a refundable up-front deposit. According to SpaceX COO and President Gwynne Shotwell, much of the globe is covered by the roughly 1,300 satellites now in orbit. However, the company plans to launch more than 30,000.

Other companies, including OneWeb, HughesNet and Viasat, offer internet access from space. While Amazon’s Kuiper Systems is a newcomer and still far from offering its services to clients, it is likely to achieve long-term success due to its parent company’s deep pockets and ability to leverage AWS-related services to bundle offers.

One difference between Starlink and most other current competitors is its combination of speed and unlimited data. The $99 a month price tag means it is also quite price competitive.

If things go as Musk and SpaceX hope, Starlink will be a core component in propelling them toward long-term profitability and corner a large part of a space industry projected to grow at 5.6% CAGR and reach $558 billion by 2026. SpaceX’s plan is to spin off Starlink and take it public. The goal is to overcome negative cash flow that will invariably affect the company in the coming few years and help make both SpaceX and Starlink financially viable. No small feat, considering past challenges for private satellite constellation companies.

Is Musk Gunning for Telecoms?

Elon Musk has been keen to point out that Starlink is not a threat to traditional telecoms. Instead, it will focus on serving the roughly 3% to 4% of the customers that traditional providers find most difficult to reach.

So, telecoms can rest safely, knowing that Starlink is not a competitor, right? Not so fast.

Starlink’s initial offerings are indeed focused on residents and smaller companies in rural areas that have poor internet connections. A US Federal Commission report estimates that 21.3 million people in America alone lack access to high-speed broadband (download speeds of minimum 25 Mbps and upload speeds of minimum 3 Mbps). That equals 6.5% of the population. Then consider that large regions across the globe lack broadband infrastructure or have ageing information infrastructure - or even  currently lack internet access. In such situations, the choice quickly becomes choosing between investing in expensive infrastructure or exploring the satellite internet opportunities. In other words, the potential market may well be much larger.

Musk has estimated that Starlink may be able to generate up to $30 billion by servicing the parts of the world’s population to whom satellite internet is or will be the most viable option. A group that seems massively underestimated. The same goes for the size of the market, with some analysts predicting satellite broadband to be worth as much as $400 billion by 2040.

One reason is that satellites can deliver internet to much more than private customers. They may be able to provide network services for IoT devices, supply chains, transportation systems, energy utilities, work-from-home, education, and other areas that demand reliable, stable connectivity. You may have noticed a large overlap between satellite internet’s potential markets and the core market areas telecoms of the costly 5G networks that are currently being deployed.

Hitting Telecoms Where It Will Hurt

Many traditional telecom companies rely on mobile traffic revenues as the central pillar of their business model. With the advent of 5G, that pillar is set to grow. If it did not, telecoms companies would struggle to turn the investments in 5G profitable.

The questions about what to do in the face of new potential competition also applies to existing business areas. For example, SpaceX has asked the FCC for authorisation to extend its broadband services to aircraft, ships and moving vehicles.

The same dynamic applies to an emerging technology that telecoms may have hoped to see drive future earnings for their 5G networks: self-driving cars. 5G could make self-driving cars smarter and commutes safer by handling communication between cars and with other traffic infrastructure. One issue facing 5G in this context is that the cost model may make it unviable in areas with low population density (countryside areas, etc). Enter satellite broadband which can cover all types of demographic density and likely maintain a viable cost model while doing so. The first moves are already happening with automaker Geely gaining approval for a constellation of satellites for self-driving vehicles.

One of the main points here is that the advent and rapid rise of Starlink creates second order questions and potential knock-on effects that many telecoms would not even have thought to ask just a few years ago. It is an example of the influence of difficult to predict new technology, increased competition, and macro-events like COVID-19 on the financial projections and risk landscape for telecoms.

Far From Over

The above examples of risks that can occur from satellite broadband are only an overview. It is a space, if you pardon the poor play on words, where many things remain uncertain.

The offerings from satellites are still some ways off from being competitive with the level of speed and low latency that particularly 5G promises. However, recent breakthroughs suggest that satellites will, sooner than originally anticipated, be capable of providing cheap high bandwidth and low latency internet access to paying customers around the globe.

For especially small to medium-sized telecoms, it raises the question if local telecom infrastructure will be competitive with satellite broadband for long enough to warrant new investments. One solution that some telecoms have started to explore is joining forces with satellite internet providers. Financial analysis and projections may show that the cost of investments in infrastructure (broadband and 5G) in remote and rural areas outweigh the limited returns and related regulatory risks, such as permit requirements from regulators.

Other areas of uncertainty include what governments’ reaction will be to Starlink. Telecoms and frequency band administration have traditionally been highly regulated, on the level of national or regional markets. The question becomes what happens to things like the amortization of frequency operating licenses or the amortization of infrastructure? These are often resold between companies. If new competitors using satellite technologies can offer a competitive service in any market, it can massively shift financial projections and potential.

For telecoms, the developments lead to a need to revisit certain risk strategies and forecasts, as well as financial projections and growth strategies (including M&A and investment strategies) that may help them mitigate some of the new risks.

One example of how telecoms may look to address such risks is that Starlink will soon face increased competition. Several companies are investing in satellite broadband opportunities, including a joint investment by telecoms Vodafone Group and Rakuten in AST & Science, a satellite company working on solutions that allow 4G and 5G compatible phones to connect to low Earth orbit satellites.

How to React in a Changing Risk Landscape

The emergence of new competitors as a central risk is mentioned by telecoms companies across the world as a prime risk in the newest edition of the BDO Telecoms Risk Survey. 90.2% of all companies surveyed identified increased competition as a top risk. 100% of the US companies surveyed identified it as a top risk. In both areas, competition from technology companies is mentioned as a prime risk factor. 

In all cases, the adoption of new technology is seen as a way to mitigate some of the risks that telecoms face. 5G still has massive potential and can deliver high-speed connections with a density that satellites will struggle to match - at least for years to come. And there is nothing in the way of telecoms investing in R&D or M&A to continually expand 5G use cases.

Other risk mitigation initiatives or strategies to implement or expand include:

  • Analyse and evaluate industry trends and market players to identify and take advantage of new opportunities.
  • Monitor market value propositions, including current and potential future risks that will affect earning potential of solutions and services.
  • Continual investment in internal R&D, potentially complemented by M&A to continually evolve your company’s product portfolio.
  • Customer due diligence on changes to demands and preferences which create or limit future earning potential.

Furthermore, future planning and risk management scenarios may be a good way of testing the setup and whether you are prepared. Look at where technology and the industry are going. Another approach that some telecoms may try is to create a red team that looks at how current offerings and projections for earnings may be disrupted by innovative new solutions.

BDO advises telecoms across the world on all business aspects, including risk mitigation, business strategy, tax, audits, financial planning & forecasting and much more. Contact us – or your local BDO office - to hear more.