10.14.13

Wretched, isn’t it?

Posted in Financials, Globalstar, Government, Handheld, Inmarsat, Iridium, LDR, Operators, Orbcomm, Services at 10:03 am by timfarrar


Incredible…it’s even worse than I thought

That’s been the reaction to my 57 page Globalstar profile, released on Friday (you can see the contents list here and get an order form here), because of the history of challenges that the MSS industry has faced in the past and more particularly the difficulties that the industry is seeing this year.

After discussions with a number of people in the industry over the last few weeks, it looks like Q3 has been pretty disastrous for MSS sales across the board, with none of the usual surge in demand expected in the summer months, as customers stock up to prepare for outdoor adventures or potential hurricanes. Part of that relates to slow government orders, as a result of the sequester (predating the current shutdown), but commercial demand has also been poor, and that’s much harder to explain.

In the handheld segment, one suggestion is that Hurricane Sandy proved that terrestrial cellphone networks are now considerably more reliable during disasters (and far more data capable than MSS phones), so companies are no longer giving as high a priority to MSS equipment in their disaster planning. In the M2M segment, a fairly convincing explanation is that service providers who formerly specialized in MSS are now focusing more and more on selling cellular-based solutions to customers who find they don’t need MSS as a backup.

As a result, I’m now convinced that subscriber growth (and equipment sales) will fall short of expectations this year, particularly in the handheld and M2M segments, for almost all of the major MSS players, with knock-on effects for subscriber revenues in Q4 and more particularly next year. The defense business also looks poor (as shown by Intelsat’s recent profit warning): the word on the street is that Inmarsat may dispose of its Segovia government FSS business, as revenues in Inmarsat’s US Government business unit fell by 11% year-on-year in the first half of 2013 and appear to have eroded further in recent months, particularly in Segovia’s VSAT business. The sale price would be a fraction of what Inmarsat paid for Segovia, but in exchange Inmarsat would hope to secure a GX airtime contract, similar to its RigNet deal in the energy sector.

In the case of Globalstar, the implications of the MSS downturn are that while Globalstar should be able to meet the new bank case revenue forecasts, it won’t be easy to beat them. However, unlike some other players, Globalstar is fortunate in having the potential upside from monetizing its spectrum, if it can complete a deal with Amazon or another company. The report looks at spectrum valuation for both LTE and TLPS and concludes that there could be substantial value for Globalstar, although realizing this will require both rapid approval from the FCC and for a deal to be struck fairly quickly, before new spectrum bands such as 3550-3650MHz develop an alternative ecosystem at what will likely be much lower prices. If you are interested in getting a copy, please contact me for more details.

09.19.13

Oh puck!

Posted in Financials, Globalstar, Handheld, Inmarsat, Iridium, Operators, Regulatory, Services, Spectrum at 9:32 am by timfarrar


Why didn’t Phil think of this first?

With MSS revenues in a bit of a funk this year, its not surprising that MSS operators are pursuing opportunities to attract consumers and expand the voice market outside the traditional verticals. We saw this first of all with Thuraya’s SatSleeve, announced at the Satellite 2013 conference in March. The SatSleeve connects via Bluetooth (and in the latest version WiFi) to an iPhone allowing the customer to use their iPhone contacts and touch screen interface. However, a key limitation is the need for compatibility of the sleeve with a particular phone form factor, and Thuraya has just launched a new version of the SatSleeve compatible with the slightly larger iPhone 5 handset rather than the original iPhone 4.

One way to overcome this handset compatibility issue is to use an external puck-like device, similar to a SPOT Connect or DeLorme inReach product, but offering voice and data capability in addition to simple messaging. This concept has been around for many years, and indeed was part of Craig McCaw’s new business plan when he bought ICO out of bankruptcy back in 2000: ICO told the FCC in its original ATC application in March 2001 that

“The use of already-permitted wireless technology such as Bluetooth or IEEE 802.11 could allow a whole range of consumer devices – standard terrestrial phones, PDAs, or laptop computers – to communicate with a satellite transceiver that houses the antennas, amplifiers, and other electronics unique and specific to the satellite link”.

