In part two of my conversation with consultant, analyst and blogger Tim Farrar, we dive a little deeper into the undergrowth: what the HTS upgrade path looks like and how to tell perception from reality, how the recent competition stacks up to the incumbent and what new opportunities may be out there for those prepared to seek new markets.
MI: I’ve had conversations recently with end users who have said, ‘I’m really interested in HTS but I sure as hell don’t want to be first through the gate, I want to see it up and running, I want other people to be signed up and using it before I consider moving. Again I’m speculating but I’m assuming that Inmarsat will make it attractive financially for users to upgrade to GX but are there other drivers too?
TF: “For new customers, every VSAT terminal they install from now is upgradeable, straightforwardly. When you go back to the investor day last October they said, ‘We’ve got 20% of our business plan committed and they included all 1100 ShipEquip VSAT terminals in that. Despite the fact that only 300 of those have actually gone to XpressLink.
“Probably only 100-200 of them actually have a compatible terminal, maybe even less than that last October because the compatible terminals have only been available for a short period of time. So quite how you square that circle and you say to those people, they [Inmarsat] will turn off Ku-Band by whatever date is an interesting question.
“But certainly, from a financial point of view, Inmarsat’s sending the message to its investors that it intends to cut back its Ku-Band leases as rapidly as possible so it can shift people over to its own system and obviously have a dramatically higher gross margin.”
Do you find it as hard as I do to make like for like comparisons? Inmarsat talks about 32,000 active FB terminals, KVH talks about terminals shipped. So it’s actually quite difficult to really get hard usage analysis of who’s really using what beyond what the airtime vendors are telling us or am I being too naïve about that?
“The VSAT industry has always been one where people tend to exaggerate a little bit and they like to tell you shipped or committed or whatever rather than actively revenue-generating terminals.
“People have their own definitions and it’s one of those things that’s self-reinforcing. If you think you’ve got a bigger market share than your competitor and your competitor is saying a number that is stretching it slightly then you’re going to have to stretch your number a little bit too.
“So people will quote numbers that are what they hope for when they’ve got through their backlog rather than what they actually have that are revenue generating right now.”
Certainly the view from Inmarsat seems to be that they are keeping their heads down and to some extent downplaying the penetration of XpressLink and the impact they expect Global Xpress to have.
“That’s because the 40-50% [market share] figure can’t be reconciled with reality (laughs). I don’t know how they came out with that. [At last year’s investor day, Inmarsat claimed to have won 50% of all high-end VSAT contracts] it’s a number that appears to relate to a selected period of time excluding KVH and a bunch of other things.
“I think they tried to downplay that number just because it’s hard to reconcile with reality over a more extended period of time. And is excluding KVH from your numbers the right way to go? Especially given the issue of where GX is going to be pitched in terms of the low end versus the high end and all those sort of things.”
“There hasn’t been necessarily huge amounts of growth in the VSAT business, it’s been a little bit slow. It’s not easy at that high end of the business either, at least in merchant shipping due to the economic climate.”
And as people like Roger Adamson have said recently there’s either two ways, either to fulfill crew calling demand or get in at the boardroom level and sell to a much higher level.
“Yes that’s right and at the board level, it’s a very difficult. They have many, many preoccupations right now other than just details of how you implement your communications.”
You touched previously on Inmarsat’s other competitors, Iridium and Thuraya. I don’t hear so much from Iridium these days but from what I do hear is that people like using Iridium OpenPort because it’s cheap and simple and the crew can install it but reliability is an issue. For Thuraya, they have a strong play albeit regionally, so I guess my question is, how far from death is the legacy L-Band market. In fact does it actually get a bit of a new lease of life if the others can carve themselves out a nice niche there?
“Well the question is how far down the spend level is VSAT going to go? I guess you could say, a KVH solution at $600 has some place in the mix. But the reality is I think that I see sub-thousand dollar a month customers being dominated by L-Band for the foreseeable future.
“But yes, OpenPort is a good cheap and cheerful solution, it has had some challenges, Thuraya has tried to become more of a FleetBroadband competitor. It has tried before and it didn’t quite work out but I’m sure that they’ll try again with another maritime broadband-type product on a regional basis.
“And obviously IridiumNext could give Iridium something more directly comparable to FleetBroadband so I think there’s potential for competition to FBB in future. Inmarsat is sort of opening itself up to that by leaving a gap between the pay as you go and the entry level type bundle.
“The people who only want to spend three, four, five hundred dollars a month, they don’t have the greatest set of options for the data at this point in time. Because how much can 10 or 20MB a month really give you? I’ve heard people say, should I bother upgrading my old Mini-M terminals, do we really want to upgrade them to FB150, because I’m not really sure what we do with 10 or 20MB a month – would that get us any further forward?
“I think Inmarsat’s pricing bracket strategy is good because it gives them lots of differentiation and once people are in those buckets you can push the bucket a little bit in terms of pricing and you won’t have people jump out of it.”
“One of their key issues is going to be now they’ve got a 2GB package how do they shift those people up from spending $1,600 to $2,000 so that they’re going to then feel that they don’t have to spend any more for VSAT. It does leave them open to a bit more competition once better alternatives are in the market.”
“You put all that together and it seems obvious there will be more competition at that lower end of the market from other L-Band solutions in the future.”
I’m interested in the comparison between Intelsat Epic and GX – what’s your take on whether you feel EPIC is going to get much traction beyond the energy, offshore and cruise markets.
“I think it definitely is directed at that higher end of the market. The challenge for GX is just the limits on what you can do in any one beam. If you have 50Mbps, you could put two carriers in one beam and get 100Mbps when it’s not raining.
“But it’s pretty much constrained to that and you think about it from the point of view of a cruiseship, you can’t really dedicate 20Mbps because if you do that to more than a couple of users and all those cruise ships end up in the same part of the Caribbean, then you run out of capacity. And when do cruise passengers want to use the internet? Normally when it starts raining outside and they can’t sit out in the sun so that’s not helping you a whole lot.
“So there’s obviously a desire to stick with Ku-Band to work around rain fade. It’s one of the limitations of GX that it’s designed for coverage, it’s not designed for lots of capacity in a given area.
“So what Intelsat is doing with Ku-band, as I understand it is working the flexibility to add capacity in particular spots, and it’s really designing it around these big pre-committed buyers [MTN and Harris CapRock] who have come along said they want X amount of capacity in the Caribbean. Or Panasonic would say they want X amount across the North Atlantic and that’s what they can put there.
“So it’s been very closely designed in conjunction with those really big players. Whether it will exactly match what a mid-tier maritime player wants, hard to know. For Inmarsat the limitation is how much capacity it can provide in any one area. It also has to manage the capacity itself to some degree. It doesn’t want to be dedicating capacity to a service provider, unless it’s for the government and you want your dedicated beam.”
In terms of other newcomers, O3B is a bit of a mystery to me.
“Yes there must be business there but I’m not sure how it will work out for them. If your market is cruiseships with more than six thousand passengers then there’s a dozen of them then it’s just bizarre. Following cruiseships around with a single beam is not a business. I don’t know how much the cruise ships are actually paying but if you track back to O3B’s numbers their original business plan said they were trying to get something like $4M per beam in revenue and I’m sure that a single cruise ship’s not paying four million dollars per year for capacity.
“I suspect that if they’re paying $1m per year that would be the high end of what I would expect. So you look at it like that it’s not exactly a wonderful business, it’s come back a long way from what they’d hoped.”