01.15.09
Posted in Aeronautical, Financials at 10:03 am by timfarrar
United has now joined the North American airlines signing up to fit the Aircell service for in-flight Internet connectivity. Similar to American, it is initially just installing the service on its P.S. business-oriented cross country flights between JFK and LAX/SFO (though American also includes some 767 flights to MIA). Undoubtedly this is a great boon for business travelers, and our experience of the service was excellent. However, to date it looks like overall usage levels are very low, since few leisure travelers are willing to pay $12.95 even for a five hour flight.
On a American SFO-JFK afternoon flight last October, we decided to walk the plane and count the number of users: the result was 8 out of 34 business and first passengers were using it, but only 2 out of about 110 economy passengers. I’m sure American is pleased with this – since the high revenue customers at the front of the plane are happy, but the amount of money flowing to Aircell is far from enough to pay for the network. We understand that to date Aircell has installed the equipment for free, so the only cost to the airline is the fuel to fly it around.
Based on the usage levels we saw, gross Aircell revenue is probably only ~$60K-$80K per plane per year, less even than the $100K seen by Connexion-by-Boeing back in 2006. Connexion had many of the same characteristics – giving away equipment, a high fixed cost network (in that case global satellite capacity leases rather than a national tower network), a large staff, and was also a great service for passengers and airlines. There are a few differences, most notably that the Connexion equipment was much heavier and more expensive than the Aircell terminals, but also that Aircell can supplement its passenger revenues with installations in the business jet market. However, Boeing ultimately decided it couldn’t afford to continue to run the service, as did Claircom, Airfone and others with their earlier voice services. In the current financial climate, we wonder if Aircell’s network will be able to avoid the same fate? Certainly they seem a long way from the prediction of 2000 equipped aircraft by the end of 2009 made by Aircell’s CEO last summer.
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11.03.08
Posted in Financials, ICO/DBSD, Spectrum at 12:47 pm by timfarrar
After the punitive damages phase of the ICO-Boeing lawsuit, it looks like the total damages awarded to ICO (including interest) will be approximately $707M. The question now facing ICO, assuming it is able to settle the case and collect something approaching this amount (which is by no means a foregone conclusion since Boeing has stated that it will appeal and according to ICO it would likely take two years for such an appeal to run its course) is what to do with the money.
Broadly speaking there are three things that this money could go towards:
1) Repayment of the ICO North America convertible bonds (which total $767.7M including interest and are due in August 2009)
2) Bringing the Mobile Interactive Multimedia (MIM) system into commercial operation in North America by 2010 (which ICO has stated will require about $700M of further investment)
3) Investing in completion of the global MEO system, which ICO is attempting to retain its license for in Europe (or conceivably even switching to a new GEO system in Europe, similar to the change ICO made in North America).
The most interesting issue is that the convertible bondholders do not actually have any rights to the proceeds of the Boeing lawsuit, since they have invested in ICO North America, not the ICO Global parent company. As such, their only security is the North American GEO satellite, the development work towards MIM, and the associated spectrum licenses. If ICO decided to sell these assets on the open market, it is entirely possible in the current financial market that it would realize far less than the $767M due on the bonds. However, it seems rather unlikely that ICO Global would simply put ICO North America into bankruptcy and keep the lawsuit proceeds for the parent company. Presumably they might instead attempt some swap of the ICO North America debt into ICO Global equity at a discount to the $767M face value of the bonds. This seems especially likely if there is a delay in concluding the Boeing lawsuit and so ICO’s available cash is limited, and appears to be the approach indicated on ICO’s conference call today.
ICO also remained tight lipped on the conference call about priorities for North America vs Europe. However, in terms of moving forward with ICO’s satellite system, its hard to see that it would make sense to prioritize a new deployment in Europe in preference to bringing the existing North American system into full commercial operation. It seems doubtful that there is a particularly positive business case for Solaris or Inmarsat’s proposed European S-band project, let alone for a new entrant such as ICO, and ICO seemed to hint on the conference call that it would focus on its current single MEO satellite as the reason why it should be entitled to a European license. However, even the future for MIM in North America is questionable in light of Toshiba’s decision in July 2008 to shut down the equivalent MBCO service in Japan next year and ICO emphasized its intention to pursue fiscal restraint, delaying commercial service until the economic and financial environment improves.
