06.05.12
Posted in Aeronautical, Broadband, Inmarsat, Maritime, Operators, Services, VSAT at 12:45 pm by timfarrar
Without any hint of the PR blitz that I had expected, Intelsat has quietly updated its website to confirm my blog post in March, that it is about to order at least two new satellites, IS-29 and IS-33 to provide high capacity spot beam Ku-band service in the North Atlantic and Indian Ocean regions. These satellites will be in-service in 2015 and 2016 respectively, and are intended to “provide four to five times more capacity per satellite than our traditional fleet” with total throughput “in the range of 25-60 Gbps” (this appears to be a total not a per satellite figure – I would guess the throughput per satellite is around 12Gbps, roughly the same per satellite as Inmarsat’s GX, including its high capacity overlay beams).
UPDATE (June 7): Intelsat has now put out a press release and added more data to its website including a fact sheet, which states specifically that the throughput of 25-60 Gbps is per satellite. Obviously this figure is a wide range but it is clearly much greater than the Global Xpress per satellite capacity. I understand that one reason for Intelsat’s lack of publicity is the quiet period associated with its proposed IPO, but Intelsat definitely considers this a very important development and has been trumpeting it privately to distributors at its recent partner conference.
Intelsat is planning to integrate these new satellites into its existing maritime coverage as shown below (indeed there is less high capacity oceanic coverage than I expected, presumably because it will take time before Intelsat’s existing capacity fills up) and it appears that Intelsat will now be looking to compete head-to-head with Inmarsat’s Global Xpress as well as Viasat (both of which Intelsat appears to be referring to with its comment that “Unlike many new satellite operators, Intelsat is not constrained to Ka-band“)
What we haven’t yet seen are the details of Intelsat’s launch partners. It is clear that one partner is Panasonic, but the more important question is who Intelsat might have managed to secure in the maritime market. Inmarsat’s recent list of XpressLink distribution partners was notable for the absence of Vizada and most other major maritime VSAT providers, so if one or more of these maritime players now makes a substantial commitment to Intelsat, it will be another important sign that the transition to Ka-band in the maritime and aeronautical sectors is far from a foregone conclusion.
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04.30.12
Posted in Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Services, Thuraya at 8:49 am by timfarrar
I noted back in November that the MSS industry was seeing a dramatic deceleration in revenue growth, but 2012 is already bringing even more challenges across the sector. As I predicted last month, Inmarsat’s price rises are causing a substantial backlash in the shipping industry, with the latest Digital Ship magazine including a devastating letter from AMMITEC (the Association for IT Managers in the Greek Maritime Industry), asserting that:
The handling of the pricing restructuring shows a blatant disregard for the long-term loyalty and trust that, up until a couple of years ago, the majority of the shipping world has had in Inmarsat and its maritime offerings.
Inmarsat’s (not terribly reassuring) response indicates that:
Inmarsat is listening to our customers. We recognise that some of these price changes will be difficult for smaller vessels, and so we will be introducing a small boat package to which they can transition.
However, to the best of my knowledge, this “Small Vessel Pricing Plan”, which Inmarsat told its distribution partners a couple of weeks ago was “in the final stages of development”, has not been announced before the pricing changes come into force tomorrow, and I’ve even heard suggestions that Inmarsat doesn’t actually intend to implement this plan unless it really does suffer from a significant number of customer defections.
Of course, Inmarsat is not alone in experiencing some self-inflicted wounds at the moment. Last Friday brought news that Iridium is implementing a “complete recall” of its new Iridium Extreme handset, while on March 30, Thuraya told its distributors that it had been unable to reach a manufacturing agreement with Comtech for its high speed MarineNet Pro maritime terminal (intended to compete with Inmarsat’s FleetBB) and so the terminal would not be in the market until “the end of the year”. As announced on its Q4 results call, Globalstar ran out of SPOT and simplex devices for a period of time in the first quarter after changing its manufacturer, and will shortly learn the results of its arbitration with Thales Alenia over its satellite contract.
Let’s just hope that all of this mess doesn’t harm the reputation of MSS providers for providing reliable service when its really needed, and in particular doesn’t make it even more difficult for the MSS sector to boost revenue growth in this challenging competitive environment.
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04.20.12
Posted in Financials, Inmarsat, LightSquared, Operators, Spectrum at 9:33 am by timfarrar
The news this morning that LightSquared has made the $56.25M payment to Inmarsat that was due in February and in exchange gained two years “breathing space” before any additional payments need to be made, is in line with the deal that I noted was on the table two weeks ago, and shows that Harbinger is still attaching importance to its spectrum rights under the agreement with Inmarsat as it tries to argue for a “spectrum swap”. In a way the $56.25M paid today may not be that important in the end, because if LightSquared files for bankruptcy within the next 90 days then that amount could probably be reclaimed by LightSquared’s creditors.
