As I predicted last week, TLPS missed its chance for approval on April 22, despite Jay Monroe being convinced that it was in the bag when he presented at the Burkenroad conference earlier that day. He presumably had been assured of that by Globalstar’s General Counsel, Barbee Ponder, who thought they had answered all the FCC’s questions in late March and seemingly didn’t bother to follow-up after that point.
Now today we have seen an experimental license filing from Microsoft to test TLPS in Redmond, WA. Microsoft’s application states:
“Microsoft will test terrestrial operations in the 2473-2483.5 MHz unlicensed band and the adjacent 2483.5-2500 MHz band, consistent with Globalstar Inc.s proposal to operate a terrestrial low-power service on these frequencies nationwide (see IB docket no. 13-213). Microsoft seeks to quantify the affect [sic] of such operations on the performance and reliability of unlicensed operations in the 2.4 GHz ISM band.”
The application also includes the incidental admission that Gerst is correct that the Ruckus APs have been modified (by removal of coexistence filters) from the approved versions (the testing will include “the use of an intentional radiator in the 2473-2483.5 MHz unlicensed band that has not received an equipment authorization as ordinarily required under 47 C.F.R. § 15.201″) although it should be noted that Microsoft plans to use different APs from those in Globalstar’s own tests, including a consumer model which was one of Microsoft’s primary concerns.
The duration of the experimental license is requested to be 6 months, from May 23 to November 23, suggesting that we may not see results until the fall. This could perhaps permit FCC consideration of the results after the November election if Microsoft identified no problems whatsoever (or if the FCC sets a hard deadline for further testing, though as noted below Bloomberg is reporting that the initial authorization will last at least a year), but more likely it will set the scene for additional back and forth between Globalstar and its opponents in the period before the next FCC Chairman gets his or her feet under the desk in spring 2017.
UPDATE (5/13): Despite Microsoft’s experimental application, Globalstar’s TLPS proposal has finally made it onto the FCC’s circulation list this afternoon. That raises the question of whether Microsoft’s application was made with Globalstar’s cooperation (as I had assumed) or if Microsoft anticipated the issuance of an order that all sides acknowledged would require more testing and simply jumped the gun in preparing to conduct its own testing after that point (which now seems the most plausible explanation).
So now the focus will shift to what this order contains. It seems to basically be taken for granted that there will be increased sharing of L-band spectrum with Iridium (though that would come in a separate parallel ruling by the International Bureau on delegated authority) and that additional power limits will be imposed as an interim measure, probably at a 200mW level. Bloomberg is also reporting that there will be constraints on the number of APs that may be deployed, with a limit of 825 in the first year, and “the FCC will assess whether they cause interference to other services”. However, prior to the rejected deal last summer the FCC also contemplated changes to the OOBE restrictions that would permit increased use of Channels 12 and 13 by terrestrial users, and it will be interesting to see if these changes are still present, or if they have been modified, perhaps due to concerns about possible impacts on Bluetooth LE users in the upper part of the unlicensed spectrum.
So now the Kerrisdale report has been released, along with a prebuttal from Citigroup, claiming that Kerrisdale is “Absolutely Not a Thesis Changer”. However, as I noted last week, the biggest issue in thinking about the future for DISH is likely its capital structure, which neither of the reports address at all.
I also wish that both of them were better at math, when they try to assess whether today’s wireless networks are operating at capacity (though perhaps its hardly surprising when these calculations have been a recurring problem for New Street Research, CTIA, the FCC, Ofcom and even the ITU). Citi criticize Kerrisdale for considering New Albany, Ohio as a representative location, given its lower than average population density amongst US metropolitan areas (suggesting that 1000 people per sq km is more representative than 258 people per sq km), and also allege that Kerrisdale “ignores the variance in usage during the day” (suggesting that 40% of traffic needs to be accommodated in each of the 2 hour long morning and evening rush hours).
By making these adjustments, Citi claims that average utilization with a 25MHz downlink spectrum allocation would be 280% in the morning and evening peaks, compared to the 15% daily average estimated by Kerrisdale. Of course Citi exaggerate on the upside and Kerrisdale exaggerate on the downside.
