Satellite Services in Europe: Is There a Broadband Play?

By Christopher Baugh

Make no mistake: Western Europe remains a top prospect for satellite delivery of telecommunications services. From international voice traffic decades ago to Internet platforms today, satellites are now an integral component of the infrastructure of the European market. A large number of satellite operators, equipment vendors, service providers and integrators now exist in Europe, which is the second largest region for satellite-delivered services.

However, the market now faces a number of challenges in the wake of the telecom sector crash. Enterprise spending is down, investment is nonexistent and a global recession has delayed most new satellite ventures. The European broadcast market is near saturation, with pricing rapidly declining and most deals crafted for only fractions of transponders. While Internet applications once looked promising, a near market collapse serves to raise questions about overall viability.

One issue is imminently clear: the European broadband satellite market is in a state of flux. First, satellite backbone connectivity from Europe continues to push further south and east, and market prices are steadily declining. The global average in 2001 for backbone connectivity from Europe was GBP2,070 ($3,211) per Mbps per month. Northern Sky Research expects this average to steadily decline to GBP1,660 ($2,575) per Mbps per month in 2004. The decline is a direct factor of both increased competition and greater bandwidth efficiency through advanced modulation and turbo coding.

Despite the steady slide in Mbps pricing, the market for satellite backbone connectivity into and out of Europe remains intact. Many large resellers such as Satellite Media Services, Kingston, GlobeCast and Plenexis are intently focused on maintaining the service provider portion of their business.

While Northern Sky Research does expect European-based and global satellite operators to increasingly infringe on the backbone capacity provisioning business, the market should remain for the foreseeable future. Fiber deployment worldwide has slowed considerably, and satellites remain a trusted option for point-to-point connectivity from the European backbone.

Second, enterprise satellite services represent both opportunities and challenges to European satellite players. While most of the European telecom market was down, the enterprise satellite market segment actually posted growth in 2001. The pace of IP upgrades from legacy systems continued in Europe, and a new, small/medium enterprise focus served to foster growth for enterprise-focused satellite companies. The two leading VSAT vendors, Hughes Network Systems and Gilat, secured the vast majority of deals in 2001 (84 percent). While most deals in the next two to three years will likely be won by these two vendors, some questions persist with regards to technology capabilities for two-way applications and manufactured costs for two-way terminals.

Many of the questions regarding current two-way technology seemingly led Gilat to pursue the SATLYNX broadband venture with Alcatel and SES Global. European vendors and satellite operators are unquestionably leading the charge for DVB-RCS. However, the news of the second largest global VSAT vendor cooperating on a DVB-based two-way standard may be evidence of the emerging acceptance of standards for broadband satellite service delivery.

Despite this positive movement, Northern Sky Research does not expect DVB-RCS to have a massive impact on the market in the next two to three years. Leading vendor Hughes has chosen to remain “proprietary” in Europe (and worldwide), and the company has established an extensive reseller and integrator network across the continent. It will also take time for SATLYNX and DVB-RCS ventures such as Aramiska to enjoy lower terminal costs through economies of scale and manufacturing standardization.

It is no secret that DVB-RCS technology is quite expensive today. For DVB-RCS-based service providers to effectively target the potentially lucrative European SOHO and SME markets, Northern Sky Research projects manufactured terminal pricing must fall by at least 50 percent to 60 percent to become competitive. A critical factor for DVB-RCS rollout in Europe will also be the commitment of Gilat, which possesses the scalability to manufacture and deploy a DVB-RCS service at reduced costs.

Issues of standardization aside, the market for enterprise “broadband” satellite services in Western Europe is expected to grow steadily over the next five years. The installed base is forecasted to rise from 76,000 units in 2002 to over 420,000 units in 2007. The compound annual growth rate (CAGR) of 40 percent is above the natural buildout of the entire European VSAT market growth (legacy + IP), but should be realized through enhanced focus on SME and SOHO markets.

Lastly, the market for consumer broadband satellite services in Europe has been virtually nonexistent. Outside of specialized applications for DTH customers and relatively few one-way DirecPC installations, the European consumer seemingly lags North America by at least 12 months to 18 months. This trend may be a direct result of financial and viability issues with current two-way endeavors in North America, especially since growth is currently slow and costs are high.

The future of the consumer broadband satellite market is, therefore, now more uncertain that ever. The pending merger between EchoStar and Hughes/DirecTV is also serving to stall developments in the European consumer broadband satellite field. Many European-based DBS/DTH and satellite operators look to the United States as a proving ground for consumer broadband satellite offerings. The next 12 months will be critical due to the expected merger decision and revised broadband strategies from the leading vendors and operators.

And despite the promise of DVB-RCS in the enterprise sector, little or no DVB-RCS growth is expected in the consumer or residential markets due to high costs.

While growth for consumer broadband satellite service in Europe will not be on par with terrestrial offerings, the long-term potential looks promising. Northern Sky Research expects this market to grow from roughly 71,000 subscribers at year-end 2002 to 701,000 subscribers in 2007.

In summary, the European broadband satellite market is in a state of change. Failed endeavors, a lack of investment funding and consolidation were the newsmakers over the past 12 months. Recent market showing also points to the lack of a killer broadband application for satellite players. Based on these trends, it is clear this market must build itself from the bottom-up and focus more on business issues over technology advancement.

While Northern Sky Research still believes in long-term growth of the European broadband satellite market, it will take the right mix of technology, business model and market approach to produce success. As of yet, most companies have not mastered this critical mix of elements.

Christopher Baugh is founder and principal analyst at Northern Sky Research, a Cambridge, Mass.-based satellite and telecom market research firm. He can be reached at tel: 617/576-5771 or by email at [email protected].