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Credit Suisse released a new report “LEO Disruption: A Starlink in the Making,” which takes a deep dive into the prospects of Low-Earth Orbit (LEO) satellite operators and compares the prospects with stocks Credit Suisse traditionally covers, such as Eutelsat and SES.

Ben Lyons, lead analyst on the report, said Credit Suisse forecasts a total addressable market of $27 billion annually for LEO constellations. He added in the research note, “We expect that actual revenues will be $9.3 billion due to competition from terrestrial broadband in the consumer space and GEO [Geostationary] satellites in the other key verticals. Combining the more than $30 billion currently earmarked for first generation LEO constellations, we estimate the internal rate of return (IRR) to be about 8 percent on the total capital deployed and therefore market-leading LEO operators have an opportunity to make outsized returns.”

Lyons said Credit Suisse expects GEO to retain a monopoly in direct-to-home (DTH) video due to the economics of the business and the fact that video distribution is not latency sensitive. Likewise, Credit Suisse believes Medium-Earth Orbit (MEO) will remain the key technology for large maritime vessels as the combination of higher throughput and lower latency are best suited for cruises and other large vessels that provide entertainment, and have to service a large number of devices.

Lyons added, “We expect NGSO [Non-Geostationary Orbit] satellites to take a large share of the sector’s revenue growth as the market expands into more latency sensitive end markets. We also expect some cannibalization of revenues that have been serviced historically via traditional operators.”

The report detailed the main issue facing satellite broadband providers — that peak data traffic tends to increase 20% to 30% a year. In order to maintain the same quality of service for customers, fully loaded operators could have to reduce year-over-year the number of customers the constellation can service. He adds, “This has tended to be handled with data limits and throttling download speeds by satellite operators after a certain data limit is reached. In our view, this is one of the main reasons satellite broadband has struggled to gain share despite offering higher maximum speeds than alternatives rurally. Some relatively poor rural fixed line coverage has resulted in some markets having a high degree of FWA [fixed wireless access] penetration (e.g. Austria, Finland).”

Lyons said if satellite broadband, particularly LEO, is being used to provide fiber-like broadband alongside FWA and possibly fixed line alternatives, it must match that performance or remain a service of last resort. “Although some things can be done about constellation capacity, satellite operators are powerless to control user data traffic growth, which spiked during the pandemic,” he wrote. “This leads us to conclude that, at today’s average data traffic consumption, LEO constellations could supply a considerable amount of broadband customers, but this is likely to reduce significantly by the time these constellations are fully operational and will be reserved only for premises in sparsely populated areas.”

Credit Suisse expects business-to-consumer broadband to be the largest LEO revenue contributor, with $2.7 billion of revenues in the United States and $2 billion in Europe, which equates to around 5.5 million subscribers across both geographies. “We expect the total addressable market to be split between GEO and LEO satellite services. We do not expect LEO to service the entire 15 million premises we identified earlier in the report,” Lyons said.

Within mobility, Credit Suisse forecasts LEO to account for half of all growth in in-flight connectivity (IFC) and maritime VSAT over the next decade which is a total revenue contribution of about $1.8 billion annually.

“We also expect LEO to offer lower latency products than GEO in the MNO [mobile network operator] services segment and assume LEO takes 50% of that market which accounts for $1.6 billion annually,” Lyons said. “We still expect governments will retain many of the services they currently use from existing infrastructures but will supplement these networks with LEO alternatives. We forecast government revenues to be $1.2 billion by 2030 [estimated] on LEO networks.”

At the end of the decade, Credit Suisse expects growth in business-to-consumer broadband to slow considerably as the networks become fully penetrated and coverage with next-generation network reaches a maximum. Credit Suisse also expects that IFC and maritime VSAT will be closer to full penetration.

One of the big questions surrounding LEO constellations is how many the market has room for. The report takes a shot at answering this question. “We believe there is economically only room for about three large-scale LEO constellations, which typically cost around $10 billion to deploy. If more LEO constellations continue to be deployed we could see destruction of value within the sector which could have a significant impact for the stocks we cover. Market-leading LEO constellations that achieve above-average market share have an opportunity to make outsized returns, certainly above cost of capital,” Lyons wrote.