Just How Profitable Is the Satellite Business?

With all of the recent press about difficulties in the satellite industry, Futron took a look at
profitability within three key sectors of the satellite industry: satellite manufacturing, fixed
satellite services, and ground equipment manufacturing. Not surprisingly, each sector had a
different story to tell. Futron found that on average, FSS providers are able to attain Net
Income margins (Net Income/Revenues) of 33%, by far the highest of all three sectors
analyzed. The Ground Equipment sector is a distant second (6%), followed closely by
Satellite Manufacturing (5%).

40%

35%

30%

25%

20%

15%

10%

5%

0%
Fixed Satellite Services

Manufacturing

Ground Equipment

Satellite Industry Average Profit Margins Based on Net Income

Why is the FSS sector so profitable when compared to the other two sectors? One reason
is the high barriers to entry for FSS operators. The scarcity of GEO orbital locations and
available spectrum, tight regulatory control and relatively closed national markets are significant obstacles to a free and perfectly competitive FSS marketplace. The limited number of
'global' providers have in essence, created an oligopoly guaranteeing them the high profits
associated with such a condition. The situation is even more pronounced for exclusive
'national' providers in markets across Eurasia, the Middle East and Africa.

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A second explanation may be found in the ability of this sector to leverage new technology.
Advances in compression technologies and satellite power systems have enabled today's FSS
providers to offer greater bandwidth and an enhanced quality of service, all at a lower cost
per transponder. Lowered operating costs, and expanded revenues with a minimal change in
price have kept margins high.
Ironically, these same factors have also combined to limit, and decrease, the number of
GEO satellites procured every year. This has led to a continuous shrinking of the market for
the manufacturers of such satellites, reducing the profitability of the satellite manufacturing
sector. With an average of about 20 satellites ordered every year, the market is simply not
large enough to support the five major players in existence today. The only way to raise
margins may be, in fact, to consolidate.
Ground equipment manufacturing, while a growing business, is increasingly competitive.
The numbers and types of providers have increased, and the market has seen the bulk
production of standardized consumer equipment such as terminals, routers, hubs, set-top
boxes and modems. As in the consumer electronics and home/office-networking industries,
margins for such products are often low.

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