08.18.11
Posted in Financials, Globalstar, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 8:49 pm by timfarrar
In my last post I estimated that to in order to relocate and preserve precision GPS service for farmers and surveyors there might need to be a “delay of several years” before LightSquared was able to bring its lower 2x10MHz of spectrum into use in a terrestrial network. Indeed, according to one GPS industry commentator, a transition period of 12 years might be more appropriate to “allow a smooth transition with a manageable financial impact to the high-precision GPS user community.”
However, because of LightSquared’s prior assurances that it wanted to cooperate with the GPS industry to preserve existing services, no-one seems to have noticed that in fact the company does have a potential “nuclear option”, namely that because these services are provided on a commercial basis to Starfire and OmniSTAR, LightSquared and Inmarsat could simply decide to cease supporting these services in accordance with their capacity lease contracts. Given that LightSquared is now blaming the GPS industry for the interference problems and accusing GPS manufacturers of being unwilling to cooperate with its attempts to find a solution, it seems increasingly plausible that LightSquared could now say that it simply can’t continue to support these services unless the FCC mandates a rapid transition of precision GPS users to new equipment equipped with filters.
LightSquared (which provides capacity to OmniSTAR, now owned by Trimble) has previously indicated that it only plans to support its legacy services in “emulation mode” for a limited period of time, and it appears likely that the contract with OmniSTAR could therefore potentially be terminated at relatively short notice. While Inmarsat’s contract with Starfire may not operate under quite such a short time horizons, many of Inmarsat’s leases are renewable on an annual basis and so could possibly be terminated if desired. In reaching such a decision, Inmarsat would have to decide whether it prefers the ~$1M or so it receives each year from Starfire to the $115M it is being paid each year by LightSquared (indeed it is conceivable that this issue may have been addressed in the deal under which Inmarsat was paid an additional $40M by LightSquared earlier this year).
Some might argue that the FCC would surely step in to prevent such damage to precision GPS services. However, in March 2010 when it granted LightSquared the requested modifications to its ATC license, the FCC explicitly stated that it would refrain “from interfering unnecessarily with licensees’ business negotiations” even though “this may present challenges to earth station operators using the satellites involved, and may require modification of operations, deployment of new equipment, or other adjustments” because “it would not serve the public interest for the Commission to assume the role of an arbiter of disputes between a satellite operator and its customers.” Nevertheless, the FCC did leave itself one potential escape route, stating that it would not step into such disputes “in the absence of a prior determination that the satellite operator provides essential service and is unconstrained by actual or potential competition from providers of substitutable services.”
Of course, if the FCC did step in and force LightSquared to continue providing precision GPS services, then that might provide grounds for LightSquared to sue for compensation, especially if that was determined to be the main roadblock to offering commercial service in its lower L-band spectrum. As I’ve noted before, ending up in court certainly seems to be an increasingly plausible outcome to what the Economist describes as this “sorry tale of greed, haste and incompetence.”
As an aside, LightSquared does not seem to be the only MSS operator whose ATC services face interference challenges. A recent comment on one of my older blog posts highlighted that Open Range has been getting into difficulties with its use of Globalstar’s S-band spectrum in Indiana. Additionally, if LightSquared’s use of ATC handsets at 1627-1637MHz is a major concern for GPS users in the 1559-1610MHz band, then one would have to expect even greater concern about any future ATC deployment within Globalstar’s L-band spectrum at 1610-1617.775MHz (note that Open Range only uses Globalstar’s S-band spectrum in a TDD architecture). Similarly, there are now a number of comments in the 2GHz proceeding about the potential interference challenges at the bottom end of the TerreStar uplink spectrum (2000MHz).
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03.11.11
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 11:48 am by timfarrar
He came from a hardscrabble background, rising to prominence along with his flamboyant wife, who became a favorite of the tabloids. After raising hundreds of millions of dollars, his unstinting efforts to bring essential resources to millions of people in remote areas attracted the interest and favor of political leaders and government agencies alike.
No, its not the story of Phil Falcone, but the autobiography of Bob Geldof. After today’s announcement of a deal with Open Range, something that other MSS-ATC proponents openly scoffed at when Open Range signed its original deal with Globalstar, I’m also left asking “Is that it?”.
