Market Dynamics of Satellite-Delivered Ka-Band Broadband Service

MARKET DYNAMICS OF SATELLITE-DELIVERED KA-BAND BROADBAND SERVICE
2003
(courtesy of Frost & Sullivan)

By offering faster throughput, smaller spot beams, dynamic bandwidth allocation and smaller antennas, Ka-band promises better satellite broadband service, more convenience and lower cost. Ka-band may reinvigorate satellite broadband service where Ku-band systems failed. Each of the potential markets for satellite broadband service - the consumer market, the enterprise market, and the military market - is unique. The attractions and aversions to Ka-band are different in each market, and each has unique barriers to entry.

The enterprise market for Ka-band-delivered satellite broadband is more promising than the consumer market. This is not because there is less latent demand in consumer market; on the contrary, our research will demonstrate that consumer potential demand is strong and more easily identified and measured than is enterprise demand. Rather, the enterprise market is more promising because enterprise users can benefit from Ka-band’s features is ways that individual consumers cannot. Moreover, though the consumer market is limited to areas not covered by terrestrial broadband service, the enterprise market is not.

The military market for Ka-band broadband communications also shows potential, but military demand may not benefit all sectors of the industry. Though satellite manufacturers are sure to benefit from military demand, operators’ participation depends upon the outcomes of current debates within the US military.

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Consumer Market

There is tremendous, untapped demand in the consumer market for satellite broadband. Using North America as a case study, roughly 60 to 75 percent of United States residents live in regions serviced by terrestrial broadband networks. In 2001, approximately eight percent of residents subscribed to broadband service. That means that about eight percent of Americans were willing to pay around $45 per month for broadband service. Satellite broadband is more expensive than terrestrial service, and the quality of service is not quite as high (and even with Ka-band systems, some transmission latency is inevitable). Hence, satellite broadband can only attract customers among the 25 to 40 percent who do not live in regions services by terrestrial broadband. We call these un-serviced regions the “rural” market (rural here means, strictly, "not covered by terrestrial broadband," though this segment of the population actually is more rural by the traditional definition). Rural Internet users will be less willing to pay for broadband, for two reasons: first, they are likely to have somewhat lower incomes. Second, they are not as likely to have been exposed to broadband service as their "urban" counterparts who work in businesses that use broadband, and are therefore not as likely to be aware of its benefits. We can therefore safely assume that the percentage of "rural" users willing to pay $45 per month for broadband would be less than that of urban users. If we assume that rural users have only one-tenth the interest in broadband, then 0.8 percent of rural users would be willing to pay $45 per month for broadband service. This leaves over two million potential users in the United States alone in 2001.

Despite what seems to be strong latent demand for satellite broadband, subscriptions remain very low. As of mid-2002, the actual percentage of satellite broadband users in the US was much lower than 0.8 percent—DirecPC and DirecWay, the most successful satellite broadband providers, had around 123,000 subscribers. That means that only .04 percent of rural Internet users actually subscribe to satellite broadband, much lower than the 0.8 percent who would want it for $45 per month, again assuming that interest in broadband service in “rural” is only ten percent as robust “urban” demand. DirecPC and DirecWay have less than five percent of the estimated total available market (TAM) for satellite broadband residential service (see Chart 1).

Chart 1: DirecWay and DirecPC share of the Total Available Market

There are two reasons for the large discrepancy between seemingly strong demand and poor subscription levels for satellite broadband. First, the quality of service for satellite broadband has not been as high as hoped. Second, the price is too high. High prices are especially harmful to the residential satellite broadband providers because their target market has less disposable income. Demand for broadband service in urban areas probably follows a traditional demand curve where a few people with high incomes are willing to pay a lot for service, a few with low income willing to pay only a little for service, and demand is evenly distributed between these two extremes (see Chart 2).

Chart 2: Demand for Broadband Service in “Urban” Areas

But incomes in rural areas are less evenly distributed, with a large portion of the population earning a lower income and only a few earning high incomes. This leads to a sharper demand curve. Moreover, broadband service is a luxury good and consumers are therefore price inelastic; if they can afford it, they will get it, but they will not stretch their budgets for it.

This hypothesis suggests that very few Internet users will pay the $60 to $90 per month for satellite broadband. Even if operators lowered their price to $50 per month, few new subscribers would be gained. But if operators can lower their prices past a certain "feather point," after which the market loosens, then many new subscribers can be gained (see Chart 3).

