TerreStar has finally filed the exhibits to its Disclosure Statement which set out more details about its Genus business plan and the valuation of its spectrum, and though I don’t think Blackstone are paying tribute to Leslie Nielsen when they respond “I am serious” (and don’t call me Shirley), their Genus business plan has caused much mirth in the MSS industry.
I’ve previously pointed out the similarities to the launch of Iridium (and ironically Blackstone were also the financial advisers to Motorola in their attempts to restructure Iridium after it filed for bankruptcy in 1999). Just as back then, it seems hard to understand how TerreStar can hope to capture 41K subscribers with an average wholesale ARPU of $50 by the end of 2011, let alone 156K subscribers with an average wholesale ARPU of $42 by the end of 2014 (almost equal to the size of the entire North American handheld MSS market today), given the reception that the Genus phone has received so far in the market, and the recent laughable attempt to sell the phone to consumers.
However, it is interesting that TerreStar has now initiated a formal sale process for its assets in an attempt to gauge their market value. This has also generated some amusing responses, but of more interest is whether this means TerreStar has reached a deal with Harbinger to avoid a fight over the “unsecured creditors’ entitlement to excess value of TerreStar-2 (after repayment of the Purchase Money Credit Agreement)” which is acknowledged in the Liquidation Analysis to be an issue of contention (and is presumable one reason why Harbinger has been buying up TerreStar Networks’ 6.5% Exchangeable Notes). Certainly, this process would be an obvious way to find out whether one or other of the European S-band licensees (Inmarsat and Solaris) really is interested in buying the TerreStar-2 ground spare, in order to meet their license obligations to the European Commission, and to see whether the $200M valuation placed on this satellite by an appraisal back in August can actually be realized in practice.
Last Friday the FCC extended the deadline for comments on the LightSquared’s updated ATC plans to December 2, with reply comments due by December 9, after a request from the CTIA. As I noted last week, it will be interesting to see the response from different cellular industry players, to what the CTIA characterizes as a “new precedent with significant legal, regulatory, and policy effects”.
If the FCC does agree to LightSquared’s request that it should be permitted to offer integrated service just to its wholesale customers, with no obligations upon those customers to offer only integrated service packages, this would mean that end users would then be able to purchase terrestrial-only terminals and service plans. In such circumstances, it is hard to see what would be gained by the 2GHz MSS players agreeing to relinquish their spectrum for an incentive auction, and to share the proceeds of that auction with the government. As a result, the FCC could end up torpedoing the intentions of its own NPRM/NOI, particularly the objective of gaining “appropriate compensation for the step up in value” of the 2GHz spectrum, because, as the FCC admits, it cannot force DBSD and TerreStar to give up their satellite spectrum, while these companies have operational satellites in orbit. Both companies would therefore presumably be well within their rights to hold out for a similar wholesale ATC-based arrangement to that planned by Harbinger and LightSquared, under which they could keep all of the proceeds from (for example) a leasing arrangement with a major cellular operator.
The FCC might still have some leverage, as it would be able to impose buildout conditions on any proposed ATC license modifications (or on a future merger of DBSD and TerreStar). However, any deal could also be delayed considerably by the additional uncertainty that would be introduced over the value of the 2GHz MSS spectrum in the current bankruptcy proceedings. This is likely to be particularly problematic in the case of TerreStar, where it already appears that there will be substantial disagreements between the parties concerned, due to the numerous classes of creditors, including both secured and unsecured debt holders at TerreStar Networks, plus preferred and common stock holders at TerreStar Corporation.
Such an outcome would clearly help Harbinger, as it looks to attract investors and partners for LightSquared, because the 2GHz spectrum would then provide a less clear-cut alternative for cellular operators such as T-Mobile. In that context it was particularly interesting to see a research note issued last week by New Street Research in London, which rated a “deal with Echostar (as likely owner of TerreStar and DBSD spectrum)” as the most probable of five alternative spectrum sources for T-Mobile USA, while suggesting that “a deal with LightSquared (or its successor)” was the least likely option for T-Mobile.
