12.02.11

Discretion is the better part of valor…

Posted in Financials, Regulatory, Spectrum at 12:24 pm by timfarrar

After losing an arm and a leg on their investments in Clearwire, and being utterly unsuccessful in their repeated attempts to sell wireless services, Comcast, TWC and BrightHouse have now apparently concluded that its not worth incurring any more flesh wounds in their attempts to become competitors in the wireless market and have agreed to sell their AWS spectrum holdings to Verizon. Of course, this acknowledges that smaller players will basically find it impossible to challenge the dominance of Verizon and AT&T in the US wireless market.

This deal puts further pressure on AT&T to buy DISH, if (and when?) the proposed T-Mobile merger finally falls apart. However, it leaves TMO in a much more difficult situation, with no easy way to acquire more AWS spectrum (at least prior to a future AWS-3 auction) and no potential cable partnership. As a result, the most likely outcome in my view would be for the FCC to make any AT&T/DISH purchase conditional on providing TMO and others with wholesale access to the network if the potential AT&T/T-Mobile network sharing agreement does not come to fruition.

Clearwire is also left with one less potential purchaser for its spectrum, now that Verizon has satisfied its spectrum needs for most of the next decade (and recall that T-Mobile looked at the Clearwire spectrum last year and decided not to buy any of it). Yesterday’s announcement of a deal with Sprint kicks the can down the road a little, but actually reduces Sprint’s near term payments to Clearwire, unless Clearwire is able to raise additional equity funding. However, that might be challenging in current market conditions unless Clearwire has a new potential strategic investor lined up. The obvious candidate would be China Mobile, which has a strong interest in establishing TD-LTE in the 2.5GHz band as a widely used international 4G standard (something of strategic importance for the Chinese government, given the earlier failure to ensure widespread adoption of TD-SCDMA as a 3G standard).

Another interesting factor to consider is the price paid by Verizon for the spectrum, which some are claiming “ratchets up the price of spectrum“, because SpectrumCo is making a profit on the extraordinarily low price it paid through a smart bidding strategy in the auction. In fact at $0.69/MHzPOP the price is almost identical to that paid by Verizon for its AWS spectrum in the auction 5 years ago (the quoted price then was $0.73/MHzPOP but the number of POPs is not directly comparable because the 2006 POPs were based off the 2000 census and Verizon’s stated 259M POPs for these licenses presumably relates to the 2010 census), and very likely was used as the benchmark in negotiating the value of the current transaction. In the intervening 5 years the AWS block has been cleared and has an established chipset ecosystem, thereby become much more readily usable, but Verizon is not paying any more for this spectrum. Certainly it makes recent assertions by Brattle Group that generic “unencumbered spectrum” (such as LightSquared’s spectrum with a waiver) should have a value of roughly $1.00/MHzPOP look hugely exaggerated.

UPDATE: If this really is “the end of broadband competition” as some believe, then its pretty obvious what the FCC does next, simply mandate wholesale access to Verizon and AT&T’s networks (as conditions on the purchase of SpectrumCo and DISH respectively). That enables two high capacity national LTE networks to be built and allows cable companies (on the Verizon network) and TMO (on the AT&T network), as well as smaller players, to compete for wireless customers, but leaves wholesale business plans like Clearwire and LightSquared out in the cold. Sprint gets stuck with a second rate LTE network using the spectrum (SMR, G-block, BRS/EBS) that no-one else wants.

7 Comments »

  1. geoff goodfellow said,

    December 2, 2011 at 6:40 pm

    tim,

    any thoughts/musings/opines/conjectures/et al. with respect to if/how this MHz-POP value “up-age” in light of the above Verizon/SpectrumCo transaction coupled with the now attendant “shortage” of one less potential spectral “dance partner(s)” effects any of the MSS ATC players WORLD WIDE spectrum values and/or suitors, or not?

    geoff

  2. timfarrar said,

    December 3, 2011 at 6:55 am

    In the context of Globalstar, which you’re clearly referring to, the most important developments are those related to interference, as the LightSquared issues have brought that to the fore. You can read the various filings in the FCC dockets (10-142 and 11-149) but the most important ones to note are that the GPS Industry is objecting to use of Globalstar’s L-band spectrum, while the EIBASS group is offering what might be a potential resolution of the S-band interference, through what I’m told could be a relatively quick and low cost rebanding.

