Given the current status of the FCC incentive auction, which is making broadcasters (or at least their auction advisers) suicidal and leaving Wall St analysts perplexed, it important to note that this really is a “great game” with billions of dollars at stake for the winners and losers. So I though it might be helpful to summarize the winners and losers in previous large FCC auctions, and take a stab at predicting how this time will be different.
2006 AWS-1 auction: Winner: SpectrumCo, Loser: Wireless DBS (DISH/DirecTV), Biggest Loser: Verizon
In the AWS-1 auction, SpectrumCo picked up a national 20MHz block of licenses at the cheapest price per MHzPOP of any participant due to smart advice from Paul Milgrom, which saved them over $1B, as highlighted in this excellent paper. In contrast, Wireless DBS, the partnership of DISH and DirecTV pulled out early without buying any licenses, while Verizon paid the most for its F-block spectrum and didn’t even come away with a national footprint because it ran out of eligibility.
2008 700MHz auction: Winner: Verizon, Loser: Google, Biggest Loser: AT&T
In the 700MHz auction, AT&T painted a target on its back by buying Aloha’s lower C-block spectrum just before the auction. That made it entirely predictable that AT&T would want to acquire the adjacent lower B-block, allowing Verizon to park eligibility in that block and push up the price, while leaving Google to bid against itself for the upper C-block with its open access conditions. This was so obvious that I pointed the situation out while the auction was still going on, even though the bidding was anonymous. Verizon ended up getting the 22MHz upper C-block spectrum very cheaply, while AT&T paid at least $5B more for a similar amount of spectrum.
2014-15 AWS-3 auction: Winner: DISH, Loser: T-Mobile, Biggest Loser: AT&T
In the AWS-3 auction, DISH confused all the other bidders and most external observers, by bidding through three entities simultaneously, and ultimately acquiring all of its licenses via its two Designated Entities, Northstar and SNR, while pushing up the prices to astonishingly high levels. This forced T-Mobile to exit from the auction without gaining the spectrum it wanted, but more importantly, AT&T’s fixed going in position of “get 10x10MHz everywhere” caused it to spend far more than either DISH or Verizon (which was either smarter or just read my blog post on what was happening). Again AT&T spent at least $5B more than necessary in the auction.
Its notable that AT&T has been the biggest loser in both the 700MHz and AWS-3 auctions and has wasted over $10B in the process. But as I noted above, I think this time will be different, presumably because AT&T has hired some smart consultants, and decided to play the game strategically rather than conforming to a fixed spectrum target from the start. So my prediction for the incentive auction is as follows:
2016-17 Incentive auction: Winner: AT&T, Losers: T-Mobile, DISH, Biggest Loser: Broadcasters
AT&T appears to have been the driving force in Stage 1 of the auction, threatening to strand DISH in a handful of expensive top licenses (New York, Los Angeles, Chicago and San Francisco) in Stage 1 and forcing DISH to exit. Then with Comcast also trying to get out after its MVNO deal with Verizon, Verizon not even playing the game, and AT&T set to win the FirstNet spectrum, AT&T clearly holds the winning hand. AT&T can now keep dropping the licenses it held at the end of Stage 1 until broadcasters are forced to accept a tiny fraction of their originally expected receipts, leave T-Mobile (plus a bunch of spectrum speculators in various DEs) holding most of the spectrum (that AT&T can later strand, by supporting the broadcasters in their efforts to delay the transition and ensuring that it remains non-standard because AT&T and Verizon won’t bother supporting the band) and screw DISH by setting a new national benchmark of ~$0.90/MHzPOP for low band spectrum (helpfully also making sure T-Mobile doesn’t need any more spectrum from DISH because it has a surfeit of low band holdings).
Am I giving AT&T too much credit? After all, there is not much existing evidence that they know how to behave smartly in FCC auctions. Perhaps, but on the other hand, I think this is the scenario that best fits what we’ve seen so far (though by stating it so explicitly, I do worry that I might trigger a rush for the exits in the next stage(s) of the forward auction).
