01.30.14

Still going down?

Posted in General, Spectrum at 6:03 pm by timfarrar

Today Cisco helpfully tweeted out one of the key statistics from their upcoming VNI report, which is scheduled for release on Feb 5, indicating that the “annual run rate” for mobile data traffic in 2013 was “less than 18 exabytes.” That’s even lower than last year’s report which forecast total traffic of 1.58EB/mo at the end of 2013. So I thought it would be interesting to examine how Cisco’s projection of global mobile data traffic for 2013 has evolved over the last six years of VNI reports.

The new figure also suggests that unless Cisco retrospectively reduced its estimate of global traffic in 2012 (which happened last year), then global traffic growth was only ~68% in 2013, rather than the 78% growth that Cisco forecasted in February 2013. Looking out to 2018, where an annual run rate of 190EB (i.e. monthly traffic of 15.8EB) is indicated, that would compare to a February 2013 projection for monthly traffic of 11.2EB at the end of 2017, or 42% growth in 2018 if the 2017 figure remained unchanged (in fact it may also come down slightly).

Sadly, we don’t have any CTIA benchmarks for traffic growth in the US in the first half of 2013, as that survey has been converted from a six monthly analysis to an annual effort, but its interesting to contrast these numbers with Chetan Sharma’s recent report suggesting that usage per consumer grew from 690MB to 1.2GB each month in the US in 2013 (74% growth) and from 140MB to 240MB per month globally (71% growth). Sharma’s numbers seem to be a little on the high side because obviously the number of smartphone users grew significantly during the year and there is tablet traffic to add in as well. One possibility is that Cisco is assuming there was little or no growth in laptop data traffic, which accounted for 46% of mobile data traffic in 2012 according to its February 2013 report.

We’ll obviously find out more next week, but it seems that despite evidence consumers are using more data on their smartphones when they upgrade to LTE, mobile data traffic growth worldwide is still slowing rather more rapidly than Cisco previously expected.

UPDATE (2/5): The released Cisco figures confirmed that traffic in 2012 is now estimated at 820PB/month, increasing by 81% to 1488PB/month in 2013. This represents a retrospective reduction of 7.3% in the 2012 estimate and 5.7% in the 2013 estimate. The trend for 2012, 2013 and growth between 2012 and 2013 is shown below.

01.28.14

H-block auction: nearly done…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 2:22 pm by timfarrar

Although some guesswork is still required, today’s activity pretty much confirmed my view about where we stand with the H-block auction. In particular, I’m still convinced that there have been no significant bidders other than DISH since Round 1 and now there is no-one else left in the auction with more than a few million bidding units of eligibility at most. As a result, the auction should be completed, with DISH paying the minimum amount of $1.564B, by the end of this week or very early next.

Tomorrow or so we might still see the odd competing bid here and there, if one or two bidders jump into the few remaining blocks that have not yet received any bids, in order to preserve their remaining eligibility. However, DISH has made it very obvious to rivals that it will simply keep pushing up the price of licenses that receive competing bids (even raising its own winning bid) until any other bidder gives up. Moreover, in Rounds 16 and 17 there were no longer any competing bids whatsoever in the auction.

The table below shows the decline in the number of competing bids and how the last few remaining competitors switched to low priced licenses in the earlier rounds today, prior to stopping further bids. As I noted yesterday, it looks like someone other than DISH (probably a financial speculator) put in bids for NY and LA in Round 1, but then seeing how little competition there was, gave up on any more bidding. That’s logical, because unless there is a critical mass of other bidders, DISH can simply target its firepower on any smaller bidder until that player stops bidding (or is prepared to pay $0.50/MHzPOP plus for its target licenses).

Thus, by sometime tomorrow morning, it looks like no other players will have any remaining eligibility and it will be left to DISH to raise the price step by step to the $1.564B minimum price and the auction will be done. Indeed that seems to already be happening, with DISH renewing its bidding on NY and LA in Round 17 as any potential competition ebbed away. Then we will be able to move on to renewed speculation about DISH’s plans, and whether a deal with Sprint will be announced soon. After all, leasing the H-block to Sprint as part of that deal would be an entirely logical path for DISH to take.

