Is there a ‘best’ owner of satellite internet?

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Satellite internet has been available for roughly 25 years, but uptake has been limited for a variety of reasons, including relatively high cost and poor performance compared with terrestrial options.1 But this situation may soon change thanks to a new wave of nongeosynchronous-orbit (NGSO) satellite constellations that promise to eliminate or reduce the bandwidth and latency issues associated with traditional geosynchronous-equatorial-orbit (GEO) satellite connectivity, all at reasonable cost.

In our previous article on low-Earth-orbit (LEO) constellations,2Large LEO satellite constellations: Will it be different this time?,” McKinsey, May 4, 2020. we focused on one question about the new wave of satellites: Will it be different this time? We concentrated on that topic because previous attempts to launch broadband LEO constellations had faltered, and it was not yet clear whether a new generation would fare any better. But developments in the two years since the publication of our initial article make it clear that this time is indeed different. Starlink, which operates more than 40 percent of all active satellites in Earth’s orbit,3 is in the first stage of operations and has paying customers. OneWeb has almost completed deployment of its initial constellation. Telesat and Amazon’s Project Kuiper are pressing ahead with their own plans for NGSO broadband—in fact, Amazon signed the largest set of launch contracts ever in April 2022 to deploy its satellites.4 Other companies have entered or are poised to enter the NGSO market to provide broadband, and many have announced partnerships and distribution agreements.

Why the new interest in LEO broadband? First, the satellite internet market has significant potential if companies can lower costs and control them. In fact, one recent analysis indicated that the shortfall in high-speed connections in the United States may be larger than previously estimated,5 opening even greater opportunity in a very large market. Consumers value high-speed, low-latency connectivity and now expect it in all locations, and businesses increasingly need more bandwidth to support remote work, Internet of Things (IoT) devices, and other applications. On top of these developments, governments worldwide are upping their efforts to provide low-latency satellite connectivity, especially in underserved areas. In the United States, for example, the Bipartisan Infrastructure Law calls for $65 billion in funding to help ensure that all areas have reliable high-speed internet. So the market is gaining momentum, although the exact size and potential for profits is still unknown at this time.

Challenges remain, however. The capital cost of deploying an NGSO constellation is substantial, the ground networks needed are significant, and technological issues loom large, including the complications involved with managing “megaconstellations” of unprecedented size and optimizing their communications pathways. While native NGSO companies are working to address these issues, competitors will not sit still—both terrestrial internet providers and traditional GEO satellite internet operators will also be investing in NGSO technology and competing vigorously with their own offerings. The number of aspirants could make it difficult for companies to win sizable market share.

All of this raises important questions: If NGSO satellite internet is to succeed and thrive, who is best positioned to make that happen? What combination of financial, technical, operational, and regulatory savvy does a player in this market need? Are there company archetypes that are well suited to this, making them the “best” owner of satellite internet? Answering these questions requires an understanding of the current satellite connectivity market, including the strengths and weaknesses of all competitors.

The competitive field

The prospects for NGSO constellations were in doubt as the world entered the COVID-19 era. LeoSat Enterprises, one of the earliest NGSO constellations, ceased operations in 2019, and OneWeb filed for bankruptcy in March 2020. But the players were resilient, and less than a year later the outlook was brighter; OneWeb was rescued when the UK government and Bharti Enterprises each invested $500 million.6 SpaceX, which began developing its Starlink constellation in 2015, has deployed more than 2,400 satellites as of June 2022 and now has more than 400,000 subscribers globally.7 Beyond these big names, many new players have entered the race (for more, see sidebar, “Current and planned NGSO constellations”).

The companies venturing into NGSO satellite internet come from a variety of industries. The main players include aerospace companies, traditional providers of GEO satellite communications (which plan to explore NGSO options while enhancing their core technologies), and tech giants with significant revenues, cash reserves, and diverse business portfolios (Exhibit 1). Beyond these groups, terrestrial connectivity providers (for example, telcos), government-owned satellite companies, and media and content development companies are also exploring NGSO options.