Chart 3: Demand for Broadband Service in “Rural” Areas

Where the actual feather point is difficult to determine. It is certainly lower than $60 per month and a $500 up-front equipment fee that satellite broadband providers charge today. The typical North American pays about $20 to $40 per month for cable television, and the feather point is probably somewhere around that level.

However, satellite broadband ventures will have difficulty meeting such a price. Equipment costs alone are in the hundreds of dollars per terminal. Added to this is the cost of the space segment, operations, and customer service.

The consumer market for satellite-delivered Ka-band broadband service is potentially huge, with millions of subscribers in North America alone. But the barriers to entry are formidable.

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Enterprise Market

The enterprise market for Ka-band-delivered satellite broadband is much more promising than the consumer market. This is not because the enterprise market is potentially larger in terms of unserved demand (the section above shows that there is much unserved demand in the consumer market), but because enterprise customers can benefit from Kaband in ways that consumer customers cannot:

First, businesses benefit from satellites’ ubiquitous coverage. Multi-site businesses using satellite broadband networks are guaranteed broadband access, regardless of a site’s remoteness or inaccessibility (though rain attenuation is always a consideration). Consumers benefit from omnipresent satellite coverage too, but only a business, with more than one location spread over a country or a continent (or several) will truly benefit from ubiquitous coverage.

Second, businesses can benefit from the peer-to-peer networking that Ka-band broadband systems will offer. If two satellite broadband users are on the same system, and the satellite has an on-board processor, then they can communicate directly, with out having the signal travel through a hub (which would require two “hops” and would double transmission time). Two users who work at the same company or organization are likely to be on the same system. Two private users (in the consumer market) are less likely to be on the same system, and would require a “double hop,” hence slower communication. The full-mesh or peer-to-peer communication that Ka-band facilitates is therefore more relevant to the enterprise market. Because consumer users are less likely to be on the same system when they communicate, they are less likely to be able to benefit from onboard processing. It is therefore more appropriate consumer-targeted broadband systems to use a bent pipe (which is what WildBlue and Miraxis are proposing).

Curiously, the value of a peer-to-peer network is proportional to the number of subscribers on a network. That is, if there are many such systems available and the market is fragmented, then businesses will be less likely to be able to communicate directly with other businesses on a one-hop link. If business A is on one network, and business B is on another, then they may as well be using a bent pipe. In other words, the ideal situation, from the perspective of efficient telecommunications networks, is for one company to have a monopoly on Ka-band satellite broadband, and for as many businesses (and individual consumers) as possible to be on that network. If many businesses offer the service, and each is on a different system (a different satellite), then the value of the networks is diminished.

The third benefit of satellite broadband unique to businesses is billing consolidation. If a business uses terrestrial broadband data service, it receives a bill from as many local providers as the business has sites. With satellite broadband, the business would have only one bill. If telephony, videoconferencing, business TV and other communication services were bundled with satellite broadband, then bills would be consolidated even further. Billing consolidation is not only a convenience for businesses, but allows them to track use and spending on telecommunications, and saves time and money. It is a real added value, and there is a precedent for companies paying a premium for consolidated billing.

Only businesses can truly benefit from these features of Ka-band-delivered broadband service, which is one reason that the business market will demonstrate greater actual demand than the consumer market will.

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Military Market

Ka-band’s higher throughput, point-to-point connectivity and dynamic bandwidth allocation are just as attractive to the military as they are to the civilian market, and the military can benefit from Ka-band satellite technology in ways that neither individual consumers nor even businesses can. The smaller ground station dishes that are possible with Ka-band are especially attractive to the highly mobile units in the armed forces. Additionally, Ka-band is resistant to jamming. C-band transponders are easier to jam because their beams are broad - as long as a saboteur is within the coverage zone, he can jam the signal. Ka-band beams are much smaller, and the would-be saboteur’s zone of opportunity is thus smaller with Ka.

On the other hand, military users suffer Ka’s disadvantages more acutely as well. Kaband’s susceptibility to rain attenuation is more problematic for the military, whose operations are time critical. Though an employee of a commercial organization might stand to wait longer to download a file during a thunderstorm, a Marine commander in the field during a battle cannot as patiently wait for a storm to pass before he uploads instructions. However, the US military has used K-band (near to Ka-band in frequency) and has found it to be appropriate for military use.

