05.14.16

Stepping off the precipice…

Posted in Aeronautical, Eutelsat, Financials, Inmarsat, Intelsat, Operators, Services, SES, VSAT at 1:49 pm by timfarrar

Back in March I noted that the Satellite 2016 industry conference “felt like 2000, as attendees peer over the edge of the precipice.” Yesterday, it seems the industry stepped off into the void, as Eutelsat’s profit warning proved to be the catalyst for a wholesale re-evaluation of the outlook for FSS/HTS data services.

Everyone is worrying about capacity pricing, where according to Eutelsat’s CEO “the outlook for data delivery is bad.” Just how bad hasn’t been obvious to many observers, not least Northern Sky Research, who in March dismissed suggestions that the sky is falling and instead claimed that so far there has only been “generally slow and stable downward pressure on pricing up to 2016″ though these drops were “expected to continue to gather steam.” Moody’s struck a similar positive note about European satellite operators in January, suggesting that “A Rebound in Revenue Growth, Stable Margins and Plateauing Capex to Support Credit Quality in 2016.”

In reality, a look at some of the largest deals shows just how much of a price decline has already taken place. Traditional wide beam transponders have been priced at $3000-$4000 per MHz per month, which made Intelsat’s offer to IS-29 anchor tenants in 2012 of about $2000 per MHz per month look like a bargain (Intelsat said it leased 20% of the capacity, i.e. about 2GHz, for $50M p.a.).

However, in February 2016, Gogo struck a deal with SES for “several GHz of both widebeam and spotbeam capacity in total” on its new SES-14 and 15 HTS satellites, followed by another agreement with Intelsat and OneWeb in early March. Gogo’s latest 10-Q has now revealed the impact of those agreements which represent commitments “to purchase transponder and teleport satellite services totaling approximately $29.5 million in 2016 (April 1 through December 31), $41.9 million in 2017, $40.4 million in 2018, $45.3 million in 2019, $58.6 million in 2020 and $309.2 million thereafter.”

Although the split between Intelsat and SES is not given, its a fairly good bet that they will be paid roughly equal amounts in 2020 and beyond. This is consistent with Intelsat renewing and extending its existing contract with more capacity being delivered at about the same revenue level (Intelsat claimed last September it had an 73% share of the aeronautical satellite communications market and Gogo had $37M of lease obligations in 2016 before these deals were struck) and also consistent with the Intelsat deal running through Dec 31, 2023 (as stated in the 8-K) and the SES deal running for “ten years from the applicable commencement of service date” for the SES-14/15 satellites (implying 7-8 years of the respective terms remaining in Jan 2021).

So if SES is leasing at least 2GHz of bandwidth to Gogo, which is the minimum amount consistent with the use of the word “several”, then the price of this capacity is no more than ~$1200 per MHz per month, and very plausibly the price may be as low as $1000 per MHz per month if Gogo is leasing say 2.5GHz. Given that the deal also represents a combination of wide beam and spot beam capacity, it certainly seems that SES’s HTS spot beam capacity is now being leased in (very!) large quantities for as little as $1000 per MHz per month, about 50% less than Intelsat’s original IS-29 deals.

That makes it pretty clear why Eutelsat has decided to step away from the HTS Ku table and limit its HTS investment “to providing broadband access to consumers and small businesses”, presumably via its European and African Ka-band satellites (and its partnership with ViaSat). Back in March I also suggested we could be in for a re-run of 2001 with “a sharp fall in satellite orders” and Eutelsat has confirmed there will now be a “downward review of our capital expenditures”.

So what comes next? Intelsat has just ordered a 9-series replacement satellite (a necessary step given that a large part of its C-band capacity reaches end of life in the next few years). But how much more Ku-band capacity is needed in the near term, given the looming threat of further price pressures from new Ka-band satellites like ViaSat-3? After all, despite large contracts with Gogo and Panasonic, there’s still a way to go just to fill up the HTS satellites that Intelsat and SES already have on order. And can Intelsat afford to match or beat SES’s price levels and still generate an adequate return on capital from the Epic satellites?

Most importantly, how much repricing is still to take place for existing Ku-band data services, and what will C-band users do if their C-band capacity becomes significantly more expensive than Ku (let alone Ka)? In addition, though Inmarsat believes (correctly) that its a very different company from Eutelsat, it has far more exposure to the data services business, and Inmarsat will now have to reconsider its pricing (and capacity provisioning) for GX services, as this low cost Ku HTS capacity impacts the aeronautical and maritime markets.

