Charlie Ergen’s atypical absence from the Paris satellite conference this week was not the only pointer that something is happening at DISH which could lead to a spectrum spinoff being announced imminently. On Wednesday Northstar and SNR asked for and were granted a two week extension to the September 17 deadline to provide an irrevocable standby letter of credit for the $3.3B DE discount that the Commission has ordered to be repaid.
This move signals that DISH is close to a deal to restructure its spectrum holdings and presumably announce the spinoff of a spectrum leasing company before October 1. However, the question is who would be the anchor leasing tenant for that entity, which would enable it to raise tens of billions of dollars of debt in its own right, and allow the Spinco to pass the proceeds back to DISH and/or to fund a bid for additional spectrum in the upcoming incentive auction.
Back in August I speculated that Sprint was a potential wild card partner for DISH, but Verizon has always been the more attractive option, given its greater financial resources and that it bid against DISH in the AWS-3 auction earlier this year and will soon be deploying AWS-3 to supplement its existing AWS-1 network. Its therefore hardly a coincidence that Verizon was openly discussing on Thursday its interest in a deal with DISH, including that “we’ve had discussions about how we could provide [Dish Network Chairman and CEO Charlie Ergen] with megabytes and how he could pay for it with spectrum.”
It seems clear that Verizon would be interested in gaining access to both DISH’s AWS-3 winnings and the adjacent AWS-4 downlink through a leasing deal. However, by advertising its bottom line in public, and in particular that Verizon is not willing to pay DISH’s asking price in cash to lease this spectrum, it seems that Verizon has presented Ergen with a take it or leave it proposition, calculating that DISH has no other options.
If DISH really is serious about entering the wireless business, then it could use the “megabytes” offered by Verizon (which would presumably not be limited to being provided on the spectrum under lease) to set up an MVNO business, and the price established by Verizon could then serve as a benchmark for cash deals with other parties (i.e. a 700MHz E block deal with AT&T and an H-block/AWS-3 uplink deal with Sprint). Theoretically Verizon could offer quite a high price, especially if it calculated that DISH might not succeed in the MVNO business and would therefore leave most of the megabytes unused.
However, this outcome would leave DISH without the ability to raise substantial debt at the Spinco, unless and until further cash deals were struck. That’s likely a wise move for Verizon, since it would prevent DISH from bidding aggressively in the incentive auction, and potentially result in lower prices in that auction and a correspondingly lower benchmark for future spectrum transactions.
So now we’ll see if Ergen accepts Verizon’s offer or if he can come up with an alternative leasing partner in the next week and a half. Alternatively, and perhaps even more likely, is that no deal will be struck now. Then Ergen might have to wait for a long time for the next opening, as operators focus their attention on the incentive auction next spring and beyond that on the possibility that a change of administration in November 2016 could result in a different regulatory climate for deals that are impossible today (such as a Sprint/T-Mobile merger).
Paris is the place to be in September for satellite industry gossip (though not the weather), and this year is no different. There’s been plenty of chatter already about the MSS sector, as people look forward to Inmarsat’s upcoming investor day on October 8. The company has seen some good news recently, displacing Intelsat General to win a large US Navy contract last week. However, Inmarsat’s aggressiveness on price is highlighted by the reduction in the total ceiling price from $543M last time around to only $450M over 5 years (which is in turn perhaps double the US Navy’s most likely spending profile). Though this contract should help Inmarsat show top line revenue growth in 2016 and beyond, a significant proportion of the capacity (in C, Ku and X-band) will have to be bought in from other players, limiting Inmarsat’s ability to make a profit.
However, the other main news about Inmarsat is that the company is expected to order its first I6 L-band satellite before the end of 2015, and it will include substantial additional Ka-band capacity to supplement the rather limited amount of capacity available on GX, even after the fourth GX satellite is launched in 2016 or 2017. That will likely mean a total capital expenditure of $450M-$500M, plausibly repeated once or twice more in the next few years, just to keep Inmarsat in the bandwidth race.
There’s also been some chatter about the FCC regulatory situation as it affects Globalstar, where a source confirms that my suppositions in June about the purpose of Globalstar’s change in tone to the FCC were correct and that a deal was on the table to approve terrestrial use just for Globalstar’s own MSS spectrum and not the wider 22MHz TLPS channel. However, this approval was only going to be for low power use, and would therefore not be of much import, except as a demonstration of regulatory progress.
Then after Jay Monroe met with several FCC Commissioners in late July he withdrew this potential compromise and insisted instead on full TLPS approval, presumably believing that if permission either to use the unlicensed spectrum or high power terrestrial use or the MSS band was treated as a separate, second stage of the process, a conclusion would be delayed for years, making it impossible for Globalstar to deploy or monetize its spectrum anytime soon.
So now it seems we are back to an impasse, and though Globalstar has recently added some additional information into the docket on an experimental deployment in Chicago, this documentation doesn’t provide quantitative information on (for example) the exact rise in bit error rates seen by services like Bluetooth, merely observing that no observable performance impact was noted. As a result, I believe it is unlikely that the FCC will feel able to rule on full TLPS approval anytime soon (i.e. this year).
