04.30.09
Posted in Globalstar, ICO/DBSD, Inmarsat, Iridium, LightSquared, Spectrum, TerreStar at 10:44 am by timfarrar
On Monday, the Wall St Journal revealed that Harbinger plans to push ahead with “a multibillion-dollar plan to build an international satellite-cellphone business” which would “complement existing cellular networks with satellite coverage, and…use new chips that could fit inside affordable, mainstream phones, keeping costs down for consumers”. This is quite different from the original plan of SkyTerra, TerreStar and ICO to build out Ancillary Terrestrial Components (ATCs) – basically a new terrestrial cellphone network using their satellite frequencies. Instead, subscribers will simply rely on their existing cellphone networks and only use the satellite services of these companies as a roaming partner when they are in uncovered areas. From that perspective, the new plan is much more similar to the business plans of Iridium and Globalstar in the late 1990s, that business travelers would rely on satellite networks to fill in the gaps in cellular coverage. For example, here’s a description from the Economist in June 1998:
“By far the largest number of subscribers is likely to come from the “cellular roaming” market. These are users of land-based cellular phones who want to be able to extend the range of their handsets when they are travelling through areas of poor or incompatible coverage. MSS subscribers will be equipped with a dual-standard phone that will switch to a satellite when a ground connection is unavailable (Iridium’s first offering is a soon-to-be-superseded $3,000 half-kilogram brick). Subscribers will pay a higher standing charge to their normal cellular operator and a premium on MSS calls. Numbering will not change and unified billing will be standard. This week Iridium said it had recruited 200 distribution partners among cellular companies.”
Of course there are many advantages that the new and very capable satellites being built by SkyTerra and TerreStar will offer over the 1990s technology of Iridium and Globalstar. Most obviously, the extra power and sensitivity of their satellites will allow the satellite service to be added to mainstream cellphones with little or no penalty in size and weight, as opposed to the ‘brick’-sized handsets produced by Iridium and Globalstar in 1998 and 1999. In addition, SkyTerra, TerreStar and ICO have signed agreements with Qualcomm to incorporate satellite technology into Qualcomm’s next generation cellular chipsets, which are likely to be used in a wide range of handsets.
However, there is a major difference between the principal sources of revenue for an ATC and a satellite roaming business plan. In the ATC case, a cellular operator would pay to lease the satellite spectrum to provide terrestrial services over a new terrestrial base station network, thereby enabling it to add capacity or new broadband services to its network. Satellite services, while available, would be a minor component of the overall revenue stream for the satellite operator. On the other hand, a satellite roaming business plan relies on the satellite services themselves to generate revenue, with perhaps some incremental benefit to the cellular partner through reduced churn, if the satellite service is sufficiently compelling to subscribers.
Even more importantly, the decision maker who will produce these revenue streams is very different: in the ATC case, it is simply a matter of convincing the cellular operator to lease the spectrum, whereas in the satellite roaming case, the end user must decide to buy the satellite service. Many people who were intimately involved in the launch of Iridium and Globalstar’s services remain convinced that it will be very difficult to explain the limitations of satellite service to a mass market: those services were sold as enabling coverage “anywhere”, and so there were numerous complaints about the inability of satellite service to work reliably in buildings, cars and urban areas. For most people, their experience of cellphone coverage limitations is in precisely these areas: in the Bay Area there are 375K riders of BART each WEEKDAY (where coverage in the underground parts of the transit system has only recently started to be deployed) compared to less than 200K visitors to Pinnacles National Monument each year (the location where we most recently spent an extended period of time outside cellular coverage). Remember also that even the new phones almost certainly won’t switch beween terrestrial and satellite modes in the middle of a call, so will likely drop an ongoing call if the user moves through a cellular (or satellite) deadzone. As the Wall St Journal explained in July 1999:
“At its core, Iridium is struggling with an incongruity between its design and its market ambitions. It was originally intended for millions of globe-trotting business travelers, and it was launched with a $180 million world advertising campaign last year aimed at that market. But when Motorola began operating the system on Nov. 1, the Iridium handsets weren’t powerful enough to work within buildings or urban areas. As a result, a vast network intended for a mass market was usable only by niche groups, such as mariners, oil-rig workers or the military. Iridium faces a tough struggle to cover its huge costs in such relatively small markets.”