05.11.16

Jay cries uncle (or not)…

Posted in Globalstar, Operators, Regulatory, Spectrum at 5:47 pm by timfarrar

As I predicted last week, TLPS missed its chance for approval on April 22, despite Jay Monroe being convinced that it was in the bag when he presented at the Burkenroad conference earlier that day. He presumably had been assured of that by Globalstar’s General Counsel, Barbee Ponder, who thought they had answered all the FCC’s questions in late March and seemingly didn’t bother to follow-up after that point.

Now today we have seen an experimental license filing from Microsoft to test TLPS in Redmond, WA. Microsoft’s application states:

“Microsoft will test terrestrial operations in the 2473-2483.5 MHz unlicensed band and the adjacent 2483.5-2500 MHz band, consistent with Globalstar Inc.s proposal to operate a terrestrial low-power service on these frequencies nationwide (see IB docket no. 13-213). Microsoft seeks to quantify the affect [sic] of such operations on the performance and reliability of unlicensed operations in the 2.4 GHz ISM band.”

The application also includes the incidental admission that Gerst is correct that the Ruckus APs have been modified (by removal of coexistence filters) from the approved versions (the testing will include “the use of an intentional radiator in the 2473-2483.5 MHz unlicensed band that has not received an equipment authorization as ordinarily required under 47 C.F.R. ยง 15.201″) although it should be noted that Microsoft plans to use different APs from those in Globalstar’s own tests, including a consumer model which was one of Microsoft’s primary concerns.

The duration of the experimental license is requested to be 6 months, from May 23 to November 23, suggesting that we may not see results until the fall. This could perhaps permit FCC consideration of the results after the November election if Microsoft identified no problems whatsoever (or if the FCC sets a hard deadline for further testing, though as noted below Bloomberg is reporting that the initial authorization will last at least a year), but more likely it will set the scene for additional back and forth between Globalstar and its opponents in the period before the next FCC Chairman gets his or her feet under the desk in spring 2017.

UPDATE (5/13): Despite Microsoft’s experimental application, Globalstar’s TLPS proposal has finally made it onto the FCC’s circulation list this afternoon. That raises the question of whether Microsoft’s application was made with Globalstar’s cooperation (as I had assumed) or if Microsoft anticipated the issuance of an order that all sides acknowledged would require more testing and simply jumped the gun in preparing to conduct its own testing after that point (which now seems the most plausible explanation).

So now the focus will shift to what this order contains. It seems to basically be taken for granted that there will be increased sharing of L-band spectrum with Iridium (though that would come in a separate parallel ruling by the International Bureau on delegated authority) and that additional power limits will be imposed as an interim measure, probably at a 200mW level. Bloomberg is also reporting that there will be constraints on the number of APs that may be deployed, with a limit of 825 in the first year, and “the FCC will assess whether they cause interference to other services”. However, prior to the rejected deal last summer the FCC also contemplated changes to the OOBE restrictions that would permit increased use of Channels 12 and 13 by terrestrial users, and it will be interesting to see if these changes are still present, or if they have been modified, perhaps due to concerns about possible impacts on Bluetooth LE users in the upper part of the unlicensed spectrum.

Do the math…

Posted in DISH, Financials, Operators, Spectrum at 1:58 pm by timfarrar

So now the Kerrisdale report has been released, along with a prebuttal from Citigroup, claiming that Kerrisdale is “Absolutely Not a Thesis Changer”. However, as I noted last week, the biggest issue in thinking about the future for DISH is likely its capital structure, which neither of the reports address at all.

I also wish that both of them were better at math, when they try to assess whether today’s wireless networks are operating at capacity (though perhaps its hardly surprising when these calculations have been a recurring problem for New Street Research, CTIA, the FCC, Ofcom and even the ITU). Citi criticize Kerrisdale for considering New Albany, Ohio as a representative location, given its lower than average population density amongst US metropolitan areas (suggesting that 1000 people per sq km is more representative than 258 people per sq km), and also allege that Kerrisdale “ignores the variance in usage during the day” (suggesting that 40% of traffic needs to be accommodated in each of the 2 hour long morning and evening rush hours).

By making these adjustments, Citi claims that average utilization with a 25MHz downlink spectrum allocation would be 280% in the morning and evening peaks, compared to the 15% daily average estimated by Kerrisdale. Of course Citi exaggerate on the upside and Kerrisdale exaggerate on the downside.

The correct calculation for a “typical” situation should take the average number of subscribers per cellsite (144M subs on 48.6K cellsites for Verizon, according to Citi’s own report, or 2965 subs/site, compared to 1773 in Kerrisdale’s report and 7092 subs/site in Citi’s report) and the average busy hour ratio for mobile traffic (6.9% according to Cisco’s Feb 2016 VNI report which says the busy hour has 66% more traffic than average, although carriers typically build to around an 8% busy hour, perhaps 9%-10% in very peaky locations) and should also derate by the share of traffic carried on the downlink (around 87% in the US according to Sandvine), which neither report takes into consideration.

