04.13.20

Solving real problems doesn’t mean bailing out fake business plans

Posted in LightSquared, Operators, Regulatory, Services, Spectrum at 1:41 pm by timfarrar

No I’m not talking about SpaceX and the RDOF auction, I’m returning to a topic I haven’t written about for years (but also provided plenty of opportunities for pointing out the idiocy of some billionaires), that of Ligado.

Over the last year there’s been a great deal of dysfunction at the NTIA, leading to the unfortunate loss of David Redl and what Oscar Wilde might have described as the “careless” loss of Diane Rinaldo. These problems were amply summed up in Redl’s speech a few days before he resigned, where he noted that:

“In this era of competition for spectrum resources, it can be easy to think that we’re in a winner-take-all battle, but that mindset asks us to make false choices that will shortchange America. For example, we don’t have to choose between making more spectrum available for the private sector and sustaining our critical government systems. We also don’t have to choose between terrestrial 5G and satellite services.”

Although it is not the only area where these problems have been manifested (and the fight over the 24GHz spectrum auction was far more important), Ligado has employed its usual lobbying tactics of attempting to secure high level political backing (just like in 2010-11), apparently getting former acting Chief of Staff Mulvaney to push the FCC into drafting an order to approve Ligado’s application last fall (which is why Defense Secretary Esper’s November 18 letter to Chairman Pai was specifically copied to him) and more recently even persuading Attorney General Barr to make the bizarre proposal that Ligado’s L-band spectrum could be used in conjunction with C-band as part of a plan to counter China, which would involve the “United States aligning itself with Nokia and/or Ericsson through American ownership of a controlling stake” in these companies.

Of course this latest business plan is just as much nonsense as the previous business plans presented by Ligado and its predecessor companies in their attempts to persuade the FCC to grant them a license, because other countries are deploying TDD networks in their C-band spectrum for the entirely logically reason that it maximizes the performance of MIMO, and are never going to approve use of L-band uplinks in satellite spectrum in any case. Why would US telcos decide to do anything other than follow suit?

But Ligado’s management has the singular objective of securing regulatory approval and keeping their jobs, rather than actually developing something that would be economically valuable, just like their prior business plans to provide a dual mode satellite-terrestrial network for utilities (despite seamless roaming from terrestrial to satellite mode being impossible), promise rural LTE service using satellite capacity that cost $10,000 per Gbyte, or meet the supposedly “vast global demand” for dual mode satellite phones that turned out to amount to fewer than 2000 phones when Terrestar tried to sell them.

So let’s take a step back. What is the problem we are trying to solve here? Is this really about whether Ligado gets a worthless approval that does nothing to benefit 5G one way or the other? Or is it really what Commissioner O’Rielly’s letter last week asked the President to do, to make sure that the DoD (and other agencies) do not simply get to veto any reallocation of spectrum within IRAC, and instead the NTIA works to properly balance competing spectrum interests, as Redl said last year?

Ligado’s current proposal, that the FCC simply ignore the NTIA’s public recommendation (which was set out even more forcefully in another letter from Associate Administrator Doug Kinkoph last Friday) and “bring an end to…this proceeding“, would make things worse not better. If the NTIA has stated on the record that “We believe that the Commission cannot reasonably reach such a conclusion [that the harmful interference concerns have been resolved]” then the next step is to set up a process to resolve them, not to simply reject this conclusion. Both sides have behaved badly here, Ligado in claiming that there is no harm whatsoever (when some older high precision devices and perhaps even some DoD systems certainly do need to be replaced) and the DoT in claiming that a 200MHz wide swath of spectrum should remain completely unoccupied in order to protect GPS. The US needs an NTIA that works, not an NTIA that is to simply be ignored.

Moreover the idea that the FCC would rush something like this out on delegated authority (which is basically what was being implied by news reports last Friday that an order could come later that day) would repeat the mistakes of LightSquared’s January 2011 approval, which was also approved by the International Bureau on delegated authority, in a ruling which former (Republican) Commissioner Harold Furchtgott-Roth noted “was an unprecedented and surprising development. That they would make this decision at the bureau level and not at the full commission level is just stunning”.

04.05.20

SpaceX and the FCC’s $16B problem

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX at 11:41 am by timfarrar

Eight and a half years ago, I wrote a blog post that got a lot of attention inside the FCC, comparing LightSquared’s request for a license that would give it a $10B windfall to the relatively small beer of the $535M Solyndra loan scandal. Despite knowing that LightSquared’s promise of an integrated satellite-terrestrial network was nonsense (not least because LightSquared had already told the FCC in November 2010 that the wholesale cost of its satellite data would be $10 per Mbyte), the FCC and White House offered strong backing for LightSquared right up until summer 2011 when political pressures became too great and their support was withdrawn.

Now it appears that the FCC’s LightSquared debacle could be exceeded by an even greater debacle in the satellite sector, because SpaceX is seeking to participate in the upcoming Rural Digital Opportunity Fund auction later this year, which will offer up to $16B of funding over 10 years to service providers that commit to offer voice and broadband services to fixed locations in eligible unserved high-cost census blocks. While the Wall St Journal highlighted competitors’ complaints a few weeks ago, SpaceX has now upped its demands even further, suggesting in a March 27 letter to the FCC that “the laws of physics” dictate that SpaceX should be allowed to bid in the highest performance tiers (which carry the most money per potential customer) because “far from [being] untested or hypothetical, SpaceX has already launched over 360 satellites and demonstrated that its network is capable of offering high-speed, low-latency service”.

That of course is complete nonsense, because the laws of physics aren’t the only factor determining the latency of a LEO constellation, especially one that is (or apparently was in SpaceX’s case) supposed to have onboard processing and crosslinks. For example, Iridium’s latency on voice calls is not actually much better than a GEO satellite network and certainly exceeds “the Commission’s 100-millisecond threshold for low-latency services” (this paper estimated it at “between 270-390 milliseconds”). In fact one should regard claims of extremely low (and improved) latency for Starlink’s current satellites as indicating that in reality some of the most important design features, such as onboard processing, have likely been discarded.

