The Satellite Economy Has a Sweet Spot. Markets Hate It.
‘Medium Earth orbit’ is a promising niche in space, but investors fear Elon Musk’s Starlink and the decline of linear TV
There seems to be no orbit where publicly listed satellite operators can escape the wrath of the market.
For the first time, the North Atlantic Treaty Organization will contract satellites in “medium Earth orbit” to fulfill some of its communications needs: Earlier this month, it awarded $200 million to Luxembourg’s SES, the only active commercial operator in this segment through its O3b mPOWER constellation.
The medium Earth orbit, or MEO, isn’t as famous as its neighbor, the low Earth orbit, or LEO, from which Elon Musk’s Starlink has revolutionized the space economy through mini-satellites that can communicate with Earth’s surface in 20 milliseconds. Nor is it as distant as the geostationary orbit used by traditional firms, where a single satellite can cover a third of the planet’s surface.
MEO sits somewhere in between, starting 1,200 miles above sea level and ending 21,000 miles above that.
Medium Earth orbit is the region of choice for navigation systems such as the Global Positioning System. It is also ideal for Earth observation, a booming area of business that spans agriculture, urban planning and environmental monitoring, and is expected to generate $700 billion in value added by 2030, according to the World Economic Forum.
From medium orbit, satellites can send signals to the surface and back in less than 150 milliseconds—five times as fast as from geostationary orbit. Apart from gaming and video chatting, this is usually sufficient for most use cases.
And MEO is still high enough to allow for global continuous coverage with six to eight satellites, if the poles are excluded. SES, the Luxembourg operator, currently does it with 26.
Meanwhile, Starlink has about 5,000 satellites in low orbit. Each sees only a small patch of the Earth, and briefly, because it circles the planet about 15 times a day. So it has to constantly hand off service to a neighboring node, which is complex and can lead to interruptions.
This is the reason MEO is often thought of as the sweet spot of space.
To reinforce congested areas and have backups, governments and commercial customers of satellite services often want to diversify. Traditional players such as California-based Viasat VSAT -1.62%decrease; red down pointing triangle, France’s Eutelsat ETL -2.15%decrease; red down pointing triangle and Canada’s Telesat are now trying to combat Starlink by combining LEO satellites with geostationary ones.
“Almost every ship we are in has Starlink too,” said Adel Al-Saleh, chief executive at SES, which provides broadband access to passengers and crew at the world’s top cruise companies.
SES satellites could have a groundbreaking role to play in “hybrid” constellations: They sit closer to the LEO layer below, and could serve as “space relays” that aggregate and transmit data from the minisatellites to ground stations or other parts of the constellation. SES successfully tested this capability in June.
And yet, SES stock has lost more than 80% of its market value over the past decade, roughly in lockstep with Viasat, Eutelsat and Telesat.
Investors are so down on the sector that those who buy telecommunications firms will often bet against satellite firms as a way to hedge risk, brokers say.
Previously, these businesses would typically spend a few hundred million dollars on a big satellite that could spend 20 years providing lackluster service, and enjoy captive demand from governments and consumers. Suddenly, advances of semiconductor technology and the LEO revolution have led to minisatellites being built for $1 million and replaced in five years’ time.
Also, the popularity of streaming has led to “cord-cutting” of satellite-TV services. SES’s video division has lost a quarter of its revenue over the past five years. Its other services have grown 53%, but they don’t generate the same massive profit margins.
Incumbents are making big investments. However, the resulting capacity war with Starlink—run by privately owned SpaceX, which can cross-subsidize satellites with its lucrative rocket-launch operation—is depressing prices.
Satellite firms are also gaining scale, as shown by the recent Eutelsat-OneWeb and Viasat-Inmarsat mergers. SES is swimming in cash, which it got from selling a portion of its C-band spectrum in the U.S. to make it available for 5G. In April, it announced that it will use the funds to purchase Virginia-based Intelsat, which recently emerged from bankruptcy. Investors, who wanted payouts instead, have reacted badly.
There is still potential upside: SES trades at a lower valuation than its peers, despite having the largest operating margin and being the only one with a significant dividend yield. Also, it doesn’t directly compete in consumer broadband, where Starlink is unbeatable.
But investors might not jump in until the MEO approach proves that it can live up to its promise. Power issues with six of SES’s mPOWER satellites, built by Boeing BA -0.84%decrease; red down pointing triangle, have significantly affected their operational life and broadband capacity. It underscores a key difference with Starlink: MEO satellites aren’t as disposable when something goes wrong; they are costly, sophisticated machines—more in the vein of the traditional satellite business model.
“Rather than being a sweet spot, it has a bit of the advantages and disadvantages of both,” said Bernstein analyst Aleksander Peterc.
Einstein’s equivalence principle states that floating in space and free fall are indistinguishable. So far, this remains true for listed satellite companies.