However, far more significant is that LightSquared has also given up all claims that Inmarsat had failed to perform its obligations under Phase 1 of the Cooperation Agreement (despite the fact that Inmarsat failed to retrofit any of its terminals with filters) and as a result Inmarsat is now saying there is “a high degree of confidence” that it will be able to recognize a further $325M. I’m informed that LightSquared had told its investors that there was “no good basis” to challenge Inmarsat’s assertion that it wasn’t actually necessary to fit filters, and it certainly appears that Inmarsat now has no intention of doing so, and instead will simply be able to recognize a further $325M (on top of the $154M recognized to date) out of the $490M paid by LightSquared up until the end of 2011 as pure profit.
Why did LightSquared make this payment, rather than filing for bankruptcy and preserving its right to sue Inmarsat for part of the money back? One explanation certainly appears to be Falcone’s continued delusional view that LightSquared’s problems can be overcome, and this fits right in with the decision back in December to give up $236M to Sprint in exchange for preserving their hosting agreement for a further three months.
More intriguing is whether this development could signal an agreement with Carl Icahn is going to be reached before April 30, which would keep LightSquared out of bankruptcy, as Falcone apparently desires, perhaps in exchange for Harbinger selling its Ferrous Resources shares to Icahn at what seems to be quite a low price. On the other hand, Falcone might simply be trying once again to convince LightSquared’s investors that he is the only person who can strike the deals necessary to keep LightSquared alive, and its also worth noting that Harbinger still needs to raise $47M from the sale of assets by April 30, regardless of whether a deal is reached over LightSquared (so that the Ferrous Resources sale has to happen anyway).
What this may therefore point to is a finely balanced situation where it remains unclear whether Icahn and his allies have sufficient votes to call a default on LightSquared’s debt after April 30. In particular it is not clear whether they would need to secure 50% support to call this default or as much as a two-thirds majority, which could be far more difficult. Today’s actions may or may not persuade some debtholders to support Falcone rather than Icahn, but as we saw with the Sprint deal, the potential recovery for LightSquared’s investors in the absence of a spectrum swap is rapidly vanishing, with only the ground spare satellite providing any reasonably monetizable asset, and a major part of the ($200M?) cash on LightSquared’s balance sheet will ultimately be consumed by bankruptcy costs.
Its therefore particularly hard to understand why the LightSquared debt has been consistently trading higher, to as much as 53-55 cents on the dollar this morning. The only way to rationalize the rising price of the LightSquared debt is that other investors think that because someone as smart as Icahn is getting involved, there must be a good opportunity here. However, as we saw a decade ago with Craig McCaw’s interest in Iridium and ICO, which ultimately resulted in him taking a huge loss, the satellite industry has a history of disappointing smart investors. With Andy Beal knowing only too well this industry’s cycle of “hopeful and ambitious birth, thrilling and painful growth, and an early and tragic death”, maybe he’s really the smart one to get out at this point. After all, as the Dallas Observer’s epitaph for Beal Aerospace pointed out: “I guess it’s hard to be a genius”.
UPDATE (4/23): LightSquared’s debt has traded even higher, as investors apparently believ a near term bankruptcy is becoming less likely. It seems like a consensus is emerging that Icahn will not have the votes to force a bankruptcy at the end of the month, and so a relatively lengthy extension may well be granted on the breach of covenant waiver, potentially through the end of this year. Even after making the payment to Inmarsat on Friday, LightSquared should have enough money to make its cash interest payments in July and October (totaling ~$50M), cover the operating costs of the current business and still have perhaps $50M-$100M of cash left at the end of 2012. I also understand that LightSquared has asserted that a spectrum swap should be forthcoming after the November 2012 election, although their recent track record of predicting favorable FCC actions is hardly encouraging for investors. However, as noted above, in the absence of a spectrum swap, the potential recovery for investors at that point will be even less, and it will be interesting to see whether Boeing still wants to buy the ground spare satellite next year, given that construction of the MEXSAT-2 satellite for the Mexican government will start relatively soon (the MEXSAT-1 satellite is scheduled for launch in 2013 or 2014).
UPDATE (4/27): The Wall St Journal is reporting today that LightSquared’s lenders are insisting that Falcone step aside as a condition for agreeing not to call a default on Monday. It appears a deal might be possible to keep the company out of bankruptcy for a substantial period of time, perhaps by substantially diluting Falcone’s equity stake, and thereby avoiding the complications (e.g. FCC license transfers) and expense that would be involved in a bankruptcy case. However, it is far from clear that Falcone will do the logical thing and step aside at this point. After all, when I’ve been wrong in my predictions about how things will go, its usually because I’ve assumed that Falcone and LightSquared will act rationally in the interests of their investors.