To date SpaceX has certainly not demonstrated anything whatsoever about the performance of its planned commercial voice and broadband services for consumers. Notably SpaceX has still not published details of its terminals (except to advise that the antennas will need mechanical steering, raising the cost significantly), and last year’s testing by the US Air Force onboard a plane did not even use a SpaceX antenna. Moreover, that test did not involve most of the operational elements needed to offer a scalable commercial service, such as provisioning and sharing of capacity between multiple users, because SpaceX simply dedicated an entire satellite to one user terminal.

In particular, SpaceX makes great sounding (but carefully worded) claims in its submission to the FCC that “SpaceX also specifically designed Starlink to provide high-speed broadband service, using advanced phased-array antennas that allow the system to automatically optimize service to certain locations and dynamically adjust its throughput per user” when in fact many features of the supposed “design” have not actually been implemented in practice. While some of those discarded design features, such as crosslinks, are well known, I’m told that to date the satellites also don’t have any ability to dynamically reallocate capacity between beams, because that was apparently “too hard”. Perhaps that’s not surprising, when SpaceX is writing the software itself, rather than looking to companies with actual experience in designing scalable satellite broadband networks, like Hughes and Viasat.

But what is truly outrageous in SpaceX’s submission is the suggestion that the FCC should now let SpaceX participate in an auction to win $16B of ratepayers’ money without ever providing service to a single consumer, because SpaceX has now pushed back the launch date until after the FCC’s planned October 2020 auction date. The latest letter states simply that (even if you are foolish enough to take Elon Musk’s ever-optimistic timelines at face value) “SpaceX will now begin to offer its Starlink broadband service for consumers—first in the United States and Canada—by the end of 2020″. Of course now that Starlink’s primary competitor, OneWeb, has gone into bankruptcy, the urgency of pushing Starlink forward as quickly as possible has diminished (not to mention SpaceX being short of money itself), and why would SpaceX now want to risk consumers experiencing a service that in the early days may not work very well, if at all, before the FCC auction takes place?

But as I pointed out a couple of weeks ago, bidders are not required to actually provide service to any specific number of customers at all in order to receive the RDOF funding, and instead are simply expected to use the funding to subsidize their buildout and make it available. So SpaceX could then take the FCC’s money, never provide service to a single customer that the money was meant to help, and reallocate its capacity to serve other users like the DoD anywhere within the country or even the rest of the world.

Perhaps the FCC and Congress, like the rest of us, are pre-occupied with the coronavirus, and think this issue should not be at the forefront of our concerns right now. But when Elon Musk has convinced many gullible people that Starlink will “catalyze enormous positive change, bringing, for the first time, billions of humans into our future global cybernetic collective” and so it would be “stupid to put one more federal dime into rural broadband when Starlink could solve the whole problem by later this year” it remains possible that SpaceX will be able to get away with this nonsense and walk away with billions of dollars of funding that were intended to help close the homework gap while we are all distracted.

03.21.20

Why SpaceX desperately needs a government bailout…

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX at 12:36 pm by timfarrar

Over the last couple of months its been interesting to watch the maneuvering by SpaceX as it sought to raise its next funding round, in large part from a range of new investors with little or no knowledge of the satellite sector. My understanding is that the original ambition was to raise well over $1B, to be announced in conjunction with Elon Musk’s appearance at Satellite 2020, and attempt to flatten the competition as OneWeb struggled to complete its own planned $1B round.

SpaceX staffed up in anticipation of this new funding, doubling the staff in Boca Chica in February, which has increased the company’s burn rate even further. According to data disclosed at the time of the November 2018 debt funding round, SpaceX generated $270M of adjusted EBITDA in the 12 months to September 2018, but only by counting hundreds of millions of dollars of customer deposits, such as that paid by Japanese billionaire Yusaku Maezawa for his trip around the moon. As a result it seems clear that SpaceX was otherwise burning cash even in 2018, when its revenues were projected to be $2.5B+. And in 2019, revenues roughly halved as the number of launches fell from 21 to 13 (of which 2 were unpaid Starlink launches). So before the staffing ramp up in early 2020, SpaceX had already been burning over $100M per month in cash, and so far in 2020 four of the six launches have been unpaid Starlink launches, resulting in even less revenue now coming in the door.

In early 2020, a key objective was to raise enough money to last until the end of the year, when SpaceX anticipated that it would receive considerable funding from the DoD (we heard rumors that up to $1B was being sought) and planned to obtain billions more from the FCC’s Rural Digital Opportunity Fund auction (which was expected to start in October and will offer up to $16B of funding over 10 years to service providers that commit to offer voice and broadband services to fixed locations in eligible unserved high-cost census blocks). Importantly, bidders are not required to actually provide service to any specific number of customers at all in order to receive the funding, but instead are expected to use the funding to subsidize their buildout and make it available. While this is a rational approach for a terrestrial network that can only make a return on the investment to the extent that it is then able to win customers within the coverage footprint that has been built out, it makes no sense whatsoever for a satellite system that covers all customers immediately but can then reallocate its capacity anywhere within the country or even the rest of the world.

SpaceX downplayed expectations in February as rumors began to spread about its funding round, telling CNBC on February 21 that it was raising $250M to buy back employees’ shares (an obvious attempt to boost its hiring efforts), while hoping to maintain the element of shock and awe, just as happened in May last year when it launched 60 satellites, a far higher number than anyone had expected. As markets began to teeter, SpaceX had to be content with telling CNBC on March 9 that the company had “authorized” $500M in new shares, but when the Form D was filed on March 13 it became clear that investors had contributed far less than expected, with only $221M contributed to date and the round listed as just $250M. That’s no more than two months of cash burn at SpaceX’s current rate of spend.

Elon Musk’s appearance at Satellite 2020 didn’t go well, and was notable mainly for his comments that “zero LEO constellations haven’t gone bankrupt” and that he “just wanted to be in the not bankrupt category”. His obsession with the problems in closing the SpaceX funding round was also very evident from the fact that he was still tweeting about the market correction when he should have already been on stage.

