Its interesting to note that Inmarsat has been competing much more aggressively against key competitors in the last few months. First, I’m told that Inmarsat offered a bounty to Telemar to capture Anglo Eastern, a key Iridium Open Port customer with 350 ships, from Globe Wireless, in the fourth quarter of 2012.
Then Inmarsat announced in March that Nordic Tankers, one of KVH’s earliest headline customers, was migrating to XpressLink “for enhanced reliability”. Apparently the pricing on that deal is well below the standard list price for XpressLink, but Inmarsat was very keen to demonstrate its ability to take customers away from KVH.
Now (perhaps showing a little pique at losing the recent tender for the AT&T Genus replacement contract) Inmarsat is going after Globalstar, with new North American ISatPhone Pro regional voice plans which will start on May 1, and match Globalstar’s recently announced Orbit and Galaxy plans (though without Globalstar’s “double time minutes” promotional offer). Inmarsat is once again offering a huge bounty to service providers for these new signups, equivalent to multiple months of service revenue.
All of these developments suggest that Inmarsat is determined to seek topline growth in its L-band business and is no longer reluctant (as in the past) to explicitly target its competitors with selective pricing, even though this runs counter to Inmarsat’s recent tendency to increase list prices. Of course, it is less clear whether the new deals will be profitable for Inmarsat, given the incentives needed to achieve these sales.
But with Inmarsat’s investors focused intently on whether the wholesale L-band Inmarsat Global business has returned to growth, and apparently willing to overlook the recent significant contraction in margins within Inmarsat’s Solutions business unit (blamed on a transfer of margin from retail to wholesale operations), that might not matter for now. However, if Inmarsat wants to make more acquisitions (and it is hard to see in the long term who else might end up operating LightSquared’s satellites), then regulators might wonder whether industry consolidation could give Inmarsat even more market power.
For those of you not following my Twitter feed (@TMFAssociates), last week there were a couple of interesting developments related to Globalstar, which is currently negotiating with its noteholders under a forbearance agreement (lasting until April 15), after holders of $70.6M of the 5.75% notes exercised their rights to require repurchase of the notes, and Globalstar did not pay the $2M of interest due on April 1.
Firstly, Globalstar has been granted received approval from the FCC for the experimental authority it was seeking for tests of its proposed S-band TLPS service, on March 25 for testing in Cambridge, MA and on April 1 (no joke) for testing in Cupertino and Sunnyvale, CA. Globalstar has also told the FCC that it intends to submit further experimental applications “in the near future”. However, the authorizations are for testing only and are “subject to prior coordination with the Society of Broadcast Engineers”, because both locations are within BAS Channel A10 pickup areas. This coordination has apparently not yet taken place, and because the BAS community is rumored to be very unhappy with the situation, it could take some time to reach an agreement. The timeline for the FCC to issue an NPRM setting out the proposed rule changes to permit commercial use of TLPS also remains unclear, but it seems to be taking longer than originally hoped.
A second recent development is that last week AT&T notified the (less than 1000) subscribers to the TerreStar Satellite Augmented Mobility (SAM) service, that DISH has decided to shut down the service effective May 1, via the letter below, and has “made an arrangement with Globalstar” to offer a discounted replacement rate plan and Globalstar satellite phone.
Of course, those with long memories will recall that TerreStar Networks filed for bankruptcy in October 2010, less than a month after AT&T started selling the Genus phone. Given Globalstar’s current financial challenges, let’s hope that AT&T’s decision to start selling Globalstar service now is not a bad omen for the company.
Yesterday, two interesting pieces of news emerged relating to LightSquared’s proposal that it should be granted “shared” access to the 1675-80MHz band in exchange for giving up “rights” to operate a terrestrial network in the 1545-55MHz spectrum block, which is closest to GPS and caused the biggest concerns during the 2011 testing.
The first of these was the GAO report on options to improve receiver performance mandated in the JOBS bill last February in response to the LightSquared debacle. Both this report and an associated paper by the FCC’s Technical Advisory Committee (TAC) published earlier this month suggest that the FCC should do more to explore setting “harm claim” thresholds at which receiver manufacturers could assert that a new service was causing interference. Spectrum bands in which these thresholds could be trialled are identified, but unfortunately for LightSquared, no mention is made of the L-band/GPS band boundary (and the rationale given for selecting a trial band appears to suggest that the LightSquareed spectrum would not be a good candidate for initial experimentation).
