So the cat is out of the bag. As we noted last December, the FCC has been looking hard at how to make sure MSS spectrum is put to productive uses, and now in a speech by Chairman Genachowski, he has stated that the Plan will propose a Mobile Future Auction “permitting existing spectrum licensees, such as television broadcasters in spectrum-starved markets, to voluntarily relinquish spectrum in exchange for a share of auction proceeds, and allow spectrum sharing and other spectrum efficiency measures”. Specifically:
“The Plan proposes resolving longstanding debates about how to maximize the value of spectrum in bands such as the Mobile Satellite Service (MSS) or Wireless Communications Service (WCS) by giving licensees the option of new flexibility to put the spectrum toward mobile broadband use-or the option of voluntarily transferring the license to someone else, who will.”
It is going to be very interesting to see whether this “new flexibility” involves further liberalizing the regulations governing ATC, over what would undoubtedly be the heated objections of existing wireless carriers (who have always had a problem with potential “windfalls” for MSS spectrum holders). For example, would the FCC contemplate removing the requirement that all terminals must include satellite capability and offer a dual mode service (similar to the European S-band licenses which do not include any such restrictions)? Presumably any such carrot might come with a corresponding “use it or lose it” stick, although if an operator chose to stay with MSS-only services, it is hard to imagine that any third party could use the spectrum for terrestrial services at the same time.
However, MSS operators will certainly now be faced with a choice: do they continue to bet that (what conceivably might be more liberalized) ATC is the best way forward, and hope they can either partner with a leading wireless operator or attract investors to a new entrant wireless business plan, or do they agree to return their spectrum to the FCC in exchange for a share of the proceeds in the proposed Mobile Future Auction? The rest of this year will certainly be filled with many twists and turns in the MSS sector as we see which way operators will jump.
The FT’s Alphaville blog has highlighted various documents filed by SkyTerra with the SEC as part of its going private transaction with Harbinger, and suggested that Harbinger is still focused on the acquisition of Inmarsat that it originally proposed back in July 2008.
However, in our view these documents actually indicate the opposite, that although Harbinger is actively attempting to put together a consortium to fund an ATC network deployment, this is unlikely to include a bid for Inmarsat. The UBS analysis for Harbinger in July 2009, suggests three possible strategic options after the privatization of SkyTerra (Sol), namely:
(a) Acquire Inmarsat (Ignis)
(b) Pursue the Inmarsat (Ignis) Coordination Agreement
(c) Lease TerreStar (Taurus) Spectrum.
Over the last several months, it is clear that Harbinger has in fact pursued options (b) and (c) rather than option (a) (although admittedly it would not be able to launch a bid for Inmarsat prior to the SkyTerra takeover):
- SkyTerra declared the Inmarsat Coordination Agreement effective in December 2009 (prior to the two year deadline for this action); and
- TerreStar announced in January 2010 that it had entered a 90 day exclusive negotiation period to lease its satellite spectrum to Harbinger in exchange for an advance of $30M against its prior terrestrial (1.4GHz) spectrum lease to Harbinger.
While the Inmarsat coordination agreement (including its payment of $250M to Inmarsat to fit filters to existing Inmarsat terminals) is a necessity to make use of SkyTerra’s spectrum in any ATC network, in our view the potential Harbinger-TerreStar satellite spectrum lease is a direct alternative to pursuing a takeover of Inmarsat (albeit one which may not give access to European S-band spectrum, unless TerreStar is successful in its challenge to the European S-band process, or either Inmarsat or Solaris give up their licenses for this spectrum).
Similarly, while we understand that Harbinger is attempting to raise money from a consortium of investors over the next month or two, using this new funding to acquire Inmarsat would mean that it could not be used to fund a near term buildout of an ATC network. In fact, given the rise in Inmarsat’s stock price over the last year, it appears plausible that Harbinger might even decide to sell off some of its Inmarsat shares in order to provide funding for an ATC deployment, especially if Inmarsat decides to go down the route of spending its cashflows on a new I5 constellation with Ka-band capabilities.
There would be two ways in which an ATC network deployment could happen: if the buildout was funded by an existing wireless operator as a way to add capacity to its existing network, or as a (self-funded) standalone 4G new entrant to the US wireless market. We believe that Harbinger is pursuing the second of these alternatives at present, because the (less expensive and risky) first option is simply not open to it for the foreseeable future. As SkyTerra notes in its preliminary proxy statement:
“The Company had been actively pursuing a major strategic partner for a considerable period of time. In addition, during early to mid 2009 the Company had pursued and encouraged such parties to submit indications of interest to make an investment in and/or acquire the Company. No such partnering efforts were successful and no bona fide offers were received. In the judgment of Morgan Stanley, it was unclear that there was a short-or-medium term need for additional spectrum by ATC companies who were potential strategic partners. In addition, potential strategic partners had sources of spectrum other than through a partnership with SkyTerra, including via spectrum auctions by the FCC, and sales from SpectrumCo, Clearwire or from other entities in the satellite sector.”
Thus the pressing question is whether Harbinger will now be able to convince prospective partners/investors that a new entrant wireless business plan (presumably similar to that of Clearwire but based on LTE) would make sense. Though some funding might be available from (for example) an equipment vendor who would like to demonstrate its 4G technology (as has happened with Clearwire), it is less obvious who might be interested in providing distribution. Most importantly, with doubts persisting about whether Clearwire (with significant backing from wireless and cable operators) will be able to develop a sustainable 4G business, Harbinger will need to demonstrate a compelling reason why customers should choose its service over those of more established wireless providers. The only credible differentiator for such a wireless network lies in the satellite roaming capabilities that will be available (and mandated) in an ATC network deployment (and which Mr Falcone suggested to the Wall St Journal back in April 2009 would attract “vast global demand”). Thus potential partners’ attention will need to be focused on the TerreStar Genus phone (which now looks like it will come to market sometime in the second quarter of this year, after the deadline for Harbinger to complete its potential satellite spectrum lease with TerreStar), and whether they believe it can provide a compelling demonstration of competitive differentiation and market demand, based on this satellite roaming capability.