Steve Jobs was said to possess a reality distortion field that would let him convince people almost anything was possible. Softbank’s visionary-in-chief, Masayoshi Son, is trying something similar. Don't fall for it.
On Tuesday, Son's Softbank Group Corp. announced a plan to merge OneWeb, a start up satellite operator in which it has a 40 percent stake, with Intelsat SA, a larger rival that's been hobbled by heavy debt since going through two leveraged buyouts. If finalized, Softbank will put $1.7 billion into the combined company and almost 40 percent of it. (Softbank plans to then transfer the holding to the Softbank Vision Fund, a $100 billion pool it is raising that will target technology investments.)
Softbank's money will help to cut Intelsat's debt by $3.6 billion. Bondholders will be asked to take a hit by exchanging their current securities at a discount to the current market price for cash and shares in the combined company. The deal will hinge on whether enough bondholders will accept those terms -- and Son's lofty vision of the future.
Outside the reality distortion field, the satellite industry is plagued by overcapacity brought on by the advent of so-called high throughput satellites. A building boom is underway, with companies like SES SA, Eutelsat SA, and Viasat Inc. all promising to expand their fleets.
Son’s OneWeb doesn't yet have a single bird in the sky. It hopes to sell connectivity at much lower price per megabit using an as yet un-built network of at least 720 satellites, thus dramatically changing the economics of using them to connect rural and poor areas to the Internet.
It faces competition from Elon Musk’s SpaceX's low-Earth project, still also un-built, while ViaSat and Hughes Satellite Systems Corp. are targeting similar customers with different technology.
OneWeb’s satellites will sit in an orbit much nearer to earth than those of Intelsat and conventional providers. That will supposedly fix the perennial problem of latency -- the gap in time between the satellite receiving a request and responding -- which makes it impractical for any uses involving interaction (think gaming or video calls). But it comes at a cost. The upstart will need far more satellites to cover the planet: 700 or so, compared with about a dozen for Intelsat.
Son has also made aggressive pledges on what OneWeb will be able to deliver. In fact, his claims of download speeds of 200 megabits per second and latency of just 20 to 30 milliseconds are better than what the company itself has promised. Just yesterday, at Mobile World Congress, he compared OneWeb’s technology to a fiber optic connection “coming straight to the Earth from space” that would “provide connectivity to billions of drivers from the satellites”.
That pesky reality distortion field strikes again!
In fact, fiber networks in the ground and Wi-Fi are a more reliable and cheaper way to provide such links. Using satellites to power autonomous cars or smart drones will be hard: connections need to have low latency, high reliability, and come cheap.
Perhaps OneWeb’s technology will change that, and Intelsat’s roster of clients and expertise will accelerate its development and provide much revenue. Or the obstacles will prove higher than Son expected, and rivals harder to outflank. In any case, some veteran executives have wondered openly lately whether the current satellite-building boom will end in bankruptcies like in the 1990s.
Son has raised an astonishing about of money for his Softbank Vision Fund that he wants to deploy quickly. Making all this pay off for his investors will require more than just a Jobs-like flair for rhetoric.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects seconds to milliseconds in eighth paragraph.)
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