Everything is (kinda) awesome (in Earth observation)

Back in 2020, not long after we were housebound due to covid, I wrote an article entitled “So, why hasn’t the Earth observation industry taken off (yet)?” The last few days I started to think back to this. I was wondering how much had changed. Certainly, on the face of it, the commercial Earth observation (EO) industry still hasn’t “taken off”: the same two companies are responsible for >50% of data/imagery sales, and the value-added services industry has slow growth and remains fragmented. Established companies such as Airbus and Maxar have pointed out that growth from EO has been slow. Maxar was not helped by the failure of WorldView-4 and delays to Legion. For someone who has spent nearly 25 years in EO, and most of that in the commercial aspects of the business, that could read a little depressing. I sometimes joke that the EO industry has to work, or what would I do?! … although I’m kinda not joking…

One conclusion from the article from 2020 was that data supply still isn’t there to meet various industry requirements; unfortunately this is still the case. Much is made of new companies emerging with new constellations of satellites with various sensors, but the simple truth is that the majority of these companies are not up to full satellite capacity. Without a full complement of satellites, they cannot deliver on the goals they set out to do – these goals being aligned to the requirements of various end-user customers. Downstream, new EO services companies building analytics and delivering information also need this data supply to feed their algorithms to build solutions. Therefore, they also cannot achieve all they set out to do.

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The challenges being faced

For companies to achieve these goals, in many cases, more financing is needed. At the same time, we’re being told that the financial environment for raising funds is more challenging. So, as we were, without more funding companies cannot get to where they need to, and without the data these companies collect, new service areas cannot emerge and revenue generation remains stunted. Add to this a more crowded field of even more companies, both operators and services companies emerging and competing for funds and the likely outcome is only in one direction – a consolidation of the sector, either through acquisition, or simply companies running out of funds. I can think of 20+ companies in EO alone which will go for a Series A round (or abouts) this year; it just won’t work out for all of them. More on that later.

What is still true is that…. “Earth observation demand by vertical markets should be considered in two different, but connected camps: new ways of meeting the requirements of existing vertical markets…, and the potential to open up into new areas. ?There is a key difference as to the need to keep some separation here: the end-users with longer term usage of EO solutions have a better understanding of its capabilities; the new markets on the other hand have not been exposed to EO, and thus do not really understand (or care) about these capabilities.”

Back in 2020 I surmised that both types of end users’ requirements would center around receiving cost-effective information based on high frequency change detection whatever the application, and delivering this in a regular fashion to multiple end-users and in doing so open EO to a mass market - Shifting from a B2G to B2B business. This, however, has been slow to shift – EO is still very much a B2G business, and this is unlikely to change significantly in the short-medium term.

The difficulties in developing B2B is reflected in the business plans of new EO companies – “established” customers in existing vertical markets (in defense, mining, oil and gas, and to a degree, civil government, agriculture etc.) understand data/imagery and the EO industry better, and selling into these industries is seen as lower hanging fruit. Oil and gas have worked with EO data since the onset of Landsat, same for agriculture, and we’ve known how to track ships with SAR/AIS for decades and so on.

Potential new “big ticket” markets for EO, such as in finance, carbon trading, environmental social governance [ESG] and the like appear attractive, but it is hard to demonstrate the path to revenue generation. This to some degree has been one of the issues for expanding the commercial base for EO; in order to generate revenue as soon as possible, existing markets are the first targets for sales. If new EO companies can get off the ground, then they can look to new areas to exploit. These new end-user markets care less about EO imagery and more about information. But, this also means that if the information cannot be delivered when it’s needed then it will not take-off as an application. The end-user here does not understand, and will be turned off by, “you can’t have your information today because the satellite didn’t pass.”

Building these markets is a challenge without the desired satellite infrastructure being in place. The simple fact of the matter is few companies are there yet. Not many EO companies have significant revenue generation and/or are up to full capacity.

I often read of EO “oversupply” but that is simply not true. There may be a lot of new companies, but most do not have many satellites. The “oversupply” is looking to a future unlikely scenario whereby all companies will all be up to full capacity. Perhaps a case could be made for 1m multispectral data being available from multiple sources. But, lower-cost SAR is only just getting there, hyperspectral and emissions monitoring companies are just starting, one or two thermal infrared satellites have gone up, couple more companies getting into 10cm data, still no high (~5m) short-wave, or LiDAR… so where exactly is the oversupply?

This creates a kind of chicken and egg conundrum; the market is there to be exploited, new (and existing) EO companies know their potential future customer needs well they just need to get there. And to do that, more investment is going to be needed, and some companies will fail.

?The market potential

If we take some market figures to illustrate this potential, Euroconsult states that the total market for EO data and services in 2022 is $4.64 billion (and a five-year CAGR of 5%). Of this the market for EO commercial data only was $1.78 billion in 2022. The data market remains driven by submetric resolution usage. In total, all optical data finer than 1-m ground resolution made up $1.2 billion in 2022, or nearly 65% of total revenues. This also indicates the importance of the defense sector to the industry. Defense, and especially US-defense is still by far the largest consumer of EO data. However, despite the emergence of new companies over the last five years, only a small number of EO operators generate >$100 million in revenues.

