Despite the delays in the launch of GX, it seems Inmarsat may be looking to stitch up an even larger share of the maritime market in the near term. Rumors are flying that Inmarsat may soon make a formal bid to acquire KVH, the largest maritime VSAT player in terms of vessels (though not in revenues), adding about 3500 more terminals to Inmarsat’s existing 2200 VSAT equipped ships.
KVH generated nearly $80M from its miniVSAT business in 2014 with an average service ARPU of $1500 per month, compared to Inmarsat’s $90M and ARPU of $4000 including equipment leases (this equates to $2500 per month after stripping out hardware, according to Inmarsat’s most recent results call, which is a more appropriate point of comparison with the KVH ARPU).
The difference in ARPUs between Inmarsat’s current VSAT business and KVH is striking, in fact KVH’s smaller V3 terminal (which has about 900 active terminals) is generating around $500 in monthly ARPU, below even Inmarsat’s FleetBB ARPU of $700 (note that the standard FleetBB package sold by KVH now only provides 20 Mbytes per month of data for $749, whereas KVH offers airtime at rates as low as $0.99 per Mbyte).
If Inmarsat does move ahead with a KVH bid, it would likely be seen as a counter to Airbus’s disposal of its Vizada business unit, because Inmarsat would then have by far the largest number of VSAT-equipped ships. Indeed it would not be surprising to see attempts by competitors to block the deal on antitrust grounds, not to mention the concerns that current KVH customers will have about potential future price increases.
However, it would also be something of an acknowledgement that GX is optimally positioned as a lower end off-the-shelf maritime VSAT service (like KVH’s miniVSAT), as a step up from FleetBB, rather than as a high end solution for cruise ships and oil rigs. KVH’s growth has slowed in the last year, with terminal shipments staying at close to 1000 per year in 2012, 2013 and 2014, but net adds and ARPUs declining. Pressure from Inmarsat will only intensify, once the low cost 60cm GX antenna is available with global coverage, so this looks like it would be a good time for KVH to sell out.
Inmarsat investors will presumably also welcome a deal, with a much clearer path established to a GX maritime business of $200M+ in annual service revenues over the next few years (though its important to note this represents a retail service business, not the wholesale spend on satellite capacity). However, the obvious question that customers will ask is whether low end price packages will still be offered for miniVSAT users, or whether Inmarsat will move them up to much higher price points, as it has done with FleetBB over the last few years.
And what will be the alternative for these users: will it be other VSAT solutions, or will it be the new broadband services (comparable in capability to FleetBB) offered by Iridium’s NEXT constellation? It will take some time for either of these options to emerge, with low cost small Ku-band VSAT antennas needed for the former, and completion of the NEXT constellation needed for the latter. That provides a further motivation for Inmarsat to move sooner rather than later, while its freedom of action in the low end of the maritime market remains relatively unconstrained by competitive alternatives.
Its been interesting to note that AT&T and Verizon did not file any petitions to deny the AWS-3 license applications of DISH’s two Designated Entities, NorthStar and SNR, despite Verizon and AT&T both having earlier been vocal in denigrating DISH’s bidding strategy in their comments in the FCC’s bidding procedures docket 14-170.
Instead the opposition was left to a couple of small bidders plus a collection of ‘public interest’ organizations, who followed the path set out by Verizon, and alleged violations of antitrust laws by DISH and its DEs. DISH’s response argued that there was no antitrust violation and that the joint bidding arrangements (including realtime coordination of bids during each round, which most people including myself thought was not allowed) were fully disclosed.
While the eventual FCC decision on DISH’s $3.3B discount remains uncertain (and according to FCC Chairman Wheeler would not in any case involve denial of the licenses or reauctioning of the spectrum), it is far from a slam dunk (as some argued originally) that DISH will keep the discount. Nevertheless, it seems to me that Verizon and AT&T could even be better off if DISH kept the DE discount, and that might provide one reason why they held back from challenging DISH’s licenses directly.
Of course DISH would lose $3.3B if the DE discount was rejected, but in that case, DISH would acquire NorthStar and SNR under the terms of its agreements with the DEs, and would be free to consolidate and restructure its AWS-3 and AWS-4 spectrum holdings. After that, in my view, the most likely end game would be to spin-off all of DISH’s spectrum (AWS-3, AWS-4, 700MHz E-block, PCS H-block) into a holding company, which could lease individual licenses to any wireless operator, and raise perhaps $20B-$30B of debt at the spinco level, flowing that cash back up to DISH (and perhaps allowing Ergen to take some chips off the table).
Any repricing of the AWS-3 spectrum would presumably increase Ergen’s asking price for his leases, meaning that Verizon and AT&T might ultimately be the ones to suffer from the removal of the discount. In fact Verizon might even decide it had to pay up and pre-empt the spinoff because of the prospect that this arrangement would make more spectrum available in key markets for both T-Mobile and Sprint.
However, in order to execute these spinoff plans and enter into meaningful leases of AWS-4 spectrum, it is critical that DISH secures interoperability for its AWS-4 downlinks (2180-2200MHz) with the AWS-3 blocks. T-Mobile and Sprint know all too well that building out networks in bands without an ecosystem (such as T-Mobile’s deployment of WCDMA/HSPA in the AWS-1 band, which was ultimately abandoned, and Sprint’s PCS G-block LTE network) makes it much more difficult and expensive to secure handsets (hence there was no WCDMA iPhone operating in AWS-1 and Sprint had to guarantee billions of dollars of purchases to secure a G-block iPhone). As a result, they are unlikely to want to get into bed with DISH and make use of AWS-4 unless and until there is some guarantee of a handset ecosystem.