Subscribers to my MSS research service heard 6 weeks ago about Iridium’s new handheld product, scheduled for launch at the end of the year, which is apparently exactly this puck-like device. It will be positioned to compete at the low end of the handheld market with a broadly comparable price to Thuraya’s SatSleeve (which was originally announced at $499 but is now selling for $599 to $799) and the Inmarsat and Globalstar handheld phones. I’m now told that Inmarsat is working on a similar device for release towards the end of next year, and meanwhile Globalstar has announced that it is “aiming to bring a $100 satellite device to market in 18 months time…to enter into a totally different market”.

I understand that Globalstar’s new device is likely to be the long-awaited two-way SPOT product, and may not be voice-capable like Iridium and Inmarsat’s new devices. It remains unclear whether the form factor will be a smartphone-connected puck (like SPOT Connect) or a standalone device: certainly the standalone device has sold much better for Globalstar to date, but equally well this might make it harder to expand beyond the current market of techie-focused backpackers and outdoorsy people (the vast majority of SPOT users are like me: 40-something relatively high income males with an interest in technology). Given the 18 month timetable stated by Globalstar, its also unclear whether this would be based on the new Hughes chipset or the current SPOT uplink plus a similar downlink channel, as the second generation ground segment upgrades are supposed to take about two more years to complete.

As Globalstar moves to raise its profile with investors, it seems the next stage will be a new round of fundraising (Globalstar noted in its 2013Q2 10-Q that “In June 2013, the Company entered into an agreement with Ericsson which deferred to September 1, 2013 or the close of a financing approximately $2.4 million in milestone payments scheduled under the contract”), presumably helping to reduce some of Thermo’s $85M backstop commitment (of which $40M had been provided by the end of July and $4.4M had been offset by receipts from termination of the 2009 share lending agreement). Indeed, it would be plausible for fundraising to go beyond this ~$35M level given the rise in Globalstar’s share price in the expectation of a positive outcome from the FCC, though it appears unlikely Globalstar will order more satellites anytime soon, given that the legal disputes with Thales are apparently still ongoing (Thales has “alleged that Thermo had failed to pay Thales $12,500,000 by December 31, 2012 as required by the Settlement Agreement“).

It seems Globalstar is highly confident that its NPRM will be issued by the time Chairman Clyburn leaves office, so it would be reasonable to suspect that this new financing is intended to take place in the next month or so, helping to cover payments of $20M+ due to Hughes between August 2013 and January 2014). Last week’s grand bargain over the 700MHz A&E blocks, DISH’s AWS-4 downlink waiver request and the H block auction, certainly indicates that I was too pessimistic in believing that Clyburn didn’t want to address spectrum issues and would leave these for Wheeler, and it would therefore now not be in the least bit surprising to see the Globalstar NPRM released at or around the time of the September FCC Open Meeting (when Clyburn will have what might be the last chance to trumpet her accomplishments as Chairman). Clyburn also appears less likely than Wheeler to pursue the “harm claim threshold” approach favored by the FCC’s TAC, which is good news for Globalstar in terms of how long it would take to issue an FCC order, although given that the FCC highlighted the speed with which it had moved to complete the DISH ruling last December (within 9 months of issuing the NPRM), it is still hard to imagine a final ruling on TLPS before early summer 2014.

So the key issues for Globalstar are likely to be how successfully it can build up its MSS business (note that the revenue projections given for the bank case in the new COFACE agreement generate just enough cash to cover debt, interest and capex payments through 2022 but little else) and more importantly whether Globalstar can find a partner to exploit its spectrum assets. We know about Amazon, but will there be other interest either from the cellular industry or (perhaps more plausibly) from non-traditional players? What are the best comparisons for spectrum valuation for TLPS and/or LTE authorization? I’ll be publishing my updated profile of Globalstar shortly and all of these issues will be discussed along with my revenue projections for the MSS business.

09.09.13

The best of times, the worst of times…

Posted in Aeronautical, DISH, Financials, Globalstar, Inmarsat, Iridium, LightSquared, Operators, Orbcomm, Regulatory, Spectrum at 3:12 am by timfarrar

That seems an appropriate title, as I head off to London and Paris this week, to hear MSS and other satellite operators talk about their future opportunities. I found it interesting to note that Euroconsult released their updated MSS market assessment a couple of weeks ago, cutting their projection of future wholesale revenue growth from 7% p.a. (in the previous version of their analysis) to 5% p.a. over the next 10 years, getting back much closer to my forecasts from a couple of years ago.

