06.14.11

What’s happening with TerreStar?

Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 3:32 pm by timfarrar

News emerged on Tuesday afternoon that TerreStar Networks (TSN) was close to agreeing a $1.2B to $1.4B stalking horse bid with DISH Networks. It appeared that DISH is likely to outbid a group of first lien debtholders and another bid from MetroPCS (possibly in conjunction with Harbinger), who jointly bid for DBSD with Solus and Harbinger back in March and were also outbid by DISH in that auction.

UPDATE: It has been confirmed to us that Harbinger was one of the parties attempting to acquire TerreStar’s spectrum assets, but its not clear whether Harbinger was aligned with MetroPCS or the other first lien holders (and it may even have been a potential customer/partner for both groups).

It seems that Harbinger had hoped to be in a position to announce a 2GHz first strategy, just as it planned back in March, in an attempt to head off the findings of tomorrow’s GPS Working Group report to the FCC which will state that testing demonstrated “widespread interference with GPS.” However, once again Harbinger may now have been thwarted by DISH.

UPDATE: Details on the agreed $1.375B stalking horse bid have now been filed with the Court. It is stated that the bid amount will exceed the secured debt (15% Notes plus PMCF plus DIP) by $90M. Thus the Exchangeable Notes (nearly $200M) and other unsecured creditors will have to make do with well under 50 cents on the dollar and no value would flow down to the equity holders in TSN (which is owned 88% by TerreStar Corporation and 12% by LightSquared). For these unsecured creditors to be paid in full and excess value to flow to the TSN equity would therefore require the winning bid in the auction to be increased to something between $1.5B and $1.6B (rather higher than I had previously estimated). Of course the disappointed equity holders (in TSN and by extension in TSC) may have some company, because at the current $1.375B bid level, Harbinger will also take a bath on its majority holdings of Exchangeable Notes, which it was buying at up to 82 cents on the dollar back in November.

Whether further bids might emerge in the subsequent auction is still unknown. The other first lien debtholders may be content to be paid in full in cash for their claim, though there were indications last night that they were still actively competing against DISH as the price rose towards $1.4B. Perhaps MetroPCS (and Harbinger?) could also try to outbid DISH in the auction itself. Unfortunately, that didn’t work in the DBSD case, and it could well be the case that no further bids emerge at the auction, given the protections that the successful stalking horse bidder will have.

If Harbinger is unsuccessful in securing rights to TerreStar’s 2GHz spectrum, its unclear where Harbinger and LightSquared go from here, unless Sprint is prepared to take LightSquared’s side in the GPS interference debate. However, if Harbinger did in fact team up once again with MetroPCS, that would make it harder to believe that a deal with Sprint is anything like as imminent as LightSquared has been hinting.

Putting everything on red

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:35 am by timfarrar

In a recent Vanity Fair profile, Phil Falcone was summed up by a rival fund manager as “A roll-the-dice, put-everything-on-red kind of guy”. However, with the report on GPS interference coming up tomorrow, it also appears that the GPS industry is united in putting all their efforts into pushing the emergency stop button on LightSquared. Particularly significant is the decision of the PNT Advisory Board last week to file comments with the FCC:

The formal recommendation reads: “The PNT Advisory Board recommends the PNT Executive Committee (EXCOM) should file formal comments with the Federal Communications Commission (FCC) regarding the interference issues.

“1. Based upon information and test results provided to the PNT Advisory Board at the meeting of June 8-10, 2011, the provision of GPS services cannot be assured if the LightSquared proposal for satellite and terrestrial broadband provision using the MSS L-Band receives final approval.

“2. The only reasonable and viable option to continue ubiquitous availability of GPS and the provision of a new 4G wireless broadband capability would be for the FCC to assign an alternate frequency spectrum to LightSquared that has little or no probability of affecting the delivery or utilization of GPS/GNSS services.”