While DISH can pursue a band class designation for AWS-4 supplementary downlinks through 3GPP, we only need to look at the story of Band Classes 12 and 17 (in the lower 700MHz band) to see that a band class designation on its own, without any regulatory mandate for interoperability, is insufficient to ensure a handset ecosystem is created. And at the end of the day, the FCC was forced to intervene and broker a deal to ensure interoperability in the lower 700MHz band, before T-Mobile moved to buy 700MHz A block licenses for its low band coverage buildout.
Its therefore hardly surprising that AWS-3/4 interoperability was a key request of DISH in March 2014 before the auction, and fiercely opposed by Verizon and AT&T. At the time, the FCC decided not to impose a mandate, but strongly suggested that cooperative efforts should be made to ensure interoperability with AWS-4:
In the absence of technical impediments to interoperability, if the Commission determines that progress on interoperability has stalled in the standards process, future AWS-3 licensees are hereby on notice that the Commission will consider initiating a rulemaking regarding the extension of an interoperability mandate that includes AWS-4 (2180-2200 MHz) at that time. Should we undertake such a rulemaking, relevant considerations may include considerations of harmful interference, technical cost and difficulty of implementation, and the extent to which licensees are common to both the AWS-3 and AWS-4 bands.
Given the likelihood that AT&T and Verizon will engage in delaying tactics (not least due to the relatively short period in which DISH needs to start moving ahead on deployment), DISH will very probably need help from the FCC to push AWS-3/4 interoperability forward. However, if DISH is seen to have gamed the auction rules and secured an unwarranted multi-billion dollar discount, it will be far more difficult for the FCC to help out DISH on interoperability over AT&T and Verizon’s objections.
That might in fact be AT&T and Verizon’s ultimate goal: box DISH in with no possibility of a deal with T-Mobile or Sprint to put its AWS-4 spectrum to use, and wait for Charlie to cry uncle when he runs up against his AWS-4 buildout deadlines. Note that it is pretty much a foregone conclusion that the 4 year interim deadline to cover 40% of the population in each Economic Area by March 2017 will be missed, which will bring forward the final 70% coverage deadline to March 2020 (the timeline was extended to 8 years as part of the H-block deal in December 2013, but one year will be deducted if the interim deadline is not met).
Thus if DISH is unable to reach lease agreements with T-Mobile and/or Sprint for an AWS-4 buildout by the first half of 2017 at the latest (which will require interoperability to be secured in the next 18 months or so), Ergen will be under considerable pressure to moderate his price demands for a sale to Verizon or AT&T. As a result, AT&T and Verizon may win even more if DISH keeps the DE discount, than the $3.3B that DISH loses if the discount is rejected.
In the wake of Globalstar’s TLPS demonstration at the FCC in March, it seems that the company has gone all in to push for an order approving TLPS in line with the rules proposed in the November 2013 NPRM. Indeed, Globalstar now seems to be losing patience, telling the FCC last month that “it is time for the Commission to move forward with an order in this proceeding” and that “it would also be bad policy and bad precedent for the Commission to require additional test data for every potential deployment scenario that would be possible under the Commission’s proposed TLPS rules.” Globalstar has also taken the decision to ignore short sellers, such as Gerst Capital, who raised additional questions about potential interference with Bluetooth.
In contrast, it seems Iridium is trying to appear as more reasonable by scaling down its L-band spectrum proposal to only involve sharing of the band, while WiFi and Bluetooth interests are requesting more testing and hinting at a possible compromise where the operating parameters of TLPS are further restricted (though it is clear that both would like to delay any order on TLPS indefinitely).
Now that LTE-U/LAA has emerged as a major concern for users of unlicensed spectrum (and an issue for the FCC), due to the potential to crowd out existing applications, the freedom that the existing NPRM proposal would grant Globalstar to shift to a supplementary LTE downlink configuration (if that ultimately provided the best opportunity for monetization) brings additional complications to the FCC’s decision. And Google has also weighed in, presumably because it sees TLPS as a potential rival ecosystem to its work to open up additional small cell spectrum in the 3.5GHz band.
The FCC has not yet given much of an indication about how it will act, although it is notable that NPRMs which confer a substantial benefit on a private company often involve additional compromises to benefit the public interest (as happened with DISH’s AWS-4 order, which, over DISH’s vigorous objections, changed the uplink OOBE limits to ensure the PCS H-block could be auctioned). However, in late April an unnamed FCC official told Bloomberg that “The Commission will consider the results [of the demonstration] in determining what next steps may be appropriate in the pending rulemaking.” The mention of next steps in the plural is particularly intriguing, since issuing an Order to conclude the rulemaking at this point would only require a single step.
