Will MSS consolidation start with LDR?

Posted in Globalstar, Inmarsat, Iridium, LDR, LightSquared, Operators, Orbcomm, Services at 12:37 pm by timfarrar

Inmarsat revealed in its 2009Q3 results that it is in negotiations to acquire a satellite services provider that generated more than $50 million in revenue in 2008, is currently profitable and will have no material indebtedness at closing, in a purchase that would cost less than $150M. There are very few companies in the MSS space that fit the profile given by Inmarsat, but one that does is SkyBitz, which Inmarsat noted in its June 2009 investor day presentation was one of the “key competitors” in the satellite Low Data Rate (LDR) market. Inmarsat also noted that one of its objectives in investing in SkyWave was to “stimulate consolidation in the [satellite LDR] market”.

Indeed, back in July we speculated that a possible resolution to the fight between Inmarsat and SkyBitz over what SkyBitz characterized as “restrictive trade covenants included by Inmarsat” in its SkyWave investment would be for Inmarsat to facilitate a buyout of SkyBitz. An Inmarsat acquisition of SkyBitz would have the added benefit (for Inmarsat) of taking out another of SkyTerra’s key LDR customers, in addition to the 50K GlobalWave customers who were moved from SkyTerra’s satellites to Inmarsat’s I4 satellite network in October 2009.

***We’ve now been reliably informed that Inmarsat’s current acquisition target isn’t SkyBitz. We understand it is most likely a system integrator focused on government business. We don’t have a name at this point, but one company in this area that would fit the disclosed parameters is Segovia. There are likely several other similar possibilities as well.***

We’ve lamented previously that no-one ever seems to leave the MSS industry, but if Inmarsat does eventually follow through on its stated ambitions to stimulate consolidation in the LDR market, then perhaps that sector could be one place where much needed MSS industry consolidation finally begins.

In that context, with Orbcomm having yet another disappointing quarter, we wonder if now is the time for a competitor to make a bid for Orbcomm. After all, the company expects to settle the $50M insurance claim for the failure of all of its QuickLaunch satellites “imminently”, at which point Orbcomm will not have spent too much on its second generation constellation and will still have a reasonable amount of cash on its balance sheet. That might be particularly attractive to Globalstar or Iridium, either of which would benefit greatly from moving Orbcomm’s subscribers over to their own networks (albeit with significant costs for terminal upgrades), and could allay investor concerns about whether Orbcomm can fund the rest of its second generation satellite constellation (which would be exacerbated if the company fails to receive something close to $50M from its insurance claim in the near future). With its partners postponing some new service offerings until messaging delays are resolved, Orbcomm will need these new satellites sooner rather than later if it to build a sustainable business and generate the rapid growth that has been promised ever since the company’s IPO in 2006, but to date has failed to materialize.


Regulatory storm in a teacup

Posted in Globalstar, Iridium, Operators at 9:56 am by timfarrar

It seems a lot of noise is being made about the potential impact of Globalstar filing the license application for its second generation constellation with the French regulatory agency ANFR instead of the FCC. Indeed this was even raised as a concern on Iridium’s 3Q2009 results call yesterday. In our view this is basically a storm in a teacup: both Iridium and Globalstar are licensed to use particular parts of the Big LEO L-band frequency allocation (1610-1626.5MHz), and in the US the FCC decided (in Nov 2007) to share this spectrum equally between the two companies (Globalstar has the bottom 7.775MHz, Iridium the top 7.775MHz and the middle 0.95MHz is shared). However, in certain other countries (e.g. Russia), some of this band is reserved for Radioastronomy and Microwave Landing Systems and so Globalstar is unable to use much (in some cases any) of the lower 8MHz of the band. Thus Globalstar wants to keep operating up to 1621.35MHz as it was allowed to in the US before the FCC’s November 2007 ruling.

In theory, the FCC’s November 2007 ruling applied to the global operations of both systems, although in reality, Iridium would still need to seek a license from individual country regulators to operate below its originally authorized 1621.35-1626.5MHz frequency band, which may or may not have been granted. Iridium still has the opportunity to make this argument, even when Globalstar is licensed by ANFR, but it will not be able to seek sanctions against Globalstar by the FCC if it is unsuccessful and Globalstar remains authorized to operate some of its gateways up to 1621.35MHz. Instead, the licensing of the two systems will depend on the decisions of individual regulators.

Some observers have seen this as a potential problem for Iridium, but that’s not really the case. Iridium will certainly need to build the capability into its next generation system to adjust frequency allocations on a country by country basis, but that’s far from an insurmountable (software) challenge. The places where Iridium will need additional frequencies for broadband and/or voice services include the oceans (for evolutions of OpenPort), where there is unlikely to be an issue as there is relatively little Globalstar coverage, and a few key countries (e.g. Afghanistan) where support from the DoD may count in Iridium’s favor in securing additional spectrum. Thus we believe Iridium is unlikely to face any meaningful incremental capacity constraints as a result of this decision. Globalstar will benefit by avoiding potential regulatory sanctions that Iridium might have pushed the FCC to impose, but there are much bigger issues for both companies: in particular, whether sufficient growth potential remains in the handheld MSS market for all of the MSS operators to be successful.

On another topic, we’ve just released the latest report in our MSS information service, with extensive discussion of the outlook for ATC, the growth prospects for in-flight connectivity and the competition between Inmarsat and maritime VSAT. In the last few months we’ve also produced detailed profiles of Iridium and Thuraya, and will be releasing profiles and forecasts for Inmarsat and TerreStar in the near future. Subscribers to the research service include the majority of leading MSS operators, distributors, equipment suppliers and satellite manufacturers, as well as a number of investors in the MSS sector. As one MSS operator recently told us: “your reports are the only ones on the MSS sector that actually provide valuable insight for someone working in the industry”. According to another provider: “I base my business targets on your forecasts; they are the only projections that you can rely on to be realistic”.

If you are interested in finding out more about our research, then contact us for more details.