10.16.12
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 8:44 am by timfarrar
Despite considerable efforts by Charlie Ergen, it looks like the Softbank deal may now have enabled Sprint to escape from the box of constrained capital, limited spectrum and a second rate network that Sprint could have been confined to, if it had failed to gain access to either usable H block spectrum or Clearwire’s network on economically advantageous terms. Many thought that Sprint would move to purchase Clearwire immediately after the Softbank investment, but today sources are denying that is the intention, stating that Sprint has no intention of taking part in mergers or acquisitions until the Softbank deal is finalized in mid-2013. This timeline also implies that Sprint will not move to disrupt the T-Mobile/MetroPCS merger, which is expected to close in 2013Q2.
So the obvious question is why did Sprint need to issue a $3B convertible bond to Softbank right now? I think that can only be intended to warn off others from doing a deal with Clearwire in the interim, by offering John Stanton the carrot of improved economics and/or further investment from Sprint. Of course there are not many options for Clearwire to sell spectrum, now that T-Mobile and MetroPCS, the two operators most frequently rumored to have designs on Clearwire’s spectrum, are getting together.
As a result, I think Sprint’s actions appear to confirm that Clearwire was about to pull the trigger on a deal with Ergen, as I suggested last month, involving an asset sale and/or WiMAX customer transfer, in exchange for a combination of cash and debt. Notably, receipts from a sale of network assets (as opposed to a spectrum sale) would not have to be used to repurchase Clearwire’s first lien debt, suggesting that this could be a preferred way for Clearwire to raise funds. In addition, I’m told Ergen now holds in excess of $900M of Clearwire’s debt (not all first lien), and some of that could potentially have been traded for Clearwire spectrum.
Reports on the Sprint/Softbank deal have also suggested that both Carlos Slim and SK Telecom have considered investments in Sprint, and it is worth noting that SK Telecom invested $60M in LightSquared back in 2010, while Slim is rumored to be buying LightSquared debt. In fact I’m told that further significant purchases of LightSquared debt have taken place in recent weeks. If one or both of those two players therefore continue to maintain their interest in US telecom assets (which has obviously included MSS-ATC spectrum similar to that held by DISH), then Ergen may be the last, best potential partner available.
So has Sprint now prevented Ergen from achieving a deal with Clearwire? I’m told that (at least with the current ownership situation) Sprint would have no ability to veto such a transaction, so presumably Stanton will now be trying to extract vastly improved economics from the existing capacity agreement with Sprint in order to forego a DISH deal. What concessions will Sprint be prepared to make, and if it does give ground, where does that leave DISH? After all, it doesn’t seem that AT&T is prepared to pay Ergen’s asking price (perhaps as high as $80-$90 per share?) to purchase the whole of DISH anytime soon. Ergen must certainly be fuming at how FCC delays have prevented him from moving forward, while potential partners seem to be rapidly exiting the dance floor. At least he appears to have made a profit on his investment in Clearwire, but that may be little consolation if it now proves more difficult to find a way to monetize DISH’s other, much larger, spectrum investments.
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10.07.12
Posted in Financials, Inmarsat, Maritime, Operators, Services at 12:29 pm by timfarrar
The history of the MSS industry, like most other parts of the telecom and technology sectors, has revolved around a theme of “faster, better, cheaper” as technological advances have dramatically improved satellite throughput and enabled significant reductions in the price per minute and per bit of voice and data communications. However, it seems that at least in L-band, we may have reached the limit of economically justifiable technological advances, and the future for the traditional MSS market could now be one of slower development cycles, simpler satellite systems and more expensive services.
Some of those technological dead ends are obvious, like the huge satellite antennas built for LightSquared and TerreStar, which did nothing whatsoever to make their satellite services more viable. However, more importantly, Inmarsat sets the tone for the entire MSS sector and could now make it much clearer that we have reached the end of the historical development pattern for this industry.
We’ve already seen Inmarsat pushing up prices this year, and with its new focus on the Ka-band Global Xpress system, Inmarsat has also indicated that it expects to delay capital expenditures on a next generation L-band (I6) satellite system and that the system itself will be cheaper and simpler than the I4 satellites. After feeling a backlash from distributors and customers, Inmarsat has been at pains to suggest that this year’s price rises represented a one-off adjustment, rather than the start of regular yearly price rises. Nevertheless, Inmarsat has seen little if any impact in terms of maritime customer losses because Inmarsat holds such a dominant position in the market and Inmarsat’s 2012 wholesale revenues are likely to be boosted by at least 2%-3% as a result of the price rises.