Instead, one of the leading candidates is Globalstar’s proposed S-band TLPS service, which perhaps explains Globalstar’s confidence that the FCC will soon move forward with an NPRM, despite the opposition Globalstar faced from the WiFi community, Clearwire and others in response to the TLPS proposal. On the other hand, the fact that such a proceeding would be an experiment to try and determine an appropriate interference threshold may well mean it would still be very difficult for Globalstar to undertake any large scale deployment in the near term or receive approval by the end of 2013 as Globalstar hoped.
The second, and more significant, development was an ex parte filing by LightSquared which documented a meeting on Wed Feb 20 between LightSquared’s regulatory lawyers and the FCC’s General Counsel and the Acting Chief of the FCC’s Office of Strategic Planning. Curiously, this meeting didn’t involve any technical personnel, despite the fact that the “much of the discussion” focused on “the proposed shared use of 1675-1680 MHz spectrum”. That seems to imply that the FCC was focused on the political problem associated with any perceived spectrum “giveaway” and appears to be confirmed by LightSquared’s offer that it would undertake “relocation of NOAA’s radiosondes…in a manner consistent with the Commission’s emerging technology and other applicable precedents”. In other words LightSquared offered to pay for this relocation.
Even that may prove insufficient, given that LightSquared’s proposed “sharing” with NOAA (based on exclusion zones around certain satellite receiving stations, after relocation of the radiosondes) actually involves even less sharing than will be needed in the 1695-1710MHz band, which has now been confirmed by NTIA as being suitable for auction. In the 1695-1710MHz band there will be protection zones around 18 satellite downlink sites, significantly more than the four locations (Fairbanks, AK, Wallops Island, VA, Suitland, MD, and Greenbelt, MD) that LightSquared would have to protect in the 1675-80MHz band.
As a result, it seems that the development of rules for interference limits at the L-band/GPS boundary is unlikely to be a high priority in the immediate future, and there are still major roadblocks to any spectrum “swap” involving the 1675-80MHz band. We will apparently soon see how much LightSquared is offering to pay for relocation of NOAA’s radiosondes, but if this spectrum is deemed just as suitable for auction as the 1695-1710MHz band, then that may be far from sufficient.
LightSquared now has a deadline of May 31 to come up with a plan to emerge from bankruptcy and after July 15 it will lose its exclusivity to propose a plan. However, if the FCC continues along the lines indicated yesterday, the main asset of the estate may end up being its legal claims, whether against Harbinger or the FCC.
On November 13, Globalstar submitted a Petition for Rulemaking to the FCC seeking permission to use its spectrum for terrestrial services, without any of the restrictions imposed under the current ATC “gating requirements”, and shift its authorization to Part 27, as used for other standard terrestrial mobile services.
The petition envisages two parallel rulemakings, the first to consider designation of Globalstar’s downlink spectrum (Globalstar refers to this as the “upper Big LEO band”) as an AWS-5 band, permitting flexibility for any wireless service to be offered, such as TD-LTE similar to Clearwire’s planned deployment in the adjacent BRS/EBS band. Globalstar also suggested that it be permitted to offer a Terrestrial Low-Power Service (TLPS), which would effectively be a separate channel for licensed WiFi service, using both Globalstar’s upper band spectrum and the adjacent unlicensed spectrum.
This would only be one possible option under an AWS-5 designation, but what is pretty smart about the low power TLPS service (similar to WiFi use, which already overlaps with these BAS channels) is that Globalstar may not have to relocate legacy BAS users who currently operate in the 2450-2500MHz band and could be impacted by a new wide area high power network deployment (as was seen with some of Open Range’s towers, due to lack of coordination on Open Range’s part). However, it is possible that even if the FCC permitted the TLPS service to begin immediately, it might require further actions to be taken (or impose other coordination requirements) before full flexibility was granted in the 2483.5-2495MHz band.
UPDATE (12/11): I’m told that legacy BAS users do experience interference from existing WiFi channels above 2450MHz, but that to date the FCC has not taken action to address concerns about interference from unlicensed spectrum users. Whether this will have implications for quick authorization of TLPS is unclear.