UPDATE (1/29): Today’s bidding threw up a few more medium-sized licenses that had been held by other bidders since the early rounds of the auction, notably in Minneapolis and Las Vegas, which DISH turned its attention to after bidding up NY & LA in Rounds 17 and 18 and Boston, DC, Chicago, Dallas and SF in Rounds 19 and 20. The sequence of bids in these licenses is not incompatible with DISH and one other player bidding actively against one another, as some other commentators have suggested is the case. However, that would not be aligned with DISH’s signaling strategy in other licenses (of overbidding its own winning bid, until competitors got the message and gave up, seen in the chart as a yellow cell followed by one or more green cells) and would also require the competing bidder to have won both NY and LA in the first round (only 25% probability, due to the random allocation of licenses between equal bids).

As a result, I conclude that it is more likely that DISH has been bidding against itself for most major licenses and has left a few winning bids from competitors alone until it has bid up the other desirable cities so far that it would be unappealing to switch to them. Now DISH is concentrating its firepower on a few smaller licenses, the increase in total bids (now at $781M) has actually been slower than yesterday, suggesting that it will take 3 or 4 more days before the auction finishes. The chart of licenses with multiple bids is as follows:

Many may now wonder if DISH’s spectrum (and that held by others such as LightSquared) should be revalued downwards, because of the low price of the H-block. That’s not unexpected (and indeed exactly what I predicted last month), but in my view DISH’s real asset value is in its potential “towers” (i.e. satellite TV antennas) not in the spectrum itself. DISH’s spectrum holdings may no longer be worth $10B, but if DISH can monetize its antennas (say 1M sites at $100/month) via a fixed broadband network deployment, then there is a very clear alternative source for $10B in incremental value.

01.27.14

What if they held an auction and nobody came?

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 3:10 pm by timfarrar

No, not LightSquared, although a renewed auction, with no contingencies associated with FCC approval, does now seem like the most plausible way forward for the company. The big issue is then whether Ergen/SPSO’s debt holding are subordinated as a result of the recent trial: if he is then it might not require much more than a $1.2B credit bid for the debtholders to take control of the company, although in those circumstances I’d still expect Ergen to come back with a rival (personal) bid for the assets so that he doesn’t lose his $700M investment. However, if there is no subordination, then we may not see anyone outbidding Ergen even at a price of $1.5B-$2B (which would not repay the secured debtholders in full).

Actually I’m more interested in the lack of competitive bidding in the H-block auction, which slowed even further today. So far, after Round 12, only $456M has been bid for the licenses on offer, or less than 30% of DISH’s minimum bid commitment of $1564M. The bidding is anonymous, so its hard to tell whether two different bidders are bidding in turn for many of the licenses or if DISH is bidding against itself in order to reach the minimum commitment.

However, the evidence now points increasingly to it being the latter situation, after bidding on the New York and Los Angeles licenses (which had accounted for $216.5M or 56% of the total bids) stopped at the end of Round 8. Then bidding resumed on several other large cities, including Boston, Washington, Chicago, Dallas, San Francisco, which had seen no bids since Round 1. The coordinated nature of this switching could mean that DISH faces a single large opponent, who ceased bidding on New York and Los Angeles and used its eligibility to bid for these other cities instead.

Instead, it seems more likely that DISH has been bidding against itself since the early rounds of the auction, because DISH has committed to bid $0.50/MHzPOP on average across the country and the bids have only reached $0.51 in New York and $0.41 in Los Angeles. Obviously any opponent would have had to have been prepared to bid rather more than $0.50/MHzPOP to win the licenses in NY or LA, and even if the objective of a DISH opponent was actually to pick up less expensive licenses in other cities, it would have been necessary to force DISH to bid more than $0.50/MHzPOP in NY and LA so that DISH could reach its committed minimum bid threshold without owning all of the licenses nationwide.

If we look at all of the 24 licenses that have attracted competing bids at any stage during the auction, as shown in the chart below, we can see that virtually all of the competitive bidding has been confined to a few small areas, notably in Colorado, Nebraska, Wyoming, Idaho and Utah, where 10 licenses (including Denver and Salt Lake City) have seen multiple bids. There has also been another smaller cluster of activity in Virginia, North Carolina and West Virginia.