Looking forward, the outlook in most parts of the MSS market is fairly depressed, with M2M services providing the main source of growth, and overall wholesale L-band revenues are only likely to grow by perhaps 4% p.a. in the next few years. Although we’ll find our more specifics on Tuesday about Inmarsat’s expectations for Global Xpress, it also remains hard to see how GX will meet the original target of $500M in incremental wholesale revenues within 5 years, suggesting that Inmarsat’s move to Ka-band will not move the needle on overall MSS market growth very far. Reasons for this include the apparent lack of military Ka-band frequencies (which were supposed to be secured by Boeing and would be needed to allow GX to operate as a seamless supplement to WGS), the fact that XpressLink customers are being given the option but not the obligation to upgrade to GX when it is launched and, most importantly, the threat posed by Intelsat’s new Epic satellites, which have secured some key anchor customers (Panasonic, MTN and Harris Caprock) and caused many distributors and end customers to reconsider the “inevitability” of a move to Ka-band.
As a result, it seems there is now a fairly clear case for Inmarsat (as the price leader in the MSS sector) to push through regular annual price rises on the 50% or so of its wholesale L-band revenue base that is least likely to move to alternative solutions and has the lowest price elasticity. This would mean price rises for low and mid range maritime customers plus many land customers, while leaving aeronautical and high end maritime customers (who are more at risk from VSAT competition) largely untouched. Today there is an essentially flat outlook for L-band revenues, as modest growth in M2M and handheld is being offset by the migration of high end maritime and aeronautical customers to XpressLink (and other VSAT solutions), together with reductions in defense spending/event revenues. However, a price rise of 5%-10% p.a. would potentially allow Inmarsat to grow its L-band business at 2%-4% p.a. for the next several years.
Other MSS operators would also benefit through (modest) gains in market share and more pricing freedom, and the overall MSS sector could perhaps then return to something closer to the 7% p.a. revenue growth rate seen before the downturn of the last couple of years. Even distributors, who have seen their margins pressured over the last decade, would appreciate some ability to increase their overall revenues (given that demand elasticity is quite low), if margins can be sustained or even increased.
However, in order to execute such a change in strategy, Inmarsat would also need to repair its relationship with independent distributors, which has taken a significant knock from Inmarsat’s acquisitions of Segovia and Ship Equip and its decision not to pass on some wholesale price increases through its own direct distribution channels. There have also been several instances where Inmarsat has made its own bids for key contracts which massively undercut the bids from the incumbent independent distributors providing the same services. Indeed it often appears that Inmarsat has the explicit intention of driving its leading independent distributor, Vizada (now owned by Astrium Services) into the arms of other satellite operators such as Intelsat and Iridium. It seems to me that only with the cooperation of independent distributors can Inmarsat present a united front to end customers, and explain that price rises are necessary for a healthy market, as opposed to having their assertions undermined not only by (the expected) sniping from competitors, but by distributor dissatisfaction (and potential defections due to increased margin pressures) as well.
Is Inmarsat willing to change this dynamic and restrain its direct distribution arm, or will it resort to a “bunker mentality” and either miss the chance to boost revenues or push further price rises onto its independent distributors, amidst a rising tide of opposition? Time will tell, but its perhaps worth remembering that the full title of the book was “The End of History and the Last Man”, the last man being someone who “is tired of life, takes no risks, and seeks only comfort and security“.
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10.04.12
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:23 pm by timfarrar
FCC Chairman Genachowski took a trip to Wharton today, to tell a bunch of students about “the incredible world of mobile communications”. However, he also gave away an enormous amount of information about the FCC’s spectrum agenda, which so far has gone almost completely unreported. As first sight one might be distracted by such nonsense as “U.S. mobile data traffic grew almost 300% last year, and mobile traffic is projected to grow an additional 16-fold by 2016″ and the boast that he alone knew “that something was up”, “did the math” (wrongly) and “sounded the alarms…about the looming spectrum crunch”. Incredibly Chairman Genachowski even makes the ludicrous claim that:
“There were many skeptics [in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”
Of course this comes just at the time when journalists are starting to ask “What happened to the spectrum crunch?”
