01.14.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:55 am by timfarrar
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”. That quote from Charles Dickens certainly seems a good summary of the current supposed spectrum crisis, and the last few weeks have been first the best of times and now the worst of times for Harbinger and LightSquared. Initially it looked as if luck was on their side, as their satellite antenna problem was resolved (something estimated to us as less than a 20% probability by technical experts) and the FCC seemed poised to approve an updated business plan that would enable LightSquared’s partners to offer terrestrial-only service and handsets. But now, an intervention from the NTIA and other US government departments has left observers wondering whether and how LightSquared will be able to move forward.
However, I’m more intrigued by the differences between the two cities of New York and Washington DC, as I wonder if, when all’s said and done, this will end up as a tale of how the ambitions of a New York financier were stymied by the bureaucratic and regulatory complexities of Washington DC. In that context, its particularly interesting to look at another contrast between the two cities, namely what you can get for $20M in each place.
In New York, for example, $20M will cover less than half the cost of a mansion, especially if you need to pay for extensive renovations and hire a security guard to “push and jostle” nosy photographers. On the other hand, in Washington DC, $20M would pay for an entire federal agency for six months, given that the estimated annual budget of the National Telecommunications and Information Administration (NTIA) is only $40M for FY2010 and $46M for FY2011. Of course, despite what some people might suggest, it appears that not everything in Washington DC is for sale.
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01.12.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 11:41 am by timfarrar
In the game of musical chairs being played by spectrum holders such as Clearwire, LightSquared, TerreStar, DBSD and NextWave, it looks like we may be approaching the point at which the music stops and we see who has secured a strategic partner and who hasn’t. At the moment there certainly appears to be a scramble to get into T-Mobile’s chair, as Clearwire reinforces its efforts to secure funding and Harbinger looks to move forward with its LightSquared buildout.
Clearwire’s newly appointed director, Ben Wolff, is taking the role of strategic adviser to secure a deal, with the most plausible outcome involving an equity investment from T-Mobile. In December, Sprint indicated it would be receptive to such a deal (and later turned down the chance to invest more money itself), after seemingly vetoing that prospect back in September, and pushing instead for Clearwire to move forward with a spectrum sale. However, the spectrum sale apparently went pretty badly, given that expectations were quickly downgraded from “$2.5 billion to $5 billion” to a more recent “up to $2 billion“.
LightSquared is also expected to announce its next moves pretty soon, given that LightSquared said last October it would “accelerate its planned implementation of the Phase 2 [spectrum lease] agreement [with Inmarsat], which now will take effect by the end of the year”. However, if a Phase 2 notice had been given to Inmarsat last month, then I understand Inmarsat would have been obligated to make a public release to that effect. LightSquared said at that time it had “already signed wholesale distribution agreements ‘and is in advanced negotiations with numerous potential partners’”, although with the exception of last summer’s 1.4GHz spectrum deal with Airspan, we are still waiting to hear about who those partners might be.
It seems that LightSquared may have to wait for approval from the FCC for the proposed change to its business plan before it is able to finalize its next round of investments and partnerships. Somewhat to my surprise, this did not get approved in conjunction with the FCC’s net neutrality ruling in December, apparently because of objections from the GPS Industry Council about potential interference with GPS receivers. In fact, the GPS Industry Council has now proposed that action on the LightSquared waiver application should be deferred (for what appears to be a 3-6 month period) until the NTIA has analyzed this interference question. Such a delay would clearly make it all but impossible for LightSquared to meet its objectives of launching commercial services later this year, and calls into question its ability to meet the FCC deadline of December 31, 2012 for LightSquared to offer service to 100M POPs. Of course, if delays in regulatory approvals caused LightSquared to miss this deadline, then the FCC would presumably issue a waiver. However, one key issue is that Inmarsat has 30 months from the point at which LightSquared issues its Phase 2 notice to make this spectrum available to LightSquared, and without this additional spectrum the capacity of LightSquared’s terrestrial LTE network would presumably be rather constrained.
