Russian Broadband Satellite: Small but Poised to Grow
The market is small, but capacity is expanding. As costs fall, operators will expand their broadband satellite service into the B2C market. But are there limits?
Demand for broadband in Russia is hot. In a recent study of global broadband growth by research firm Point Topic, Russia was at the top of the list. What is satellite’s role among the other terrestrial technologies in this market?
The bull-market case is that in addition to being propelled by a surge of new capacity (including Ka-band), the broadband satellite industry can benefit from reduced costs, more government support and better marketing. While predominantly business-to-business (B2B) today, it has the chance to flourish in the business-to-consumer (B2C) market. Eastern Russia is an especially rich target.
The bear-market case is that even with lower price points, the industry will face relatively low demand and competitive technologies that limit its growth.
Broadband is climbing fast in Russia. Point Topic clocked annual subscriber growth at a blazing 28.3 percent, far above the next two countries: Brazil (17.3 percent) and China (15.8 percent). Total broadband subscribers now number 23 million. With Russia’s population a relatively stable (after 15 years of decline) 143 million, there is still plenty of room for growth.
Most of this growth is occurring in European, or Western, Russia. This is the 23 percent of Russian Federation territory where nearly 80 percent of the population lives. European Russia is also the country’s most connected region. Thanks to a vibrant telecom industry, this region has access to the same types of technology—fiber, XDSL, DOCSIS (cable), fiber optics—available in Europe.
While broadband is growing, the country’s dominant wireless companies (MTS, Vimpelcom and Megafon) have saturated the market, perhaps peaking at a 160 percent penetration rate. Wireless data traffic, however, continues to surge. In 2011, the big three along with state-owned Rostelecom agreed to unite behind the LTE network being built by Yota. The plan is to deliver mobile broadband services in 180 Russian cities and reach half of all Russian citizens by 2014.
That partnership subsequently split in several ways, but LTE networks are already being lit, including Megafon service in Moscow, Krasnodar, Novosibirsk, and Sochi, site of the Winter 2014 Olympics. Yet even though LTE may expand and help unify broadband coverage, the country is fractured today.
“The broadband market is characterized by a huge divide between the East and the West of the country,” says Pavel Marceaux, technology, communications and media analyst at Euromonitor International. “The Eastern market, which is Siberia and Far Eastern cities such as Vladivostok, are characterized mainly by lower take-up broadband rates, (and) less options for technology and consumers compared to the Western market.”
Marceaux says that going forward, Internet access in Russia’s East would get a push from the government, which would also promote broadband satellite. Linked to the growing capabilities Russian Satellite Communications Company (RSCC) and Gazprom Space Systems (GSS), the industry is poised for a boost.
Despite what seem like strong fundamentals, the Russian VSAT market is small. “The total in Russia, according to our estimation, [is] between 40,000 and 50,000 VSATs, and most of them are for the corporate market,” says Igor Kot, deputy director general of GSS.
Market data from VSAT market research firm Comsys provide some context. The global VSAT market first hit 100,000 units in 2000, the same year that terminals offering consumer Internet first reached the market. The total VSAT market — enterprise, small-to-medium enterprise (SME) broadband and consumer Internet—has surpassed 600,000 units annually since 2005.
Hughes has taken more than 300,000 consumer and enterprise orders (roughly divided equally) each year for the past five years. Demand is strong in some countries. Hughes alone has shipped more than 110,000 terminals to India. HughesNet has more than 600,000 subscribers in the United States. With another 400,000 from ViaSat’s Exede service, the total U.S. consumer market surpasses 1 million.
Russia’s VSAT market pales by comparison. It also tilts heavily toward the B2B sector. GSS is a case in point. With natural gas giant Gazprom as its main stakeholder, GSS provides capacity to a range of service providers but also has devoted 200 MHz to serving 1,000 customers in the oil and gas industry, a classic VSAT B2B vertical.
But whatever the fraction of this market that reaches the consumer, it appears to be growing. AltegroSky CEO Sergei Pekhterev shared this interesting news: B2C revenue increased to 12.5 percent of his company’s total revenue, growing 10.3 percent Q2 over Q1. Last year it was 6 percent. AltegroSky is a satellite services provider in Russia. It serves more than 7,000 subscriber terminals and operates more than 500 certified centers of partner companies in Russia.