Once you’ve stopped laughing at all of this, the meat of the speech is in fact very useful, as the Chairman indicates just how he hopes the “audacious” target in the National Broadband Plan of freeing up 300MHz of spectrum by 2015 will be “exceeded” by a combination of auctions, removal of regulatory barriers, clearing the TV bands and spectrum sharing. First of all, 75MHz of AWS spectrum will be auctioned, including, in 2013, the 10MHz of H-block spectrum desired by Sprint. This confirms that DISH has lost the battle to avoid a 5MHz shift in its uplinks, but in compensation DISH will at least be authorized to use the full 40MHz of spectrum (2005-2025MHz up and 2180-2200MHz down) for a terrestrial network “later this year”.
Secondly, an additional 50MHz of AWS-3 spectrum (desired by T-Mobile) will be auctioned, based on spectrum sharing with the DoD in the 1755-1780MHz uplink band. Finally, AT&T will get its rebanding of the WCS spectrum approved. The Chairman even indicates that the FCC is “working with stakeholders to enable use of the portions of the mobile satellite spectrum in the L- and Big LEO bands [i.e. LightSquared and Globalstar] for terrestrial service” although notably this spectrum is not included in the 2015 total, indicating that these efforts may not be concluded quickly.
The most obscure reference is in the unstated 15MHz balance of AWS spectrum planned for auction before 2015. Given the short timeframe, this can only be the 1695-1710MHz spectrum being reclaimed from NOAA. Presumably this block will be made available as uplink spectrum (because it is adjacent to AWS-1 uplinks at 1710-1755MHz) and as such it will be attractive for AT&T to pair with the WCS spectrum (which will probably all be converted to downlinks). However, this leaves LightSquared in a bind over the spectrum “swap” it proposed last Friday, because LightSquared does not want more uplink spectrum (let alone having to buy it in an auction), and after giving up the 1695-1710MHz block, NOAA will need to use the 1675-80MHz band even more intensively for weather balloons.
Looking at the bigger picture, the situation may be made more difficult not just for LightSquared, but for DISH and Clearwire as well, because the FCC’s actions appear designed to give all of the major wireless operators the spectrum they are hoping for in the near term. Specifically, the FCC intends to free up the H block for Sprint, the AWS-3 block for T-Mobile and 1695-1710+WCS for AT&T, while Verizon has already had its SpectrumCo purchase approved. Especially in the wake of yesterday’s T-Mobile/MetroPCS merger, this makes me wonder just how many attractive alternatives Charlie Ergen still has to a deal with Clearwire for buildout of his 2GHz spectrum?
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09.28.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:05 am by timfarrar
So LightSquared has filed a modification application this morning with the FCC, proposing that it be granted access to the 1675-80MHz spectrum as an additional downlink, in exchange for relinquishing rights to deploy a terrestrial network in the 1545-55MHz band. LightSquared also asks the FCC to open a rulemaking proceeding to develop service rules for terrestrial use of the 1526-36MHz band. During the pendency of this proceeding, LightSquared offers to “voluntarily” not deploy the L-band downlink spectrum on its terrestrial network.
This proposal certainly represents a climbdown from the options that LightSquared presented to the FCC in May, coming close to the (worst case) 5MHz option presented by LightSquared at that point, but falling short of that demand for “quick start” options that would allow LightSquared “to expeditiously recommence deployment” in 5MHz of the spectrum and leaving open the transition plan for eventual use of the lower L-band spectrum. Indeed several critical issues, like how the pairing would work between the L-band uplink and 1670-80MHz downlink, how concerns about handset (uplink) interference would be addressed, and what level of coverage can be achieved while protecting “the integrity of continuing, essential government operations in 1675-1680 MHz and the adjacent spectrum at 1680-1695 MHz” are left undefined.