Indeed there are about 150,000 Iridium and Globalstar satellite phone subscribers within these niche markets in North America at the moment, generating about $100M in retail service revenues per year (excluding international users like the DoD). New smaller, cheaper handsets from SkyTerra and TerreStar should increase the size of this “professional” MSS niche significantly (including amongst “police, fire and ambulance personnel”). In addition, a low cost “satellite backup” service might appeal to several million consumers, particularly in earthquake or hurricane-prone areas such as California or the Gulf Coast, if it is explained properly: as an emergency service for use outdoors in the event that other communications are unavailable. In order to achieve this level of take-up, cellular carriers will not only have to sign roaming deals with the satellite networks, but also ensure that satellite connectivity is included in the phones they sell and support large scale distribution of the phones themselves. Even then, it may be hard to explain properly: there were reports after Hurricane Katrina that first responders were unable to get their satellite phones to work, and it was later discovered that some were trying to use the phones in a basement conference room or inside the Superdome. Although gaining several million subscribers would be a great achievement for the MSS sector, in view of these challenges we remain skeptical that there will ever be “vast global demand for the network [Harbinger] envisions”.
In contrast, we are more positive about the long term potential of ATC: cellular operators will ultimately need more spectrum to cope with the surge in wireless broadband data demand and will use up the stockpiles of 700MHz and AWS spectrum which they have purchased in recent years. At that time ATC will be one of the most obvious sources of supplementary spectrum, and there is no technical reason why it can’t be made to work. Indeed many of the developments being put in place to enable satellite roaming (such as the Qualcomm chipset) are precisely those needed as a pre-requisite for ATC deployment. The only problem is how long it may take before major cellular operators feel a pressing need to use MSS spectrum for their terrestrial operations – it is likely to be several years off at a minimum. Indeed, if WiMAX struggles, then Clearwire’s spectrum may be sold off to other players, pushing out the timeframe in which ATC might be considered even further into the future.
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03.12.09
Posted in ICO/DBSD, Inmarsat, Regulatory, Spectrum, TerreStar at 1:43 pm by timfarrar
Although the European S-band spectrum allocation process is well underway, its looking increasingly possible that there might never be more than one satellite system actually built to use this spectrum, namely the Solaris payload to be launched on Eutelsat W2A later this year. Amongst the other three entrants to the spectrum allocation process, ICO and TerreStar’s financial situation already makes it difficult to see them being able to fund construction and launch of new European satellites, although ICO maintains its legacy claim to the spectrum (by virtue of the MEO satellite launched in 2001), and has vigorously protested Ofcom’s planned cancellation of its registration in the ITU’s Master Frequency Register.
On Inmarsat’s results call today, the company was explicit about its intention not to “put its balance sheet at risk” to build its proposed EuropaSat S-band satellite, and when the CEO was asked about whether he would adopt a “build it and they will come” approach, he replied “absolutely not”. Inmarsat instead plans to seek external investors to fund the project, and ultimately to spin it off as a separate company. The contrast between Inmarsat’s description of its Alphasat project as bringing more capacity in the EMEA region, more spectrum and more redundancy to support future growth, and EuropaSat as a “non-core” project, was particularly striking.
While Inmarsat highlighted that EuropaSat could have interesting prospects in satellite radio as well as mobile TV, Ondas (which now looks to be the most likely vehicle for satellite radio development in Europe) has been growing closer to Solaris in recent months. This comes despite SES’s earlier skepticism about the prospects for satellite radio in Europe, and presumably reflects the very dim outlook for satellite-delivered mobile TV in Europe and elsewhere. Its therefore far from clear where Inmarsat might find the partners needed to fund EuropaSat, especially in such difficult economic times, and we believe it is now plausible (and perhaps even likely) that even if Inmarsat is awarded a license by the EU later this year, the EuropaSat satellite may never be built.
Ironically, the EU’s allocation rules don’t appear to envisage such an outcome, focusing instead on how to resolve a spectrum shortage and restricting any one operator to at most half of the 2x30MHz of spectrum available. In these circumstances it is quite possible that some of the spectrum might eventually end up being reallocated to terrestrial 3G networks instead of satellite services, as happened in North America back in 2003.
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03.04.09
Posted in Globalstar, Handheld, Inmarsat, Iridium, LightSquared, TerreStar at 11:52 am by timfarrar
Its been revealed today that EMS has taken a $3.4M charge to terminate its work on the Inmarsat next generation satellite phone, and that Inmarsat will be assuming “more control over production phases of the product development”. This is the latest in a long line of setbacks for the ISatPhone, with the first generation phone failing to achieve any meaningful traction and repeated delays in completion of the next generation phone since Inmarsat acquired the ACeS customer base two and a half years ago.
In our view, a key reason for the failure of the original phone was its poor performance on the Inmarsat I4 satellite, with users advised to use a hands-free kit and keep the phone antenna pointed at the satellite! It remains unclear if EMS had solved these technical challenges with the new phone (which are caused by the smaller 9m antenna on the I4 satellites, compared to the 12m antennas used by Thuraya and AceS), and therefore it is quite possible that serious constraints may still apply to the usability of Inmarsat’s new handheld, a concept model of which is shown below. Certainly we expect that it will be difficult if not impossible for Inmarsat to ensure satisfactory handheld performance in Alaska and much of Canada.