That would result in a daily downlink traffic of around 258GB per site (vs 177GB for Kerrisdale and 709GB for Citi) and a busy hour traffic of 17.8GB rather than the 142GB estimated by Citi. Then, using their own assumptions about capacity per site, each site would see a busy hour utilization of 35%, not 15% and certainly not 280%, suggesting that there is some headroom on most cellsites, just as you would expect, but that carriers will need to continue to upgrade their networks in years to come, to cope with future traffic growth, especially in peak locations.

That brings us back to my original thesis: Verizon might find DISH’s spectrum useful, but its network is not in danger of imminent collapse without it. Instead Verizon might prioritize increased use of small cells, sectorization and beamforming, and treat buying spectrum as the last thing to do, as Bob Azzi (former Sprint CTO) suggested on today’s Tegus call that I participated in.

This is a poker game, and if Ergen can prolong his license term (by building out fixed wireless broadband, as all of the call participants agreed would be logical) then he may be able to wait for Verizon to come to the table. If DISH can push up the price of spectrum in the incentive auction and prevent LightSquared/Ligado from offering a midband alternative then Ergen will be in a stronger position. So it seems more logical to me to talk about where that money will come from over the next couple of years, and not whether DISH will be forced to sell at a discounted price or Verizon will be forced to pay whatever DISH demands.

05.05.16

Go with the flow…

Posted in DISH, Financials, Globalstar, Operators, Regulatory, Spectrum at 8:35 pm by timfarrar

Its interesting to hear that Kerrisdale is apparently raising $100M to short DISH stock, after its previous attacks on Globalstar and Straight Path. As I said back in October 2014 when Kerrisdale mounted its attack on Globalstar, all spectrum (even that owned by Globalstar) does have value, its just a question of what someone will pay for it.

The spectrum bubble has clearly deflated considerably since late 2014 (despite DISH’s successful efforts to push up the price of the paired spectrum sold in the AWS-3 auction) with DISH’s share price roughly halving since that time, and other spectrum plays (like LightSquared/Ligado) also trading at much lower price levels.

This reduction in valuation clearly seems be the result of lower anticipated prices in the upcoming incentive auction, and last week’s FCC announcement that the initial clearing target will be at the maximum level of 126MHz, allowing 100MHz to be auctioned in most of the country (other than close to the Mexican border), will reduce the initial reserve price from $1.25/MHzPOP to $0.875/MHzPOP (although that could rise if broadcasters bid too much in the reverse auction to give up their spectrum).

However, arguments that DISH’s share price will fall much further seem to rely on DISH being forced to sell its spectrum at an even more discounted price due to impending buildout deadlines, competition (not least from Ligado, which secured a Public Notice from the FCC on its revised spectrum plans a couple of weeks ago) and very low prices in the incentive auction. Its useful to look back at what has happened previously, when operators have overpaid for spectrum, notably Verizon’s lower A and B block purchases in the 700MHz auction in 2008. In that case Verizon simply waited until someone (T-Mobile and AT&T respectively for those blocks) was prepared to pay the same as Verizon had paid (plus its cost of capital over the holding period).

If DISH is not under time or competitive pressure, then Ergen could also potentially wait to realize a reasonable price, at least in line with what DISH has already invested in its spectrum holdings (including the $10B spent on AWS-3 spectrum). Verizon might even decide to do a deal to buy spectrum from DISH sooner rather than later if it believes Ergen can wait indefinitely. And all of these problems can be addressed by spending money: bidding up the prices in the incentive auction this year, outbidding Ligado for the 1675-80MHz spectrum next year, and building out a fixed broadband network in the 1695-1710/1995-2020MHz band (as I suggested in November) to meet its FCC buildout deadlines.

Those three items could represent a sizable amount of money: perhaps $3B-$5B in the incentive auction (something that does not appear to be contemplated by most of the analysts covering the auction), $1B-$2B for 1675-80MHz and $2B-$3B for a fixed wireless broadband network, for a total of $6B-$10B over the next couple of years. And at first blush many would view that as another negative for DISH’s equity.

But the key issue here is to understand DISH’s capital structure and how the money flows around. DISH has raised its existing debt in the form of unsecured bonds at the DBS subsidiary, with no recourse to the parent entity which holds DISH spectrum assets. And the DBS bonds are not protected from being structurally subordinated to new bank debt at DBS (indeed part of the plan to fund a bid for T-Mobile last year was to raise $10B-$15B of new bank debt at DBS).