Thus, as we’ve speculated before, it looks like ICO will continue to wait and see whether cellular operators eventually decide to acquire MSS operators such as ICO to get hold of their spectrum, perhaps revisiting the handheld MSS market in the meantime. It now seems probable that ICO will be able to outlast TerreStar and thus it could also perhaps hope to acquire TerreStar’s assets and spectrum in the future at a very attractive price, creating a more compelling spectrum platform for terrestrial partners.
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10.09.08
Posted in Financials, ICO/DBSD, Inmarsat, Spectrum, TerreStar at 10:52 pm by timfarrar
We now know that there are at least four applicants for the European 2GHz MSS spectrum licenses, namely Solaris (the SES-Eutelsat joint venture), Inmarsat, ICO and TerreStar. Applications were due by October 7, and the first phase of the selection procedure (identifying which applicants are technically and commercially “qualified”) should be completed in the first half of 2009. There are 2x30MHz of spectrum available, which is sufficient for 2 or at most 3 applicants, so the current list of applicants will certainly have to be cut back during the selection process.
Perhaps the most surprising application is that from TerreStar, given that it has to date failed to raise external funding for TerreStar Global (its European venture) despite attempting to do so over the last year. TerreStar may calculate that it has little to lose, since it has committed several million dollars to EADS for initial preparatory work and it has already signed a launch agreement with Arianespace. From this point of view, its financial commitments to the European project to date are equivalent to those of Inmarsat (which has stated it will only spend “single digits millions of dollars” on “business development activities” prior to securing a license), although of course TerreStar does not currently have sufficient funding available to complete construction and launch of a European satellite, in addition to its two North American satellites (one of which is a ground spare). However, since both Solaris and Inmarsat strongly prefer 2x15MHz over the 2x10MHz which a three way split would imply, we assume that if TerreStar’s application was approved, it might subsequently seek to team up with one of these two competitors, rather than pursuing a standalone project. For example, Solaris has already indicated that it may acquire a follow-on satellite to the Eutelsat W2A to offer wider pan-European coverage.
Its also worth noting that in addition to putting in an application, ICO is separately seeking to challenge the legality of the EU’s licensing process, in an attempt to preserve the spectrum priority rights of its MEO satellite that was launched in 2001. ICO had been hoping to know the outcome of its litigation with Boeing before the European 2GHz applications were due, but to date it appears the jury has not reached a verdict (after three weeks of trying). Clearly, given the amount of money at stake, this litigation will have a significant impact on how ICO decides to move forward from here on.
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09.23.08
Posted in Financials, Globalstar, Inmarsat, Iridium at 11:05 pm by timfarrar
Despite several successful fundraising deals this year by Globalstar, TerreStar and MSV, Iridium’s deal with GHL is noteworthy as the first investment to directly validate the potential of the MSS market in the absence of spectrum upside, since Iridium cannot free up significant amounts of spectrum for an ATC play.
However, there is no direct read across to the MSS market potential for other players, since Iridium and Inmarsat are the only MSS operators that can provide truly global service across the oceans and thereby address the maritime and aeronautical segments that account for roughly half of wholesale MSS service revenues. These markets segments continue to grow strongly, particularly for broadband communications, and we expect Iridium’s next generation system to be designed to compete more directly with Inmarsat for maritime and aeronautical broadband customers. Combined with moderate progress in land-based handheld and low data rate MSS markets, Iridium should be able to grow its revenue and subscriber base over time, despite increasing levels of competition from new players such as ICO, and Inmarsat’s entry into the handheld MSS market.
Where we can draw some conclusions for other players is on the maximum amount Iridium could afford to pay for Globalstar in the event of a merger, given the value placed on Iridium in this transaction ($591M). Given that Iridium’s revenues this year will be about three times those of Globalstar, and that Iridium presumably does not ascribe value to Globalstar’s ATC opportunity, it seems likely that Iridium would place such a low valuation on Globalstar as to all but rule out any prospects of a negotiated deal between the two companies. At least in this case, it therefore looks like we won’t see a merger being agreed any time soon.
