How can mobile operators capture the value of satellite direct-to-device services?

Christopher Baugh

Hello, and welcome to the Analysys Mason podcast. My name is Christopher Baugh, Partner at Analysys Mason and head of our Space research practice. Today, I'm joined by one of my colleagues, Research Director, Lluc Palerm. Lluc, welcome.

Lluc Palerm

Hi, everyone.

Technology maturity and current deployments

Christopher Baugh

Thanks for joining. 

So, the title of the podcast today is a very important one, one that a lot of our clients are keenly interested in, which is in the form of a question. How can mobile operators capture the value of satellite direct-to-device services, so D2D, or we use the acronym NTN, non-terrestrial network services. A major topic for both space and telecom companies for revenue generation and many other benefits-type applications or services. This is a big topic of our research today. 

So, we have Lluc, he is the head of the Satellite–Telecoms Integration practice here at Analysys Mason, where this application squarely sits. 

I want to start broadly at the top. So, in the general status of technology, we hear a lot of things happening in it. Where on the maturity cycle or where is this application/technology today?

Lluc Palerm

Right. So, it's a very exciting moment for the satellite direct-to-device industry. We are starting to see actual deployments. Starlink with the mobile data service in the US, Skylo with Verizon, and Deutsche Telekom, AST and Link doing testing. Even the regulators are now putting a lot of attention into this particular segment. Ofcom launched the public consultation for the regulation. FTC is also doing a lot of work. So, a lot of pieces are moving here. The market is becoming real with actual services. I look forward to seeing more progress and how these technologies evolve and more capabilities are added to the market.

Christopher Baugh

It's interesting because there are so many developments happening daily. I talk about whether it's the hype cycle or the maturity cycle. How would you characterise direct-to-device, maybe even a scale of 1 to 10, to full maturity? Where do you see this application today? Globally and regionally notwithstanding.

Lluc Palerm

No, it's not at full maturity. It's still in the early stages. We are going to see what we define as four stages of this technology. We are maybe at the initial stages of the second step. So, we see emergency services, messaging, which is where we are getting started now, and then eventually voice and data, which is when the market will scale and become a multi-billion opportunity.

Subscribers' willingness to pay

Christopher Baugh

OK. So, it's still very early days. That makes perfect sense. One of the key questions that we receive all the time from clients is, will subscribers pay for the service? Is this something that a mobile operator can say, OK, I can grab more revenue from a subscriber? Is that the case?

Lluc Palerm

Right, and that's the exact question everyone wants to answer now. We ran a survey among 18 000 subscribers in 18 countries. And the answer is yes. We detected a lot of interest in these direct-to-device services. 30% of the subscribers are willing to pay for these services. And the interest in these services is even higher. 72% of those subscribers expressed interest in direct-to-device services.

Christopher Baugh

So, interest is there. The demand seemingly is there, from an, I will pay a few extra euros, dollars, pounds, whatever it might be for service. So, it seems like the correlation is good between demand and the potential to pay for service. Does that vary amongst user types, populations and regions, or is it pretty consistent across the board?

Lluc Palerm

We see interest across the board, but obviously, there are pockets of the population that show higher interest. So, males in the younger age groups with high income and high interest in tech, use the highest advanced devices with 5G capabilities and live in urban areas. This is the typical subscriber that shows higher interest in direct-to-device services. Depending on the region, there are also differences. I would speak particularly on the Middle East, which is where we see the highest interest in these direct-to-device services and the highest willingness to pay. Maybe because the coverage is concentrated in densely urban areas. There are some challenges covering the rest of the geographies. So, these are the areas where the survey detected the highest level of interest.

Revenue opportunities for mobile operators

Christopher Baugh

OK, so lots of interest, and lots of potential for revenue generation. Now, from a macro, what is the summation of the revenue opportunity for mobile network operators for direct-to-device? What does the data say from our perspective when we run these calculations?

Lluc Palerm

As I mentioned before, the four stages of technology. What we see is that in the first two steps, emergency alerts and messaging, there is a market opportunity there, but the opportunity is not massive. Our forecasts expect close to USD200 million globally in 2025. So, it's a good opportunity, but it's not massive. We see this scaling to a multi-billion-dollar opportunity when voice and data services become available. We still expect a few years until the technologies are ready. 

Now, how can mobile operators monetise or capture value on these D2D services in the short term? That's where the conclusions of our survey are super important. We detected that 82% of the subscribers continuing churning in the next 6 months were looking at direct-to-device as one of the key decision factors to either stay with their mobile operator or move to their new mobile operator. So, the key now in the short term is to capture value through D2D services by enhancing retention and capturing subscribers from competitors.

Regulatory challenges and developments

Christopher Baugh

Interesting so there is a lot of positive correlation between interest, demand and revenue generation. 

A question on the regulation itself. We've seen for example Ofcom make positive moves in the UK by authorising direct-to-device, is that part of this picture? Regulators, national entities and governments, are they lagging in this, or is this where we expect some challenges with the use of spectrum, authorising the service, etc.? Where is that in terms of a critical factor in this growth projection?