There are two issues that are currently being debated in the military that will determine how Ka-band will change the market for military communications for the near-term and medium-term future. First, the military is trying to decide whether it will consolidate its satellite communications over only one (predominant) frequency band, or communicate over many frequency bands, as it does today. Each has its advantages. Consolidating frequencies makes it easier for different units to communicate as well as to exchange and repair one another’s RF equipment. The main disadvantage is that it increases the risk of interference. Naval vessels, for example, are notorious for causing and receiving satellite communications interference to and from nearby units. If the Navy were on its own frequency, the chances of interference would be minimized. (The Navy is considering moving entirely off C-band by 2006.) If the military consolidates transmission frequencies, then even if Ka-band becomes the frequency of choice it may only displace the other frequencies. The affect on market growth for satellite communications would then be net neutral. If many frequencies are used, then each would be used for only certain applications or for certain services, rather than having one “commodity” frequency. In this case, military demand for Ka-band and for satellite broadband would boost the market.

The second major satellite communications decision that the military is debating is whether to lease satellite capacity from commercial operators, or to acquire its own, dedicated military communications satellites. The advantages of the former are lower upfront investment and more flexibility, because communications assets would be distributed among many operators each operating satellites at different locations. The advantage of the latter is more security. Dedicated satellites do not provide more information security than leased transponders, because military signals are always encrypted anyway. But when leasing capacity the military runs the risk of being denied use of a satellite operated by an entity based outside the US, or based in a country hostile to the US at the time of whatever conflict would prompt the military to lease the capacity. The military is currently investing in Ka-band on both dedicated systems (such as the Kaband Wideband Gapfiller System) and leased capacity (the US government intends to lease come of Spaceway’s Ka-band capacity). One indication that leasing commercial capacity will become the more attractive option is that the US military is dispersing its troops. Since the Second World War, the Pentagon’s policy was to have concentrations of troops in key outposts in each theatre - Germany, Korea, and Okinawa, Japan, for example. Today, the military wants a greater dispersion of troops in more locations. This makes it more difficult to provide satellite communications through a few satellites, and makes more attractive the ability to choose communications assets from many different orbital locations.

The consequence of the leased versus dedicated capacity debate is that it will determine the extent to which satellite operators will have a role in military communications. Kaband technology may boost military demand for satcom, but if the military chooses only dedicated satellites, then only the satellite manufacturers will reap the rewards, and operators may even stand to lose business.

Neither decision will be absolute - that is the US military will always make use of more than one frequency, even if Ka-band or X-band become the standard, and the military will always have need for some commercial capacity, even if it decides to rely primarily on dedicated satellites. But the degree to which the military chooses one policy over the other will directly affect the degree to which the US military drives the future markets for satellite communications in general and for Ka-band in particular.

Currently, only the US military (and to a lesser extent, the Spanish military) has demonstrated real interest in Ka-band satellite communications. Militaries from other countries may gain interest if the US shows that Ka can be effective for military use.

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Conclusions

Even though it demonstrates strong latent demand, the consumer market for Ka-band satellite broadband service is price inelastic, and therefore difficult for service providers to penetrate. The enterprise market is more price elastic because businesses can benefit from Ka-band broadband service in ways that individual consumers cannot. The enterprise market offers lower barriers to entry and will yield higher returns to those that pursue it. A service provider’s choice of whether to pursue the consumer or enterprise market must be made early because it affects major design decisions such as whether to use a bent-pipe relay system (better for consumer markets) or on-board processing (better suited for institutional customers). Providers that try to make this decision in the later phases, such as the marketing phase, run the risk of trying to sell services inappropriate for their audience. Market entrants that are in the process of making this choice ought to pursue the enterprise and institutional markets. The consumer market will become profitable a few years after the enterprise market has been served, once prices fall to the “feather point” that makes satellite broadband service attractive to individual users.

The US military market will be a sure source of satellite broadband demand, and much of that demand is likely to be for Ka-band communications. If the military consolidates its satellite communications on one dominant frequency, then satellite communications will become commoditized - even if Ka-band becomes the standard frequency, the military’s overall demand for satellite communications will not necessarily increase. The decision on whether to lease capacity or to acquire dedicated satellites will determine the extent to which satellite operators will benefit from the military’s demand for broadband communications, though satellite manufacturers will benefit in either case.

The Ka-band market will develop over the next several years. Growth will be incremental, as customers and operators gradually migrate to Ka-band systems. Only in North America will the introduction of Ka-band be sudden - Spaceway will flood the North American market with Ka-band in late 2003 and early 2004 with two large Ka-band satellites for its broadband service. The following chart shows the regional distribution of Ka-band capacity from 1992 to 2005.

Chart 4: Ka-band Commercial Capacity by Region, 1992 to 2005

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