The recently passed House version of the National Defense Authorization Act (NDAA) would block the FCC from authorizing LightSquared operations until GPS interference concerns have been resolved. Thus, if the GPS community continues to receive strong Congressional backing, it may become impossible for the FCC to authorize commercial operation of LightSquared’s planned terrestrial network, whatever LightSquared decides to recommend in its June 15 report (note that this report will undoubtedly not have any meaningful consensus recommendations about how to proceed). Of course it is implausible that the FCC would simply assign “alternate frequency spectrum” to LightSquared, and the other spectrum controlled by LightSquared (8MHz in the 1.4GHz band, leased from TerreStar Corporation, and 5MHz in the 1670-75MHz band) is unlikely to be usable for a large scale mobile LTE buildout.

As a result, LightSquared and the FCC both face a dilemma about how to move forward. Perhaps Harbinger could partner with the first lien debt holders (other than Echostar) (or even partner once again with MetroPCS and Solus) to make a run at TerreStar Networks, similar to its efforts in the DBSD bankruptcy auction back in March. Although providing LightSquared with a waiver of the ATC rules in the 2GHz band might be one option for the FCC, that would not solve LightSquared’s funding problem, and more likely would exacerbate it, because LightSquared would potentially then have to lease TerreStar’s 2GHz MSS spectrum from the consortium buying the assets out of bankruptcy. Granting TerreStar a waiver of the ATC gating criteria would also potentially disrupt the FCC’s current consultation process, which seeks to persuade DBSD and TerreStar to give up their spectrum for incentive auctions. Even more problematically, a decision to use TerreStar’s spectrum initially might give the Congress the excuse they are looking for to completely prohibit LightSquared from using the L-band for future terrestrial operations, as the GPS industry is requesting.

As I noted a few days ago, Harbinger therefore needs to announce something big to turn around perceptions of LightSquared. At this point, some sort of deal with Sprint (with Sprint expressing confidence that the interference issues are manageable) appears to be the best option with a chance of achieving that, with a potential partnership with MetroPCS and Solus to bid for TerreStar a rather less attractive backup choice.

06.13.11

Uncutting the cord

Posted in General, Regulatory, Spectrum at 10:31 am by timfarrar

If the paradigm shift for the telecom industry in the 1990s was the Death of Distance and in the 2000s was Cutting the Cord, then what might the new paradigm be for the next decade? I’d venture to suggest that one of the most important trends will be data offloading from mobile to fixed networks. As a result, you will need that fixed wire (or cable or fiber) into your home more in a decade’s time than you do today.

The simple reason for this is that the cost of data delivery on a fixed network (at around 2-5 cents per Gbyte) is nearly two orders of magnitude lower than on wireless networks. Similarly, monthly usage per subscriber, despite dramatic increases in wireless usage over the last few years, is also about 100 times greater on wireline networks (15Gbytes per month compared to a few hundred Mbytes on wireless). This ratio is unlikely to change significantly over the next decade, given expected improvements in both wireline and wireless technologies.

What that means is if you want to watch streaming video on your tablet or smartphone, you will be very strongly incentivized (by price) to offload that traffic to a WiFi hotspot and onto a wireline network. For example, at ~2Gbyte per hour for streaming HD video (at 4-5Mbps) to a tablet, you would have to pay $20 per hour at current wireless prices of $10/Gbyte. Even in 5 years time the price will undoubtedly be dollars per hour, not pennies per hour. Unsurprisingly, consumers are already taking these pricing signals onboard and turning to WiFi. However, the impact of this switch is dramatically underestimated in Cisco’s forecasts, which project that in the US only 30% of smartphone and tablet traffic will be offloaded in 2015. Even today, this ludicrously underestimates the amount of tablet offloading, given that the majority of iPads are WiFi-only.

Ironically, the spectrum that might therefore be in greatest demand in the future is unlicensed spectrum, for short range wireless access. That’s why there is considerable pressure from Microsoft and Google to ensure that white spaces are protected in any future broadcast spectrum auction, and why a study for Ofcom on future UK spectrum requirements predicted that there would be more near term demand for incremental unlicensed spectrum than licensed spectrum.