Its worth recalling that the prior spectrum lease contract between Open Range and Globalstar called for annual spectrum lease payments which in the first six years were projected to range from $0.6M to $10.3M, something that is little more than a Band Aid in the context of Harbinger’s $2.9B investment in LightSquared. I’m therefore left with the distinct impression that LightSquared intended to announce a much bigger deal with MetroPCS, as I suggested yesterday, but it has not yet been possible to reach agreement over a joint bid on the 2GHz MSS spectrum.
Given the pressure to reach a deal on any bid for the DBSD spectrum before the next hearing on Tuesday March 15, and DBSD’s intention to announce its preferred bidder the day before, we will have to wait and see if a MetroPCS deal can be struck over the next three days, or if Mr. Falcone will be the one left singing “I Don’t Like Mondays“.
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10.08.10
Posted in Financials, Globalstar, LightSquared, Operators, Regulatory, Spectrum at 11:30 am by timfarrar
Although we remain intrigued by the timing of yesterday’s announcement of LightSquared’s chipset and device partners, what is now clear is that next year should finally result in the actual commercial deployment of an ATC network, offering both satellite and terrestrial mobile services for the first time. (Although Open Range had deployed a couple of thousand terminals under its agreement with Globalstar prior to the FCC suspending Globalstar’s ATC license, these did not include two-way functionality, and to date no handheld terminals had been produced).
LightSquared now claims to have raised over $2B, which the company expects will see it through to “operational launch and beyond” in the second half of next year. Although it is not clear where the $2B is coming from, and whether (as yet unannounced) vendor financing will form part of that $2B or could be incremental to it, it is certainly the case that with Harbinger apparently injecting funds from a $400M UBS loan in July, converting its reported $430M of debt into equity (as part of this week’s $850M debt refinancing) and presumably investing the proceeds from the sale of half of its Inmarsat stake (for $650M) in LightSquared, the company should have enough money both to pay Inmarsat for the ongoing rebanding of the L-band, and to fund the buildout of its first markets in 2011, an outcome that looked like a distant dream less than a year ago.
Given that there are no significant remaining technical barriers to overcome in deploying their satellite network, and LightSquared has commitments to produce both chipsets and ATC devices from leading manufacturers, it will be interesting to see next year both how the LightSquared network is positioned and what the public reaction is to the service. In particular, will LightSquared’s retail partners attempt to use satellite as a key differentiator, or will they rely just on the LTE offering to compete with Verizon, Clearwire, MetroPCS and others?
In the nearer term, we will also look forward to finding out exactly who these retail partners will be, and whether any of them will make a financial investment in LightSquared itself. In that regard, it appears that T-Mobile is certainly keeping its options open with regard to LightSquared, having filed at the FCC in support of relaxing the ATC gating criteria, which currently require all devices to offer integrated satellite and terrestrial services. Leap Wireless also appears to be looking closely at the ATC opportunity, having initially proposed this relaxation of the gating criteria. Whether T-Mobile’s actions are part of its negotiating strategy with Clearwire, or whether T-Mobile and Leap really are taking a potential investment in LightSquared seriously, remains to be seen.
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09.20.10
Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services at 8:46 am by timfarrar
One of the most interesting questions about Inmarsat’s new ISatPhone Pro is how well it will work at low elevation angles, including for example whether the phone antenna needs to be pointed towards the satellite. This is going to be particularly relevant in Alaska, much of which lies very close to the nominal edge of coverage, and well outside the 20 degree elevation angle contour (where Inmarsat suggests that “more user cooperation is required”), as shown below.
However, I’ve been told by Inmarsat that the phone is performing better than expected, even at relatively low elevation angles, so it will be interesting to see what this means in practice. Given that the beams used for registering the phone on the Inmarsat satellite are lower power than the beams used for a call, it appears probable that either the phone will register successfully and then calls can be made OK, or the phone won’t register and then no calls can be made at all.
Its surprising that we haven’t yet seen any published real world tests of the Inmarsat phone in comparison to Iridium, similar to the Frost & Sullivan reports which compared Iridium and Globalstar in 2008 and 2002. However, I’m sure similar analyses will be undertaken by both Iridium and Inmarsat at least for their own internal purposes, and possibly even for external publication if they believe the results are favorable. If you’ve tried out the phone in “fringe” coverage areas then feel free to let us know about your experience in the comments section below.
