After all the back and forth in court this week, with testimony from Charlie Ergen and Phil Falcone about Ergen’s purchases of LightSquared debt, the casual reader could be forgiven for thinking that this is still a battle between the two of them for control of LightSquared. However, a court filing from LBAC today emphasized that DISH is withdrawing its bid and if their argument (that DISH’s bid is not locked-up) stands, it appears that the Ad Hoc Committee will have an uphill task in moving to confirm a plan based on sale of the assets.
Instead, if LightSquared can get sufficient commitments tomorrow so that the $2.5B of new debt needed to back its reorganization plan is in place (contingent of course on FCC approval), then both Ergen and DISH appear happy to step back and wait to see what happens. If the FCC did give LightSquared the approvals it wants, which Falcone has “a pretty good feeling about” (mirroring his confidence back in 2011 that GPS interference issues could easily be solved), then Ergen would get repaid with interest (assuming he wins the current trial), and if the FCC refused (or declined to rule), then he could come back with another (lower) bid later on.
What’s far more intriguing is why DISH now seems to regard LightSquared as dispensable, at least for the time being. Remember that Ergen testified DISH only became interested in LightSquared as a backup plan once it became clear DISH would not succeed in buying Sprint or Clearwire. In addition, rebanding the AWS-4 uplinks to downlinks and pairing with LightSquared’s uplinks would delay any network deployment by at least a couple of years.
So it seems highly likely that Ergen has another plan in mind, which DISH will move to implement soon after the H-block auction is complete. There are repeated rumors about a Sprint bid for T-Mobile and an expectation that DISH would mount a counterbid. But it still seems that Sprint would have a tough job getting regulatory approval.
BTIG seem to think that a asset sale by Sprint to DISH would be one solution (what assets this would be is unclear, but we suspect DISH’s main objective would be to get hold of Clearwire spectrum, not a retail wireless business, and Sprint doesn’t need to buy T-Mobile for its spectrum). But isn’t a direct Sprint/DISH partnership a simpler solution, with a Sprint bid for T-Mobile acting as a backstop option if a deal with DISH falls through?
Its surprising how few people really seem to have grasped what DISH’s key asset is, namely that its 14M potential towers (i.e. rooftop satellite dishes) are at least as valuable as its spectrum (and perhaps more so, since using the AWS-4 spectrum for a fixed wireless broadband network wouldn’t be a very high value use).
Consider for example, a wireless broadband network deployed to 20% of DISH’s current customer base (2.8M households), let along the 8.5M targeted in DISH’s April 2013 Sprint bid proposal. If DISH can rent even a fraction of this tower space for $100 per month (compared to the $1700 or so that is charged by traditional tower companies) to Sprint to host its 2.5GHz small cell buildout, then that could generate at least $1B per year of incremental cashflow, with little or no offsetting costs (remember the power and space is provided by the homeowner). Moreover, DISH’s best use of its money would then be to try and buy DirecTV, offering a national broadband fixed wireless competitor and ensuring that AT&T couldn’t gain a similar buildout opportunity via DirecTV’s satellite dishes.
We’ll see what happens in the H-block auction next week, but even that may not be particularly critical to DISH’s near term plans, and I’d expect DISH could be quite content to be outbid on many licenses by non-strategic investors. Then regardless of what happens to LightSquared in the next few weeks (and things may go at least somewhat quiet for much of this year while the company makes yet another effort to secure FCC approval), my bet is that we’ll be hearing a lot more about Ergen’s wireless plans in the next few months.
The announcement today that DISH is pulling its bid for LightSquared has thrown what was already a massively complicated and controversial bankruptcy case further into chaos, as we start the trial on whether Ergen’s purchase of LightSquared debt was illegitimate (and warm-up for a lengthy contested confirmation hearing over the next 3 weeks). Of course, the withdrawal of the bid completely undercuts LightSquared and Harbinger’s arguments that Ergen always knew DISH would come in and buy out his debt holdings and it will be interesting to see the effect on this part of the trial. Thus the withdrawal is certainly a logical move simply for that reason alone.
However, as we move forward into confirmation, there are two further possibilities to be considered. If DISH’s move is simply a strategic maneuver to undercut LightSquared’s lawsuit against Ergen, then it would be logical to expect DISH would ultimately give in when the debtholders attempt to force specific performance of the Asset Purchase Agreement (assuming the Ad Hoc debtholder reorganization plan is approved by the judge).
