12.25.11

Gogo dancing…

Posted in Aeronautical, Financials, General, Services at 6:42 am by timfarrar

Gogo has finally decided to strut its stuff, by filing an S-1 with the SEC in preparation for a potential IPO early next year. However, it needs to put on a very good performance over the next couple of years if this IPO is going to be successful.

The filing reveals some interesting statistics about the company, and highlights just how wrong most analyst forecasts for the passenger communications market have been. Bizarrely, the S-1 quotes Forrester projections that “in-flight internet usage is expected to increase rapidly over the next five years, from approximately 15.6 million North American sessions in 2011 to 96.9 million by 2015″ when the company knows that the 2011 number is simply wrong – Gogo (which had over 90% of usage in 2011) had “provided more than 15 million Gogo sessions” since its inception by the end of September, and previously stated at the beginning of this year that it had reached 10 million sessions, after the success of the free promotion with Google late last year (which itself generated 3 million sessions in 6 weeks). As a result, the total number of sessions in 2011 (when there hasn’t been the same level of promotional activity) across all providers in North America is certainly well below 10 million and more likely close to half the level estimated by Forrester. In fact the total number of sessions (free and paid) might be no higher in 2011 than in 2010 because of the distorting effect of the free promotion last year.

Perhaps one reason for quoting Forrester is that the other widely cited analyst projection (by InStat in October 2011) is even further off the map (one person deeply involved in the industry said to me that he “didn’t know what they had been smoking”), with InStat noting that “take rates have increased significantly, moving from an average of 4% in 2010 up to 7% in 2011” (contradicted by Gogo’s actual numbers showing no more than ~4% take rate in 2011) and that “in-flight Wi-Fi revenue is expected to grow from about $225 million in 2011 to over $1.5 billion in 2015” (again miles away from Gogo’s passenger revenues of $58M in the first 9 months of 2011).

However, now we have the public S-1 filing, perhaps some of these erroneous forecasts will come back down to Earth. The key data in the S-1 shows that current take rates are only about 4%, with users spending an average of $10 to $10.50 per flight, implying a severe (but unsurprising) skew towards laptop use on long flights (charged at $12.95). A survey (strangely citing data from 2009) showed that the average Gogo user had taken 14.2 domestic business flights in the last 12 months, indicating exactly as Connexion-by-Boeing found in 2006, that it is frequent business travelers who pay for in-flight WiFi and rarely anyone else. Of course, only about 10%-15% of airline passengers fly this frequently on business, so it is hardly surprising that current usage levels are so low (especially once very short flights are taken into account). It is also unsurprising that the service is dominated by repeat users (15 million sessions from 4.4 million unique users – and some of these unique users may have only used the service in late 2010, when free access attracted 2 million users in 6 weeks).

What is critical for the future growth of Gogo is therefore its ability to expand usage dramatically amongst leisure travelers and more occasional business travelers. The key statistic to watch is the average revenue per passenger, which has climbed from $0.32 in 2010 to $0.41 in the first 9 months of 2011. It would be useful to see in the roadshow how much of this growth is due to new leisure users (as opposed to growing awareness after major fleetwide rollouts were completed in 2010), e.g. by looking at the trajectory on Virgin America (which had fleetwide availability very early) and by examining more recent data on the average number of annual flights taken by a Gogo user.

If the average revenue per passenger (ARPP) only grows to say $0.50, because paid usage remains limited to frequent business travelers, then it will be hard for Gogo to generate more than about $100M in EBITDA by 2015, but if ARPP grows to say $1.00, then EBITDA could grow to ~$200M, due to the nearly fixed cost base of the ground-based system (airlines receive about a 15% revenue share at present, though this payment might be on a tiered system so could increase in the future if usage is higher). Clearly, to have a successful IPO at a value not less than the $500M invested to date, Gogo therefore needs to demonstrate convincingly how its ARPP can more than double within 2-3 years, which can only happen by achieving much greater take-up amongst leisure and occasional business travelers.

12.22.11

The next broadband battle…

Posted in General, Regulatory, Spectrum at 9:15 am by timfarrar

As my article yesterday for GigaOm highlighted, the potential ripple effects of an AT&T/DISH deal are almost too numerous to mention. However, in addition to the political consequences, its also worth considering the implications of this potential industry realignment for the US spectrum market. As I’ve noted before, spectrum didn’t look like a good investment a year ago, and while the cable companies have come out OK (based mainly on their smart bidding strategy in the 2006 AWS auction), companies like Clearwire and NextWave who have bet on more speculative spectrum bands have suffered badly from a lack of buyers for the spectrum they’ve tried to sell. Even DISH faced little or no opposition from major wireless operators in its acquisition of DBSD and TerreStar’s spectrum assets.

