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Summary

  • Google Inc. plans to spend $1 billion on the launch of satellites to provide internet access to under-served regions of the globe.
  • Over the past few quarters, Google’s revenues have grown at a slower pace. Much of it can be attributed to the pricing pressure on the cost of ads and a slower growth in search queries across the internet.
  • If Google were to succeed and the number of internet users were to increase to 4.5 billion in the next five years, the total addressable market double in size, and the sale of PCs and smart connected devices across underserved regions would also increase.

Google Inc.(NASDAQ:GOOG) (NASDAQ:GOOGL) plans to spend $1 billion on the launch of satellites to provide internet access to under-served regions of the globe. While the details of the project are still under wraps, people familiar with the project state that the company plans to launch 180 low earth orbit high capacity satellites in the initial stage. The project is said to be led by Greg Wyler, the founder of satellite startup O3b Networks, a company that received some funding from Google in 2010. Persons familiar with the hiring initiative for the project also said that Google has been hiring engineers from satellite company Space Systems/Loral LLC. We expect that the satellites launched will form part of the O3b’s MEO satellite network. In this article, we will explore the reasons behind this ambitious project and how Google will gain from it.

Growth In Internet Penetration In Focus

Currently, over 2.7 billion people, or around 40% of the world population, have access to internet. Internet penetration has increased in regions with easy access to infrastructure, while the remaining regions have lingered on as infrastructure development was slow to take off in these inhospitable terrains. As a result, the growth rate of Internet penetration declined from 50% in 2000 to 8% in 2013. If this trend were to continue, internet user base will grow at a slower rate in 2014. However, to facilitate the adoption of internet, and to ensure easy connectivity across the globe, some of the companies are innovating and adopting new technologies. These companies claim that they can deliver higher capacity, lower latency and lower cost broadband access to people across the world.

One of the companies that is looking to expand internet penetration is O3B Networks. It plans to launch a number of standard Geosynchronous (GEO) medium earth orbit (MEO) satellites that will help in transmitting internet signals to inaccessible regions of the world. The company hopes to increase internet penetration to 70% of world population by using its constellation of satellites.

Google Looks To Expand its Total Addressable Market

Google’s business is heavily dependent on the number of users on the internet that use its search engines to query the internet. The company leverages its popularity across PCs (65% market share) and mobile devices (over 90% market share) to sell ads slots to advertisers. As a result, its PC search ads division makes up 35% of its estimated value, while its mobile search ads division makes up 29% of the value.

Over the past few quarters, Google’s revenues have grown at a slower pace. Much of it can be attributed to the pricing pressure on the cost of ads and a slower growth in search queries across the internet. Furthermore, the advent of Microsoft’s (NASDAQ:MSFT) search engine Bing has also dented Google’s market share in search engine industry. However, to ensure that the revenue growth rate for the company does not slow down significantly, Google has undertaken ambitious plan to launch 180 satellites to provide internet access to regions that are currently underserved. This project will be an extension to Google’s Project Loon, which uses high-altitude balloons to carry internet signal across the hostile terrain of New Zealand with the intention of establishing an uninterrupted internet signal around the country.

While the company stated that the launch of such satellites will cost around $1 billion, experts in the industry estimate that the cost might exceed $3 billion as the network’s final design and the increase in the number of satellites at a later stage still needs to be factored in. However, according to Neil Mackay, CEO of Mile Marker 101, an advisory firm, the costs to build and launch satellites have dropped sharply, and the cost of launching 180 satellites could be as low as $600 million.

If Google were to succeed with this project, and the number of internet users were to increase to 4.5 billion in the next five years, not only would the total addressable market double in size, but the sale of PCs and smart connected devices across underserved regions would also increase. As a result, we expect growth in the number of queries originating from both PCs and mobiles. Currently, we project internet searches per PC to grow to 91 per month, and internet searches per mobile to increase to 94 per month. However, if these figures were to grow to 120 per month by 2020, our stock price estimate can increase by 20%.

However, Google will have to overcome regulatory hurdles, as well as design and financial complications before it can deploy its satellites and drones. We currently have a $544 price estimate for Google, which is inline with the current market price.

Disclosure: No positions.

Source: Google Looks To Expand Its Addressable Market Size With Satellite Launch