[UPDATED 9/28 & 10/3] Indeed the use of 1675-80MHz by LightSquared could prevent the FCC from auctioning 15MHz of spectrum in the 1675-1710MHz as mandated by Congress, and will certainly meet with heavy opposition from NOAA. Critically, as identified in the NTIA report on this band back in October 2010, there is no ITU allocation for mobile service in the spectrum above 1675MHz, a matter which is intended to be addressed by WRC-15. A NOAA presentation to the ITU highlights that the decision to free up the 1695-1710MHz band will require weather balloons (radiosondes) to use the 1675-80MHz band and that “Radiosondes and Broadband Mobile cannot share common spectrum in same geographic areas”. Given that weather balloons need to be used across the US and can drift for hundreds of miles during their flights, it is rather surprising that LightSquared’s lawyers suggested in court on Monday (Oct 1) that:
“We’ve made substantial progress on our regulatory issues…Short of a few sections of the country, dead zones we will attempt to resolve through other means, this would give us 4G LTE coverage throughout the country. It’s not the proverbial home run everyone said we’d hold out for, but it is a significant terrestrial network.”
Instead, LightSquared has told the FCC that it “believes that it is necessarily relieved of the obligation to meet the build-out milestones” imposed back in 2010 and gives no indication of any desire to rapidly deploy a network, as opposed to securing access to spectrum that could then be sold to another wireless carrier. While LightSquared discusses the use of the spectrum it would be granted for a “new, competitive broadband network” the commitment to provide “wholesale access” is notably absent from its new submissions.
LightSquared quotes the PCAST report pretty heavily, highlighting that (as I suspected) it is jumping on the PCAST bandwagon to gain FCC and White House support. However, it is ironic that while LightSquared suggests it is looking “to share [the 1675-80MHz band] with certain government users”, in fact it is still asking for a spectrum “swap” to “use the 1675-1680MHz band to provide a commercially-useable, terrestrial wireless broadband service as part of a contiguous 10 MHz downlink channel”.
That is what is needed to sustain Harbinger’s argument that LightSquared is still worth the billions of dollars required to maintain control and after the recent successes with the FCC it looks like the debtholders will now wait a few months to see how this strategy plays out rather than arguing for an immediate termination of exclusivity which would allow them to force Falcone to “put his money where his mouth is” and pay them off at par. However, it seems likely that if this attempt fails, the debtholders will be quick to declare “that’s it for me”.
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09.25.12
Posted in Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 5:25 am by timfarrar
Surprisingly little attention is being given to Charlie Ergen’s upcoming PCIA keynote speech on October 3, where he is set to “discuss DISH’s wireless plans” and will be followed by a Q&A session with FCC Chairman Genachowski. This may be due to the fact that many analysts believe DISH are unlikely to build out a wireless network and will instead seek to sell their spectrum to AT&T. Support for this view comes from the narrowing field of potential partners for DISH, with DirecTV indicating last week that “it’s hard for us to see why we would want to go and compete in [the wireless] space”. DISH have also been pushing back at the FCC on the proposed shift of their uplinks by 5MHz into the 2005-25MHz band, claiming that a 5MHz buffer is needed between their spectrum and BAS operations above 2025MHz, and that a shift would cause serious delays for their network buildout plans. However, our BAS industry contacts indicate that any interference issues would be largely manageable, and so many believe DISH may struggle to win this battle on interference arguments alone.
However, I think that in fact the chances of any spectrum sale to AT&T in the near future are rather low, unless DISH can put forward a wireless business plan that scares AT&T into making a knockout bid for the company. Indeed it is in AT&T’s interests to sit on the sidelines if they expect DISH to struggle with network buildout and customer acquisition, because then the potential price for taking the assets off DISH’s hands would most likely go down, and AT&T does not need (and could not use) the 2GHz spectrum band for several years.
As a result, whether or not a deal with AT&T remains a possibility, DISH now need to come up with a concrete plan for their network buildout as well as partnerships that AT&T would consider a real threat. Some of these pieces now appear to be coming together, and the first details may even emerge as soon as next week’s speech. With regard to a network buildout plan, it is interesting to note that DISH have apparently been building a significant stake in Clearwire’s first lien debt, which totaled almost $400M at the end of June and may now be considerably higher. Clearwire have also been highlighting the potential for “asset sales” to raise the money required to complete their planned LTE buildout.