The launch of the new phone had already been pushed back from early 2009 to the end of the year, with features such as packet data dropped to save time and money. Now it looks like Inmarsat will experience a further delay until well into 2010, and yet another increase in costs, adding to a development program which already totals around $100M. We will be looking with interest at whether Inmarsat maintains its stated intention to sell the phone for around $500 retail, thereby making it even harder to recover its investment in handset development. Notably, this price point has already met with pushback from potential distributors, who would be unable to realize the margins they make today on the sale of other satellite phones.
The clear winner is Iridium, who will have even more time than they had expected to capitalize on the lack of handheld competition from Inmarsat, and who managed to complete the development of their new 9555 phone on time and at a cost of less than $10M. Other current and potential satellite handheld providers, such as Globalstar, Skyterra and TerreStar, who have faced a barrage of criticism from Inmarsat in recent months, will also be rubbing their hands with glee at Inmarsat’s embarrassment.
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01.28.09
Posted in Inmarsat, Maritime at 2:45 pm by timfarrar
On Monday, Thrane & Thrane announced an agreement with KVH Industries to distribute KVH’s TracPhone V7 mini-VSAT product. At first sight, this seems to be an expression of confidence in the potential of maritime VSATs, with Thrane noting that “the market for Ku-band equipment for maritime satellite communication is expanding strongly” by about 1500 terminals per year. However, Thrane’s original plan was to pursue development of its own maritime Ku-band VSAT product and service, the SAILOR 900, announced last June, which has now been cancelled.
The Ku-band maritime VSAT market has grown dramatically in recent years, taking market share amongst high end users, who can afford the expensive terminals (typically $50,000+) and need the flat-rate, always-on connectivity that Inmarsat cannot provide with its L-band satellites. However, the Achilles heel of Ku-band systems has always been coverage: as Connexion-by-Boeing found out in 2006, the cost of leasing a global Ku-band network far outweighs the near term revenue that can be gained in what is a very fragmented business, with the largest players (Vizada/Marlink, SeaMobile/MTN, Caprock and ShipEquip) each having a market share of less than 20%. As a result, providers have to date offered C-band systems to customers requiring global coverage, and focused Ku-band solutions on intra-regional users.
KVH and Viasat have promised to change this model with their mini-VSAT network, building out global Ku-band coverage for both aeronautical and maritime applications, along similar lines to the concept envisaged by Connexion (though with smaller, cheaper terminals costing around $30,000). Thrane’s decision to join with KVH is an acknowledgement that even a company such as Thrane, with it’s very strong maritime brand, is unable to justify the costs of establishing global Ku-band coverage on its own. The question now is whether KVH and Viasat can afford the investment needed to complete their 2009 coverage expansion plans.
Orders have remained strong for maritime VSATs, even in recent weeks, but in the current financial climate, maritime VSAT looks far more vulnerable than Inmarsat to ship operators seeking to cut back their communications spending: it generally has a high fixed cost every month (compared to Inmarsat’s pay-by-the-use) and is usually sold on the basis of getting “ten times more data for double Inmarsat’s cost”, not on the basis of saving money over current expenditures. Most importantly, in many cases it is seen primarily as an investment in crew welfare: when there are few jobs going either at sea or on land, crew retention in 2009 will be much less of a problem than in 2008. As a result, Thrane looks amply justified in getting cold feet over pursuing its own VSAT product.
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10.09.08
Posted in Financials, ICO/DBSD, Inmarsat, Spectrum, TerreStar at 10:52 pm by timfarrar
We now know that there are at least four applicants for the European 2GHz MSS spectrum licenses, namely Solaris (the SES-Eutelsat joint venture), Inmarsat, ICO and TerreStar. Applications were due by October 7, and the first phase of the selection procedure (identifying which applicants are technically and commercially “qualified”) should be completed in the first half of 2009. There are 2x30MHz of spectrum available, which is sufficient for 2 or at most 3 applicants, so the current list of applicants will certainly have to be cut back during the selection process.
Perhaps the most surprising application is that from TerreStar, given that it has to date failed to raise external funding for TerreStar Global (its European venture) despite attempting to do so over the last year. TerreStar may calculate that it has little to lose, since it has committed several million dollars to EADS for initial preparatory work and it has already signed a launch agreement with Arianespace. From this point of view, its financial commitments to the European project to date are equivalent to those of Inmarsat (which has stated it will only spend “single digits millions of dollars” on “business development activities” prior to securing a license), although of course TerreStar does not currently have sufficient funding available to complete construction and launch of a European satellite, in addition to its two North American satellites (one of which is a ground spare). However, since both Solaris and Inmarsat strongly prefer 2x15MHz over the 2x10MHz which a three way split would imply, we assume that if TerreStar’s application was approved, it might subsequently seek to team up with one of these two competitors, rather than pursuing a standalone project. For example, Solaris has already indicated that it may acquire a follow-on satellite to the Eutelsat W2A to offer wider pan-European coverage.