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04.17.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 4:53 pm by timfarrar
Separate articles published yesterday by The Daily Beast and Bloomberg had plenty to say about Phil Falcone’s “deep perspiration stains” and his claim that “he doesn’t sweat” under pressure. However, with the waiver of the covenant breaches on LightSquared’s first lien debt expiring on April 30, the heat is certainly on him to figure out the way forward.
Bloomberg’s article indicates that Falcone is hoping Carl Icahn “might become a partner”, as he searches for a way to keep LightSquared out of bankruptcy. In that context it is interesting to note that news emerged last week that Icahn is nearing a deal to buy a 14.9% stake in Ferrous Resources, a Brazilian iron ore mining company, from Harbinger at a price of $1.50 per share, one third of what Harbinger paid for shares in the company in 2009 and less than half of the valuation put on these shares by Harbinger in January 2012. At least conceivably, such a deal could provide a quid pro quo for Icahn’s support in keeping LightSquared out of bankruptcy, and it is notable that Harbinger also needs to raise $47.5M from this asset sale to repay its own loan (from Jefferies) by April 30, the same day that the LightSquared covenant waiver expires.
Two weeks ago I thought that the April 20 deadline (this coming Friday), when Inmarsat can terminate its Cooperation Agreement with LightSquared, could provide the impetus for a decision on whether or not to file for bankruptcy sometime this week. However, if the future of Harbinger itself is riding on avoiding a potential default on the Jefferies loan, then the Inmarsat deadline might well now be ignored. Inmarsat has been standing firm on its insistence that it must be paid even more money to contemplate any extension of the Cooperation Agreement, so if the April 20 deadline passes without payment being made, then it is hard to see an outcome where Inmarsat doesn’t just terminate the Agreement for default, and reclaim several additional MHz of spectrum from LightSquared as part of these default conditions. In those circumstances, it would become even harder for LightSquared’s successors to ever deploy a terrestrial network in the L-band MSS spectrum, even if the FCC was to mandate GPS receiver standards at some point in the future.
As a result, we may soon be asking what is actually left for LightSquared’s creditors, in the absence of any agreement with Inmarsat or Sprint, other than a ground spare satellite (which at least originally was worth $120M to Boeing, based on their vendor financing agreement) and an in-orbit satellite (which is probably worth very little, given its negative cashflows). Of course, LightSquared will try and sue the government, but that may now be made much harder by the statements of DirecTV’s CEO, who told Bloomberg that they “looked at LightSquared’s spectrum in 2004″ and concluded “It conflicts with GPS, it will never work”. DirecTV’s CEO may be misremembering the events, because Rupert Murdoch (then owner of DirecTV) was telling the Wall St Journal in November 2005 that “We may be forming a company with partners to build something out here that would give you broadband” and I had understood that these discussions were in 2005 (possibly even into early 2006) and broke down mainly over price.
Nevertheless, even Falcone admitted that in 2010 he “knew there were interference issues [but] they weren’t his to solve because GPS users were encroaching on his spectrum”. If that is the case then wouldn’t it have been rather better to tell the GPS community about the problem years ago, rather than try to spring it on them as a fait accompli at the last minute? It seems that as DirecTV’s CEO put it “Falcone ‘made a bet that the government would say, “Sure, go ahead,” or somehow make it right.’”.
Of course the complaints of Harbinger’s own investors will be significantly boosted by Falcone’s admission, and LightSquared’s investors may well suggest that UBS ought to have enquired more deeply into this issue before selling the first lien debt. However, for the moment, both Falcone and LightSquared’s debt investors appear to be more focused on securing a spectrum swap, which as Walt Piecyk says in the Bloomberg article (and as I’ve said many times before) “isn’t a realistic option [because] there’s nothing readily available and…if there was, that’s spectrum that could be auctioned off for billions in proceeds”.
Indeed the news today that the FCC has appointed Gary Epstein, a former SkyTerra executive, as co-head of the Incentive Auction Task Force (something which has already attracted Sen. Grassley’s attention) may make it even harder for the FCC to take any action to help LightSquared, because further accusations of favoritism would be sure to follow.
All of this comes as attention finally seems to be turning to the fact that (as I’ve said for the last 18 months) the “spectrum crisis” is based on hyperbole from the wireless carriers (not to mention the FCC and White House). As Marty Cooper, the inventor of the cellphone and Cooper’s Law (which states that spectral efficiency, or put another way potential wireless capacity in a given area, has doubled every 2.5 years for the past century) puts it:
“Every two and a half years, every spectrum crisis has gotten solved, and that’s going to keep happening,” Mr. Cooper said. “We already know today what the solutions are for the next 50 years.”