A deal which could meet the needs of both DISH and Clearwire would be for Clearwire to sell its existing WiMAX network and retail customer base to DISH for something like $1B to $2B in cash (and Clearwire debt?) and then enter into a network sharing agreement for Clearwire and DISH’s separate LTE buildouts. This would allow DISH to acquire a network covering 130M+ people (and perhaps more when moved to the 2GHz band) at a very substantial discount to the $4B that Clearwire have invested in their network to date, and enable DISH to offer fixed wireless broadband to their existing satellite TV subscriber base. Indeed, by adding an outdoor 2.5GHz terminal alongside their satellite TV antennas, DISH could extend the range of the 2.5GHz WiMAX network to cover considerably more people compared to existing indoor modems. DISH would also presumably develop a dual mode 2.5GHz WiMAX/2GHz LTE (and perhaps 2.5GHz LTE) handset to provide an evolution path for Clearwire’s handheld customer base. Meanwhile, Clearwire could substantially reduce their network costs and gain additional income from leasing 2.5GHz spectrum to DISH for the next several years.
The second part of the puzzle is who DISH’s partner(s) for their wireless operation might be. Obviously AT&T and Verizon could not be partners, and after their AWS spectrum deal with Verizon, T-Mobile are almost certainly out of contention. Sprint have been looking for a hosting customer similar to LightSquared to help defray the cost of Network Vision, but if DISH enter into a network deal with Clearwire then that would likely rule out a partnership with Sprint (though Sprint’s wholesale WiMAX customers would continue using the Clearwire/DISH network for the time being). With DirecTV also now on the sidelines, it looks like DISH’s partner would have to come out of left field, and the only obvious option there would be Carlos Slim (and presumably America Movil). Its worth noting that Slim already appears to be interested in MSS spectrum, given he is probably the only remaining credible possibility for the mystery LightSquared investor that many thought was Ergen earlier this year, and he has an existing relationship with Ergen in Mexico, so a deal here would not be that much of a surprise.
The biggest unknown is how much of this unfolding story will emerge next week at PCIA. With the FCC not expected to approve DISH’s request for terrestrial use of the AWS-4 spectrum until later in October, it may be risky to reveal too much right now. If an announcement does come next week, then it will also come as a major shock to most wireless industry observers, because almost no attention is being given to the possibility of a tie-up between DISH and Clearwire. However, this may be the last chance for DISH to pressure the FCC not to shift their uplink spectrum, and a major announcement of network plans could tip the scales in their favor. As a result, I suspect that Ergen’s speech could well contain an announcement of a network deal, a partnership or perhaps even both.
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09.24.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:05 am by timfarrar
The FCC witnesses’ testimony at the House Energy & Commerce subcommittee hearing last Friday certainly came as a surprise to many observers, including myself, with their emphasis on blaming the GPS industry for not raising concerns at an earlier date. Predictably, that position defanged much of the criticism from Republican lawmakers, who have switched seamlessly from describing LightSquared as a product of government-backed crony capitalism to a shining example of private enterprise ruined by government regulation. However, it was of course anathema to the GPS Coalition, whose Jim Kirkland described the FCC testimony as “deeply misguided and wrong“.
I had heard earlier in September that the FCC was working on an order which apparently confirmed the February ruling, but it seems that within the last couple of weeks, LightSquared’s lobbying has paid off and the FCC intends to delay a decision (potentially until after the November election) in order to explore alternative solutions which would allow LightSquared to move forward without the widely anticipated litigation battle. Indeed the FCC testimony indicated that receiver performance issues, which had largely been sidelined after the March workshop, are now going to be the subject of a report from the FCC’s Technological Advisory Council (TAC) in “the next few weeks”, which would presumably precede the ruling on LightSquared itself.
While at first sight it may seem surprising that the FCC wants to take up the LightSquared issues once again and initiate another fight with powerful government agencies such as the DoD and FAA, what may have tipped the scales is the enthusiasm of the FCC Chairman for implementing the recommendations of the recent PCAST report on the sharing of government-held spectrum with commercial wireless operators. That alone portends a battle over spectrum with the DoD, but with the White House standing alongside the FCC (as it did in the early stages of the LightSquared waiver effort), the FCC presumably feels confident that some progress can be made.
LightSquared spent the spring and early summer casting around for various solutions to its GPS interference issues in the form of a direct “spectrum swap”, but with little success. However, since publication of the PCAST report, LightSquared appears to have reformulated its proposal as a deal under which it would become the “poster child” for sharing government spectrum as recommended by PCAST, in exchange for accelerated action by the FCC to implement receiver standards within the L-band. LightSquared would then build its terrestrial network initially using shared spectrum, and subsequently move into the lower L-band spectrum in a few years time. The practicality of all this is still to be seen, not least in terms of the timeline for any use of the L-band. However, the proposal appears to be attracting serious consideration within the FCC, and the forthcoming TAC report on receiver standards should provide some guidance as to the likely way forward. Thus the scene appears to be set for a resumption of last year’s battle, and those in the GPS industry who thought the LightSquared issue had been resolved, will need to steel themselves for yet another bitter fight.
