Well that was fast.
It was only one month ago that we learned Google parent company Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is sending up another batch of Earth-imaging "Terra Bella" satellites. The mission is slated to take place sometime in late 2017 -- but now, it turns out, by the time those satellites reach orbit, Alphabet may not even own them anymore.
Spinning on a dime
As The Wall Street Journal reports, Alphabet has entered into discussions to sell its entire Terra Bella operation -- the whole kit and kaboodle -- to rival satellite-imaging start-up Planet Labs. This is a surprising reversal, to say the least.
In fact, Alphabet only just finished buying Terra Bella in 2014, paying $500 million for the business. As part of Alphabet, Terra Bella's seven orbital satellites have helped to improve the quality of Alphabet's self-built Google Maps, decreasing the company's reliance on outside satellite imaging suppliers such as DigitalGlobe (NYSE:DGI). But Alphabet has apparently rethought the advantages of owning its own photo-snapping satellites and decided it's better to focus on its core business -- and outsource sat-services work to others.
After all, as satellite-research firm TMF Associates head Tim Farrar explains, it only costs Alphabet $10 million to $50 million a year to buy all the satellite images it needs from other suppliers. At those prices, the $500 million spent to acquire Terra Bella could keep Google Maps in pictures for anywhere from 10 to 50 years. Factor in the cost of maintaining, operating, and eventually replacing Terra Bella's satellites as they wear out over time, and it becomes even more economical for Alphabet to just buy its pics from outside vendors such as DigitalGlobe and Planet Labs.
Is SpaceX next?
Speaking of outsiders, you probably recall that two years ago, Alphabet teamed up with Fidelity to invest $1 billion in SpaceX to assist with the latter's effort to build a constellation of broadband internet satellites. This project is a little closer to Alphabet's core internet search business, but it's still something Alphabet can easily outsource to other companies to handle.
In fact, Alphabet recently announced that it is halting expansion of its Google Fiber rollout and laying off workers in that division. Soon after, the company pulled the plug on a plan to provide internet service via solar drone. The company is still looking into the possibility of using high-altitude balloons to beam internet service to earth, but given the rollbacks elsewhere, it appears Alphabet may lose interest in this effort as well and begin looking around for someone to buy out its stake in SpaceX.
(The good news: If and when such a sale takes place, it would give us an up-to-date look at how the market is valuing SpaceX stock).
Final thought: What does all of this mean for investors?
Why might Alphabet be pulling back from its space investments? In a word: profits. For some time, analysts have been criticizing Alphabet's "moonshot" investments for blunting profit margins and causing the company to miss earnings targets. By reducing investments in non-core businesses, Alphabet may hope to get its margins moving upwards again. And Alphabet's moves may have follow-on effects elsewhere.
Consider: Planet Labs already has more than 100 Earth-imaging microsatellites in orbit. Adding seven somewhat larger Terra Bella satellites to the mix won't grow Planet Labs' constellation very much. What it will do is remove a rapidly growing competitor from this industry -- and hand greater pricing power to DigitalGlobe and Planet Labs.
With less competition, DigitalGlobe should become more profitable. And with less competition, the still-private Planet Labs will become a more attractive investment if and when it decides to IPO.