It is particularly notable that DISH appears to have been deterring any rival bids through multiple rounds of incremental bidding, regardless of whether it holds the license (which is randomly assigned between equal competing bids), until any competitors have demonstrably given up, as seen in the repeated rounds of multiple bids (note competitors with no minimum bid requirement would not overbid themselves, but DISH would be happy to do that while it remains below the minimum bidding threshold).

My suspicion is that the same factor may have been in play in New York and Los Angeles, where a token competitive bid was mounted in the first round, and then DISH’s one or more major rival(s) dropped out of the auction, leaving only a handful of small regional players to fight a doomed battle with DISH over a few insignificant licenses like North Platte and Scottsbluff, NE. If that were not the case, then we would again have seen DISH make overbids when it held the NY or LA license itself and that would have manifested itself in two competing bids being made for these licenses if a competitor were present. The fact that no competing bids were offered in NY and LA after Round 1 strongly suggests that no competitors were bidding against DISH for these licenses after that point.

Even more significant than the slowing increase in overall bids (where the determining factor is clearly DISH bidding against itself), the increase in total bids for once contested licenses today has been only $1M-$2M per round, demonstrating that virtually no-one is still fighting against DISH. DISH therefore appears well set to capture all of the H-block licenses in the country that it wants, as it has enough spare eligibility to bid for all of these licenses (including those still held by the FCC) for many rounds to come. The fact that the FCC has now increased the pace of the auction to 5 rounds per day, starting Tuesday, also supports the view that DISH is the only bidder for most licenses and most other participants have dropped out.

Taking a wider view, many commentators will undoubtedly try and explain away the results of the H-block auction as an aberration, due to the lack of major competitors for DISH. However, even if you accept that view (and ignore the fact that an unprecedented amount of spectrum is being made available through auctions this year and next, which is likely to change the balance of demand and supply significantly), it still doesn’t give much comfort to those who believe that spectrum is a scarce, appreciating asset. After all, this auction has demonstrated that if, like LightSquared, you don’t have many buyers for your spectrum, you’re not going to be able to realize a high price for that asset.

01.18.14

Smackdown!

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 6:16 pm by timfarrar

It seems that contrary to Phil Falcone’s testimony on Thursday, its not true that “if you talk to anybody, they’ll tell you LightSquared will get the FCC license” at least if that “anybody” is FCC Chairman Wheeler (who of course did talk to LightSquared just before Christmas). It seems he wanted to send that message loud and clear with a Friday evening court filing, telling Judge Chapman that:

“The FCC is not in a position to confirm whether it will able to complete the work required to act on each of the conditions specified in the FCC Exit Condition before December 31, 2014. It is also impossible to predict what decisions the Commission may reach on these matters.”

The filing went on to explain that the first Exit Condition in the LightSquared bankruptcy plan (which requires approval for use of LightSquared’s 20MHz of uplink spectrum) “is not solely within the FCC’s control” because “the FCC coordinates certain spectrum-related matters with the NTIA, which in turn consults with all federal stakeholders through the Interdepartmental Radio Advisory Committee.”

That’s particularly important in view of a Bloomberg article earlier this month which indicated that “The Transportation Department, whose concerns that the LightSquared network could affect airliner navigation helped kill the company’s original plan, is withholding assent from the Interdepartment Radio Advisory Committee.” So in effect, the FCC is saying that if the DoT/FAA veto is maintained (and remember they would have to walk back the prediction that LightSquared’s operations could cause 800 deaths), it will not approve LightSquared’s application.

In addition, the filing noted that with respect to the second Exit Condition (which requires LightSquared to have gained approval to use the 10MHz of downlink spectrum between 1670-80MHz) “the FCC will need to conduct a notice-and-comment rulemaking process…[which] will include issuing a Notice of Proposed Rulemaking (“NPRM”), seeking comments from the public and adopting a Report and Order to allocate, develop service rules for and assign the [1675-80MHz] spectrum. At this time, it is not possible to provide any assurances that the processes outlined herein will be completed by December 31, 2014.”

