Low Earth Orbit Satellite Constellations Top of Mind at Satellite 2015

“Constellations,” in satellite industry parlance, are top of mind at Satellite 2015. The immediate reason is a sudden upsurge of low earth orbit satellite ventures that is bringing with it fears about overinvestment, overcapacity, plunging capacity prices and market share disruption.

Not for perhaps a couple of decades have such issues been so “top of mind” in the satellite segment of the communications industry.

The reason for the sudden eruption of talk about the impact of new constellations is the threat of industry disruption that happens in any capacity-related industry when suppliers use new technology to support mas market business models built on lower capital and operating costs, allowing new lower retail prices, leading to more price competition, at the same time also offering better performance and user experience.

It’s a recipe for potential disruption.

Consider consumer Internet access by satellite, which has one level of current offers the upstarts threaten to overturn.

Asked about the challenges of supplying Internet access across South Asia and Southeast Asia, where hundreds of millions cannot afford to pay 41 cents a month for Internet access,

Dave Bettinger, OneWeb CTO quipped off stage, we’re talking about “15 cents a month” as an “ability to pay” hurdle to be overcome.

That is an issue incumbent satellite service providers will have to confront, assuming there are at least some winners in the emerging LEO segment of the business.

No geosynchronous satellite Internet service provider can afford to sell retail access at such prices. To be sure, geosynchronous providers will be working on getting their own cost structures down.

The issue is how much more performance they can wring out of their operations.

That isn’t the only potential threat to existing providers. Latency always has been an issue for services based on use of geosynchronous satellites, especially for isochronous apps (events or sessions that rely on equal time periods) such as interactive apps such as videoconferences or voice.

That is another area where LEO constellations will be a new threat. Operating at lower orbits, LEO satellites will feature lower latency than geosynchronous service providers can provide.

Caching helps with user experience in some cases, but encrypted HTTPS is a problem, compared to non-encrypted traffic, said Dave Rehbehn, Hughes Network Systems senior director. And the problem is growing, since more traffic is being encrypted.

HNS has a way of improving user experience by pre-fetching some web page elements, for example.

The unanswered question is what “outside the industry” developments might shape LEO success as “outside” developments once lead to the demise of Globalstar, Iridium and Teledesic (early LEO business plans and entities).

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Comcast Will Launch 1 Gbps in 2015

Comcast plans to offer gigabit access service in U.S. markets starting in 2016, said Jorge Salinger, Comcast VP. The service will enabled by use of DOCSIS 3.1 technology that Comcast now is testing at employee homes. Salinger was too conservative, though.

Comcast will do so by the end of 2015.

"Our overall goal is to be able to deploy DOCSIS 3.1 and gigabit-per-second in a broad scale starting in 2016,” said Salinger.

DOCSIS 3.1 is in many ways a departure from past cable TV transmission schemes, in that it is the first to abandon the 6-MHz (8-MHz in many other countries) channelization plan that is a legacy of the industry’s origins as a TV retransmission network.

One question many will have is how Comcast will price the 1-Gbps service, to protect its legacy high speed access pricing. Comcast’s existing 505 Mbps service, primarily aimed at business customers, costs $300 a month, Comcast’s 105 Mbps high speed access services, aimed at consumers, costs perhaps $50 a month, depending on the package a consumer buys.

Most Internet service providers will face similar dilemmas, as they introduce gigabit services. In fact, some ISPs might find they sell more packages at slower speeds, even if gigabit access is the marketing headline.

Much depends on what speeds an ISP offers, at what price points. Google Fiber has a simple offer: a gigabit for $70 a month, or 5 Mbps for free. That pushes buyers immediately to 1 Gbps.

Other ISPs face tougher packaging choices. In my own Denver neighborhood, CenturyLink will sell a 100-Mbps service that costs $70 a month, with the price guaranteed for a year.

The 40-Mbps service costs $30 a month, guaranteed for a year. All those prices are for stand-alone service, with no phone service.

In that sort of environment, many consumers are going to conclude that 40 Mbps is “good enough,” and provides a better price-value relationship.

34% of all Video Now Consumed on Mobiles, Tablets

About 34 percent of all video consumed online--on a global basis--was watched on a mobile device (phone or tablet) during the fourth quarter of 2014, according to Ooyala.

Tablet and smartphone plays grew 200 percent in the past year, 500 percent since 2012 and 1600 percent since 2011, Ooyala says.  