The remaining $2.86 billion is related to the delivery of value-added solutions (inclusive of products, services, analytics/information.) More moderate resolution data sets tend to be utilized more to build solutions rather than represent significant revenues as imagery alone, particularly for applications in which greater coverage and spectral capacity are key requirements, such as in natural resources monitoring, agriculture and environmental applications.

The total addressable market [TAM] for EO is a little harder to establish… actually for the “whole of EO” it is really hard (I know, I’ve tried), it is still hard to do at a company level, but at least there’s some numbers out there. Without getting into too much trouble, the three SPAC’d EO companies in their investor report prior to the public offering stated TAMs between $40 billion and $140 billion depending on the company. Obviously what markets each company is aiming to serve will lead to different TAMs, but just taking these as is, it means a market penetration today of only 3%-10%.... that’s not a lot. There is still plenty of margin to make some decent cash.

The light at the end of the tunnel

That’s where the investment community comes in. We’re being told that it is a challenging investor environment for EO, and indeed space in general. Space industry investment plummeted from a $47 billion peak in 2021 to $20 billion in 2022,?according to analysis?from early-stage investor Space Capital. The stock performance of SPAC’d companies since their public offering hasn’t helped matters. However, investors need to invest to make money… so they invest in perceived “safer” industry and technology. The investments are still there to be made in EO, the case for the technology however needs to look like a safer bet. This means greater scrutiny of business cases than perhaps what occurred a few years back.

Nevertheless, on a positive note, several companies (Blacksky, Capella, Pixxel, Wyvern Satellite Vu, Kuva Space…) all managed significant raises in the last year. Indeed, According to Euroconsult the EO sector has raised $5.5 billion over the last decade, most in the last five years, albeit with a recent slowdown.

Over the years at Euroconsult we have taken part in many EO due diligence processes – this has been mostly for private equity, banks, debt deals. Not so much from venture capital, but we are starting to see this change. I now also work with start-ups leading into the due diligence process. I’m generalizing here, but most investors encountered tend to believe the company can build the technology that they are setting out to do, they are less convinced on the path from this technology to revenue generation. This includes what the company is selling (just imagery, imagery plus analytics, just analytics…) and how these products are developed. Here there still seems to be a gap in language between the EO community and investors (again… I’m massively generalizing.) To be a safer bet work is required on explaining how data from the satellites can be converted into products customers want.

One way to get around this is for the EO company to focus on what it knows, or the new bit of technology it is developing: whether this be a new type of sensor, way of processing data etc. This also streamlines CAPEX, reducing risk. Why build a new analytics platform? Or build you own satellite bus if it’s not your core business or part of a wider business strategy? There are plenty of solutions already out there. This is also giving rise to new space/satellite-as-a-service companies, such as Loft Orbital , which offer quicker ways to space – and for EO companies, that can mean a quicker ways to generate revenues.

I also suspect new EO operator companies will fall into one of two camps: general data suppliers of whatever types of data they are collecting, and vertically integrated companies focused on data delivery and service generation in one or two markets. I made that prediction back in 2020, and I’m sticking with it. Trying to target numerous markets for data and services from your dataset may have been attractive to generate big addressable markets to look attractive to VCs in the past, but the reality is that this is hard to achieve, even unfeasible. There will be some compromise in the data – the data needed for mapping could be used for agriculture, but it is unlikely to be the ideal imagery – and it also means the need to hire specialists, sales teams in each of the vertical markets you are aiming to address, all adding to costs. What is more likely is that the EO operator may acquire specialist service providers in its future if it wants to double-down on a specific vertical. We have already seen a little of this activity, noting a couple of Planet acquisitions in the agriculture space in the last couple of years.

New Year’s Predictions

So this time next year what would be some predictions… well, in the main part I don’t think the year will be paradigm shifting. On a negative note, I think some EO operators and even analytics companies will restructure/consolidate or be simply no longer around. But, others will continue to emerge. We’ll have some more, varied solutions up there.

However, it is likely that the industry still needs a couple more years of development and investment to start to reach its full potential. During 2024 low-cost SAR operators will start to reach full capacity, companies such as ICEYE are already making strides in the market, Umbra 's open data policy and transparent pricing is encouraged. Wyvern , Pixxel and OSK will continue to roll-out hyperspectral satellites, we may see 5m ground resolution SWIR, but none of these operators will be close to full capacity within the year; SatVu will launch further units for thermal imaging and we may even see the launch of NUVIEW ’s first commercial LiDAR satellite…

This in itself would all be great to see. It will allow companies to test what can be done with the different datasets, but it won’t lead to an immediate shift in market expansion. These companies need to come to full fruition. Even the established ones, such as Maxar, had difficulty in diversifying prior to the launch of WorldView Legion.

If we consider EO on a growth cycle, it is hard to look at the sector beyond still being in the take-up phase (OK, may be a couple of exceptions such as optical datasets in support of defense, or SAR in maritime domain awareness). A little perspective is needed. In the satellite communications business, the operators were government entities for years prior to being fully commercialized. Now, no one thinks of communication/TV/broadband as being “government orientated.”

What is needed for the sector to further develop is perhaps a little less hype, and a little more patience. Cos I don’t want to be out of a job.