The second rulemaking that Globalstar envisages would then extend the AWS-5 designation to include Globalstar’s uplink spectrum (which it refers to as the “lower Big LEO band”), thereby enabling FD-LTE across the whole of the Big LEO band, which Globalstar considers to be the “highest and best terrestrial use” of this spectrum. The reason for separating the two requests is that the lower band (uplink) spectrum is close to the GPS band, and so the FCC is likely to be cautious about permitting terrestrial services in this band after the LightSquared debacle. As a result any authorization of high power LTE usage in the lower band spectrum (even though it would be for uplink only) would require considerable testing and therefore it would take some time before any approval could be granted.
If granted permission to provide TLPS by the FCC, it appears that Globalstar would look to monetize the TLPS offering (prior to gaining authorization for a standard LTE service) by providing spectrum for a small cell buildout, most likely by a major wireless carrier, but possibly by a tower company or technology player instead. Though such a buildout could be undertaken with existing licensed spectrum (e.g. Clearwire’s 2.5GHz band), or new unlicensed or shared spectrum (such as TV white spaces or the 3550-3650MHz band that the FCC intends to auction for shared usage), Globalstar’s advantage is that WiFi capability is built into the vast majority of smartphones, and Globalstar estimates that its licensed channel would be expected to offer around three times the range and speed of similar access points in the existing uncontrolled WiFi spectrum. However, Globalstar would need to move quickly to take advantage of the installed base of WiFi-capable devices, before capabilities to use longer range unlicensed spectrum (White Spaces) or other licensed small cell bands become widely available in smartphones.
As a result, Globalstar would need both quick action from the FCC and to strike a partnership (or long term spectrum lease) in 2013 or early 2014 enabling rapid deployment of a small cell network. In that regard, the fact that the FCC has acted much more quickly to put Globalstar’s proposal on public notice (2 weeks) than the recent LightSquared petition (which took 6 weeks) suggests that the FCC may well consider Globalstar’s proposal with rather more urgency. This certainly marks a significant turnaround in Globalstar’s relationship with the FCC, which was rather difficult (to say the least) back in September 2010, when the Commission suspended Globalstar’s ATC authority.
Globalstar believes that because of the availability of an existing WiFi device ecosystem, its spectrum should be more highly valued than alternative small cell spectrum, such as that owned by Clearwire. Indeed, Globalstar apparently considers that the future possibility of using LTE within its spectrum band could make this spectrum worth even more than the $0.20 to $0.30 per MHzPOP valuation seen in recent transactions such as NextWave’s WCS spectrum.
However, that is very dependent on a major cellular operator deciding to choose Globalstar as the solution for a small cell rollout (as well as future LTE licensing), and it remains uncertain what will happen to the value of “small cell” spectrum in the next year or two, as more spectrum is brought to market (a rulemaking on the 3550-3650MHz band will be considered at the FCC Open Meeting later this week), especially if data traffic on existing LTE networks grows more slowly than expected. Some think that the value of the 3550-3650MHz band will be very low (perhaps $0.01/MHzPOP or less), as has been seen internationally, which could lead operators to decide that putting a multi-billion dollar valuation on Globalstar’s spectrum for use in a TLPS service would be totally ludicrous.
Clearly the potential value of Globalstar’s spectrum is a critical component in securing investors for the new financing that Globalstar is trying to complete in the early part of 2013, because even though duplex revenues are slowly starting to recover, growth in the SPOT business, which has carried the company for the last few years, has recently fallen short of (at least my) expectations. Globalstar needs to raise money to pay for its EUR150M contract with Thales Alenia Space (TAS) to build a further six satellites, plus the launch and insurance for these satellites. At some point Globalstar will presumably need to complete its second generation ground segment upgrade contracts with Hughes and Ericsson, and Globalstar also has to address the April 1, 2013 deadline when $71.8M of Globalstar’s 5.75% convertible notes may be redeemed for cash at the option of the holders (Globalstar stated in its 2011 10-K that it assumed these notes “will be refinanced in 2013 by issuing additional debt”).