Globalstar continues to maintain in investor presentations that “process completion/TLPS authority” is “expected shortly”. That appears to assume that the FCC rejects the demands for more testing of TLPS and simply moves forward with the NPRM as written, since we have not yet seen any evidence of potential compromises (such as for example a response to Iridium’s latest proposal). As I noted at the beginning of this post, this looks to be a high risk approach: if Globalstar doesn’t get what it is asking for, and doesn’t proactively offer to move forward with additional testing and/or other compromises, then any resolution of this matter is going to be delayed for many months, possibly even beyond the end of 2015.
At last week’s Satellite 2015 conference, considerable attention was focused on new LEO constellations, most prominently OneWeb, whose founder Greg Wyler made a keynote speech to introduce the system and a couple of mockup terminals. Although many doubts exist about the feasibility of the OneWeb system (particularly with regard to the very ambitious cost estimates and the plausibility of building a profitable global Internet access business), its clear that OneWeb is moving aggressively to try and secure funding and sign a contract for satellite construction with one of five bidders in the next month.
Much less was said at the conference about SpaceX’s proposed 4000 satellite constellation, which Elon Musk announced in January with a half-baked speech in Seattle, which included many off-the-wall and some completely incorrect statements (such as that Teledesic “were trying to talk to phones”). Back in January, Google’s investment of $900M in SpaceX was seen as initiating a partnership to launch this new satellite system. However, at Satellite 2015, SpaceX made clear that the satellite venture was in the “very early stages” and Google’s investment was “not for the global internet project we’re exploring right now.”
A logical conclusion to draw, given Musk’s usually impeccable technical depth and the later change in description of Google’s investment, is that the announcement of the SpaceX constellation was rushed out in order to overshadow Wyler’s announcement of the much more modest investment he had secured from Qualcomm and Virgin.
However, what SpaceX has already done (on March 2) is make a filing at the FCC, which “support[ed] the extension of proposed changes to the Commission’s ITU coordination procedures to NGSO systems to encourage such filings through the U.S. administration”. SpaceX noted that there were “incentives for foreign administrations to pursue NGSO broadband satellite filing strategies that effectively block access to available spectrum and orbital resources” in contrast to the FCC’s “modified processing round” approach.
SpaceX proposed that licensees also be required to launch and operate a percentage of the authorized number of satellites (such as 5%) within 3.5 years and then 75% of the authorized satellites within 6 years, rather than the current milestones of 1 satellites then the entire constellation. In addition, it was proposed that the initial milestones for contracting for, and beginning construction of, the satellite constellation should each be shortened by 6 months.
All of these proposals are clearly intended to make OneWeb’s life more difficult. However, the more important subtext of SpaceX’s submission is that it would clearly like to be subject to the FCC rules, which mandate a sharing of both Ku-band and Ka-band NGSO spectrum between all entrants, regardless of ITU filing priority, based on avoidance of inline interference events.
Under these rules, the spectrum is split in half when two satellites from different systems are inline with one another and would therefore interfere with terminals at a particular location on the ground, and the first system to launch simply gets to indicate which (fixed) half of the spectrum it will use during these inline events. Given the large number of satellites that SpaceX and OneWeb both propose to launch, this splitting of the spectrum would happen almost all the time, and therefore for all intents and purposes, OneWeb would lose access to half of the Ku-band NGSO spectrum once both systems were operational.
Some have argued that OneWeb could simply rely on its ITU priority and not seek a license from the FCC. However, its hard to imagine that ignoring the US market is practical, given that the vast majority of the world’s satellite broadband subscribers today are in North America, and OneWeb has expressed its ambitions to provide inflight connectivity services, when most equipped aircraft are also based in North America. Moreover, if as many suspect, one of Qualcomm’s reasons for investing in OneWeb is to gain access to spectrum that could eventually be authorized for terrestrial 5G use (just like the ATC applications by LightSquared, Globalstar and others for 4G in the L-band and S-band), it is hard to imagine trying to pursue such an approach through any administration other than the FCC.
While it might be more difficult for the FCC to enforce its mandated allocation on systems licensed through other administrations when they are operating outside the US (notably Globalstar licensed its second generation constellation through France for precisely this reasons, after the FCC reallocated some L-band spectrum to Iridium), mutually assured destruction could potentially result if a US-licensed system decided to transmit in half of the spectrum in accordance with US rules, wherever its satellites were operating around the globe. (Note that, in contrast, Iridium and Globalstar have reportedly not noticed any interference from the two systems operating at relatively low levels of loading in the portion of the L-band spectrum that the two operators share.)
With OneWeb looking to close an investment round of between $300M and $500M in April, and start manufacturing satellites, it would therefore not be in the least surprising if SpaceX decides to ask the FCC to initiate an NGSO processing round in the very near future (perhaps in both the Ku-band and Ka-band) as a way of impairing OneWeb’s ability to move forward, and perhaps even preventing the investment round from closing. Musk certainly seems to have decided that he wants to destroy Wyler’s project (perhaps because he doesn’t like any potential imitator as a publicity-seeking space entrepreneur), and it is notable that the Steam filings, through Norway, which are generally believed to be controlled by SpaceX, were received at the ITU on June 27, 2014, when Wyler and Musk were still in discussions about potential collaboration.
