Eight months ago, SpaceX had a problem.

Despite launching literally thousands of satellites into orbit and signing up hundreds of thousands of paying customers, Elon Musk's pioneering space company was losing money on its Starlink satellite broadband service. This was partly a function of high capital costs and a (then) slow-growing customer base. But it was also a function of SpaceX losing $20 million a month on Starlink service provided to Ukraine -- for free.

Lucky for SpaceX, this second part is no longer a problem.  

Artist's depiction of a global satellite internet network.

Image source: Getty Images.

We're from the U.S. government, and we're here to help

Since the early days of Russia's invasion of Ukraine, SpaceX has provided Starlink hardware and Starlink service to Ukraine at discounted rates -- and even entirely for free. That seems to have changed over the past few months. However, earlier this month, the U.S. Department of Defense confirmed that in cooperation with "a range of global partners," it is now paying for both Starlink satellite terminals and Starlink internet service to be provided to Ukraine.

Washington is running the funding through its Ukraine Security Assistance Initiative, a Pentagon program designed to bolster Ukraine's ability to defend itself during the war. Citing "operational security reasons," the Pentagon is keeping mum on precisely how much it is paying SpaceX to provide Starlink to Ukraine, although The Washington Post puts the value in the "hundreds of millions of dollars."    

What this means for the Starlink initial public offering

For investors who have been looking forward to the prospect of SpaceX holding an IPO of Starlink and have been waiting for this to happen for years, this description of the value of its Starlink contract is perhaps not quite as precise as we might like. (How many "hundreds of millions of dollars?" How close does this get Starlink to the "reasonably predictable" revenues that Elon Musk wants to see before running a Starlink IPO?)

But beggars can't be choosers, and the Pentagon's new Starlink contract has at least given us a clue.

Start with the fact that, as of October 2022, SpaceX had delivered 25,300 Starlink terminals to Ukraine; as of December 2022, Ukraine had put in a request for 10,000 more Starlink terminals. Assume that request was granted in full and that there are now 35,300 Starlink terminals operating in Ukraine.  

Multiply those 35,300 terminals by $120 (Starlink's advertised monthly subscription-service cost for an ordinary terminal in the U.S.), then multiply them again by 12 months in a year. You're still going to end up with only $50.8 million in revenue -- a far cry from the $200 million it would take to reach the Post's estimate of this contract being worth "hundreds of millions of dollars."

So where is the extra $149.2 million-plus coming from?

We make it up on volume

Volume, baby! You see, while SpaceX advertises at $120 a month, this is the price for an ordinary Starlink subscription for household use such as you or I might sign up for. Ukraine's government and military, on the other hand, are presumably using a much greater volume of bandwidth on their Starlink terminals than most households do.

And SpaceX's rates for Starlink usage rise astronomically as usage of the service increases.

Turns out, once you start measuring Starlink downloads not in gigabytes per month but in terabytes, the cost of a subscription can rise to $250, $500, or even $5,000 per month. And with rates escalating so quickly for power users, it's easy to imagine how 35,300 government or military Starlink terminals could generate revenues in the "hundreds of millions of dollars" for SpaceX.

What this means for investors

Much electronic ink has been spilled in recent months over the fact that SpaceX has rocketed from 10,000 Starlink subscribers to more than 1.5 million over just a few short years. And this is good news for Starlink, as more subscribers means more revenue for SpaceX. Currently, the service is probably pulling down in excess of $2.2 billion in annual revenue.

That's still a far cry from the $30 billion in annual revenue that Elon Musk ultimately wants to get out of Starlink. But reasonable minds can now agree that Starlink is on a path to reach this goal.

True, some may still doubt how far Starlink is down this path and whether its revenue growth is "reasonably predictable" enough that an IPO might happen soon. Should subscriber growth at Starlink begin to slow, this may put future revenue growth -- and the IPO -- into question. But if SpaceX can generate hundreds of millions of dollars from just a few tens of thousands of Starlink terminals in Ukraine, then we can see how the size of subscriber growth may not necessarily limit the size of revenue growth at the company -- or determine how close Starlink is to an IPO.

That's something to bear in mind as we await the next update on how big Starlink has become.