Much of the upcoming capex program would presumably be funded by an increase in Globalstar’s COFACE loan facility (which typically would cover 85% of the costs, although it is unclear if this would relate only to work carried out by French companies). It is worth noting that the FCC licenses do not form part of the security package for the COFACE loan, which could make Globalstar’s fundraising easier, if additional funding (from non-COFACE sources) was secured against the FCC license subsidiary. However, if Globalstar does not succeed in raising the required funds, this also poses the question of whether (in the event of a bankruptcy) the existing convertible note holders could sell the spectrum licenses and receive a recovery, even if the COFACE loan is not paid off in full by a sale of the satellite assets. Such a possibility may complicate negotiations over the upcoming refinancing of the 5.75% convertible notes.
More importantly, it will be very important to see whether the FCC follows the DISH model, and simply grants Globalstar a separate terrestrial license (alongside its satellite license) which could be monetized at a later date (regardless of the ultimate fate of Globalstar’s satellite system), or if it follows the LightSquared path, where (because LightSquared is operating under an ATC waiver) the L-band MSS spectrum cannot easily be disentangled from the continued provision of satellite services. After all, past bankruptcies in the MSS sector have shown how hard it is for creditors to achieve a large recovery from billions of dollars invested in MSS satellite hardware, and at least in the case of DBSD and TerreStar (albeit in a situation with no meaningful existing satellite business, unlike Globalstar), the in-orbit satellites were seen as a potential cost associated with obtaining the spectrum licenses, rather than valuable assets in their own right.
Apologies for the lack of posts over the last couple of weeks – I’ve been buried in writing my latest MSS industry report, which is bigger and better than ever, and includes not only all the latest MSS industry developments such as an analysis of Inmarsat’s investor day, but 30 pages on everything you want to know about the current spectrum issues involving DISH, LightSquared, etc. I’ll be writing blog posts about that plus some of the latest inflight connectivity developments over the next few days, but I’ll start with a little noticed fact that emerged while I was analyzing MSS subscriber growth: surprisingly enough, the various MSS operators use very different definitions for what they count as a subscriber.
Now you might think that a subscriber is simply someone who is paying the operator for service (perhaps indirectly via a distributor) and if the customer is paying for x terminals, then the MSS operator will report that they have x subscribers. That is basically what Iridium do, now that there is a charge each month even for suspended terminals. However, until recently Inmarsat didn’t have a monthly access charge for most terminals, and only got paid for airtime. As a result, Inmarsat has always defined its subscriber count as terminals that have accessed the network in the last 12 months. Now that Inmarsat is charging monthly fees for most services, this leads to anomalies such as in its 2012Q2 results, where Inmarsat noted that:
“At the time of our consolidated financial results for the three months ended 31 March 2012, we announced having reached over 55,000 IsatPhone Pro subscribers. However, in our reported active terminals for land mobile, we included a lower number of approximately 49,800 terminals, the difference being the elimination of subscribers who had not used their IsatPhone Pro terminal in the preceding twelve months…”
Even more significantly the number of Satellite Low Date Rate (M2M) terminals reported by Inmarsat has declined quite noticeably over the last year, but as far as Inmarsat’s distributors like SkyWave are concerned, the number of subscribers is actually going up. However, once you realize that a key application for ISatM2M is stolen vehicle recovery, its pretty obvious that only a small proportion of terminals (i.e. those cars that are actually stolen) will need to access the Inmarsat network each year.
That’s a positive for Inmarsat, because their market share in the SLDR/M2M sector is actually quite a bit higher than many assume. However, Globalstar’s counting methodology goes the other way: SPOT customers are included in the published subscriber count even if their terminal is “suspended” for non-payment, because those terminals still have access to the network and Globalstar is attempting to collect payment for the service (although of course no revenue is actually being recognized for those subscribers unless and until collection occurs). The number of suspended SPOT subscribers has increased consistently since this statistic was first reported in early 2010, and by 2012Q3 amounted to 29% of SPOT subscribers. I’ve generally been pretty optimistic about the long term potential of the personal tracking market, but worringly, in the third quarter of this year the number of paying (i.e. non-suspended) SPOT subscribers actually fell from the previous quarter for the first time ever.
FCC Chairman Genachowski took a trip to Wharton today, to tell a bunch of students about “the incredible world of mobile communications”. However, he also gave away an enormous amount of information about the FCC’s spectrum agenda, which so far has gone almost completely unreported. As first sight one might be distracted by such nonsense as “U.S. mobile data traffic grew almost 300% last year, and mobile traffic is projected to grow an additional 16-fold by 2016″ and the boast that he alone knew “that something was up”, “did the math” (wrongly) and “sounded the alarms…about the looming spectrum crunch”. Incredibly Chairman Genachowski even makes the ludicrous claim that:
“There were many skeptics [in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”
Of course this comes just at the time when journalists are starting to ask “What happened to the spectrum crunch?”
