How healthy is the market for VHR earth observation?
CEO of Geocento
As Geocento approaches its tenth anniversary we have been taking stock of the market we operate in, focusing in particular on the very high resolution imaging business – the most commercial valuable part of the industry.
The most obvious feature is that the industry has continued to grow, powered by technological innovations being introduced at scale. In 2011, 12 nano satellites were launched, this year there are predicted to be 434 . There are currently ~900 satellites streaming photos, videos, and information on Earth’s condition from the macro to microscale, driven by an overall growth in investment in space from $0.5 Bn in 2011 to about $7.5 Bn last year . Investment has extended beyond the platforms and sensors to include a focus on technologies designed to connect data with markets, including advanced processing technologies (in particular to extract “commercially valuable” signal from “big data” noise) and packaging of data for particular market verticals, particularly in terms of providing services under subscription .
This has all started to drive major market growth, so why do we hear the doomsayers or realists (depending on your point of view) still express misgivings?
One such point of view, for example, is provided by Aravind Ravichandran. He talks about the “iphone moment” in earth observation , a term that itself appeared some years earlier more generally in relation to space tech. He posits that earth observation has gone through an initial powerful innovation trigger with new spaceborne sensors and platforms, the application of AI and new platforms designed to integrate earth observation into market verticals and that we now find ourselves positioned around a “peak of inflated expectations”, the danger being that the next stage is a “trough of disillusionment” for investors and those within the industry, as market growth fails to match the hype.
There are various aspects of the business that have been suggested as particularly relevant to the “iphone moment”. In recent years, efforts have been focused on effective engagement with end user needs to complement technology push, or “vertical integration”, and this is the approach presented as most likely to succeed by Ravichandran himself. There is no doubt in our minds that this is important and necessary. However, we believe that “vertical integration” needs to work in both directions: both up the value chain and down.
The space business has traditionally operated with a focus on products and services being drive from left to right in the diagram above, i.e. up the value chain. The genesis of earth observation was technology-driven with new sensors being made available for researchers and early businesses to exploit. A personal example that sticks in my mind, from the early 1990s, was ESA’s ERS-1 satellite being used to generate ice maps to fax to a vessel off Greenland via dial-up modem (from my then office, late in the evening). At that stage, the capabilities were determined by the technology; use cases had to fit. Nearly 30 years later, the technology, and its effective deployment, has improved immeasurably, with the result that capabilities have improved beyond recognition. However, the industry has a culture of technology drive embedded within its DNA. It is very difficult to entirely remove the notion that the technology will, to some degree, sell itself.
So: forget the technology for now. Let’s just look at the market in terms of its dynamics.
Figure 1. The Hype Cycle (credit: Gartner)
Figure 2. Market dynamics
A healthy market has arrows going in both directions above, not just left-right. Let’s take a look at these right-left arrows. To what extent is the supply chain receiving and reacting to input from higher up the value chain?
We believe these right-left arrows are weak in the current imaging ecosystem and that this becomes clear by asking the following questions.
1. Do customers have confidence in the products and services?
The technical complexity of image products can be off-putting, but this is not the fundamental issue here. You cannot get the image you want in order to try it with your algorithm, or show it to your organization, before you buy, and you cannot get a refund if pay for the imagery and it turns out that the imagery fails in this regard. As well as this, customers are often nervous about the licensing and whether their use cases are covered, particularly in cases of larger investments in imagery, so they can end up with hesitancy in terms of both technical and commercial considerations. The supply side as a whole appears reluctant or unable to come up with effective solutions to these barriers.
2. How much flexibility and influence does the customer (anyone downstream in the value chain) have within the market?
Traditionally, customers have found it difficult to switch between suppliers for sources of imagery. Once a single supplier has been found, the investment in time and energy to switch to others, dealing with a whole new set of product specifications, ordering processing, and licensing conditions, makes it far easier to stick with one source. Furthermore, if a customer wants imagery then they have to select from imagery that someone else wanted (catalogue imagery), or fresh collection on terms that involve the customer taking on significant risk (e.g. paying for a certain amount of cloud cover).
3. Finally, does price respond to supply?
It is clear imaging capacity is highly variable from location to location and capacity is growing, yet pricing remains insensitive to demand. The lack of dynamic pricing is perhaps the clearest indicator that the market is not operating in a healthy manner. Situations in which excess capacity is available should drive down pricing, while situations in which demand is very high should attract a price premium and this should change over time.
WHAT CAN WE DO ABOUT THIS?
The key to generating a healthy market and perhaps helping to avoid an “iphone moment”, is to ensure that the right-to-left arrow is strong – in other words, the market is dynamic, not static. There are some things that could be done as follows:
1. Make old archive imagery open source. The enlightened USGS and EU policies in relation to the Landsat and Copernicus programs are illustrative of what can happen when you create stuff for free. Are we throwing away valuable revenue? Hardly, as the current market for imagery that is several years old is minuscule. Open this for free and everyone can “try the product” whether in terms of eyeballing or analysis before they buy. How old is “old” is a matter for discussion.
2. As a supplier, recognize the increasingly competitive landscape and create more flexible services that enable you to respond to requests on customer terms. This will give you invaluable business intelligence, helping you to formulate your business strategy, and will give you a competitive edge in the current market. Increasing competition will, at some point, break the current operating model. It is best not to wait for this to happen before reacting.
3. Simplify, simplify, simplify. Pricing, product descriptions, licensing, etc. Sure, have the technical details available, but make everything else transparent and clear.
Of course, Earth Observation sector should continue to innovate and create fantastic new sensors, platforms, and processing techniques, but we think that the fundamentals of the market need to be addressed with some urgency to enable to sector to meet its potential.