So it’s hardly surprising that we now see reports that the Commercial Spaceflight Federation is asking for a bailout for SpaceX and other member companies and that Musk has adopted a high risk approach of criticizing the coronavirus as exaggerated and insisting that SpaceX remain open and working at full speed. But what articles suggesting that Tesla has the cash to weather the storm miss is that Musk’s most critical near term cash problem is now at SpaceX not at Tesla.

It’s hard to imagine the company changing course and abandoning either Starship or Starlink, which means the enormous cash burn will continue. However, the recent equity valuation of $36B is now completely untenable (especially if OneWeb collapses, as has been rumored this week), although a several hundred million dollar secured loan might still be a feasible option to tide the company over for several months. Nevertheless, unless Musk is proved right about the coronavirus and the markets improve quickly enough that new funding becomes available to SpaceX relatively soon, or alternatively the US government offers to bail him out (either publicly or with off the books money from the DoD), SpaceX is currently heading on autopilot towards a concrete wall of bankruptcy.

12.12.19

Reality and hype in satellite constellations…

Posted in Broadband, Echostar, SpaceX, Spectrum, ViaSat, VSAT at 4:47 pm by timfarrar

I was surprised to see last month that generally well informed observers like Om Malik were taking seriously (and even describing as “astute”) a blog post by Casey Handmer that suggests Starlink is a “very big deal” that will “catalyze enormous positive change, bringing, for the first time, billions of humans into our future global cybernetic collective.”

In order to justify that level of hype, Handmer claims that each satellite will cost $100K (which could “fall to $20k by the thousandth unit off the line”) and generate $30M in revenue during its five year lifetime, delivering “the ocean of gold needed to philanthropically build a self-sustaining city on Mars”. The first half of this claim is excessively optimistic unless the capabilities of the satellite are dramatically scaled down, which is already known to be the case.

For example, Starlink has abandoned crosslinks, at least for now, and would require a fundamental change in design and deployment in order to accommodate them: placing fragile movable RF antennas (let alone laser payloads which was the original plan) on the corners of the satellites would mean changing the current stacking and non-propulsive deployment mechanism and potentially implicate other characteristics like the stabilization of the satellite bus, due to the need for extreme pointing accuracy (especially for laser crosslinks). And the cost of a single phased array antenna on the ground can exceed Handmer’s supposed $100K cost for the entire satellite, which may be another explanation for why the current satellites are apparently operating in a fixed beam configuration.

But my primary focus is on the second half of the claim with regard to revenue, which is far easier to validate against terrestrial broadband benchmarks. In order to get to his $30M per satellite figure, Handmer assumes that a satellite will generate 100 beams capable of supporting 100Mbytes per second (800Mbps), i.e. a peak capacity of 80Gbps per second, with a loading factor of 100 seconds per 90 minute orbit (i.e. 1.85%) in order to carry 1000 GBytes of data per orbit. This peak capacity is significantly in excess of the figures in SpaceX’s own November 2016 FCC filing (which states an average aggregate downlink capacity of 20Gbps), and that filing doesn’t account for any reduction in capacity resulting from SpaceX being required to share spectrum with other satellite systems such as OneWeb.

However, Handmer’s assumed loading factor could be slightly on the low side (thought certainly not “ludicrously low” as he alleges), if Starlink was able to provide services all around the world. For example, Iridium’s (never filled) capacity for its first generation of satellites was just under 4% of the nominal peak capacity per satellite (1100 calls per satellite x 66 satellites = 38.2 billion minutes, but the system only had 1.5 billion minutes of saleable capacity per year).

On the other hand, SpaceX is planning to ignore the ITU spectrum priority rules (claiming merely that Starlink needs to initiate rather than complete coordination with other systens), which give OneWeb priority access to the NGSO spectrum and may block Starlink from gaining market access in many countries. And the low altitude of Starlink’s satellites, combined with the lack of crosslinks, means that providing services to ships and planes crossing the oceans and poles is not a feasible objective in the foreseeable future.

Combining these two factors, it appears that Handmer’s 1000Gbytes of saleable capacity per orbit will in reality be more like 250-500Gbytes per orbit (i.e. 2-4 times less), based on a peak capacity of up to 20Gbps (downlink plus uplink) and a loading factor per orbit of 2%-4%.

But the more important assumption is that this capacity will be sold at “a subscriber cost of $1/GB”. That figure is ludicrously overstated compared to the cost of broadband today. For example the average usage of Altice customers was 220Gbytes per month back in Q2 2018, while Charter’s median broadband usage in Q1 2019 was 200Gbytes with cord cutters averaging 400Gbytes per month. If we take a typical retail ARPU of around $60 then the retail price is $0.15-$0.30 per Gbyte and with consumer Internet data usage projected to increase by 160% between 2018 and 2022 (according to Cisco) the retail price of data on existing fixed broadband connections will soon be below $0.10 per Gbyte. So Handmer has overestimated the retail revenue potential per satellite for Starlink by at least 20-40 times.

Another, even more critical consideration is that the underlying cost of data delivery over fixed networks is much, much lower than the retail price. Back in 2016, Dave Burstein noted that it cost ISPs less than 1 cent per Gbyte to deliver internet traffic, and that figure is undoubtedly lower today. That’s the more appropriate basis for comparison with the cost of delivery for Starlink (unlike Handmer’s ridiculous comparison with an obselete 14 year old submarine cable, when most domestic internet traffic doesn’t even need to go outside the US), which (using our 250-500Gbytes per orbit figure above) would have a satellite capex cost alone of 0.7-1.3 cents per Gbyte over 5 years.

Then you need to add the cost of the ground segment and backhaul (certainly at least as high as the satellite capex), and most importantly, the cost of the user equipment, which will be much higher than the (less than $100) cost of a terrestrial cable modem and will far outweigh the cost of the satellites themselves. As CNN notes, “ground equipment may pose one of the biggest obstacles to success” and was probably the main reason why previous efforts like Teledesic folded.