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09.14.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:06 pm by timfarrar
As I noted last week, it appears that the FCC ruling on LightSquared is expected to be released very soon, and two more developments have now provided support for this assessment. Firstly, today’s bankruptcy court hearing on exclusivity and executive bonuses was postponed until October 1 at the request of LightSquared’s debtholders. It would be logical to conclude that this postponement came because the debtholders expect an FCC ruling to emerge before the end of this month, after which time they will be in a much stronger position to argue that LightSquared’s existing management (and Harbinger) should not retain control of the bankruptcy process.
After an FCC ruling (presuming it is negative), it would be clear that a little progress could be achieved during a 5 month extension of exclusivity as LightSquared requests, because the ruling would trigger litigation which would undoubtedly last for many years. Instead the debtholders want to “force Mr. Falcone to put his money where his mouth is” and either hand over the company to them (via an auction where they could credit bid their holdings), or pay off the debtholders at par in order to retain Harbinger’s ownership of the company.
Secondly, news has emerged today that the House Energy & Commerce committee plans to hold a hearing on LightSquared next Friday, September 21, which can be expected to focus on criticizing the FCC’s role in rushing through the LightSquared waiver. As a result, it seems highly likely that the FCC will now move to release their LightSquared order next Thursday evening in order to deflect this criticism and show that their process “worked”.
Of course, its hard to imagine the FCC order doing anything other than confirming their February proposal to withdraw LightSquared’s waiver and ATC authorization (indeed people like Gen. Shelton are already taking that for granted), but if comments from House Republicans focus on blaming the FCC for LightSquared’s losses, then that could be helpful to LightSquared’s PR campaign for a spectrum swap or other compensation. Nevertheless, if the result of the November Presidential election is an Obama win, then after the political backlash caused by the developments of the last two years, it seems unlikely that any such settlement would be forthcoming. So I guess Mr. Falcone will be voting Republican this time around.
UPDATE (9/20): The FCC testimony for tomorrow’s hearing appears to place the entire blame for the LightSquared debacle on the GPS industry, creating a whole new range of possibilities for how the hearing might develop. If the Committee joins the FCC in this blame game, then that would increase the likelihood that the FCC might offer LightSquared access to some alternative spectrum for a limited period on favorable terms, while receiver standards efforts move ahead in the L-band. However, that approach would also remove any potential legal liability from the FCC, and it is highly implausible that LightSquared would be able to sue the GPS industry for damages for not raising concerns at an earlier date.
As a result, LightSquared’s fate now seems more likely to become entangled in a political rather than a legal process. The FCC also seems determined to delay any ruling further and if the ruling is delayed until after the November election then that would also open up the possibility of throwing LightSquared a bone while limiting the political fallout. However, it still remains far from clear whether there is any spectrum block available that could offer LightSquared sufficient spectrum to pursue additional fundraising and buildout a network, or even allow LightSquared to sell its assets and repay the $2B+ of outstanding debts.
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09.05.12
Posted in Financials, Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:55 am by timfarrar
It looks like the next month or so may be filled with interesting developments in the US spectrum market. Last week, it was reported that the FCC is preparing to launch of review of its “spectrum screen” at the September Commission meeting. Of course if the FCC suggests a preference for distinguishing between low frequency (sub 1GHz) and higher frequency spectrum, in response to concerns that AT&T and Verizon have been accumulating too much of the most valuable spectrum, then that might not only put a damper on the prospects for broadcast TV incentive auctions (recall that AT&T and Verizon contributed over 85% of the 700MHz auction proceeds back in 2008), but could be taken as a clear signal that the FCC would approve of AT&T buying DISH for its higher frequency spectrum.
In that context, it seems increasingly likely that the release of a LightSquared ruling (almost certainly confirming the FCC’s February proposal to withdraw LightSquared’s ATC license) will also come this month, along with approval of DISH’s terrestrial network in the 2GHz MSS band. This week DISH has been continuing its campaign to avoid its uplink allocation being shifted up by 5MHz to 2005-2025MHz, which is an option being considered very seriously by the Commission, as it would satisfy Sprint’s desire to access the H-block (which Sprint probably considered to be a done deal last November when it settled with DBSD and TerreStar), and mitigate both windfall and timeline concerns. However, it is notable that the Public Interest organizations who have been most vocal in raising the windfall issue actually oppose a relocation of the uplink due to the delay it would could in the standardization process.