December saw the highest percentage of video plays on smartphones and tablets at 38%. That’s the highest since the Global Video Index began publishing.

In fact, December mobile plays were 15 percent higher than in November and 114 percent  higher, year over year.

Does "Moving Up the Stack" Actually Work, and if so, When?

Whenever a leading service in the telecommunications or video entertainment business begins to suffer margin compression, lower take rates and usage, observers offer the advice that suppliers need to “add more value” or “move up the value chain.”

Such advice normally is given because the compressing profit margins are largely the result of price pressure caused by competitors.

Call me a cynic, but that advice rarely, if ever, has been shown to produce significant and sustained revenue improvements.

Some might argue that is because suppliers have failed to add new value. In that line of thinking, suppliers have failed to transform--or at least significantly enhance--products under pressure, and that is why the “add more value” approach seems not to produce serious gains.

Others might argue the efforts have largely come to naught because buyers do not want to pay more for the enhancements. In that alternative explanation, buyers do not see the value, or, if they see the value, do not wish to pay extra.

In the cable TV business, suppliers have justified rate increases because “we are giving you more channels.” But one can question whether most buyers actually wanted the extra channels, or want to pay more to receive them.

In the voice business, VoIP services priced close to zero seemingly have gained usage and market share compared to other forms of voice with “enhancements” (high definition audio quality).

In fact, the successful adaptation seemingly has been to “cut prices,” the polar opposite of “adding more value.” True, selling at lower prices, and bundling features that formerly could be obtained only at extra cost, might be positioned as moves that add value.

Reasonable people will debate whether that is an example of “adding value” or an instance of cutting price.

No doubt, as streaming video suppliers begin to proliferate, there will be calls for video entertainment suppliers to “embrace the trend,” much as voice suppliers were urged to embrace VoIP.

The “cannibalize yourself” strategy has merit, to be certain. But the greatest merit tends to happen when suppliers cannibalize their legacy revenue streams by replacing them with entirely new revenue sources, not “adding value” to legacy services.

In other words, cable TV did better by getting into the new voice, high speed access and small business communications businesses than it did by “adding more value” to basic cable.

Telcos did better by getting into linear video, high speed access and mobility than by innovating in voice.

Generally speaking, competing on price has helped preserve the declining products, but hasn’t really enabled service providers to innovate themselves out of mature product problems.

In other words, recent history suggests that harvesting a declining business while growing new lines of business is what works. So far, one would be hard pressed to cite many instances where adding more value actually reversed a trend of revenue or subscriber decline.

That does not necessarily mean that adding more value is irrelevant. One might argue that adding more value can slow the rate of business decline. That can be an important business objective, and well worth some amount of investment.

What seems clear is that such efforts have yet to demonstrate they can sustainably reverse a pattern of decline, in a mature business category.

Apple to Launch New Streaming Video Service?

Now that Dish Network, HBO, CBS and NBCUniversal have announced plans to market new streaming video services, it perhaps was inevitable that Apple would do so.

The Dish Network and Apple services offer bundles of perhaps 20 to 25 channels at prices between $20 and $40 a month. HBO will cost $15 for a single channel. Pricing for  the CBS and NBCUniversal offers are not yet public.

As always for a content-driven and content-based business, value and price will matter. Given the emphasis on reaching a customer base that, it is believed, does not want to spend $90 a month for linear video, as well as the demographics of the resisters, the initial content focus will be on channels or bundles of channels believed to appeal to a Millennial demographic, with or without children.

The initial thinking seems to be that broadcast TV and HBO, plus sports content, are the key demand drivers. The other bit of thinking is that Millennial buyers with children will want programming for them as well.

Eventually, we are likely to see experimentation with other bundles or channels, aimed at other possible segments of the market, with or without devices, with or without multi-network access.

Facebook, Google Are, Will Be, ISPs. Will Apple or Amazon Follow?

Few observers would be shocked if Facebook moved ahead with plans to create a satellite-based Internet access service aimed at billions of potential users in the global south. Facebook has talked about using satellites and drones as ways to deliver affordable Internet access services.

Facebook also has discussed other methods, including low earth orbit satellites, and has been working on free satellite-delivered Internet service in Africa.

Boeing Co. said it could get a deal in 2015 to build a high-throughput communications satellite for at least one leading application or device supplier.

The type of satellite Boeing talked about would be deployed in geostationary orbit.