Nongeosynchronous-orbit satellite companies fall into several archetypes.

Similar goals, different strategies

Companies follow varying routes when investing in NGSO broadband connectivity from space. Likewise, they differ in terms of funding sources, deployment and development strategies, business models, and go-to-market approaches. We examined select companies to understand more about these variations, focusing on characteristics such as favored technologies, constellation size, ground and space operations, and launch plans (in the architecture dimension). Although no single recipe works for all companies, some general patterns are emerging within different archetypes for funding and other activities (Exhibit 2).

Companies in a variety of industries are taking different approaches in their satellite internet ventures.

Sources of funding

Deploying NGSO satellite internet is a capital-intensive activity; several billion dollars of investment are the table stakes before any significant revenue can be expected. Companies planning to build such capabilities typically obtain the necessary capital from a wide variety of sources, including private funding rounds, public offerings, debt financing/cash from a parent company, and government support (direct investment, subsidies to provide consumer service/access, and contracts or guarantees of future contracts for direct government use).

To some degree, companies select funding based on what sources they can leverage most easily. But they must also consider several other questions that could affect their eventual success. How deep are their chosen investor’s pockets, and will the funding suffice for expected capital needs? How patient and risk tolerant are the investors? Are additional sources of capital available to leverage, if needed? As discussed later, funding decisions will ultimately affect elements of a company’s strategy.

Development and deployment approaches

The architectural8 concepts for satellite internet vary widely, as do the ways in which different players expect to build and deploy their systems. Consider just two examples of the range of approaches:

  • SpaceX is a vertically and horizontally integrated space company that plans to operate more than 42,000 satellites in LEO and very-low-Earth orbit (VLEO) eventually. The company builds its satellites and most ground equipment in-house and launches its own rockets. For the ground segment, SpaceX currently manages most of its satellite operations and gateways, although recently announced partnerships with both Google and Microsoft9 may portend a change to that model.
  • “Traditional” satellite communications providers have thus far focused on NGSO systems that augment their existing GEO capabilities. They also outsource the work of building and deploying the space segment. Telesat, for example, plans to launch 188 LEO satellites initially. It has contracted with manufacturers for its spacecraft and mission payloads, such as Blue Origin, for launches and will likely outsource the manufacture of ground equipment as well. One satellite communications provider, Viasat, plans to increase its capacity for satellite internet by first enhancing its ViaSat-3 GEO constellation, but it has also applied for a license to operate an NGSO constellation in LEO.10 Similarly, SES is pursuing a multi-orbit approach that involves existing GEO assets and new O3b mPOWER constellations in medium-Earth orbit.

Business models—current and evolving

Satellite internet operators may succeed by providing connectivity services alone, but some companies are likely to offer a range of value-added services and solutions, such as cloud computing, entertainment or other content, or other value-added services, either on their own or in partnerships with others.

Pure connectivity. For consumers, current satellite internet providers offer packages that typically have a combination of bandwidth (speed) limits or data caps, with price largely dependent on these features. In contrast, SpaceX’s Starlink offers flat rates (basic and business) with no caps or limits (other than technical limits of the still-developing constellation). It remains to be seen whether SpaceX will continue this once it declares the system fully operational.

For enterprise customers, satellite providers have traditionally negotiated connectivity contracts on a case-by-case basis, with access and airtime varying. These contracts often involve significant additional costs, such as those related to equipping a fleet of aircraft or ships with appropriate antennas. It is uncertain how NGSO operators will price these services, but they are interested in business customers and may offer competitive contracts.11

Cellular “backhaul” connectivity—the bulk transport of local radio network data to a distant location—is another potentially significant connectivity market for NGSO constellation operators.12 Although other satellites could perform the same function, the low latency of NGSO constellations opens up possibilities for more effective LTE and 5G backhaul.