Viasat spends $700 to acquire each satellite broadband customer of which roughly $300 is the end user equipment and installation adds another $150. But those are fixed dishes which do not need to track the satellites as they move across the sky. A Starlink terminal could easily cost $1000 or more, even with various compromises to reduce cost (such as narrowing the scan angle, though that will require a very large number of satellites, potentially several thousand, to be in orbit), before adding the cost of rooftop installation, let alone customer acquisition. And if each customer consumes say 500 Gbytes per month, then that will mean 250-500 terminals will need to be deployed to consume each satellite’s saleable capacity, implying incremental terminal costs of at least $250K-$500K per satellite (at $1000 per terminal).

To sum up, Handmer’s assessment that the satellites will generate revenue equal to 300 times their costs is fatally flawed. Even looking purely at retail revenues, then the revenues will be 20-40 times lower than he estimates, while the total system capex costs will be 4.5 to 7 times higher than he estimates (including ground segment costs of $100K per satellite and terminal costs of $250K-$500K per satellite). In the best case (and with unlimited demand!) that means retail revenues will be just over 3 times the capital costs, while in the worst case the retail revenues will only just cover the capital costs, ignoring ongoing operations, service and support.

When looking at the underlying costs of data delivery, it is also clear that Starlink’s costs will be meaningfully higher than the cost of terrestrial data delivery in areas with access to broadband, giving terrestrial rivals plenty of room to compete to retain their existing customer base (and ensuring that additional cost sensitive markets like cellular backhaul will remain out of reach).

So my conclusion is that while Starlink may be a “big deal” for the satellite industry (and for astronomers), it certainly isn’t a big deal for the terrestrial broadband market. In essence, under any plausible set of cost assumptions, Starlink’s bandwidth will cost more than current terrestrial broadband connections, and Starlink’s ability to disrupt a retail market where existing providers have existing infrastructure with enormous gross margins will be very limited. That’s nothing like Handmer’s nonsensical claims that “further launches will be funded entirely by providing better service to high density cities”.

Starlink may provide service for customers with no access to terrestrial broadband alternatives, but the satellite broadband market has fewer than 2M subscribers in North America and 1M users in the rest of the world combined, which Viasat, Echostar and others have spent the last decade trying to serve (and at least in North America have essentially saturated the market). So it seems unlikely that Starlink will do much better.

11.15.19

Picking up the C-band pieces…

Posted in AT&T, Financials, Intelsat, Operators, Regulatory, SES, Spectrum, Verizon at 2:13 pm by timfarrar

It looks like the CBA’s offer today to make a (not particularly generous) defined contribution to the US Treasury may have come too late to rescue a private auction, with reports that FCC Chairman Pai will shortly lay out a plan for a public auction of the C-band spectrum. That comes after what I’m told was a call to Chairman Pai from President Trump, at the instigation of Sen. Kennedy, who has used increasingly heated rhetoric to demand a public auction in recent weeks.

The irony of that action will not be lost on those who remember Pai’s statement in March 2016 on the prior Commission’s net neutrality decision that “Moving forward, the Commission must recommit itself to being a truly independent agency that makes decisions based on the facts and the law, not on the whims of any White House.”

UPDATE (11/18): Chairman Pai has now announced that the FCC will conduct a public auction before the end of 2020. However, the FCC has also stated that the President “did not express an opinion” in his call to Chairman Pai, and it is “categorically false” that Trump drove the decision on a public auction. A bill to mandate a public auction, with at least 50% of the proceeds going to the Treasury, has also been introduced in the Senate, although it is unclear if it will be taken up expeditiously.

A great backgrounder on the issues involved was laid out by Harold Feld on Wednesday, where he points out that a major issue is that Congressional rules do not permit a “voluntary contribution” to be spent by Congress, unlike the proceeds from an FCC run auction. Moreover, Congress can spend whatever the CBO estimates the proceeds will be, and a ludicrously optimistic $50B-$60B figure is being widely banded about.

As Harold also points out, the FCC does have authority to repurpose the C-band spectrum in the public interest by only paying transition costs to the parties involved. However, he doesn’t note that in recent years Republican policy wonks such as Tom Hazlett have been encouraging private transactions to repurpose spectrum for its “highest and best use”, arguing (correctly) that FCC intervention has often directed spectrum to politically connected players rather than serving the public interest.

What the FCC does not have is authority to share the proceeds of a public auction with the satellite operators, unless it can contort the incentive auction statute (which requires at least two competing bidders) to fit this situation. However, if the FCC cannot share the proceeds with the satellite operators then not only will there be prolonged litigation, but the satellite industry may be plunged into even more of an existential crisis than it already faces from declining revenues and the loss of customers to terrestrial alternatives. Moreover, there will be no incentive for satellite operators to move swiftly to make the spectrum available for terrestrial use within the next three years.

As a result, there is a clear imperative for satellite operators to receive a meaningful proportion of the proceeds, which was recognized by the proposed Matsui bill earlier this summer. That bill would have allowed the satellite operators to keep 75% of the net proceeds if they had cleared 300MHz, as is now on the table (the current CBA offer is less generous to the government, despite specifying a minimum 30% voluntary contribution, because that contribution is “inclusive of all Federal income tax liabilities incurred by the CBA member companies as a direct result of the auction”). However, it is unclear whether any such legislation will be able to pass into law in the current fevered political climate, especially when Sen. Kennedy has railed against giving away “$60 billion that belongs to the people of America to two companies in Luxembourg and one other one in Canada”.

What options does that leave the FCC with? Well the most obvious possibility might be for the FCC to return to the original concept, before the October 2017 offer from Intelsat and Intel, and conduct a public overlay auction for spectrum rights in 300MHz of the C-band before the end of 2020. If the CBA can come up with a agreed, concrete price and timetable for clearing the spectrum for the benefit of the overlay rights holders, set at a level that is acceptable to the cellular operators, then the FCC can claim to have complied with the Congressional (and Presidential) demands to conduct a public auction, without needing new legislation or to work around the language of the incentive auction statute. Of course the public auction would then raise a much more limited amount of money, assuming the CBA is going to receive many billions of dollars for moving out of the spectrum and giving up its rights to this part of the band.