Once you’ve stopped laughing at all of this, the meat of the speech is in fact very useful, as the Chairman indicates just how he hopes the “audacious” target in the National Broadband Plan of freeing up 300MHz of spectrum by 2015 will be “exceeded” by a combination of auctions, removal of regulatory barriers, clearing the TV bands and spectrum sharing. First of all, 75MHz of AWS spectrum will be auctioned, including, in 2013, the 10MHz of H-block spectrum desired by Sprint. This confirms that DISH has lost the battle to avoid a 5MHz shift in its uplinks, but in compensation DISH will at least be authorized to use the full 40MHz of spectrum (2005-2025MHz up and 2180-2200MHz down) for a terrestrial network “later this year”.
Secondly, an additional 50MHz of AWS-3 spectrum (desired by T-Mobile) will be auctioned, based on spectrum sharing with the DoD in the 1755-1780MHz uplink band. Finally, AT&T will get its rebanding of the WCS spectrum approved. The Chairman even indicates that the FCC is “working with stakeholders to enable use of the portions of the mobile satellite spectrum in the L- and Big LEO bands [i.e. LightSquared and Globalstar] for terrestrial service” although notably this spectrum is not included in the 2015 total, indicating that these efforts may not be concluded quickly.
The most obscure reference is in the unstated 15MHz balance of AWS spectrum planned for auction before 2015. Given the short timeframe, this can only be the 1695-1710MHz spectrum being reclaimed from NOAA. Presumably this block will be made available as uplink spectrum (because it is adjacent to AWS-1 uplinks at 1710-1755MHz) and as such it will be attractive for AT&T to pair with the WCS spectrum (which will probably all be converted to downlinks). However, this leaves LightSquared in a bind over the spectrum “swap” it proposed last Friday, because LightSquared does not want more uplink spectrum (let alone having to buy it in an auction), and after giving up the 1695-1710MHz block, NOAA will need to use the 1675-80MHz band even more intensively for weather balloons.
Looking at the bigger picture, the situation may be made more difficult not just for LightSquared, but for DISH and Clearwire as well, because the FCC’s actions appear designed to give all of the major wireless operators the spectrum they are hoping for in the near term. Specifically, the FCC intends to free up the H block for Sprint, the AWS-3 block for T-Mobile and 1695-1710+WCS for AT&T, while Verizon has already had its SpectrumCo purchase approved. Especially in the wake of yesterday’s T-Mobile/MetroPCS merger, this makes me wonder just how many attractive alternatives Charlie Ergen still has to a deal with Clearwire for buildout of his 2GHz spectrum?
It looks like the next month or so may be filled with interesting developments in the US spectrum market. Last week, it was reported that the FCC is preparing to launch of review of its “spectrum screen” at the September Commission meeting. Of course if the FCC suggests a preference for distinguishing between low frequency (sub 1GHz) and higher frequency spectrum, in response to concerns that AT&T and Verizon have been accumulating too much of the most valuable spectrum, then that might not only put a damper on the prospects for broadcast TV incentive auctions (recall that AT&T and Verizon contributed over 85% of the 700MHz auction proceeds back in 2008), but could be taken as a clear signal that the FCC would approve of AT&T buying DISH for its higher frequency spectrum.
In that context, it seems increasingly likely that the release of a LightSquared ruling (almost certainly confirming the FCC’s February proposal to withdraw LightSquared’s ATC license) will also come this month, along with approval of DISH’s terrestrial network in the 2GHz MSS band. This week DISH has been continuing its campaign to avoid its uplink allocation being shifted up by 5MHz to 2005-2025MHz, which is an option being considered very seriously by the Commission, as it would satisfy Sprint’s desire to access the H-block (which Sprint probably considered to be a done deal last November when it settled with DBSD and TerreStar), and mitigate both windfall and timeline concerns. However, it is notable that the Public Interest organizations who have been most vocal in raising the windfall issue actually oppose a relocation of the uplink due to the delay it would could in the standardization process.
