The next figure25 provides an overview of a typical development lifecycle of a company active in the GMES Downstream Sector.
Source: VEGA (2004)
The value-adding production process is part of the operational processes.
The Value-Adding Companies (VACs) are active in adding value to source data and in that way increase the internal complexity of their products and services. According to the study by Holt Andersen26 the EO Value-adding industry is an extremely diverse sector which develops products and services that address a wide range of thematic domains. To support these thematic domains, it produces a wide range of products, which vary greatly in terms of what they deliver and how they are produced. As the applications are so diverse, no single company is able to cover very many of them. The typical profile of a VAC is a small, specialised organisation that focuses on one or two thematic and geographic areas. The industry is characterised by isolated expert groups offering niche services.
The next table provides an overview of the different service types which are offered by Value-adding companies:
Table 3.1 Service type description
Service type Description Class
Standardised products and services Standardised off-the-shelf geo-information solutions with routine/standard delivery. Typically corresponds to repeat sales offerings for many customers, in general high volume.
Class 127
Customised products and services Customised geo-information solutions based on EO interpretation and tailored to specific users. Typically corresponds to one-off offerings for individual customers, generally project-oriented.
Class 1
Integrated / Turnkey solutions Offerings combining EO products and services plus other elements such as hardware, systems, maintenance, etc.
Class 1
Data products and services E-selling EO images/data (with little if any added value) Class 228 Software products and services Packages sold under license to support use of EO images or
data, including maintenance.
Class 2
Training Stand-alone training courses available on a commercial basis including e-learning.
Class 2
Source: VEGA (2004)
On average29, each product draws data from three sources. Whilst the final products is presented in such a way that is easily used by the end customer, there is a lot of effort and/or sophistication involved in producing the product. So although a delivered product may not be seen as complex, the work done to get to that stage is. The more complex a product’s supply chain and production methods, the more vulnerable the product becomes
26
Holt Andersen et al, “What should the public sector do to incubate the Earth observation value-adding sector?”, 2006 27
Class 1 products include one or more of the “customised”, “integrated” or “standard” service types as part of their definition 28
Class 2 products do not include any of the above service types, i.e services including one or several of “data”, “software” and “training”, but none of the the “customised”, “integrated” or “standard” service types
29
to failures in the process. With respect to data supply, almost a third of products have no alternative if one of their data supplies fails. This is a risk which the VACs have little or no influence over.
Within Europe30, markets are open to international competition in principle, however at a national level there is a tendency for value-adding from local providers for several specific value-added services. Due to the sensitive nature of Homeland Security and Law Enforcement, value-adding activities in the defence and security markets tends to be done by national government bodies or companies under government licence.
The Value-adding process consists of the following four main activities31:
• Integration of multiple data sources
• Interpretation and reporting
• Customisation
• User support services
The first activity is integration of data from different sources. Results of the VEGA 2004 study show that 80% of the current services incorporate non-EO data and indicate there will be an increase in the integration of non-EO data into future products and services declared by the VACs, particularly with the incorporation of ground measurements. The second activity is interpretation and reporting. This activity transfers the EO data into a form of output that can be easily understood by users that are not EO specialists.
The third activity concerns customisation. The degree of customisation indicates how much the services depend on the expertise of the providers for configuration or tailoring to meet specific user requirements. According to the VEGA 2004 study 70% of the current services are highly customised and only 8% are not customised at all. Future products and services are planned to have a lesser degree of customisation than current offerings.
The fourth and last activity concerns customer support services. A high level of user support is provided. Only 41 of 162 products or services have not declared any user support32. In each market area about one fifth of the services are offered with training. The VEGA 2004 study shows that value-adding services are a highly diverse set of services, internally complex and typically incorporating a wide range of data sources, including non-EO data. The industry relies heavily on expert services and it is
characterised by a high degree of product customisation driven by the expertise of those conceiving and developing the products and services.
The majority of products and services have been demonstrated to be complex offerings. The use of data from multiple sources, plus the incorporation of additional data sources such as non-EO data or DEMs (Digital Elevation Models) adds a level of complexity to
the service offerings, in turn increasing the added-value nature of the service. VACs understand the benefits of standard products and services, and the data on future products and services compared to the current offerings shows that the extent of customisation within each delivery is set to decrease.
High added-value means high reliance on expertise and human resources, more
variability in output, and so potentially more risk in terms of reliability or availability of the delivered product. The expert service model is identified by the VACs as a response to sophisticated requirements given by their clients. Stability of demand is not high and so VACs must be flexible and agile in their responses.