A second more intriguing alternative is that DISH and Sprint might be nearing a partnership deal, under which Sprint could use DISH’s satellite TV antennas (backhauled via a fixed wireless network using AWS-4 spectrum) for a 2.5GHz small cell hosting strategy in suburban and rural areas and DISH would resell Sprint wireless services. After all, if there is a near term deal to move forward with a wireless partner and an AWS-4 buildout, then the rebanding and delay associated with a DISH acquisition of LightSquared would probably cause more problems than it solves.
Certainly a hiatus in negotiations between DISH and Sprint seemed to be behind the leaks before Christmas that Sprint was planning a bid for T-Mobile and DISH’s rejoinder that it would consider a rival bid. Indeed one could view AT&T’s recent offer of a $450 incentive to T-Mobile customers as an attempt to kill any prospects of regulatory approval for a Sprint/T-Mobile tie-up. So from that point of view, Sprint’s only viable big move in the near term is a deal with DISH, and I’m told large scale deployment of such a network could double the total wireless network capacity available in the world today.
Another factor worth considering is that DISH’s move creates further uncertainty for the H-block auction as well, because (especially after Echostar’s purchase of Solaris, which has overlapping 2GHz band spectrum in Europe at 1995-2010MHz uplink and 2185-2200MHz downlink) the possibility that DISH will not decide to switch its AWS-4 uplinks to downlinks is back on the table.
Nevertheless, even if DISH doesn’t buy LightSquared, and no deal is ultimately worked out with Sprint, DISH could still come back and buy the 1695-1710MHz unpaired uplink spectrum in the FCC auction later this summer, likely at a lower price (and with rather less risk) than it would be taking with LightSquared – as unpaired uplink this band will probably sell for around $0.30 to $0.40/MHzPOP unless AT&T and DISH both bid aggressively against one another. So DISH certainly still has many spectrum options left on the table this year.
Today and tomorrow the LightSquared hearing will involve live testimony from both Ergen and Falcone about the debt purchases. Given that DISH’s maneuver has now undercut many of Harbinger’s arguments, and Ergen still seems to have plenty of cards up his sleeve, it will be interesting to see just how far Phil is out of depth in this great game.
As we head towards the holiday season, LightSquared’s attempts to find an alternative to being bought by Charlie Ergen are becoming ever more desperate, as the December 24 deadline to put forward an alternative plan approaches and the company takes a “time machine back to the summer…to formulate from scratch their own refinancing plan
…like the failed effort with Jefferies.”
Reuters is reporting the terms of a $2B-$2.5B three year term loan to back a Fortress-sponsored exit plan as including 12% interest, all paid-in-kind, with an additional unspecified amount of equity injected into the company (presumably mostly achieved through rolling over existing investments). Unless a substantial amount of warrants are also included in this deal, the terms appear worse than those offered by Jefferies (and rejected by investors) back in July, which comprised mostly cash pay interest plus an ongoing ticking fee and substantial warrants.
We find it hard to imagine that the judge will be happy with a proposal which involves waiting another 6-9 months for an FCC decision, with no certainty at the end of the process, and which would presumably result in DISH terminating its non-contingent cash offer. Remember that there are numerous other uncertainties in the near future as well, including the resolution of LightSquared’s Mexican coordination negotiations, the Cooperation Agreement with Inmarsat, LightSquared’s difficult relationship with the DoD (which led to the termination of a contract accounting for one third of LightSquared’s total satellite revenue earlier this year) and most importantly the unprecedented amount of spectrum that will be auctioned by the FCC in 2014 and 2015. All of these issues are discussed in detail in our new 49 page LightSquared profile, released yesterday – please get in touch if you are interested in purchasing a copy.
The AWS-1 auction in 2006 provides one good example of how large amounts of new spectrum coming to the market can have a major effect on the perceived value of spectrum. Take for example ICO’s July 2005 Offering Memorandum, which suggested its spectrum was worth $1.64/MHzPOP, whereas after 2006, ICO had to use an AWS-1 benchmark instead (in that case the most optimistic number that could be justified was $0.73/MHzPOP for the 20MHz F-block spectrum).