Satellite systems have significant fixed costs, independent of the geographies served, which make it imperative to capture as many users as possible. And that means the business case for selling connectivity alone will come down to a numbers game: Can the constellation operators connect enough subscribers to pay for the cost of constantly replenishing and updating the space segment, in addition to expanding and maintaining the ground segment and operating the system? To capture as many subscribers as possible, satellite providers—particularly those with NGSO constellations—will aim to provide worldwide coverage. Terrestrial providers, by contrast, base their investment on expected demand in specific areas.

Value-added services and solutions. Even with a wide reach, however, satellite providers may find it difficult to make inroads in many markets because of regulatory issues, national landing rights, and other concerns. Consequently, they may look for revenue opportunities by providing value-added services and solutions. Consider a few examples:

  • Bundled computing and connectivity. Satellite operators could package cloud-computing services with internet access to provide a one-stop shop for both enterprises and high-end consumers.
  • Entertainment and other consumer services. Free shipping is not a moneymaker for retail operators, but it helps them make sales. Similarly, satellite operators that provide connectivity at or below cost—or even for free—might find a receptive customer base for entertainment or other consumer services that their parent company provides.13 Companies currently in media, gaming, content development, and over-the-top (or OTT, which are media services delivered directly via internet) streaming services might be interested in partnering with an NGSO internet provider to make their offering more appealing. They might even consider developing or buying their own direct satellite link to consumers if they have global ambitions.
  • Logistics and other remote IoT applications. Platform connectivity for ships, trains, ports, and other locations could help companies get continuous, in-transit visibility about containers and other cargo that are equipped with low-cost radio-frequency-identification tags. Similarly, NGSO constellations could aggregate and transmit data from other small, low-power sensors. In this case, the internet providers would compete directly with companies that offer low-data-rate devices that communicate information from sensors directly to satellites. The winner would likely be determined by cost and ability to satisfy specific customer requirements.
  • Business/enterprise analytics. NGSO companies could offer advanced analytics in combination with satellite monitoring services to optimize productivity for agriculture, oil and gas, mining, and utilities companies.
  • Government and military needs. Multiple applications have an insatiable demand for bandwidth and low latency. If satellite operators combine this with advanced cloud processing and analytics, governments might buy their services for some applications to supplement their own capabilities.

By adding elements of the value chain that go beyond connectivity, operators can capture a greater share of value from the services that their connectivity enables. If connectivity does become commoditized, companies that focus on value-added services will not see revenue decline to the same extent as pure connectivity providers.

The go-to-market approach

Satellite operators differ in how they approach end users. Our research showed that many offer direct sales to users. The second major group focused on B2B sales to providers of internet connectivity and other services or on partnerships with these providers.

For consumers, satellite internet is already available via direct sales, and Starlink’s model fits this pattern. But other operators, such as Telesat and OneWeb, have stated explicitly that they will not conduct direct sales. Instead, they will form partnerships with local operators (telcos, other businesses, rural communities) to provide what is essentially a communications backbone for remote customers.14

For business users, the direct-to-customer approach requires a sales and service organization that many traditional satellite operators lack. That’s true even if they offer pure connectivity. To gain a foothold in this competitive business market, several service providers now bundle satellite bandwidth with sales, installation, and support. We expect this trend to continue.15

If satellite internet providers wish to include value-added services of any kind, including cloud computing, entertainment, and analytics, they will need additional skills and offerings. At least initially, satellite internet providers are likely to pursue partnerships, as Starlink is doing with Google and Microsoft. Over the long term, particularly once Amazon enters the market, this model could change. If companies want to propose integrated offerings, they will have to weigh the trade-off between potential synergies that come with this model and the flexibility that comes from being part of an ecosystem of partners, each of which can tackle different customer segments and use cases.

