After a very eventful day, Mr. Falcone is claiming that he has a cunning plan and that bankruptcy “is clearly not on our table”. However, it certainly appears to be on the mind of LightSquared’s investors, who are laser-focused on stopping the $56.25M payment to Inmarsat, which is expected to be made on Tuesday next week, after the President’s Day holiday. Under pressure from investors (and UBS), LightSquared has now reportedly hired restructuring advisers from Moelis and Company, but it appears that Mr. Falcone is actively resisting UBS’s entreaties that the best way forward would be to file for bankruptcy and stop LightSquared’s cash draining away. Indeed it appears that LightSquared may have cash expenses totaling nearly $200M between now and early April, of which the vast majority would go to Inmarsat. If Mr. Falcone continues to resist then I suspect the next step may be for Mr. Icahn and others to initiate a rather more public dispute with Harbinger.
Part of this cunning plan may be to seek a spectrum swap for part of the AMT band (1515-25MHz), which LightSquared reportedly pitched to the DoD last month, despite the “extremely formidable difficulties” this would entail. Of course it is hard to see why the DoD would want to give up this spectrum, when it seems implausible that they could use the L-band satellite spectrum for these terrestrial operations instead, and being directly below the 10L block, it is not a foregone conclusion that there would be no interference to GPS. As a result, that element of the plan does not appear to be a particularly viable near term option.
The second part of the plan appears to involve trying to pressure the FCC into proposing some compensation for the supposed abrogation of LightSquared’s 2004 license. The FCC’s Public Notice doesn’t seem to actively discourage this view, complaining that no overload interference concerns were raised until 2010, and stating that:
“…although the GPS community raised overload interference issues in connection with the 2011 Conditional Waiver Order, the interference addressed by the NTIA Letter is associated with LightSquared’s planned terrestrial base stations rather than the mobile handsets at issue in the Conditional Waiver Order. Thus, the test results stated in the NTIA Letter appear to apply to the full LightSquared ATC service authorized in 2004 and 2010.”
On the other hand, the FCC is clearly being extremely careful from a legal perspective, and as the GPS industry have noted in the past, all ATC operations are subject to CFR 25.255, which states:
If harmful interference is caused to other services by ancillary MSS ATC operations, either from ATC base stations or mobile terminals, the MSS ATC operator must resolve any such interference. If the MSS ATC operator claims to have resolved the interference and other operators claim that interference has not been resolved, then the parties to the dispute may petition the Commission for a resolution of their claims.
It will therefore be very interesting to see how the FCC rules. With a comment deadline of March 1 and no reply comment period, it appears that the FCC wants to dispose of this matter quickly, though any ruling will certainly have to be very carefully written to withstand legal challenges. It seems that for the moment Harbinger are trying to keep their options open and hoping that either the DoD or FCC throws them a bone, before major payments are due at the end of March. However, it is inconceivable that a spectrum swap could be engineered in that time period and it hardly seems plausible that the FCC would proactively offer taxpayers’ money to LightSquared by way of compensation.
With respect to some of the other developments today, it is notable that Sprint are claiming they would only have to return $65M of the $310M that LightSquared had paid by the end of September. That is a big shock because I had assumed Sprint might return at least $200M to LightSquared’s creditors. If LightSquared remains determined to pay yet more money to Inmarsat and might only recover a small fraction of its advances to Sprint, then that is a very negative sign for LightSquared debtholders.
The FCC has responded to this letter with an even more devastating statement as follows:
“To drive economic growth, job creation, and to promote competition, the FCC has been focused on freeing up spectrum for mobile broadband. This includes our efforts to remove regulatory barriers that preclude the use of spectrum for mobile services. To advance these goals, the Commission runs open processes – the success of which relies on the active, timely, and full participation of all stakeholders.
