What if the answer to next-generation communication is not 5G but space?

Elon Musk apparently noticed that the margins of the companies for which Space X was launching satellites were better than Space X's own margins. So why not use those rockets to create their own communication business?

On Monday this week, Space X delivered its fifth batch of 60 satellites into space as part of its plan to build a new space-based communication network called Starlink. It may have as many as 42,000 satellites. Of course, compared to other satellite constellations, this is a huge number. GPS has 24 and a few spares. Iridium has 66 and some spares (the original plan was for 77, hence the name, since the atomic number of Iridium is 77). However, compared to terrestrial base stations, this is a small number. Base stations ship in the millions per year. The estimate is that there are currently 7 million base stations. And that's before worrying about mmWave, where we might need a small base station on every street light, and there are over 300 million of those.

So first, a couple of personal anecdotes.

About 25 years ago, when I was working in strategy and M&A at VLSI Technology, I went on a course about mobile in Oxford run by the wonderfully named Herschel Shosteck. I was on the business course, and there was a second course that was more technical, run by a company called RTT. I think we had a few sessions in which both groups were combined, and certainly, for the social events and meals, the two groups were together. One evening we punted up the river to a pub for dinner. If you've never done it, going in a straight line is harder than it looks, rather like trying to get a kayak to go straight rather than veering off randomly. But having been an undergraduate at Cambridge, which also has punts on the river, I knew how to do it. Coming back from the pub as it went dark, I took over so we could get back quickly. Suddenly, the other guy who clearly knew how to punt shouted out in the gloom:

You're Paul McLellan, aren't you?

It turned out to be someone I'd been at Cambridge with called Geoff Varral, but with whom I'd lost contact. I'd not recognized him since he was on the technical track, not the business track. In fact, he was running the technical track. not only that, he was the co-founder of RTT. Surprisingly, given how technical mobile is, he had been a history major. Anyway, after reminiscing about mutual friends, I ended up becoming subscribed to their monthly email newsletter, Technology Topic.

This month's technology topic takes a look at the history of mobile, and in particular how it needs to operate on a global scale. I've criticized Japan before for being too inwardly focused on just the Japanese market, and so, as a result, their handset manufacturers gave up on the rest of the world. The same happened in the US with Motorola, when the US adopted standards IS-136 and IS95 that were not used elsewhere. Motorola was forced to focus on its domestic market, and missed the transition to GSM in most of the rest of the world, leaving that much bigger market to Nokia, Ericsson, and others. The US was a fairly mature market, too, meaning that most of the growth was in other markets.

But the real winners have been the global web-scale competitors using the networks. As Geoff says in the newsletter:

Ericsson and Nokia each have a market capitalisation close to $20 billion. To put this in context, on a single day last November, Ali Baba recorded sales of $31 billion dollars. Motorola stock has had a roller coaster ride from $65 billion in 2006 to $6.5 billion to $30 billion today.
 
Apart from this terrifying volatility, similar startling comparisons can be made for the relative cash positions of the web scale majors and the industrial scale majors—the web scale companies have hundreds of millions of dollars of cash, the industrial scale majors have hundreds of millions of dollars of debt.

In a Dr. Evil moment, I think that "hundreds of millions" should be "hundreds of billions". Google's cash position is over $100B.

A second anecdote. One of the guys I go hiking with for a few days each summer (18 years and counting) knows Elon Musk. He spent a week with him at space camp. I was going to say it was at NASA, but it seems more likely that it would have been at Space X. I asked him what he thought of Musk:

He has the highest tolerance for risk of anyone that I've ever met.

Starting an electric car company would seem to be enough risk and a lot of work. Starting a rocket company would seem to be enough risk and a lot of work. Doing both together seems like more than enough risk and work for one person. And why not start a tunnel boring company, too?

And a space-based communication company. It's a big gamble, both technically and business-wise. But the economics could be very compelling. As Geoff points out:

Space X / Starlink could, therefore, have an operational cost base several orders lower than their terrestrial competition, coupled to a global network with absolute control of end-to-end performance.

And the competition?

Starlink will be competing with upwards of 600 cellular operators, 590 of which are sub-scale.

What are likely to be the first devices connected to this constellation? How about Tesla cars? That would give global coverage wherever the cars are, without relying on the patchy coverage of terrestrial networks. That would allow any teething troubles with the satellites to be worked out in a friendly environment before going head-to-head with the existing cellular operators.

It would also make owning a car company, a rocket company, and a satellite communication company look a lot less random.

I think Geoff may be over-egging the pudding a little bit with his final conclusion, but who knows:

It would be perfectly possible for China to combine their telecom, space, and automotive capabilities, but so far Mr Musk seems to have achieved a first mover advantage and, like Mr Ford a hundred years ago, seems well positioned to be a dominant industrial force for the foreseeable future.

More Information

You can read the entire newsletter from which I took the above quotes.

Here is a recording of the Livestream of the latest launch on President's Day:

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