In fact, the CTIA’s semi-annual statistics, released last week, gave a pretty clear indication of what those solutions are. Remarkably, in the last six months of 2011, an all-time record 26,465 cell sites were added in the US (an increase of more than 10% in just 6 months) despite the fact that wireless capital investment by the carriers during 2011 was up only 1.7% on 2010. Thus it seems pretty clear that deployment of new (small, lower cost?) cell sites for capacity enhancement is working very well to accommodate increasing amounts of data traffic, without imposing any significant burden on the wireless operators. Indeed, with the operators apparently able to include on-net WiFi traffic in the data they report to CTIA, as AT&T is probably doing, the need for more licensed spectrum may be reduced even further. As a result, if LightSquared’s investors ever believed Mr. Falcone’s assertion that “it is clear that the investment thesis was dead-on” then maybe they ought to start having some doubts about that as well.
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04.06.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 6:47 am by timfarrar
Its certainly been an eventful week for LightSquared (why is it that whenever I go on vacation something significant seems to happen?) and press reports have indicated that we are now moving a lot closer to my prediction in January that creditors would force the company into bankruptcy before all the money had gone, with Mr. Icahn apparently indicating that he is seeking a debt for equity swap to squeeze out Harbinger.
Mr. Falcone has responded by suggesting that he is “seriously considering” a “voluntary bankruptcy” as “one of several options” for the company. More pointedly, yesterday he indicated (in a very explicit reference to Icahn) that this would be an attempt to “protect the company from creditors who are more interested in a quick flip”.
Of course, the idea that Harbinger could remain in control rests on Falcone’s view that “a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value” (something that I’m told debtholders consider simply “delusional”). At this point in time, the LightSquared spectrum is only usable for satellite services, which its very hard to believe could generate any positive value (because it would be difficult and time consuming for the satellite business even to reach cash flow breakeven).
As I’ve said in the past, the best case is that 20MHz of the spectrum might be usable in a decade or more for a terrestrial service, but if you have to wait a decade for the spectrum to be usable, and LightSquared’s “$10B waiver” has been withdrawn, then its hard to see why anyone would pay more than the $1.4B DISH paid for 20MHz of TerreStar spectrum last summer. Unfortunately using the spectrum at all would require maintaining the lease deal with Inmarsat at an NPV cost of somewhere between $1.5B and $2B (depending on the discount rate applied), which would need to be deducted from the above sum, and so its not clear that there is any positive value for the spectrum under this scenario either.
The last remaining hope to have some usable (and valuable) spectrum in the near term is to engineer a spectrum swap, but that would rely on the DoD showing some goodwill towards LightSquared, something which has hardly been evident to date.
As a result, after a voluntary bankruptcy filing, we would be thrown headlong into a valuation fight, where the debtholders tried to argue to the judge that LightSquared’s likely attribution to itself of a $2B-$3B valuation and proposed cramdown of the first lien debt was simply not feasible. It is difficult to see LightSquared prevailing, when the basis for a high valuation of the spectrum is simply not sustainable. However, these arguments will tie the company up in court for the rest of the year, and in the interim presumably Harbinger would try to stay in charge.
The timing of a bankruptcy filing is likely to be dictated not only by the April 30 expiry of LightSquared’s waiver in respect of the covenant breach from the termination of the Sprint agreement, but also by the status of LightSquared’s Cooperation Agreement with Inmarsat. Earlier this week, a deal appeared to be on the table whereby LightSquared would make the missed February payment of $56M and give up any claims that Inmarsat had failed to complete Phase 1, in exchange for a two year deferral of further payments. However, LightSquared appears reluctant to pay out additional money to Inmarsat when a bankruptcy filing would also prevent Inmarsat from terminating the Cooperation Agreement and could still allow LightSquared to reach a resolution with Inmarsat later on if that was felt to be useful. As a result, I expect LightSquared’s bankruptcy filing to come before the April 20 deadline on which Inmarsat can terminate the Cooperation Agreement for default, and plausibly it could be made over the weekend of April 14/15.
Mr. Falcone has also taken to the press to accuse “the FCC of bowing to special interests” by blocking his “shovel ready” project. The article suggests that he “first got into the telecom business in 2010″ when he “placed a $14 billion bet on what he thought was a sure thing”, which of course is revisionist history at its worst. In fact Mr. Falcone had been an investor in the predecessors to LightSquared and TerreStar since 2004, and made most of his purported $2.9B investment well before 2010.
Since the FCC granted the SkyTerra transfer of control (including various ATC license modifications and what appears to have been an implicit promise of a later waiver) to Harbinger in March 2010, the investment has mostly come from third parties. By my calculations, Harbinger has only invested about $700M into LightSquared over the last two years (including the cost of buying out minority equity investors in SkyTerra), while other investors have put in roughly $2B.