    At least in theory, Globalstar’s S-band spectrum could provide the “test run” for incentive auctions that was supposed to come with the DBSD and TerreStar spectrum (but is unlikely to happen now DISH has bought those assets). However, to what degree the FCC wants to address this issue in the immediate future remains unclear (and any incentive auction approach would likely require Globalstar to give up perhaps 50% of the proceeds to the government).

    Whether Globalstar then might see demand for its S-band spectrum depends very much on whether (and at what price) Clearwire can monetize its adjacent spectrum. However, the market seems relatively skeptical that there is a pot of gold there, judging by recent movements in the price of Globalstar’s publicly traded bonds.

  3. ORBITRAX said,

    December 4, 2011 at 12:07 pm

    You lost us on this one…..

    ………”At least in theory, Globalstar’s S-band spectrum could provide the “test run” for incentive auctions that was supposed to come with the DBSD and TerreStar spectrum (but is unlikely to happen now DISH has bought those assets). However, to what degree the FCC wants to address this issue in the immediate future remains unclear (and any incentive auction approach would likely require Globalstar to give up perhaps 50% of the proceeds to the government).”…….

    How could Globalstar’s S-Band provide a “test run” for incentive auctions?

    In the 2Ghz MSS band, the FCC clearly showed that it was interested in returning all 40Mhz back to terrestrial. The 2Ghz MSS spectrum was not ITU sanctioned spectrum, unlike the Big LEO and L Band (Inmarsat/MSV). Just as the FCC repurposed earlier amounts of the 2Ghz MSS spectrum to terrestrial wireless via auctions.

    We believe the FCC has various treaty commitments in connection with the Big LEO spectrum that would prevent such an occurrence and we don’t think that Globalstar has any intention to “return the S-Band MSS allocation for a cut of a terrestrial incentive auction”.

    Unless we are mistaken, an incentive auction is a process that would incentivize a MSS license to return the spectrum to the FCC for terrestrial-only auction. We have seen no indication that this is even a consideration at Globalstar.

    Overall, a very US centric viewpoint in our opinion. Globalstar is licensed to cover ~5.5Billon/POPs using ~ 33Mhz outside the United States, 25.2 Mhz inside the US on its French registered second generation satellites.

    As far as the GPS Industry goes, they can object to Globalstar all they want to the FCC, they are objecting to a regulatory commission that no longer has oversight over Globalstar outside the US. Perhaps the GPS industry can influence the FCC and ultimately kill a limited reach US focused Lightsquared. However, as far as Globalstar goes. They can take up their agenda with the ITU?

    The Russian Federation recently approved (ECC/DEC/(09)02) “Harmonization of the bands 1610-1626.5Mhz and 2483.5-2500Mhz”. Globalstar now has legal access using its second generation satellites to the entire MSS Big LEO band in Russia, including spectrum licensed by the FCC exclusively to Iridium, however, Iridium lacks regulatory approvals to operate in Russia.

    ORBITRAX

  4. timfarrar said,

    December 4, 2011 at 5:28 pm

    At ~2500MHz, as Clearwire and Sprint have indicated, any terrestrial deployment now seems likely to be for the “hottest of the hotspots” (i.e. the first 100M-150M POPs in the US) and so there would be little to prevent Globalstar continuing to use the 2483.5-2495MHz spectrum on a secondary basis for satellite service outside terrestrial coverage (as it does now in the 2496-2500MHz part of the band, which has been re-allocated to BRS in the US). Indeed there didn’t even seem to be a problem with Open Range (using the S-band spectrum terrestrially in rural areas) for Globalstar’s existing customers (with satellite-only handsets, which couldn’t switch to the Open Range network when in their coverage footprint, unlike LightSquared’s plan for satellite devices). Requiring an incentive auction to permit terrestrial-only use of Globalstar’s S-band spectrum would of course not be in line with the LightSquared precedent of giving away this authority for free, but the windfall issue is now more of an issue than it was back in January (see the CTIA’s filing on the DBSD/TerreStar waiver application).

    Arguably also Globalstar may not be in a position to meet the current NGSO ATC gating requirements (32 operational satellites plus an in-orbit spare) on a permanent basis, unless and until it can move forward with deploying the additional 24 second generation satellites (or at least rather more than 6 of them, because the 8 first generation spares will fail at some point). If Globalstar struggles to fund this substantial additional cost, the FCC could have an additional point of leverage if it decides to push for an incentive auction as the only way it will then grant Globalstar unfettered terrestrial use of the S-band spectrum.

