The satellite industry is undergoing rapid change. Incumbent operators are upgrading their fleets to keep pace with technological advancements and addressing secular pricing pressure across several traditional offerings. These new geosynchronous-Earth orbit (GEO) satellites offer more efficient allocation of exponentially more capacity, resulting in a much lower cost per bit of bandwidth.

Separately, several high-profile new entrants are emerging in various stages of launching low-Earth orbit (LEO) constellations that could compete with incumbent operators' services, made possible by significant declines in launch and production costs. We believe rated operators will respond to industry disruption by targeting growth opportunities in new markets or geographies to offset secular declines. We also believe more industry consolidation and partnerships will emerge over the next 2-3 years as companies reposition themselves to offer more differentiated services in an increasingly multi-orbit industry.

In this report we examine the state of the global satellite industry and offer our view on how each company is positioned to adapt to shifting industry dynamics.

Core Media And Network Services Markets Are In Secular Decline

Media constitutes the largest market for global fixed satellite services (FSS) operators and satellite media industry fundamentals are weakening due to a variety of factors:

• Channel reduction, particularly in the U.S., as content migrates to streaming platforms.
• Broadcast via satellite uplink and then downlink to cable headends being replaced by direct fiber distribution in certain markets.
• Signal compression technology that reduces transponder capacity necessary to broadcast channels.
• Shorter contracts as customers adapt to shifting consumer viewing habits.
• Consolidation of direct-to-home (DTH) capacity, or customer-insourcing of satellites used for DTH video in some cases, such as in Latin America.

However, we believe media segment pressures are more pronounced in the U.S. than in Europe and other markets because:

• Cord-cutting is occurring much faster in the U.S. since video is more expensive, creating a greater incentive to switch to streaming alternatives.
• Free-to-air broadcasting options are more widely available and adopted outside of the U.S.

Media revenue generated outside of U.S. is more concentrated with the relatively more resilient DTH business, underpinned by take-or-pay contracts, typically to end of satellite life. We believe shifting media fundamentals hit Intelsat Corp. hard given its greater exposure to North American broadcasters, content providers, and television programmers, with less DTH concentration than peers. We expect mid-single-digit percentage media revenue declines will continue for the next several years. Furthermore, we revised the outlook to negative for Eutelsat S.A. given accelerated broadcast revenue declines. However, we believe its lack of exposure to the mature U.S. market and presence in expanding emerging markets should help stabilize its broadcast revenue. Although Canada-based Telesat LLC's predominantly DTH revenue within media (about 50% of overall revenue) offers some near-term support through non-cancellable contracts, several are due within the next few years. Given the secular attrition DTH distributors face for subscribers in North America, we believe the company could face revenue and cash flow pressure as it renegotiates contracts or is forced to sell such capacity into a very competitive market.

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The second-largest traditional segment is network services, which consists of wireless data backhaul, private networks, and other services for enterprise and telecom customers. We expect mid-single-digit percentage revenue declines will continue over the next 2-3 years, mainly because of pricing pressure stemming from increasing supply and ongoing expansion of superior fiber-based and 4G wireless substitute competition globally. Although Intelsat has diversified from its recent purchase of Gogo Inc., it is still the most exposed operator to this segment.

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Significant Investment Cycle Will Pressure Cash Flow In The Next Two Years

Industry participants are investing in new very-high-throughput (VHT) GEO satellites to offer high-bandwidth communications. These new satellites are designed to flexibly and dynamically allocate capacity by service, time, and geography, allowing companies to better allocate satellite capacity to markets with the highest bandwidth usage demands and returns. Certain operators also invest in multi-orbit strategies, incorporating medium-Earth orbit (MEO) and LEO satellites to enhance their networks by offering lower latency. Therefore, we expect industrywide capital spending for rated operators to peak over the next two years as new satellites are procured and launched.

