Balancing Act (London)

23 May 2014

Africa: Satellite in Africa - Huge Opportunities but It's Time for Some Disruptive Business Models

analysis

London — African satellite industry event Satcom 2014 took place this week in Johannesburg. As the satellite sector digests the loss of backhaul traffic to fibre, it is clear that there are new but potentially difficult opportunities.

Russell Southwood tries to pick apart what might connect these new satellite opportunities to customers and what's holding them back.

Before fibre arrived, satellite was Africa's primary means of getting its bandwidth. Even when the first international fibre cable landed, its monopoly prices meant that satellite was still able to hold prices at the same or just below pre-fibre days.

Now that international fibre wholesale prices have gone down to US$100-200 per mbps per month and national networks are spreading out across the continent, there is little reason to keep the same level of satellite bandwidth.

But the impact on satellite prices was not immediate. Although satellite resellers with their shorter contracts lost business rapidly, the "majors" with their longer contracts have had more time to adjust.

Prices, which for so long had held steady, have now dropped: for example, KU band capacity is currently between US$3,000 to over US$4,000 per MGHz with some deals struck at a lower price. However new players are entering the market including Measat, ABS, RSCC and Avanti.

These new players will not be disruptors but offer prices that are a little bit cheaper (say 5-10%) and be in the words of one industry insider "incredibly flexible".

O3B's (owned by SES) meo satellites are now coming into service with the first hub starting in DRC operated by Raga and more will follow.

These are selling capacity at US$400-800 per mbps but this is "satellite as fibre" because you need a relatively expensive base station to track from satellite to satellite.

Although "the majors" whose customer portfolio has been and still is largely data driven (for example, Intelsat) have suffered, others like Eutelsat whose customer portfolio is mostly broadcast have been largely unaffected. But all satellite operators would like to increase sales and are trying to get their heads around how.

There are a number of smaller niche opportunities but there are probably only three large new market openings:

1. Satellite Broadband, off-network

Whilst fibre is now increasingly available for backhauling capacity across countries and between cities, there has been much less investment in local access delivery.

Local access delivery is a large investment and requires longer payback periods than voice base stations for example.

Satellite is easy to deploy and although the customer premises equipment is relatively expensive, it can be almost anywhere. Errrr... .well maybe not where there's heavy rain although satellite operators say this can solved.

Some satellite operators (like Yahsat) are chipping away at this market but numbers are modest because the monthly subscription price remains high alongside other forms of delivery.

Unless that gap can be narrowed, this will remain a niche, high-end market. Also if the satellite operators do not move quickly, investment will be made that will start removing parts of this market.

2. Rural areas

Any mobile operator will tell you that the largest OPEX cost of running an off-grid base station with satellite is the satellite transmission costs.

These will not become markets unless the cost of transmission falls. If you take the numbers currently unconnected to fibre (even with non-addressable customers taken out), this is potentially a huge market.

But if the fuel required to reach them is too expensive, then it will not turn into a new market, no matter how many sympathetic noises the satellite operators make.

One strand of Satcom 2014 was about rural access and all those I heard speak or spoke to were clear that this was a major barrier to creating this new market.

3. Satellite TV and DTT

A large number of satellite set-top boxes have been sold that receive the Free To Air TV Channels in Africa's skies: they number well in the hundreds of thousands and for a relatively small sum you can get a more diverse choice of programmes, particularly in those countries where there are only 1-2 terrestrial channels.

Taking this insight and working with SES, Ghana's Multi TV has sold 1.3 million set top boxes and is offering a free to air bouquet, opening up the potential for a new business model.

Several operators have tried to create satellite "neighbourhoods" (platforms) that offer a mix of free local channels and international channels, some free and others pay-for at a relatively low price. However, the satellite operators are not content companies and have struggled to get the model to fly.

Satellite is ideal for covering a country making the transition to digital. In Liberia, the capital Monrovia has terrestrial transmission but the rest of the country could easily be covered by satellite.

Even those countries where terrestrial investment and coverage is greater could use satellite to fill in the gaps in terrestrial coverage. To my knowledge, no satellite operator has convincingly mounted a presentation of the costs of these alternatives.

There are two gaps that make life difficult for the satellite operators with all three of these opportunities. The first and most fundamental is that the cost of satellite capacity (or retail prices based on it) is not yet a level where they can help these new market exist.

The second is that satellite operators are not fleet-footed, entrepreneurial organisations capable of opening up the market to new business models.

With fibre, there have been several rounds of technological improvements that have added capacity and allowed the fibre operators to lower costs.

Satellite transmission technology has improved somewhat but there is very little sign of the cost reductions from these improvements being passed on to the customer. In the case of some operators, their level of debt makes it all but impossible to contemplate this approach.

So what are the costs of delivering satellite capacity? With fibre in Africa, all the major cost delivery elements are in the public domain and it is possible to build a model and examine margins.

In Africa, almost every fibre project has been built on the basis of open access, where the lowest cost is passed on to customers, allowing them to make profits from their retail customers.

Satellite costs and margins are contained in a "black box" of secrecy that is almost impossible to penetrate. Industry insiders tell me that the margins are extremely high.

In their defence, satellites are high-cost, high-risk projects. Nevertheless, there is never any discussion in the sector of reviewing how they make their capacity available.

Historically, broadcasters have paid three times more than data users for their capacity, the justification being that the value of reaching many millions of people has a higher commercial value than reaching a single customer.

The existence of two tariffs means that it is perfectly possible to look at creating other, lower tariffs. And if I was a broadcaster, I'd be interested to know the relationship between what I'm charged and what it costs to deliver.

Africa pioneered delivering fibre through consortia that broke the competitive mould and opened up new markets.

The existing African data market is the offspring of this process. Perhaps it is time to think about creating disruptive satellite models that are capable of opening up other new markets in Africa.

Essential reading for those in mobile VAS to anyone just interested in what African and relevant international content they can now get online.

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