The correct calculation for a “typical” situation should take the average number of subscribers per cellsite (144M subs on 48.6K cellsites for Verizon, according to Citi’s own report, or 2965 subs/site, compared to 1773 in Kerrisdale’s report and 7092 subs/site in Citi’s report) and the average busy hour ratio for mobile traffic (6.9% according to Cisco’s Feb 2016 VNI report which says the busy hour has 66% more traffic than average, although carriers typically build to around an 8% busy hour, perhaps 9%-10% in very peaky locations) and should also derate by the share of traffic carried on the downlink (around 87% in the US according to Sandvine), which neither report takes into consideration.
That would result in a daily downlink traffic of around 258GB per site (vs 177GB for Kerrisdale and 709GB for Citi) and a busy hour traffic of 17.8GB rather than the 142GB estimated by Citi. Then, using their own assumptions about capacity per site, each site would see a busy hour utilization of 35%, not 15% and certainly not 280%, suggesting that there is some headroom on most cellsites, just as you would expect, but that carriers will need to continue to upgrade their networks in years to come, to cope with future traffic growth, especially in peak locations.
That brings us back to my original thesis: Verizon might find DISH’s spectrum useful, but its network is not in danger of imminent collapse without it. Instead Verizon might prioritize increased use of small cells, sectorization and beamforming, and treat buying spectrum as the last thing to do, as Bob Azzi (former Sprint CTO) suggested on today’s Tegus call that I participated in.
This is a poker game, and if Ergen can prolong his license term (by building out fixed wireless broadband, as all of the call participants agreed would be logical) then he may be able to wait for Verizon to come to the table. If DISH can push up the price of spectrum in the incentive auction and prevent LightSquared/Ligado from offering a midband alternative then Ergen will be in a stronger position. So it seems more logical to me to talk about where that money will come from over the next couple of years, and not whether DISH will be forced to sell at a discounted price or Verizon will be forced to pay whatever DISH demands.
Its interesting to hear that Kerrisdale is apparently raising $100M to short DISH stock, after its previous attacks on Globalstar and Straight Path. As I said back in October 2014 when Kerrisdale mounted its attack on Globalstar, all spectrum (even that owned by Globalstar) does have value, its just a question of what someone will pay for it.
The spectrum bubble has clearly deflated considerably since late 2014 (despite DISH’s successful efforts to push up the price of the paired spectrum sold in the AWS-3 auction) with DISH’s share price roughly halving since that time, and other spectrum plays (like LightSquared/Ligado) also trading at much lower price levels.
This reduction in valuation clearly seems be the result of lower anticipated prices in the upcoming incentive auction, and last week’s FCC announcement that the initial clearing target will be at the maximum level of 126MHz, allowing 100MHz to be auctioned in most of the country (other than close to the Mexican border), will reduce the initial reserve price from $1.25/MHzPOP to $0.875/MHzPOP (although that could rise if broadcasters bid too much in the reverse auction to give up their spectrum).
However, arguments that DISH’s share price will fall much further seem to rely on DISH being forced to sell its spectrum at an even more discounted price due to impending buildout deadlines, competition (not least from Ligado, which secured a Public Notice from the FCC on its revised spectrum plans a couple of weeks ago) and very low prices in the incentive auction. Its useful to look back at what has happened previously, when operators have overpaid for spectrum, notably Verizon’s lower A and B block purchases in the 700MHz auction in 2008. In that case Verizon simply waited until someone (T-Mobile and AT&T respectively for those blocks) was prepared to pay the same as Verizon had paid (plus its cost of capital over the holding period).
If DISH is not under time or competitive pressure, then Ergen could also potentially wait to realize a reasonable price, at least in line with what DISH has already invested in its spectrum holdings (including the $10B spent on AWS-3 spectrum). Verizon might even decide to do a deal to buy spectrum from DISH sooner rather than later if it believes Ergen can wait indefinitely. And all of these problems can be addressed by spending money: bidding up the prices in the incentive auction this year, outbidding Ligado for the 1675-80MHz spectrum next year, and building out a fixed broadband network in the 1695-1710/1995-2020MHz band (as I suggested in November) to meet its FCC buildout deadlines.