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More specifically, key operators have the following launch plans:

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• Viasat Inc.: Plans to launch three Viasat-3 constellation VHT satellites over the next 2-3 years to relieve capacity constraints in North America and allow for expansion into Europe and Asia-Pacific. The company is also in the early stages of investing in the design of Viasat-4, which could deliver multiple terabits per second (Tbps), yielding another significant productivity gain relative to Viasat-3 satellites.
• Inmarsat PLC: Plans to launch four GEO satellites over the next 2-3 years representing a step change in the evolution of GX's capabilities, capacity, and agility to keep pace with customer demand while drastically reducing the cost of delivering more.
• Intelsat: Plans to launch five next-generation software-defined high-throughput satellites (HTS) through 2026 to capture growth opportunities in managed services.
• SES S.A.: Plans to complete the launch of a 03b mPOWER constellation by 2024. The next-generation MEO constellation will provide more flexibility and the ability to serve data intensive applications that require low latency, such as cloud services. MEO satellites offer a balanced mix of pros and cons compared with GEOs and LEOs. They have lower latency than GEOs (150 m/s versus 700 m/s), but not as low as LEO (50 m/s). They also have a greater Earth view than LEOs, which allows for a less complex ground network (and satellites that do not require intersatellite links). However, MEOs do not have the view of a GEO, so more satellites are required for global coverage (six versus three) with more expensive ground infrastructure.

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• Eutelsat: Will launch two satellites targeting growth opportunities in mobility and residential broadband. The company also plans to launch three satellites to replace its fleet, supporting legacy video services.
• Telesat: Will launch a new C$6.5 billion LEO constellation, dubbed Lightspeed, as the company seeks growth in new markets with a differentiated offering to complement its GEO business. Telesat is targeting growth areas such as enterprise customers in aviation, maritime, government services, and terrestrial mobile backhaul, exploiting the benefits of low latency and high bandwidth. We do not anticipate that Telesat will invest significantly in launching new GEO satellites.
• Hughes Satellite Systems Corp.: New VHT satellites will alleviate capacity constraints in North America. Hughes has also invested in LEO provider OneWeb to develop and supply essential ground systems and gateway electronics.

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Growth Opportunities On The Horizon, Although Returns Are Uncertain

New satellites will open avenues for monetization, primarily around high-speed internet in new markets and geographies. We believe differentiated capacity with the ability to target specific end markets and high-use locations will be critical to stemming pricing pressure and monetizing demand for high-speed connections. More specifically, we believe growth could come from the following end markets:

• In-flight connectivity (IFC; $3 billion-$5 billion): The relatively low penetration of global aircraft combined with continued growth in consumer data usage make this an attractive market for satellite operators. Roughly 70% of global aircraft do not have an internet provider, mostly outside of the U.S., which is more mature. Capacity constraints have been a limitation in the past, but new satellites should improve customer experience and passenger adoption rates per aircraft. This could result in higher average revenues per aircraft (ARPA). However, ARPA growth could be limited by heightened competition and pricing pressure. We estimate there was about $1 billion being generated globally by satellite operators before the COVID-19 pandemic and that this market is likely to more than double over the next 5-10 years with significantly more connected aircraft. While we expect air traffic should return to pre-pandemic levels in 2024 within the US and thereafter in Europe, IFC revenue growth could face headwinds if travel takes longer to recover, or if corporate and long-haul segments (particularly to Asia-Pacific destinations) lag significantly.
• Maritime and cruise ($3 billion-$5 billion): This is another attractive market because passengers demand greater connectivity at sea, and there is no competition from land-based technology. Increased capacity and targeted throughput should enable satellite operators to capitalize on higher volumes. We believe SES is best positioned to capture the cruise opportunity with its MEO constellation, as the combination of higher throughout and lower latency allows it to serve a concentration of data-intensive devices. We believe this market could double over the next 5-10 years.
• Residential internet ($20 billion-$40 billion): Offered by few operators that have been capacity constrained, more global bandwidth should open the door to serve significantly more households that do not have a terrestrial alternative. In the U.S. market, we estimate at least 10 million homes do not have access to high-speed internet on land, of which about 1.7 million are served by satellite internet from Hughes or Viasat. We estimate there will be at least 4 million homes in Europe, and 5 million in Africa, beyond the reach of terrestrial infrastructure (with few served by satellite internet today) beyond 2030. Hughes management estimates the Latin American addressable market is as large as 27 million upper income households. However, the size of the market will depend heavily on the pace of competing fiber network expansion --which will accelerate in the U.S. and Europe with government subsidies-- as well affordability. We assume a monthly average revenue per user of about $80-$90 would yield an addressable market of about $40 billion for 40 million homes in the U.S., Europe, Latin America, and Africa. We believe Viasat, Hughes, Telesat, and Eutelsat will be most active in the consumer broadband market. We do not expect SES to target this segment, which is likely to face intense competition from new LEO constellations.

