They're completely capable of adding capacity like that and having a high satellite count.
I'm not saying that it doesn't have a cost, but they have no middleman. They don't need to buy space on somebody else's rocket. They also don't have to pay any ongoing maintenance cost beyond equipment replacement and it's much cheaper than doing it on land. I know that you have satellite experience but their launch costs are a fraction of what other companies have done till now.
I worked for a suburban, regional ILEC and our operating costs were around 100 million a year to cover like two counties of maybe 100k customers and the local businesses.
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I actually do agree with you about costs delivering in dense markets as providing locally has certain "economy of scale" benefits. It's also not going to compete on the "Gigabit in every home" front, because I do agree that the bandwidth is more limited. Operating a local provider in general though is extremely expensive and doesn't really provide any additional benefit to the provider. SpaceX themselves have uses for this network. I also hope that I'm right here :)