However, by my estimate, MSS wholesale service revenues only grew at 2% in 2011 and 3% in 2012 (not 5% as Euroconsult estimates, perhaps due to double counting of Orbcomm’s revenue growth from resale of Inmarsat and now Globalstar services) and the majority of this growth in 2012 came from Inmarsat’s price rises. While it originally looked like 2013 was shaping up to see a bit better growth, Iridium has reduced its guidance, Globalstar’s second quarter results were nothing to write home about and Inmarsat is again seeing a significant part of its modest revenue growth being driven by maritime price rises. So its now far from clear that we will get even to Euroconsult’s lowered 5% growth projection in the near term.

While spectrum is a wildcard that could provide incremental revenues for Globalstar (through a potential deal with Amazon) and Inmarsat (through a resumption of lease payments from LightSquared), progress here may not be as fast as expected. Globalstar’s hoped for NPRM is not on the tentative agenda for the FCC’s September Open Meeting, presumably meaning that although the NPRM has now been placed on circulation this issue may be left for incoming Chairman Wheeler to finalize. The recent application by Oceus Networks for an experimental license to test TLPS for DoD users also suggests that a partnership with Amazon is far from set in stone as the way Globalstar will be able to realize value from its spectrum assets.

In contrast, it looks increasingly like DISH will succeed in its bid to buy LightSquared’s satellite assets later this year, and DISH has agreed to assume the Inmarsat Cooperation Agreement as part of its stalking horse bid. But buying LightSquared is a sign that DISH is unlikely to move forward quickly with its entry into the wireless market, because it would take until late 2014 or beyond before the FCC could approve any change to downlink use for the 2000-2020MHz AWS-4 uplink band. At the moment it seems that interim FCC Chairman Clyburn doesn’t want to take a decision even on LightSquared’s uplink band (let alone address the purported “swap” of downlink spectrum, which Ergen doesn’t want or need – leaving MAST Capital Management stuck holding a largely worthless lease of the 1670-75MHz spectrum band), because the FCC will not receive reply comments until September 23 (shortly before Clyburn relinquishes the chairmanship). So even if DISH buys the satellite assets, and drops the request to get hold of the 1675-80MHz band, reaching any resolution of the current regulatory issues in the L-band will undoubtedly be a lengthy process.

Charlie Ergen hinted on DISH’s Q2 call that he doesn’t anticipate simply continuing the Cooperation Agreement in its current form, so it would not be at all surprising to see a fight between DISH and Inmarsat over renegotiation of the Cooperation Agreement in the early part of 2014. One possible compromise could be in the form of a partnership between DISH and Inmarsat to use the TerreStar-2 satellite to preserve Inmarsat’s S-band license in Europe, in exchange for further postponement of any cash payments under the Cooperation Agreement.

Despite (or perhaps because of) the challenges that the MSS market faces, M&A continues apace. Recent agreements include Inmarsat’s sale of its energy sector assets to RigNet and Rockwell Collins’ acquisition of ARINC. I understand a number of additional notable transactions are in the works. Rumors persist that SITA has put OnAir up for sale (only six months after buying Airbus’s stake in the business) and Honeywell appears to be the most likely buyer, while Orbcomm continues its acquisition of satellite M2M service providers and may now be in negotiations to buy Comtech Mobile Datacom.

UPDATE: According to an OnAir spokesperson “SITA has no intention to sell OnAir to Honeywell or to anyone else and remains OnAir’s sole shareholder.”

It will be particularly interesting to see the valuation put on OnAir, given the recent disastrous public offerings of Gogo and Global Eagle/Row44, because if OnAir attracts a much lower valuation than Gogo and Row44 it could be a sign that SITA is pretty pessimistic about the future of the inflight connectivity market. That would be a surprise to many, because after all inflight connectivity is seen as one of the major areas for growth in the MSS market going forward, but at present making an operating profit, let alone a return on investment, is a pretty distant prospect for most if not all of the service providers. So if now is the time for SITA to get out, will this turn out be the age of wisdom for the sellers and the age of foolishness for the buyers, or the reverse?

