Known unknowns and unknown unknowns

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:39 pm by timfarrar

There are known knowns; there are things we know we know.
We also know there are known unknowns;
that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.

As Donald Rumsfeld’s famous speech pointed out, often the most important issues are not the known unknowns, but the unknown unknowns. There are many known unknowns in LightSquared’s plan, such as the eventual impact of GPS interference, and where they will find funding for the network buildout.

However, the ultimate outcome may in fact be dictated by things we didn’t know we didn’t know, like the negotiations that resulted in today’s deal for AT&T to buy T-Mobile. Although some observers are suggesting this would be bad for LightSquared, in fact I think its much better for them than the alternative, of Sprint buying T-Mobile, which would hardly have left much room for a new entrant 4G network. In addition, my understanding is that discussions between LightSquared and T-Mobile have not been particularly active for quite a long time.

Although the AT&T/T-Mobile deal will undoubtedly overshadow this week’s CTIA conference, it will force Sprint to respond in some way fairly soon. Sprint obviously will be in a better negotiating position vs both Clearwire and LightSquared, but if those negotiations are already at an advanced stage, as most people assume, the outcome may not change too much.

From my point of view, one of the most interesting facts to come out of the AT&T announcement is that AT&T’s expectations are for mobile data growth of 8 to 10 times between 2010 and 2015, very similar to (though slightly lower than) T-Mobile’s January 2011 projection of 60% data growth per year from 2010 to 2014. Though AT&T trumpets this statistic as evidence of the growing demand for spectrum, when two of the biggest carriers agree that growth will be far slower than the FCC’s October 2010 spectrum demand model (which was already subject to significant errors), it certainly demonstrates how out of touch the FCC Chairman was this week, when he highlighted Cisco’s projection of “a nearly 60X increase [in data traffic] between 2009 and 2015″ as evidence that “the looming spectrum shortage is real”.

In the end, as Secretary Rumsfeld acknowledged, political decisions are made on the basis of incomplete and sometimes even incorrect evidence. To date, the FCC Chairman’s firm belief in a “spectrum crunch” has benefited LightSquared substantially, even if the reality is more likely something very different. However, as Secretary Rumsfeld found out, if momentous decisions are based on a faulty hypothesis, there will usually be a pretty significant backlash once the truth is revealed.

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