The Dangers of Overcapacity

by Jan Grøndrup-Vivanco

Paris, France, September 5, 2013-- When the NSS-8 satellite was destroyed after its launcher exploded on January 30, 2007 it overnight created a shortage of C-band capacity over Africa and the Middle East. The NSS-8 satellite had 56 C-band transponders, which was supposed to have created some relief to the African capacity market, which was already getting increasingly tight. The capacity situation over Africa is completely different today where overcapacity will be with us for some time still. This situation will have an impact on Europe and the MENA region as well.

One of the main demand drivers for C-band capacity over Africa in the ’00s was cellular backhaul, with cellular operators or their service providers often ordering multiple transponders, benefiting from satellites inherent advantage of wide and immediate coverage over areas not served by terrestrial means.

In addition, many countries in Africa have experienced rapid economic growth in the last decade, contributing to increasing demand for telecommunication, including satellite.

However, only a few years on from a very tight capacity situation at the end of the ‘00s, the situation has completely reversed, with large amounts of C-band capacity being available. This is due to several factors.

One of the main factors contributing to the current overcapacity situation is substitution to fiber. Over the last couple of years massive amounts of fiber has landed in Africa and still more fiber capacity is expected in the coming years. The satellite industry tends to put the blind eye to this, by saying (mainly among themselves) that new fibre will only be available at certain landing points and this will just move the demand for satellite capacity inland. While there is some truth to this, one of the facts that the satellite industry is often overlooking is the fact that areas with low population densities, thus ideal areas to be served by satellite, are often areas with low purchasing power.

As a consequence of this, cellular operators are delaying rolling out their 3G networks to the rural parts of their network, because the economics of serving these remotes parts of the network are not favourable, especially if the backhaul is via satellite.

All market research reports are forecasting that the total demand for satellite capacity in Africa and the rest of the MENA region will increase in the decade to come, which is of course good news for the satellite industry. However, there are several 

factors this time around that will make the future challenging with respect to Africa.

Most satellite operators who traditionally have had C-band capacity over Africa are launching satellites with additional capacity over Africa. In additional, both new and existing regional operators like ABS, APT, Azercosmos, Measat and Yahsat, to mention a few, have or will also launch satellites with new African coverage.

As if this wasn’t enough to put on the competitive pressure, Ka-band is coming to Africa big time. Avanti and Yahsat have recently launched satellites with partial African Ka-band coverage and of course O3b has just launched their first satellites. Other operators also have Ka-band payloads in the works, like Intelsat’s Epic and Inmarsat’s Global Xpress.

These demand and supply drivers are both putting a downward pressure on prices for standard C-band and made Extended C-band a really tough sell. When C-band was in short supply some operators were able to sell their Ku-band for trunking and cellular backhaul, however many of those customers have moved back to C-band for several reasons. One reason is “rain fade” which still stigmatises non C-band capacities in Africa and probably more importantly, the economic advantage of using carrier cancellation technologies in a combined national and international C-band network.

Even though O3b’s real impact in terms of market share will probably be marginal in the coming 3-5 years, their “Megabit” pricing will provide a new lower end price benchmark. This will provide a strong “signal effect” in the market and will put pressure on traditional FSS providers. 

Above is not just a possible scenario - it is already reality. Only in the last 12 months we have seen that prices for C- and Ku-bands have started to soften significantly. This trend is likely to continue.

A big issue for the satellite operators is how to avoid that low prices in Africa will start to spill over into to the neighbouring regions of Europe and Middle East, especially C-band hemi capacities which are serving and can be accessed from all three regions through the same beam.

One way to mitigate this issue is to implement price differentiation based on customer location or based on user application.

Price differentiation based on the location of customers is relatively straightforward to implement if a satellite operator has a well functioning sales management process to, avoid arbitration and cannibalisation between various fractions of their sales force and channels.

Only few operators have successfully implemented price differentiation based on the user application of the capacity. Those who have been able to do so, have only done this for selected capacities or satellites in their fleet. Implementing price differentiation based on user application is possible, whereby the operators and their channels for instance charge a higher prices for capacities used for video compared to capacities used for trunking. To implement application specific pricing is best done in partnership between the satellite operators and their service provider distribution channels.

Even though above will mean more challenging times for satellite operators in Africa, lower prices for a developing continent like Africa is overall good news in the long run. Lower prices will not only drive up usage, it will also open up new markets – the key is how to effectively shield higher yield European markets. This is best done by the operators taking a proactive approach and partner with their go-to-market channels, including sharing both risk and upside that such approach will bring.

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Jan Grøndrup-Vivanco is a Director in Emerald Advisors, a strategy & business development advisory firm to the satellite communication industry.  He can be reached at jgv@emerald-advisors.com