However, it is unclear whether the CBA is capable of agreeing to a specific clearing price in the short time remaining before Chairman Pai has to decide how to move forward. One of the biggest problems in this whole process has been how long it took to come up with a concrete commitment to clear 300MHz and now to publish a specific revenue share for the government. Of course the CBA has been worried that by publishing specific figures it would be bidding against itself. But by allowing the process the drag on for so long, it became possible for Sen. Kennedy and others to consolidate their opposition to a private sale.

Now that Eutelsat is on the sidelines (and has its own interests in worsening Intelsat’s financial position), it may be even more difficult to reach agreement. Investors’ unreasonable expectations about the price that could be realized in an auction, represent another barrier to agreeing a fixed clearing price with AT&T and Verizon. With 280MHz on offer, it is very hard to see how demand could significantly exceed supply, which would be needed for auction prices to rise to $50B or $60B. Verizon and AT&T are unlikely to spend more than $10B each to buy 100MHz per operator, and T-Mobile will not need to participate in a major way if its merger with Sprint goes through. Beyond that there are very few companies who will want to pay billions of dollars for C-band spectrum, because it makes little sense to start in that band as a potential new entrant. So I struggle to see the gross total raised from a C-band spectrum sale getting to more than $30B (~$0.30/MHzPOP).

More importantly, a fixed clearing price certainly could not exceed the amount AT&T and Verizon are collectively prepared to pay for their share of the spectrum (i.e. $20B), since they would be instrumental in negotiating that figure. More likely, AT&T and Verizon would be unwilling to agree to a clearing price above about $15B (if not less), leaving net proceeds after ~$3B of actual costs at roughly $5B each for Intelsat and SES. Compared to where we stood two years ago, when no value was attached to C-band spectrum, that seems like a pretty stunning achievement. But at this point in time, after two years of declines in the core satellite business, it would be unlikely to make Intelsat shareholders happy.

06.20.19

Charlie may be wrong, but he’s not stupid…

Posted in DISH, Operators, Regulatory, Spectrum at 9:39 am by timfarrar

The news that DISH is negotiating to buy Boost and other assets, which T-Mobile and Sprint may be forced by the DoJ to dispose of as a condition to approving their merger has been met with near universal derision from commentators. Some suggest that Ergen is “holding out for a big payday from a hoard of idle spectrum he assembled over the past decade” and the purchase would allow him to “seek more time [from the FCC] while waiting for Verizon or Google or somebody to sweep in and buy him out of his big spectrum bet”, while others say “We’re not sure why that deal is sensible for anyone involved. Dish, remember, already has more spectrum than they know what to do with; what they lack is money and ground facilities, and the deal described on Friday wouldn’t deliver either one. Instead, it would make both problems worse.” Some even note that DISH itself told the FCC in May that “a standalone Boost would not provide ‘meaningful competition’”.

But what no-one seems to be able to explain is why, despite all these issues, DISH would therefore be pursuing a deal to acquire these assets. Does everyone believe that Charlie Ergen is stupid? Or that he’s desperate, and its all just a bluff with a weak poker hand? That’s ludicrous on its face, since both the FCC and the other wireless carriers would simply call that bluff: if he does nothing then the FCC will refuse to renew his wireless licenses next year, and we have known for almost 5 years that Verizon and AT&T don’t want anything to do with his spectrum, after he cost them $5B+ each by manipulating the AWS-3 auction outcome to push up the prices by bidding through three entities simultaneously.

It’s been obvious for most of the last year that Ergen has a plan to get something out of a T-Mobile/Sprint merger. He doesn’t hire expensive economic experts and consultants to submit lengthy analyses simply to block a deal (as an aside, 10 years ago I was an expert witness for DISH in the DBSD bankruptcy, where DISH was ultimately successful in securing the spectrum assets). So what does he want? Boost is not that important, though getting some of Sprint’s 2.5GHz spectrum (which DISH tried to buy from Clearwire back in 2013) might be helpful, and a hosting agreement is even more critical.

After all, DISH already had an agreement lined up with T-Mobile to host the network it planned with Google back in 2015-16. And it’s very likely that some 2.5GHz spectrum is on offer, because the sale would hardly have attracted much interest from cable operators, who (as new entrants) would need to acquire significant amounts of spectrum, if all they gained was some 800MHz and 1.9GHz spectrum without much of a roadmap to 5G. So for the mooted $6B+ price tag, with a valuation of less than $3B for Boost, it is conceivable that DISH could acquire perhaps 20-30MHz of spectrum, depending on the mix of urban and rural areas and whether it is leased (EBS) or owned (BRS). I’d guess DISH might take more leased EBS spectrum at a lower price, since that is likely to gain in value now the band is going to be restructured by the FCC and overlay spectrum will be auctioned.

Even so, if all DISH secured was some assets from T-Mobile and Sprint, then critics are correct to observe that it is almost inconceivable that DISH alone could become a meaningful fourth competitor in the mobile market. Unless DISH has a major partner lined up behind the scenes, then it is setting out on a doomed path, and as I noted, Ergen knows this and is not stupid. He’s said previously on multiple occasions that a full scale wireless buildout would cost $10B and that he wouldn’t do that without a partner. Indeed he’s hinted at partnership interest from “unexpected places” in recent months.

It looked like DISH might have had a deal lined up with Amazon at the end of the incentive auction in April 2017, but it appears that Amazon was considering three multi-billion dollar investments in parallel at that time (DISH wireless, Slack and Whole Foods) and selected Whole Foods as the initial priority. But there’s no suggestion that Amazon permanently ruled out such a deal, and with Amazon reported to have taken its own look at Boost a few weeks ago, it is eminently possible that Amazon could be a silent and unreported partner for DISH in this effort. That certainly seems far more plausible than Amazon and DISH being rival bidders for these assets.