Now, if deals between AT&T/DISH and Verizon/SpectrumCo go through, network sharing will create significant bandwidth efficiencies and with only two national LTE networks there will be even less competition in future spectrum auctions. That could well mean that incentive auctions will come to naught, because it will not be possible to generate high enough bids to persuade broadcasters to give up their spectrum (although that probably won’t prevent Congress eventually passing a bill so it can count imaginary future revenues against the deficit and/or D-block buildout).

In the near term, it also means that it will be difficult if not impossible for Clearwire to find eager bidders for the portion of its spectrum holdings it would like to sell (at anything from $0.25 to $0.75 per MHzPOP according to its recent roadshow). Indeed I’ve been told that the only offer to buy spectrum from Clearwire (during its efforts to sell spectrum earlier this year) came from Sprint, and its far from obvious that enough has changed to justify the recent speculation about new near term Clearwire partners/spectrum buyers ranging from MetroPCS to DirecTV.

As an aside I also find it hard to see how DirecTV’s involvement in a 2.6GHz TD-LTE venture in Brazil, which is focused on fixed wireless broadband in residential suburbs, just like Clearwire’s original fixed WiMAX business plan, has much relevance to Clearwire’s current small cell mobile data roaming plan in core urban hotspots. In theory DirecTV could buy Clearwire spectrum to deploy its own separate fixed wireless broadband network in the US, with a completely different cell spacing than a mobile network would require, but that hardly seems a productive use of capital when the US has vastly better fixed broadband infrastructure than Brazil and we’ve just seen the ignominious collapse of Open Range, which was trying to execute such a plan in rural areas, with subsidized loans from the USDA. As I’ve said before, fixed broadband is by far the best way to go for almost all in-home data delivery, and so I think that ultimately DirecTV will have to reach some agreement to use AT&T’s wireline infrastructure, completing the alignment of AT&T with the satellite TV companies against Verizon and the cable companies.

12.20.11

Imitation is the sincerest form of flattery…

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

Stifel Nicolaus’s note on DISH is getting a lot of attention in the press today, with DISH shares sharply higher on the news. Of course, if you’d read this blog, you would have seen all the salient points of their note in my post last week, including:

- how the “windfall” issue could be avoided “through an agreement to reimburse the government if the adjacent AWS spectrum sells for a higher price in a subsequent auction”
- why the FCC would “want to address both deals simultaneously…to extract matching commitments for…the wholesale access conditions needed to ensure that other wireless operators such as T-Mobile remain viable”
- why AT&T “needs to find additional clean paired spectrum for Carrier Aggregation with the 700MHz unpaired downlink…outside the 700MHz band”
- and why AT&T “will have to buy the whole company, not just the spectrum”.

12.16.11

Will it be Merry Christmas, Mr Ergen?

Posted in Regulatory, Spectrum at 6:29 pm by timfarrar

It seems like a lot of readers agree with my sentiments that an AT&T takeover of DISH is inevitable, and the only question is timing. In that context, this week’s ex parte filing by DISH is particularly intriguing, not just for the multiplicity of lawyers present, but for the omission of DISH’s recent refrain that “any so-called ‘windfall’ concerns raised in the record are entirely unfounded”.

That implies to me that a deal on the waiver conditions was likely negotiated and agreed at this meeting, potentially setting the scene for an announcement by the FCC at the end of next week. That would give Mr. Ergen a much more welcome holiday card than Mr. Falcone, and keep AT&T even busier over the holidays.

12.14.11

Curiouser and curiouser…

Posted in LightSquared, Operators, Regulatory at 6:02 pm by timfarrar

As scrutiny of the LightSquared and Harbinger situation intensifies, it seems to me that there are more and more questions to be answered. Firstly, will the FCC concede to Sen. Grassley’s request for its communications with LightSquared, to overcome the hold he has placed on the two nominees for vacant Commissioner slots? This certainly seems to be very likely (especially as LightSquared and Harbinger have apparently agreed to produce their communications with the FCC, which I doubt they would have done if they did not believe the FCC would produce these documents anyway). If that is the case, could last night’s unexpected resignation of Chairman Genachowski’s Chief of Staff, Ed Lazarus, have anything to do with what these emails might contain?