We believe Viasat and Inmarsat have the most exposure to growth markets, with a healthy backlog of aircraft still waiting to be installed at both companies. We believe Intelsat's recent purchase of Gogo will drive incremental growth in IFC, which will be partly offset by continued weakness in network services and media. We believe SES is well positioned to benefit from cruise demand, although pressures in media will continue to weigh on overall earnings growth potential. Similarly, we expect Eutelsat to expand its nascent residential broadband service, but the majority of its revenue comes from media, which will limit overall EBITDA growth potential. We believe earnings will decline near term in Telesat's legacy GEO services, although long-term EBITDA growth potential from its planned LEO constellation are substantial, albeit mostly beyond 2024. Finally, Hughes will likely capitalize on consumer broadband demand in 2023-24 once its Jupiter-3 satellite is operational.

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LEO Satellite Constellations Will Increase Competition In Growth Markets

Multiple LEO constellations are being deployed worldwide to capture demand for high-bandwidth applications in remote locations. These different LEO satellites are all designed and optimized to capture different use cases and end markets. Still, with several new entrants to the market, we believe the threat of irrational pricing could materialize as these startups aim to establish customer relationships, with varying degrees of risk (and opportunity) to rated operators:

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If LEOs are deployed successfully, we believe they could take a large share of industry growth as the market expands into more latency sensitive end markets. We also expect some share gains in markets historically served by traditional operators:

• Consumer broadband: LEOs appear to have an advantage given latency similar to a fiber connection that will allow customers to take video calls and play video games in real time, whereas GEO satellite home-internet has been a service of last resort given its high prices, high latency, and slow download speed. We believe Starlink and Kuiper Systems LLC are most likely to disrupt this segment. Still, we believe the addressable market will continue to be in markets that do not have terrestrial alternatives because a wired connection will be more reliable and affordable than satellite. Ultimately, LEO's ability to compete will be determined by economics, which is still uncertain. One major hurdle appears to be the cost of user terminals, which are more complex and cost significantly more than GEO antennas today. This will need to come down significantly for LEOs to be more price competitive. Secondly, high capital intensity will also challenge the LEO business case as satellites will need to be replaced every seven years compared with GEOs that last roughly double that time. Thirdly, LEO's cannot concentrate capacity the way GEOs can, requiring customers to be more evenly distributed. Finally, a substantial portion of LEO capacity is stranded over oceans and uninhabited land, which could challenge returns.
• IFC: We expect LEOs to capture some growth in this market, as roughly two-thirds of global aircraft do not have a WiFi provider. Although antenna technology has not yet been designed to be compatible with LEOs, we expect this hurdle to be overcome in the coming years. In fact, Anuvu Corp. has already reached a partnership with Telesat to provide future IFC service.
• Government: LEO constellations bring a new capability for military communications due to the low latency and reasonable bandwidth that can be used to fly unmanned aircraft and connect outposts and vessels. LEO constellations are also somewhat more difficult to interfere with given the volume of satellites and relatively inexpensive nature of each satellite. Therefore, we expect LEOs to take growth share as significant capacity comes online. Still, we expect some growth in GEO government revenues too as they will remain well positioned for several use cases including fixed data transfer, bandwidth on demand, and mobility services for non-latency sensitive support vessels and aircraft.
• Traditional network backhaul: There could be opportunities for lower-latency applications, but LEOs are unlikely to match the bandwidth to a single user terminal that GEO's can provide.
• Maritime very-small-aperture terminal (VSAT): Bandwidth provided to small ships on a service such as Inmarsat FX is usually up to about 10 megabits per second (Mbps), which can be matched by LEO constellations. However, the barrier to entry is on the antenna side and traditional providers dominate the market, with antennas already installed on thousands of vessels which creates high switching costs.
• Cruise: MEO satellites are likely to remain the key technology to large maritime vessels because of the right combination of higher throughput and lower latency to serve a large concentration of data-intensive devices.
• Media: Will not be targeted by LEOs due to the economics of the business and the point-to-multipoint service best suited for GEOs, particularly considering that video distribution is not latency sensitive.

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We believe Hughes is most exposed to LEO competition with the majority of it sales derived from residential broadband in North America. We believe the market is large enough to accommodate all satellite players at today's level of fiber deployment, so incremental competition is likely only to slow the pace of subscriber growth over the next 2-3 years (once Jupiter-3 is launched). However, we believe the addressable market will shrink considerably over the next 5-10 years with the aid of government-subsidized high-speed internet. Therefore, we believe pricing pressure could be significant, particularly in a shrinking market with increasing capacity coming online.