Intriguingly, if we do see a ruling (at least partly) in DISH’s favor in the next month or two, it may make it even more difficult for Clearwire to pull off any potential spectrum sale. Then we may be faced with exactly the same situation in December as at the end of last year, namely does Clearwire pay the large interest payment due in December, or use the threat of a bankruptcy filing as leverage to raise more money from Sprint and others to fund it through next year.
LightSquared is also wheeling out the big guns in its lobbying campaign right now, with former FCC Chairman Kevin Martin lobbying the Commission on LightSquared’s behalf last week, and the company is once again ramping up attempts to get its side of the story across. This may raise a few eyebrows, given that Martin was key to approving ATC back in 2005 and then requiring Inmarsat to cooperate with LightSquared via their Dec 2007 agreement. However, it seems unlikely to change many minds at the Commission, especially in advance of the November election. Apparently the best that LightSquared could hope for is for the initial decision to be taken by the full Commission, rather than by the International Bureau on delegated authority, which would give LightSquared an earlier opportunity to challenge the decision in court (because an IB decision must first be appealed to the full Commission before any legal action is initiated).
After LightSquared’s attempts to insert consideration of its own situation into the DISH proceeding, it would seem natural for both rulings to emerge at about the same time. The FCC will also need to indicate in the DISH ruling how it plans to take forward any similar flexibility proceedings in other MSS bands, notably the Big LEO band, where Globalstar has emphasized that “Greater flexibility for mobile broadband in Big LEO spectrum [is] necessary to enhance financial viability of Globalstar and its mission-critical MSS offerings” (emphasis mine). With Globalstar looking to raise substantial financing (perhaps as much as US$250M to $300M if Globalstar aims to fund both the remaining satellites and the ground segment buildout) by the end of the year in order to move forward with the final phase of its second generation constellation buildout, it is plausible to conclude that a positive signal from the FCC in this regard within the next month or two may be a pre-requisite for completion of that financing (which would presumably involve a combination of additional Export Credit Agency funding and further investment from Thermo).
Finally, and separately, TerreStar Corporation appears to have basically resolved its bankruptcy, and the existing preferred shareholders will convert their holdings to equity and keep control of the company. It is interesting to note that the valuation put on the 8MHz of national 1.4GHz spectrum in the event of a liquidation was only $80M to $100M (or $0.03-$0.04/MHzPOP) for an M2M smart grid type network (which is gratifyingly close to my estimate of $60M to $100M two years ago at the beginning of this process). It is hoped that FCC waivers can be secured, which would make the spectrum more valuable and usable for LTE, but that is a long term process, and there is no guarantee that it will be attractive to manufacturers to include this small, isolated band in future LTE chipsets. As a result, although there is a proforma offer for sale of the spectrum, it is inconceivable that any bid would be higher than the $400M+ that the existing preferred holders could credit bid in any auction. Of course its also another example of how just assuming spectrum is always a valuable asset, without consideration of the limitations applicable to that spectrum, is a quick way to lose a lot of money.
So going back to my title above, the next few months should reveal a lot more about who’s going to show that they’re an “All Star” and who will prove to have “the shape of an L on [their] forehead”. However, one thing seems pretty clear: when the FCC announces its decisions, not everyone is going to be a winner.
I noted back in November that the MSS industry was seeing a dramatic deceleration in revenue growth, but 2012 is already bringing even more challenges across the sector. As I predicted last month, Inmarsat’s price rises are causing a substantial backlash in the shipping industry, with the latest Digital Ship magazine including a devastating letter from AMMITEC (the Association for IT Managers in the Greek Maritime Industry), asserting that:
The handling of the pricing restructuring shows a blatant disregard for the long-term loyalty and trust that, up until a couple of years ago, the majority of the shipping world has had in Inmarsat and its maritime offerings.
Inmarsat’s (not terribly reassuring) response indicates that:
Inmarsat is listening to our customers. We recognise that some of these price changes will be difficult for smaller vessels, and so we will be introducing a small boat package to which they can transition.
However, to the best of my knowledge, this “Small Vessel Pricing Plan”, which Inmarsat told its distribution partners a couple of weeks ago was “in the final stages of development”, has not been announced before the pricing changes come into force tomorrow, and I’ve even heard suggestions that Inmarsat doesn’t actually intend to implement this plan unless it really does suffer from a significant number of customer defections.
