Why spectrum may be a bad investment

Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:32 pm by timfarrar

The President has now announced his support for the proposal set out in the FCC’s National Broadband Plan (NBP) to free up 500MHz of spectrum for wireless broadband over the next decade. However, even though “Our nation’s ability to lead the world in innovation and technology is threatened by the lack of sufficient spectrum for wireless broadband applications and services” according to the FCC, it doesn’t necessarily mean that spectrum will prove to be a good investment over the next few years. (In this analysis, we’re looking at the opportunity for financial investors, as opposed to cellular operators – just like in the housing market, if you intend to use your spectrum, then that’s a different proposition from planning to flip it to someone else).

Indeed it is highly desirable from the FCC’s point of view that spectrum should become cheaper rather than more expensive, because that will enable more competition in the wireless market and result in lower prices for consumers. In the absence of lower prices for spectrum, it is likely that some cellular operators will be shut out entirely from 4G, or will be forced to merge with competitors in order to combine their spectrum holdings – not the outcome that the FCC wants to see. The FCC also doesn’t want to reward speculators – it would much prefer spectrum to be put to use, rather than see financial investors lock it up with a view to profiting from higher prices in the future. Although some might argue that the FCC also needs to raise money from auctions (not least to fund the buildout of public safety networks), it is far from clear that such motivations will weigh heavily in the FCC’s decisions (even if some members of Congress disagree). Certainly the concept of maximizing the proceeds of future auctions was not emphasized in the NBP.

From a historical perspective, despite this apparent crisis, spectrum prices in the US (on a per MHzPOP basis) are actually far lower than a decade ago. This is entirely logical: if it now takes 50MHz+ of spectrum to support $30 of monthly data services, whereas ten years ago operators required only 20MHz of spectrum to provide $50 of monthly voice services, then cellular operators simply can’t produce the same ROI from each MHz of spectrum as they did in the past.

Just the objective of freeing up 500MHz of spectrum (almost doubling the amount currently available for terrestrial cellular service) alone is likely to put a damper on spectrum prices. In recent months, we have also seen the FCC moving rapidly to finalize rules to enable use of 25MHz of WCS spectrum, and formulate policies to ensure that 90MHz of MSS-ATC spectrum is put to use. In addition, the FCC may also decide to limit the amount of additional spectrum that AT&T and Verizon (who accounted for the vast majority of spending during the 700MHz auction in 2008) can acquire in the future.

In my view, all of these developments point to lower spectrum prices in the next few years. In the short term, prices will be depressed further by the glut of spectrum owners seeking to monetize their holdings at the moment: Harbinger, Clearwire, NextWave and other MSS operators, to name just a few. This comes at a time when there is a relative lack of buyers, with most analysts hard pressed to name anyone other than T-Mobile that is an obvious partner for these companies. Investors who acquired undervalued spectrum assets a few years ago (particularly if that was prior to recent rule changes) may be OK, but new investors will need to be more cautious about the price they pay for these assets.

In summary, even if there is considerable long term demand for spectrum, it is a fallacy to equate this with increasing prices. In that regard, spectrum is like oil: you know there will be more demand in the future, but that tells you nothing about how the price will move in the next year or two. The short term price (and indeed the price in auctions) is determined by the balance of demand and supply today. That alone is a negative sign for investors in spectrum assets. However, when the FCC (unlike OPEC) would also prefer to see lower prices for spectrum, then it certainly looks like a risky bet to assume that prices will go higher anytime soon.


Rumorwatch: Will Inmarsat buy Thrane & Thrane?

Posted in Broadband, Financials, Inmarsat, Maritime, Operators, VSAT at 5:12 pm by timfarrar

In recent discussions we’ve heard rumors that Inmarsat may soon make a bid to take over Thrane & Thrane, its biggest equipment supplier. Inmarsat has certainly been in acquisition mode over the last year, taking over Stratos and Segovia and investing in SkyWave. Nevertheless, such a move would still be quite a shock for many in the MSS industry.