On November 18, LightSquared filed an updated showing with the FCC of its plans for compliance with the ATC gating criteria. LightSquared states that it will ensure that its wholesale offering includes 500 kbytes of satellite capacity for every 1 Gbyte of terrestrial capacity it provides to a partner, and that dual mode chipsets are available through its $50M development agreement with Qualcomm. However, LightSquared also admits that its “retailer customers will have the ability to offer terrestrial-only plans to their own end users” and that it intends to “file reports with the Commission every six months providing the number of terminals in service falling into each of three categories: MSS only, dual-mode MSS/ATC, and terrestrial-only” (implying that terrestrial-only chipsets and/or devices will also be developed).
In view of the poor reception that the TerreStar Genus phone has received, both in the MSS community and amongst terrestrial-oriented reviewers, it is hardly surprising that potential LightSquared partners are unlikely to be enthused about attempting to sell a dual mode satellite-terrestrial service to a mass market, and would much prefer the opportunity to offer terrestrial-only service. Indeed, as I noted previously, the responses from Leap Wireless and T-Mobile in the FCC’s current MSS NPRM/NOI proceeding, were supportive of interpreting the ATC gating requirements in a manner which would allow for terrestrial-only devices.
While LightSquared states that its “revised business plan satisfies the Commission’s integrated service requirements for L-band MSS systems” the original ATC rules did not consider the business plan that LightSquared now envisages, that of a wholesale provider whose customers are retailers (or other operators) who repackage and sell on the service. For example, the FCC’s February 2005 ATC report and order states:
The purpose of ATC is to enhance MSS coverage, enabling MSS operators to extend service into areas that they were previously unable to serve, such as the interiors of buildings and high-traffic density urban areas. We will not permit MSS/ATC operators to offer ATC-only subscriptions, because ATC systems would then be terrestrial mobile systems separate from their MSS systems. We therefore clarify that “integrated service” as used in this proceeding and required by 47 C.F.R. § 25.147(b)(4) forbids MSS/ATC operators from offering ATC-only subscriptions.
LightSquared appears to be arguing that because it is offering integrated service to its customers, it is irrelevant whether or not those customers offer ATC-only subscriptions to their end users. Likewise, instead of seeking the safe harbor that all devices will be dual mode, LightSquared apparently intends this narrative (as required by the February 2003 ATC Order) to provide “for Commission review evidence demonstrating that the service they propose to offer will be integrated. This can be accomplished through technical, economic or any other substantive showing that the primary purpose of the MSS licensee’s system remains the provision of MSS.”
It will therefore be interesting to see the responses to this application (although as noted below the short timeframe may limit the number of comments) and the degree of support that LightSquared receives from the FCC. It seems all but certain that AT&T and Verizon will continue their hostility to LightSquared, while assuming Sprint remains committed to Clearwire, it would also likely be counted on to oppose the application. On the other hand, I would expect most of the smaller cellular operators including T-Mobile, Leap and US Cellular to be supportive, as they look to ensure that more spectrum options are available when they eventually decide how to move to 4G.
One additional (and more speculative) conclusion that could also be drawn from this submission is that LightSquared may now push off the announcement of any major partnerships (for example with one or more cellular operators) until more clarity is available on the FCC’s attitude to both this application and the MSS NPRM/NOI (where LightSquared has requested that the FCC reconsider the requirement for a ground spare satellite). This is because it would seem surprising for LightSquared to introduce additional regulatory uncertainty over its business plan if the company was in a position to announce a series of partnerships in the near term (which until recently I had expected might come shortly after the launch of SkyTerra-1). Nevertheless, LightSquared has announced previously that it intends to exercise its Phase 2 option with Inmarsat before the end of the year (which will involve substantial additional payments), and Harbinger appears to be under considerable pressure from its investors to demonstrate the progress it is making, so there will undoubtedly be more developments in this story soon.