What will broadcasters do now? Will they cave on price and accept less than $14B for 84MHz of spectrum cleared (so the auction can close at the Stage 4 reserve price)? Will this drag on further, with both the dollars raised and spectrum sold falling further? That’s unclear, but either way, its not going to be a Happy New Year if you are a broadcaster trying to sell your spectrum.
Here’s a question for FCC incentive auction watchers: why did Stage 1 of the forward auction stop suddenly in Round 27 with proceeds of $23.1B? After all, that was substantially more than the first component (reserve price) target of $15.9B and dramatically less than the second component target (clearing costs) of $88.4B. So was it just random, or was there a deliberate decision by one or more large bidders to stop in that round by dropping demand to match supply in all of the top 40 high demand markets?
If you analyze the data carefully, you can see that in fact that stopping in Round 27 was precisely calibrated to match the reserve price target in Stage 4 and beyond, when it resets to a subtly different formulation. To be specific, “the first component, which aims to ensure that winning bids for forward auction licenses reflect competitive prices, will be satisfied if, for a given stage of the auction:
The clearing target is at or below 70 megahertz and the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop; or
The clearing target is above 70 megahertz and the total proceeds associated with all licenses in the forward auction exceed the product of the price benchmark of $1.25 per MHz-pop, the forward auction spectrum benchmark of 70 megahertz, and the total number of pops associated with the Category 1 blocks in high-demand PEAs.”
[UPDATED 12/21] Its clear that Round 27 was the first round in which “the benchmark average price per MHz-pop for Category 1 blocks in high-demand PEAs in the forward auction is at least $1.25 per MHz-pop” (although this will only be achieved in Stage 4 if one or more of the spare licenses in Los Angeles is taken up). Thus, at least one bidder was looking ahead to a situation where the auction would have to go into Stage 4 or beyond (the FCC pointed out in its public notice that the starting price for high demand markets in Stage 4 was $1.22/MHzPOP). That conclusion very likely explains why we saw no further bidding in Stages 2 and 3, as additional bids were dropped. It also tends to confirm that DISH was no longer present at the end of Stage 1 to force up the price of spectrum above the minimum necessary.
Now we’ll have to see how the game continues (and you can read more about who we think is responsible in our industry report for subscribers published last week), but the carefully calibrated outcome of Stage 1 ensures that the first component can be met as soon as one or both of the spare licenses in Los Angeles are taken up, but (if they still have eligibility to play with in the top 40 markets) the bidders could continue to drop license demand and simply wait until the clearing costs drop below the total forward auction bids. That would mean a realized average price for spectrum across the US as a whole of less than $0.90/MHzPOP.
When could that happen? Well, with FCC staff apparently suggesting that as little as 40MHz of spectrum might be sold, it could be a while yet, and net proceeds might be as low as $10B (at 40MHz sold in Stage 7) or $12-13B (at 50MHz sold in Stage 6). With $1.9B deducted from that figure for repacking costs, broadcasters could quite plausibly be left with little more than $10B in reverse auction payments. That might be too pessimistic, but at this stage it seems like a decent bet that the final net proceeds in the forward auction will be below the $19B raised (from 52MHz of spectrum sold) in the 700MHz auction back in 2008 and essentially certain that the average price per MHzPOP will be lower than the $1.28/MHzPOP achieved back in 2008.
Probably the most surprising thing about today’s announcement that Softbank is investing $1B in OneWeb as part of a $1.2B funding round, is the lack of a spoiler announcement from SpaceX. That’s happened in the past on both of the two occasions when OneWeb made a major announcement, in January 2015 (when OneWeb announced its initial agreements with Qualcomm and Virgin) and in June 2015 (when OneWeb announced its initial $500M equity round).