04.22.13

Inmarsat throws its weight around…

Posted in Globalstar, Handheld, Inmarsat, Iridium, KVH, Maritime, Operators, Services, VSAT at 9:22 am by timfarrar

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.

02.21.13

I did it my way…

Posted in Aeronautical, Financials, Government, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 1:57 pm by timfarrar

As Inmarsat approaches its end of year results presentation, scheduled for March 7, the company’s stock price has been surging in the expectation of continued strong progress in the maritime market, which is likely to lead to full year wholesale MSS revenue growth for 2012 (excluding LightSquared payments) somewhat above Inmarsat’s 0%-2% target. This has been driven primarily by Inmarsat’s 2012 price rises, which have been so successful that Inmarsat announced further price rises of around 10% for E&E services last month.

I estimate that these new price rises could boost wholesale maritime revenues by a further $10M (roughly 3%) in 2013, on top of the pull-through from the mid year price rises in 2012, and as a result, it is plausible to imagine that Inmarsat’s wholesale MSS maritime revenues might rise by as much as 10% in 2013. Thus, unless there are severe cutbacks in government usage this year, overall revenue growth for 2013 may again come in quite a bit above the 0%-2% target. Our updated profile of Inmarsat provides full details of our forecasts by product, and will be released shortly.

That revenue upside perhaps explains why Inmarsat has become notably more aggressive in recent weeks, for example telling its sales team that commission will no longer be paid for selling Iridium products and services (historically Stratos has sold over $10M of Iridium equipment each year). In addition, the IS-27 launch failure appears to have given Inmarsat more confidence that potential partners will need GX for maritime and aeronautical services, rather than continuing to rely on Ku-band services in what may now become a capacity-constrained North Atlantic Ocean Region over the next couple of years.

One intriguing issue to watch in terms of Inmarsat’s relationships with its distributors is the ongoing dispute in Russia, where I’m told Morsviazsputnik has refused to pay for Inmarsat capacity for a substantial period of time (note that Inmarsat’s trade receivables have been increasing by about $10M per quarter during 2012, excluding LightSquared payments), unless all Inmarsat-equipped vessels going into Russian waters use a Russian SIM. This dispute has apparently extended to the Russians modifying their call routing gateway (which sends all traffic within 200 miles of Russian territory to an intercept point in Russia) to give them the ability to cut off the communications on foreign vessels. I’m told that in response Inmarsat has considered terminating the routing of traffic to the Russian intercept point, which would of course escalate the dispute even further and make it even more difficult to recover the withheld revenues.

Beyond this year, Inmarsat is guiding that its 8%-12% revenue growth in 2014-16 will be backend loaded, and so growth in 2014 will not need to increase sharply (which would be difficult prior to achieving global GX coverage). Indeed, a combination of continued price rises on L-band services and a release of some of the cash previously received from LightSquared (and never spent on installing filters) could help to meet expectations in the next few years, even if GX does not live up to Inmarsat’s projected $500M in wholesale revenue by 2019.

With respect to GX, I have been cautious about the $500M target because I have always assumed that maritime would account for the largest share of the GX business and it is very hard to see how Inmarsat could hope to generate $200M-$300M of wholesale maritime GX revenues by 2019, when Inmarsat itself estimates that only $145M was spent on maritime FSS space segment capacity in 2010.

However, I understand that Inmarsat is now suggesting that the GX government business will generate more revenue than the maritime market. Of course that is much harder to prove or disprove, especially as Inmarsat gave very little insight in the October 2012 investor day into whether the government business is expected to rely mainly on the dedicated HCO beams in military Ka-band frequencies or on the standard wide area coverage beams which only use civil Ka-band frequencies.

An additional GX question that may soon be answered is the potential for a fourth backup satellite to be ordered. Inmarsat certainly has ample justification for placing a near term order, given its reliance on Proton launchers for all three GX satellites, and the run of problems that Russian rockets have had in recent months. Although Inmarsat would presumably portray an order as a sign of increased confidence in the market for GX, this would also add up to $200M of additional capex to the $1.2B GX program, even if no commitment was made to a fourth satellite launch at this stage.

Given Inmarsat’s more assertive stance in the market, it will now be particularly interesting to see whether Inmarsat can persuade distributors to share its positive view of the overall GX opportunity, and make revenue commitments similar to the $500M that Intelsat has achieved from Caprock, MTN and Panasonic for its EPIC system. Time will tell, but at least so far, my assertion last October that we had reached a turning point in MSS history has come only partly true: while it certainly appears that the next few years will bring regular price rises, an improvement in Inmarsat’s relationships with its distributors still seems like a distant prospect.

12.03.12

Let me count the ways…

Posted in Globalstar, Handheld, Inmarsat, Iridium, LDR, Operators, Services at 3:26 pm by timfarrar

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.

04.30.12

What a MeSS!

Posted in Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Services, Thuraya at 8:49 am by timfarrar

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.

04.19.12

Why smart executives fail…

Posted in Financials, ICO/DBSD, Iridium, LightSquared, Operators, Spectrum, TerreStar at 9:32 am by timfarrar

This week’s Bloomberg article about LightSquared had an interesting assertion from Nathan Pettit, an assistant professor at New York University’s Stern School of Business that “Falcone’s doubling down on LightSquared fits a pattern”:

“People of status and power have an illusory sense they can control more than they do,” said Pettit. “That leads to unrealistic optimism, increased risk-taking and decreased inhibitions.”

That brought back memories of the classic case study on Iridium’s 1999 bankruptcy, by Sydney Finkelstein, which was included in his book “Why Smart Executives Fail” (uniquely, Motorola actually features twice in the book, both for Iridium and for missing the transition to digital cellphones). I wonder if Mr. Falcone has ever read this book and case study, because the parallels with the LightSquared debacle are quite striking. In particular, the three forces that according to Finkelstein combined to create Iridium’s business failure were:

1. Escalating commitment among Motorola executives who pushed the project forward in spite of known and potentially fatal technology and market problems
2. For personal and professional reasons Iridium’s CEO was unwilling to cut losses and abandon the project
3. Iridium’s board was structured in a way that prevented it from performing its role of corporate governance

In the case of LightSquared/SkyTerra/Harbinger, it is pretty easy to identify exactly the same problems:

1. Escalating commitment by Falcone, who kept devoting an increasing proportion of Harbinger’s assets to SkyTerra/LightSquared (and other spectrum projects such as TerreStar), despite Falcone’s apparent awareness of the GPS interference problems and the lack of interest from wireless operators in buying this (or any other MSS) spectrum. Similar to Motorola, Falcone’s history was that similar bets (e.g. in subprime mortgages and iron ore) had paid off in the past and so just as with Motorola he has maintained his “arrogance” that “the investment thesis was dead-on“.

2. Unwillingness to cut losses, because Harbinger’s investment was in equity, which would all be wiped out if Falcone did not continue with the project, but the chance of a recovery could be preserved by raising additional senior debt from third parties (just as with Iridium, where the bondholders also got stuck with a 99% loss because in the end the assets were essentially worthless).

3. Lack of corporate governance, because Falcone was able to make whatever bets he wanted with Harbinger’s money, despite the fact that as another Bloomberg interviewee pointed out “There should have been constraints on risk and concentration of the investments”. In addition, SkyTerra’s board was focused solely on trying to raise money and then sell the company to someone else (Falcone) rather on whether they actually had a viable business at the end of the day, because they could never hope to fund a terrestrial network buildout themselves.

As I’ve pointed out before, it took nearly nine months after the Iridium bankruptcy filing in August 1999, before the investors actually realized that the assets were worthless (and considered de-orbiting the satellites), during which time even as smart an investor as Craig McCaw considered a multi-billion dollar commitment to rescue Iridium. Indeed in the end McCaw and others actually committed $1B+ to rescue the similar ICO project, much of which now looks to have been wasted after ICO’s jury verdict against Boeing was reversed last week. As we look to what will happen next, I’m therefore left wondering if history will once again repeat itself, with Icahn in the role of McCaw, and a decade long court case in the offing.

03.03.12

Explode or implode?

Posted in Broadband, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services at 8:23 am by timfarrar

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.

11.29.11

Not very happy holidays for the MSS sector…

Posted in Aeronautical, Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Orbcomm, Services, TerreStar, VSAT at 12:20 pm by timfarrar

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.

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