Lluc Palerm

There are essentially two strategies for direct-to-device. The satellite constellations using the terrestrial spectrum from space, need special regulatory approval, so this might take some time to go through. You have the US being an innovator here and allowing these satellite operators to launch services based on this utilisation of terrestrial spectrum from space. You mentioned Ofcom now starting to do something very similar. There are other regulators in Australia looking into that as well. But the challenge here is getting the approval to use terrestrial spectrum from space. 

The other strategy from a spectrum point of view is using the traditional MSS satellite bands. We have players like Iridium, Globalstar, Viasat/Inmarsat and Ligado, those traditional satellite players using the S and L-band spectrum, already have their regulatory approvals to operate in different countries. The challenge for them is to convince the chipset manufacturer and the smartphone manufacturers to incorporate the spectrum and the waveforms to communicate to this network.

Christopher Baugh

OK, this is the part I think is interesting because we've seen some of the current players in the market make very bold claims about service availability and quality and some testing situations being taken as real-world, everyday use cases. It seems that this is not one we should minimise in terms of impact and challenge for the service to scale. Is that correct?

Technology risks and standards

Lluc Palerm

Regulations are going to be very important to accelerate the development of this market, and access to spectrum for sure. So, spectrum is one of the key bottlenecks here. There is a big technology risk associated with this. Closing the lean budget with space is quite challenging, you need big antennas and very sophisticated networks on the back end of the infrastructure to deal with the doppler, the latency, jitter and so on. So, there are a lot of technology risks here that need to be solved. And then, we have the standards as well, which will play a key role in advancing this technology. Release 17 was the first standard to incorporate satellite, and the focus there was on IoT, and it's now being used for messaging as well. We will see release 18, release 19 and so on to get more sophisticated and allow more advanced services like voice and data.

Christopher Baugh

OK. So, we're early in the characterisation of the market in this cycle. 

I want to switch back to the deployment potential and revenue opportunity for mobile network operators. They're all interested in some way, shape, or form. But I think you said that the opportunity is limited because it's just basically messaging. Emergency and basic SMS essentially is what the service will be in the short term. If that's the case, how can mobile network operators capture the value if it's such a limited revenue opportunity for them?

Lluc Palerm

Right. So, the direct revenue opportunity might be limited, but the value they can extract from integrating satellite direct-to-device services is massive. When you think about retention, and you build the case of, I have 100 million subscribers at a USD50 ARPU, I have a monthly churn rate of 1%. If you improve that retention just by a few percentage points and you retain more subscribers, that can easily have hundreds of millions of dollars in value over a year. So, when you think about that, that explains the strategy that T-Mobile is following with Starlink there. It's giving the service for free for the high-end subscribers and charging quite a lot for the rest of the subscribers and even offering that to the competitors. When you think about it, it's not about direct generation of revenue it's about attracting subscribers to their high-end plans and attracting subscribers from competitors.

Retention strategies for mobile operators

Christopher Baugh

Interesting. So, that retention piece and churn in any subscription-based business is your primary goal to minimise that and retain clients. That's something the industry has typically looked at maybe the other way around, which is, is this a new service I can charge more for? But again, your statement as a service is not at a level that, theoretically, is more about retention than top-line revenue per subscriber. 

You mentioned Starlink and T-Mobile, I'm fascinated by the two of them together; we saw it in the Super Bowl in the US just a month or two ago. They had an advertisement for all of this. So, it's becoming mainstream. Have we calculated the value piece for retention in that scenario, and what it might look like?

Lluc Palerm

Yes, absolutely. 

We can do a back-of-the-envelope kind of calculation here. So, imagine you have in the range of 120 million subscribers, an ARPU of USD50, a monthly churn rate of 1%, and we take what our survey says, that 82% of subscribers are looking to churn in the next six months will see D2D as a key decision factor. So, if that 1% of people that are churning in the next 6 months, 82% of them stay, that translates into a USD590 million per year added value just by adding D2D services.

Prospects and conclusion

Christopher Baugh

So backed by real survey data, and I know the survey that we did was pretty extensive, so this is not just phoning up 100 friends. This was using those data points and, back-of-the-envelope calculations, even if it's within the margins of that number, that's a significant number for one company. And you could scale this across many markets. So, from a value perspective, it seems we may just be scratching the surface. Would you agree? It's remarkable when you match the data all together.

Lluc Palerm

Yes, absolutely. And that's just the first step. Again, this is just looking into retention for messaging. Then when we get to poise and data, you will add the direct revenue opportunity to this for sure.

Christopher Baugh

Unbelievable. Yes, so early days, but a lot of promise, a lot of expectation and enthusiasm from users and the mobile operators themselves. Luke, it's been a pleasure. Thank you for your contributions. 

That'll end our podcast today. For our audience, there is more content on this topic of direct-to-device on the Analysys Mason website and Satellite Telecom's integration programme. 

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