UPDATE: So now Frost & Sullivan has released its comparison of the Iridium and Inmarsat phones, which was commissioned by Iridium. It is notable that in Anchorage, Alaska, Frost & Sullivan “was unable to make or receive a call despite dozens of attempts and was only able to briefly find a satellite”. This points to difficulties with registration, as we suspected. However, Inmarsat sources tell us that it is perfectly possible to register on the satellite in Alaska, and make calls there. We haven’t yet got an independent view, but it would seem likely that the actual answer may lie somewhere between these two opposing views. We would speculate that you will probably have to have a pretty good idea where the Inmarsat satellite is so you can point the phone antenna at it during registration (maybe using a compass would be helpful?).
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09.14.10
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:54 pm by timfarrar
The FCC today released its ruling denying Globalstar’s request for a postponement of the deadlines in its ATC license, which required launch of its second generation satellites by July 1, 2010 and provision of two-way service to its ATC terminals by July 1, 2011. The FCC has granted Open Range a temporary waiver, which basically gives it 60 days to make other spectrum arrangements or its network will be shut down.
This ruling comes as quite a shock to most observers, because it was assumed that the FCC was contemplating providing more flexibility to MSS-ATC licensees after release of its recent NPRM/NOI. However, as we argued at the time, the contents of the NPRM/NOI were actually something of a disappointment to those expecting such liberalization, because the emphasis was on reallocation of the 2GHz spectrum for terrestrial use, with incentive auctions or other mechanisms used to ensure that the government receives “appropriate compensation for the step up in value” that would occur if the existing ATC restrictions were removed in that band. In that context, as we suggested, it would be hard for the FCC to provide further flexibility to ATC licensees in other bands (i.e. LightSquared and Globalstar) with no offsetting “compensation”. Nevertheless, we had still expected that Globalstar might be granted its requested waivers, because LightSquared had achieved the ATC license modifications it desired back in March.
However, now that the FCC has taken a hard line with Globalstar, it raises the question not only of what Open Range will do next for spectrum, but whether any future inability to meet license conditions will place other ATC licenses (and the associated spectrum assets) at risk. Notably, observers will presumably begin to wonder what will result from the proceeding relating to the reimbursement claimed by Sprint from DBSD and TerreStar for clearing the 2GHz spectrum band (estimated by Sprint at $100M+ per operator), compliance with the outcome of which was a condition of TerreStar’s ATC license grant back in January. Though DBSD has sought to avoid these costs through its bankruptcy filing, it is less certain that TerreStar would be able to do likewise. TerreStar has also recently requested certain waivers of the ATC base station and terminal requirements from the FCC. In addition, it is quite possible that there may be requests by Harbinger to extend the very aggressive terrestrial deployment deadlines associated with the LightSquared network at some point in the future, and in the near term, LightSquared recently delayed the launch of its first next generation satellite to December 2010, which will also require a waiver from the FCC, and questions are sure to be raised about whether this delay was solely attributable to technical problems.
With comments due in response to the July 2010 NPRM/NOI tomorrow, it is likely that a lot of last minute redrafting of submissions is going on tonight, so it will be interesting to see whether any of these issues are raised either by the satellite companies themselves, or by terrestrial wireless interests encouraging the FCC to continue to take a hard line on ATC.
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07.15.10
Posted in Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:15 am by timfarrar
At today’s FCC Commission meeting, the Commission began its proceeding “to spur mobile broadband investment in MSS bands”, which will take the form of a Notice of Proposed Rulemaking (NPRM) and a companion Notice of Inquiry (NOI). The NPRM and NOI have now been published along with a press release and accompanying statements from all five of the Commissioners.
The NPRM is focused on two issues: First, it proposes to add co-primary fixed and mobile allocations to the 2 GHz band. Second, it proposes to expand existing secondary market policies and rules to address transactions involving the use of MSS bands for terrestrial services. However, given that the Commission notes that the Globalstar-Open Range lease was already evaluated under this standard, this second issue is more of a streamlining matter than a substantive change in policy.