This intervention potentially throws the LightSquared bankruptcy into chaos, and could leave Judge Chapman in a near impossible position, because as the FCC emphasized “Under the Revised Second Amended Plan, if the Effective Date has not occurred on or before December 31, 2014, the Plan shall be null and void.” We’ve already had DISH withdraw its bid, and as I noted the other day, it looks very much like DISH has alternative deals in mind. Commitments were also due on the LightSquared exit financing on Friday, and the FCC’s intervention could make the status of that financing even more uncertain.

So the question now is whether there is any feasible plan for Judge Chapman to confirm at this point in time? If she decides there is not, perhaps she could order the company to resume the auction of assets, this time without any conditionality on FCC approval. Would that mean Ergen jumping back in with a personal bid at a lower price? After all he suggested on Monday that had been a possibility, backed by a loan against his stake in EchoStar. Would the other LP debtholders compete against him (and put up cash to buy him out) if they weren’t going to get paid off at par plus accrued interest as they expected a few days ago?

Worryingly for LightSquared’s own reorganization plan, if the FCC intervention, which few expected at this point in time, is regarded as a direct smackdown in response to Falcone’s comments in court, that again raises the question of how big a “Phil risk premium” needs to be attached to the regulatory process, if Falcone maintains a substantial ownership stake in the company (even if he is no longer involved on a day-to-day basis, which seems to be the intent of the Fortress-backed plan).

After all, Senator Grassley (who has been a vocal critic of how “the FCC nearly granted billions of dollars in taxpayer assets to someone accused by our nation’s financial regulator of having ‘victimized’ ‘clients and market participants alike’ and leading a ‘graduate school course in how to operate a hedge fund unlawfully’”) was only too happy to give a statement for Bloomberg’s recent story about the lack of progress in Washington, and I’m sure that he won’t remain silent about any future FCC approvals while Phil remains involved with LightSquared.

01.16.14

If not you then who?

Posted in DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 5:27 pm by timfarrar

After all the back and forth in court this week, with testimony from Charlie Ergen and Phil Falcone about Ergen’s purchases of LightSquared debt, the casual reader could be forgiven for thinking that this is still a battle between the two of them for control of LightSquared. However, a court filing from LBAC today emphasized that DISH is withdrawing its bid and if their argument (that DISH’s bid is not locked-up) stands, it appears that the Ad Hoc Committee will have an uphill task in moving to confirm a plan based on sale of the assets.

Instead, if LightSquared can get sufficient commitments tomorrow so that the $2.5B of new debt needed to back its reorganization plan is in place (contingent of course on FCC approval), then both Ergen and DISH appear happy to step back and wait to see what happens. If the FCC did give LightSquared the approvals it wants, which Falcone has “a pretty good feeling about” (mirroring his confidence back in 2011 that GPS interference issues could easily be solved), then Ergen would get repaid with interest (assuming he wins the current trial), and if the FCC refused (or declined to rule), then he could come back with another (lower) bid later on.

What’s far more intriguing is why DISH now seems to regard LightSquared as dispensable, at least for the time being. Remember that Ergen testified DISH only became interested in LightSquared as a backup plan once it became clear DISH would not succeed in buying Sprint or Clearwire. In addition, rebanding the AWS-4 uplinks to downlinks and pairing with LightSquared’s uplinks would delay any network deployment by at least a couple of years.

So it seems highly likely that Ergen has another plan in mind, which DISH will move to implement soon after the H-block auction is complete. There are repeated rumors about a Sprint bid for T-Mobile and an expectation that DISH would mount a counterbid. But it still seems that Sprint would have a tough job getting regulatory approval.

BTIG seem to think that a asset sale by Sprint to DISH would be one solution (what assets this would be is unclear, but we suspect DISH’s main objective would be to get hold of Clearwire spectrum, not a retail wireless business, and Sprint doesn’t need to buy T-Mobile for its spectrum). But isn’t a direct Sprint/DISH partnership a simpler solution, with a Sprint bid for T-Mobile acting as a backstop option if a deal with DISH falls through?

Its surprising how few people really seem to have grasped what DISH’s key asset is, namely that its 14M potential towers (i.e. rooftop satellite dishes) are at least as valuable as its spectrum (and perhaps more so, since using the AWS-4 spectrum for a fixed wireless broadband network wouldn’t be a very high value use).