How all these regulatory challenges are impacting the considerations of LightSquared’s potential partners is hard to tell, but this series of events (now potentially complicated further by the Mexican L-band satellite contract with Boeing in December) does help to explain why it has been so difficult for ATC spectrum holders to find strategic partners, and why MSS spectrum assets generally trade at a discount to similar terrestrial spectrum.
UPDATE: The NTIA has just filed a rather devastating letter with the FCC, indicating that “Several Federal agencies with vital concerns about this spectrum band, including the Departments of Defense, Transportation and Homeland Security, have informed the NTIA that they believe the FCC should defer action on the LightSquared waiver until these [GPS] interference concerns are satisfactorily addressed”. Its not clear whether the FCC will now be in a position to approve the Draft Order and Authorization that it had sent to the NTIA (according to the DoD letter attached to the NTIA submission) when it is already facing significant criticism for supposed overreach in the net neutrality proceeding. If that doesn’t happen, then it will be interesting to see where Harbinger goes from here.
FURTHER UPDATE: LightSquared’s CEO sent a letter to the NTIA on January 6 offering $20M to fund a six month study of the GPS interference issues. Obviously LightSquared wants this study to take place after FCC approval of its new business plan (which it notes is “an essential building block for our network and requires quick favorable action so that we may continue to roll out our network”), whereas the NTIA has requested that this approval should not be granted until after the study has been completed and their concerns addressed.
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12.06.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:02 pm by timfarrar
LightSquared has received significant backing from the highest levels of FCC as the company moves forward with deployment of its 4G LTE network, including several statements by FCC Chairman Genachowski in support of LightSquared’s public unveiling in July and its plans to donate 2000 handsets to the Indian Health Service, announced in September. Now we will have to wait and see whether the FCC will act to approve LightSquared’s recently updated ATC business plan, which met with significant opposition from cellular interests last week. These comments requested that this “novel re-interpretation of the Commission’s integrated service requirement” be deferred for consideration as part of the currently pending MSS rulemaking proceeding, which would likely delay any resolution of the request by many months.
Unfortunately it seems that LightSquared doesn’t have the friend in high places that really matters, as an act of God appears to have left the SkyTerra-1 satellite (which was launched on November 14, carrying “with it, the ambitions of one of the world’s richest hedge fund managers, Philip A. Falcone“) experiencing problems in deploying its 22m L-band antenna. While we probably won’t know until the end of this month whether or not the problem can be solved, if it can’t, then the satellite would very likely be unable to communicate with LightSquared’s handsets, and the company would be forced to launch the SkyTerra-2 satellite (which may or may not have been intended to remain a ground spare). Space News estimated last week that this could probably be done “within a year”, but that was before Sunday’s Proton rocket failure, which fell into the Pacific Ocean along with its cargo of 3 Glonass satellites. Although SkyTerra-2 currently is listed as having a March 15, 2011 launch date, it seems hard to imagine that it would be possible to go ahead with the launch at that point in time, unless the antenna was uninsured (as happened with TerreStar-1 in the wake of the Solaris problems last year).
In the meantime, it will be interesting to see whether and how LightSquared moves forward with the buildout of its terrestrial LTE network, which it is required to construct “without regard to satellite service” under the second of the conditions agreed with the FCC in March this year. Given the apparent potential for conflict between this condition and the original ATC gating criteria (which require satellite service to be commercially available before the ATC network is launched), it will be particularly fascinating to see what the FCC does next.
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11.30.10
Posted in Financials, Handheld, Inmarsat, Operators, Spectrum, TerreStar at 5:51 pm by timfarrar
TerreStar has finally filed the exhibits to its Disclosure Statement which set out more details about its Genus business plan and the valuation of its spectrum, and though I don’t think Blackstone are paying tribute to Leslie Nielsen when they respond “I am serious” (and don’t call me Shirley), their Genus business plan has caused much mirth in the MSS industry.
