Weekend Reading #7

This is the seventh edition of our weekly newsletter, Weekend Reading, sent out on Saturday 9th March 2019. To receive a copy each week directly into your inbox, sign up here.

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The ultimate frontier market.

For decades our solar system has been the domain of sci-fi writers and astrophysicists, overlooked by entrepreneurs and capitalists. 

Now, not so much. Thanks to the work of a visionary group of entrepreneurs (and investors), space is well and truly in play commercially, and looks like it’s going to be a once-in-a-millenium wealth generator – assuming the recent flyby of interstellar object Oumuamua wasn’t a precursor to an alien invasion resulting in the mass extinction of the world’s fund management community!

We founded Three Body Capital because we believe change is happening much faster than most people think, due to the human bias towards linearity. And nowhere is this more true than the private space industry. Within years (low single digits, not decades), our relationship with the cosmos will likely be profoundly different, creating incredible opportunities for investors.

It’s fair to say most investors in public markets aren’t aware of space’s potential, or the very real progress that’s already been made. Certainly, the space industry isn't likely to become a fully fledged investment category any time soon. Most companies are privately held, meaning that those wanting to play the space theme have to satisfy themselves with buying Alphabet to vicariously access its 7.5% interest in SpaceX.

SpaceX, Boeing, Blue Origin, OneWeb and a long tail of ridiculously innovative companies are building something akin to an operating system for space, covering nascent operational fields as diverse as satellite internet, deep space exploration, lunar landing, planetary observation, even asteroid mining. But this message can’t compete with the triumphs, failures and scandals that seem to emerge from Silicon Valley and its cousins on a daily basis, and so, the space investment narrative remains obscured. 

A constellation of constellations.

For a sense of how quickly things are changing, take OneWeb. 

For decades, geostationary satellites costing more than a tech billionaire’s post-apocalyptic holiday retreat have been the order of the day. OneWeb believes the best way to expand connectivity is to eschew these big beasts in distant orbits and deploy smaller satellites in Low Earth Orbit (LEO). A different solution requires a different business model and a different funding model, too.

OneWeb might not have the sex appeal of SpaceX, but it’s one of the most ambitious companies we’ve come across. Sadly, like the vast majority of the private space sector, it’s not publicly traded, but the Virginia based company has received close to $2bn in funding from a smörgåsbord of investors including of Softbank, Coca Cola, Airbus, Qualcomm and Virgin.

By bringing satellites closer to earth and massing them into ‘megaconstellations’, OneWeb is seeking to improve the user experience and reduce costs. Antennas and satellites are cheaper to produce and launch (a few hundred thousand dollars, compared with hundreds of millions of dollars for geostationary satellites). Customers get high data throughput, low latency, global coverage to the poles, and a range of ground terminals for multiple markets. High frequency trading shops will be rejoicing... until they realise that low latency coverage is now universal.

In the coming years a huge volume of capacity will come online from multiple sources and in order for consumer demand to absorb it, ground equipment needs to be affordably priced. Trackable terminals still need work, but affordable flat-panel antennas are in the pipeline thanks to companies such as Kymeta and Phasor Solutions. If they can get this critical piece of the puzzle right, everybody wins (well, almost everybody).

The UN estimates that 3.8 billion people globally lack access to the internet, almost entirely in emerging and frontier markets. That’s more than half the world’s population. So, it’s not an overstatement to say that if OneWeb and peers can pull this off, it will be a game-changer for life on earth – particularly for emerging and frontier markets, where a lack of connectivity is undoubtedly holding back economic development. The poorest countries have the lowest rates of connectivity, so while penetration might be high in parts of South America and South-East Asia, only 25% of people in India and 30% of people in Indonesia access the internet occasionally or own a smartphone.

The long and short of it.

Satellite internet is going to be a catalyst for change on a global (perhaps even interplanetary) level. So, how can we help our investors to benefit? Like all technological breakthroughs, universal connectivity is going to create career-defining long opportunities – and some great shorts, too. 

The most obvious sell candidates are cell tower providers, which could be eviscerated when telecoms providers can go direct to OneWeb for cheap, universal and reliable connectivity. The moat that surrounded these companies – ability to acquire land, configure infrastructure for transceiver towers in remote areas and gain operating leverage from multiple tenancies on the same tower – will be rendered irrelevant overnight. Working on the premise of stable, predictable long-term returns, these companies have been funded by large amounts of debt. After all, they were providing balance sheet capacity for the networks, allowing telcos to go asset-light. This is unlikely to end well.

What’s more, in many emerging markets the assumption is that these companies will benefit from the underpenetrated nature of the economies they operate in. They are priced for growth, and when that growth takes place outside their domain we expect to see significant pain, particularly as many of these companies are seen as safe, high dividend payers.

The most obvious victors (from this trend at least) are the telcos, who despite many other impending challenges can expand user bases and improve the customer experience in one go – at least until 5G comes into the picture.

A platform for change.

OneWeb isn’t alone. A growing cast of companies is getting in on the action, including Elon Musk’s Starlink, which has regulatory approval for nearly 12,000 satellites. Telesat, LeoSat and Iridium are also building their own constellations, and China is sending 156 satellites developed by state-owned spacecraft maker CASIC into LEO to improve internet access in remote parts of China and other developing countries. 

It’s not clear who’s going to win the race to global domination – there’s probably room for several players – but it’s clear that satellite internet is well on its way to commercialisation and mass adoption. And that has huge consequences for consumers (and investors) everywhere. As with other transformative technologies, it will be the knock-on effects of the new space race that create the biggest dislocations and opportunities. Here at Three Body Capital, we look forward to exploiting them. 
 

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Beyond the obvious.
+ Status as a Service (StaaS)
+ How China’s fintechs serve the underserved: an interview with CreditEase CEO Ning Tang
+The future of politics with Peter Zeihan
+When a passion for videogames helps land that job
+ Meet the exclusive service bringing lunch to NYC’s Chinese workforce

Weekend ReadingEdward Playfair