One of the underrated issues that is still to play out in the bankruptcy (and a key sticking point in negotiation of DISH’s proposed Asset Purchase Agreement) was that DISH’s bid included acquiring all of the litigation rights of the LightSquared estate. The most obvious effect that would have is on LightSquared’s lawsuit against Ergen for buying up its debt. However, it would also have significant consequences for the suit against the GPS industry and potential litigation against the FCC: whereas LightSquared soon may have nothing to lose by employing scorched Earth tactics, we suspect DISH would look for a compromise that would be acceptable to all parties. Finally, DISH could even sue Harbinger on behalf of LightSquared investors who lost money as a result of the “guarantees” that there was no GPS interference problem whatsoever.
We should soon know if this will be Phil’s last gasp, so just like the Delorean above, he will find himself “OUTATIME” or if we will have many months more of uncertainty about the FCC process. Either way, it looks like it is no longer FCC Chairman Wheeler who will have an unhappy Christmas, but instead it will be Judge Chapman, who is charged with resolving the LightSquared bankruptcy case and now has to determine just how much of LightSquared’s “alarming and reckless” efforts to fend off DISH she will tolerate.
Tomorrow FCC Chairman Wheeler plans to tell Congress that “we are not the Federal Courtesy Commission” with respect to the upcoming rulemaking on in-flight cellphone calls. However, that message could apply equally to the unwelcome prospect of Centerbridge’s bid for LightSquared, where the unexpected backlash over phones on planes may end up looking like a walk in the park compared to the renewed battle over approvals for LightSquared. After all, whichever way the FCC now rules will be “picking winners and losers” between DISH and Centerbridge and will undoubtedly end up making some people (including many politicians) very unhappy.
Earlier today I wondered what Centerbridge heard from the FCC during Reed Hundt’s lobbying meeting last week that gave them enough comfort to put together their $3.3B bid. However, it now appears that in fact Centerbridge’s bid is contingent on FCC approval of LightSquared’s so-called spectrum “swap” coming through very soon, presumably before the deal closes. Thus if the FCC doesn’t rule quickly in favor of LightSquared, the Centerbridge deal could fall through, and DISH would then be back in the driver’s seat with its original $2.2B bid.
Indeed, if the process is extended past February 15, then DISH’s offer could be withdrawn and LightSquared would be back at square one, so I suspect the bankruptcy court will require a firm commitment to be made by Centerbridge well before then. As a result, the FCC’s previous plan, to simply ignore LightSquared’s request and hope that it goes away after DISH buys the company, has now essentially become untenable.
So if Chairman Wheeler and his staff didn’t already have enough in their in tray (including ruling on DISH’s request for more flexibility in its use of the AWS-4 spectrum by the end of next week, in order to keep the H-block auction on track), he now has the prospect of spending the holiday period pondering whether to alienate the DoD, GPS industry and politicians opposed to a perceived spectrum “giveaway” to a reorganized LightSquared which will still count persona non grata (i.e. Falcone and Harbinger) amongst its major investors.
Given that Centerbridge’s plan is apparently simply to sell the LightSquared spectrum to AT&T or Verizon before the end of 2015 (when the new tranche of funding will run out), helping to make LightSquared viable is hardly going to do much to promote the FCC’s objective of more competition in the mobile market either (though who knows what will happen in reality, because Centerbridge will be trying to sell the spectrum in the midst of the most sustained period of major FCC spectrum auctions in history).
However, if approval is refused, then the alternative may be that the FCC has to face the prospect of LightSquared actually commencing its long threatened legal action against the Commission for blocking LightSquared’s ATC license. That’s because I assume that the LightSquared estate will now try to keep control of its causes of action rather than handing them to DISH if the Centerbridge deal falls apart, since the damages supposedly suffered by LightSquared investors as a result of adverse FCC action will now be much more explicitly quantifiable. Either way this decision is going to be tricky, and somehow I doubt Chairman Wheeler’s mood will be improved by the knowledge that several of his predecessors are already working for Phil Falcone.
Its rather ironic to see the headline in the WSJ today, proclaiming that “A Gold Rush Hits Wireless Spectrum” on the same day as LightSquared’s bankruptcy auction takes place. While I’ll address the gold rush silliness in another post (although I note that amazingly enough MAST apparently still wants to fight with Ergen over the H-block), behind the scenes of the LightSquared bankruptcy there’s been a lot of activity over the last three weeks, as LightSquared and Harbinger tried to pull together a consortium to keep the company out of DISH’s hands (and submit a more credible reorganization plan).
