Saturday, November 14, 2020

Starlink will be priced to be affordable

Charging more in affluent markets will increase revenue and tend to reduce the "digital divide" -- good business and good karma.

SpaceX is now serving customers (aka beta testers) in the northern United States. They will soon be doing so in Southern Canada and recently announced that Germany, where they have applied for permission and have begun construction on two ground stations, will probably be next. Early customers in the US are paying $499 for their user terminals and $99 per month for Internet service.

But what about the eventual price in Canada, Germany, or, say, a poorer nation like Cuba? When discussing the plan for Germany, SpaceX vice president Hans Königsmann said the price was not yet determined and "we will focus on what the local market allows." At first, that sounds like something an arrogant monopolist might say, but on second thought it is both good business and good karma.

In Econ 101, pricing is simple. In a competitive market, the price or a product or service will be at the point at which the curves for supply and demand as a function of price intersect. A monopolist will set the price at the point where marginal cost = marginal revenue. Things get trickier in a classic oligopoly and even trickier in a dynamic market like satellite Internet service.

The capacity of a satellite constellation increases as technology improves and as new satellites are launched. Today, SpaceX has only around 800 satellites in service which limits both their coverage area and the number of customers they can serve in a covered area, but they plan to add around 120 satellites per month, have permission for around 12,000 and have requested permission for 30,000 more. Furthermore, the technology deployed in the 12,000th satellite will be more sophisticated and have higher capacity than that in today's satellites and most of those 12.000 satellites will have inter-satellite laser links which will further increase coverage and capacity and reduce the need for terrestrial infrastructure.

The fixed cost of a satellite Internet constellation is high -- satellites are expensive to make and to launch -- but the cost of adding and servicing a new customer is relatively low and the market is global. SpaceX satellites that fly over the southern US will also fly over Cuba, but at $500 for a user terminal and $99 per month Raúl Castro may be the only Cuban customer. Perhaps Cuba could justify shared links at clinics or schools, but the individual market would be essentially zero, and excess capacity on a satellite, while it is flying over Cuba, would be wasted. The price in Cuba should be lower than that in the US in order to fully utilize available capacity.

Prices may or may not remain a flat fee per month, other factors like the political situation and vested interests of terrestrial Internet service providers will affect pricing decisions, and end-users will not be the only customers in a nation, but in general, SpaceX and the other constellation operators will charge more in affluent markets than in poorer markets -- they will try to operate at full capacity everywhere. Charging more in affluent markets will increase revenue and tend to reduce the "digital divide" -- good business and good karma.

Update 2/9/2021

SpaceX has invited the general public to sign up for the Starlink service, stating that "Starlink is available to a limited number of users per coverage area at this time. Orders will be fulfilled on a first-come, first-served basis." As with Tesla cars, you can reserve a place on the waiting list with a refundable deposit.

I had predicted that they would charge less in poorer nations and, for now at least, Elon has decided to ignore my suggestion, for now, tweeting that "It’s meant to be the same price in all countries. Only difference should be taxes & shipping." (The price of the terminal is $499 in the US and €499 in Germany and the service is $99 and €99).

We may see lower prices in developing nations when the capacity of the constellation is greater, but for now, they will be serving relatively affluent end users and groups that share a connection. It will be interesting to see the prices when they begin serving India, which Elon Musk hopes will be in the middle of this year.

Update 3/12/2021

I found a tweet confirming this pricing strategy. Furthermore, subsidies from local and national governments, non-governmental organizations, foundations, etc. will also help with affordability in low-income nations.



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