The challenges ahead

Companies hoping to succeed in the satellite internet market must secure sufficient and sustained funding, navigate a complex regulatory environment, and develop new satellite communications systems—all while making a profit. What’s more, they must procure an extensive number of satellites, launch them, operate a space network of unprecedented size, manage a tremendously complex communications network, obtain and service potentially millions of customers, and develop in-demand offerings. For many of the challenges ahead, companies don’t have an existing model to follow, let alone an example of a company that has mastered the segment. We looked closely at some of the regulatory and operational issues to understand the challenges ahead.

Companies hoping to succeed in the satellite internet market must secure sufficient and sustained funding, navigate a complex regulatory environment, and develop new satellite communications systems—all while making a profit.

Regulatory questions and the role of governments

On the regulatory side, significant issues are still in flux, including those related to operating licenses, landing rights, and spectrum deconfliction. Current regulations for satellite communications, which are largely based on a relatively small number of satellites in GEO, will almost certainly evolve. How they evolve, and which companies the emerging environment will favor, is yet to be determined.

One important issue relates to control of the electromagnetic spectrum. This is likely to remain within the purview of national authorities, which could give an advantage to satellite providers with strong existing relationships with regulators, as well as to those seen as national champions in their respective countries. As constellations proliferate, the potential for electromagnetic interference is likely to require new ways of dealing with spectrum deconfliction in nonterritorial areas, such as international waters.

Incumbents, or first movers in obtaining licenses, could have an initial advantage based on the current approach to allocating spectrum and orbits, which is based on a “first come, first served” philosophy.16 With billions of dollars of revenue at stake, and limited spectrum to share, it seems logical to expect that the existing system will come under pressure, however.

Governments might also decide to regulate services, rates, and access for satellite connectivity. Future developments are uncertain, but the potential exists for internet access to be regulated in the same manner as a utility.17 At a minimum, this implies that players wishing to succeed in the NGSO internet market might benefit from closely monitoring activities of regulatory and legislative branches of government.

The proliferation of satellites and the increased potential for collisions and debris-related problems might eventually prompt a government response. At present, governments have regulations about end-of-life deorbit,18 but these are unlikely to be sufficient if all current plans are realized, and they will certainly be inadequate if more players enter the market. Governments might eventually consider an international agreement, such as the one for the GEO belt, to regulate access to and use of some LEO orbits or altitudes, or to oversee the removal of debris, such as nonfunctioning satellites. What form this might take is uncertain, but it reinforces the need to stay engaged with government authorities.

The role of government could extend far beyond regulations in many instances. As in other space sectors, government could also be a key financial player; this could take the form of guaranteed contracts, subsidies to support internet access in remote/underserved areas, direct purchases of services, and possibly government-funded development and deployment of NGSO satellites.

The operating challenges

While many companies clearly recognize the potential of satellite internet, few have experience managing the complex issues associated with large NGSO constellations. As always, technological and operational challenges will arise with any untested system.

To get the coverage required, companies must undertake an unprecedented deployment of LEO satellites. Starlink alone, as of this writing, is now overseeing more than 40 percent of all active satellites and is on track to have more satellites than all other systems—commercial or government, combined—within two years. No company has ever managed a constellation on this scale, and it will almost certainly require capabilities that go beyond traditional telemetry, tracking, and control, all of which are now performed manually. Without better systems, companies will have difficulty monitoring the health and status of their satellites, and they might lack the situational awareness required to avoid collisions or struggle with debris removal.

Network management—the routing of signals within large and moving sets of communications nodes—represents yet another challenge. For instance, LEO operators must maximize the number of possible users in areas with high density and demand while simultaneously providing acceptable data throughput. To do so, they will need to think about strategies for optimizing capacity in underutilized parts of the network and providing the best routing for longer-haul connections. Further complexity will arise as constellations begin deploying intersatellite links.