Those three items could represent a sizable amount of money: perhaps $3B-$5B in the incentive auction (something that does not appear to be contemplated by most of the analysts covering the auction), $1B-$2B for 1675-80MHz and $2B-$3B for a fixed wireless broadband network, for a total of $6B-$10B over the next couple of years. And at first blush many would view that as another negative for DISH’s equity.
But the key issue here is to understand DISH’s capital structure and how the money flows around. DISH has raised its existing debt in the form of unsecured bonds at the DBS subsidiary, with no recourse to the parent entity which holds DISH spectrum assets. And the DBS bonds are not protected from being structurally subordinated to new bank debt at DBS (indeed part of the plan to fund a bid for T-Mobile last year was to raise $10B-$15B of new bank debt at DBS).
So if Ergen agrees with his kids, that its crazy to be in the pay TV business long term, then it makes absolute sense to raise say $6B+ of bank debt at DBS, flow that up to the parent company to support its spectrum plans, and (depending on how quickly the pay TV business declines and if a spectrum deal can be done in the interim) eventually file Chapter 11 for the DBS subsidiary (but not the DISH parent company). In fact raising that money sooner rather than later would make sense – DISH would have to convince the bankruptcy court that the subsidiary was not insolvent at the time of the transfer, unless that transfer happened several years before the filing. Note also that DISH has no need to spin off a spectrum holdco – the parent is exactly that, once it has extracted all of the equity value from the DBS subsidiary via this bank debt.
What does all this mean? All of the upside from any spectrum deal flows to DISH’s equity, but relatively little of the downside from no deal being struck: that downside is much more likely to be a problem for the DBS bonds. So if Kerrisdale’s plan is to short the equity, then it may face an asymmetric exposure risk. In fact, some people taking the other side of Kerrisdale’s trade might even decide to be long DISH equity and buy credit default swaps on the DBS bonds. That would create the possibility that they could win from a spectrum deal taking place, but also win if DISH can’t do a deal this year and has to raise money to wait out Verizon and/or AT&T.
In conclusion, remember what DISH said in response to rumors of the Kerrisdale report: “We will continue to manage the business for the long-term benefit of our shareholders as we have done over the last 35 years.” After all, Charlie Ergen’s a shareholder, with much of his wealth tied up in DISH stock, but as far as I know he’s not a DBS bondholder.
Its interesting that Globalstar has decided to announce its Q1 results this Thursday afternoon, which may be just before the FCC releases the draft agenda for its May open meeting and would presumably therefore mean Globalstar management is not in a position to discuss TLPS, just as in late February.
UPDATE (5/3): On the other hand, if the FCC issues the agenda on Wednesday or Thursday, its possible that Globalstar will either be able to celebrate or will face questions during the call on why the process has not yet reached a conclusion.
The May open meeting could be the last chance for Globalstar to get a ruling on TLPS from the FCC in 2016, as Chairman Wheeler tries to triage his enormously long to-do list before the change of administration at the end of the year. Otherwise Globalstar might well find itself being measured up for a “political funeral”.
The results of Smitty’s triage efforts became evident on Friday April 22, with the release of the final agenda for the April open meeting (which addressed the 3.5GHz band) accompanied by the public notices on LightSquared/Ligado’s modification applications resulting from its GPS settlement and petition for a 1675-80MHz rulemaking.
It seems clear that Globalstar also expected to be included in the day’s releases, with Jay Monroe announcing that morning at the Burkenroad conference that TLPS “authority expected shortly”. That was a notable contrast to the Q4 results call on February 25, where he said only that “it is in all of our best interest not to provide any additional comments or answer any questions during the Q&A on the subject of the proceeding”.