“LightSquared’s proposal to provide ground-based mobile service offered the potential to unleash new spectrum for mobile broadband and enhance competition. The Commission clearly stated from the outset that harmful interference to GPS would not be permitted. This is why the Conditional Waiver Order issued by the Commission’s International Bureau prohibited LightSquared from beginning commercial operations unless harmful interference issues were resolved.
“NTIA, the federal agency that coordinates spectrum uses for the military and other federal government entities, has now concluded that there is no practical way to mitigate potential interference at this time. Consequently, the Commission will not lift the prohibition on LightSquared. The International Bureau of the Commission is proposing to (1) vacate the Conditional Waiver Order, and (2) suspend indefinitely LightSquared’s Ancillary Terrestrial Component authority to an extent consistent with the NTIA letter. A Public Notice seeking comment on NTIA’s conclusions and on these proposals will be released tomorrow.
“This proceeding has revealed challenges to maximizing the opportunities of mobile broadband for our economy. In particular, it has revealed challenges to removing regulatory barriers on spectrum that restrict use of that spectrum for mobile broadband. This includes receivers that pick up signals from spectrum uses in neighboring bands. There are very substantial costs to our economy and to consumers of preventing the use of this and other spectrum for mobile broadband. Congress, the FCC, other federal agencies, and private sector stakeholders must work together in a concerted effort to reduce regulatory barriers and free up spectrum for mobile broadband. Part of this effort should address receiver performance to help ensure the most efficient use of all spectrum to drive our economy and best serve American consumers.???
Unsurprisingly, it appears that Chairman Genachowski wanted to get this issue off his plate before testifying to Congress on Thursday. It now seems the next steps will be a Public Notice, which may request comment on the terms of reference for a future receiver/interference standards proceeding, followed by a proceeding stretching well beyond the November 2012 election. Even if that resulted in a favorable ruling, the NTIA letter highlights that “lower 10″ operations would not be phased in for many years (2020 or beyond), which as I’ve indicated previously makes it extremely unlikely that it would be worthwhile preserving the current Cooperation Agreement with Inmarsat.
Indeed, with Inmarsat poised to claim another $56.25M from LightSquared early next week, and the 90 day bankruptcy window for challenging the $40M paid to Inmarsat in November expiring on Thursday this week, a decision may need to be reached on how to proceed very soon. With LightSquared set to run out of money in the near future, the company must now consider whether to file for bankruptcy and preserve its resources for the inevitable litigation fights, or continue pretending that all of these problems can be overcome while its cash drains away.
It seems that even if LightSquared does continue to pretend that all is well (and remember that LightSquared’s relentlessly optimistic/deluded CEO told the FT only a few days ago that he was confident the FCC would “do the right thing” and approve the network), then its debtholders will certainly assert that the FCC’s action means a MAC has occurred under the first lien debt covenants. However, it remains unclear whether that event would occur upon release of the FCC’s Public Notice tomorrow, or only when a final Order is issued, which may not take place for several months.
With apologies to Private Eye, it seems like everyone is trying to grab as much of LightSquared’s cash as they can, while there is still some left in the bank, and run away before they get sued. I’m told that Inmarsat is poised to assert completion of its Phase 1 transition (freeing up two 2x5MHz blocks of spectrum, known as 5L and 5H) on February 18, which would entitle it to a payment of $56.25M. In addition, it appears that the spectrum blocks used for augmentation signals by Starfire’s precision GPS receivers will be moved in late March (though it should be noted that this shift does nothing to protect these receivers from experiencing interference if LightSquared was ever to begin terrestrial operations).
However, once this relocation has taken place, Inmarsat should also be able to claim completion of the Phase 1.5 transition by April 1 (freeing up the lower 2x10MHz block, known as 10L) under the April 2011 amendment to the Cooperation Agreement, which I’m told would entitle it to another very substantial sum of money (many tens of millions of dollars) over and above the $40M already paid. This is an additional cash outlay that I had not considered in my previous estimates of LightSquared’s cashflows, and although it is not enough in itself to exhaust LightSquared’s remaining cash resources, it certainly could be another potential hit to the ultimate recovery for LightSquared’s creditors (unless they can recover this money via the lawsuits that will inevitably be filed against Inmarsat and other parties at a later date).