3.4.2 Trends in production technology
In this section, relevant trends in production technology are presented.
Automation and outsourcing
The following two figures provide an overview of automation of the processing chain and outsourcing of production33.
Figure 3.14 Automation and outsourcing in EO
Source: SAGE study
The EO service industry world-wide is fragmented and fragile. This goes in line with limited evidence of mature and repeatable products in the face of immature requirements from industry and institutional markets. Most value adding companies have expert skills but a strong regional focus. They usually have only few automated processes and are very dependent on satellite data providers, i.e. availability of EO data.
33
Product specifications
The market34 has an increased focus on product specifications, hence becoming more demand-oriented. This means that the method of data collection is becoming less relevant. If the EO sector can adapt to this trend, for instance by supplying products and services that are following acknowledged standards, are GIS-ready, have a certified quality and are independent of data sources, then this will help to secure long term customers and open up new market segments.
Effects of broader technological developments
Broader technological developments of course have an effect on EO VACs and the environment in which they work. For instance broadband, LBS, on-line micro-payments and web services will all continue to open up new business models. Google Earth and Microsoft Virtual Earth themselves present a new market for EO products. They have also opened up a new business model for EO outside the traditional ‘information product’ sales approach. Already the “Google Earth effect” has stimulated new demand from customers that has led to new EO products and services35.
Technical developments
According to the VEGA 2004 study investment in technical development is higher than the general industrial average and consistent with other technology oriented industries. The profile of technical development is ill-defined as it is driven by a wide range of stimuli and receives support from a diverse set of funding sources – public sector contracts and grants are the primary source of funding.
Investment in technical development is higher than the industrial average, but consistent with other technology-oriented industries. VACs report that they spend an average of 20% of the value of their revenues, and an even higher proportion of staff time. Technical development is driven by a wide range of factors split equally between customer facing motives, and evolution of the VAC’s own ideas and capabilities.
Technological innovations
The EO industry is characterised36 by sophisticated products, constant technological innovations and ever-changing demand as the market evolves. Although EO products exist at all maturity stages, the majority of products are at a rising stage, i.e. sales are growing and expected to continue to do so.
Increasing market opportunities
According to the VEGA 2008 study many companies identified a generally growing market opportunity arising from public policy movement and increasing awareness of EO as a potential solution or component thereof. A growing customer awareness for the additional value of satellite data next to ground-based data has been observed. The focus will be on model development based on raw data (space and non-space) in various themes
34
(atmosphere and air quality, water management and subsidence, security, mobility), next to further upstream instrument technology development
3.4.3 Development in expenditure on investment, marketing, training
The following section analyses the EO industry expenditure in both R&D and marketing.
Public support for R&D in space technologies is, according to the EC White Paper37, believed to be imperative because of the high costs and risks involved, and the
comparatively low returns from commercial and institutional markets. Despite issues with funding relating to support from the public institutions38, the EO sector shows above average investment in R&D compared with other sectors, with the average R&D expenditure accounting for 27.5% of EO revenue. It is important to note that technical development activities in the EO sector are funded by clients / public funds and not direct by internal investment (VEGA 2008).
In terms of R&D trends, VEGA (2008) shows that investment intensity is highly correlated with company size. As a proportion of EO revenue, large companies spend 10% or less, compared to a comparable small to medium firm spend of 25%. It was also reported that a significant number of small and medium companies devote more than half their staff to R&D.
One of the possible consequences of higher than average R&D expenditure is that each company in 2006, brought on average 4.5 products onto the market (VEGA 2008). In terms of distribution of R&D effort across the industry, the EO sector spread is indicative of the commercial strategies of the companies. For example, EO may not be a core service of the company and therefore R&D relating to this would be less significant to the overall firm strategy.
Marketing related expenditure is evidenced in the VEGA (2008) study in relation user facing constraints of sales effectiveness. The study reports that the lack of marketing or promotion was particularly an issue for medium-sized companies.
A common priority for VACs, identified in VEGA (2008) was the need to increase commercial activities, either to address new markets and geographies, or simply to drive greater volumes in existing market. The private sector is a key sales target of the
industry. Future private sector acceptance of EO capabilities, VEGA (2008) noted would mean the creation of a large and truly competitive marketplace for products. The need for identified marketing follows findings that the capabilities and acceptance of EO solutions are not know to as wide a community as they could be (VEGA (2008).