A better account of the history would be that by late 2009 (when Harbinger decided to buy out the other investors in SkyTerra), Harbinger had already invested over $2B in this project which had all gone to waste. At that point, Mr. Falcone desperately tried to rescue his losing bet (with assistance from the FCC) by persuading other people to invest their money into this supposedly valuable spectrum.
Remember that Harbinger also invested almost $1B in TerreStar’s equity and preferred shares from 2005 through 2010, attempting the same trick of converting satellite spectrum for terrestrial services, and that also was lost when Echostar acquired TerreStar’s senior debt and pushed Harbinger out, just as Icahn is likely to do in LightSquared. Ironically, back in August 2010, when TerreStar was on the point of bankruptcy, Falcone also claimed to Reuters that TerreStar’s senior debt was easily covered by its spectrum value. He was wrong then, as DISH’s ultimate bid was just enough to pay off the senior debt (which Echostar held the majority of) at par and unsecured creditors lost most of their claims (while the equity in TerreStar Networks was worthless). In the case of LightSquared it appears he will be wrong by an even greater margin, because GPS interference and the Inmarsat lease costs will dramatically reduce any interest in buying the LightSquared spectrum, and make it hard even for secured creditors to realize much of a recovery.
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03.15.12
Posted in Aeronautical, Broadband, Inmarsat, Maritime, Operators, Services, VSAT at 12:37 pm by timfarrar
The biggest news of this week’s Satellite 2012 show was only hinted at in the background, with many elements of the announcement (which I’m told was originally scheduled for Monday March 12) apparently delayed while the final details are worked out. Panasonic hinted at their role in this deal on the in-flight connectivity panel, stating that they would be investing “more than any other player in the aeronautical sector” in a new network, while Inmarsat backpeddled on their recent aggressive approach to potential Global Xpress partners, by indicating that they would allow GX maritime distribution partners to keep their own VSAT services rather than being forced to resell Inmarsat’s XpressLink Ku-band service for the next 2-3 years.
What has shaken up the industry is that Intelsat apparently planned to announce additional elements of their global Ku-band maritime and aeronautical service, using new spot beam Ku-band satellites in the Atlantic, Indian and Pacific ocean regions. Although Intelsat did issue a press release on Monday, highlighting their focus on mobility, this largely reiterated existing commitments, and omitted both new satellite plans (including IS-29, which is expected to be a high capacity satellite in the Atlantic, and will likely be built by Boeing) and Intelsat’s anchor tenant(s). More details on both of these elements are expected soon. Panasonic will apparently be the anchor aeronautical tenant for this new network and is expected to make an upfront commitment (for purchase of capacity) to help fund Intelsat’s satellite program which could exceed $100M. Many maritime VSAT providers are also looking actively at potential use of the network, as an alternative to Inmarsat’s Global Xpress project, because Intelsat have promised to operate purely as a wholesale capacity provider, rather than competing with their own customers as Inmarsat is doing. The cost of Intelsat’s Ku-band capacity is said to be comparable to Global Xpress (though that will undoubtedly be disputed by Inmarsat), and with Intelsat’s numerous Ku-band mobility beams, coverage will apparently be nearly as great as on Global Xpress.
The repercussions of this development are far-reaching, not least because it will make Inmarsat’s already challenging GX transition plan even more tricky. Inmarsat have recently backed off their original plan to select Rockwell Collins as the aeronautical terminal and distribution partner for GX and now appear poised to use Honeywell (who were originally Panasonic’s terminal development partner before Panasonic opted to bring that work in-house). Up until this week Inmarsat were requiring potential GX maritime distributors to drop their own VSAT service and instead act as agents for XpressLink until GX was launched, but Inmarsat’s CEO indicated on Wednesday that this is no longer the case. And Inmarsat are raising their prices for FleetBroadband service to try and prevent maritime VSAT competitors from using FleetBB as a backup, driving some of them such as KVH into Iridium’s arms with their new (and very aggressively priced) OpenPort backup service, which can cost less than 20% of Inmarsat’s on-demand FleetBB price per Mbyte.
Now the question is whether Inmarsat will have to engage in a further rethink of their maritime distribution strategy (prior to their hastily arranged maritime partner conference in May) as they look to assuage the widespread anger amongst distributors. Many distributors are openly delighted about Intelsat’s move, after they were told at Inmarsat’s January 2012 partner conference that they would just have to accept Inmarsat’s terms, and hand over their VSAT customers for XpressLink, because there was no other choice available. Inmarsat will also have to consider whether their revenue forecast for Global Xpress (of $500M in wholesale revenue by 2019 and $200M-$300M in 2016, based on their 8%-12% p.a. wholesale revenue growth target in 2014-16) is still achievable, especially if some of the key potential partners for maritime GX want to continue to use well-proven Ku-band services and therefore opt to stay with Intelsat for their maritime VSAT capacity.