I’ve previously pointed out the similarities to the launch of Iridium (and ironically Blackstone were also the financial advisers to Motorola in their attempts to restructure Iridium after it filed for bankruptcy in 1999). Just as back then, it seems hard to understand how TerreStar can hope to capture 41K subscribers with an average wholesale ARPU of $50 by the end of 2011, let alone 156K subscribers with an average wholesale ARPU of $42 by the end of 2014 (almost equal to the size of the entire North American handheld MSS market today), given the reception that the Genus phone has received so far in the market, and the recent laughable attempt to sell the phone to consumers.
However, it is interesting that TerreStar has now initiated a formal sale process for its assets in an attempt to gauge their market value. This has also generated some amusing responses, but of more interest is whether this means TerreStar has reached a deal with Harbinger to avoid a fight over the “unsecured creditors’ entitlement to excess value of TerreStar-2 (after repayment of the Purchase Money Credit Agreement)” which is acknowledged in the Liquidation Analysis to be an issue of contention (and is presumable one reason why Harbinger has been buying up TerreStar Networks’ 6.5% Exchangeable Notes). Certainly, this process would be an obvious way to find out whether one or other of the European S-band licensees (Inmarsat and Solaris) really is interested in buying the TerreStar-2 ground spare, in order to meet their license obligations to the European Commission, and to see whether the $200M valuation placed on this satellite by an appraisal back in August can actually be realized in practice.
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11.29.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 3:57 pm by timfarrar
Last Friday the FCC extended the deadline for comments on the LightSquared’s updated ATC plans to December 2, with reply comments due by December 9, after a request from the CTIA. As I noted last week, it will be interesting to see the response from different cellular industry players, to what the CTIA characterizes as a “new precedent with significant legal, regulatory, and policy effects”.
If the FCC does agree to LightSquared’s request that it should be permitted to offer integrated service just to its wholesale customers, with no obligations upon those customers to offer only integrated service packages, this would mean that end users would then be able to purchase terrestrial-only terminals and service plans. In such circumstances, it is hard to see what would be gained by the 2GHz MSS players agreeing to relinquish their spectrum for an incentive auction, and to share the proceeds of that auction with the government. As a result, the FCC could end up torpedoing the intentions of its own NPRM/NOI, particularly the objective of gaining “appropriate compensation for the step up in value” of the 2GHz spectrum, because, as the FCC admits, it cannot force DBSD and TerreStar to give up their satellite spectrum, while these companies have operational satellites in orbit. Both companies would therefore presumably be well within their rights to hold out for a similar wholesale ATC-based arrangement to that planned by Harbinger and LightSquared, under which they could keep all of the proceeds from (for example) a leasing arrangement with a major cellular operator.
The FCC might still have some leverage, as it would be able to impose buildout conditions on any proposed ATC license modifications (or on a future merger of DBSD and TerreStar). However, any deal could also be delayed considerably by the additional uncertainty that would be introduced over the value of the 2GHz MSS spectrum in the current bankruptcy proceedings. This is likely to be particularly problematic in the case of TerreStar, where it already appears that there will be substantial disagreements between the parties concerned, due to the numerous classes of creditors, including both secured and unsecured debt holders at TerreStar Networks, plus preferred and common stock holders at TerreStar Corporation.
Such an outcome would clearly help Harbinger, as it looks to attract investors and partners for LightSquared, because the 2GHz spectrum would then provide a less clear-cut alternative for cellular operators such as T-Mobile. In that context it was particularly interesting to see a research note issued last week by New Street Research in London, which rated a “deal with Echostar (as likely owner of TerreStar and DBSD spectrum)” as the most probable of five alternative spectrum sources for T-Mobile USA, while suggesting that “a deal with LightSquared (or its successor)” was the least likely option for T-Mobile.