In fact one of the more important fights that is going on behind the scenes is related to regulatory priority in terms of ITU filings, where SpaceX is some way behind. OneWeb is acknowledged to be have the first filing for an NGSO Ku-band system, but also needs access to the Ka-band for its gateway links. That led Telesat to request that the FCC deny OneWeb’s petition for a US licenses, based on “Canadian ITU filings associated with Telesat’s Ka-band NGSO system [that] date back to 2012 and January 6, 2015″ whereas “the earliest ITU filing date priority for OneWeb is January 18, 2015.” LeoSat also claimed that it had priority over OneWeb in November 2016, based on “French ITU filings for LeoSat’s Ka-band MCSAT-2 LEO-2 network [that] date back to November 25, 2014.”
However, OneWeb now appears to have attempted something of an end run around these objections, acquiring rights to the French MCSAT LEO with an ITU advance publication date of April 2, 2013 network from Thales Alenia Space. That’s particularly odd because LeoSat, which states specifically in its FCC application that it “will deploy the LeoSat System in conjunction with Thales Alenia Space,” might now find TAS’s own filings being used against it.
UPDATE (12/20): I’m told that the relevant ITU coordination dates for the different Ka-band NGSO proposals are as follows:
Telesat (Comstellation): December 20, 2012
LeoSat (MCSAT2 LEO2): November 25, 2014
OneWeb’s newly acquired MCSAT LEO filing: December 3, 2014
SpaceX: December 27, 2014
OneWeb’s original Ka-band filing: January 18, 2015.
That would imply that OneWeb has now jumped ahead of SpaceX at the ITU, but remains behind Telesat and LeoSat, although I’m sure there will be many arguments to come.
All this fighting to be first in line at the ITU will also have to take into account the FCC’s attempt to clarify the rules for new NGSO systems in an NPRM released on Thursday, December 15. The FCC’s rules state that NGSO systems should share spectrum through the “avoidance of in-line interference events” and the NPRM proposed new language in an attempt to make this more explicit. However, this language is far from clear about whether the sharing of spectrum is required on a global basis or just in the US, specifically the key paragraph in the newly proposed §25.261 states:
(a) Scope. This section applies to NGSO FSS satellite systems that communicate with earth stations with directional antennas and that operate under a Commission license or grant of U.S. market access under this part in the 10.7-12.7 GHz (space-to-Earth), 12.75-13.25 GHz (Earth-to-space), 13.75-14.5 GHz (Earth-to-space), 17.8-18.6 GHz (space-to-Earth), 18.8-19.4 GHz (space-to-Earth), 19.6-20.2 GHz (space-to-Earth), 27.5-29.1 GHz (Earth-to-space), or 29.3-30 GHz (Earth-to-space) bands.
whereas the existing language states:
(a) Applicable NGSO FSS Bands. The coordination procedures in this section apply to non-Federal-Government NGSO FSS
satellite networks operating in the following assigned frequency bands: The 28.6-29.1 GHz or 18.8-19.3 GHz frequency bands.
The pertinent question here, which is left unresolved by the proposed changes shown in the italicized text above, are whether a “satellite network” consists of both an FCC-licensed satellite system and the earth station it is communicating with, and if so whether both of these or just the satellite system itself must “operate under a Commission license or grant of U.S. market access” according the new text. If it is the former, then the new rules will clearly apply only in the US (where the earth station is licensed by the FCC), whereas if it is the latter, then the rules could be taken to imply that any recipient of a satellite system license from the FCC in the current processing round may have to agree to comply with these sharing rules on a global basis.
It therefore seems that regulatory lawyers will have plenty of work for the next year arguing on behalf of their clients. However, OneWeb will have the money to move forward quickly and extend its lead over other NGSO systems, apart from O3b, which is currently building its next batch of 8 satellites. It remains to be seen if other systems will catch-up, but Telesat (which has already ordered two test satellites) is potentially best positioned to be a third player, especially if it can secure Canadian government backing for universal service in the Arctic region.
Then we need to see how the market evolves. Greg Wyler highlighted his ambitions for OneWeb to serve 100M people by 2025 and after the alliance with Softbank, this will most likely be in the form of cellular backhaul from tens or hundreds of thousands of small cells in remote areas, just as Softbank already does at over 6000 cell sites in Japan using IPStar capacity. In contrast, O3b should continue its plans to serve highly concentrated demand hotspots, like remote islands needing connectivity to the outside world and large cruise ships.