Back on Earth, a constellation with thousands of satellites and potentially millions of users will require an extensive ground segment. In addition to constellation management, the ground segments will provide gateways for the upload and download of user-requested content. When building and operating these ground segments, operators will adopt different models. Some operators may own everything and even plan to sell excess capacity to other satellite operators, as Amazon Web Services did for cloud computing. Others may choose a major partner for at least part of the operation, as Starlink has done with Microsoft Azure and Google, and others may use a third party, including those that specialize in managing ground segments.

Is there a ‘best’ owner of NGSO satellite internet?

The “best” owner of a business demonstrates valuable linkages to other businesses and excels in other ways: distinctive skills, better governance, better insight or foresight, and strong access to talent, capital, or relationships.19Are you still the best owner of your assets?,” McKinsey Quarterly, November 1, 2009. There may also be a “natural owner” for a business based on four features:20Igniting your next growth business,” McKinsey, July 23, 2021.

  • distinct competitive advantages
  • a clear and compelling customer value proposition
  • alignment of the business with company culture and capabilities
  • the ability to expand through M&A or new product introductions

With those features in mind, we evaluated company types to see if any indicators might point to a best owner of NGSO satellite internet, looking at them in terms of the archetype categories described earlier. Our analysis found that each category would have different advantages and disadvantages throughout all phases of building and deploying satellite internet constellations. Consider a few examples:

  • Traditional aerospace companies may struggle to raise sufficient—and sufficiently patient—capital while simultaneously developing profitable markets.
  • Tech giants have the required capital but will be entering an unfamiliar market and developing new technologies.
  • Media, telco, and content companies could provide a large customer base and offer compelling entertainment content, but they might lack the capabilities required to build and operate such extensive space systems.
  • NGSO natives with new business models won’t be burdened by historical ways of operating constellations, but they would need to assemble the right backers and suppliers to gain the needed capital.
  • Traditional satellite communications providers have experience with sales and regulations but might not be able to quickly adapt their current business model.
  • A fully integrated space company has more control of its supply chain, can leverage cash flow from other parts of the business, and may obtain cost synergies. Even with these advantages, however, it may not always maximize long-term shareholder value.

In such a rapidly changing industry, companies that have an initial advantage may not retain their position, and those that face multiple challenges may actually emerge stronger over the long term. Consider the intricacies involved with building, deploying, and operating thousands of satellites. No single company has experience with this, although SpaceX is on its way. This implies that traditional aerospace and satellite communications expertise conveys limited advantages, and companies in these sectors could initially fall behind the pack. Fast followers could learn from the experience of early leaders, leverage their technical skills, and avoid first-mover mistakes.

As the satellite internet landscape evolves, companies must consider how they can combine different elements needed for success. What degree of integration makes sense, and when should companies remain specialized? Are there some combinations of functional areas that make more sense than others? While a highly integrated company has the potential to control costs and be efficient, it also must do—or even invent—everything on its own. More specialized companies that are willing and able to select “best of breed” suppliers might be able to rival their more integrated peers, but they must also coordinate multiple partners with different motivations.

Satellite internet is on the cusp of a major expansion. The pandemic has accelerated the trend toward remote work and has underscored the value of a high-speed internet connection at home.21Connected world: An evolution in connectivity beyond the 5G revolution,” McKinsey Global Institute, February 20, 2020. And those who are traveling, either for business or pleasure, increasingly expect a more “living-room-like” experience wherever they connect to the internet.

There is also momentum in the public sector. Governments are increasingly interested in low-latency satellite connectivity, whether as part of a desire to improve citizens’ infrastructure, as a matter of national security and technological strength, or for their own benefit. But is there a best owner of satellite internet that can provide the desired services? At this point, no. Different players have various advantages, but none are decisive. The winner—or winners—will be the companies that best navigate the complexities of this rapidly evolving market, control costs, and position themselves to capture value. At the moment, the field is open, and opportunities exist for all the players involved, as well as for those not yet in the game.

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