The NOI “requests comment on further steps the Commission can take to increase the value, utilization, innovation, and investment in MSS spectrum. It builds upon the proposals in the NPRM and addresses, in part, the recommendations of the National Broadband Plan for increasing terrestrial deployment in the MSS bands. The NOI inquires about ways to create opportunities for more expansive and efficient use of the 2 GHz band for stand-alone terrestrial uses. It also asks, if the value of the spectrum increases, what actions the Commission should take to further the overall public interest.
The NOI further requests comment on other ways to promote innovation and investment throughout all three of the MSS bands while also ensuring market-wide mobile satellite capability to serve important needs like disaster response and recovery efforts, rural access for consumers and businesses across America, and various government uses.”
Most of the NOI is focused on the 2GHz band, as I suggested last month, and suggests that either incentive auctions or a voluntary relinquishment of part of the spectrum would be means of providing appropriate compensation for the step up in value for the remaining spectrum. Of course, if part of the spectrum was relinquished, and the license for the remaining spectrum was still based on the MSS rules, it would quite possibly be necessary to continue to operate an MSS satellite. Such an outcome would almost certainly require a merger of DBSD and TerreStar (and disposal of two of their three satellites – 2 in-orbit and 1 ground spare), in order to reduce their satellite operating costs.
What the NOI doesn’t do is make specific proposals about relaxing the ATC rules in the Big LEO and L-bands, although it asks whether there are “any other actions that the Commission could take that would increase terrestrial use of the MSS bands”. To me, the tenor of the NPRM and NOI suggests that the FCC feels it has given ground to Harbinger (in approving the SkyTerra transaction and ATC modifications) and Globalstar (with what will presumably be a near term approval of its ATC waiver requests, for which the deadline is now August 2). Now the FCC needs to sort out the 2GHz band and it appears to be adopting a somewhat harder line than some might have hoped.
In his statement, Commissioner Copps highlights his belief that “charging fees for the ancillary terrestrial use in the MSS bands could provide incentives to ensure that the spectrum resource is used more efficiently and intensively”. However, whether this position will be shared more widely by the other Commissioners is still to be seen.
This must be a disappointment to those who had hoped for a relaxation of the ATC gating requirements without any significant givebacks in exchange. In particular, it may be hard for the FCC to agree to such a relaxation if a hard line is taken over incentive auctions or other compensation for the “step-up in value” in the 2GHz band.
With this proceeding going forward at the same time as MSS-ATC proponents are trying to secure partners and further investment (and in some cases are in bankruptcy or on the verge of it), it is going to be very interesting to see how the regulatory and financing activities affect one another over the next few months.
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07.13.10
Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services, TerreStar, Thuraya at 2:37 pm by timfarrar
Inmarsat has now launched its ISatPhone Pro, which I was lucky enough to try out the other week. Although the phone itself is not particularly attractive, the call performance was better than I expected – voice quality was good (with the other party easily recognizable), and the ability to ‘walk and talk’ was far superior to my experience with the TerreStar Genus phone. Latency was also somewhat better than on the Genus phone. The main limitation was that the phone only registers on the Inmarsat satellite when the antenna is extended and pointed in the direction of the satellite, which means there is a delay of 1-2 minutes before a call can be made, and calls will rarely, if ever, be received on the phone (assuming the user doesn’t want to carry it around with the antenna extended).
Though Inmarsat’s phone is not expected to perform well at high latitudes (particularly in Alaska), it should generally be a good alternative for those MSS voice users who aren’t worried about carrying such a large device. The phone itself has been priced very aggressively, with pricing currently around $599 and in some cases close to $500.
However, the most surprising development is the airtime pricing that Inmarsat has set. Postpaid wholesale pricing has been set very low, leading to retail offers of $150 per year with 60 free minutes of calls. Even more extraordinary is the prepaid pricing, where a user can buy a 25 minute card, valid for 2 years, for only $20.
