So Liberty Media has struck a deal to invest up to $530M in Sirius XM, in the form of secured loans, and will receive preferred stock convertible into a 40% stake in the company in exchange for its investment. The first $280M tranche from Liberty will be used to pay off $171.6M in bonds held by Echostar, which are due for redemption today. Subsequently, and subject to “various closing conditions”, Liberty will loan Sirius XM a further $150M and offer to acquire up to $100M of the company’s outstanding loans.
While this means that Echostar’s attempt to acquire Sirius XM has been defeated for the moment, it may be too early to write Echostar off completely. As we highlighted previously, Sirius XM would offer potential synergies with Echostar’s other investments (particularly in TerreStar), which will not be available to Liberty. Indeed other analysts have commented on how satellite radio holds little interest for DirecTV, and in our view, speculation that Sirius XM is a good route into mobile video is completely misplaced. We highlighted back in September 2006 that even if the mobile video opportunity is large (which is now far from certain), satellite radio is a very poor solution for providing the necessary handheld coverage, without deploying a huge number of repeaters. Unless either the Sirius or XM radio service was closed down, it is also unclear that there would be sufficient capacity for a meaningful video service, since both Sirius and XM each have only about 4-5Mbps of data delivery capability within their current architectures.
Instead, we consider that the potential to add two-way (OnStar-like) capability to the in-car service, using Echostar’s other assets (i.e. TerreStar), offers much more long term promise. Viewed from this perspective, Liberty’s investment should be seen more as an attempt to frustrate Charlie Ergen’s ambitions, and acquire the satellite radio service at a very attractive price, rather than a desire to add new mobile services to DirecTV’s offering. Conversely, we shouldn’t rule out the possibility of Echostar coming back with a better offer (or simply acquiring more debt than Liberty would want to buy back), given the much greater synergies available to it from an acquisition of Sirius XM, and the likelihood that Sirius XM will continue to struggle to generate enough cash to meet its debt repayments over the next year or more, while new car sales remain at a low ebb.
There continues to be confusion about who said what to whom and when. Iridium stated emphatically on Thursday that “it had no advance warning of the impending collision”. However, Nicholas Johnson, NASA’s chief scientist for orbital debris, was quoted in a Washington Post article on Friday afternoon as saying “Iridium, the Bethesda-based satellite phone company, had received a report that its satellite — one of 66 used in its communications network — would pass within 300 meters of the non-operational Cosmos. Instead, the Iridium suddenly went silent. Soon thereafter, the military picked up on its radar indications of debris in orbit over Siberia. The improbable had finally happened.”
Curiously enough this quote was removed from the final printed version of the article, and Mr Johnson had previously noted that Iridium wasn’t on the top 10 list of most likely collisions on Tuesday, while the US Defense Department has been quoted as saying it did not predict the collision.
While the trading of accusations may continue for some time, it seems increasingly likely that the problem will turn out to be due to some unanticipated modeling error in the orbit prediction programs used by both military and civilian operators. Its pretty certain that this will lead to calls for more funding of space observation networks, to avoid any future problems. As a minimum, better data, and more sharing of the data that does exist, needs to be high on everyone’s agenda.
Our initial reaction to the collision of Iridium SV33 with a non-functioning Russian Cosmos 2251 satellite was that NORAD (or rather the US Strategic Command or Stratcom to give it the current title) would have questions to answer about why it did not warn of the danger of a possible collision. Its now been pointed out to us that both Iridium and Stratcom would have been running their own collision prediction software, not least because Iridium has to be careful that its own satellites do not collide with one another, though the input data is supplied in a USSC database (and is publicly available at Heavens Above).
However, it appears that the data did not show any predicted collision between the two satellites and they were expected to miss one another by 80km or so. Either something happened to the Russian satellite to dramatically increase its drag (“a bit falling off”?) or the Iridium satellite was moved (which appears implausible since it was in service at the time and has to stay within a box of a few km to keep its crosslinks in contact with the rest of the constellation).
Hopefully a better explanation will emerge soon, but this highlights why Iridium didn’t identify the Russian satellite correctly at first and was taken by surprise by the collision. In the meantime, we’re sure this will give ammunition to conspiracy theorists, speculating about Russia deliberately trying to take out an American satellite. However, that would undoubtedly be going too far – as the US Missile Defense Agency knows only too well, its pretty hard to hit such a small target, and no-one has actually suggested that the Russian satellite was secretly under control.
So now the unthinkable has happened, and two satellites have collided in orbit, despite the fact that NORAD is supposed to be tracking “more than 10,000 pieces of high-speed debris, some no larger than a football” and warning of potential collisions. Indeed to our knowledge, Iridium satellites have been moved in the past to avoid possible near-misses with debris.