UPDATE: Given that the FCC has placed this submission on an extremely accelerated timescale, with comments due by November 29 (immediately after the Thanksgiving holiday) and reply comments due by December 6, it seems plausible that LightSquared might well be expecting to receive a decision on this application very soon. Assuming this ruling was favorable, LightSquared might therefore still be able to announce its planned partnerships and exercise the Phase 2 spectrum option with Inmarsat before the end of the year.
This afternoon, Harbinger filed another Form 4, which detailed its continued sales of TerreStar Corporation’s common stock, where it has sold a total of 37.4M common shares since October 22, and the purchases of 6.5% Exchangeable Notes in its Blue Line Fund, where it has now acquired $31.55M (in face value) of these Notes. As of June 30, Harbinger’s Master Fund held 31.6M shares of TerreStar Corporation and its Special Situations Fund held 11.6M shares of TerreStar Corporation. As a result, it appears that Harbinger has now disposed of nearly all of its common equity interests in TerreStar Corporation, and currently owns just 3.7M shares of common stock.
The Form 4 also indicates that Harbinger still has a beneficial ownership of 37.05M shares in the Master Fund and 10.33M shares in the Special Situations Fund, which includes the conversion rights associated with Harbinger’s exchangeable note and preferred stock holdings, plus its Series E holdings (equivalent to 30M shares of common stock). Based on Harbinger’s prior ownership of one third of the $178.7M in Exchangeable Notes, this would equate to beneficial ownership of 10.7M common shares, while its Series B preferred stock holdings presumably account for the balance of 3M shares (which would equate to holding $100M in face value of Series B preferred stock at the designated exchange ratio of $33.33 per share).
With its recent Blue Line purchases, Harbinger now appears to have acquired control of a majority of the TerreStar Networks 6.5% Exchangeable Notes, although it has had to pay a significant premium to do so (paying 82 cents on the dollar for its most recent purchases, compared to 43 cents when it started buying). Harbinger has also disposed of most of its holding in the TerreStar Purchase Money Credit Facility, with MAST Capital Management now holding 47% of the $85.9M in outstanding loans and presumably Harbinger therefore only holding 3% of the loan. Thus Harbinger’s position is now effectively concentrated in the Exchangeable Notes at TerreStar Networks and the Series B and Series E Preferred Stock at TerreStar Corporation, so it will interesting to see how this impacts its future actions in the TerreStar bankruptcy.
Back in March, we noted the rumors that Huawei could end up building and vendor financing the LightSquared network to the tune of $1B+ and highlighted the potential security concerns that would be associated with such a move. Today the Wall St Journal’s story on Huawei appears to confirm this rumor, stating that Huawei’s “acquisition attempts since , including an attempt to buy into Harbinger Capital LLC’s high-speed wireless network, have been quashed due to security-related concerns as well, according to a report by the U.S.-China Economic and Security Review Commission”.
This raises the interesting question of whether Huawei was one of the potential funding sources that Harbinger was counting on when it decided to buy SkyTerra in 2009, and whether Nokia Siemens Networks (NSN) was actually the second choice as prime contractor to build the LightSquared network, after the Huawei deal fell through. It also leads us to wonder whether NSN will eventually provide substantial vendor financing for LightSquared, and at what stage that will be announced. With Reuters reporting last week that Nokia and Siemens were making “little progress in efforts to find a deep-pocketed partner for their ailing telecom gear venture” it might now be more difficult for NSN to make a major funding commitment to LightSquared in the near term.
Am I the only person to be somewhat suspicious about the timing of this week’s revelations of withdrawal requests from Harbinger’s funds and investigations by the Securities and Exchange Commission and U.S. Attorney’s office into whether the firm “misled investors” and “improperly allowed some clients to withdraw money following the financial crisis while barring others from doing so”? Though these stories have just emerged, it appears that the withdrawal requests were submitted at the end of September, while the investigations began this summer. As a result, I have to wonder if the timing of these stories was intended to derail the next stage of LightSquared’s plans.