So can Ergen pull this off? DISH appears to be in the lead for now, and a sale to DISH appears to be the preferred outcome from the DoJ’s perspective. Incidentally that’s another strong reason to believe DISH already has a major partner like Amazon essentially lined up, since its hard to believe Ergen wasn’t asked that question in his meeting with Pai and Delrahim last week. And although there are possible alternatives like Rakuten, in the current political climate it’s likely that the DoJ’s preference would be for DISH to partner with another American company.

Another argument raised by some who don’t believe a DISH-Amazon partnership is likely, is that they think T-Mobile wouldn’t want to enable such a potentially threatening competitor. But as I titled this post, it is certainly possible that Ergen is wrong, in that it won’t be that easy for a new entrant to break into the market, even in partnership with Amazon, and that 5G won’t mark a revolution in how wireless is used, so churn will continue to be low. In those circumstances it would make a lot of sense for T-Mobile and Sprint to complete their merger, and deploy their 2.5GHz spectrum to add capacity at much lower cost. What no-one should assume is that Ergen is stupid and is making an irrational multi-billion dollar bet on either a doomed standalone strategy or a spectrum sale to AT&T or Verizon.

05.09.19

Backing winners?

Posted in Broadband, Operators, Regulatory, Services, SpaceX, Spectrum at 3:13 pm by timfarrar

I noted a couple of weeks ago that SpaceX was putting the FCC under considerable pressure to approve its April 5 request for Special Temporary Authority to operate its initial tranche of Starlink satellites. However, rather than giving approval for this STA, on April 26 the FCC instead approved SpaceX’s November 2018 license modification.

Buried in this order is a key waiver sought by SpaceX, which is fundamentally different from the authorizations granted to other NGSO players (including Theia, whose license was approved at today’s FCC Open Meeting):

28. Waiver of ITU Finding Required Under Section 25.146(a). In the SpaceX Authorization, the Commission required that SpaceX receive a favorable or “qualified favorable” finding from the ITU with respect to compliance with applicable EPFD limits in Article 22 of the ITU Radio Regulations prior to commencing operations. SpaceX asserts that the ITU will not examine the modified filing in this respect anytime soon and in light of its expedited deployment schedule, requests a waiver of this condition prior to the initiation of service. OneWeb and the GSO Satellite Operators, request that the Commission deny SpaceX’s waiver request. SES and O3b, argue that any waiver grant addresses the timing of the ITU filing and is conferred at SpaceX’s own risk. Given the ITU’s timeframe for examining SpaceX’s modified filing and the fact that SpaceX presents EPFD calculations using the ITU software, we agree that this condition should not deter SpaceX start of operations. Thus, SpaceX’s request for waiver of the requirement to receive a favorable or “qualified favorable” finding prior to commencing operations is granted. We retain the requirement, however, that SpaceX receive the favorable or “qualified favorable” finding from the ITU, and in case of an unfavorable finding, adjust its operation to satisfy the ITU requirements. Accordingly, operations of SpaceX’s system, as modified prior to the ITU’s finding, are at SpaceX’s own risk.

While other systems like Theia are required to receive ITU approval “prior to the initiation of service”, SpaceX has now been given permission to provide service over the Starlink system unless and until a final ITU finding is published. This appears to reflect the FCC’s view of SpaceX as a potential winner in the NGSO race and a desire to enable operations to begin as soon as possible. In addition, SpaceX appears to be receiving strong backing from other agencies within the US government for the capabilities that Starlink is expected to make available.

So next week on May 15, SpaceX plans to launch “dozens of satellites” (perhaps as many as 40-50 from what I’ve heard in Washington DC this week), although it remains unclear what technologies are actually onboard these satellites. It seems that the satellites include a variety of different designs (launching everything “including the kitchen sink”) and there may even be some non-communications payloads onboard.

It appears that the launch will be accompanied by a publicity blitz to set the scene for a major fundraising effort immediately thereafter, with one feature of this PR campaign being SpaceX’s production line in Redmond, described to me as “more impressive” than OneWeb’s factory in Florida. But SpaceX clearly believes that numbers are important, and will be comparing the number of satellites it has launched to the 6 satellites launched by OneWeb in February. So I expect SpaceX’s fundraising target will also exceed the $1.25B raised by OneWeb in March and will include more of the wild predictions we’ve heard for Tesla in recent weeks as well as on the SpaceX fundraising call in early April.

That sets the scene for a race between OneWeb and SpaceX to launch as many satellites as possible in the next 6-12 months: OneWeb is claiming it will be launching 35 satellites per month starting in the fall, and SpaceX is suggesting it may also have 2-6 more launches by the end of the year (helpfully filling a hole in its Falcon 9 manifest as the demand for GEO launches continues to slow, but clearly requiring a substantial financial commitment).

In comparison, other proposed systems like Telesat and LeoSat will be far behind, and even though these systems may have designs which are more optimized for their target markets, it could become increasingly difficult for either system to attract the attention and funding they need to move forward, without backing from major strategic investors. Speculation is likely to focus on Amazon’s Project Kuiper plans, but unlike Elon Musk’s “build it and they will come” mentality, I expect Jeff Bezos is more likely to want to put together a solid plan before committing to spend many billions of dollars on such an effort.

But the most important thing of all is whether investors believe Elon Musk’s predictions and will now throw billions of dollars at his Starlink vision. A shortfall in the amount raised, as seems to have been the case in all of SpaceX’s various funding rounds over the last year, will keep the pressure on the company after a series of costly issues (most notably the loss of the Crew Dragon capsule). On the other hand, if he is able to raise a couple of billion dollars, SpaceX and OneWeb could make this into a two horse LEO constellation race over the next couple of years. So I’ll be waiting with bated breath to see the launch next week and what the subsequent fundraising effort reveals about investors’ confidence in both the project and (more importantly) in Elon himself.

04.08.19

High Times…

Posted in Broadband, Operators, Regulatory, Services, SpaceX, Spectrum at 9:43 am by timfarrar

Last week, on hearing the news of Amazon’s Project Kuiper LEO constellation plans, my immediate reaction was that it looked like “a good way to make it even harder for SpaceX to raise their next funding round”. Unsurprisingly, that turns out to be exactly the situation, because I’m told that Elon Musk held a lengthy conference call with SpaceX investors last week to seek additional funding for Starlink, ahead of the next launch (which has now been announced to be “no earlier than May”).