A second question relates to what role Jared (Jerry) Abbruzzese, who featured as a witness in the corruption trial of Senator Joseph Bruno back in 2009, has been playing at LightSquared/Harbinger? Bruno (a Republican state senator in New York) was paid consulting fees by Motient, the predecessor of TerreStar, and one time parent company of MSV, which ultimately became LightSquared. The New York Times mentioned Abbruzzese in a 2007 article on President Obama’s 2005 investment in SkyTerra, and a host of allegations related to Abbruzzese’s involvement in Motient/TerreStar and connected companies were made by Highland Capital in 2006. iWatchNews reported in July that “Abbruzzese eventually left the [TerreStar] satellite group”. However, in the White House FOIA email production from November, Abbruzzese turns up being copied on an internal LightSquared email to senior executives and legal counsel in August 2011.

12.13.11

The inevitable next step for AT&T…

Posted in Regulatory, Spectrum at 7:42 pm by timfarrar

After the Verizon-SpectrumCo deal that represents “the end of the world as we know it” it has been very surprising how little attention has been paid to the nearly inevitable consequence, namely an AT&T purchase of DISH. With the SpectrumCo deal, Verizon has not only gained a greatly increased block of spectrum in the AWS band for the next stage of its LTE buildout, but has also aligned with the cable companies, as their “out of region” partner for TV service. In response, AT&T not only needs to come up with an alternative source of spectrum, now the T-Mobile deal is as good as dead, but is all but certain to align with satellite TV as their equivalent out of region video offering.

From a spectrum point of view, AT&T obviously needs to buy DISH’s 700MHz E-block spectrum (to give it a clean 12MHz unpaired block when combined with the spectrum it is purchasing from Qualcomm). Less obviously, it also needs to find additional clean paired spectrum for Carrier Aggregation with the 700MHz unpaired downlink. This needs to be outside the 700MHz band to avoid interference with AT&T’s existing LTE network, but AT&T will have to give up most of its AWS spectrum holdings (originally intended to be used for this aggregation pairing) to T-Mobile as part of their breakup fee. Of course at this point in time, the only spectrum that could realistically be used for this purpose is DISH’s 2GHz MSS spectrum (from DBSD and TerreStar), subject to securing a waiver of the ATC gating criteria from the FCC.

By approving the Qualcomm spectrum purchase the FCC appears to be giving AT&T a pretty direct signal to abandon the T-Mobile acquisition in favor of a deal with DISH. DISH is signaling with the suggestions that it has other options (like a deal with T-Mobile or Sprint) and that it is not interested in selling the spectrum, that AT&T will have to pay a high price and will have to buy the whole company, not just the spectrum. And AT&T has just been told by the judge in the DoJ’s antitrust case to go away and decide what it wants to do by January 12.

So now the big question is whether the FCC will take the obvious next step and grant DISH a waiver on Christmas Eve, leaving them to negotiate a deal with AT&T over the holidays. There would have to be a creative way to overcome the windfall issue (probably through an agreement to reimburse the government if the adjacent AWS spectrum sells for a higher price in a subsequent auction), and time is pretty short, but if the FCC wants to process both a Verizon-SpectrumCo and an AT&T/DISH deal in parallel before the election, then action is needed pretty imminently.

The reason that the FCC would want to address both deals simultaneously is that it would be the best (only?) chance to extract matching commitments for near universal (97%-98%) deployment of two competing LTE networks along with the wholesale access conditions needed to ensure that other wireless operators such as T-Mobile remain viable and have access to these networks in the future. Verizon has already struck a wholesale access deal with the cable companies which it could be required to extend to other companies in the future, and presumably AT&T would agree a network sharing/wholesale access deal with T-Mobile in order to reduce the amount of the breakup fee it will need to pay. Of course, these conditions would likely only be imposed under a Democrat administration, providing another reason for the FCC to want to hurry the process along to a conclusion before the November 2012 election, rather than risk the parties potentially delaying things until they see how the election is going to turn out.

In this context, Charlie Ergen has played a masterful game of poker, and far from making the FCC “look foolish” as some have suggested, he simply makes Harbinger look foolish for having failed to do adequate due diligence on the potential problems with the LightSquared spectrum. DISH also looks good in comparison to DirecTV (which ironically has been much more highly valued by investors in recent years), by securing an exit from the satellite TV business at precisely the time that the business case for a standalone satellite TV play in the US looks ever more difficult.

