Starlink's business, Explained
Elon Musk says Starlink will make 30 billion a year, should you believe him?
As a private company, SpaceX’s finances are in shadow. A shred of secrecy covered with doubt over its long-term profitability, Starlink expectedly is a game-changer for SpaceX's financial outlook. Now with over 1000 satellites in space, hundreds more to come in just 2021, SpaceX is closer than ever to realize its projection of 30 billion in revenue per year. But 30 billion is a lot of money, is that achievable?
This is SpaceX's financial projection from the Wall Street Journals after reviewing a Leaked internal document in 2017, giving us a rare peek into the 74 billion dollar space empire. This answers some of the most critical questions we have for the company.
Unlike Tesla, Elon Musk’s projections on SpaceX could be accurate. Still optimistic, but the rate of disruption does match its ambitions. Starship's rapid development is the best example. Over the last year, Starship’s test vehicles have demonstrated incredible robustness starting with short distance hop tests, then longer distance tests to its recent soft landing on the launchpad. From SN3 to SN15, unbelievable progress was achieved in less than a year.
To the public, Starlink was the appetizer of SpaceX’s story. But the Wall Street Journal presented a different perspective from the inside, it turns out Starlink is the main course.
Starlink of course is SpaceX’s consumer Internet solution. It consists of three components, satellites, gateways, and a home dish. With these devices, users are able to receive Internet signals from space.
WSJ documents revealed SpaceX revenue projection over the 10 years period from 2015 to 2025, the orange bar represents SpaceX launch industry revenue, leveling at around 5 billion dollars per year, a moderate projection considering SpaceX’s market dominance today.
The more consequential segment of SpaceX’s business, however, is Starlink shown by the pink bar. SpaceX expects Starlink’s revenue and profit to rapidly rise in the next few years to 40 and 20 billion dollars respectively, and Starlink is the key. This is a huge deal and a bold outlook.
It shows SpaceX’s understanding of its own business.
The launch business has moderate to low-profit margins and demand. SpaceX does not project a rapid increase in revenue in this market.
Over the years, the majority of SpaceX's profit will come from Starlink’s operation in the telco communications market.
On the outside, Elon Musk and SpaceX send an enthusiastic message about Mars colonization and the moon trips. But internally, SpaceX is sober and realistic about its financial situation.
It knows the mountain it has to climb, Starship is important, but not nearly as important as Starlink for its eventual profitability.
SpaceX’s business branches, not created equal
When I look at the SpaceX business, I think of it in two different sections. The launch industry, and the telco communications industry. In case it is not clear to you, here is their revenue potential in comparison. The space launchers business is a 5 billion dollar market, and the fixed telco data industry is worth over 800 billion dollars, dwarfing the launch industry’s potential.
Just 1% of the latter industry means 1.6 times the revenue for SpaceX’s current launch business.
When we start to see things from this perspective, considering SpaceX's capability, Starlink is a no-brainer. So, how much can SpaceX make with Starlink? It turns out, the numbers from SpaceX kept changing over the years. Starlink’s story started in 2015 when Google and Fidelity invested 1 billion into SpaceX. This is why timing is so important here. Google put 1 billion dollars in SpaceX in 2015 when SpaceX had not landed its booster yet. This is the first indication of SpaceX’s commitment to Starlink. The money is critical for Starlink’s R & D. In 2017 when the leaked document was made public, SpaceX projected revenue of over 35 billion, consisting of 5 billion from its launch services and 30 billion from its data services. And finally, in 2019, Elon Musk confirmed the company's target of taking 3 - 5% of the telco communications business which is worth close to 1 trillion dollars. This puts Starlink’s revenue potential at around 30 - 50 billion dollars.
50 billion revenue ceiling, but challenging
But wait a second, we can see that this number is getting bigger over the years, how much is achievable and realistic? Starlinks numbers are transparent. So we can afford to be accurate. SpaceX charges 99 dollars per month for its Starlink services, which means 1200 dollars per year. In order to have a recurring revenue of 30 billion dollars per year, how many subscribers must SpaceX have? Brace yourself, 25 million subscribers. Hold on a second, we are not talking about 25 million individuals here, wifi is shared usually by the whole family. We are talking about 25 million households.
For your information, there are around 120 million households in the USA, 25 million would mean 20% of all Americans using Starlink, this is quite an impossible feat to achieve in 2025. If we limit the target audience to rural computer-owning users with bad internet access, which is Starlinks current target audience, this number is roughly 7 million. Basically, 30 billion is impossible to achieve solely from the North American market. So to assess the viability of 30 billion revenue in the long term, we must look beyond the borders of the US or even North America, we must look at the total addressable market across the globe.
According to Quilty Analytics analysis last year, the total available market for Starlinks business, taking into consideration affordability and the rural target segment. There are an estimated ~279 million rural computer-owning households worldwide, excluding China. Out of this population, around 70 million households can accord Starlink price points. This means, according to Quilty Analytics, a 50 billion revenue ceiling. Assuming SpaceX could solve the bandwidth problem and service as many customers as possible. I haven’t talked about this, let’s do it now. With every service comes expectations. According to the SpaceX FCC petition in February, with Starlink, it promises a baseline performance of 100 MB per second download speed and an upload speed of 20 MB per second. Latency is to be maintained at below 31 ms. But these promised “baseline” performances will inevitably drop when the service goes to densely populated areas such as New York or California. Motley Fool estimates that when the subscriber number reaches 3 million, Starlink would have reached its maximum capacity, based on its throughput of 20Gbps.
There is one good news, since not all Starlink capacity will be used, Starlink may be able to oversubscribe to 8 million users and make 10 billion dollars a year without compromising performance. Still short of the 30 billion projection, but not bad at all. Elon Musk admitted to this challenge in a tweet.
To be clear, these limitations may be solved with innovation over the long term, which explains Elon Musk’s optimism. If we assume SpaceX figured out a way to acquire 25 million subs and solved its bandwidth problem. I think it’ll be a great business because of one simple economic concept, the entry barrier! Put it in plain English, no one can build rockets like SpaceX, so no competition for Starlink. The entry barrier for this industry is so high, no one can cross it.
Get it. Entry barrier.
On top of that, there are many more factors that favor SpaceX,
Elon Musk is great at fundraising which is important for building rockets,
Starlink’s production is vertically integrated,
SpaceX has an unmatched record of achievement
and most importantly, there is Starship’s X factor - its potential to launch 400 Starlink satellites in one go.
Put all of these together, SpaceX will have an unchallenged market for at least 2 - 5 years before Amazon’s project Kuiper or perhaps a Chinese reusable rocket comes into the market.
This is the end of the first article on Disrupted. Hopefully, you found this helpful. Pls, feel free to contact me @LeiCreatives to ask me questions about this newsletter or give me suggestions for what I should include in it.
Additionally, if you work in the aerospace industry, pls contact me, I’d love to build a list of insider contacts I can reach out to for expert opinions that I can feature in this newsletter. Cheers.
I enjoyed this article! It was very well written and structured with good Illustrations as well. Keep up the good work!