Pekhterev also notes a potentially complicating factor as service providers grow their B2C business: Average revenue per user (ARPU) is three to four times as high in B2B as B2C. The goal, naturally, would be to grow both sides of the business.
Growth notwithstanding, today’s low absolute numbers are negligible to Oleg Timoshenko, CEO of Romantis Russia, a VSAT systems manufacturer and platform provider. “We do not have a real consumer market,” he says. “I’m talking about real household people who are installing VSAT terminals just for private use.”
What explains the small B2C market and slow overall pace? Demographic and economic factors such asdeclining population, density in the West, low per capita income, all play a role. But two discrete impediments have been a lack of cheap capacity and high equipment costs.
Limits and Costs
Leading players in this space—Megafon, AltegroSky, RTComm (an affiliate of Rostelecom) and KB Iskra (a regional operator)—have met with some success. They have also faced common obstacles.
“We don’t have space capacity,” says Pekhterev, speaking in particular about satellite bands available for the Far East, but captured by video distributors. “All satellites in this area sold out two years ago.” Recent satellite failures have exacerbated that trend. That includes the powerful Ku-band and Ka-band Express-AM4, which the RSCC brought into a controlled descent in May 2012.
“The failure of AM4 hit the market hard because it kept it a seller’s market,” says Arunas Slekys, VP corporate marketing and GM Russia/CIS Business for Hughes. “It constrained market growth.”
RSCC and GSS are Russia’s main satellite operators, but others have entered the market, albeit to a limited extent. “Intelsat, SES, and all foreign players are not so aggressive, because the rules of the game are not always clear to them,” says Timoshenko. “The ones they’ve launched have had few transponders, and most of those transponders were immediately occupied.”
Romantis did strike a deal in August 2012 with SES, but the issue is not just the number of transponders. Dennis Pivnyuk, CFO of RSCC, summed it up: “Satellite capacity is always available. We only lack cheap capacity.”
Simply put, demand has eclipsed supply. However wide the gap has grown—GSS’s Kot estimates it at 20 to 25 percent—its impact has been predictable. Several years ago, according to Timoshenko, the price per MHz transponder in the Ku band was less than $3,000; now it is more than $4,000.
Someone has to pay those rents. Sure enough, VSAT systems and service come with high price tags. A case in point: Pekhterev says VSAT terminals are about $800, installation is $200 to $250, and service is $20 to $30 per GB, which translates to a staggering $250 for 10 GB.
Comparisons are tricky, but as a point of reference, given a 24-month contract, the U.S. service provider Exede charges $10 for rental, $50 for set-up (including a $100-off special) and $50 per month for 10 GB.
Equipment subsidies are clearly a factor. “Go buy an iPhone and pay retail, it will cost you $600,” comments Slekys, who says $800 would buy a “gold-plated” terminal in Russia, delivered and installed, with no marketing discounts.”
In any case, $800 carries a sticker shock. Given the idea (promoted at the Comsys VSAT 2012 conference) of a sub-$200 VSAT, it is only fair to ask: Why so high? Discussing the cost structure of the equipment he uses, Pekhterev pointed not only to transportation and markup, but also to customs clearance, an 18 percent value-added tax (VAT) and high credit rates (15-18 percent) for SMEs.
Given these costs and a nominal per capita GDP (estimated by the IMF) at less than $13,000, it is not surprising that VSATs have stayed in Russia’s B2B realm. Moving into the B2C market would require a new cost structure, including fewer externalities and lower transponder costs. Government support could help, too.
Less Friction, More Capacity
The idea of reducing transactional friction is catching on. “There’s still a pretty hefty customs and duties charge, and they’re trying to beat that down,” Slekys says. “That’s a key area between Russian satellite operators and providers, and I think you’ll see that happen.”
Pivnyuk endorsed the idea. While not playing directly in the B2C market, RSCC has worked with Eutelsat and its Skylogic service on a Ka-band broadband satellite project in Western Russia and is aware of the costs. “All market participants are interested in reducing the price,” he says. Timoshenko adds that it should be easy enough for the government to simplify registration and give anyone who buys VSAT equipment a rebate on the 18 percent tax.