However, it looks probable that Globalstar was derailed not just by Google’s poison pill, but also by growing worries about potential interference with Bluetooth hearing aids, a topic that was brought up by Gerst Capital in a meeting on March 30, and elevated to a more significant concern by a letter from two members of Congress on April 7. Technical meetings with the Hearing Industries Association on April 19 and 20 then seem to have failed to put these issues to rest.
Its not only Globalstar’s TLPS ambitions that now may be prepared for burial, but also its prospects for MSS business growth. Distributors appear to expect that release of new devices based on the Hughes chipset will be delayed, with the Sat-Fi 2 unlikely to be available in volume until the fall (amid only tepid interest after the struggles of other satellite WiFi devices), the new two-way SPOT expected after that, in winter 2016/17, and the next generation handheld phone delayed to as late as the end of 2017 (even assuming funds are available for product development next year).
Voice pricing has been changed to remove the popular $25 per month service plan, with little or no notice given to current subscribers that their bill will jump by $15 this month. While that may lead to an increase in ARPU, it may also prompt an increase in churn, unless Globalstar caves when customers threaten to terminate their service. Instead, Globalstar will presumably intensify its efforts to give away free phones to new $65 per month customers, including an increase in internet advertising that I’ve noticed recently. However, the handheld market remains pretty slow for all MSS operators.
So now the question is whether Jay Monroe can keep up his optimism about Globalstar’s promising mass market future and multi-billion dollar spectrum opportunity, despite all these problems. More to the point, once the Terrapin equity line is exhausted later this year, will he put his own money on the line to keep Globalstar afloat, or will he once again be able to find others willing to keep buying Globalstar’s equity?
As I noted after the Satellite 2016 conference a couple of weeks ago, the outline of an FCC compromise over Globalstar’s TLPS proposal has become clear in recent weeks. That would involve increased sharing of the Big LEO L-band spectrum (which led Jay Monroe to use nearly as many F-words about Matt Desch as he did about me at the conference) and a restriction of the initial approval to operate at a power level of not more than 200mW (consistent with, but not specifically limited to, indoor operation). Then testing of Globalstar’s (supposedly all-capable, but apparently not yet contracted from ViaSat or even fully defined) Network Operating System would be required to demonstrate that any interference would be prevented, before any potential increase in power levels would be contemplated.
This mechanism was sought by Globalstar because then it would have an authorization for commercial deployment and, on the back of that, could go and raise $150M to keep the company funded (and avoid Jay having to put in any more money) for the next couple of years, while Globalstar looked for a partner that would attribute value to TLPS. Of course that may well be an endless task, if the cable companies do not “have an interest in leasing or buying Globalstar’s spectrum even if that company received approval by the FCC” and Cisco is unwilling to pay billions of dollars to acquire Globalstar.
I was told that an FCC order would very likely come before the end of this month, because the FCC wanted to get a precedent in place (of non-interference with existing unlicensed services, as recommended by Public Knowledge) before it considered what to do about LTE-U.
However, it seems everyone reckoned without Google’s continued interest in the proceeding, which has now forced Public Knowledge to change its tune, and emphasize that the FCC should impose the “public interest condition” of “authoriz[ing] reciprocal public use of Wi-Fi Channel 14 in locations where Globalstar’s TLPS is not deployed…in return for the auction-free windfall that Globalstar seeks.”
Google’s insistence on the “examination of options for general public use of Wi-Fi Channel 14″ seems like just the sort of poison pill that would prevent Globalstar from raising additional funding after the initial approval, because who would give Globalstar money for spectrum that they could use anyway whenever Globalstar had not deployed in a given location?
So if the FCC does include this condition, it seems highly likely that Jay will reject the deal, just as he did last summer when the FCC tried another compromise that would have involved low power approval only within Globalstar’s licensed spectrum, along with increased L-band sharing with Iridium. As a result, the uncertainty about the eventual outcome of the TLPS proceeding may last a little longer yet.