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11.22.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:49 am by timfarrar
On November 18, LightSquared filed an updated showing with the FCC of its plans for compliance with the ATC gating criteria. LightSquared states that it will ensure that its wholesale offering includes 500 kbytes of satellite capacity for every 1 Gbyte of terrestrial capacity it provides to a partner, and that dual mode chipsets are available through its $50M development agreement with Qualcomm. However, LightSquared also admits that its “retailer customers will have the ability to offer terrestrial-only plans to their own end users” and that it intends to “file reports with the Commission every six months providing the number of terminals in service falling into each of three categories: MSS only, dual-mode MSS/ATC, and terrestrial-only” (implying that terrestrial-only chipsets and/or devices will also be developed).
In view of the poor reception that the TerreStar Genus phone has received, both in the MSS community and amongst terrestrial-oriented reviewers, it is hardly surprising that potential LightSquared partners are unlikely to be enthused about attempting to sell a dual mode satellite-terrestrial service to a mass market, and would much prefer the opportunity to offer terrestrial-only service. Indeed, as I noted previously, the responses from Leap Wireless and T-Mobile in the FCC’s current MSS NPRM/NOI proceeding, were supportive of interpreting the ATC gating requirements in a manner which would allow for terrestrial-only devices.
While LightSquared states that its “revised business plan satisfies the Commission’s integrated service requirements for L-band MSS systems” the original ATC rules did not consider the business plan that LightSquared now envisages, that of a wholesale provider whose customers are retailers (or other operators) who repackage and sell on the service. For example, the FCC’s February 2005 ATC report and order states:
The purpose of ATC is to enhance MSS coverage, enabling MSS operators to extend service into areas that they were previously unable to serve, such as the interiors of buildings and high-traffic density urban areas. We will not permit MSS/ATC operators to offer ATC-only subscriptions, because ATC systems would then be terrestrial mobile systems separate from their MSS systems. We therefore clarify that “integrated service??? as used in this proceeding and required by 47 C.F.R. § 25.147(b)(4) forbids MSS/ATC operators from offering ATC-only subscriptions.
LightSquared appears to be arguing that because it is offering integrated service to its customers, it is irrelevant whether or not those customers offer ATC-only subscriptions to their end users. Likewise, instead of seeking the safe harbor that all devices will be dual mode, LightSquared apparently intends this narrative (as required by the February 2003 ATC Order) to provide “for Commission review evidence demonstrating that the service they propose to offer will be integrated. This can be accomplished through technical, economic or any other substantive showing that the primary purpose of the MSS licensee’s system remains the provision of MSS.”
It will therefore be interesting to see the responses to this application (although as noted below the short timeframe may limit the number of comments) and the degree of support that LightSquared receives from the FCC. It seems all but certain that AT&T and Verizon will continue their hostility to LightSquared, while assuming Sprint remains committed to Clearwire, it would also likely be counted on to oppose the application. On the other hand, I would expect most of the smaller cellular operators including T-Mobile, Leap and US Cellular to be supportive, as they look to ensure that more spectrum options are available when they eventually decide how to move to 4G.
One additional (and more speculative) conclusion that could also be drawn from this submission is that LightSquared may now push off the announcement of any major partnerships (for example with one or more cellular operators) until more clarity is available on the FCC’s attitude to both this application and the MSS NPRM/NOI (where LightSquared has requested that the FCC reconsider the requirement for a ground spare satellite). This is because it would seem surprising for LightSquared to introduce additional regulatory uncertainty over its business plan if the company was in a position to announce a series of partnerships in the near term (which until recently I had expected might come shortly after the launch of SkyTerra-1). Nevertheless, LightSquared has announced previously that it intends to exercise its Phase 2 option with Inmarsat before the end of the year (which will involve substantial additional payments), and Harbinger appears to be under considerable pressure from its investors to demonstrate the progress it is making, so there will undoubtedly be more developments in this story soon.