Most of the other NGSO proposals, including Telesat and SpaceX, appear to have a fairly similar plan to O3b, with small beams used to serve a select number of demand hotspots. So the question then becomes, how much concentrated demand exists for satellite connectivity? O3b will generate roughly $100M of revenues in 2016 and has a clear path to growth into the $200M-$300M range. But is it a multi-billion dollar opportunity and is there room for one or more additional systems in this niche? And can new systems overtake O3b, given its multi-year lead in this market? Only time will tell, but if OneWeb can maintain its focus on low cost cellular backhaul and gain anchor tenant commitments from Softbank, Bharti Airtel and perhaps others, these competitive dynamics are going to be much more of an issue for O3b.
UPDATED Feb 5, 2017
There’s been a lot of recent news about Chinese investments in satellite companies, including the planned takeover of Spacecom, which is now being renegotiated (and probably abandoned) after the loss of Amos-6 in September’s Falcon 9 failure, and the Global Eagle joint venture for inflight connectivity.
There were also rumors that Avanti could be sold to a Chinese group, which again came to nothing, with Avanti’s existing bondholders ending up having to fund the company instead in December 2016. The latest of these vanishing offers was a purported $200M bid from a Chinese company, China Trends, for Thuraya in mid-January 2017, which Thuraya promptly dismissed, saying it had never had discussions of any kind with China Trends.
Back in July Inmarsat was also reported to have approached Avanti, but then Inmarsat declared it had “no intention to make an offer for Avanti.” I had guessed that Inmarsat appeared to have done some sort of deal with Avanti, when the Artemis L/S/Ka-band satellite was relocated to 123E, into a slot previously used by Inmarsat for the ACeS Garuda-1 L-band satellite (as Avanti’s presentation at an event in October 2016 confirmed).
However, I’m now told that the Indonesian government reclaimed the rights to this slot after Garuda-1 was de-orbited, and is attempting to use the Artemis satellite to improve its own claim to this vacant slot before these rights expire. I also understand that with Artemis almost out of fuel, various parties were very concerned that the relocation would not even work and the Artemis satellite could have been left to drift along the geostationary arc, an outcome which thankfully has been avoided.
The action by the Indonesian government seems to hint at a continued desire to control its own MSS satellite, which could come in the shape of the long rumored purchase of SkyTerra-2 L-band satellite for Indonesian government use, similar to the MEXSAT program in Mexico. If that is the case, then presumably the Indonesians would also need to procure a ground segment, similar to the recent $69M contract secured by EchoStar in Asia (although that deal is for S-band not L-band).
Meanwhile Inmarsat still appears to be hoping to secure a deal to lease the entire payload of the 4th GX satellite to the Chinese government, which was originally expected back in October 2015, when the Chinese president visited Inmarsat’s offices. That contract has still not been signed, apparently because the Chinese side tried to negotiate Inmarsat’s price down after the visit. Although Inmarsat now seems to be hinting to investors that the I5F4 satellite will be launched into the Atlantic Ocean Region for incremental aeronautical capacity, last fall Inmarsat was apparently still very confident that a deal could be completed in the first half of 2017 once the I5F4 satellite was launched.
So it remains to be seen whether Inmarsat will be any more successful than other satellite operators in securing a large deal with China or whether, just like many others, Inmarsat’s deal will vanish into thin air. China has already launched its own Tiantong-1 S-band satellite in August 2016, as part of the same One Belt One Road effort that Inmarsat was hoping to participate in with its GX satellite, and Tiantong-1 has a smartphone which “will retail from around 10,000 yuan ($1,480), with communication fees starting from around 1 yuan a minute — a tenth of the price charged by Inmarsat.” Thus Inmarsat potentially faces growing pressure on its L-band revenues in China, and must hope that it can secure some offsetting growth in Ka-band.