37
White Paper, 2003, Space: a new European frontier for an expanding Union An action plan for implementing the European Space policy
38
Issues being that revenues are primarily generated from operational services but revenues grants still comprise about a quarter of company revenues on average (VEGA 2008). Organisations awarding grants to the EO sector included National public grants, European public grants - ESA EC & other (VEGA 2008)
3.4.4 Share of different distribution channels
The characteristics of the industry have implications for the way in which customers are contacted and products and services are sold and delivered. The ways in which EO value added service are ordered and delivered therefore form part of the overall industry sales process. The following section therefore first briefly discusses the relationship and engagement of customers and users, and then goes onto identify the methods, and constraints associated with the distribution of products and services.
EO value adding companies describe typical commercial relationships with users in the following ways; mutual benefit partnership, standard terms framework agreement, data procured on a case by case basis (VEGA 2008). The data from the VEGA study implies that in cases where a limited number of value adding companies buy data from a small number of suppliers, company size and market presence are seen to be drivers. It is therefore concluded by VEGA that the nature of the product drives the customer relationship with data providers.
As with the majority of industries, access and engagement of new and potential clients is seen as vital to the EO value adding sector. Evidence shows that a large percentage of the EO sector considers user accessibility to be an issue, affecting both large and small companies (VEGA 2008). The associated constraint on sales volumes is believed to be as a result of the EO sector users generally being dispersed, hard to locate, and limited access to resource which would facilitate identifying them. User access was shown to be a particular issue in export markets, and felt more acutely by smaller companies, which have limited resources. In terms of meeting the user requirements data requirements is proven to be a primary factor affecting the ability of value adding companies to meet customer requirements.
Methods for distributing products and services include those that are distributed over the internet. VEGA (2008) reported that at the end of 2006, over a third of products are distributed via the internet. The use of E-Business tools for both ordering and delivery of products and services is also increasing. The VEGA study showed that in the ordering and delivery of products via E-Business has more than doubled in the period 2003 – end of 200639.
The ability of firms to implement E-business delivery of products and services has been proven to be restricted by their size. Large companies, for example make the most of web ordering and delivery facilities, where as small and medium companies appear to have not introduced these facilities to the level that was expected in a similar study, conducted in 200340 .
39
3.5 Conclusion
The total revenue of the EO downstream sector amounted € 250- 300 million in
2005/2006 and showed a modest revenue growth in the last eight years. The sector can be considered relatively small, in terms of turnover and employment. The sector serves five overall market segments: land monitoring, natural resource monitoring, oceanography, defence and security and meteorology. The level of maturity of each of these segments differs significantly. Revenue growth within each of these five sectors has differed significantly between these segments. The sector is strongly dependent on grants, especially the smaller and medium sized companies.
Overall, nearly 10% of all European products are also sold to global users. However, the majority of the users or customers of European value adding companies are located in the country of the company itself. This implies that intra-European export is relatively limited and that export to non-European customers is poor, and almost entirely carried out by few large companies.
Most of the EO markets are considered to be open to foreign suppliers at a global level. Within Europe markets are open to competition in principle, however at a national level there is a tendency for value-adding from local providers for several value-adding activities. There is no evidence found in the literature studied that non-European companies serve a significant share of the European market.
In terms of profitability trend of the EO service industry as a whole, profitability is typically below 10% and concentrated in a few larger companies. However, smaller companies tend to show a higher margin on their revenue than larger companies. On the other hand, margins of smaller companies seem to be more volatile than those of their larger competitors. Companies with higher profit/revenue ratio are those for which the value adding activity represents a minor part of their overall activity. In terms of liquidity, it has shown that many companies remain below a safe level, although this is improving. Barriers to entry the sector are relatively limited in number. Most important seems to be the influence of governmental policy and additionally the cost of data access, where incumbent producers that are part of a larger group of companies also providing data have a comparative advantage. Nevertheless, the initial set-up costs for a new company in the value adding industry are low, and many new entrants originate from the R+D
environment. Given a high R&D intensity, funded by grants, the sector seems to be open for entry in this respect.
Data providers are the most important supplier for the sector. The relation between the data suppliers and the value adders is a possible threat for the competitive position of the sector, as a large share of the value adders consider suppliers to have a negative impact on their performance. Additionally, nearly half of the supplier relationships are now
supported by some form of framework agreement and of these framework agreements used, more than three-quarters are managed by the supplier, which indicates a strong dependency of the sector on their suppliers.
The majority of the customers of the value adding organisations are public organisations. The services provided by the EO downstream sector drive productivity increases at these customers. Takeoff of commercial business is slow, which seems to stem from a lack of knowledge about the EO potential to tentative private customers and the (perceived) high costs of EO products and services.
EO products and services show a large extent of customisation. Less than ten percent of product and services is not customised at all. This level of customisation is decreasing.