The Satellite 2016 conference this week has reminded me of years past. All the talk has been of ViaSat and their new ViaSat-3 1Tbps high throughput satellite (depicted above), just like in 2004 when Mark Dankberg used his Satellite Executive of the Year speech to describe his ambitions to build a 100Gbps satellite. Unlike back then (when most dismissed Dankberg’s plans as pie-in-the-sky), ViaSat’s announcement has already caused some large investment decisions by major operators to be postponed, and re-evaluated or perhaps even cancelled. Indeed the entire industry seems frozen like a deer in the headlights, trying to decide which way to run.
Some competitors, like Inmarsat, have chosen to portray ViaSat-3 as a “mythical beast” and ViaSat’s current offering of free streaming video on JetBlue as a “marketing stunt”. However, its far more serious than that. One perceptive observer suggested to me that its like competing for the presidency against Donald Trump: how do you respond to a competitor who is clearly intelligent and has a plan to win, but deliberately says things that fundamentally contradict your (supposedly rational) world view.
In the satellite industry the prevailing world view is that (at least in the foreseeable future) there is no need to build 1Tbps satellites offering capacity at $100/Mbps/mo, because satellite broadband will never compete directly with terrestrial and capture tens of millions of subscribers. But if ViaSat is determined to blow up the industry, most current business plans for two-way data applications (including essentially all Ku-band data services) are simply no longer viable. And if competitors remain frozen (or worse still dismissive) in response to ViaSat’s plans, then ViaSat will gain a head start on building these new higher capacity satellites.
In addition to this overarching theme, several other nuggets of information emerged: Inmarsat is acquiring a seventh “GX payload” by taking over Telenor’s Thor-7 Ka-band payload in Europe on a long term lease, presumably at a very attractive rate (perhaps even approaching the Eutelsat-Facebook-Spacecom deal price of ~$1M/Gbps/year, given Telenor’s lack of Ka-band customers). And Globalstar now appears to have a roughly 60%-70% chance of getting FCC approval for TLPS in the next couple of months, given the FCC’s desire to set a precedent of protection for existing unlicensed services that can be used in the upcoming LTE-U rulemaking. However, it appears that any deal would require a compromise of 200mW power limits (the maximum level demonstrated to date) and sharing of Globalstar’s L-band spectrum above 1616MHz with Iridium.
Going back to the title of this post, if last year’s conference felt like 1999, with exuberance about multiple new satellite projects, this year felt like 2000, as attendees peer over the edge of the precipice. Following on from that, next year could be like 2001, with pain to be shared all around the industry: a sharp fall in satellite orders, as operators re-evaluate the feasibility of their planned satellites, a continuing fall in prices, and the possibility of stranded capacity, either at operators, who are unable to sell their growing inventory of HTS capacity, or at distributors, who entered into contracts for capacity leases at prices far above current market rates.
“I’m half crazy all for the love of you” is a good description of the state of mind of Globalstar investors and perhaps even more appropriately, this is the song HAL sings as he’s shut down in 2001: A Space Odyssey. But now Globalstar apparently has its answer, delivered by “Smitty” and the heads of the International Bureau and the Office of Engineering and Technology in a meeting on January 14.
It seems Globalstar was nervous about the outcome, carefully scheduling its Odeon conference call several days before this meeting (on January 11), so that the company could say that it “has not been asked by the Commission to provide any further technical data or engage in any additional testing.” Even now there would not be any formal demand made by the Commission, merely a discussion of how the proceeding could be brought to a conclusion.
Globalstar’s hopes were raised by the intervention of Public Knowledge in November, who (while not thinking much of Globalstar’s attempt to devise “yet-another-sure-fire-plan-to–make-beaucoup-bucks-using-ATC-and-this-time-TOTALLY-not-go-bankrupt“), saw this as an opportunity to set a precedent for the upcoming rulemaking on LTE-U, requiring new users of unlicensed spectrum (i.e. cellular operators) to guarantee that they will prevent interference and resolve any complaints that do arise.
However, numerous technical issues remain outstanding, because Globalstar has steadfastly maintained that its program of demonstrations (rather than cooperative laboratory testing) provides a sufficient record for the FCC to reach a decision, and as I indicated previously, Globalstar rejected a proposed FCC compromise last summer.