UPDATE: Given that the FCC has placed this submission on an extremely accelerated timescale, with comments due by November 29 (immediately after the Thanksgiving holiday) and reply comments due by December 6, it seems plausible that LightSquared might well be expecting to receive a decision on this application very soon. Assuming this ruling was favorable, LightSquared might therefore still be able to announce its planned partnerships and exercise the Phase 2 spectrum option with Inmarsat before the end of the year.
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11.19.10
Posted in Financials, Operators, TerreStar at 3:40 pm by timfarrar
This afternoon, Harbinger filed another Form 4, which detailed its continued sales of TerreStar Corporation’s common stock, where it has sold a total of 37.4M common shares since October 22, and the purchases of 6.5% Exchangeable Notes in its Blue Line Fund, where it has now acquired $31.55M (in face value) of these Notes. As of June 30, Harbinger’s Master Fund held 31.6M shares of TerreStar Corporation and its Special Situations Fund held 11.6M shares of TerreStar Corporation. As a result, it appears that Harbinger has now disposed of nearly all of its common equity interests in TerreStar Corporation, and currently owns just 3.7M shares of common stock.
The Form 4 also indicates that Harbinger still has a beneficial ownership of 37.05M shares in the Master Fund and 10.33M shares in the Special Situations Fund, which includes the conversion rights associated with Harbinger’s exchangeable note and preferred stock holdings, plus its Series E holdings (equivalent to 30M shares of common stock). Based on Harbinger’s prior ownership of one third of the $178.7M in Exchangeable Notes, this would equate to beneficial ownership of 10.7M common shares, while its Series B preferred stock holdings presumably account for the balance of 3M shares (which would equate to holding $100M in face value of Series B preferred stock at the designated exchange ratio of $33.33 per share).
With its recent Blue Line purchases, Harbinger now appears to have acquired control of a majority of the TerreStar Networks 6.5% Exchangeable Notes, although it has had to pay a significant premium to do so (paying 82 cents on the dollar for its most recent purchases, compared to 43 cents when it started buying). Harbinger has also disposed of most of its holding in the TerreStar Purchase Money Credit Facility, with MAST Capital Management now holding 47% of the $85.9M in outstanding loans and presumably Harbinger therefore only holding 3% of the loan. Thus Harbinger’s position is now effectively concentrated in the Exchangeable Notes at TerreStar Networks and the Series B and Series E Preferred Stock at TerreStar Corporation, so it will interesting to see how this impacts its future actions in the TerreStar bankruptcy.
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Posted in Financials, LightSquared, Operators, Regulatory at 10:34 am by timfarrar
Back in March, we noted the rumors that Huawei could end up building and vendor financing the LightSquared network to the tune of $1B+ and highlighted the potential security concerns that would be associated with such a move. Today the Wall St Journal’s story on Huawei appears to confirm this rumor, stating that Huawei’s “acquisition attempts since [2008], including an attempt to buy into Harbinger Capital LLC’s high-speed wireless network, have been quashed due to security-related concerns as well, according to a report by the U.S.-China Economic and Security Review Commission”.
This raises the interesting question of whether Huawei was one of the potential funding sources that Harbinger was counting on when it decided to buy SkyTerra in 2009, and whether Nokia Siemens Networks (NSN) was actually the second choice as prime contractor to build the LightSquared network, after the Huawei deal fell through. It also leads us to wonder whether NSN will eventually provide substantial vendor financing for LightSquared, and at what stage that will be announced. With Reuters reporting last week that Nokia and Siemens were making “little progress in efforts to find a deep-pocketed partner for their ailing telecom gear venture” it might now be more difficult for NSN to make a major funding commitment to LightSquared in the near term.