Hughes has about 1.1 million U.S. customers out of an addressable market of about 10 million–15 million homes. Furthermore, we estimate Starlink and Kuiper may handle less than 2 million U.S. homes combined, limited because a LEO constellation has substantial stranded capacity. We based these estimates on the following assumptions:

• Starlink has about 100 Tbps of capacity, of which about 35 Tbps is sellable globally. This is based on a constellation of about 4,400 satellites, the current U.S. Federal Communications Commission authorization, with each satellite offering 23 gigabits per second (Gbps) of download capacity. The assumed sellable capacity percent is lower than Telesat's due to a lower altitude and a smaller field of view but higher than OneWeb's due to better design specifications, including intersatellite links and steerable beams.
• The U.S. accounts for about 6% of global landmass so Starlink would be able to sell about 2 Tbps to the country.
• Starlink provisions for peak average usage per household of about 3 Mbps (according to CommScope), resulting in a fully utilized network capable of serving about 700,000 homes at today's usage (assuming there is no significant concentration in any one area).
• While less is known about Kuiper, we make similar assumptions bringing the total addressable market to about 1.5 million homes between the two based on today's usage.
• However, usage is rising about 30% per year, which means these operators can serve fewer customers every year or sacrifice quality of service.

We believe Viasat is also heavily exposed to impending LEO competition, but the risk is more manageable given its diversity. Overall, we expect Viasat to increase earnings meaningfully as new capacity comes online globally, with LEO competition potentially influencing the pace of growth. More specifically, the greatest competition will likely be in residential broadband because Viasat will likely face the same challenges as Hughes longer term. But this is a market that Viasat is diversifying away from. Separately, there is likely to be heightened competition for IFC, but Viasat is well established in this market with a large fleet of installed aircraft, good reputation, and healthy backlog. Finally, Viasat's largest segment--government--could face some incremental competition for certain services. But the company has good program diversity with no major concentration in any single platform and generates more than half of its government revenue from product sales.

Industry Consolidation Is Possible, Which Could Drive Rating Changes

We believe there could be more consolidation and partnerships in the coming years to capitalize on a rapidly evolving and growing space technology, intensifying competition, and aggressive entry of LEO players. Operators could aim to differentiate themselves by becoming more vertically integrated and vying for more noncommoditized services while reducing costs through horizontal mergers. We believe strategic responses to shifting competitive conditions could drive rating changes over the next 2-3 years, posing a credit risk if leverage rises to fund deals without a clear improvement to the business risk profile.

There are already several recent deals:

• Viasat agreed to purchase Inmarsat to improve diversity and accelerate its global presence, particularly in mobility markets in which Inmarsat has a well-established presence, allowing for cross-selling once Viasat-3 is launched. We view this transaction favorably despite temporarily increased leverage, as integration risk is fairly low.
• Viasat acquired Eutelsat's stake in European Broadband Infrastructure, giving it a larger European footprint through 100% ownership of the KA-SAT satellite. This allows Viasat to better establish operations, distribution, and sales channels ahead of Viasat-3 launch.
• Viasat purchased RigNet, allowing the company to expand into adjacent markets such as renewable energy, transportation, maritime, and mining.
• Intelsat purchased Gogo's commercial IFC business, allowing the company to become more vertically integrated as it pivots toward managed services for growth.
• Eutelsat purchased a 23% stake in OneWeb, providing an entry into exposure to new technology that can complement its GEO fleet.
• Hughes invested $50 million in LEO provider OneWeb.

We believe there is industrial logic to horizontal GEO consolidation, which could drive significant capital expenditure (capex) synergies, operational savings, and more favorable pricing dynamics for the industry. Furthermore, the influx of fresh capital from C-band proceeds could support these deals. The bulk of accelerated relocation payments will be made to Intelsat and SES in 2024, but visibility into this windfall could assist in financing deals beforehand.

With horizontal FSS opportunities, both SES' and Eutelsat's stock prices have steeply declined over the past 2-3 years due to their exposure to legacy video services, potentially making them more attractive targets. However, this could also prevent shareholders from agreeing to sell, as Eutelsat rejected Patrick Drahi's bid of €12 per share in September 2021. Furthermore, government ownership could be impediment as satellites are viewed as strategic assets (SES is part owned by Luxembourg government and Eutelsat is 20% owned by French government).

