- Google announced the Skybox acquisition even as leaks of a massive satellite network emerge.
- Satellites come with unique technological advantages and are suitable for emerging and developing markets.
- Assuming Google successfully deploys satellites, an incremental 1 billion in internet users may add $66 billion to Google’s topline sales.
As you can tell, Google (NASDAQ:GOOG) seems to be jumping onto the satellite bandwagon. I kind of thought this was weird, but it starts to make sense when you review the broader economic implications paired with recent technological developments.
Also, many in the world, still don’t have access to the internet. So, by increasing the number of web based users, Google can continue to grow organically.
Google's Skybox could drive bottom line
Google has made two major acquisitions in the first half of 2014, Skybox at $500 million, and Titan Aerospace for an undisclosed amount. Furthermore, Google plans to launch satellites to offer global scale broadband.
As you can tell, internet deals had an average valuation of $6.435 billion in Q1 2014. Google’s recent acquisitions seem reasonable when compared to industry averages. However, the potential accretion from these acquisitions is what truly excites me.
As reported by the Wall Street Journal:
By 2016 or so, Google's Skybox will be able to take full images of the Earth twice a day, at a resolution that until last week was illegal to sell commercially—all with just a half-dozen satellites. By the time its entire fleet of 24 satellites has launched in 2018, Skybox will be imaging the entire Earth at a resolution sufficient to capture, for example, real-time video of cars driving down the highway. And it will be doing it three times a day.
Image data has a lot of potential, as real-time data analytics becomes a more feasible reality. After all population statistics, density of high net worth individuals, size of military, number of cars, export tracking, and etc. can be quantified using image data. Furthermore, the image data is expected to be pinpoint accurate, therefore, the variability of gathered data through population sampling will decline.
Furthermore, big data analytics is contingent upon the quality of data. After all, a team of mathematicians needs useful data inputs. You can’t come up with reasonable mathematical models, without having reliable sets of data to base them on. Therefore, Google’s skybox imaging can earn licensing revenue, or fees from the data that can be generated on non-individual data. The aggregated data alone could be useful in many industries. Furthermore, the public sector could save tons of money by not having to send out an army of people to create the census.
Therefore, Google’s investment into satellite technology has practical business implication for the company not including other uses like self-driving cars, and broader access to broadband.
Global broadband expansion to help Google
The Titan Aerospace acquisition will be used to lower the cost of building out satellite infrastructure. As Google’s low-end estimate of a couple billion may be too low. As per a report by Singularity Hub:
Roger Rusch, who runs satellite consulting firm TelAstra, told the WSJ that Google’s satellites could cost up to 20 times more than their low-end estimate—more like $20 billion than $1 billion. “This is exactly the kind of pipe dream we have seen before.” Rusch says the landscape is littered with failed satellite projects like the one being proposed by Google.
However, upon doing further quantification, I believe that it’s possible that the economics of broadband can work even if capital expenditure for satellites reaches $20 billion. Admittedly, Google’s core business of advertising would be severely diluted with a lower margin service, but assuming the business can scale to add one or two billion users to the internet, the company can easily reach break-even, and earn profit at some point.
Furthermore, satellite broadband comes with the advantage of having massive range.
Source: KVH Industries
The above picture is DirecTV’s coverage area of the United States (it’s at 99.99%). The ability to deploy massive networks across the world with that kind of coverage range will lower the cost of broadband access.
Assuming Google can offer 100% coverage, internet penetration may accelerate. Currently, global internet penetration is at 40.4%. Over the past two years, internet user growth has declined. The decline in user growth comes from emerging markets where the cost of internet is too prohibitive, for people to subscribe. This is where Google comes into play.
Based on rough estimates, there are 3 billion internet users. Currently the world population is 7.25 billion; therefore Google’s total addressable market expands by 4.25 billion people. Currently, the lowest cost broadband in the world is in Sri Lanka at $5.50 per month . The lowest price point is the assumed price at which a market can be established despite extreme income disparity.
At $5.50 per month, Google can convert a billion users. Perhaps it can convert more, but we would have to assume the demand curve shifting inward in even poorer countries. However, by using these rough numbers we can come up with an estimate on potential revenue. Not to mention, Google’s broadband is expected to span the whole world, so Google can technically charge more in wealthier countries, and charge significantly less in poorer countries.
I believe, that if Google can market and sell broadband to a billion users at $66 per year, the company can generate $66 billion. That’s a pretty huge figure, but it’s certainly attainable given the flexibility that Google has both in terms of technology, and scale of build-out.
Furthermore, the FCC states in a white paper:
As the chart above depicts, there is some variation by technology in actual versus advertised speed during peak usage periods, with satellite returning the highest performance ratio. In the past, satellite broadband faced certain technological challenges not experienced by wireline technologies. Previous generations of satellites had limited bandwidth, which restricted the speeds available to the consumer. In addition, due to the physical characteristics of satellite technology, latencies are significantly larger than for terrestrial technologies. Starting in 2011, the consumer broadband satellite industry began launching a new generation of satellites which have greatly improved overall performance. As relevant here, the high capacity of ViaSat’s ViaSat-1 satellite, which at the time of launch surpassed the total capacity of all current Ku-, Ka-, and C-band satellites over North America,9 together with other technological improvements discussed below, have decreased latency and improved the quality of satellite broadband service available to subscribers.
Satellite technologies offer the best broadband per given dollar of capital expenditure. Because of this fact, a world in which everyone has internet is possible as the pricing can be brought to a level of economic equilibrium in every market.
Google’s staking its future on satellite as it offers the most potential for monetization. Spreading the internet to the remaining 4.25 billion who don’t have internet has now become feasible. Speeds above 7.5 Mbps are sufficient for HD video, and because satellite broadband can provide that level of speed at massive scale, it’s the most economical solution for the developing and emerging world.
Investors should expect serious upside from Google’s satellite program. It looks expensive on the surface, but given the economics of the business model, I have high conviction that it can have meaningful impact on revenues and net income. This will help to diversify Google’s business, and even allows Google’s core-search business to expand due to an increase in the size of the market.
Furthermore, I expect Google’s other satellite property i.e., Skybox to add meaningful societal benefit, and add wings to the growing data analytics industry. Assuming, Google is able to lower cost on a worldwide scale, global economic productivity may improve at an unprecedented rate.
Google has $58.7 billion in short-term investments and cash equivalents. So even if costs escalate to $20 billion, the company has ample financial resources to deploy a global internet network.
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