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03.03.12
Posted in Broadband, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services at 8:23 am by timfarrar
Ease your trouble
We’ll pay them double
Not to look at you for a while
And you rely on
What you get high on
And you last just as long as it serves you
Explode or implode
Explode or implode
We will take care of it
This rather dark song seems to sum up perfectly Inmarsat’s current dilemma: will the recent price rises enable Inmarsat’s revenue growth rate to “explode” or will the souring relationship with customers and distributors ultimately cause their business to “implode”? As an article in Cruising World points out, the basic price of Inmarsat’s low end FleetBB plan (the Intellian version of which costs $55 per month) will “more than triple” in May, and “it’s surely looking like the company doesn’t feel much obligation to the boaters who purchased expensive but yacht-size FB hardware once able to get online most anywhere at reasonable costs if carefully used”.
I understand that the amount of bundled data included will double from 5 Mbytes/month to 10 Mbytes/month (which may not be terribly relevant to low end users), but the plan will not longer include any voice and SMS – that will be charged on top, increasing the costs further. Cruising World attributes the price increases to Inmarsat’s loss of LightSquared revenues, which is partially true, though I’m told that internally Inmarsat has set a target of double digit revenue growth within its maritime business, and with the core shipping business very depressed, the only way to do that is to force dramatic price increases upon existing Inmarsat customers.
Almost 60% of all FleetBB users are on this basic plan, and so nearly 15,000 maritime customers will be helping to “ease [Inmarsat's] troubles” by “pay[ing] them double”. More importantly, many of these customers bought their FleetBB terminals in the last two years, and now will most likely feel that they have been the victims of a bait and switch by Inmarsat.
The price changes in Inmarsat’s handheld business are equally dramatic, with roughly 90% of customers using either the basic plan or low end prepaid cards, which are also expected to more than double in price at the retail level. Thus Inmarsat will also be faced with something over 30,000 handheld customers who have bought their phones in the last 18 months and will similarly feel that they have been victims of a bait and switch.
‘Cause you’re deserted
What’s good, you hurt it
And it kills you it keeps you alive
So give it up
In a world of puppets
It’s a shame what they do to us all
Inmarsat will presumably counter that neither group of customers accounts for a large share of their revenues (I would estimate the basic FleetBB plan accounts for perhaps 10% of FleetBB revenues, while handheld is still generating only ~$1M of service revenues per quarter), but it can’t be good for long term business if there are something like 45,000 end users who’ve been hurt by Inmarsat and will be expressing their negative perceptions (“What’s good, you hurt it…It’s a shame what they do to us all”) of the company pretty openly.
Distributors are also likely to be deluged with complaints by these end users, and many service providers are already actively focusing on alternatives to Inmarsat, as we saw with the recent KVH-Iridium partnership. Distributors are thus understandable furious about Inmarsat’s moves, with the (printable) comments I’ve heard ranging from “harsh and irrational” to “just unprofessional” and simply have no idea what Inmarsat will do next.
Though distributors might not be able to “desert” Inmarsat right now, ironically the low end customers that Inmarsat is alienating in the maritime segment are precisely those for whom Iridium’s OpenPort represents a competitive offering. Indeed, in terms of the opportunity that Inmarsat has just created, Iridium apparently feel like its February 2007 (when Globalstar announced that their satellites were failing) all over again.
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02.27.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 12:00 pm by timfarrar
According to this book, Americans are “the worst negotiators on Earth” and it appears that LightSquared are unlikely to prove the author wrong. I noted last week that LightSquared’s contract with Inmarsat apparently permitted Inmarsat to assert completion of its Phase 1 spectrum transition (under which it is paid $250M to fit filters to its terminals) without actually retrofitting any terminals. Specifically the Cooperation Agreement with Inmarsat signed in Dec 2007 states that:
In accordance with the provisions of this Agreement, each Party shall expedite the development of an implementation plan, which shall be coordinated with each of the other Parties, that will reflect all such actions as shall be necessary or advisable to effect the implementation of the L-band frequency ITU Region 2 use arrangements set forth in the respective Spectrum Plan, including, but not limited to (i) replacement or modification of user terminals, including in the case of the Phase 1 and Phase 2 Spectrum Plans, adding appropriate filters to all terminals operating on the Inmarsat system that might otherwise receive interference from or cause interference to the operation of the systems of the MSV Parties operating in accordance with this Agreement (or otherwise addressing such interference by other appropriate means, including at the absolute discretion of Inmarsat by discontinuance or replacement of any affected service or terminal)…
While at first sight it would appear that this clause requires Inmarsat to actually fit some filters, I believe that Inmarsat will argue they are given “absolute discretion” to simply replace any terminal that is affected by LightSquared’s operations, using the new filter technology it has developed, and of course no terminals will be affected if LightSquared never operate a terrestrial network.