The effects of an FCC processing round would be to delay any regulatory certainty about NGSO spectrum allocations for at least a year and possibly much more, while the FCC decided whether to confirm its existing rules for spectrum sharing, and it became clear whether this approach would be adopted elsewhere. There could also be some notable knock-on effects from any Ka-band processing round on O3b, whose FCC authorization specifically states that O3b’s use of the NGSO Ka-band spectrum is “subject to the sharing method specified in Establishment of Policies and Service Rules for the Non-Geostationary Satellite Orbit, Fixed Satellite Service in the Ka-band, Report and Order, IB Docket 02-19, 18 FCC Rcd 14708 (2003) and 47 C.F.R.§ 25.261.”
Thus the FCC has mandated that O3b must share its existing NGSO Ka-band spectrum with future systems, and the launch of a new large NGSO Ka-band system (which might include SpaceX’s constellation, if it operates in both Ku- and Ka-band) could have a meaningful effect on O3b’s operations in the future, whether O3b complies with the FCC ruling or withdraws from operating in the US in (what might end up being) a futile attempt to evade these constraints.
Despite it coming as a “surprise” to many reporters (and Wall St analysts) that DISH ended up with more total winning bids (before DE discounts) than Verizon in the AWS-3 spectrum auction, and that DISH got a 25% DE discount on its bids, the outcome is exactly what I predicted from the bidding patterns back in November. I was particularly amused to look back at Jonathan Chaplin’s comment from his December 7 report which poured scorn on my thesis, stating:
Some have suggested that DISH is distorting prices by bidding against themselves (DISH has three bidding entities that can’t communicate with each other during the auction). While possible, this is highly, highly unlikely.
[As a reader suggests, perhaps I should take this opportunity to note Chaplin's follow-up proposal on January 11 that DISH should do a LightSquared and set up a wholesale capacity business generating $10B per year. While possible, this is highly, highly unlikely.]
Its useful to examine exactly why DISH was so successful in driving up the price of the AWS-3 paired spectrum to a price far beyond anyone’s expectations. One of the key objectives for a bidder in the early rounds of an auction is to discover the amount of spectrum that its rivals are looking to acquire (only later does it become possible to discover how much they are prepared to pay for that spectrum). The price usually rises fastest in the key cities and then as the mix of demand becomes clear, bidders can switch over to second tier licenses knowing roughly how much spectrum they will end up being able to win.
We know that AT&T was looking to buy a paired 10MHz block, and it seems likely that Verizon would have been seeking roughly the same. Meanwhile T-Mobile wanted to selectively pick up one or two paired 5MHz blocks. If DISH hadn’t been bidding then everyone could have got what they wanted at close to the reserve price. However, adding DISH to the mix meant that the four key players were trying to buy more than the 2x25MHz of paired spectrum that was available.
More importantly, DISH was bidding through three separate entities and instructed them to bid on all the licenses simultaneously in key cities, to ensure that AT&T, Verizon and T-Mobile simply didn’t know how much spectrum each other and DISH were looking to buy.
The chart below shows the bidding patterns for the G, H, I and J blocks in New York (the G block is a smaller 2x5MHz CMA license, while the H and I blocks are 2x5MHz BEA licenses and the J block is a 2x10MHz BEA license).
We can see that all three DISH entities bid on every one of the New York paired license blocks they weren’t already holding all the way through Round 15, by which time the total combined gross price had reached $2.81B ($2.28/MHzPOP). In fact, it wasn’t until Round 18 (when the price reached $3.81B or $3.12/MHzPOP) that DISH’s bidding on these licenses began to slow (and SNR even overbid its own winning bid in Round 17).
[Incidentally, DISH's 3 entities combined were the biggest bidder for much of the auction, notably as late as Round 63, where they held $14.7B of gross PWBs or 35% of the $41.6B total, compared to $12.6B for AT&T, $10.5B for Verizon and $2.1B for T-Mobile. When the reserve price was met in Round 13, DISH held a total of $5.4B of PWBs, 44% of the $12.3B auction total at that point in time, compared to only $2.7B for AT&T, $2.1B for Verizon and $1.3B for T-Mobile.]
DISH clearly wrote the instructions to its DEs very well, because in the end there were very few cases where the final winning bid from SNR was topping an existing bid from NorthStar or vice versa (the largest license I’ve seen where this happened is the B1 unpaired license in Tampa BEA034 which sold for $21.4M before the DE discount). And it does seem that DISH complied with the letter of the rules: even though the FCC still needs to rule on whether the DE discount should be granted, it seems unlikely the FCC would want the auction to descend into chaos (which could theoretically result in a re-run).
However, its clear that the rules for future auctions will need to be rewritten significantly – I would expect severe restrictions on DE discounts and common ownership of different bidding entities at the very least. Indeed, it will now be very difficult to come up with a workable structure to advantage smaller operators like Sprint and T-Mobile in the incentive auction next year.
Where does the outcome leave us? Ergen did not buy a readily deployable collection of spectrum, instead seeking a blocking position in key cities (including New York and Chicago) in an attempt to force other operators to make a deal with him. Interestingly, most of DISH’s paired AWS-3 spectrum is in the G block, which is adjacent to and perhaps more quickly usable with the AWS-1 spectrum band, rather than being aggregated directly with the adjacent AWS-4 downlinks in the longer term like the J block. DISH also acquired most of the unpaired uplink blocks, which appears to be a hedge against the potential (and now perhaps likely) loss of LightSquared.
