10.06.14

Do you believe?

Posted in Financials, Globalstar, LightSquared, Operators, Regulatory, Spectrum at 3:04 pm by timfarrar

Today hasn’t been a great day for the MSS industry, with Kerrisdale Capital mounting an attack on Globalstar, and LightSquared’s bankruptcy process descending further into chaos, with Judge Chapman ordering the stakeholders back to mediation after the standalone reorganization proposal for LightSquared LP was withdrawn and the Special Committee threw up its hands in despair.

Fundamentally this debate comes down to whether investors (and more importantly potential spectrum buyers such as cellular operators) believe there is a shortage of spectrum, which will justify a higher valuation for spectrum assets. An answer to that broader question should become a lot clearer after the AWS-3 auction next month, as Charlie Ergen has been at pains to point out. After all, DISH has declared its intent to bid, apparently in order to push up the final price that others pay.

Some clearly believe, like Macquarie who published a report last week claiming that the AWS-3 spectrum will sell for $1.30 to $1.50 per MHzPOP, and DISH’s spectrum could be worth more than their current estimate of $1.75 per MHzPOP. However, the FCC is less sanguine and has set a relatively high reserve price (sufficient to meet the $7B required to fund First Net) in the expectation that bidding may not be very aggressive. Chairman Wheeler is also clearly nervous about the incentive auction, warning cellular operators at CTIA last month that:

Many broadcasters have been led to believe that the demand for mobile spectrum really isn’t as your industry has claimed.
As a result, they believe that wireless carriers won’t fully participate in the auction. Whether or not wireless carriers show up with sufficient demand to incent broadcasters to participate is something only you control.
But, if that is the case, if mobile operators don’t put their money where their mouths have been, the future of spectrum policy will begin to look a lot different.

Remember that Greenhill has just estimated that bids in the incentive auction could total $45B (of which $33B would be paid to broadcasters), even at what some would consider the relatively modest price for low frequency spectrum of $1.50 per MHzPOP. The price for AWS-3 should be rather lower than that, and to me it would not be at all surprising to see the final auction receipts total less than $15B ($0.80-$0.90/MHzPOP).

Even that total, of up to $60B, may prove a significant burden for cellular operators now that AT&T and Verizon are loaded with debt after their purchases of DirecTV and the Vodafone stake respectively and have much less incentive to bid the price up aggressively (especially in the incentive auction, since spectrum will potentially be reserved for smaller players).

Perhaps there will be an external savior in the form of a new entrant? That’s what one Globalstar bull, Odeon Capital, apparently believes, suggesting today that “Today, carriers and cable companies provide access, you need them to use wifi. Ultimately, TLPS provides an end run around the traditional gatekeepers, and we think that’s a very compelling incentive.”

However, its important to note that Google looked at buying both Globalstar and Inmarsat in late 2012/early 2013 (at a time when Globalstar’s share price was a lot lower) for Project Loon, but that proposal was rejected by Larry Page (note that the companies are not named, but Astro Teller specifically stated that there were six months of negotiations with “large companies” to buy “a relatively thin piece of harmonized spectrum” and its been confirmed to me by multiple independent sources that the targets were Globalstar and Inmarsat).

Amazon is another mooted investor in wireless spectrum, and a prospective Globalstar partner, but now that its Fire phone has failed to set the world alight, it seems increasingly unlikely to spend billions of dollars on spectrum.

So if its hard to see a new entrant saving the day, what will happen to spectrum values? It certainly doesn’t mean that Globalstar or LightSquared’s spectrum is worth nothing, but does suggest that (as I’ve long predicted) the spectrum bubble may soon start to deflate. The bands that will likely feel the pressure first are those without an existing ecosystem (or that are not owned by large operators like Verizon and AT&T with the power to create one).

On the other hand, unless you can find someone to pay for and use your spectrum, how do you monetize it? Do you build out your own network, like Clearwire and LightSquared tried to do? Or do you just sit and wait for conditions to improve? It certainly seems plausible that a number of spectrum owners, including DISH, may now have to choose between these two, relatively unpalatable, options.