What’s Charlie’s deal?

Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum at 5:20 pm by timfarrar

For the last week, since DirecTV’s bid for GVT fell through, rumors have been circulating about a potential merger between DirecTV and DISH. However, to me that seems rather implausible in the near term: while a merger might well be feasible from a regulatory perspective, there would almost certainly be months of jockeying for position in Brazil and elsewhere, before it became clear which of the two companies would be in the stronger position to dictate the terms of a merger.

Instead, if DISH isn’t to be left holding its spectrum assets for many years (with no potential buyer on the horizon, after AT&T and Verizon both declared they would not be buying any more spectrum outside of FCC auctions in the next few years), DISH now has to focus on trying to bring its spectrum plans to fruition in the immediate future. This means seeking either to block the Sprint-Clearwire deal (to gain leverage for a network sharing agreement with Sprint) or to do the same in the T-Mobile-MetroPCS deal, which is now set to close in the next few weeks, unless MetroPCS shareholders vote it down.

I suggested last month that if Clearwire drew down the funding line from Sprint at the end of February, then DISH might “potentially move on MetroPCS immediately thereafter”. While no public offer has emerged, in recent days DISH has sounded noticeably less enthusiastic about its prospects of blocking the Sprint-Clearwire merger (and note that DISH is likely to make a $250M-$300M profit on its investment in Clearwire simply by allowing Sprint’s deal to go through). It therefore seems to me that if DISH does emerge with a deal in the near future (which perhaps might have prompted the 5% rise in DISH’s stock price on Wednesday), then the only plausible possibility is that T-Mobile got worried that its MetroPCS merger would be voted down, and negotiated a network sharing deal behind the scenes with Charlie Ergen.

That would be a great move for T-Mobile, at one stroke removing both potential alternative merger partners for MetroPCS (by taking DISH off the table and ensuring that Sprint is tied up with its Clearwire merger) and also cementing its position as the wireless operator best able to offer large, low cost data packages for the foreseeable future. Of course it would also be disastrous for those hedge funds betting that they can force T-Mobile and Sprint to increase the financial consideration being offered for MetroPCS and Clearwire respectively.

What would such a deal look like? I would guess very much like DISH’s desired deal with Sprint, namely that T-Mobile hosts the DISH spectrum on its LTE network, while taking most if not all of the financial consideration in the form of capacity, providing DISH with a roaming deal plus up to half of the AWS-4 capacity to launch its own wireless services. A deal like that, with no spectrum actually changing hands, would provide no basis for further FCC review of the T-Mobile/MetroPCS transaction, so the perfect time to announce it would be in the next couple of days (now all approvals have been received), giving MetroPCS investors time to contemplate their fate ahead of the April 12 vote.

LightSquared’s Mexican standoff…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 4:12 pm by timfarrar

According to Wikipedia, “In financial circles, the Mexican standoff is typically used to connote a situation where one side wants something, a concession of some sort, and is offering nothing of value”. That’s presumably how the FCC feels about LightSquared’s request for a so-called spectrum “swap”, as I noted last month when the FCC’s General Counsel summoned LightSquared’s lawyers to tell them that there was no way LightSquared would get access to the 1675-80MHz band for free. LightSquared’s lawyers were forced to promise that the company would at least pay for relocation of NOAA’s radiosondes “consistent with the Commission’s emerging technology” doctrine.

The FCC must therefore have been even more annoyed when LightSquared followed up this meeting with a request for an STA to conduct four months of tests to examine radiosonde relocation, and essentially stated that NOAA should pay for the relocation itself. In particular LightSquared asserted that “continued use of this [1675-80MHz] band by radiosondes may not be compatible with the expected operation of the new GOES-R satellite system that is expected to be deployed in the next few years” and so “the modification of current radiosonde operations in and around the 1675-1680 MHz band…is required by the “downshift” of a portion of the GOES-R satellite downlink channels”. Given that NOAA has spent five years studying this “downshift” to free up the 1695-1710MHz band for auction (in that case to raise money for the government) and has never indicated that relocation of radiosondes out of the 1675-80MHz band is required by this downshift, that is quite a remarkable assertion for LightSquared to make, and is all but guaranteed to alienate NOAA as well.