SpaceX is seeking to complete a near term equity raise (apparently limited to existing investors) at a valuation of $32B, and has made some outlandish claims about the potential for Starlink, similar to (if not even more exaggerated than) the widely ridiculed business plan published in the Wall St Journal back in January 2017, with many tens or even hundreds of millions of subscribers relying on the constellation. Jumping onboard with others, but exaggerating further, Starlink’s flat panel terminal is claimed to be capable of 100Mbps, but will cost only $500 at launch, falling to $150 over time. Moreover, the cost of the 4000+ satellites is said to be around half a million dollars each, including launch, implying total capex of less than $3B.

Meanwhile, Amazon continues to troll SpaceX, hiring the former leaders of Starlink, who Musk fired for wanting “more iterations of test satellites” rather than “cheaper and simpler satellites, sooner” and posting over 70 jobs in Bellevue, WA in an attempt to lure away additional engineers from Starlink facility in nearby Redmond.

So can Bezos derail SpaceX’s satellite internet plans, which may be the last avenue left to raise money for SpaceX, as the demand for launches continues to decline and its backlog nears exhaustion? Are people starting to doubt Elon Musk’s claims? Or does Musk still have enough believers amongst the existing SpaceX investors, including Google, which may have many reasons of its own to push back against Amazon?

UPDATE (4/19): The WSJ reported on SpaceX’s new funding round on April 15, noting that Gwynne Shotwell had expressed doubts over the prospects for Starlink in a February interview (although the outlandish claims I noted above were of course made by Elon Musk in the first week of April, not by Shotwell). It then emerged in an April 17 SEC filing that initial fundraising attempts had been largely unsuccessful, with only $44M out of $400M raised to date, suggesting that SpaceX’s approach, described to me as “you’ve got 24 hours to wire us the money or we’ll get it from someone else”, appears to have backfired.

So that makes me wonder quite how much financial pressure SpaceX is now under. Certainly SpaceX is putting considerable pressure on others, notably the FCC, where it filed on April 5 for Special Temporary Authority to operate its initial tranche of Starlink satellites. SpaceX claims these satellites will be launched in “early May”, despite it not having received approval for the revised constellation plan that was filed in November 2018 and not even specifying how many satellites will be in this “initial tranche”.

Given the complexities inherent in assessing SpaceX’s “iterative design” which will initially “use only Ku-band spectrum” and subsequently “phase the Ka-band antennas back into subsequent generations”, it is hardly surprising that it has taken the FCC some time to make a decision on whether to grant a license modification (indeed the FCC is only now proposing to grant a license for Theia’s NGSO system that was filed back in November 2016). Moreover, the mess that resulted from Swarm’s unapproved launch in 2018, led the FCC to caution satellite launch providers such as SpaceX that “a satellite integrated into a launch vehicle or deployment device without a current FCC authorization may need to be removed from that vehicle or deployment device if the satellite operator’s application for an FCC authorization is not acted upon favorably, or for various reasons cannot be granted within a time frame consistent with the launch schedule.”

So will the FCC bend under the pressure that SpaceX is exerting? Even then, would the launch of a few more demo satellites persuade investors that it’s now worth putting more money into SpaceX to fund a questionable (some would say non-existent) Starlink business plan? Or is this going to end badly, with SpaceX running out of cash to fund both Starlink and its new Starship development projects? Certainly the idea that “the decision to open a second $500M funding round just months after the first also bodes well for demand” (as opposed to indicating that SpaceX is experiencing a cash crunch) seems about as plausible as Musk’s recent suggestion that Starship should be fitted with “giant stainless steel dragon wings”. High times indeed!

02.09.19

Splitting the C-band baby

Posted in AT&T, Financials, Intelsat, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 2:02 pm by timfarrar

It’s now just over a year since I first wrote about the possibility of a “pioneering market-based transfer of [C-band] spectrum to higher value uses” which could allow satellite operators to sell part of the C-band to boost Verizon’s 5G network capacity. In that time, the process has moved forward significantly, with the FCC issuing an NPRM in July, to which comments and reply comments were received late last year.

Opposition from the cable companies has been growing, as they’ve become scared by the prospect of new wireless broadband competition, with Verizon, T-Mobile and AT&T all admitting that they have no better plan than to use the huge amounts of capacity that their new 5G networks will create, to compete in the fixed broadband market.

But it was truly ironic to see New America and Google team up with the cable industry last week to claim that the plan put forward in the NPRM for a private market transaction represents “The Great Airwaves Robbery” because satellite operators rather than the Treasury will receive the proceeds. Not only are these very odd bedfellows, but Google has traditionally been on the side of freeing up more spectrum and encouraging broadband competition, rather than trying to block such an effort.

However, it now seems that if Google can’t get what it wants in the C-band (meaning essentially free access to the band on a shared basis), it will seek to derail the plan for a market-based approach. While one reason for Google to mount this effort is to prevent C-band from undermining interest in the CBRS band in which has invested a lot of time and resources, a cynic might also say that Google would prefer a “Political Spectrum” where the FCC would be able to insert policy provisions that suit Google, especially since an FCC-run auction wouldn’t take place until after the next Presidential election in November 2020.

That’s certainly been the case in the past, when Google persuaded (Republican) FCC Chair Kevin Martin to include Open Access provisions covering the upper C-block into the rules for the 700MHz auction in 2008. Of course, despite the fact that the Open Access conditions ultimately proved to have no effect on the wireless market, Google didn’t care that these provisions meant that the C-block spectrum sold (to Verizon) for less than half the price of the unrestricted paired A and B blocks, costing the Treasury something like $6B in auction proceeds.