As we said in the WSJ interview, the Pentagon are going to face a barrage of questions about exactly why there was no warning given about a possible collision: though you can’t predict that two satellites will definitely hit one another, unless Iridium had been maneuvering its satellite (which does not appear to be the case) it is easy to calculate when they may come within a few miles of one another a minimum of several days in advance.
Fortunately for Iridium, the disruption is reduced by the availability of in-orbit spares, and the fact that the satellite is only one out of 66 providing coverage, so there will just be a hole passing over any point on the Earth’s surface twice a day for 5-9 minutes (less at higher latitudes). Its a lot better than the failure of a GEO spacecraft which could eliminate service for months (or even years) across a large part of the globe, while a spare satellite is built and launched to replace it.
The main worry now is about how far the debris cloud will spread, and whether it will affect other Iridium satellites at that altitude, or even other satellites in nearby orbits. The closest commercial sytem is Orbcomm (only about 10km away), then there are optical imaging satellites a bit lower. The debris won’t get up to Globalstar’s orbit (600km further up) or of course the geostationary belt (36,000km above the earth). However, there are also a lot of government (military and civil) satellites in and around these orbits (including weather and other Earth observation satellites). In a worst case situation it is even possible that Iridium might have to raise the orbit of its remaining satellites slightly, but within reason this could probably be achieved without any additional service disruption.
Its now been reported that Echostar has acquired a substantial portion of Sirius XM’s maturing debt as part of a possible attempt to take control of the company through a forced bankruptcy filing. This doesn’t come as a great surprise given Echostar’s other investments in satellite-delivered mobile TV (in Korea and China), in 700MHz spectrum that would likely be used for mobile TV in the US, and in TerreStar’s MSS-ATC system (where it has stated an interest in using the satellites for mobile video, most recently at the SATCON conference in New York last October). Indeed, a primary reason for the spin-off of Echostar from DISH was to enable Echostar to exploit new business models in mobile entertainment, while the slow growth DISH business would ultimately be sold to a telco or merged with DirecTV.
In our view, satellite radio has always had a far more viable business model than mobile TV, despite the recent downturn in new car sales making it difficult if not impossible for Sirius XM to achieve subscriber growth this year. We believe that satellite radio will remain an attractive feature for car manufacturers in the medium to long term both because the satellite infrastructure is ideally suited to providing a near ubiquitous car-based service with only a limited number of terrestrial repeaters and because the technology is not going to change dramatically over the next decade, avoiding the risk of existing OEM installations being left with no service (as happened to many OnStar subscribers when analog cellular networks were switched off). Compare this to cellular-based navigation and entertainment systems, where technology is advancing very rapidly and an aftermarket solution (or a flexible OEM solution such as Sync) is the most viable option for car manufacturers and end users alike. However, we also view a bankruptcy filing by Sirius XM as highly likely, because it will enable the company to renegotiate its biggest (controllable) expense – that of content rights. While some providers such as talk radio hosts may feel that there is a better deal on offer from terrestrial free-to-air networks, for most sports programming there is no viable alternative to satellite radio as a distribution mechanism, because no other broadcast (audio) medium can offer sufficient capacity and reach to deliver multiple simultaneous games to a widely distributed national audience. Some may argue that internet streaming is an alternative, but 3G and 4G wireless networks are (and will remain) ill-suited to providing continuous in-car coverage (not to mention the difficulty of extracting any revenue stream for content providers other than advertising from such users).
So if Echostar does now move to take control of Sirius XM, how will this fit with its other investments? Most obviously it seems plausible that TerreStar’s satellites could be used to provide a two-way communications channel for future generations of Sirius XM receivers, while Sirius XM’s repeater network could form part (although not all) of the necessary Ancillary Terrestrial Component (ATC) to ensure signal reception for TerreStar in urban areas. This would enable low cost integration of other services into cars, whether desired by the manufacturer (such as over-the-air fault monitoring) or paid for by the consumer (such as an OnStar alternative). Indeed, with the exception of mobile video (which we do not believe is likely to gain traction in cars, for the simple reason that the vast majority of satellite radio use is by solo commuters, who obviously couldn’t watch a video) this sounds surprisingly similar to ICO’s proposed Mobile Interactive Multimedia (MIM) service, and given Sirius XM’s strong relationships with most of the major auto manufacturers, this prospect could make it even more difficult for ICO to move forward with a commercial launch of MIM. Perhaps it might even provide an incentive for ICO to contemplate merging with TerreStar (as has often been rumored in the past)? Certainly Echostar’s interest in satellite radio is likely to shake up the MSS sector as well.