FSS Experts Warn of Industry Struggle in New Morgan Stanley Report

[Satellite TODAY 09-27-13] Morgan Stanley has released a new report citing “three highly experienced professionals in the FSS sector” on how they think the sector will develop over the next few years. The outcome of the report is surprisingly negative with the sources predicting the sector has “entered a ‘no-growth’ cycle, and that returns will likely decline over the next few years.”

Morgan Stanley’s three FSS contacts are bullish on Latin America and “large parts of Asia,” competition from terrestrial networks, and the belief that High Throughput Satellites (HTS) will “struggle to open up new markets,” leading to the overall negative outlook.

The feeling is that many operators have launched HTS too soon without securing a big enough backlog first. “This will likely lead HTS operators to start commercializing existing applications (Trunking, GSM, VSAT) and compete against traditional Ku-band satellites. It may also lead HTS operators to try and differentiate themselves from Ku-band through lower prices. This usage of HTS would be sub-optimal, however it would seem like a plausible response from management teams looking to drive HTS returns as close as possible to their cost of capital,” the report states.

One of the main themes of the report is whether the business case for HTS can be justified. Morgan Stanley says its contacts suspect some operators will also be tempted to offer lower prices as the marginal cost of an HTS is very low once it is up and running, and management teams are under pressure to produce some form of return on investment. “One of our contacts described this phenomenon as using ‘a bazooka to kill an ant’. This image is meant to describe the fact that very powerful and flexible HTS could end up being used for fairly basic applications in existing markets simply because that is where demand lies,” the report states.

The report goes on to paint a bleak future for satellite-based consumer broadband saying that the three experts in the FSS sector are “unanimously bearish” on this topic. “They believe that the HTS that have been designed predominantly to sell broadband services to the consumer have all undershot expectations and that they will continue to struggle to increase their fill rates. In the developed world, the rollout of terrestrial broadband and fiber will greatly limit the potential for satellite companies to commercialize consumer broadband. The value proposition of terrestrial networks is seen as superior to satellite’s, even HTS, and demand in remote areas is proving less buoyant than originally planned. Our contacts cited Avanti and Eutelsat’s Ka-Sat as examples of HTS designed for consumer broadband that would undershoot expectations,” the report states.

While the overall tone of the report was fairly negative with key sectors such as video and government and military remaining flat for the FSS sector, Morgan Stanley’s contacts see strong opportunities in maritime and aero, as well as oil and gas. Additionally, Latin America and Asia remain key targets of growth “where both data and video are expected to grow fast over the next few years,” the report states.