Elon Musk’s SpaceX Could Have a ‘Natural Monopoly’

Satellite dishes belonging to local communications provider near Leuk, Switzerland. SpaceX is reportedly seeking to build 40 satellite dishes for the Starlink satellite network at the site. (Robert Hradil/Getty Images)

Amazon.com signed up a customer for its space-based internet service, bringing new competition for SpaceX and its Starlink broadband product.

That competition, however, might turn out to be Amazon’s Bing to Starlink’s Google.

“The low-earth-orbit satellite broadband business has all the makings of a natural monopoly, and a global one at that,” wrote MoffettNathanson analyst Craig Moffett on Wednesday.

A natural monopoly arises when one firm can serve the entire market at a lower cost than if multiple firms compete. It is characterized by high fixed costs and economies of scale. Regional water and electric utilities are classic examples of natural monopolies.

In technology, Google Search can be considered a kind of natural monopoly. There isn’t a lot of physical infrastructure, but Alphabet can spend billions to improve the service, and network effects are high, two reasons that Google’s search share is some 90%.

As for space, fixed costs are high. It costs billions to build, launch, and maintain satellites.

“SpaceX’s Starlink has a runaway head start. SpaceX dominates the rocket launch business, as well,” adds Moffett. “By virtue of its vertical integration, Starlink’s launch costs are (in theory) dramatically lower, giving Starlink an enormous cost advantage.”

SpaceX isn’t quite Google-search-dominant, but it accounts for more than half of all orbital launches. That dominance has allowed the company to build a constellation with more than 8,000 working satellites. And Starlink has amassed, at least, five million subscribers and is profitable, according to the company.

Geopolitics and Amazon’s competitive nature might not make low-earth-orbit satellite broadband a winner-take-all market, however, says Moffett. Amazon’s project Kuiper is an American competitor. Europe has Eutelsat OneWeb. China has Guowang and Qianfan. Even Canada has Starlink-like aspirations. Telesat Lightspeed is based in Ottawa, Ontario.

Not all of the Starlink upstarts will succeed, and Moffett estimates that Starlink will require somewhere between eight million and 13 million subscribers, at current service prices, to be considered a very good business with Ebitda margins in the range of 70%.

Ebitda is short for earnings before interest, taxes, depreciation, and amortization. Ebitda margins are sometimes favored by investors when looking at businesses with high capital requirements.

Starlink is well on its way to that subscriber base before any competitors, metaphorically, get off the ground. But space-based broadband is still new, and there is a lot to learn about satellite costs and subscriber pricing.

“We’re left wondering…is satellite-delivered broadband a good business?” asks Moffett.

Maybe, maybe not, but it has the potential to be one, which is why SpaceX is valued at some $400 billion in private markets, making it the most valuable aerospace and defense company on the planet.

Write to Al Root at allen.root@dowjones.com