However, it would be a logical accompaniment to Inmarsat’s Ka-band strategy: Inmarsat would be able to reduce the price of L-band equipment (particularly FleetBroadband terminals) and thereby help to fend off the threat from Ku-band VSAT for the next few years until its new Ka-band satellites are in orbit. Thrane could also play an important role in development of mobile Ka-band terminals, which are clearly the biggest technical risk in Inmarsat’s entire Ka-band plan.

Though the threat from Ku-band has been hyped up recently, most notably in Comsys’s recent maritime VSAT report, our view continues to be that L-band has a very sustainable market position, outside the highest spending ships. To date, Ku-band VSATs have achieved only limited penetration within Inmarsat’s core maritime commercial transportation market (which incidentally is much smaller than 100,000 ships), and most of these ships spend far too little to ever contemplate a move to VSAT.

By reducing the cost of L-band equipment, in concert with its aggressive moves on airtime pricing over the last year, Inmarsat has a very viable opportunity to hold off Ku-band VSAT incursion. Even the recent concerns about shortfalls in Inmarsat’s maritime revenue growth during the first quarter of 2010 appear to stem much more from the price reductions that Inmarsat and its distributors have used to remain competitive on high spending vessels, rather than any substantial loss of market share to VSAT in the commercial transportation business. Indeed many maritime VSAT service providers had a very disappointing year in 2009, and quite a number of them are now up for sale, in what we would view as an attempt to exploit the perception of rapid future market growth before they actually need to fulfill these expectations.


FCC acts on MSS spectrum – why now?

Posted in Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 2:36 pm by timfarrar

On Friday, the FCC’s Spectrum Task Force announced a “plan to increase value, utilization, and investment in mobile satellite service (MSS) bands”, beginning with a Notice of Proposed Rule Making (NPRM) which they hope to approve at the Commission meeting scheduled for July 15.

Although the announcement itself referred to the whole 90MHz of MSS spectrum identified in the National Broadband Plan (NBP) as suitable for terrestrial broadband, the focus of the discussion at Friday’s press conference appeared to be around the 2GHz (S-band) spectrum. Indeed the FCC highlighted that this spectrum, which is held by DBSD and TerreStar, is “right in the neighborhood of both the AWS spectrum and the PCS spectrum”. In particular, the FCC indicated that it would propose changing the table of allocation for the 2GHz spectrum, to allow primary terrestrial use (without ATC), and then enable secondary leasing for all three MSS spectrum bands. These rules would enable secondary leasing to begin “relatively soon”, if the FCC agreed to the proposal of the Spectrum Task Force.

According to Communications Daily, this proposal might include “charges”, presumably as “consideration for the step-up in the value of the affected spectrum” (as proposed in the NBP), but would avoid some of the delays associated with an incentive auction (which was one of the other options suggested in the NBP). Of course spectrum leasing for purely terrestrial use (as would then be possible in the 2GHz band) would be rather more straightforward than leasing under the current set of ATC restrictions, but the level of any FCC “charges” (and perhaps other conditions on terrestrial buildout or provision of satellite services) would dictate how much value could be realized by the existing spectrum holders.

What is particularly interesting is that this NPRM is being issued so quickly, when the Credit Suisse research conference call three weeks ago indicated that it was not expected until September. In addition, the NBP suggested that an S-band (2GHz) Order would not be expected until 2011 (as opposed to 2010 for the L-band and Big LEO bands), at least partly because decisions might be impacted by the outcome of the adjacent AWS-3 band proceeding.

Perhaps the reason for this change in timing is hinted at by the first line in the FCC’s announcement: the need to “increase…investment in MSS bands”. Certainly both Echostar and TerreStar were well prepared with immediate comments on the announcement (with Echostar also noting that the proposed change would “help spur investment”), and TerreStar desperately needs new investment in the very near future. It looks like the outcome of the FCC meeting in July (which according to Friday’s press conference is “still in flux”) might therefore prove critical to TerreStar’s future.


Guaranteeing a competitive future for MSS

Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar

So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.

Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.

We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.

The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.

The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.

In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.

Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.

Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.