Just before Thanksgiving, the “interest” of Fortress and Centerbridge was leaked to the WSJ, in an attempt to persuade other firms to become involved and to pressure the FCC to move forward. The auction itself was even delayed until today, to give more time for an FCC ruling (or at least some sign that the FCC would rule on LightSquared’s request), because many potential investors thought it was simply too risky to participate without any signal from the FCC that the proposed spectrum “swap” had a chance of being approved.
However, the FCC appears unmoved, despite some last ditch in-person lobbying by former FCC Chairman Reed Hundt on Thursday Dec 5. That’s the second former FCC Chairman that LightSquared has sent to the FCC to lobby for them in recent months! This filing highlights that Centerbridge has been working hand in hand with LightSquared in order to try and outbid Ergen. The rationale behind Centerbridge’s interest is unclear, as I’m told they were not a previous investor in LightSquared, but appears to relate to a belief in the opportunities of the spectrum “gold rush”.
That’s different from Fortress, who own a substantial amount of LP Preferred Shares, which would be largely wiped out by DISH’s bid and so are likely motivated primarily to protect their existing investment. Fortress’s LP Preferred investment would receive only a modest recovery as a result of DISH’s bid, despite Ergen’s earlier agreement last April to purchase Fortress’s preferred shares at 95 cents on the dollar, as this purchase was blocked because SPSO is certainly an “affiliate” of DISH (the term used in the shareholder restrictions), even if its not a “subsidiary” (as used in the term loan restrictions). However, with the LP Preferred being next in line for a recovery, even pushing DISH’s bid up by $100M-$200M would provide a major benefit to Fortress.
UPDATED (12/11): It seemed that because everything had been so quiet in recent days, LightSquared might have been unable to gain enough backing for their bid, presumably because the FCC appeared to have been unmoved by Hundt’s entreaties. However, its now being reported by the WSJ that LightSquared postponed the auction to try and thrash out a deal with Centerbridge, which has resulted in a $3.3B tentative deal. I would expect that to include all of the company (and for Centerbridge to assume the Inmarsat Cooperation Agreement largely in its current form), so that Centerbridge would pay off the Inc holders and continue to pursue the spectrum “swap” with the FCC and the litigation against the GPS industry. Notably Harbinger could now potentially also stand to benefit substantially if Ergen’s $1B debt claim was ultimately disallowed as a result of the litigation, because there will be no debtholders ahead of them with higher priority bankruptcy claims.
If the $3.3B Centerbridge bid becomes firm, I wouldn’t expect DISH to bid even more, although it would remain the backup bidder through Feb 15 if the Centerbridge offer falls apart. DISH would have other options for uplink, including the 1695-1710MHz band which will be auctioned in 2014. However, if DISH did instead ultimately emerge as the winner, there would still need to be significant negotiations over the DISH Asset Purchase Agreement, which apparently has some areas of disagreement (not least over DISH’s request for certain releases (including for Ergen’s purchases) and for its purchase to include all causes of action of the LightSquared estates against the GPS industry, FCC, Inmarsat and Harbinger, etc.). If it came to that, I’d expect that issue in particular to require the intervention of the judge, and of course her ruling would therefore also determine whether LightSquared’s lawsuit against Ergen would continue as currently scheduled. In that event, a very interesting question would be whether DISH actually has an out in the event that no resolution is reached over the asset purchase agreement or whether the judge can force DISH to follow through with its bid, even if the final terms of the asset purchase agreement were not acceptable to DISH.
Despite all of LightSquared’s and Harbinger’s efforts, it would hardly be surprising if the FCC proves unwilling to act on LightSquared’s requests, because DISH has made it clear that it is not interested in the spectrum “swap” (see LightSquared’s recent motion for an extension of the use of cash collateral which states “As the Court is well aware, LBAC is not interested in LightSquared’s downlink channels or resolution on the series of applications LightSquared has filed with the FCC…LBAC is only interested in LightSquared’s uplink channels”).
Given that, why would the FCC give spectrum away for free to LightSquared (or even forgo an auction) when DISH would drop this request if it won the bidding, especially at a time when the FCC is under considerable pressure to raise as much money as possible from spectrum sales? Even selling the 1675-80MHz band of spectrum to LightSquared for the $300M assumed in the White House budget would inevitably lead to accusations of favoritism (because the price would be equivalent to only $0.20 per MHzPOP), so why wouldn’t the FCC simply auction this spectrum along with other bands, once the appropriate rules have been put in place?