In addition, Section 4.4 Payment on Completion of Implementation of Phase 1 Transition states:
The MSV Parties shall not be entitled to operate under the Phase 2 Spectrum Plan or benefit from the operational parameters set forth in Section 3.5 [ATC Operations] until such time as the payment under this Section 4.4 is made to Inmarsat.
Thus if LightSquared do not make the $56.25M payment that they skipped on February 18, they are not allowed under the terms of the Cooperation Agreement to actually operate a terrestrial (ATC) network. Of course its not only LightSquared’s agreement with Inmarsat that is a bad sign for potential investor recoveries after the inevitable bankruptcy filing, but also the status of its agreement with Sprint, as revealed today in Sprint’s 10-K for 2011, which states:
The arrangement contains contingencies related to possible interference issues with LightSquared’s spectrum, including the right of Sprint to terminate the arrangement if certain conditions are not met by LightSquared. As of December 31, 2011, the Company had received $310 million of advanced payments from LightSquared for future services to be performed under the spectrum hosting agreement.
Beginning in December 2011, through a series of amendments, the arrangement was modified to, among other things, extend the date in which Sprint has the right to terminate the arrangement and suspend Sprint’s obligation to incur any further cost or expense related to performance under the original agreement. Under the amended arrangement, Sprint, for any reason, including but not limited to FCC action or inaction, or no reason at all, may terminate the agreement after March 15, 2012 and before April 30, 2012. If LightSquared secures lender’s consent for modifications to the agreement, Sprint’s right to terminate will be deferred until June 25, 2012 and will continue through December 31, 2012. In addition, the parties definitively agreed that approximately $236 million of the total $310 million of advanced payments made by LightSquared represent payment for incremental costs or obligations incurred by Sprint under the original agreement in support of LightSquared. The parties agreed that this amount is irrevocably and unconditionally paid and will not be subject to dispute or claim by LightSquared. Accordingly, Sprint will refund up to approximately $74 million of Lightsquared’s initial prepayments, of which $65 million will be paid on the earlier of LightSquared’s lender’s consent or March 15, 2012, and the remaining $9 million will remain subject to the termination and unwind provisions of the original agreement and will be returned to LightSquared upon termination, less any additional incremental cost or obligations incurred by Sprint in support of LightSquared. In the event the arrangement is terminated for LightSquared’s material breach, non-payment or insolvency, Sprint maintains a second lien on certain of LightSquared’s assets, including spectrum assets.
Thus in December 2011, LightSquared definitively agreed to forfeit $236M of its advance payments to Sprint if they were unable to move forward which the agreement, which seems a huge sum of money when it appears Sprint had done basically nothing in terms of deployment apart from some initial network planning. Clearly LightSquared were deluding themselves as well as investors in December when they insisted that approval was going to be forthcoming in early 2012. However, this now puts further pressure on LightSquared to file for bankruptcy within the next two weeks, so that the December 15 revision to the Sprint agreement does not fall outside the 90 day bankruptcy window for review of recent contracts and payments.
Fundamentally I think that what both of these problems come down to is that in its negotiations LightSquared appear to have only considered the outcome if they were successful in deploying a network. I’m told that Inmarsat certainly focused most intently on the default provisions, because they always expected LightSquared to fail, and Sprint appear to have done likewise in demanding an upfront payment and then concentrating on retaining that money once LightSquared failed to get approval for their network. Both Harbinger and LightSquared were truly putting it all on red.
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02.23.12
Posted in Handheld, Inmarsat, Maritime, Operators, Services at 10:44 am by timfarrar
2011 was a very tough year for Inmarsat, when the company struggled to grow its MSS revenues at all in the face of a shipping downturn and military pullback from Afghanistan. Now 2012 has started on an even worse note, with LightSquared defaulting on its $56.25M Feb 18 payment to Inmarsat.
In the face of this pressure, Inmarsat have adopted a somewhat surprising response to increase their revenues. Inmarsat indicated in the latter part of 2011 that maritime E&E prices would be increased from January 1, 2012 in an attempt to shore up legacy maritime revenues. This move was at least somewhat logical, as it did not affect the early adopters who would be most likely to churn to other services.