Who the buyer might be is the big question. Some suggest it could be Facebook, Google, Apple or Amazon, or perhaps discussions have occurred with all four firms.

Google already has purchased satellite manufacturing assets, and invested $1 billion in SpaceX , which has announced plans to launch a new fleet of satellites to provide Internet access. Some might note that the Google investment appears to be in SpaceX as an entity, not just the new fleet of satellites.

And Google is testing a variety of methods for supplying Internet access across the global south, including drones, balloons and apparently, satellites.

Separately, OneWeb plans a huge fleet of new low earth orbit satellites to provide Internet access services.

Jim Simpson, vice president of business development and chief strategist for Boeing Network and Space Systems, says big technology firms have direct financial interests in expanded Internet access.

"The real key to being able to do these type of things is ultra high-throughput capabilities, where we’re looking at providing gigabytes, terabytes, petabytes of capability," Simpson said.

Both Google and Facebook have talked about use of satellites as part of efforts to bring affordable Internet access to perhaps billions of people who cannot afford to buy it, or cannot buy it because affordable service provided by terrestrial networks do not reach them,  right now.

It would come as no surprise if Facebook emerged as the buyer, since Facebook has been most open about use of geosynchronous satellites for Internet access.

Some would deem Google a  “not surprising” but also not “most likely” buyer. The big shocker would be if a firm such as Amazon or Apple were the buyers.

Should the deal happen, within a couple of years at least one big app provider would emerge as a competitor to existing satellite retailers and mobile service providers.

It isn’t clear whether most observers would see Amazon or Apple as potentially more dangerous competitors than Google or Facebook, if only because observers expect to see both Google and Facebook get into the Internet access business, in some form. Indeed, Google already is an operating ISP in the U.S. market.

On the other hand, it is conceivable that either Facebook or Google could wind up being partners, to an extent, with mobile operators, though potentially competitive as well. Much depends on whether the new satellite-based ventures are retail or wholesale oriented, or at least what the balance is, between retail and wholesale operations.

That is almost an expectation. What would be more unexpected is an entry by Amazon or Apple into the satellite Internet access business, in some form.

When are Consumer Markets Effectively Competitive?

When is a market effectively competitive? And what are the key tests of whether markets are effectively competitive? To examine the matter simply, is it the number of suppliers in a given local market, or the market shares of those competitors?

Of course there is the argument that it is a combination of those two metrics. But the answers might hinge on which test is dominant.

The U.S. Federal Communications Commission, for example,  seems to apply different standards to different services within the triple play bundle.

In high speed access, the Commission appears to believe there is not enough competition, with two terrestrial providers and two satellite providers in just about every market.

In the case of linear video services, the FCC thinks competition is effectively competitive with the same number of suppliers in virtually every market.

So perhaps it is the market share test that is relevant.

Still, the market share held by the market leader in most local markets does not vary much, whether looking at high speed access or linear video.

Broadly, a cable operator has about 59 percent share of the high speed access market, while in linear video the local cable TV operator tends to have about 52 percent share.

What differs is the share held by other contestants. In high speed access markets, though there are a growing number of competitors (two satellite Internet providers, Google Fiber an independent ISPs), market share generally is held by the cable TV operator and a local telco.

On a national basis, a cable provider might have 59 percent share, the telco might have 40 percent share. Satellite and other providers have the rest of the share. Local markets will vary much more widely, however.

Still, high speed access tends to feature four providers in most markets, despite the fact that the market share structure is functionally a duopoly.

In linear video, market share is much more dispersed. Nationally, cable operators have about 52 percent share, while satellite providers have about 36 percent share, while telcos have about 12 percent share.

In the linear video market, virtually every market has four providers, as well. In 1993, a cable operator had about 93 percent share.

The linear video market arguably is more competitive, one might say. On the other hand, should AT&T succeed in buying DirecTV, the number of suppliers in linear video, in most markets, would drop to three.

The result would be that in many markets, where AT&T has fixed network operations, though hat a cable operator might still have roughly 52 percent share, AT&T might have 27 percent share.

Dish Network would still have perhaps 15 percent share. In some markets, where AT&T does not have local fixed network facilities, Verizon might have about 25 percent to 30 percent share of linear video.

More competition is coming, in voice, high speed access and linear video markets. But the FCC now seems to have concluded that voice and linear video now have become effectively competitive, though it believes high speed access and mobility have not reached that stage, yet.