So if Ergen agrees with his kids, that its crazy to be in the pay TV business long term, then it makes absolute sense to raise say $6B+ of bank debt at DBS, flow that up to the parent company to support its spectrum plans, and (depending on how quickly the pay TV business declines and if a spectrum deal can be done in the interim) eventually file Chapter 11 for the DBS subsidiary (but not the DISH parent company). In fact raising that money sooner rather than later would make sense – DISH would have to convince the bankruptcy court that the subsidiary was not insolvent at the time of the transfer, unless that transfer happened several years before the filing. Note also that DISH has no need to spin off a spectrum holdco – the parent is exactly that, once it has extracted all of the equity value from the DBS subsidiary via this bank debt.

What does all this mean? All of the upside from any spectrum deal flows to DISH’s equity, but relatively little of the downside from no deal being struck: that downside is much more likely to be a problem for the DBS bonds. So if Kerrisdale’s plan is to short the equity, then it may face an asymmetric exposure risk. In fact, some people taking the other side of Kerrisdale’s trade might even decide to be long DISH equity and buy credit default swaps on the DBS bonds. That would create the possibility that they could win from a spectrum deal taking place, but also win if DISH can’t do a deal this year and has to raise money to wait out Verizon and/or AT&T.

In conclusion, remember what DISH said in response to rumors of the Kerrisdale report: “We will continue to manage the business for the long-term benefit of our shareholders as we have done over the last 35 years.” After all, Charlie Ergen’s a shareholder, with much of his wealth tied up in DISH stock, but as far as I know he’s not a DBS bondholder.

05.02.16

Heading for last chance saloon…

Posted in Financials, Globalstar, Operators, Regulatory, Spectrum at 9:05 pm by timfarrar

Its interesting that Globalstar has decided to announce its Q1 results this Thursday afternoon, which may be just before the FCC releases the draft agenda for its May open meeting and would presumably therefore mean Globalstar management is not in a position to discuss TLPS, just as in late February.

UPDATE (5/3): On the other hand, if the FCC issues the agenda on Wednesday or Thursday, its possible that Globalstar will either be able to celebrate or will face questions during the call on why the process has not yet reached a conclusion.

The May open meeting could be the last chance for Globalstar to get a ruling on TLPS from the FCC in 2016, as Chairman Wheeler tries to triage his enormously long to-do list before the change of administration at the end of the year. Otherwise Globalstar might well find itself being measured up for a “political funeral”.

The results of Smitty’s triage efforts became evident on Friday April 22, with the release of the final agenda for the April open meeting (which addressed the 3.5GHz band) accompanied by the public notices on LightSquared/Ligado’s modification applications resulting from its GPS settlement and petition for a 1675-80MHz rulemaking.

It seems clear that Globalstar also expected to be included in the day’s releases, with Jay Monroe announcing that morning at the Burkenroad conference that TLPS “authority expected shortly”. That was a notable contrast to the Q4 results call on February 25, where he said only that “it is in all of our best interest not to provide any additional comments or answer any questions during the Q&A on the subject of the proceeding”.

However, it looks probable that Globalstar was derailed not just by Google’s poison pill, but also by growing worries about potential interference with Bluetooth hearing aids, a topic that was brought up by Gerst Capital in a meeting on March 30, and elevated to a more significant concern by a letter from two members of Congress on April 7. Technical meetings with the Hearing Industries Association on April 19 and 20 then seem to have failed to put these issues to rest.

Its not only Globalstar’s TLPS ambitions that now may be prepared for burial, but also its prospects for MSS business growth. Distributors appear to expect that release of new devices based on the Hughes chipset will be delayed, with the Sat-Fi 2 unlikely to be available in volume until the fall (amid only tepid interest after the struggles of other satellite WiFi devices), the new two-way SPOT expected after that, in winter 2016/17, and the next generation handheld phone delayed to as late as the end of 2017 (even assuming funds are available for product development next year).

Voice pricing has been changed to remove the popular $25 per month service plan, with little or no notice given to current subscribers that their bill will jump by $15 this month. While that may lead to an increase in ARPU, it may also prompt an increase in churn, unless Globalstar caves when customers threaten to terminate their service. Instead, Globalstar will presumably intensify its efforts to give away free phones to new $65 per month customers, including an increase in internet advertising that I’ve noticed recently. However, the handheld market remains pretty slow for all MSS operators.

So now the question is whether Jay Monroe can keep up his optimism about Globalstar’s promising mass market future and multi-billion dollar spectrum opportunity, despite all these problems. More to the point, once the Terrapin equity line is exhausted later this year, will he put his own money on the line to keep Globalstar afloat, or will he once again be able to find others willing to keep buying Globalstar’s equity?