06.10.11

Can the FCC split the baby?

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:37 pm by timfarrar

As data continues to emerge on the results of the GPS interference testing, it now seems that LightSquared intends to propose that it should initially use the lower part of its L-band spectrum, but that GPS users should be required to fit filters so that after a multi-year sunset period, LightSquared would be able to use the full 40MHz of MSS-ATC spectrum in its terrestrial network. Indeed LightSquared appears to be insistent that “eventually the company intends to use all the spectrum allocated to it by [the] FCC”.

On the other hand, the GPS industry is asserting that “there is no viable technical fix” and the FCC “should focus its efforts on finding [alternative] spectrum that LightSquared can operate in”. The government-chartered NPEF task force has presented a range of potential mitigation options, of which it appears the most plausible is to “limit implementation to lower end of MSS L-band” (i.e. to just 20MHz of the 40MHz of MSS-ATC spectrum that LightSquared has access to under its agreement with Inmarsat).

It therefore seems possible that caught between these conflicting demands, the FCC could choose to split the baby, permitting LightSquared to operate in the lower part of the L-band, while putting off a decision about the upper part of the L-band until considerable further study is undertaken (very likely taking a year or more). However, this would make it much harder for Harbinger to fund the LightSquared buildout, because it already has a $2B+ obligation to Inmarsat for its spectrum lease (the NPV of $115M increasing at 3% p.a.) and clearance costs, plus $1.5B in first lien debt. Unless the lower 20MHz of spectrum was valued at an implausible $1 per MHzPOP, or LightSquared could renegotiate its deal with Inmarsat (which seems unlikely given that LightSquared has just had to pay Inmarsat another $40M to eliminate Inmarsat’s permitted 9 month excusable delay in making the Phase 1 spectrum available), it would be hard to invest at anything close to the $2.5B value that Harbinger puts on LightSquared’s equity. It would also be problematic for the GPS industry, because GPS-augmentation solutions such as John Deere’s Starfire (for precision agriculture) would still be severely affected by LightSquared’s lower band operations. Thus splitting the baby might actually be far from optimal, forcing large costs on at least some parts of the GPS industry, while not enabling the buildout of LightSquared’s network to proceed.

Next week all eyes will be on the June 15 report, in which LightSquared will set out its proposed mitigation strategy. I would expect it to include a proposal for initial operation in the lower part of the L-band without any further restrictions or delay (something which will presumably be resisted by the GPS industry, who will instead likely propose further study, given that LightSquared “failed to deliver test equipment that matches its proposed operations” for the Las Vegas tests), and then propose an aggressive timetable for resolution of issues in the upper band (where the GPS industry will ask that all terrestrial operations be completely ruled out).

UPDATE: OnStar has also now requested that the FCC require additional testing before reaching a final decision to allow LightSquared to commence ATC service.

However, the big question is whether LightSquared will accompany the release of the report with an announcement of a network sharing agreement with Sprint (arguing that it could use capacity from Sprint if necessary while it waits for upper L-band spectrum). This might sound like a plausible proposition, but of course LightSquared would not be able to pay for its buildout without substantial incremental funding. Realistically the best that LightSquared could hope for is an MoU which requires it to obtain more funding and resolve its FCC issues within the next few months (before Sprint starts its Network Vision buildout in Q4).

It is unclear whether Sprint is prepared to get caught in the Congressional crossfire between the GPS industry and LightSquared, at a time when it needs all the support it can get in its attempts to block the AT&T/T-Mobile merger, and that will probably determine whether a deal comes to fruition next week or not. However, given the pressure Harbinger and LightSquared are under at the moment, it is almost certainly essential that they announce a deal with Sprint next week to have any chance of changing perceptions that Harbinger is as doomed as Captain Ahab.

