Commentary

Jul
11
2017

ViaSat Inc. (VSAT)

Modems to Connect ViaSat-2 to Earth Do Not Exist for Distribution

Disclosure

We are short shares of ViaSat Inc. Please click here to read full disclosures.

This post is part of a series of additional research that we conducted following our initial report on ViaSat. Please visit factsaboutviasat.com to access all of our research on ViaSat.

A key flaw in ViaSat’s technology path and business model is the lack of backward compatibility.  ViaSat’s newest satellite, upon which the company’s growth prospects hinge, cannot communicate with its current subscribers. Currently installed aviation equipment is also not compatible with ViaSat-2, which is why management recently cited a “pause” in installation activity.

ViaSat management would have investors believe that it can selectively target only new subscribers and avoid costly customer migrations.  However, this is highly unlikely and there is strong evidence to the contrary.  ViaSat’s own history (~400k of the present 650k subscribers came from the predecessor to ViaSat-1, WildBlue) and the experience of ViaSat’s peers (HughesNet recently stated it is seeing an even split between upgrades and new subscribers since launching Jupiter 2) indicate that customer migrations and their impact to financials are material.

The reason for the incompatibility is related to spectrum and customer modems.  ViaSat-2 will use 600MHz of spectrum it has never deployed before. ViaSat-2’s spectrum range has been extended to 2,100 Mhz from a historical 1,500 Mhz.  The resulting new total band range presents significant engineering challenges given the lack of a similar or compatible terminal used by the industry today.

The lack of compatible ground equipment means that current subscribers who wish to upgrade service will have to endure re-installation.  The cost of a new modem, exterior equipment, and associated labor is in excess of $300 and many customers will rightly balk at such a cost. ViaSat will either have to incur some or part of the cost itself or risk losing the customer.  When management and bullish investors speak glibly about 75 Mbps to 200 Mbps of achievable speeds, they fail to address how not a single modem in the current subscriber base can actually deliver that performance.  Upgrading cable or fiber subscribers often requires nothing but a phone call, whereas upgrading satellite internet customers is an expensive chore.

The theory that if migrations do occur, it will free up capacity on ViaSat-1 is also flawed. Recall, ViaSat’s record of interior performance in delivering speeds in line with advertised rates. The capacity created though migrations will not provide subscribers currently suffering 8.5 Mbps median speeds a boost to an acceptable level of performance – it will merely bring them back to what they had originally paid for.

It’s no wonder that ViaSat plans to shed its damaged brand.  Upon operational launch of ViaSat-2, the company intends to abandon the Exede brand and incur significant costs to comprehensively re-brand and re-market its service. We suspect none of these costs are captured in consensus forecasts.