This last week has seen wireless operators such as US Cellular and Leap Wireless state explicitly that they could be open to becoming wholesale customers of LightSquared. T-Mobile also appears to be keeping its options open, given it has not yet struck a deal with Clearwire as was being negotiated back in September, and T-Mobile also indicated potential interest in LightSquared’s capacity this week. Whether or not these operators want to do a deal with LightSquared today, it is certainly in their interests for LightSquared to survive, and to be available as a potential source of capacity when they do reach a decision on 4G. That would, at the very least, help to hold down the price of alternative spectrum (from a source such as Clearwire or a future FCC auction), and their expressions of support come at an important moment for Harbinger.
LightSquared stated over a month ago that it had “already signed wholesale distribution agreements” and was “in advanced negotiations with numerous potential partners”. It also said that the company intended “to accelerate its planned implementation of the Phase 2 agreement, which now will take effect by the end of the year”. With today’s successful launch of the SkyTerra-1 satellite, I had expected to see an announcement of at least some of these partnerships in the very near future, in conjunction with additional equity investments (whether from wholesale partners, or perhaps more likely from other financial investors) to validate the valuation that Harbinger has placed on LightSquared. However, with Harbinger’s clients fuming, we will have to wait and see whether the recent revelations will delay or even derail these plans.
Last Thursday, Clearwire announced that it was laying off 15% of its staff (as I suggested a couple of weeks ago), in an attempt to conserve its cash resources, which are only expected to last “through the middle of 2011″. When news first emerged of the Clearwire spectrum auction back in mid-October, I suggested that it was going badly and appeared to have been leaked by Clearwire itself, and it certainly doesn’t appear that the auction has concluded with a positive outcome (i.e. with T-Mobile agreeing to pay a significant amount for the 40MHz of spectrum that Clearwire was trying to sell).
The question now arises of what this means for LightSquared, which has also been pursuing a deal with T-Mobile as a potential wholesale customer and/or strategic partner for its 4G LTE network. Although T-Mobile appears not to have struck a deal with Clearwire, and thus is at least potentially still a partner for LightSquared, it is far from clear whether this is good news. If T-Mobile’s interest in Clearwire was thwarted because of roadblocks thrown up by Sprint (i.e. Sprint’s unwillingness to share a network with a key competitor), then it is quite possible that a deal with LightSquared could still be on the cards. However, if instead T-Mobile has decided that the price of spectrum is only going to go down over the next 6-12 months (and perhaps even in the medium term), as Clearwire and LightSquared become increasingly desperate for a deal, then that would certainly be bad news. T-Mobile might even be waiting to see if the 2GHz MSS spectrum could present another possible alternative, once the TerreStar and DBSD bankruptcies are resolved, given that this spectrum is closer to its existing PCS and AWS holdings than either the LightSquared L-band spectrum or the Clearwire 2.5GHz spectrum, and could even be available without ATC restrictions (via an incentive auction) in a couple of years’ time.
Whatever the reason, if T-Mobile does delay its decision on 4G spectrum (which might well be suggested by the recent rebranding of its HSPA+ network as 4G), then that would tend to indicate that it is not feeling too much pressure from the supposed “spectrum crunch”. While that may be at least partly because it won’t be offering the iPhone anytime soon, it will be interesting to see whether it also prompts more people to question the received wisdom about future spectrum demand.
In October 2009, Inmarsat announced that Andy Sukawaty would stay as Chairman and CEO until September 30, 2011, and then move into the role of Chairman until at least September 30, 2012. Typically, Inmarsat has announced personnel changes at the top of the company as much as a year in advance, such as when Michael Butler stepped down from his role as President of the company in April 2009. Inmarsat has also just undertaken various changes of responsibility related to establishing its new Global Xpress business, which will be based in Switzerland. As a result, it appears logical that Inmarsat may announce in the near future who is expected to take over as CEO next year, perhaps even as soon as Inmarsat’s Q3 results call on Monday.