Unlike FSS, which has few leading players, the mobile satellite services segment is more fragmented with several niche companies. There are smaller players globally with regional presence that cater to nonterrestrial mobility segments such as shipping, cruise, and off-shore oil and gas rigs. These service providers could continue to expand horizontally to gain scale, improve customer diversity and business segment verticals, and achieve meaningful network synergies. However, it is also possible they become targets for FSS players looking for growth opportunities, particularly if there is a greater desire for vertical integration in an increasingly competitive landscape. Service providers such as Marlink, Speedacast, Anuvu, and KVH have a deeper understanding of customer needs and experience providing end-to-end customer support, which could prove valuable in securing new mobility contracts.

Lower Financial Risk May Be Required To Preserve Credit Quality

Our view of the satellite industry has weakened in recent years on ongoing pricing pressure, greater investment for uncertain returns, shrinking backlogs, shorter media contracts, and margin pressure from more integrated services. Therefore, we could consider tightening our rating triggers further if traditional end markets come under intensifying pressure or growth opportunities do not materialize to offset these impacts. As a result, prudent capital allocation decisions and lower financial risk could be required to preserve credit quality.

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Still, we recognize the satellite operators we rate are heterogenous, with different levels of capital spending, funding requirements, revenue mixes, and end-market exposure. Therefore, capital allocation strategies, credit metrics, and ratings implications vary:

• Intelsat: Roughly break-even free operating cash flow (FOCF) will limit Intelsat's ability to organically reduce leverage through 2024, but we expect C-band incentive payments of about $4 billion in 2024 to reduce in debt to EBITDA of about 2.5x from about 6x.
• Viasat: Debt to EBITDA is likely to approach about 5x-5.5x in 2023 from the mid-3x area as the company funds the Viasat-3 constellation, along with the $1.6 billion purchase of Inmarsat (expected to close in late 2022). However, we expect meaningful leverage reduction in 2024, supported by a healthy IFC backlog, as new capacity comes online.
• Hughes: It has sufficient liquidity to fund capex internally, as we expect cash flow to remain positive. Additionally, the company maintains a conservative balance sheet with cash and marketable securities approximating total debt outstanding. Still, the company's long-term strategic direction is unclear. If Hughes engages in transformative M&A, we would expect it to sustain leverage below 4x long term. If it pursues organic investments that exceed our base case, such as a GEO satellite over India and a global S-band network, we believe it would still maintain leverage below 3x.
• Iridium Communications Inc.: Will generate significant FOCF over the next three years, as it is on a capex holiday. However, the pace of deleveraging will likely be limited by EBITDA growth, as we expect the company to return excess cash to shareholders. Still, we expect management to operate within its target net leverage of 2.5x-3.5x longer term.
• Eutelsat: We expect debt to EBITDA to remain at about 3.5x through 2023, as most FOCF is applied toward dividends with relatively flat EBITDA trends.
• Telesat: The company has indicated it is targeting a funding mix of 60% debt and 40% equity at the Lightspeed subsidiary. We expect a major portion of the capital investment will be back-end loaded and the company will have meaningful cash burn over the next few years. This will pressure the company's debt-repayment capacity and result in elevated debt to EBITDA. Furthermore, if there are project delays or significant launch failures, the already elevated credit measures could make the company vulnerable to further credit pressure.

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Related Research

• Hughes Satellite Systems Corp., April 5, 2022
• Iridium Communications Inc. Outlook Revised To Positive On Reduced Leverage; 'B+' Rating Affirmed, April 4, 2022
• Telesat Canada Downgraded To 'B' From 'BB-' On Weaker Business Conditions, LEO Constellation Launch Delays, March 30, 2022
• Eutelsat Communications Outlook To Negative On Tighter Leverage Buffer, Broadcast Revenue Decline; 'BBB-' Affirmed, March 16, 2022
• Viasat Inc. 'BB-' Rating Affirmed, Outlook Stable; Proposed Secured TLB Rated 'BB' (Recovery Rating: '2'), Feb. 10, 2022
• Intelsat S.A. Assigned Preliminary 'B+' Issuer Credit Rating, Stable Outlook, Jan. 12, 2022