Ironically, Globalstar’s consultants are also acting for LightSquared, and have proposed a similar program of tests for GPS interference, again based on a “KPI” criteria of observable degradation in performance, rather than actual quantified impact on the signal to noise ratio. Most observers seem to believe that LightSquared is no more likely to gain FCC approval for its plans than before, and that after the recent publication of the DOT test plan for their Adjacent Band Compatibility study, the FCC will wait for those tests to be conducted, which could take a considerable period of time.
Predictably LightSquared is already criticizing the DOT test plan, very likely setting us off on exactly the same well trodden (and ultimately disastrous) path as before. As a result, I’m sure that those hedge funds who committing funding to the bankruptcy plan (especially those in the $3B+ second lien, which sits behind $1.5B of first lien debt) must now be feeling pretty nervous. I wonder if any of them will now be frantically searching to see if they have any way to avoid funding these commitments once the FCC approves the transfer of control?
Finally, in yet more FCC-related news, the consensus here seems to be that the 14GHz ATG proceeding may also fail to reach a conclusion in the near term, as I predicted earlier this month, due to the uncertainty over how to protect NGSO systems. Instead, ViaSat’s Ka-band solution seems to be going from strength to strength, with the hugely positive reactions to the performance on JetBlue contributing to their recent win at Virgin America and to other airlines taking another look at what will be the best future-proof solution. All this makes Gogo’s predictions that its US market share is secure and that its revenue potential is “like a gazillion dollars” seem just as foolish as it sounds.
Often I wonder whether some companies understand how the FCC works and what they really shouldn’t say in an FCC filing. Gogo has just provided a classic example in its August 26 ex parte filing that tries to counter SpaceX’s recent intervention in the 14GHz ATG proceeding, where Gogo has been trying to get 500MHz of spectrum auctioned for next generation ATG networks.
Unfortunately for Gogo, it has been left as virtually the sole active proponent of this auction, after Qualcomm laid off the team that developed the original proposal and stopped participating in the proceeding. While I’m sure Panasonic and Inmarsat would take part if an auction was held, undoubtedly they are relishing the prospect of Gogo struggling to improve its “infuriatingly expensive, slow internet” service with 2Ku capacity that Gogo itself admits is roughly the same cost per Mbyte as its existing ATG-4 network (at least until it can renegotiate its current bandwidth contracts).
So when Gogo makes submissions that directly contradict those it previously put into the record, it shouldn’t be surprised if the FCC regards these rather skeptically. In particular, in July 2014 Gogo told the FCC that it “supports the proposed §21.1120 requirement that interference from all air-ground mobile broadband aircraft and base stations not exceed a 1% rise over thermal” whereas now “Gogo concurs with Qualcomm in that a 6% RoT has a negligible impact on the cost and performance of an NGSO system while creating an additional and disproportionate level of complexity or loss of performance for the AG system” and “Gogo supports the 6% RoT aggregate interference levels initially proposed by Qualcomm”. So suddenly Gogo thinks that its a perfectly acceptable to have six times more interference than a year ago.
Even more of a hostage to fortune was Gogo’s September 2013 comment about the unacceptable problems that an ATG network (referred to as Air to Ground Mobile Broadband Service or AGMBS) would cause for NGSO systems like that proposed by SpaceX:
“In its initial comments, Gogo expressed its concern that Qualcomm’s assumptions regarding the operating parameters of the hypothetical NGSO satellite systems were not representative of typical or worst case system configurations, and that the interference between a future system and AGMBS systems could be far greater than indicated by Qualcomm’s estimates. Gogo is not alone in this view, as the Satellite Industry Association (“SIA”), ViaSat, EchoStar and Hughes all raised similar concerns in their comments. SIA included an analysis within the Technical Appendix attached to its comments which illustrates the potential for much greater interference than had previously been calculated by Qualcomm. In Gogo’s view, some aspects of the analysis are subject to challenge because it overstates the level of interference that may be expected. Nevertheless, the overall conclusion remains valid – an AGMBS system operating consistent with the proposed rules would cause unacceptable levels of interference to many, if not most, possible future Ku-band NGSO system configurations. The analysis of EchoStar and Hughes, provided in Annex B of their comments, provides additional support for this conclusion. Similarly, ViaSat’s comments indicated that the NGSO analysis presented by Qualcomm is not representative of the range of potential Ku-band NGSO systems which have been previously proposed.”
Yet now Gogo, having previously claimed that Qualcomm’s calculations were flawed, suddenly decides that after “incorporating [SpaceX's] stated parameters into the Qualcomm interference calculation methodology” everything is fine and “the resultant RoT from an AG system into the SpaceX NGSO system is far less than [its newly relaxed] 6%” interference criteria.
I can only conclude that Gogo must be truly desperate to get the 14GHz ATG proceeding completed, because it needs the capacity ASAP. However, making contradictory filings is certainly not going to help the company to get a favorable ruling from the FCC anytime soon (especially when politics is lurking in the background, in the form of the Association of Flight Attendants expressing concern about the FCC taking action on this matter).