However, with AT&T winning enough AWS-3 to meet its spectrum needs (and make it highly indebted) for the next few years (not to mention AT&T’s ownership of DirecTV which makes a tie-up with DISH very difficult), it seems clear that Ergen is setting his sights squarely on a deal to sell DISH (or perhaps more likely lease its spectrum, given the difficulty of reaching agreement on a sale price) to Verizon.
So now, as I pointed out in November, the key question is whether Sprint will take this opportunity to satisfy Verizon’s spectrum needs through a sale of 2.5GHz spectrum? Given everyone in the industry is fed up with Charlie, that certainly seems like a plausible next step.
The AWS-3 auction has finally closed today, after lasting far longer and attracting much higher bids than anyone thought possible. So now we are confronted with a flood of headlines saying the auction “has raised” $44.9B.
Of course that is not true. The total of Provisional Winning Bids is $44.9B. But look carefully at the FCC’s own blog post about the auction results. This blog post indicates the auction raised $7B for public safety, $300M for research, $115M for grants, funding for relocation (estimated at a total of $5.1B before the auction), plus “more than $20 billion” for deficit reduction.
So by my count that totals $32.5B. How can that be when the winning bids totaled $44.9B? The answer is that total amount raised will be reduced by any discounts accruing to Designated Entities, who are entitled to a 25% discount. And we know that Ergen is backing two DEs (SNR and NorthStar) in the auction. While the FCC is not going to give an exact figure for the amount raised, until they announce the winning bidders tomorrow (Friday), why wouldn’t the FCC have trumpeted “more than $30B” or even “more than $25B” raised for deficit reduction if they could make that statement? (Note: Walt Piecyk believes it is because the original 2012 legislation projected $20.4B would be available for deficit reduction).
If the amount raised for deficit reduction is less than $30B then that puts the DE discount at more than $2.4B, implying the DEs won more than $9.6B of PWBs and spent more than $7.2B net. If the amount raised for deficit reduction is less than $25B then that puts the DE discount at more than $7.4B, implying the DEs won more than $29.6B of PWBs and spent more than $22.2B net. And no-one has come up with a plausible case for any DEs other than those backed by Ergen to have billions of dollars available to spend on spectrum.
So it looks like Ergen is going to come out with what’s very likely more than $10B in PWBs and perhaps even $20B+ in PWBs before his 25% discount. That would be a severe disappointment to those who believe that there is unprecedented demand for spectrum, because the result will have been dictated by Ergen’s desire to corner the spectrum market, taking advantage of a windfall discount granted him by the FCC. It would certainly contradict the consensus of Wall St analysts, who apparently can’t conceive of Ergen actually wanting to bet the company on buying up spectrum.
UPDATE (1/30): The FCC has now released the full results, confirming that the final total of net winning bids is $41.3B, with $3.3B of the $3.5B in DE discounts accruing to SNR and NorthStar (i.e. DISH). That means that the amount raised for deficit reduction is less than $30B (actually just under $29B) and we are certainly set for a battle over whether DISH’s “small business” discount is warranted. The results also basically confirm my guesses about the double bidding in Round 36 and elsewhere, where SNR and NorthStar both bid for the license, but their opposition was AT&T, not Verizon as I (and others) thought at the time.
Of course, Ergen’s discount is going to raise massive protests from Verizon and AT&T and its interesting to note that the FCC blog post also stated that “Our team in the Wireless Bureau will thoroughly review and scrutinize each application to assure that granting each license is in the public interest and, where applicable, that each applicant has complied with the Commission’s bidding credit rules.”
Even if Ergen is successful in retaining his discount (and if he doesn’t then the whole auction may fall apart) then this result (as I predicted back in November) may lead Sprint to ally with Verizon and AT&T to isolate DISH and make sure no-one needs to lease Charlie’s spectrum. After all, we’ve already seen Sprint’s CEO indicate he is looking to sell off some of the 2.5GHz spectrum.
Recently we’ve also see Ergen demanding LightSquared pay him off in cash, in exchange for agreeing to the bankruptcy plan, and if he is going to spend $10B or more for AWS-3 spectrum, then that cash may be needed to fund the DEs.
UPDATE (1/30): DISH also won most of the unpaired uplink spectrum in the AWS-3 auction, so it may not need LightSquared’s spectrum (which in the near term most likely consists of unpaired uplinks) in any case.
Will Charlie’s all-in bet pay off? What will be the next piece of his strategy to monetize the spectrum? DISH won’t be able to give any details until after the downpayment deadline (10 business days after the results are announced). But we will have plenty of time to speculate, and tomorrow should be a very interesting day.
If I’m right and DISH is determined to win a significant AWS-3 spectrum position at the end of the auction, then it seems highly likely that one or both of AT&T and Verizon will leave the auction with a significant shortfall in AWS spectrum in major cities including New York, Los Angeles and potentially several other markets.
Then it seems Ergen’s calculation is that he will have significant leverage to force AT&T and Verizon to deal with him and lease spectrum on his terms (including supporting interoperability for his AWS-4 spectrum holdings). However, one way for AT&T and Verizon to freeze Ergen out and avoid having to make a deal would be for them to instead purchase 2.5GHz spectrum from Sprint. Its plausible that Sprint could raise as much as $10B relatively easily from selling say 30MHz to each of AT&T and Verizon, leaving Ergen holding an asset with no clear route to monetization and a buildout deadline which will start to become a pressing concern within a year or two (especially if DISH has not yet standardized the AWS-4 band).
