A revolutionary development for the mobile wireless industry would allow more than 5 billion phones to connect globally—even when out of terrestrial relay coverage.
It is estimated that 90 per cent of the planet’s territory isn’t reached by wireless networks. About 5.2 billion people move in and out of coverage as terrestrial towers frequently fail to reach distant areas. There are 3.3 billion people without wireless data coverage and another 700 million with no cellular coverage whatsoever.
In a recent report, Mexico City-based Scotiabank analysts Andres Coello and Emiliano Flores note that the cost of building towers, the installation of active equipment and the technical challenge of connecting sites to fibre frequently make it expensive for carriers to expand coverage.
But thanks to companies like SpaceX (formally Space Exploration Technologies Corp.), the cost of launching satellites has fallen dramatically. Back in 2019, we explored the use of satellite backhaul in rural areas.
Texas-based AST SpaceMobile is taking connectivity one step further: through large, powerful and highly sensitive satellites, AST intends to bring data directly to unmodified standard mobile phones.
Vodafone Group PLC (NASDAQ—VOD), American Tower Corp. (NYSE—AMT) and Rakuten Inc. (TYO—4755) on the Tokyo Stock Exchange are among AST’s strategic investors.
Vodafone has a 50-50 revenue share agreement covering its markets. American Tower will provide facilities for AST’s terrestrial gateways. Millicom International Cellular SA (NASDAQ—TIGO), Liberty Latin America Ltd. (NASDAQ—LILA), Telefónica SA (NYSE—TEF), AT&T Inc. (NYSE—T) and Telecom Argentina SA (NYSE—TEO), among others, already have a Memorandum of Understanding with AST.
Seamless coverage while roaming
The business model is simple: users get an SMS (a text messaging service) when they run out of coverage asking if they would like to connect to SpaceMobile. If they respond “yes”, their mobile carrier makes a charge and users seamlessly connect to the satellite network.
Under a wholesale model, AST shares revenues with the carrier. AST estimates carriers spend 80 per cent of their capital providing service to 20 per cent of their subscriber base, so a technology like this could help carriers save on capital budgets. Although ARPUs (average revenue per user) are expected to be as low as US$1 per month in emerging markets and US$2.70 a month on a global basis, SpaceMobile expects to deliver a 90-per-cent-plus EBITDA (earnings before interest, taxes, depreciation and amortization) margin by 2024 as wireless companies take care of marketing, subscriber acquisition, billing and backhaul costs.
Space-Mobile’s technology is based on high-powered, large phased-array satellites that are sensitive enough to collect the weak signal of smartphones and powerful enough to return a signal that can be picked up by an unmodified, ordinary cellphone.
Global coverage expected by 2023-24
AST’s system will consist of satellites that use patented high-throughput modular satellite technology called Microns. These Micron modules use a unique modular design and mechanically deploy in space to create the solar panel on one side and the beam-forming antenna on the other side. The first-phase deployment of 20 satellites is expected in the second half of 2022 with coverage to 49 equatorial countries in 2023. AST plans to achieve full global mobile coverage with 110 satellites by the end of 2023 or early in 2024 with a total of 168 satellites by the end of 2024. Each satellite will provide coverage to an area with a 2,800-kilometre diameter, reducing the number of satellites required to achieve global coverage compared to other LEO (low earth orbit) systems and capable of supporting 5G.
The equatorial project should cost US$510 million and the global constellation a further US$1.2 billion. AST predicts it will generate revenues and positive EBITDA in about 2023 and become free cash flow positive by 2024. According to SEC filings last December, after a business combination with New Providence Acquisition Corp., AST intends to become publicly listed on NASDAQ. Also according to SEC filings, AST is raising capital at an estimated multiple of 1.4 times 2024 estimated EV/EBITDA (enterprise value divided by EBITDA).
Critical connectivity beyond big cities
Expanding connectivity beyond metropolitan areas is becoming one of the most critical issues facing the global telecom industry. According to AST, over 60 per cent of the planet’s population moves in and out of wireless coverage as it lacks reliable access to wireless infrastructure; about one in 10 people completely lack access to any means of connectivity.
Along with the lack of geographic coverage, this is inhibiting major gains in productivity that, in our view, end up resulting in economic inequality and failure to implement environmentally-friendly digital solutions in multiple areas, from education to finance and agriculture. This is a particularly pressing issue in Latin America as we slowly emerge from the COVID-19 pandemic.
The cost of bringing connectivity to unserved areas is affected by four key factors: the cost of building new towers or sites; the cost of installing active infrastructure (antennas); the cost of bringing a backhaul alternative to the tower (fibre, microwaves or satellite); and spectrum availability and licensing costs.
In October 2019, we published an extensive report after attending a conference by the Mexican regulator IFT [Federal Telecommunications Institute] on the growing importance of satellite connectivity. One of the key highlights of the conference was the viability of satellite as a backhaul technology for connecting towers in rural areas.
Satellite launch costs declining
In our report we mentioned the importance of the declining cost of launching satellites thanks to efforts by companies like SpaceX. According to AST, that cost has plunged 90 per cent since 2008.
Satellite backhaul in rural towers is increasingly becoming a feasible alternative. In our 2019 report, we commented on OneWeb’s constellation of satellites. But the COVID-19 pandemic affected OneWeb’s plans and the company filed for bankruptcy; recently, the UK government and India’s Bharti Enterprises injected US$1 billion in equity, which allowed OneWeb to emerge from financial distress. OneWeb currently has 74 satellites in orbit.
The problem with satellite as a backhaul or Wi-Fi alternative is the cost of the terrestrial hardware and the limited market opportunity. Satellite phones have existed for years, but their expensive cost and brick-like shape make them unattractive for the mass segment. Projects like OneWeb reach the mass market indirectly through the use of complex and expensive hardware like antennas mounted on towers, planes, ships, vehicles or buildings. We still believe that, for rural areas, the possibility of using such technology as backhaul in wireless towers is one of the alternatives to improve connectivity. However, as mentioned above, not only do we have to consider the cost of the satellite hardware, but also the tower and active telecom infrastructure to broadcast the data.
This is why we find SpaceMobile’s technology intriguing. Supported by more than 750 patent claims, the company believes that its satellites will be able to talk directly to “unmodified” mobile phones without any intermediate terrestrial infrastructure like towers or antennas.
This would be a revolution for the mobile wireless industry as it would: allow more than 5 billion phones globally to connect to data when out of terrestrial coverage, tapping a market currently worth over US$1 trillion; help wireless operators to continue monetizing customers in areas not currently under service, boosting revenues and reducing churn; help carriers save billions in terrestrial capital expenditures; and maximize the value of spectrum holdings in licensed areas.
Andres Coello and Emiliano Flores are equity research analysts for Scotiabank Inverlat, the Bank of Nova Scotia’s Mexican arm. They are based in Mexico City.
This is an edited version of an article that was originally published for subscribers in the February 5, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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