What is notable about the latest ex parte filing is how half-hearted Globalstar’s statements are compared to its submission in December, which at least tries to highlight some of the technical arguments. In the new filing, Globalstar doesn’t even bother to put additional details about its “Network Operating System” for resolving interference on the record, despite Public Knowledge stating last week that “For the Commission to formulate service rules, Globalstar must provide greater detail on how its proposed mitigation mechanism would work” and Globalstar apparently telling investors on the Odeon call that the “Company will succinctly address ‘framework’ and ‘additional testing’ from the new PK Ex Parte in the coming days.”
Its therefore pretty easy to conclude that far from this representing the last step before approval as some of Globalstar’s “half crazy” investors apparently think, the FCC indicated that more information will be required before they are prepared to even consider moving forward, likely in the form of a cooperative testing plan agreed with opponents. Some have suggested that if such a discussion had happened, Globalstar would have been obligated to put it in the ex parte filing, but the FCC’s ex parte rules at §1.1204 (a)(10)(iii) specifically note that “information relating to how a proceeding should or could be settled, as opposed to new information regarding the merits, shall not be deemed to be new information” that must be summarized.
Given these developments, and a share price which has now fallen by more than 50% in the last six weeks, it hardly seems like great timing for Globalstar’s new COO to start work. However, if TLPS is not going to be approved any time soon, Globalstar will have to focus on making something (however modest) of the MSS business, if only to minimize the cure payments due under the COFACE agreement in the next couple of years, and hope that additional funding can be found to meet these obligations.
Its been interesting to see Inmarsat’s stock price rising recently based on excitement about the prospects for its inflight connectivity business, as well as the fourth GX satellite (which Inmarsat hopes to lease to the Chinese government as the Financial Times also reported in October).
We published our new Inmarsat profile in December which highlights the company’s prospects for strong revenue growth from GX over the next few years, although since then Inmarsat has faced a few setbacks, with the Intelsat appeal of Inmarsat’s US Navy contract win being sustained and Apax finally emerging as the purchaser of Airbus’s Vizada division, despite Inmarsat telling people before Christmas it expected to buy this business in early 2016.
However, there is the potential for an even more worrying development in the near future, with ViaSat expected to give more details of its ViaSat-3 project in early February. This seems to represent something of an acceleration in ViaSat’s plans since last November, and it now looks possible that this announcement could include deals with some large new airline customers to provide advanced passenger connectivity services.
If it can be realized, ViaSat’s proposed 1Tbps capacity for ViaSat-3 would have a dramatic impact on bandwidth expectations and more importantly the low cost of capacity would make it feasible to offer low cost or free Internet connectivity, including streaming video, to airline passengers, even as data consumption continues to grow rapidly in the future. ViaSat could potentially do deals with Southwest and/or American, the first of these sounding the long awaited death knell for GEE/Row44′s connectivity business and the second proving disastrous for Gogo, which currently gets about 40% of its passenger connectivity revenues from American Airlines (though any fleetwide migration to ViaSat wouldn’t happen until after the current 10 year contract expires in 2018, just as seems likely for Virgin America).
That really would represent an explosion in the inflight connectivity market, though not one which would be welcomed by other satellite operators and service providers, many of whom have a difficult relationship with ViaSat. Indeed its notable how ViaSat is now also throwing its one-time partner Thales LiveTV under the bus, claiming that they mounted “a campaign of whispers…alleging that Exede did not meet its advertised performance.”
The implications of deals that could ultimately bring ViaSat’s number of served aircraft in North America up to as many as 2000 planes (i.e. half the equipped fleet) would be wide ranging, not least for inflight connectivity service providers, who’ve become used to seeing Gogo and Panasonic as the market leaders, and passengers, who’ve become accustomed to a market where “Inflight Wi-Fi Is Expensive, and No One Uses It.”