Moscow has also sponsored VSAT project work. In one, Hughes and Megafon helped bring broadband to schools; in another, Gilat Satellite Networks and RTComm equipped polling sites for the March 2012 presidential elections with video cameras. Another government project involving RTComm and Gilat has gone quiet. “It’s been shelved,” says Slekys. Why? A technology transfer and manufacturing deal failed to map against sufficiently high volumes.
Broadband satellite continues to play niche roles. Pivnyuk mentions working groups that support e-learning at home for handicapped children. Yet it also factors into broader strategies.
In September, Deputy PM Arkady Dvorkovich reportedly stated that the government intended to make broadband services accessible to 95 percent of the population by 2015. He also said that Rostelecom had sufficient resources to accomplish this task. Marceux may have spotted some of those funds in referring to “a 3 billion ruble program ($967 million) to deploy satellite broadband technology in the East, primarily Siberia.”
As for increasing transponder capacity, a prerequisite for any such objective, GSS and RSCC are advancing that cause. In September 2012, GSS announced an agreement with SES to be provided with additional capacity on SES’s ASTRA 1F satellite. In early November 2012, it successfully launched the wide-area Yamal-300K. The Yamal-402 is also set to launch in the next few weeks.
The total in Russia, according to our estimation, [is] between 40,000 and 50,000 VSATs, and most of them are for the corporate market,”— Igor Kot, Deputy Director General of GSS
Kot says GSS is also studying the feasibility of launching a Ka-band satellite in 2014. Dubbed the Yamal-401, it would replace the Yamal-201 and displace the Yamal-300K to another orbital slot. In 2015, GSS plans to launch the Yamal-600.
Meanwhile, rebounding from the Express-AM4 disaster, RSCC is preparing to launch a slew of Express-class birds. “In 2013, RSCC is planning to launch its own Ka-band satellites, and by the end of the year a satellite infrastructure for developing broadband services will be established over the whole territory of Russia,” Pivnyuk says.
The entire 2013 slate includes AM5, AM6, AT1, AT2 and AM8. While planning more launches for 2014 (AM4R and AM7) and 2015 (AM9), Pivnyuk described the near term goal as “saturation of the Russian domestic market with broadband services.”
Bull and Bear
This aggressive addition of capacity will change the industry. But it will take operators to move business to the last mile. Indicating that AltegroSky has already initiated cost reductions, Pekhterev pointed to a new and he hopes “temporary” problem: getting the word out. “We don’t have money for TV advertising, and mostly customers find us via Internet,” he says.
The company already has been creative in devising service packages that reach consumers, according to Slekys, which supplies AltegroSky with VSATs. Those solutions include pay-as-you-go connectivity, payment via local ATMs and a shared model, in which VSAT service fans out over Wi-Fi or power line cable to other paying users.
A liftoff in capacity, more rational cost structures, creative marketing, government support of some kind are the ingredients of a bull-market case for broadband satellite. “My guess is that in two to three years, you could see realistically 100,000 consumers,” says Slekys.
Timoshenko offers a bearish outlook. He admits that the ongoing satellite launches will ’definitively’ change the business, but has doubts. “There is no demand for such capacity,” he adds. “The problem is that Russia is too late with the launch of this program. My personal opinion is that telecommunications providers will be much faster in approaching the consumer market.”
In other words, demand is limited and the competition potent. The advanced capabilities of Ka-band satellites, however, can be turned to further advantage. “We are working on a range of B2B applications, from TV distribution and TV production down to cellular backhaul based on Ka-band,” Timoshenko says.
It will take time to discern whether the ongoing launches enable service providers to reach more underserved niches or compete more broadly. Pivnyuk, referencing the date announced by Deputy PM Dvorkovich, seems to want Russia’s broadband satellite industry to aim for the latter.
“Without a doubt, we will have to do our best to win the customer in the struggle with fiber optic and mobile operators,” Pivnyuk says. “We have to offer a service package and at such a price that will be competitive with alternative broadband technologies in 2015.”