Of course, Inmarsat is not alone in experiencing some self-inflicted wounds at the moment. Last Friday brought news that Iridium is implementing a “complete recall” of its new Iridium Extreme handset, while on March 30, Thuraya told its distributors that it had been unable to reach a manufacturing agreement with Comtech for its high speed MarineNet Pro maritime terminal (intended to compete with Inmarsat’s FleetBB) and so the terminal would not be in the market until “the end of the year”. As announced on its Q4 results call, Globalstar ran out of SPOT and simplex devices for a period of time in the first quarter after changing its manufacturer, and will shortly learn the results of its arbitration with Thales Alenia over its satellite contract.
Let’s just hope that all of this mess doesn’t harm the reputation of MSS providers for providing reliable service when its really needed, and in particular doesn’t make it even more difficult for the MSS sector to boost revenue growth in this challenging competitive environment.
Ease your trouble
We’ll pay them double
Not to look at you for a while
And you rely on
What you get high on
And you last just as long as it serves you
Explode or implode
Explode or implode
We will take care of it
This rather dark song seems to sum up perfectly Inmarsat’s current dilemma: will the recent price rises enable Inmarsat’s revenue growth rate to “explode” or will the souring relationship with customers and distributors ultimately cause their business to “implode”? As an article in Cruising World points out, the basic price of Inmarsat’s low end FleetBB plan (the Intellian version of which costs $55 per month) will “more than triple” in May, and “it’s surely looking like the company doesn’t feel much obligation to the boaters who purchased expensive but yacht-size FB hardware once able to get online most anywhere at reasonable costs if carefully used”.
I understand that the amount of bundled data included will double from 5 Mbytes/month to 10 Mbytes/month (which may not be terribly relevant to low end users), but the plan will not longer include any voice and SMS – that will be charged on top, increasing the costs further. Cruising World attributes the price increases to Inmarsat’s loss of LightSquared revenues, which is partially true, though I’m told that internally Inmarsat has set a target of double digit revenue growth within its maritime business, and with the core shipping business very depressed, the only way to do that is to force dramatic price increases upon existing Inmarsat customers.
Almost 60% of all FleetBB users are on this basic plan, and so nearly 15,000 maritime customers will be helping to “ease [Inmarsat's] troubles” by “pay[ing] them double”. More importantly, many of these customers bought their FleetBB terminals in the last two years, and now will most likely feel that they have been the victims of a bait and switch by Inmarsat.
The price changes in Inmarsat’s handheld business are equally dramatic, with roughly 90% of customers using either the basic plan or low end prepaid cards, which are also expected to more than double in price at the retail level. Thus Inmarsat will also be faced with something over 30,000 handheld customers who have bought their phones in the last 18 months and will similarly feel that they have been victims of a bait and switch.
‘Cause you’re deserted
What’s good, you hurt it
And it kills you it keeps you alive
So give it up
In a world of puppets
It’s a shame what they do to us all
Inmarsat will presumably counter that neither group of customers accounts for a large share of their revenues (I would estimate the basic FleetBB plan accounts for perhaps 10% of FleetBB revenues, while handheld is still generating only ~$1M of service revenues per quarter), but it can’t be good for long term business if there are something like 45,000 end users who’ve been hurt by Inmarsat and will be expressing their negative perceptions (“What’s good, you hurt it…It’s a shame what they do to us all”) of the company pretty openly.
Distributors are also likely to be deluged with complaints by these end users, and many service providers are already actively focusing on alternatives to Inmarsat, as we saw with the recent KVH-Iridium partnership. Distributors are thus understandable furious about Inmarsat’s moves, with the (printable) comments I’ve heard ranging from “harsh and irrational” to “just unprofessional” and simply have no idea what Inmarsat will do next.
Though distributors might not be able to “desert” Inmarsat right now, ironically the low end customers that Inmarsat is alienating in the maritime segment are precisely those for whom Iridium’s OpenPort represents a competitive offering. Indeed, in terms of the opportunity that Inmarsat has just created, Iridium apparently feel like its February 2007 (when Globalstar announced that their satellites were failing) all over again.
As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.
This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.
Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.
If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.
« Previous entries Next Page » Next Page »