If this happens, it will be very interesting to see if Inmarsat goes outside the company or promotes an internal candidate. Several people in the MSS industry have suggested that Jim Parm, the CEO of Stratos, could be a potential internal candidate, although this might raise concerns amongst other distributors about whether Stratos will be managed at arms length in the longer term. However, earlier this year, Andy Sukawaty indicated in an interview that Inmarsat was “seeking talent” in “senior general management roles”, noting that the recession had made “even C-suite executives available”. There are few obvious external candidates for the Inmarsat CEO position in either the MSS or FSS industry, but more possibilities in the US defense sector or perhaps even the wider telecoms sector. It certainly seems plausible that a defense executive could potentially be a good match for Inmarsat, given that Global Xpress will further reinforce Inmarsat’s dependence on the US DoD as its leading customer.
On its results call last night, Viasat said that it is soliciting preliminary technical proposals from manufacturers for a ViaSat-2 Ka-band satellite to complement the ViaSat-1 spacecraft set for launch in the first half of 2011. Viasat is also aiming to sell around 10% of its Viasat-1 capacity to government users and another 10% of the capacity for mobile applications. With the possibility that the Viasat-2 satellite could add beams to target areas such as the North Atlantic ocean and/or various oilfields, it now seems plausible that Viasat will seek to challenge Inmarsat’s Global Xpress project directly, in several of its Inmarsat’s planned target markets (government, energy and maritime).
This would not be particularly surprising, because it is our understanding that (despite significant efforts earlier in the year) Viasat is not on the list of bidders for the Global Xpress ground infrastructure contract, which Inmarsat is expected to award early next year (and for which bids were received in mid-October). Inmarsat has a major advantage in that Global Xpress will provide coverage around the world, including hotspots for UAV demand such as Afghanistan. However, Viasat has dramatically more capacity on its satellite and so it could potentially cherry pick some high revenue opportunities in North America and the surrounding areas.
On balance I think Inmarsat is better placed to win this battle, because we have projected for many years that the satellite consumer broadband market would not live up to Viasat’s very high expectations. Indeed I still expect that the most that Viasat and Hughes can hope for in the North American consumer broadband market is 2-3 million customers between them, with growth stalling in 3-4 years time as terrestrial buildout continues. Fundamentally, I have a hard time seeing satellite broadband as anything other than a last resort technology, however much capacity Viasat throws at the customer, because the constraining factor is the need to install a relatively costly terminal, which then requires ARPUs of $50 per month and up, far above expectations for terrestrial alternatives (especially in less wealthy rural areas).
As a result, Viasat could well be left with excess capacity if it does decide to contract for Viasat-2 before Viasat-1 has proved its commercial potential, as was stated on the call. Of course that could lead to some destructive price cutting to capture the limited number of regional customer opportunities, but just as in the MSS market when regional players have made inroads in certain areas, Inmarsat could well emerge relatively unscathed.
Wall Street analysts always seem to have a difficult time understanding the MSS industry. Who can forget the forecasts from the late 1990s that the MSS industry would generate tens of billions of dollars in annual revenues within a few years?
Now we see equally wild guesses about the TerreStar bankruptcy and what might happen to those assets. Jonathan Chaplin of Credit Suisse suggested that there could be a grand bargain between LightSquared, TerreStar and DBSD to pool their spectrum for wireless broadband. Unfortunately this prospect appears to have been comprehensively shot down by Harbinger’s apparent attempt to disrupt the TerreStar Restructuring Support Agreement by buying TerreStar’s Exchangeable Notes.
Next up was Jason Bazinet from Citigroup, with speculation that Echostar was intending to build a satellite-based mobile video network using TerreStar and/or DBSD’s assets. However, this bizarre analysis completely misunderstands the limitations of satellite services: you can build a satellite-based broadcast network using a limited number of repeaters (just like Sirius XM has done), but then its only useful in cars, not for serving the tablet market that Bazinet assumes would be the target market for the service (unless you like standing around outside in a field to watch the video programming). And of course the in-car market for subscription-based video is a small fraction of the market for satellite radio (while Qualcomm’s MediaFLO business has been little short of a disaster), because solo commuters can’t exactly spend their time watching TV whilst driving down the freeway.
So we’re left with the question – can anyone come up with a better analysis of what’s going to happen to these assets, or will we just have to wait for more to be revealed at the end of this week?