12.12.11

Tests show interference with GPS navigation equipment…

Posted in LightSquared, Operators, Regulatory, Spectrum at 7:50 am by timfarrar

As I mentioned on Friday, the test results from the draft NTIA report indicated that 75% of cellular and general navigation devices suffer from harmful interference. These are the 400 million “cell phones and auto systems” which LightSquared claimed were “already compatible” with its network, based on the “new plan, which was announced in June”. Now LightSquared claims that the tests did not take into account “a critical element in LightSquared’s mitigation proposal to manage the power from its network that GPS devices will be able to receive”. However, this “power on the ground” proposal was first set out in a presentation to the FCC in early September, and was never part of LightSquared’s June proposal. That was only a day or two before the NTIA mandated this further round of tests, so it is hardly surprising that it was not considered as part of the recent testing.

It is important to note that this phase of testing related to operation solely in the lower 10MHz block of L-band spectrum at LightSquared’s revised operational power limit of 32dBW (exactly as proposed by LightSquared in June). I understand that the test criteria was a limit of 1dB increase in the signal to noise ratio (rather than the 6dB that LightSquared originally proposed but the NTIA refused to accept), with line of sight to the tower. LightSquared’s newer “power on the ground” limits proposed in September do reduce the output power below 32dBW (to as little as 21dBW, i.e. ~15 times less) on the shortest towers (because these will produce the highest interference level close to the tower). However, LightSquared also proposes to increase these power levels by 3dB (i.e. double) in Jan 2015 and another 3dB (double again) in Jan 2017, so that far more towers will be operating at the 32dBW output level tested by the NTIA. Even a tall tower operating at the full power level could have a vehicle passing nearby in line of sight to the main beam, e.g. if the tower is next to an elevated roadway.

All in all, it is certainly true to say that the government conclusions are based on conservative assessments of interference (modest impact on devices in line of sight to a tower operating at the maximum power level). However, this is understandable when general navigation devices are relied on for vehicle safety, including in light aircraft.

As an aside, I found the holiday card pictured above in Target. If you come across it, then do send a copy to Mr. Falcone (450 Park Ave, Floor 30, New York NY 10022) or Mr. Ahuja (LightSquared, 10802 Parkridge Blvd, Reston VA 20191). I’m sure you will find the message inside (“Get lost in the spirit of the season”) to be very appropriate, especially if you add your own punctuation after the second word.

12.09.11

Lights out…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:46 pm by timfarrar

Bloomberg now has a copy of the results from the recent NTIA testing that I noted yesterday and is reporting that “LightSquared signals caused harmful interference to majority of GPS receivers tested” and “millions of fielded GPS units are not compatible” with the planned network. The presentation goes on to conclude that “No additional testing is required to confirm harmful interference exists”. This language is particularly important because the FCC Public Notice in September requesting this further testing stated that:

This Public Notice is issued pursuant to the provision of LightSquared Subsidiary LLC’s (LightSquared) conditional Ancillary Terrestrial Component (ATC) authorization that LightSquared may not commence ATC operations until the Commission, in consultation with the National Telecommunications and Information Administration (NTIA), finds that Global Positioning System (GPS) interference concerns have been satisfactorily resolved. Following extensive comments received as a result of the technical working group process required by the International Bureau’s Order and Authorization dated January 26, 2011, the Federal Communications Commission, in consultation with NTIA, has determined that additional targeted testing is needed to ensure that any potential commercial terrestrial services offered by LightSquared will not cause harmful interference to GPS operations.

In other words, assuming this conclusion is endorsed by the NTIA at its meeting next week, the FCC would be perfectly within its rights to deem that no further testing is required to confirm that the conditions of the January 2011 waiver cannot be met and it must be revoked. Not only that, but LightSquared committed in January that “this process must be completed to the FCC’s satisfaction before LightSquared commences offering commercial service pursuant to approval of our requested modification with regard to our L-band MSS frequencies”, so it appears the FCC could potentially prevent LightSquared from offering any terrestrial commercial service at all. Though I suspect LightSquared will try to argue that this commitment is only applicable to service under the waiver, it will be hard to win that point when it was very clear from LightSquared’s discussions with the FCC and White House in January what was intended.

The FCC therefore is now confronted with a tricky decision: does it simply wait for LightSquared to run out of money, so it can try and avoid the inevitable legal action, or does it allow testing to continue, and risk the wrath of Congress (and Sen. Grassley in particular) for appearing to be supportive of LightSquared.