Intriguingly, if we do see a ruling (at least partly) in DISH’s favor in the next month or two, it may make it even more difficult for Clearwire to pull off any potential spectrum sale. Then we may be faced with exactly the same situation in December as at the end of last year, namely does Clearwire pay the large interest payment due in December, or use the threat of a bankruptcy filing as leverage to raise more money from Sprint and others to fund it through next year.
LightSquared is also wheeling out the big guns in its lobbying campaign right now, with former FCC Chairman Kevin Martin lobbying the Commission on LightSquared’s behalf last week, and the company is once again ramping up attempts to get its side of the story across. This may raise a few eyebrows, given that Martin was key to approving ATC back in 2005 and then requiring Inmarsat to cooperate with LightSquared via their Dec 2007 agreement. However, it seems unlikely to change many minds at the Commission, especially in advance of the November election. Apparently the best that LightSquared could hope for is for the initial decision to be taken by the full Commission, rather than by the International Bureau on delegated authority, which would give LightSquared an earlier opportunity to challenge the decision in court (because an IB decision must first be appealed to the full Commission before any legal action is initiated).
After LightSquared’s attempts to insert consideration of its own situation into the DISH proceeding, it would seem natural for both rulings to emerge at about the same time. The FCC will also need to indicate in the DISH ruling how it plans to take forward any similar flexibility proceedings in other MSS bands, notably the Big LEO band, where Globalstar has emphasized that “Greater flexibility for mobile broadband in Big LEO spectrum [is] necessary to enhance financial viability of Globalstar and its mission-critical MSS offerings” (emphasis mine). With Globalstar looking to raise substantial financing (perhaps as much as US$250M to $300M if Globalstar aims to fund both the remaining satellites and the ground segment buildout) by the end of the year in order to move forward with the final phase of its second generation constellation buildout, it is plausible to conclude that a positive signal from the FCC in this regard within the next month or two may be a pre-requisite for completion of that financing (which would presumably involve a combination of additional Export Credit Agency funding and further investment from Thermo).
Finally, and separately, TerreStar Corporation appears to have basically resolved its bankruptcy, and the existing preferred shareholders will convert their holdings to equity and keep control of the company. It is interesting to note that the valuation put on the 8MHz of national 1.4GHz spectrum in the event of a liquidation was only $80M to $100M (or $0.03-$0.04/MHzPOP) for an M2M smart grid type network (which is gratifyingly close to my estimate of $60M to $100M two years ago at the beginning of this process). It is hoped that FCC waivers can be secured, which would make the spectrum more valuable and usable for LTE, but that is a long term process, and there is no guarantee that it will be attractive to manufacturers to include this small, isolated band in future LTE chipsets. As a result, although there is a proforma offer for sale of the spectrum, it is inconceivable that any bid would be higher than the $400M+ that the existing preferred holders could credit bid in any auction. Of course its also another example of how just assuming spectrum is always a valuable asset, without consideration of the limitations applicable to that spectrum, is a quick way to lose a lot of money.
So going back to my title above, the next few months should reveal a lot more about who’s going to show that they’re an “All Star” and who will prove to have “the shape of an L on [their] forehead”. However, one thing seems pretty clear: when the FCC announces its decisions, not everyone is going to be a winner.
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08.29.12
Posted in Aeronautical, Financials at 10:48 am by timfarrar
It seems that most if not all commentators have ignored Gogo’s Aug 14 S-1 amendment containing the company’s results for the first half of 2012, instead picking up on Gogo’s Aug 28 press release that Gogo has been approved to operate in Canada (which in fact according to Gogo’s SEC filing was actually approved back in mid July).
