The Starlink Financial Mystery: Caveats Concerning Its Profitability

Let's be clear. LEO satellite service is an unproven business model. Obviously, if prices are high enough or the service is a monopoly, it will work. But no complete financial picture is public at this point. This is why the planned 2026 IPO is so interesting. The prospectus will reveal enough to make an informed judgment.

But despite stubborn optimism to the contrary, there is no strong evidence that LEO Internet is highly profitable. I doubt even Starlink investors have the company's complete financial details except for a few high profile venture capitalists. Starlink does release an annual report. It is best characterized as a slick marketing pitch designed to give the impression that Starlink is an unstoppable juggernaut that reflects historical inevitability. All Bow to Caesar.

What are the missing details?
1. Depreciation.
2. Customer acquisition costs.
3. Operating expenses.
4. Capital replacement costs.

Depreciation is important because LEOs are likely to last only five years. So annual depreciation of the company's capital stock, its network, is approximately 20%. In contrast, fibre optic cable's lifespan is 20 to 25 years or longer and really reflects technological obsolescence. If mechanical stress on fibre optic glass is limited, it can last centuries or perhaps millennia. For terrestrial networks most depreciation assumes a 5 to 15 year life span. So LEO depreciation rates are effectively an outlier in the telecom industry.

There is significant uncertainty around customer acquisition costs. In developed countries they should be low because customers are willing to pay for the terminal equipment. But in many parts of the world Starlink dishes and routers are free. That is the case here in Hungary, the poorest nation in the EU. I expect similar pricing to hold in most of the developing world. However, customer acquisition costs will reise because churn is inevitable due to the imminent arrival of Amazon's LEO. Amazon has one of the world's largest backbone networks, expertise in selling, strong and highly automated customer service, and very low customer acquisition costs due to its huge base of existing clients. None of the Tech Bros are particularly admirable characters, but Jeff Bezos is practically white linen compared to the Ellon Musk's stains of insecurity and narcissism. Tesla's slumping sales are a testament to it.

I doubt that investors are fully factoring in launch costs, satellite support and management into their bullishness. Most of them have no access to operating expenses. These include ground network costs, customer support, and satellite management.

If depreciation is high, then capital needs are high. This implies that Starlink will eventually be a debt-laden entity. The fact that investors only talk about revenues, ignore recurring costs, and also the equity-debt ratio suggests a high degree of naiveté.