As a result, a cynic might conclude that LightSquared’s attempt to obtain a four month testing window is intended to delay any negative ruling from the FCC until after LightSquared tries to convince the bankruptcy court that they are well positioned to secure the spectrum they need, and persuade the judge to allow them to cram down the LightSquared LP debtholders, on the grounds that Harbinger’s equity is supposedly still “in the money”. Indeed, the FCC may well be tempted to consent to LightSquared’s request, in order to push out any litigation beyond the end of Chairman Genachowski’s term in office.

However, there is yet another, potentially even more serious, Mexican issue looming on the horizon (which will quite possibly emerge before mid July), namely the MEXSAT-1 satellite that Boeing is constructing, which is scheduled for launch at the end of 2013 or early in 2014. As I noted in December 2010, when the MEXSAT order was placed, after the MEXSAT launch, LightSquared will no longer have “any authority to share spectrum with [Mexico's planned next generation] system in the absence of coordination”.

I’m informed that as part of this new coordination agreement, the Mexican government will now demand the right to use one third of all L-band spectrum in North America for the MEXSAT-1 and 2 satellites, based on Mexico’s huge $1B investment in this system. This amount (~22MHz in total) is of course far more than Mexico’s current allocation for its older satellites. However, LightSquared’s Cooperation Agreement with Inmarsat guarantees that Inmarsat will be held harmless from any future reallocation of spectrum to Mexico, and thus all of the additional spectrum demanded by the Mexicans would have to come out of LightSquared’s allocation. That quite possibly explains why Inmarsat wanted to keep the Cooperation Agreement in place last April, while suspending further payments by LightSquared for two years, because now Inmarsat won’t have to give up any spectrum at all to Mexico. It might also indicate why Carlos Slim was rumored to be interested in LightSquared, although given recent developments, Slim might now have bigger issues to worry about in Mexico.

UPDATE (3/21): Here is a description of the MEXSAT system, confirming that it will need at least 15.4MHz of L-band spectrum (2.2MHz per beam, 7 color re-use) to operate as designed.

LightSquared could potentially reject the Mexican request, which would result in a return to the status quo under the original Mexico City L-band coordination agreement from the late 1990s. However, then the L-band would be broken up into small chunks, with the Mexican spectrum (which is largely in the lower L-band where LightSquared wants to operate terrestrially) preventing LightSquared from gaining any contiguous 5MHz blocks of spectrum that could be used for an LTE network deployment. In adddition, LightSquared would have no right to generate any interference whatsoever into the Mexican system from its terrestrial operations.

In other words LightSquared’s L-band MSS spectrum assets now run the risk of either becoming either completely worthless or at the very least being significantly reduced, perhaps to as little as 10-15MHz in total (excluding the spectrum leased from Inmarsat). This of course makes it far less plausible that DISH would be willing to countenance using LightSquared’s spectrum (for uplinks) in conjunction with its own AWS-4 spectrum (for downlinks), as LightSquared’s debtholders hope. After all, harking back to another long ago post of mine, it seems DISH has a pretty good understanding about “which of DBSD/TerreStar, Clearwire and LightSquared” turned out to be “the good, the bad and the ugly”.

ADDENDUM (3/23): Apart from its spectrum, LightSquared’s other assets mainly consist of its two new satellites, SkyTerra-1 (in orbit) and SkyTerra-2 (still on the ground). Many assumed that the SkyTerra-2 could be sold to Boeing, for use in the MEXSAT program (since MEXSAT-1 and 2 are very similar to SkyTerra-1 and 2). However, I’m told that it is now far too late for that, as the MEXSAT-2 build is already well underway, and so it is likely to be even more difficult to raise money from the sale of LightSquared’s satellites.

Another option for LightSquared has always been its supposed litigation claims against the FCC. I understand that LightSquared believes it has some communications in its posession which would make this case a “slam dunk”, and so it expects to succeed in extracting concessions from the FCC, including the purported spectrum “swap”. However, note that the Mexican coordination is formally a government to government agreement (with the FCC at least in theory responsible for negotiating on behalf of LightSquared). Thus, I wonder how much leverage LightSquared currently has with the FCC, when a negative outcome (or simply no progress) from the coordination negotiations would likely ruin LightSquared’s prospects of deploying a terrestrial network in the L-band. In particular, LightSquared’s ATC licenses from the FCC could then potentially become useless, even without further action on the GPS-related issues, based on LightSquared’s acceptance of the FCC’s (separate) March 2010 Mexico re-use approvals. This might even provide a convenient way for the FCC to park the GPS issues, while completely avoiding any liability to LightSquared.