That’s a shame because the six month results are pretty fascinating: they show that in Q2 of 2012 Gogo’s take rate and (more significantly) the average revenue per passenger carried both fell compared to Q1. If the revenue per passenger carried does not grow after the price increases Gogo implemented during the second quarter of 2012, then this raises the question of whether we may already be close to the point at which Gogo’s average revenue per plane cannot be increased much further. In addition, Gogo’s average revenue per session fell from the previous year, despite the price rises. Gogo’s filing attributed the decline in revenue per session to more (lower revenue) sponsored sessions compared to the same period in 2011. However, this simply highlights that a major contributor to Gogo’s (rather modest) increase in take rates over the last year has been the growing use of sponsorships, which are counted as part of the “take rate” even when passengers do not pay anything to use the service.
The chart above shows how Gogo’s take rate has developed by quarter since its launch, and how much it has been driven by promotional activity, with take rates at an all time high during the Google promotion in Q4 2010, and falling quite sharply when there was very little promotional activity in Q2 2011. Q1 2012 saw another boost to take rates, again coinciding with high levels of sponsorship revenues.
Though there is clearly some underlying growth in the take rate, during the remainder of 2012 this is likely to be diluted by the increasing number of Gogo installations on regional jets (where usage is much lower than on longer flights) and the (more marginal?) deterrent effect of recent price increases. As a result, I now expect that barring some large scale sponsorship, Gogo take rates for 2012 as a whole are unlikely to exceed 6%, and if we only count paid usage by passengers, then the true take rate may remain below 5%.
That’s pretty scary given the $1B valuation supposedly being mooted for Gogo’s IPO and the $200M valuation put on Row44 in its recent fundraising transactions. Its also interesting that Gogo’s bankers insisted that their recent $135M loan should be secured against Gogo’s profitable Business Aviation subsidiary, with cashflows from that operation potentially devoted to pre-payments on the loan, so that their loan recovery would not depend solely on the success or otherwise of Gogo’s commercial aviation business.
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07.12.12
Posted in Financials, LightSquared, Operators at 3:33 am by timfarrar
LightSquared’s recent filing of the Employment Contract with Sanjiv Ahuja, its former CEO, makes for interesting reading, especially for those impacted by the LightSquared bankruptcy. According to the terms of the agreement, Mr Ahuja was entitled to a base salary of $2M per year plus a target bonus of 150% of his base salary. In addition he was to receive restricted stock with an initial fair market valuation of $135M. All of his domestic travel was to take place by private jet (which must have been useful because NetJets was paid $227K in the 90 days prior to LightSquared’s bankruptcy filing, and NetJets was billing around $100K per month prior to Mr Ahuja leaving in February 2012), including short haul international travel, and “in his reasonable good faith judgment” Mr Ahuja could also “require the use of private planes for long-haul international travel, as appropriate”. Remarkably, however, Mr Ahuja was only expected to devote 50% of his working time to the company.
Now that a proposed settlement has been reached over termination of his employment, Mr Ahuja will be able to retain the 8.83M shares of stock he would have been granted (apparently he did not take the restricted stock he was entitled to at the time, because of the large tax liability that would have been incurred: perhaps he thought that the price would go down rather than up!). Indeed, though the 8.83M shares apparently had a “fair market valuation” of $135M (presumably reflecting the restrictions applicable to the grant), LightSquared Inc. had sold 3.39M shares of common stock to SK Telecom for $60M, giving an market valuation of $17.71 per share, for a total value at that time of $156.4M. Indeed, if Harbinger’s supposed prior contribution of $2.9B of assets to LightSquared (in exchange for 91.88M shares) had been taken at face value, then Mr Ahuja’s shares could theoretically have been worth as much as $31.50 each, for a total of $278M. And if LightSquared’s spectrum had been worth $12B, after the waiver grant, as LightSquared’s consultant told the FCC, then (after deducting LightSquared’s debt) Mr. Ahuja’s stock would have been worth $90-$100+ per share, or at least $800M!
Of course, one has to wonder what on earth Mr Falcone thought he was buying for this sort of money, because it certainly didn’t seem to be a realistic judgment about LightSquared’s prospects of resolving its GPS issues. However, perhaps what was really important was that LightSquared’s debt investors believed Mr Ahuja’s assurances that there wasn’t any need to worry about GPS, when he was persuading them to invest an additional $586M in the company in February 2011. I’m sure Mr Ahuja therefore appreciates the indemnification he is receiving under the proposed settlement agreement “to the fullest extent permissible under LightSquared’s organizational documents and the Employment Agreement…from and against any and all claims and demands related to actions or omissions of the Executive during the time the Executive was as a director, officer or employee of LightSquared.”
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