    Yes Globalstar has coverage outside the US, but its not like there is great enthusiasm for ATC/CGC in other parts of the world (and in most cases even less for giving a windfall to a foreign company). There’s been no meaningful progress in Europe towards building satellites for the existing 2GHz CGC licenses. DISH also appears not to have exercised its option to buy the ICO MEO satellites last month in order to secure access to the (rather more attractive) 2GHz spectrum globally. The ECC is not developing harmonized regulatory procedures for CGC in the 1.6/2.4GHz (Big LEO) bands across the CEPT countries, so although one country could authorize Globalstar to provide terrestrial services, it is unlikely to become a harmonized band for terrestrial use in that region. Thus if 2GHz MSS isn’t seeing much interest in terrestrial exploitation, who will want to do something with the Big LEO bands?

    And in respect of the L-band, regulators in the rest of the world are said to be in “disbelief” that the US would potentially jeopardize GPS by letting LightSquared go forward (http://www.insidegnss.com/node/2866). Thus they would presumably (at the very least) need extensive analysis and testing before authorizing terrestrial use of Globalstar’s L-band spectrum (and many countries may just not want to go there at all). Remember also that the GLONASS frequencies are above the GPS L-1 signal and very close to Globalstar’s L-band spectrum, which has always been an issue in Russia even for satellite-only use.

  5. ORBITRAX said,

    December 5, 2011 at 10:40 am

    ……..(with satellite-only handsets, which couldn’t switch to the Open Range network when in their coverage footprint, unlike LightSquared’s plan for satellite devices)

    Lots of “plans” over at Lightsquared, or perhaps more so a “bag of promises”? Which so far they have largely failed to materialize.. like those datacards for example.

    As far as the “Windfall Issue”, since you appear to infer that their is not only little value in the Big LEO band as a unfettered terrestrial solution, but also little overall interest by an external operator, then it appears that there would be a very marginal, if any, “step up in value”? So not really a “Windfall” as far as terrestrial flexibility would go. Certainly not a value amount that would trigger a distributed economic benefit, when it appears that you believe the possible cost of the Federal auction proceedings might exceed the potential proceeds/interest.

    As far as we know, Globalstar’s ATC scheme has always been a 2 part solution. FDD paired spectrum in the L Band/S Band, and a TDD partition in the S Band. Hence since they would operate in FDD in the L Band, there would not be “terrestrial base stations blasting next to the GPS /GNSS bands similar to Lightsquared. We are not saying there may be interference profiles from user terminals to deal with, but overall a much different animal.

    As far as the ICO MEO authorizations, we thought that ICO’s regulator, OFCOM had written the ITU to remove the ICO authorization? So we don’t know what the value of ICO’s MEO system is with the OFCOM issue.

    You yourself have made a compelling case as to why there would effectively be no “step-up” in value for the Globalstar spectrum, and hence no need for an incentive auction because, according to your analysis, there is little/no commercial value and no commercial interest in Globlastar’s Big LEO spectrum for un-gated terrestrial use.

    ORBITRAX

  6. timfarrar said,

    December 5, 2011 at 11:07 am

    What I’m saying is that the market appears to be viewing with skepticism the likelihood that Globalstar will be able to realize a large sum of money from its spectrum rights (i.e. an amount in excess of the COFACE debt). As satellite-only spectrum you could argue that the S-band is currently not worth much at all, at least for that part of the S-band which is not needed for primary MSS operations (i.e. most/all of it if you believe that the satellite service only needs to operate outside terrestrial S-band coverage).

    In that context any realization of value from this spectrum is a “step-up in value” even if it is not the multi-billion dollar windfall that LightSquared was seeking. If Clearwire is able to sell its owned spectrum for say $0.25/MHzPOP as many believe (though it is unclear whether they could achieve that spectrum value nationally if the buildout would only happen in urban areas), then that would put a potential value of up to $860M on 11.5MHz of national S-band spectrum. There are many caveats which could make Globalstar’s spectrum less valuable than Clearwire’s adjacent spectrum (non-standard band, limited quantity compared to Clearwire, clearance costs, who knows what the FCC will do), but that is clearly not a negligible step-up in value.

    As LightSquared has said, “if [ATC] doesn’t work in the United States then it doesn’t work”, so even if Globalstar could only realize a modest portion of this potential value through an incentive auction, it might be worthwhile to get some standardization around this band, which could make it easier to monetize the spectrum elsewhere. On the other hand, 50% of $860M doesn’t pay COFACE back, so you still need a viable satellite business and a strategy for monetization of the spectrum internationally.

  7. clytle33 said,

    December 9, 2011 at 7:27 am

    Falcone and Harbinger just received Wells Notice

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