Contract Structures for SatCom: How Will Competition from Low Earth Orbit Mega Constellations Change How Communications Services Are Purchased?

Abstract

Communication satellite operators contract their capacity through service-level agreements (SLAs) to their customers, some of which reserve fixed capacity over multiple years. Relative to current capacity constraints, this market has seen substantial demand growth, as well as number of new entrants such as SpaceX and Amazon. While historically these SLAs have helped matched large capital investments with long-term revenue, the history of communications markets suggests that this leaves significant capacity and revenues underutilized. Our objectives were to review existing SLAs, identify their limitations, and explore new SLAs, some of which leverage the flexibility of new communication satellites. We find that existing SLAs can be characterized into classic, data volume, and dual SLAs. While important historically, these are found to leave significant capacity and revenue potential underutilized while simultaneously failing to meet customer desire for improved flexibility and lower prices. Through 60 interviews with SatCom customers, we find that lower prices and more flexibility for capacity bookings are the 2 most desired characteristic. By examining the history of the cloud computing and telecommunication industries, we propose spot instance, time-of-day pricing, and 2 classes of service SLAs, which address these shortcomings by offering more liquid services accessible to a broader range of customers. We conclude that the classic SLA excels where reliability and speed are essential, traffic volume is high, and variation is low. When consumers are price-sensitive, data volume SLAs, time-of-day pricing SLAs, and 2 classes of service SLAs are affordable options. When the traffic patterns are not repeating on a daily or monthly basis, spot instances offer the desired flexibility.