Johannesburg, 02 Dec 2020
It is happening, the new HTS-GEO (geostationary), LEO (low-earth orbit) and MEO (medium-earth orbit) satellite constellations are being launched on the global landscape and some of the new and exciting services are already introduced in the local South African and African market. These technology innovations also drove fundamental industry changes, including vertical integration models with satellite operators now also directly servicing the end-user market.
Why are these satellite network innovations also driving vertical industry integration and will these business models be best to service the Africa market?
For the purpose of this discussion, we are referring to satellite solutions that provide connectivity to government, enterprise and consumer market sectors using fixed satellite user terminal at a typical cost of R7 500 ($500) and with an average service bundle charge of R150 ($100) per month. These generally apply to the satellite services currently in the market and also correlates with the newly US launched SpaceX StarLink services. We will scope the project at 32 000 end-user terminals and model the business over a 12-month period after the initial roll-out phase.
Business model options
To illustrate the challenges with the satcom business models, we will consider two alternatives and we will use very basic metrics in order to discuss the principle rather than reviewing a detailed accounting exercise.
We have excluded the cost and implications of the field engineering efforts since some of these planned LEO service options will be completely “user-installed”, thus eliminating the need for truck-rolls and field teams.
Satellite operator direct
In this model, the satellite operator has decided to vertically integrate and create a go-to-market end-user service, which the operator then directly sells to the market. This scenario will require the satellite operator to obtain the required local regulatory approvals, establish a critical mass marketing, sales and operational team in-country and drive the go-to-market actions directly.
Telco wholesale model
This scenario is the more classic option, where the satellite operators will partner with a local telco and service provider in a wholesale structure. All in-country resources, regulatory compliance and go-to-market programmes are then done by the telco’s team.
First order model outcome
Operator direct model
The total revenue of 32 000 sites at R1 500/site/month over 12 months is R576 million.
Since the service is directly delivered by the satellite operator, the margin is @ 60%, then the input cost is 40% (R230 million), marketing budget at 10% (R57.6 million), operational expense budget R30 million (5%) and regulatory cost 3% (R20 million).
This leaves a gross profit for the in-country operation at 41% (R238 million).
Telco wholesale model
This is a wholesale model with an expected margin of 30% for the telco, then the input cost is 70% (R403 million), marketing budget at 10% (R57.6 million), operational expense budget can be smaller, as this is part of the telco operations, ie, R12 million (2%) and regulatory cost 3% (R20 million). This leaves a gross profit for telco at 14% (R83 million).
Interestingly, the satellite operator in this model earns a much larger income of 70% (R403 million) with no in-country operations or additional costs.The risk, however, is that sales and business growth depend fully on the drive and success of the telco team.
Conclusion
The challenge with these business model scenarios is that for a first tier telco to establish a satellite service operation to service 32 000 customers, with R576 million revenue, and then earn 'only' 14% GP might not be very attractive. This situation can dilute focus and undermine the success of the project.
Also, for the satellite operator to establish a full in-country operation with a GP of 41% (R238 million), and to do this in multiple countries, might simply not be feasible.
An alternative could be for the satellite operators to partner with high-end specialised and focused niche operators which have the in-country resources as well as the focus, appetite and drive to operate at these business metrics based on niche technologies.
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