Even amongst satellite operators there could be some upheaval, with Inmarsat having just ordered $600M of I6 satellites (actually $900M+ including launch, insurance and ground segment costs) carrying what looks, in comparison, like a puny ~30Gbps per satellite, SES having signed a ten year $290M bandwidth contract with GEE in November 2014, and Intelsat potentially set to lose some of its claimed “73% share of today’s aeronautical satellite communications market.” Most importantly, if passenger expectations of free or low cost inflight WiFi start to spread beyond North America, then Inmarsat’s estimate that its European Air-To-Ground network will generate $300K per plane per year (more than double Gogo’s current run rate) would look even more questionable.
Widespread angst about the effects of new HTS satellites and slowing revenue growth is already weighing on the outlook for the satellite industry, but if ViaSat really does have one or more big deals to announce next month, then it would take concerns over future capacity and pricing trends to a whole new level. In that case we’d better all buckle in and get prepared for a very bumpy ride.
I woke up this morning to read New Street Research’s latest 3Q2015 Wireless Trends Review, subtitled “Competition Gets Ugly: The Big Guys Have A Problem” and while I agree that competitive pressures in the US wireless market are getting ugly, I’m afraid it is the analysts rather the “Big Guys” that have a problem. In particular, New Street’s “network capacity framework” that suggests Verizon “have half the capacity they will need by 2020 to maintain current network quality” is based on a completely flawed premise, just like most other pronouncements of an imminent spectrum crisis.
This network capacity framework calculates the number of “MHz-sites” that Verizon has for LTE in the top 25 markets and assumes that data demand will grow at 30% from 2015 to 2020 (reaching 10GB/LTE sub per month by then). Ignoring the fact that New St doesn’t know its Petabytes (1 million Gbytes) from its Exabytes (1 billion Gbytes), Verizon’s “aggregate LTE data demand” is projected to increase five fold between 2015 and 2020, while Verizon is expected to increase its deployed LTE spectrum from 68 to 138MHz and its number of LTE macrosites in these markets from 21K to 27.2K over the period, which supposedly will result in 2.5 times growth in network capacity. Thus New St concludes that Verizon will have only half the capacity needed to meet demand, without buying more spectrum from DISH.
This thesis is even more flawed than the Brattle Group study for CTIA back in June, because it completely fails to consider the potential for improvements in network efficiency over the period as LTE-Advanced technologies are deployed. Even Brattle Group acknowledges that “LTE+” will carry over 70% more bps per Hz than 4G LTE, based on a move from 2×2 MIMO to 4×4 MIMO, and the original source for these estimates (Rysavy Research’s August 2014 paper on “Beyond LTE: Enabling the Mobile Broadband Explosion“) acknowledges that many additional improvements are feasible.
Correcting for this error alone, and assuming capacity constrained locations are upgraded to LTE-Advanced by 2020, New Street’s supposed capacity shortfall is reduced from 50% to 14%, and so the number of additional macro sites that Verizon would need to build is reduced from 26.7K to only 4.5K (which based on the FCC’s October 2010 estimate of $550K per cellsite would cost only $2.5B in incremental capex). That hardly seems to justify Verizon spending tens of billions of dollars to buy DISH’s spectrum.
New Street also ignore other sources of incremental capacity (such as LTE-U) and reject small cells as infeasible because they have supposedly only 1/3 the capacity of macro sites (Rysavy in fact points out in Figure 68 of his report that through careful placement to meet hotspot demand, four picocells per macrocell could produce roughly a 10x increase in capacity).
Its hardly surprising that New Street conclude Verizon’s behavior is “perplexing” and suggest that rather than “discounting to hang onto subs” Verizon “should be taking up price to shed subs faster in congested markets to preserve superior network performance for their most valuable subs.” But perhaps Verizon do actually understand network engineering and the potential for network capacity enhancements better than analysts with a simplistic, erroneous spreadsheet model?
In these circumstances Verizon would also feel happy to say no to Ergen’s blackmail and refuse to pay more than their previous offer for DISH’s spectrum (which I guess is around $1/MHzPOP). In fact, it would seem likely that Verizon don’t want a deal at any price ahead of the incentive auction, if that would enable Ergen to bid up the price of spectrum once again. On the other hand, Ergen is undoubtedly keen to find a partner to endorse the value of his spectrum holdings and force Verizon back to the table. As part of that effort, I’m told he has been visiting Google again recently, just as he did back in 2012 when he was trying to pressure AT&T to do a spectrum deal.