On the other hand, Centerbridge must have come away from Friday’s meeting feeling somewhat comforted by the discussion with the FCC, so perhaps the compromise could be to auction the 1675-80MHz band along with AWS-3 and 1695-1710MHz next summer? Certainly the FCC is now in a much trickier political position if the Centerbridge bid goes through, compared to the prospects of DISH getting them out of the LightSquared mess.
Despite Phil’s efforts to hire the best lobbyists (and lawyers) that money can buy, even if the Centerbridge bid succeeds, it therefore seems like it will still be a struggle to put LightSquared together again. We’ll be publishing our latest report on LightSquared, DISH and the related spectrum issues later this week, including an analysis of why LightSquared suddenly lost one third of its total revenues earlier this year (hint: the DoD really doesn’t like them…). Contact me for more details if you are interested.
In my view the announcement of a partnership between Orbcomm and Inmarsat on Monday evening may represent a sea change for the MSS industry, as Orbcomm showed how its planned “multi-network operator strategy” could eventually lead to it getting out of the business of operating its own satellite fleet, allowing Orbcomm to be what it wants to be: a solutions provider rather than a satellite operator.
In the short term the deal means that Orbcomm will invest in developing a new low cost Inmarsat ISatDataPro (IDP) module, costing around $100 (i.e. aiming to be less expensive than Iridium’s SBD module) which OEMs and VARs can choose to drop into their terminals as a direct alternative to Orbcomm’s own OG2 module, using a common management interface provisioned by Orbcomm.
The choice of module will be up to the OEM, and will depend on their data needs (IDP has higher capacity and less latency, because there will sometimes be several minute gaps in coverage between the 17 OG2 satellites), the geographies they will serve (Inmarsat will provide access to Russia and China) and the price they are willing to pay (IDP service will be more expensive than the current Orbcomm $5-$6 OEM ARPUs). Note that this is somewhat different than Orbcomm’s arrangement with Globalstar, under which Orbcomm’s Solutions business offers a Globalstar tag to retail customers (and existing Comtech VARs), but Globalstar will not be a direct alternative for Orbcomm’s OEM customers (who buy from Orbcomm’s Devices and Products business).
In the longer term it seems to me that (although this is not part of the current agreement with Inmarsat) Orbcomm will very likely not build a third generation of LEO VHF satellites, as the nature of their network (where the LEO satellites search actively for channels that are free of interference as they orbit the Earth) would be very difficult to consolidate onto an Inmarsat GEO platform. Because Orbcomm will have access to Inmarsat capacity on an I6 constellation which will last into the 2030s, eventually (in a decade or more) Orbcomm could instead migrate its customer base onto Inmarsat’s L-band services, so that it will not have to spend hundreds of millions of dollars on another round of fleet replenishment. In fact, if Orbcomm has any substantial launch problems with OG2 (remember that the satellites from its last two launches have been lost) it might not even make sense to reinvest the insurance proceeds in replacement satellites and conceivably such a migration could take place more quickly.
The significance of this announcement is that it appears to represent the first step towards a reduction in the amount of capex being invested in the rather slow growing MSS market. The next question will be whether, when Inmarsat orders its I6 L-band satellites (likely in late 2014 or early 2015), it opts for a copy (or even a simpler version) of the I4 constellation, and thus whether, as I suggested last year, we really have now reached the “end of history” in the MSS L-band industry. After all, with the sale of the Stratos energy business to RigNet (and a likely disposal of Segovia), Inmarsat is now backing away from its strategy of going direct, and is continuing to focus on maritime price rises to boost revenues, in accordance with the other part of my “end of history” thesis.
So, as many expected, Globalstar’s NPRM finally emerged from the FCC tonight, before the new Chairman, Tom Wheeler, is sworn in on Monday. It appears that Wheeler has had a strong influence on the rather subdued language in this NPRM, which takes a much more equivocal stance than similar NPRMs (and has even been toned down compared to previous drafts, or so I’m led to believe).
As the language perhaps reflects Wheeler’s more cautious stance compared to former Chairman Genachowski’s “full speed ahead” approach, it is hard to predict what this will mean for Globalstar’s potential approval process. However, it is clear that it will take some time, because the FCC is seeking detailed technical studies from commenting parties, and has set a relatively long comment deadline of 75 days after publication in the Federal Register (i.e. January or February 2014).
Nevertheless, it is instructive to compare the language to DISH’s AWS-4 NPRM in March 2012, especially as that is the model that Globalstar sought in its petition, which stated that “the Commission’s rulemaking proposal on terrestrial use of Big LEO spectrum should incorporate a number of the basic reforms proposed by the Commission in the 2 GHz NPRM”. As a starting point, the DISH NPRM set a comment period of 30 days after publication, but more notable is how definitive the DISH NPRM was about its intentions:
DISH: “In this Notice of Proposed Rulemaking, we propose to increase the Nation’s supply of spectrum for mobile broadband by removing unnecessary barriers to flexible use of spectrum currently assigned to the Mobile Satellite Service (MSS) in the 2 GHz band”
Globalstar: “By this Notice of Proposed Rulemaking (Notice), the Commission proposes modified rules for the operation of the Ancillary Terrestrial Component (ATC) of the single Mobile-Satellite Service (MSS) system operating in the Big LEO S band”
DISH: “With this proceeding we intend to fulfill the Commission’s previously stated plan to create a solid and lasting foundation for the provision of terrestrial services in 40 megahertz of spectrum in the 2 GHz band”
Globalstar: “For all the reasons stated herein, we believe that Globalstar’s proposal to deploy broadband access equipment should be further examined and a record developed to determine whether this proposal has the potential to enable more efficient use of Globalstar’s S-band spectrum and spectrum in the adjacent band. This action could potentially increase the amount of spectrum available for broadband access in the United States”
DISH: “According to Cisco Systems, North American mobile Internet traffic more than doubled in 2011 and is expected to grow over 15-fold in the next five years. This explosive growth is creating an urgent need for more network capacity and, in turn, for suitable spectrum”
Globalstar: “The rapid adoption of smartphones and tablet computers, combined with deployment of high-speed 3G and 4G technologies, is driving more intensive use of mobile networks. According to Cisco Systems, global mobile Internet traffic is expected to grow over 13-fold from 2012 to 2017″
DISH: “In this Notice of Proposed Rulemaking (AWS-4 Notice), we build on the Commission’s recent actions to enable the provision of terrestrial mobile broadband service in up to 40 megahertz of spectrum in the 2000-2020 MHz and 2180-2200 MHz spectrum bands. We propose terrestrial service rules for these spectrum bands that would generally follow the Commission’s Part 27 rules, modified as necessary to account for issues unique to the 2000-2020 MHz and 2180-2200 MHz spectrum bands. Given the proximity of these spectrum bands to spectrum bands previously identified as AWS, in our proposal we refer to these spectrum bands as “AWS-4″ or “AWS-4 spectrum”
Globalstar: “We believe that Globalstar’s proposal to deploy a low-power terrestrial system in the 2473-2495 MHz band should be examined to determine whether it is possible to increase the use of this spectrum terrestrially in the near term, without causing harmful interference to users of this band and adjacent bands, and without compromising Globalstar’s ability to provide substantial service to the public under its existing MSS authorization. If supported by the record, this action could potentially increase the usefulness for terrestrial mobile broadband purposes of 11.5 megahertz of licensed spectrum. As a result, these changes may induce increased investment and innovation throughout the industry and ultimately improve competition and consumer choice. Therefore, we propose to make the changes to Part 25 of the rules necessary to provide for the operation of low-power ATC in the licensed MSS spectrum in the 2483.5-2495 MHz band”
(note that Globalstar also sought to operate under Part 27, which the Commission rejected, and I’m told that an earlier draft of the NPRM also contained a proposed new name for this band, although not the “AWS-5″ designation that Globalstar had sought)
As far as the specifics of the NPRM proposal goes, it appears that the FCC has gone along with Globalstar’s requested TLPS power and OOBE levels, while highlighting that “significant concerns have been raised about potential detrimental impact on unlicensed devices, such as Bluetooth, that are currently used extensively for various wireless broadband services and applications”. However, there are a number of lurking issues, such as the process to be used for approving any changes to devices to use the new service (which will fall under Part 25 so would normally require a new FCC ID to be granted for an existing Part 15 device operating in the WiFi band).