Coming after the SEC issued a Wells Notice to Harbinger Capital this morning, and Harbinger subsequently suspended redemptions from its funds, this news could hardly have come at a worse time.

12.08.11

Spin until you puke…

Posted in LightSquared, Operators, Regulatory, Spectrum at 4:02 pm by timfarrar

Despite LightSquared’s best efforts to spin the GPS interference issue as “needlessly complex” and turning “basic engineering issues into a political debate”, I’m told that this spin is yet again doomed to fail, once the results of the NTIA tests of cellular and general navigation results are published next week.

These results were described to me as “devastating”, because far from confirming (as most people have assumed) that there is no problem with cellular and general navigation devices if LightSquared limits its operations to the lower part of the L-band, in fact a “good chunk” of these 400 million devices will suffer interference at the 1dB C/No degradation that the NTIA has set out as the maximum acceptable impact level, even if the interference is not as overwhelming as under LightSquared’s original plan.

This comes only a day after LightSquared proclaimed to the FCC that it is “well on its way to demonstrating that GPS interference issues have been resolved”. As a result, it will be interesting to see how LightSquared tries to spin its way out of this problem. Perhaps LightSquared will tell the FCC that it should ignore not only the “subjective views” of the federal agencies but all of their testing as well?

After all, surely we can rely on LightSquared’s own “independent testing” to be more unbiased than those pesky federal agencies? And I’m sure that all of those politicians taking LightSquared’s side yesterday had carefully verified LightSquared’s technical claims before speaking out on the company’s behalf. No wonder our international partners are “absolutely aghast” that we are even having to discuss this “Made in the USA” fiasco.

12.07.11

There’s no there there…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 11:49 am by timfarrar

Today LightSquared has been making a big deal about how its “independent tests” have shown that “LightSquared is well on its way to demonstrating that GPS interference issues have been resolved”. This is in line with LightSquared’s statement to the FCC on November 15, that “any determination that the federal precision and timing coexistence issue has been resolved would have to be based on objective and independent test results and not the subjective views of the federal agencies involved”. However, now LightSquared appears to have lost its backing from both the White House and the FCC (and the views of the federal agencies are pretty clear), LightSquared cannot seriously expect the FCC to change the currently defined PNT testing process, and so I think that the only place LightSquared will be trying to argue that point is in the court of public opinion, followed sooner or later by a court of law.

LightSquared also appears to be renewing the tired arguments about how its integrated satellite network can provide coverage everywhere, even quoting the Commissioner of Randolph County, GA who suggested that “this powerful new high-speed network will finally allow them to access broadband wherever they might live or work or travel”. However, LightSquared has never intended to provide terrestrial service in Randolph County, GA, as shown in this chart of planned terrestrial coverage that LightSquared presented at a conference in October 2010.

Even if its deal with Sprint comes to fruition (which now seems unlikely to say the least), LightSquared won’t provide terrestrial coverage there, because Sprint has no towers in Randolph County either.

Thus any potential LightSquared customers in Randolph County will have to rely on satellite coverage. I wonder if they realize that they will get at most 200-300kbps downlink speeds and 10-20kbps uplink speeds from a LightSquared handset? And that they will have to stand outside in an open area and make sure they know which direction the satellite is in? Even more problematically, the total data capacity for all the handsets using the SkyTerra-1 satellite anywhere in the US is roughly equivalent to the capacity of a single LTE base station. And remember that LightSquared’s wholesale partners get 500kbytes of satellite data for every Gbyte of terrestrial capacity that they buy, so they will only be allocating 1Mbyte of satellite data per month for each customer on a standard 2Gbyte terrestrial data plan (if they even sell service to customers who live outside terrestrial coverage).

UPDATE (2/9/12): LightSquared’s satellite capabilities have now been revealed in documents produced by the FCC in response to FOIA requests. The total capacity of each LightSquared satellite is stated to be 100 gigabytes per hour (222Mbps) compared to 2800 terabytes per hour on the terrestrial network (28,000 times more, or in other words the satellite capacity for all users in North America is approximately equal to the capacity of a single base station). Furthermore, LightSquared’s intended wholesale pricing for satellite data (before it was marked up by their partners) was $10 per Mbyte, or 1600 times the price of LightSquared’s terrestrial data services.

Of course I’m sure that none of the endless parade of former politicians that LightSquared has hired has any conception of the technical issues involved, so they will presumably keep touting the company right up to the point at which the money runs out and the lawsuits start flying.

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