In my view the fact that Inmarsat has selected a uniform 2 year expiry date on its prepaid cards is a huge mistake, which I can only assume is due to the limitations of Inmarsat’s prepaid billing system (note also that prepaid service is currently not available in the US, due to patent litigation over the prepaid platform that Inmarsat uses). Iridium has previously indicated that about half of handheld MSS users are “glovebox”-type customers, who only use the phone for emergencies (and rarely use any minutes). To date such users have been paying at least $30 per month for satellite phone service (apart from occasional dual mode roamers on Thuraya), but now they will be able to get service for less than $1 per month. Inmarsat has thus completely undermined the economics of a significant part of the handheld MSS market, making it impossible for its service providers to justify targeting these customers (especially as SPs are busy competing away the margins which Inmarsat expected would be available on its handsets). In addition to leaving large amounts of money on the table, this action may also create added costs for Inmarsat, as these users are the least likely to be familiar with the limitations of satellite communications and thus may well end up consuming disproportionate levels of customer support resources.
Inmarsat may well have had a reason to act in such a destructive manner a few months ago, when it thought it might have the opportunity to prevent Iridium gaining funding in the public markets to pay for its NEXT contract. However, now that Iridium can rely on more money than expected from COFACE, such a calculation looks less sensible.
Despite having an attractive proposition for low end users, Inmarsat may still prove less successful than it hopes amongst higher volume users. In particular, these users will gain less of an advantage from the low occasional use tariffs, and may be somewhat reluctant to churn after making a substantial investment in buying an Iridium or Globalstar handset in recent years. Inmarsat has stated that it believes the average lifetime of a satellite handset is around three years, but in reality Iridium and Globalstar handsets are used for up to 8 years (and there is a thriving market for secondhand phones). As a result, churn in the handheld MSS market is much lower than Inmarsat apparently expects (even for Globalstar users, who have had to cope with a lack of two-way service in recent years), which will make it difficult to persuade large numbers of existing users to switch over rapidly to Inmarsat’s new service. On the other hand, competition from Inmarsat will potentially force Globalstar to offer rather more aggressive pricing as it tries to rebuild its subscriber base in 2011 and 2012.
In the end therefore, Inmarsat may end up being able to trumpet a fairly large number of handheld subscribers (potentially up to 150K by 2014), but many of these will be less desirable customers and ARPUs may be rather lower than expected. Thus the overall impact for the handheld MSS market of Inmarsat’s new service (even when combined with Globalstar’s two-way relaunch in 2011) may remain subdued, and at best we expect wholesale revenue growth of no more than 10% p.a. in the next five years. Indeed a more pessimistic view, assuming significant erosion of ARPUs at the low end of the handheld market could put wholesale revenue growth at less than 5% p.a. over this period.
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06.28.10
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:32 pm by timfarrar
The President has now announced his support for the proposal set out in the FCC’s National Broadband Plan (NBP) to free up 500MHz of spectrum for wireless broadband over the next decade. However, even though “Our nation’s ability to lead the world in innovation and technology is threatened by the lack of sufficient spectrum for wireless broadband applications and services” according to the FCC, it doesn’t necessarily mean that spectrum will prove to be a good investment over the next few years. (In this analysis, we’re looking at the opportunity for financial investors, as opposed to cellular operators – just like in the housing market, if you intend to use your spectrum, then that’s a different proposition from planning to flip it to someone else).
Indeed it is highly desirable from the FCC’s point of view that spectrum should become cheaper rather than more expensive, because that will enable more competition in the wireless market and result in lower prices for consumers. In the absence of lower prices for spectrum, it is likely that some cellular operators will be shut out entirely from 4G, or will be forced to merge with competitors in order to combine their spectrum holdings – not the outcome that the FCC wants to see. The FCC also doesn’t want to reward speculators – it would much prefer spectrum to be put to use, rather than see financial investors lock it up with a view to profiting from higher prices in the future. Although some might argue that the FCC also needs to raise money from auctions (not least to fund the buildout of public safety networks), it is far from clear that such motivations will weigh heavily in the FCC’s decisions (even if some members of Congress disagree). Certainly the concept of maximizing the proceeds of future auctions was not emphasized in the NBP.
From a historical perspective, despite this apparent crisis, spectrum prices in the US (on a per MHzPOP basis) are actually far lower than a decade ago. This is entirely logical: if it now takes 50MHz+ of spectrum to support $30 of monthly data services, whereas ten years ago operators required only 20MHz of spectrum to provide $50 of monthly voice services, then cellular operators simply can’t produce the same ROI from each MHz of spectrum as they did in the past.