So does Masa Son want to boost DISH’s position at the expense of AT&T and Verizon, or would he like to get revenge for DISH’s actions in the Sprint & Clearwire bidding wars last year? If DISH is stuck with billions of dollars of spectrum it can’t lease, then DISH will be disadvantaged in mounting a competing T-Mobile bid, when Sprint renews its attempts after the 2016 Presidential election, because DISH will struggle to raise as much cash and DT will be reluctant to accept shares whose value is based primarily on spectrum assets with limited utility (remember that T-Mobile isn’t in a position to create an ecosystem for AWS-4, unlike AT&T and Verizon).
In fact, Sprint could point to DISH’s reserves of spectrum as providing the basis of a new competitor in the wireless market, and could even gain the tacit endorsement of AT&T and Verizon for a purchase of T-Mobile. In addition, by selling some spectrum now, Sprint raises money to participate in the 600MHz incentive auction (where DISH may not have the resources to compete) and gets out from under the spectrum screen limitation. So it might well make sense for Masa to make a choice which boosts AT&T and Verizon, rather than cooperating with DISH.
Incidentally, another side-effect of the AWS-3 auction prices is that Phil Falcone is now scrambling to get back into the LightSquared reorganization plan, as his argument that LightSquared’s spectrum should be valued at more than the debt gains support from these price benchmarks. For example, the unpaired uplink 10MHz B1 block (1700-1710MHz), currently valued at almost $1.3B, will be used to argue that LightSquared’s two 10MHz uplink blocks alone are worth double this sum. So the obvious counterstrike from Ergen is likely to be to try and blow up the reorganization plan and force LightSquared into liquidation.
I understand conversion to Chapter 7 would invalidate the Inmarsat Cooperation Agreement, and thereby make it much harder for anyone to take on the risk of buying LightSquared’s assets. Of course, that is unlikely to worry Ergen (he would be expected to take a hard line with Inmarsat in any case), and would provide an opportunity to potentially buy LightSquared’s satellite assets for considerably less than the value of the LP debt and boost Ergen’s attempts to corner the spectrum market. As one person close to the case told me, such an outcome would literally make Judge Chapman cry.
UPDATE (11/26): Another interesting question is the status of the 650M MHzPOPs of EBS spectrum (38MHz) that NextWave holdco controls in New York City. I would expect hectic bidding to secure access to that spectrum, if DISH turns out to be the winner of much of the AWS-3 spectrum in New York. Of course, Ergen has likely already thought of that, and I’d speculate that he might even have locked up an agreement to buy that spectrum block in advance of the AWS-3 auction, making it harder for Verizon and AT&T to address their potential spectrum shortfall in the New York market.
That seems to be a pretty good summary of what Charlie Ergen has told SNR and NorthStar, the Designated Entities (DEs) which appear to be doing a lot of the bidding in the AWS-3 auction. We’re still seeing multiple bids on the New York and Los Angeles J block licenses (which are now priced at over $3.6B for just these two licenses), and so its possible that DISH’s DEs may now hold in excess of $10B of Provisionally Winning Bids (PWBs) between them.
Its interesting to note that because Ergen is a designated bidder for American AWS Wireless I LLC (the DISH subsidiary), he wouldn’t be allowed to communicate with either SNR or NorthStar during the auction. So they must be bidding in line with instructions he gave them previously, and he can’t change course in the middle of the auction, if bidding has gone well beyond what even he expected. Ergen could have set a limit on the $/MHzPOP that he is prepared to pay for a single license and/or an overall dollar cap on bidding, but it looks like neither of those factors have been affecting the bidding to date. That suggests to me that Ergen is more likely to have imposed an overall dollar cap, which could perhaps be as much as $8B to $10B each, before the 25% discount on the PWBs that each DEs is expected to receive.
A plausible bidding strategy for each DE, which requires no communication after the auction starts (and seems to roughly accord with what happened after DISH likely switched to the unpaired spectrum in Round 17), could then be something like:
Bid in every round until you see high activity in the unpaired spectrum (a sign that DISH has switched away from the AWS-3 blocks), then defend what you have, no matter what the price of each license. When you reach the overall dollar cap, drop the G block licenses first, then the H and I blocks, but keep the J blocks.”
So now the question is whether, with a weekend to think about it, AT&T and Verizon decide to leave Ergen holding the J-block licenses in major cities. Is there a point at which DISH becomes so financially stressed by the burden of spending perhaps $15B on spectrum, that it is in a weaker position after the auction than it was before (e.g. with insufficient resources to bid for T-Mobile or build out its spectrum)?
Does it matter if AT&T and Verizon are unable to deploy as much AWS-3 spectrum in major cities as they wanted? How much leverage can they exert at the FCC if DISH fails to build out these licenses? And should AT&T or Verizon force up the price of the unpaired spectrum to a level which puts the Ergen-led LightSquared reorganization plan in jeopardy? We’ll see in the next few days whether AT&T or Verizon are able to play Ergen at his own game.