However, in early 2012 Inmarsat also announced they were withdrawing the wholesale voice price cuts made in early 2011 when they trumpeted a suggested retail price of $0.55 per minute for FleetBB and FleetPhone voice calls. I’m told that apparently these wholesale price cuts had simply been absorbed by Inmarsat’s partners, and had not led to widespread retail price declines (because Inmarsat’s maritime crew calling rates were still uncompetitive with Iridium), but they did have a major negative impact on Inmarsat’s maritime voice revenues in 2011.
Even more remarkably, this week Inmarsat have just told partners that they will be increasing the price of ISatPhone Pro handsets by about 20% and withdrawing the two year prepaid card expiry for low value cards that I criticized back in 2010. It therefore appears that Inmarsat has finally recognized (as Iridium very bravely concluded when they continued with a premium handset strategy) that there is very little churn in the MSS handheld market and this cannot be increased simply through lowering prices.
UPDATE (2/27): I’m told that Inmarsat is also increasing the monthly subscription prices for postpaid ISatPhone Pro service very substantially, and we are likely to see retail prices rise by around $15 per month (in other words what is currently a ~$200 per year service for low end customers would potentially double in price). I’ve not yet managed to confirm when this price rise will take effect. This is likely to cause quite a lot of upheaval as distributors figure out how to reposition the ISatPhone Pro once it is no longer pigeonholed as the “cheap and cheerful” satphone option.
Taken individually all of these changes therefore seem to have a rational basis, but it has to be very worrying when distributors have to go and explain to their customers that Inmarsat’s prices are being increased in numerous different areas, when historically customers’ biggest complaint about Inmarsat has always been that they get a great service but are being gouged on price. This also comes in the context of a wider telecoms sector where it is almost universally accepted that prices will go down and services will improve each year. While these changes may be sufficient to allow Inmarsat to achieve (at best very modest) positive growth in MSS revenues during 2012, they could also set up more difficult comparisons in 2013, especially if some customers opt for competitors’ services instead.
More broadly, Inmarsat need their customers to respond positively to the company, especially now that direct sales are being emphasized and when Global Xpress is poised to enter a much more crowded maritime VSAT market in a couple of years time. As a result, it will be interesting to see how views on Inmarsat develop across the MSS industry as these price changes filter through to end customers, and whether customers’ satcom choices are affected in the future.
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02.20.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 11:10 pm by timfarrar
Today news has emerged that LightSquared have failed to make the $56.25M payment to Inmarsat that was due upon completion of the Phase 1 spectrum transition, which Inmarsat certified was complete on Saturday February 18. This development is hardly surprising, because as I indicated last week, LightSquared’s investors were adamantly opposed to the payment being made. LightSquared are claiming that there are “several matters to be resolved” before the payment is due, apparently suggesting that Inmarsat have not fitted filters to their own equipment as they were being paid to do in Phase 1, while Inmarsat are stating “categorically that we have fulfilled what was required on Phase 1 of the agreement”.
Intriguingly, Inmarsat apparently believe that it is not necessary to actually fit filters to their terminals in order to fulfil the Phase 1 conditions, simply that they must be willing to accept any interference generated by LightSquared’s terrestrial operations (which of course will not arise because LightSquared have been forbidden from actually operating a terrestrial network by the FCC). It would be strikingly cynical if Inmarsat hadn’t bothered to fit any filters (and as far as I know no equipment has been retrofitted to date), because they always believed that GPS interference issues would prevent LightSquared from actually getting into service. However, that certainly seems to be the most plausible interpretation of what has happened, because (independent of GPS) serious problems could arise with maritime and aeronautical safety services (on Inmarsat terminals without filters) if LightSquared did actually commence terrestrial operations at this point in time.
UPDATE (2/22): Inmarsat’s ATC team wanted me to know that they exist and have been working to develop ATC-resistant terminals. I know that some ATC-resistant terminals (e.g. IsatDataPro, ISatM2M, BGAN M2M, ISatPhone Pro) are already on the market, but my point above was that there has been no attempt to retrofit existing terminals used for maritime and aeronautical safety services. Indeed, Inmarsat told its partners in April 2011 that the timeline for introduction of SwiftBroadband aero safety services (which will provide ATC-resistance) “envisages flight trials in early 2013 leading to safety certification during 2014″.
As a result of LightSquared’s failure to make the payment, Inmarsat has issued a Notice of Default, which gives LightSquared 60 days to make the payment or else the Cooperation Agreement will be terminated. The key question now is whether the simple receipt of this Notice (as opposed to termination of the Cooperation Agreement itself) is sufficient to cause an Event of Default on LightSquared’s first lien debt. Although LightSquared are arguing that the Notice is invalid (because they claim Inmarsat have not fulfilled the Phase 1 requirements) that may ultimately be irrelevant if LightSquared’s investors now try to force the company into bankruptcy. I’m sure we will see a lot more news on this front in the next few days.
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