In April, Amazon (AMZN) became the latest company to reach for the stars with the announcement of Project Kuiper, a planned constellation of 3,236 Low-Earth Orbit (“LEO”) satellites. Once operational, the constellation aims to deliver broadband internet connectivity to customers around the globe:
“Project Kuiper is a new initiative to launch a constellation of Low Earth Orbit satellites that will provide low-latency, high-speed broadband connectivity to unserved and underserved communities around the world. This is a long-term project that envisions serving tens of millions of people who lack basic access to broadband internet. We look forward to partnering on this initiative with companies that share this common vision.”
The economics of the satellite internet business have proven intensely challenging in past attempts. Whether Amazon will succeed remains to be seen, but it is currently the only player with the necessary capital readily available to bankroll its objectives without fear of financial ruin.
Combined with its unique set of non-financial assets, the company appears well-placed to be a contender in the new LEO space race.
The Resource Challenge
Amazon is joining the party comparatively late in the game. Startup OneWeb has made some inroads with early launches of its own LEO constellation, and has even managed to find buyers for its bandwidth. Elon Musk’s SpaceX (SPACE) has also been moving forward with its long-anticipated Starlink constellation, which is set to include as many as 11,000 satellites once completed.
Building and launching a LEO satellite constellation is an extremely capital-intensive undertaking. Starlink, for example, is projected to cost upward of $10 billion all in. It is far from clear how SpaceX will manage to pay for it all. Its core space launch business is barely profitable, while its manned spaceflight program has little prospect for economic return. With a $30 billion valuation, it can continue to sell equity, but that can only get a private company so far. While neither as ambitious nor as expensive as Starlink, OneWeb’s LEO constellation will also cost at least a few billion before it is complete.
The Market Challenge
Development and launch costs are only the first challenges facing LEO satellite operators. Once the constellation is live, the question turns to making money off of them. History shows this to be anything but a sure thing. Even Musk, usually known for his buoyant techno-utopian optimism, has shown a sober understanding of the daunting task. On the eve of Starlink’s first significant satellite launch last month, he reflected on the fates of other companies that have made the attempt:
“I believe none have successfully gone into operation without going bankrupt.”
Musk is not wrong. Iridium (IRDM) was forced into bankruptcy after its 66-satellite constellation failed to find sufficient user demand to recoup the $5 billion it cost to deploy. Teledesic shared a similar fate, though, unlike Iridium, it did not get a chance at a profitable second life.
The new generation of LEO satellite constellations faces the same fundamental economic challenge that afflicted Iridium and Teledesic: how to find a viable market for the bandwidth on offer. After failing to win over the consumer internet segment, Iridium found a workaround, refocusing on a smaller, but stable and lucrative, government market.
SpaceX, OneWeb, and now Amazon have talked at length about areas with poor connectivity as ready markets for their satellite internet offerings. Yet, these markets are actually relatively few and far between, and many such isolated locales can hardly afford to pay for satellite internet. Meanwhile, most consumers already have access to stable, inexpensive internet and have little use for the ultra-low latency promised by LEO satellite service.
The Amazon Advantage
Amazon has two key advantages compared to its satellite internet rivals. First, it has radically greater resources. The huge cost requirements of all LEO satellite programs mean that, despite having joined the party comparatively late in the game, Amazon has a distinct advantage over its smaller rivals in the form of financial heft. With $37 billion in cash on hand, the company is not wanting for financial firepower. It certainly has everything it needs to fund its own vision for satellite internet.
While Amazon is hardly going to go bust if Project Kuiper falls apart, Jeff Bezos is no fan of losing money. So, how could Amazon succeed where others have failed in terms of making consumer-focused LEO satellite internet financially viable? Twitter’s ValueTrap recently offered an intriguing perspective:
"Since there are complementary offerings (video, music, etc) at Amazon, they can offer lower pricing than SpaceX and still meet return hurdles... This will immediately give Amazon global distribution for streaming video, bypassing traditional ISPs/telcos... Finally, of course there is no question AMZN is hyper-competent in complex supply chain management and competitive strategy selection.”
In essence, Amazon can leverage its already significant online assets to deliver a differentiated offering with a value proposition that could actually move the needle among ordinary consumers. This is a highly compelling argument, and we suspect it is a major piece of the company’s internal financial model for Project Kuiper.
Investor’s Eye View
Ultimately, it is impossible to judge whether any of the new batch of LEO satellite programs will amount to anything significant. They could end up as costly millstones around the necks of their developers, forcing them into the same ignominious fate suffered by the likes of Iridium and Teledesic in years past.
That said, Amazon appears best placed to win the LEO space race. With cash to burn, it can eat the writedown if Project Kuiper is a bust. At the same time, its vast network of loyal customers and wide array of ancillary business services make it the most likely player to be able to squeeze economic value out of its satellite constellation.
Project Kuiper may not bring Amazon vast riches, but it has a decent chance of enhancing the company’s other competencies as it continues on its seemingly inexorable path of commercial domination.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.