06.08.11

Could LightSquared default on its first lien debt?

Posted in Financials, LightSquared, Operators, Spectrum at 7:01 pm by timfarrar

As concerns continue to swirl around Harbinger and LightSquared, one unexamined issue is whether any FCC (or Congressional) action to restrict LightSquared’s access to the upper part of its spectrum or revoke the January waiver could put LightSquared in default on its $1.5B of first lien debt.

Because this debt offering was private, it is not possible to examine the indentures which specify the events of default. However, TerreStar’s first lien debt indentures are public and probably provide some guidance as to the likely language in the LightSquared debt indentures. TerreStar’s debt indenture states that the events of default include:

(10) (a) failure by the Issuer and the Guarantors to receive the U.S. FCC Letter of Intent Authorization by July 31, 2008; or (b) a revocation, cancellation or relinquishment of (i) the U.S. FCC Letter of Intent Authorization or (ii) any FCC authorization held by the Issuer or a Restricted Subsidiary of the Issuer to operate ancillary terrestrial component facilities, unless the revocation, cancellation or relinquishment (x) remains subject to reconsideration, review, or appeal at the FCC or any court, provided that during the pendency of such reconsideration, review or appeal the Issuer is permitted to utilize the related spectrum and continues to conduct its business in the ordinary course, or (y) is accompanied by the issuance of a substitute or successor license, permit, or authorization of substantially equivalent utility;

While some features are not directly analogous (because, as a Canadian-registered satellite system, TerreStar held a Letter of Intent Authorization from the FCC rather than a License), the critical language would appear to be “a revocation, cancellation or relinquishment of … any FCC authorization held by the Issuer … to operate ancillary terrestrial component facilities, unless the revocation, cancellation or relinquishment (x) remains subject to reconsideration, review, or appeal at the FCC or any court, provided that during the pendency of such reconsideration, review or appeal the Issuer is permitted to utilize the related spectrum and continues to conduct its business in the ordinary course“. If LightSquared’s current ATC waiver was revoked or even if the waiver remained in place but LightSquared was rendered unable to use all of the “related” spectrum for its ATC operations, then (assuming similar language is in the LightSquared first lien debt indentures) an argument could plausibly be made that an event of default had occurred.

Of course, just because an event of default had occurred (and any such proposition would be vehemently resisted by Harbinger), that does not necessarily mean that the first lien debtholders would take action to enforce their rights. However, if a truly dire outcome (such as Congress forbidding the FCC from authorizing LightSquared’s terrestrial operations) did come to pass, then the debtholders might be better off trying to get hold of the cash on LightSquared’s balance sheet before it was all spent, and trying to renegotiate the spectrum lease agreement with Inmarsat before all of the Phase 1 payments had been made. Certainly I would expect all of these options to be under active consideration, as the first lien debtholders in LightSquared contemplate the various possibilities for what happens next.

06.07.11

Why is Iridium outselling Inmarsat?

Posted in Handheld, Inmarsat, Iridium, Operators, Services at 1:50 pm by timfarrar

Last July, I suggested that although the performance of ISatPhone Pro was better than I had expected, the pricing strategy adopted by Inmarsat seemed to be mistaken and their expectations of rapid churn from Iridium were wide of the mark. Some criticized this opinion as biased, suggesting that the ISatPhone Pro would actually be “a huge hit“. Based on conversations with distributors last fall, I encountered a quite diverse set of views, with some expecting the low price of the ISatPhone Pro to open up significant new markets, and others concerned that they would not be able to make up for the lower revenues through increased volumes and (what were supposed to be) better margins.