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11.14.10
Posted in Financials, LightSquared, Operators, Spectrum at 5:42 pm by timfarrar
Am I the only person to be somewhat suspicious about the timing of this week’s revelations of withdrawal requests from Harbinger’s funds and investigations by the Securities and Exchange Commission and U.S. Attorney’s office into whether the firm “misled investors” and “improperly allowed some clients to withdraw money following the financial crisis while barring others from doing so”? Though these stories have just emerged, it appears that the withdrawal requests were submitted at the end of September, while the investigations began this summer. As a result, I have to wonder if the timing of these stories was intended to derail the next stage of LightSquared’s plans.
This last week has seen wireless operators such as US Cellular and Leap Wireless state explicitly that they could be open to becoming wholesale customers of LightSquared. T-Mobile also appears to be keeping its options open, given it has not yet struck a deal with Clearwire as was being negotiated back in September, and T-Mobile also indicated potential interest in LightSquared’s capacity this week. Whether or not these operators want to do a deal with LightSquared today, it is certainly in their interests for LightSquared to survive, and to be available as a potential source of capacity when they do reach a decision on 4G. That would, at the very least, help to hold down the price of alternative spectrum (from a source such as Clearwire or a future FCC auction), and their expressions of support come at an important moment for Harbinger.
LightSquared stated over a month ago that it had “already signed wholesale distribution agreements” and was “in advanced negotiations with numerous potential partners”. It also said that the company intended “to accelerate its planned implementation of the Phase 2 agreement, which now will take effect by the end of the year”. With today’s successful launch of the SkyTerra-1 satellite, I had expected to see an announcement of at least some of these partnerships in the very near future, in conjunction with additional equity investments (whether from wholesale partners, or perhaps more likely from other financial investors) to validate the valuation that Harbinger has placed on LightSquared. However, with Harbinger’s clients fuming, we will have to wait and see whether the recent revelations will delay or even derail these plans.
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11.08.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 4:18 pm by timfarrar
Last Thursday, Clearwire announced that it was laying off 15% of its staff (as I suggested a couple of weeks ago), in an attempt to conserve its cash resources, which are only expected to last “through the middle of 2011″. When news first emerged of the Clearwire spectrum auction back in mid-October, I suggested that it was going badly and appeared to have been leaked by Clearwire itself, and it certainly doesn’t appear that the auction has concluded with a positive outcome (i.e. with T-Mobile agreeing to pay a significant amount for the 40MHz of spectrum that Clearwire was trying to sell).
The question now arises of what this means for LightSquared, which has also been pursuing a deal with T-Mobile as a potential wholesale customer and/or strategic partner for its 4G LTE network. Although T-Mobile appears not to have struck a deal with Clearwire, and thus is at least potentially still a partner for LightSquared, it is far from clear whether this is good news. If T-Mobile’s interest in Clearwire was thwarted because of roadblocks thrown up by Sprint (i.e. Sprint’s unwillingness to share a network with a key competitor), then it is quite possible that a deal with LightSquared could still be on the cards. However, if instead T-Mobile has decided that the price of spectrum is only going to go down over the next 6-12 months (and perhaps even in the medium term), as Clearwire and LightSquared become increasingly desperate for a deal, then that would certainly be bad news. T-Mobile might even be waiting to see if the 2GHz MSS spectrum could present another possible alternative, once the TerreStar and DBSD bankruptcies are resolved, given that this spectrum is closer to its existing PCS and AWS holdings than either the LightSquared L-band spectrum or the Clearwire 2.5GHz spectrum, and could even be available without ATC restrictions (via an incentive auction) in a couple of years’ time.
Whatever the reason, if T-Mobile does delay its decision on 4G spectrum (which might well be suggested by the recent rebranding of its HSPA+ network as 4G), then that would tend to indicate that it is not feeling too much pressure from the supposed “spectrum crunch”. While that may be at least partly because it won’t be offering the iPhone anytime soon, it will be interesting to see whether it also prompts more people to question the received wisdom about future spectrum demand.
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