Its also worth noting that in addition to putting in an application, ICO is separately seeking to challenge the legality of the EU’s licensing process, in an attempt to preserve the spectrum priority rights of its MEO satellite that was launched in 2001. ICO had been hoping to know the outcome of its litigation with Boeing before the European 2GHz applications were due, but to date it appears the jury has not reached a verdict (after three weeks of trying). Clearly, given the amount of money at stake, this litigation will have a significant impact on how ICO decides to move forward from here on.
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09.23.08
Posted in Financials, Globalstar, Inmarsat, Iridium at 11:05 pm by timfarrar
Despite several successful fundraising deals this year by Globalstar, TerreStar and MSV, Iridium’s deal with GHL is noteworthy as the first investment to directly validate the potential of the MSS market in the absence of spectrum upside, since Iridium cannot free up significant amounts of spectrum for an ATC play.
However, there is no direct read across to the MSS market potential for other players, since Iridium and Inmarsat are the only MSS operators that can provide truly global service across the oceans and thereby address the maritime and aeronautical segments that account for roughly half of wholesale MSS service revenues. These markets segments continue to grow strongly, particularly for broadband communications, and we expect Iridium’s next generation system to be designed to compete more directly with Inmarsat for maritime and aeronautical broadband customers. Combined with moderate progress in land-based handheld and low data rate MSS markets, Iridium should be able to grow its revenue and subscriber base over time, despite increasing levels of competition from new players such as ICO, and Inmarsat’s entry into the handheld MSS market.
Where we can draw some conclusions for other players is on the maximum amount Iridium could afford to pay for Globalstar in the event of a merger, given the value placed on Iridium in this transaction ($591M). Given that Iridium’s revenues this year will be about three times those of Globalstar, and that Iridium presumably does not ascribe value to Globalstar’s ATC opportunity, it seems likely that Iridium would place such a low valuation on Globalstar as to all but rule out any prospects of a negotiated deal between the two companies. At least in this case, it therefore looks like we won’t see a merger being agreed any time soon.
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08.15.08
Posted in Inmarsat, LightSquared, Spectrum at 8:41 am by timfarrar
Harbinger Capital has just acquired a 4.9% stake in Cablevision at a cost of some $350M, only a few days after we suggested that it would have to invest billions of dollars in a wireless operator to facilitate the deployment of ATC.
Notably, Cablevision is not participating in the Clearwire JV with other cable companies and instead has opted to deploy a WiFi network in the New York area with a planned investment of some $300M over the next two years. Most other operators have found the use of unlicensed spectrum less than satisfactory, particularly for providing indoor coverage, which requires much higher power levels. As a result, Cablevision may ultimately find that it needs to move to licensed frequencies for its deployment, and there has been speculation that it would be a potential purchaser of NextWave’s 2.5GHz spectrum. However, to date NextWave’s efforts to sell this spectrum appear to have been unsuccessful.
While Harbinger’s initial stake in Cablevision is relatively small, its past record suggests that it may increase its stake over time and seek to influence the direction of the company. Cablevision could well be a potential user of the L-band MSS-ATC spectrum block that Harbinger is seeking to put together via a merger of Skyterra and Inmarsat. We speculate that Harbinger might even try to engineer a consortium of Cablevision and Leap (and perhaps other companies), similar to the Clearwire JV, to build and sell broadband services on a national ATC network.
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08.14.08
Posted in Aeronautical, Inmarsat at 11:28 am by timfarrar
According to a recent Economist article Air France has found that “On a typical flight about 100 text messages were sent or received and ten megabytes of data transferred by a dozen BlackBerry users”. This level of usage seems very high, given that Blackberries can usually synchronize with 100kbytes or less of data and the usage level given here is 800kbytes per Blackberry. We questioned OnAir’s PR representatives and they confirmed that the data (which comes from the first phase of the Air France trial, before introduction of voice) was quoted correctly.
Inmarsat also stated on its Aug 6 results call that initial Air France trials had seen usage levels of around 300 minutes per day, so combined this would produce total end user revenues of well over $1000 per plane per day, significantly in excess of our expectations (and the Qantas trial which had data only usage of $100-$150 per day). However, we have heard from another source that usage revenues (for voice and data combined) on the Air France aircraft in the second phase of the trial were at a rather lower level of around $400 per day, very close to (or even below) our expectations.
We’re waiting to see if any more data emerges to clarify likely usage. As we’ve noted before, this is critical to determining the rate of installation, particularly on short haul aircraft, since airlines need to see a minimum usage of about $800 per day to make a profit after paying for the equipment and cost of flying it around. Only then will financially strapped airlines be willing to push forward with fleetwide installations in the current economic climate.
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