Consider for example, a wireless broadband network deployed to 20% of DISH’s current customer base (2.8M households), let along the 8.5M targeted in DISH’s April 2013 Sprint bid proposal. If DISH can rent even a fraction of this tower space for $100 per month (compared to the $1700 or so that is charged by traditional tower companies) to Sprint to host its 2.5GHz small cell buildout, then that could generate at least $1B per year of incremental cashflow, with little or no offsetting costs (remember the power and space is provided by the homeowner). Moreover, DISH’s best use of its money would then be to try and buy DirecTV, offering a national broadband fixed wireless competitor and ensuring that AT&T couldn’t gain a similar buildout opportunity via DirecTV’s satellite dishes.

We’ll see what happens in the H-block auction next week, but even that may not be particularly critical to DISH’s near term plans, and I’d expect DISH could be quite content to be outbid on many licenses by non-strategic investors. Then regardless of what happens to LightSquared in the next few weeks (and things may go at least somewhat quiet for much of this year while the company makes yet another effort to secure FCC approval), my bet is that we’ll be hearing a lot more about Ergen’s wireless plans in the next few months.

01.09.14

The great game…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 9:42 am by timfarrar

The announcement today that DISH is pulling its bid for LightSquared has thrown what was already a massively complicated and controversial bankruptcy case further into chaos, as we start the trial on whether Ergen’s purchase of LightSquared debt was illegitimate (and warm-up for a lengthy contested confirmation hearing over the next 3 weeks). Of course, the withdrawal of the bid completely undercuts LightSquared and Harbinger’s arguments that Ergen always knew DISH would come in and buy out his debt holdings and it will be interesting to see the effect on this part of the trial. Thus the withdrawal is certainly a logical move simply for that reason alone.

However, as we move forward into confirmation, there are two further possibilities to be considered. If DISH’s move is simply a strategic maneuver to undercut LightSquared’s lawsuit against Ergen, then it would be logical to expect DISH would ultimately give in when the debtholders attempt to force specific performance of the Asset Purchase Agreement (assuming the Ad Hoc debtholder reorganization plan is approved by the judge).

A second more intriguing alternative is that DISH and Sprint might be nearing a partnership deal, under which Sprint could use DISH’s satellite TV antennas (backhauled via a fixed wireless network using AWS-4 spectrum) for a 2.5GHz small cell hosting strategy in suburban and rural areas and DISH would resell Sprint wireless services. After all, if there is a near term deal to move forward with a wireless partner and an AWS-4 buildout, then the rebanding and delay associated with a DISH acquisition of LightSquared would probably cause more problems than it solves.

Certainly a hiatus in negotiations between DISH and Sprint seemed to be behind the leaks before Christmas that Sprint was planning a bid for T-Mobile and DISH’s rejoinder that it would consider a rival bid. Indeed one could view AT&T’s recent offer of a $450 incentive to T-Mobile customers as an attempt to kill any prospects of regulatory approval for a Sprint/T-Mobile tie-up. So from that point of view, Sprint’s only viable big move in the near term is a deal with DISH, and I’m told large scale deployment of such a network could double the total wireless network capacity available in the world today.

Another factor worth considering is that DISH’s move creates further uncertainty for the H-block auction as well, because (especially after Echostar’s purchase of Solaris, which has overlapping 2GHz band spectrum in Europe at 1995-2010MHz uplink and 2185-2200MHz downlink) the possibility that DISH will not decide to switch its AWS-4 uplinks to downlinks is back on the table.

Nevertheless, even if DISH doesn’t buy LightSquared, and no deal is ultimately worked out with Sprint, DISH could still come back and buy the 1695-1710MHz unpaired uplink spectrum in the FCC auction later this summer, likely at a lower price (and with rather less risk) than it would be taking with LightSquared – as unpaired uplink this band will probably sell for around $0.30 to $0.40/MHzPOP unless AT&T and DISH both bid aggressively against one another. So DISH certainly still has many spectrum options left on the table this year.

Today and tomorrow the LightSquared hearing will involve live testimony from both Ergen and Falcone about the debt purchases. Given that DISH’s maneuver has now undercut many of Harbinger’s arguments, and Ergen still seems to have plenty of cards up his sleeve, it will be interesting to see just how far Phil is out of depth in this great game.