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09.16.08
Posted in Financials, ICO/DBSD, TerreStar at 9:04 pm by timfarrar
TerreStar announced today that it has sold its remaining stake of 29.9M shares in Skyterra to Harbinger and other investors for a total of $123M. This will meet TerreStar’s capital needs into 2010, well beyond the delayed launch date for TerreStar’s first satellite in 2Q2009.
We find it particularly interesting that this transaction took place in the week in which ICO’s ongoing lawsuit with Boeing has gone to the jury for a decision. There has been speculation in the past that eventually ICO and TerreStar will merge, to secure a much improved spectrum position, and a key challenge in determining the value of ICO’s business has been the uncertainty in respect of the Boeing lawsuit. ICO faces a deadline of August 2009 to refinance over $750M in convertible bonds, so we wonder if the upcoming resolution of this lawsuit might provide a catalyst to restructure and merge with TerreStar. Certainly TerreStar’s actions in obtaining further funding would help to strengthen its position in any such negotiations.
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Posted in Financials, Globalstar at 8:08 am by timfarrar
Globalstar faces its next quarterly milestone payment to the satellite construction escrow account with Thales Alenia Space at the end of September. The company has admitted that sooner or later it will need to raise more money to complete its second generation satellite constellation – it has previously indicated that $250M+ will be needed, though some of this could be offset by cashflows from operations if the SPOT product really takes off. However, in the short term, as we’ve noted previously, SPOT isn’t producing cash. Excluding the money already in the escrow account, Globalstar had available liquidity of $75M at the end of June and expected payments to Thales Alenia of EUR146M over the 12 months to June 2009. The Euro/dollar exchange rate has fallen by about 10% since then, cutting the value of this EUR146M to only $208M in dollar terms, compared to $231M at the end of June. As a result the payment which Globalstar has to make into the escrow account at the end of September may be closer to $50M than the $60M+ it could have been if the exchange rate had remained constant. The original sum would have come close to using up Globalstar’s remaining liquidity, but now it looks like Globalstar may have another 3 months to raise additional funds.
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09.08.08
Posted in Financials, General at 8:23 pm by timfarrar
This isn’t really an MSS topic, but having worked for several years in the late 1990s on the Teledesic project and with fond memories of evaluating the market for broadband in developing countries, I thought the emergence of O3b Networks with reportedly $60M of investment from Liberty Global, Google and others, merited a comment.
Some of the commentaries appear to conflate O3b’s satellite backhaul business plan with the satellite access services offered by Wildblue and HughesNet in the US. O3b can’t offer services to the end user (except the largest corporates) since customers will require expensive terminals which track their Low Earth Orbit satellites. As Teledesic found out in the late 1990s (and as is still true today) you either need a couple of moving dishes (to ensure seamless handover) or an electronic steered antenna – both are well beyond realistic consumer prices (not to mention their installation difficulties compared to fixed geostationary terminals).
Instead O3b will offer backhaul for ISPs operating in countries without fiber links, so they can obtain connectivity to the Internet backbone. That’s a fairly well established and highly competitive market (valued at several hundred million dollars a year), with Intelsat and other FSS players competing intensively on price. Characteristically the market grows as Internet take-up and usage expands within a country, then collapses almost to zero within 12-18 months of fiber’s entry. There’s absolutely no reason for O3b to change this equation – satellite is at least two and in some cases closer to three orders of magnitude more expensive than large fiber connections for this backhaul service, and fiber continues to decline rapidly in price.
A second market is for cellular backhaul within a country, when fiber isn’t deployed outside the major cities. Again this market is somewhat transitory: terrestrial microwave links become a good option when the cellular coverage is sufficiently contiguous for daisy chaining links from one tower to another, but the satellite opportunity is longer lasting than ISP backhaul in major cities. The opportunity here for O3b will also be affected by how much more expensive its terminals are than standard VSATs, since somewhat more limited amounts of capacity are required. However, O3b’s low latency may be helpful for this voice-oriented traffic.
Thus O3b is simply a bet that quite a few countries, particularly in Africa, won’t get fiber any time soon. Even though its been (very) slow to get going, I’d rather put my money on EASSY, an African fiber project with many of the telcos in the region as signatories (as well as credible international players), which has just entered the construction phase and is hoping to be operational in 2010, well before O3b could expect to be up and running.
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