Now that the first results are in from Q1 of this year, it appears that Inmarsat sold only 6K-7K handsets (total revenues of $3M including accessories), while Iridium sold well over twice that quantity (15K+), with handset unit sales up 39% on the previous year. These results come as quite a shock, because even though I was relatively skeptical about the potential of the ISatPhone Pro to open up new markets, I still found it hard to envisage a scenario where Iridium sold more handsets than Inmarsat this year. However, unless things turn around dramatically in the second quarter of the year (which is the key sales window for handheld MSS phones), that will very likely be the outcome for 2011 as a whole. (Note that Inmarsat did have slightly more net adds than Iridium in the quarter, ~7K as opposed to 4K-5K for Iridium, but that reflects the fact that Iridium has well over 200K commercial handheld subscribers, some of whom will inevitably terminate service each month).

Distributors now seem far more downbeat about the prospects for the ISatPhone Pro than they were even late last year, presumably because so far it doesn’t look like substantial untapped markets have emerged, and customer response to the phone itself (as opposed to the price) has not been that positive. In addition, the ARPUs being generated by those ISatPhone Pros that have been sold appear to be rather low, because Iridium seems to have been quite successful in targeting multi-unit sales and retaining its high value customers, while leaving the low end individual market largely to Inmarsat, by not reducing the headline price of the handset too much.

Will Inmarsat therefore fall short of its target of reaching 10% of the MSS handheld market after 2 years? In terms of active handsets the target remains achievable (if now somewhat more challenging), because Inmarsat needs to gain around 70K-80K handheld subscribers by the end of 2012 (compared to around 15K ISatPhone Pro users at the moment). However, it seems all but impossible for Inmarsat to generate the $30M in annual wholesale service revenues it would need to gain a 10% share of handheld MSS revenues. Indeed, unless Inmarsat does gain much greater traction amongst high end users, it is plausible that its annual wholesale service revenues from the ISatPhone Pro may be as low as $10M (and in any case are unlikely to be more than $15M) in 2012.

06.04.11

FCC’s concession: is it enough?

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:49 am by timfarrar

A first, very modest concession has now emerged from the FCC Chairman over the process for authorizing LightSquared’s commercial operations, in a letter dated May 31 to Senator Chuck Grassley. This letter is a response to the demand from Grassley on April 27 for records of communications between and within the FCC related to Harbinger and LightSquared. The May 31 letter completely ignores Grassley’s specific request and also fails to addresses the concerns he expressed about the very short comment period originally set for the November proceeding, which as the CTIA pointed out, was “unlike most satellite modification filings”. Unsurprisingly, Grassley is therefore still upset about the FCC’s “lack of transparency in this case”.

However, the letter does make one modest concession, in that it promises that the Commission “will establish a public comment cycle and give all parties further opportunities to present their views”. This was one commitment that was missing from the January 2011 waiver order, and was of considerable concern to the GPS community, although it does not go as far as the Save Our GPS Coalition requested, which was for a comment period of “at least 45 days” and for “further FCC actions [to] take place with the approval of a majority of the commissioners”.

The FCC Chairman is presumably very cognizant of the language in the House version of the National Defense Authorization Act (NDAA), which would forbid the FCC from authorizing LightSquared’s commercial operations until GPS interference concerns are resolved, and wants to prevent similar language from being included in the final bill. Whether his concession on a public comment period is sufficient to achieve that remains to be seen, especially given his conclusion that “I remain focused on ensuring that the Commission takes full advantage of the incredible economic opportunities that underutilized spectrum presents. This includes the opportunity presented by LightSquared…”

However, even if the FCC is successful in forestalling Congressional intervention, a public comment period (of say 30 days or longer if it includes time for reply comments) will certainly push back the timeline on which a final ruling from the FCC can be expected to at least the end of July, and more likely sometime in August. Unless and until the GPS interference issue is resolved, it hardly seems likely that Sprint will want to finalize a network sharing deal with LightSquared, or that LightSquared will be able to raise the money to pay for that buildout. Thus it appears that a LightSquared IPO in July is certainly off the table, and the supposed network sharing deal with Sprint seems to be no more imminent than it was in mid-March (when supposedly LightSquared was about to announce a deal with Sprint at CTIA) or in mid-April when these reports last emerged.

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