UPDATE (11/23): Thinking further about the end-game, it looks to me like the mysterious spin-off of DISH’s spectrum, mentioned briefly by Ergen in the Q3 results call, is the likely way forward if one of the DEs is successful in acquiring a large block of spectrum. DISH could inject its existing spectrum assets into this entity and raise debt against the combined spectrum portfolio. Then (given the FCC rules against selling DE spectrum for at least 5 years), DISH would have a standalone entity it could spin-off to shareholders, and could lease or all of its spectrum holdings to the major operators, just like Grain Management.
UPDATE (12/1): Round 38 saw another apparent “tell” from DISH with the bidding on the New York I block: 2 new bids were submitted for a price of $1.316B, when the identical H block could have been secured for only $1.235B. Its implausible that either Verizon or AT&T would have bid for the I block at this price unless they already held the H block and wanted to double up. But equally well, its impossible for both of them to already be holding the H block, and only the holder of the H block would want to bid a higher price than necessary for the I block. So the only logical scenario under which 2 bids could have been submitted for the I block is if DISH holds the H block and both its DEs were bidding to add the I block, potentially sending a “signal” to AT&T and Verizon that DISH is determined to capture both blocks (and preserving eligibility for both DEs for when the FCC moves to the second stage of the auction). Note also that a similar single bid in Round 40 for the New York H block (after several rounds with no bids) was followed by a double bid in Round 41 (albeit at a lower price than the I block).
If we go back a few rounds then we can see many instances of these paired bids in New York, Los Angeles and a few other major cities. Until now I had assumed this simply to be a sign that DISH was competing with both AT&T and Verizon. However, now I think that quite possibly only one of AT&T and Verizon is competing very actively for the paired spectrum blocks. Most likely that would be Verizon (who can put AWS-3 to use more quickly as supplementary downlink for its AWS-1 holdings), with AT&T perhaps switching to the unpaired uplink B1 block, where DISH appears to be facing unexpectedly intense competition.
Notably, we can also see that there were two bids for the New York J block in Round 36 (after 1 bid in Round 35 and 2 bids in Round 34), followed by a single bid in Round 37 and no other bids thereafter. That sequence may indicate that Verizon finally forced DISH to relinquish the J block in Round 37. However, the fact that DISH’s DEs both appear to have enough eligibility to still be bidding for such a large license (when only one could be the winning bidder in any round) at that stage also suggests that DISH must hold a very significant share of the major city licenses. So the question now is just how far Verizon will need (and is prepared) to go in order to capture the remaining licenses it wants to secure.
After the AWS-3 auction reached its reserve price of $10.066B for the 50MHz of AWS-3 spectrum (1755-1780MHz uplink/2155-2180MHz downlink) in Round 12, the most notably feature of the auction so far has been in the high level of bidding activity for the largest cities, such as New York and Los Angeles. As shown in the table below, in the first 12 rounds, there were up to 8 bids per round for the three main (BEA) licenses in these cities, implying that multiple players other than the major operators (AT&T, Verizon and T-Mobile) were bidding.
By now it would have been expected that the three operators would sort themselves out and bid on a self-selected subset of licenses (e.g. AT&T for 20MHz in H+I, Verizon for 20MHz in J and T-Mobile moving to the smaller CMA G-block license as it did successfully in the AWS-1 auction in 2006). However, it appears that this has all been disrupted by DISH’s desire to drive up the price. DISH has presumably concluded, logically, that the major operators will have to buy the New York and LA licenses (plus a few other places such as Chicago, Washington, Boston, San Francisco and Dallas) whatever the cost, so has been bidding simultaneously across all of the main licenses in these cities.
Uniquely amongst the participants, DISH is also part of three separate bidding consortia: American AWS-3 Wireless I LLC, Northstar Wireless, LLC and SNR Wireless LicenseCo, LLC. Given Ergen’s interest in pushing up the price that the operators have to pay, it would not be in the least surprising if all three have been bidding simultaneously against one another for all of these licenses. The resulting higher level of bidding activity would potentially sway the decisions of AT&T, Verizon and T-Mobile, making them think they face more competition from each other than is actually the case, and thereby persuading them to bid more than they originally expected. After all, if AT&T thinks Verizon wants all 50MHz and Verizon thinks the same about AT&T, they are both likely to bid more aggressively, since both will think they had underestimated how valuable the spectrum is.
What happens next? DISH could potentially have instructed each bidding consortium to cease bidding at the same level, minimizing the risk that it would be stuck with licenses it didn’t actually want. That wouldn’t require any coordination, merely setting a near identical budget/price limit for each of the three consortia. Then I’d expect a sharp drop in bidding activity, probably later today or tomorrow, when DISH reaches its desired price point (to provide a high comparable for its other spectrum holdings) and probably switches to buy the 1695-1710MHz unpaired uplink block, where to date the price has lagged significantly due to a lack of competitive bidding. Recall that this unpaired uplink block is one of the best comparables for LightSquared’s valuation (where Harbinger is arguing that the 20MHz of uplink should be worth up to $5B), and so its clearly in DISH’s interests for the end price to be little more than the $580M reserve price (for 15MHz of spectrum).
Of course, DISH is in a win-win position: if Verizon, AT&T and T-Mobile bid up the price of AWS-3 then Ergen can claim his AWS-4 spectrum is worth even more, but if they call his bluff and leave DISH owning the key licenses in major cities (that will be needed as part of any AWS-3 rollout), then Ergen can demand interoperability for his current AWS-4 spectrum as a condition of selling the spectrum to those operators.