In addition, proposed use of Part 25 along with a simple modification to the existing ATC rules to require TLPS to be permitted (so long as Globalstar can “demonstrate the commercial availability of MSS, without regard to coverage requirements”), could make it harder to get LTE approval in the future, especially in the L-band, where the FCC warned Globalstar that “Should we find it to be appropriate, the Commission reserves the right to consolidate this proceeding with any proceeding addressing Globalstar’s L-band proposal and Iridium’s petition for rulemaking” (creating a risk that some L-band spectrum could be reallocated to Iridium if Globalstar pushes for LTE authorization: the FCC quietly issued a public notice seeking comment on Iridium’s petition for reallocation of L-band spectrum on Friday as well).
So now the question is whether Wheeler will be prepared to work through these issues, face down the interference concerns and push through a final order approving TLPS, or if he will instead prioritize the 3.5GHz band, where a public notice was also issued today (with a much shorter comment cycle), seeking further comment on how “Priority Access” licenses (which as I’ve remarked before could be somewhat similar to TLPS) might be allocated for exclusive use.
UPDATE (11/3): Globalstar’s press release noted that the release of the NPRM “represents a seminal development and yet another step forward in Globalstar’s renaissance”. However, unlike in September, when the NPRM was circulated, its notable that the company didn’t say that it was “very pleased” with the FCC’s action. Globalstar’s comment that “We look forward to receiving the public’s comments and working towards a final order over the next several months” is also a curious description of a process where reply comments won’t even be received for 3.5 months after publication of the NPRM in the Federal Register.
I won’t belabor the errors of physics in the movie, instead just noting that even though you might think that in space things can keep going in a straight line indefinitely, they are still subject to gravity and you can’t get to a higher orbit without some form of propulsion.
We’ve now seen confirmation from Iridium of what I pointed out last week, that Q3 was very bad for the MSS industry. Iridium missed its expectations for equipment revenues (i.e. handset sales) and subscriber growth (i.e. M2M net adds), although at least the government contract renewal is more favorable than expected – the unlimited nature of the contract removes the incentive for the DoD to scrub its user base to remove unused handsets, which has been a headwind for Iridium in the last couple of years.
Its far from clear that anyone else is doing better: it looks like Iridium’s competitors also saw pretty poor handset sales in Q3 and the SPOT 3 has been very slow to arrive in stores as well. Moreover, the government business is dire – Intelsat’s profit warning (which included its off-net business reselling MSS) is a bad sign for Inmarsat, as are the large scale layoffs in Astrium’s government business last week.
Inmarsat has now followed up its promise not to raise FleetBB prices in 2014 with an enormous 48% rise in maritime E&E prices from January, in an attempt to sustain maritime revenue growth next year. While the stated intention is to persuade the remaining pay as you go customers to move off the E&E network and choose FleetBB instead, the vast majority of higher spending B and Fleet customers have already migrated and many of the remaining users are mini-M voice-only users or really want the PAYG service because they are only occasional users, so FleetBB is not necessarily the ideal option.
Inmarsat is clearly calculating that these customers won’t want to risk moving to Iridium after the OpenPort problems earlier this year and has stepped up its efforts to portray Iridium’s network as “failing”. Despite all this, no-one believes that Inmarsat could possibly achieve its 8%-12% revenue growth target for 2014 and I expect this to be “softened” in the near future as well. Inmarsat is also likely to emphasize its opportunities for internal cost savings next year and move to dispose of some retail business units like Segovia.
Its interesting to speculate about implications for the wider satellite industry as well. Last time around (in 1999-2003), problems in the MSS industry were a harbinger of a downturn in the FSS industry a couple of years later. That came in the wake of a peak in satellite orders in the 1999-2001 timeframe and after the launch of these satellites, which resulted in a sharp decline in prices, the FSS industry took a big hit. We’ve seen a similar peak in orders in recent years (2009-10), and while the major operators are much more likely to retain pricing discipline (in a far more consolidated industry than a decade ago), the advent of High Throughput Satellites, especially those owned by smaller players like Avanti (who might become the most desperate for contracts), could pressure prices in certain market segments and geographies.
Just as an example, in recent years, underlying transponder demand has grown at roughly 4% p.a., but revenues have been boosted by around 2% p.a. by price rises. Even if demand growth continues (not a foregone conclusion in some sectors like government where WGS is an alternative), a reversal of the pricing trend would certainly make a big difference to the FSS revenue outlook. As I said at the beginning of this post, gravity clearly exerts a force, even in space.
As others have noted, in order to get a 700MHz interoperability deal, which will largely benefit Verizon and AT&T (as AT&T are now the only plausible national user of the A block spectrum and are likely to acquire both Verizon and Leap’s spectrum holdings in this band), DISH has secured a pretty good deal in Washington from interim FCC Chairman Clyburn: in exchange for DISH agreeing to low power use of the 700MHz E block (and bidding $0.50 per MHzPOP in the H block auction), DISH appears set to obtain an option to reband its AWS-4 uplinks to downlinks and an extension of the AWS-4 buildout milestones.
UPDATE (11/13): T-Mobile is raising $2B for spectrum purchases and is now rumored to be contemplating a bid for Verizon’s 700MHz A block spectrum. This would only give T-Mobile a 5x5MHz LTE network, which would not add much capacity in urban areas, but if T-Mobile is seeking to improve its rural coverage then it would have to buy other A block licenses as well.
This gives DISH a significant advantage both in the upcoming LightSquared bankruptcy auction, where no-one really expects any alternative bidder to emerge for the L-band spectrum, because the FCC has all but guaranteed it will not propose the so-called spectrum “swap” that LightSquared has asked for: it’s understood that Ergen will simply drop the request when he buys LightSquared’s satellite assets, so there is no point in the FCC annoying those in Congress who would want to see the 1675-80MHz spectrum band auctioned instead.
More importantly, if DISH is given an option but not an obligation to reband the AWS-4 uplinks (DISH has asked for 30 months to decide, but I would expect the FCC to only allow 12-18 months at most), then it also has a huge advantage in the H-block auction, because if Sprint were to win the spectrum then DISH could hold up standardization of the band (and delay any ability for Sprint to use the H block to relieve capacity constraints in its PCS G block LTE network). After years of experience in being held hostage by Ergen, its therefore hardly surprising that the smart move for Sprint will be to let DISH have the H block at the reserve price. That will force DISH to drive the standardization efforts, and potentially even allow Sprint to put roadblocks in DISH’s way instead of vice versa.
UPDATE (11/13): Both T-Mobile and Sprint have now ruled out bidding for the H-block spectrum. So it seems that both have made the smart move by leaving Ergen to contemplate what to do with ~80MHz of spectrum and no partners.
Moreover, it will establish a low benchmark price for the rest of DISH’s spectrum holdings, well below the $1.00 per MHzPOP that many analysts have been touting recently, and Ergen will then have doubled his bets on spectrum to roughly $8B, when taking into account both the LightSquared and H-block spectrum, without any clear route to monetization. With AT&T focused on European expansion and Verizon encumbered by the debt from buying out Vodafone’s stake, Sprint could then hope to hold the whiphand in any partnership negotiations with DISH.
Indeed next year’s auctions of 70MHz of additional spectrum (AWS-3, 1695-1710MHz and J block) may further impact perceptions of spectrum value: a $0.50 per MHzPOP valuation will again be ample to cover the costs of clearance plus the $7B needed to fund FirstNet. That is the FCC’s key objective in the upcoming spectrum auctions, so it can limit AT&T and Verizon’s participation in the 2015 broadcast TV incentive auction and ensure that Sprint and T-Mobile gain sufficient low frequency spectrum to preserve a four player market after the next presidential election. Once no net revenues need to be raised from the incentive auction, then it won’t matter if AT&T and Verizon refuse to participate, as that would simply keep the price low for Sprint and T-Mobile (or ensure that not as much broadcast spectrum is cleared).
However, rather than negotiating with Sprint on their terms, I expect that Ergen will instead pursue a merger with DirecTV, as an alternative to any wireless partnership, and I still expect a commitment to build out a fixed wireless broadband network with rural coverage to be key to getting regulatory approval for such a deal. Nevertheless, if DirecTV doesn’t put as much value on DISH’s spectrum holdings as Ergen does, it may be difficult to reach agreement on the respective value of the two companies. As a result, while Ergen builds his tower of spectrum cards ever higher, it will be interesting to see whether investors stay confident that he can ultimately create substantial value from these holdings.
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.
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