One possibility for such a partnership would be to reinvigorate DISH’s rooftop small cell deployment plan, and meet Ergen’s AWS-4 buildout requirements, using the AWS-4 uplinks (2000-2020MHz) as downlinks in conjunction with his 1695-1710MHz uplink spectrum. Remember that Google has backed similar efforts in the past, when it funded Clearwire (rather than LightSquared) in 2008, in order to get a competitive 4G network built out quickly, and push Verizon and AT&T to do the same. However, Ergen has little more than a month left to get a deal done before the auction restrictions kick in, so time is not on his side.
Inmarsat has certainly had a great deal of success in the last two months, winning key contracts with the US Navy, Lufthansa and most recently Singapore Airlines, as well as a strategic partnership with Deutsche Telekom to built out its S-band European Aviation Network. While some of these wins may be a direct result of what Inmarsat refers to as “success-based capex” (otherwise known as giving away free terminals), these deals certainly have the potential to provide a significant boost to the company’s revenue growth outlook.
Moreover, it seems that the biggest deal is yet to come, as Inmarsat hinted on its results call last week that “customers in different regions [are] vying to have the [fourth GX] satellite placed over their areas of interest” and the plan for this satellite is expected to be finalized before Inmarsat announces its Q4 results in early 2016. However, in practice there is one deal which is far and away the most likely outcome, and it appears these statements are simply a matter of Inmarsat trying to make sure that it still has some negotiating leverage.
That deal was clearly apparent during last month’s State Visit to the UK by Chinese President Xi Jinping, when the only British company he visited was Inmarsat. Inmarsat highlighted that one purpose was “to understand how Inmarsat is able to uniquely contribute to President Xi’s One Belt One Road (‘OBOR’) strategic vision through the provision of critical global mobile broadband connectivity services, including Inmarsat’s revolutionary new service, Global Xpress” and noted that “Inmarsat has already signed a Memorandum of Understanding (MOU) with China Transport Telecommunication & Information Centre (CTTIC) to establish a strategic partnership to deliver Inmarsat’s revolutionary Inmarsat-5 Global Xpress mobile satellite broadband communications connectivity throughout China and OBOR.”
I’m told that the original intention of President Xi’s visit, accompanied by HRH The Duke of York and the UK Chief Secretary to the Treasury, was to have a signing ceremony for the agreement to formalize this “strategic partnership” and that would involve a full lease of the fourth GX satellite to China. Unfortunately the final agreement required certain changes and therefore could not be completed in time.
However, assuming this deal can be completed, Inmarsat is likely to receive a further significant boost to its revenues. Given Chinese expectations are typically that they will receive lower prices than other countries, I’d expect the payments to Inmarsat for capacity could potentially be on the order of $100M p.a. (assuming the agreement is for 10+ years), depending on who covers the capex and opex costs for the new GX gateways in China. And China could then be in a position to provide free or subsidized satellite broadband capacity to adjacent countries in support of its geopolitical OBOR ambitions, just as Google and Facebook have been working to bring Internet access to developing countries.
Once this deal is done, Inmarsat can move onto ordering I6 satellites with both L-band and Ka-band capacity, in order to supplement the (somewhat limited) capacity of the initial GX constellation. But with Eutelsat apparently looking for French government backing to buy a 3-4 satellite Ka-band system, and ViaSat (not coincidentally) announcing the intention to build its own even bigger 1Tbps satellites, the race to add lower cost Ka-band capacity is far from over. More importantly, despite all the attention given to Ku-band HTS in the last year or two, its hard to agree with the statement Gogo made on its Q3 results call (after its GX distribution deal with Inmarsat was terminated) that “there are simply not enough Ka satellites now or for the foreseeable future to meet the needs of global aviation”.
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