Just the objective of freeing up 500MHz of spectrum (almost doubling the amount currently available for terrestrial cellular service) alone is likely to put a damper on spectrum prices. In recent months, we have also seen the FCC moving rapidly to finalize rules to enable use of 25MHz of WCS spectrum, and formulate policies to ensure that 90MHz of MSS-ATC spectrum is put to use. In addition, the FCC may also decide to limit the amount of additional spectrum that AT&T and Verizon (who accounted for the vast majority of spending during the 700MHz auction in 2008) can acquire in the future.
In my view, all of these developments point to lower spectrum prices in the next few years. In the short term, prices will be depressed further by the glut of spectrum owners seeking to monetize their holdings at the moment: Harbinger, Clearwire, NextWave and other MSS operators, to name just a few. This comes at a time when there is a relative lack of buyers, with most analysts hard pressed to name anyone other than T-Mobile that is an obvious partner for these companies. Investors who acquired undervalued spectrum assets a few years ago (particularly if that was prior to recent rule changes) may be OK, but new investors will need to be more cautious about the price they pay for these assets.
In summary, even if there is considerable long term demand for spectrum, it is a fallacy to equate this with increasing prices. In that regard, spectrum is like oil: you know there will be more demand in the future, but that tells you nothing about how the price will move in the next year or two. The short term price (and indeed the price in auctions) is determined by the balance of demand and supply today. That alone is a negative sign for investors in spectrum assets. However, when the FCC (unlike OPEC) would also prefer to see lower prices for spectrum, then it certainly looks like a risky bet to assume that prices will go higher anytime soon.
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06.21.10
Posted in Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 2:36 pm by timfarrar
On Friday, the FCC’s Spectrum Task Force announced a “plan to increase value, utilization, and investment in mobile satellite service (MSS) bands”, beginning with a Notice of Proposed Rule Making (NPRM) which they hope to approve at the Commission meeting scheduled for July 15.
Although the announcement itself referred to the whole 90MHz of MSS spectrum identified in the National Broadband Plan (NBP) as suitable for terrestrial broadband, the focus of the discussion at Friday’s press conference appeared to be around the 2GHz (S-band) spectrum. Indeed the FCC highlighted that this spectrum, which is held by DBSD and TerreStar, is “right in the neighborhood of both the AWS spectrum and the PCS spectrum”. In particular, the FCC indicated that it would propose changing the table of allocation for the 2GHz spectrum, to allow primary terrestrial use (without ATC), and then enable secondary leasing for all three MSS spectrum bands. These rules would enable secondary leasing to begin “relatively soon”, if the FCC agreed to the proposal of the Spectrum Task Force.
According to Communications Daily, this proposal might include “charges”, presumably as “consideration for the step-up in the value of the affected spectrum” (as proposed in the NBP), but would avoid some of the delays associated with an incentive auction (which was one of the other options suggested in the NBP). Of course spectrum leasing for purely terrestrial use (as would then be possible in the 2GHz band) would be rather more straightforward than leasing under the current set of ATC restrictions, but the level of any FCC “charges” (and perhaps other conditions on terrestrial buildout or provision of satellite services) would dictate how much value could be realized by the existing spectrum holders.
What is particularly interesting is that this NPRM is being issued so quickly, when the Credit Suisse research conference call three weeks ago indicated that it was not expected until September. In addition, the NBP suggested that an S-band (2GHz) Order would not be expected until 2011 (as opposed to 2010 for the L-band and Big LEO bands), at least partly because decisions might be impacted by the outcome of the adjacent AWS-3 band proceeding.
Perhaps the reason for this change in timing is hinted at by the first line in the FCC’s announcement: the need to “increase…investment in MSS bands”. Certainly both Echostar and TerreStar were well prepared with immediate comments on the announcement (with Echostar also noting that the proposed change would “help spur investment”), and TerreStar desperately needs new investment in the very near future. It looks like the outcome of the FCC meeting in July (which according to Friday’s press conference is “still in flux”) might therefore prove critical to TerreStar’s future.
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06.02.10
Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar
So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.
Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.
We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.
The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.
The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.
In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.
Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.
Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.
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