If this is actually what is happening, then I’d expect criticism of how the FCC has enabled DISH to game the system (by participating in multiple consortia), just like there was criticism of their decision to auction off the H-block earlier this year in what some likened to a “retail sale” to DISH. However, the result will be the opposite to the H-block, which only just reached the reserve price, because in this case the auction revenue will be significantly higher than expected. Nevertheless, I’d expect mobile operators to be even less enamored of DISH than they were already, because Ergen will have just cost them billions of dollars they didn’t want to spend, just like he cost Masa Son billions of dollars by forcing him to raise the price that Softbank paid for Sprint and Clearwire last year.
UPDATE (11/20): It seems that I may have been right, because the FCC announced on Tuesday afternoon that the reserve price of $10.066B was met for the paired spectrum blocks at the end of Round 13:
At the conclusion of Round 13, the provisionally winning bid amounts, net of any applicable bidding credit discounts, for the paired 1755-1780/2155-2180 MHz licenses (the licenses in Blocks G, H, I, and J) exceeded $10,0660,326,600, thus meeting the aggregate reserve price for these licenses in Auction 97.
However, at the end of Round 12, the total of Provisionally Winning Bids (PWBs) in these bands was already $10.375B. The PWB is calculated before bidding credits (of 25% for a small business) are applied. Thus holders of bidding credits must have held sufficient licenses for the total of net bids to still be below the reserve price (i.e. had bids with the 25% discount valued at more than $311M). That means these small bidders held licenses valued at more than $1250M at the end of Round 12.
Two of the three DISH entities (SNR and Northstar) both sought 25% bidding credits (despite apparently having credit agreements with DISH to fund their bids) so it appears likely that they were bidding aggressively throughout this period. Then we apparently saw DISH move its own bids over to the unpaired spectrum in Round 17, leading to a reduction in the number of bids for the large metro licenses. Given their use of bidding credits, it would not be at all surprising if SNR and Northstar emerge still holding billions of dollars of spectrum, funded by DISH, and it would be logical to take this approach (if DISH buys the unpaired spectrum at close to the reserve price, then it would have gained no benefit from using bidding credits, since the reserve price has to be met by the net bids). Of course the availability of bidding credits will probably also be a cause for further criticism of DISH’s apparent moves to game the system by pushing up the prices paid in the auction.
I’ve just released my new 69 page Globalstar profile, analyzing both Globalstar’s MSS business and their spectrum valuation and potential partnerships. Over the last month its been interesting to observe the rather hyperbolic comments from both supporters and opponents of the company, and unfortunately those on both sides appear poorly informed about the potential value of the TLPS spectrum and the growth of the MSS opportunity.
In the MSS business, its crystal clear that growth has fallen far short of expectations in the business plan presented to COFACE in summer 2013, and it is expected that Globalstar will need to make equity cures to address an EBITDA shortfall in 2015, and perhaps even at the end of this year. However, those amounts will be modest, nothing like the $200M raised by Iridium earlier this year, and so there is no need for concern that MSS challenges will disrupt Globalstar’s attempts to monetize its spectrum in the next year or two.
Nevertheless, it seems unlikely that the new Hughes-based devices will dramatically change this picture: MSS terminals offering WiFi links to smartphones but no standalone functionality have generally been fairly unsuccessful in comparison to self-contained communications devices (compare SPOT Connect vs SPOT or the original inReach vs inReach SE/Explorer), and low price terminals/consumer distribution channels have not altered the dynamics of the handheld market very much (for example, the SPOT Global Phone has not changed Globalstar’s business prospects materially). Its also little use selling a new device for $100 if the customer still has to choose from the existing handheld airtime plans (which have a four times higher ARPU than SPOT). So overall, we don’t expect Globalstar’s MSS business to generate enough value to match the $1B invested, or even the current COFACE debt.
While the MSS picture may not be encouraging, I’m more positive about Globalstar’s TLPS opportunity. It’s clear that Globalstar’s spectrum does have potential value to partners, since Globalstar came close to a deal with Google in early 2013, and we suspect a deal with a different partner was almost reached earlier this year. I also expect the FCC to approve TLPS without material concerns, although it seems likely to come in Q1 not Q4, and may involve giving up some L-band spectrum to Iridium, as happened in the past when Globalstar was seeking ATC authority.
The key question is therefore whether a partner can now be secured who will pay a substantial sum for access to the spectrum, from a limited universe of possibilities in the service provider category. Equipment and infrastructure providers are more likely to want to make money from selling equipment to Globalstar (and its service provider partner), than to pay Globalstar for access to the spectrum. The second question is then what the appropriate valuation would be if a deal can be struck: based on comparable valuations for high band spectrum and the alternative sources of spectrum out there (including AWS-3) it is hard to believe that anyone could seriously envisage a $6B or $10B valuation for TLPS. However, the debate should be about what Globalstar’s spectrum is worth, not whether it is worthless.
All of these issues are discussed in more detail in the report: we give specific forecasts for the MSS business by product through 2018 and explain what we believe to be the most appropriate valuation benchmarks for TLPS and who is now the most likely partner. Contact us if you’re interested in more information.
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »