A Transforming Space Sector

Over the past 10 years, the space industry has undergone a unique period of rapid transformation, affecting all its market segments and stakeholders. Following a phase of major diversification, the space sector is now moving towards consolidation as market players seek opportunities to scale up and boost their competitiveness.

The global space sector is experiencing exceptionally strong growth driven by new supply and demand drivers, disruptive innovations and transformational business models. Over the decade, commercial markets drivers such as satellite broadcasting have given way to new growth areas. Markets such as broadband connectivity, satellite data for global and near real-time change detection, and emerging space solutions, such as in-space logistics, are fostering a new ecosystem of innovative market players.

The paradigm change brought about by New Space has accelerated the transformation of the sector enabling widespread access to affordable space technologies and services, boosting the overall market potential. Revenues from the global space sector have increased from $285 billion in 2016 to $425 billion in 2022, experiencing an annual growth rate of over 7%.

Revenues from the Space Sector Worldwide ($ Billion)

Space market dynamics are spurred by activities downstream in the value chain with services and applications accounting for 90% of the sector’s overall revenues, driven by consumer applications for satellite communications and navigation.

In comparison, upstream activities, which represent the core of the space industry from manufacturing of space assets to their operations, generate more modest value and growth as infrastructure business.

New Industry Cycle Ahead

Within a decade, the space sector has gone from being the captive industry of a few aerospace and defence conglomerates, integrating complex technologies and relying on government funding, to an era of hyper-competition resulting from the lowering of barriers to entry and democratisation of access to technologies.

Space start-ups have proliferated in all fields of space applications, taking advantage of low-cost production and short development cycles. Technological breakthroughs in areas such as electronics and digital technology have dramatically increased the performance and productivity of satellite systems, particularly small satellites.

This technological revolution has been accompanied by the transformation of the space ecosystem, with a fragmentation of the industry landscape and a diversification of business models initiated by new entrants, including start-ups or digital native players.

More recently, the need to rationalise complex supply chains and the constraints of maturing markets are naturally leading the sector towards a new development cycle, with the onset of a consolidation phase. The volatility of the global macroeconomic and geopolitical environment has also played an important part. In this regard, 2023 has been particularly illustrative with 45 M&As occurring as of September 31st (versus 9 realised in the full year of 2018).

The window of opportunity has therefore narrowed considerably for new entrants, as illustrated by the sharp slowdown in fundraising since the beginning of the year (a situation that is not specific to the space industry). All these factors underline a structural evolution of the space sector following a massive phase of diversification.

10 Year Evolution of the Market Share of the 2012 World’s Top 5 Satellite Manufacturers on the Commercial Market

*Top 5 satellite manufacturers in 2012 based on estimated revenues from commercial and government contracts. Corresponding market share in 2012 and 2022 on commercial market only.

Space Ecosystem on the Move

With the intensification in the competitive environment and the resulting needs to diversify revenues, a growing number of players are motivated to move within their ecosystem and opt for verticalisation upstream or downstream.

Vertical integration is not new in the space business. Satellite manufacturers have a long history of downward integration to operate satellite systems and ultimately deliver data or services directly to end-users with the objective to catch growth opportunities from the services business. However, this strategy requires international scale, the integration of complex business operations and the ability to develop global customer sales, which is why it has been traditionally pursued by the largest players.

Fundraising in the Space Industry Worldwide ($ Billion)

More recently, the smallsat industry has experienced upward integration with satellite constellation players insourcing their manufacturing capabilities as part of a strategy to control costs, their supply chain and innovations. These market players often propose satellite-as-a-service solutions to their customers as a complementary set of revenues.

Beyond these potential benefits, experience has shown the risks and challenges associated with verticalisation strategies, including an almost irreversible long-term business process and very high CAPEX commitment. By vertically integrating, companies lose a degree of flexibility, as they commit investments to a specific product instead of relying on external suppliers’ options. In a sector where time-to-market matters, the potentially complex economic and technological equation doesn't always make vertical integration a compelling business case.

The space industry is now entering the era of horizontal consolidation and vertical cooperation, during which market players in the space industry will attempt to limit the intensity of competition by joining forces and seeking partnerships within the value chain.

The recent escalation in horizontal mergers and acquisitions is a clear signal in favour of a contraction of supply in a new market environment. Furthermore, vertical cooperation will enable companies to maximize their flexibility and join forces where appropriate. The proliferation of partnerships in the Earth Observation sector between data providers and cloud platforms is a typical illustration of this win-win vertical partnership model. Upstream, manufacturers will increasingly seek to collaborate with suppliers of distinctive technologies as a differentiating factor from competition. The partnership between ReOrbit and AAC Clyde Space to establish a joint satellite avionics and flight software bundle is a typical illustration.

Download the full white paper analysing the paradigm change that was brought about by New Space, as well as benefits and trade-offs of a software-first approach in the space industry.