Nevertheless, it is clear that the various sides of the C-band debate appear to want to capture all of the benefits for themselves, without looking for a compromise solution. This includes the satellite operators, where Preston Padden of the C-band Alliance (CBA) has claimed that there is “no alternative” to the CBA Plan, which gives all of the control and sale proceeds to the satellite operators. In fact there is a fairly simple compromise option, which follows the traditional FCC model of splitting the baby, so everyone gets something out of the process. That was followed back in 2003, when the initial approval of Ancillary Terrestrial Component (ATC) flexibility for MSS operators was given in exchange for 30MHz of the 70MHz of 2GHz band MSS spectrum being reallocated to terrestrial services (this ultimately became the G block and H block spectrum).

So a relatively simple solution at this point would be to allow the satellite operators to sell the 180MHz of spectrum at the bottom of the C-band, and keep the proceeds (part of which would be used to pay for new satellites and filters to enable continuation of video delivery in the remaining 300MHz of spectrum), while the FCC conducted an overlay auction of terrestrial mobile licenses in the rest of the band (excluding a modest guardband of perhaps 50-100MHz below 4200MHz to preserve key services and protect aeronautical users in the 4200-4400MHz band). Purchasers of the overlay licenses (which would cost considerably less than the spectrum being sold by the CBA) would then be able to pay C-band earth station owners to move their earth stations away from major cities or migrate them to fiber, in order to clear the spectrum in high demand areas, with no additional compensation due to the satellite operators (since the satellite operators would already be receiving a windfall from the spectrum they sold).

All parties could then be compensated: the satellite operators would receive proceeds from selling 180MHz of spectrum (potentially worth $11B-$18B at $0.20-$0.30/MHzPOP), the Treasury would receive proceeds from the overlay auction (potentially worth $4B-$5B from selling 270MHz at $0.05/MHzPOP) and the earth station operators would receive compensation if they decided to migrate to fiber or relocate their earth stations to clear the overlay spectrum. And both the FCC and the wireless operators would be happy, with T-Mobile’s demand for 300MHz+ to be made available being met if they bought the overlay licenses and paid to clear the spectrum in the areas where they needed spectrum, while Verizon and AT&T could get the spectrum they need in the near term by agreeing a deal with the CBA. Even Google could acquire spectrum in the overlay auction, if they really did want to buy spectrum, rather than just prevent others from getting hold of it.

Of course the cable operators might not be happy with the additional competition for their broadband business, but they would also have the option to acquire spectrum in the overlay auction, and compete in the wireless market themselves, especially since they would have an easier time clearing their own earth stations out of the band. And if they didn’t want to do that, they could hold out for compensation from the holders of the overlay licenses.

Will the CTIA and the wireless operators now be prepared to push for such a compromise? Will the satellite operators accept that they can’t have it all? And will the cable operators and Google accept that blocking the reallocation of C-band spectrum to terrestrial is an unacceptable outcome? That depends on whether the FCC is willing to rule that none of the parties should get all of what they want, but everyone can get something.

11.09.18

The New New Space Thing…

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX, Spectrum at 5:32 pm by timfarrar

Michael Lewis’s book “The New New Thing” was published the same week as I moved to Silicon Valley in October 1999 and provided a great tour through the landscape at the high point of the Dotcom Bubble, just as his Liar’s Poker was a signature story of the 1980s Wall Street boom. Unfortunately we don’t have anything quite the same about New Space, although Tim Fernholz’s book comes close.

However, just as it was obvious back in 1999 quite how untethered Silicon Valley had become from real world business models, the New New Space industry seems intent on demonstrating the same about the space sector. In recent months I’ve heard about numerous planned nano-satellite constellations that are struggling to raise funding (beyond their $10M or so in proof of concept venture capital) and may run out of money soon, because they simply don’t have a credible business plan.

Looking elsewhere, it seems that 5G IoT and “Armani WiFi” are not really such convincing buzzwords after all (sorry Charlie and Jay), and Ligado’s lobbyists can’t outwit Brad Parkinson’s “fervent ally” in the White House, so some if not all of those multi-billion dollar investments will soon prove to be a complete debacle as well.

But the poster child for the bursting of the bubble can be seen in SpaceX’s increasing frantic attempts to raise money in the face of a rapid decline in launch demand, and increasing competition from Blue Origin, which doesn’t need to make a profit. Firing your bankers because they are nervous about how much additional debt you will take on in the future is a bad sign, and redesigning your constellation to hide its problems seems even more bizarre.

SpaceX’s launch tempo is already falling, with 10 launches now scheduled for the second half of 2018 compared to 12 in the first half, far short of the 50% increase in 2018 launches and medium term 30-40 launches per year that the company predicted only a year ago. So its an open question what the core business is worth, but with $270M in LTM adjusted EBITDA (which counts deposits and excludes some R&D) and a declining revenue outlook for 2019, the valuation of $28B achieved this spring is clearly ludicrous.

SpaceX’s attempts to find new sources of revenue are also proving deeply problematic because the broadband satellite constellation business now appears to be in even more dire straits than the launch business. Recently rumors have circulated that SoftBank is looking to exit from OneWeb (before the next tranche of its $1B equity commitment is due after the test satellites are launched in early 2019), as the system costs increase and questions abound over the size of the market opportunity for satellite broadband. Certainly Masa Son’s attitude to the project appears to have changed dramatically in the last year, from touting satellite as an alternative to fiber, to not even mentioning satellite in a recent lengthy feature on the Vision Fund.

And finally, given the lack of demand for launch services, the need for the BFR now seems highly questionable, except as a vehicle for space tourism. Since SpaceX is likely to have investment needs of $1B+ per year just for BFR and the debt capacity of the company is unlikely to be more than about $2B, it therefore wouldn’t be in the least surprising if the company’s next step in 2019 is to start taking more deposits from potential tourists who want to emulate Japanese billionaire Yusaku Maezawa. In the meantime, soliciting contracts from anyone who might offer a cash deposit seems like another avenue SpaceX will be exploring.

Looking back once again to 1999, it seems quite relevant to note that the first major meltdown (the Iridium bankruptcy) came in August 1999, well before the bursting of the wider tech bubble. And it now appears that there are several multi-billion dollar satellite projects that could suffer the same fate within the next year. What will that mean for investor perceptions? Will incumbents benefit? And which elements of this new technology will prove to be useful in the long run?

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