UPDATE (2/14/12): I’m told that Starfire will be relocated to somewhere in the 1536-1544MHz spectrum block, implying that Inmarsat’s focus is on strict compliance with the terms of the Cooperation Agreement (so they can claim more money from LightSquared), rather than on creating a long term solution for these users (which would involve placing the augmentation downlinks close to the top of the band around 1559MHz). That’s unsurprising because Inmarsat emphasized previously, in a confidential June 2010 letter to the FCC (included in the recent FOIA production), that they would only be doing the work LightSquared paid them to do, and nothing else.
At the House Aviation Subcommittee hearing last Wednesday, it was indicated that the NTIA’s report and recommendations would be transmitted to the FCC “shortly”, and although the report was not released on Friday evening, it seems all but certain that we should hear more this week, potentially followed very quickly by an FCC ruling to initiate an interference/receiver standards proceeding. The testimony of Mr. Porcari, Deputy Secretary at the Dept of Transportation, and co-signatory of the Jan 13 Excom letter could not have been more clear in stating that “[The Obama Administration has] concluded that [LightSquared's] current plan to provide such services adversely affect GPS signals” and “LightSquared’s proposals are fundamentally incompatible with GPS use”, so it now seems that the FCC will be bound to indicate that LightSquared will not be permitted to build and operate a terrestrial network for the foreseeable future.
However, the precise language of this ruling will be critical in establishing whether a Material Adverse Change has occurred under LightSquared’s debt covenants. With Inmarsat apparently intent on securing as much money from LightSquared as it possibly can in advance of a bankruptcy filing, and no chance of a favorable ruling from the FCC, LightSquared’s creditors will now presumably be keeping their fingers crossed that in the very near future they have the chance to assert that an event of default has occurred, and stop LightSquared’s cash from draining away, perhaps even before the next payment is made to Inmarsat on February 18.
Back in 2008, the decision of Maersk to choose Inmarsat’s FleetBroadband service for 150 (later increased to 370) vessels was described by Inmarsat as “a ground-breaking deal” which represented “the strongest possible endorsement of our revolutionary FleetBroadband service”. As a result, this week’s revelation that Maersk is now going to shift 400 vessels to VSAT must be a correspondingly earth-shattering blow to Inmarsat, because not only has Maersk decided to move away from FleetBB, but it has opted for a Ku-band solution from Ericsson and Thrane & Thrane (with a 7 year service agreement), rather than the XpressLink service from Inmarsat which would provide an upgrade path to the Ka-band Global Xpress service.
Maersk’s average spend for the 370 ships using the FleetBB service was about $2600 per ship per month retail, implying that wholesale revenues to Inmarsat in 2011 were between $8M and $9M (and making them Inmarsat’s biggest single maritime customer for L-band service). While Maersk will presumably keep Inmarsat as a backup, its safe to say that the vast majority of this revenue will likely be lost once the transition is completed. The decision to make this change comes after Inmarsat’s move to impose usage caps on maritime vessels in October 2011 (with the data rate limited to 20kbps once the cap is reached), because Maersk had apparently been generating as much as 25% of all I4 (BGAN+FBB+SBB) traffic under its former unconstrained deal, and Inmarsat was worried about the saturation of its I4 network in regions such as the Middle East, which could impact higher value traffic from defense and media users.
This news also comes in the wake of Inmarsat’s major reorganization, which was revealed in early January, and has led to the exits of a number of senior managers in the government and maritime business. Despite Inmarsat’s claims that it “does not intend to change its policy of distributing its services primarily through independent channel partners”, the new management structure will have both direct and indirect sales reporting to the same people, which has been very poorly received by Inmarsat’s distributors, who clearly expect Inmarsat to cut them out of the business in the future, as Inmarsat emphasizes its own direct sales channels and gets “closer to our partners and customers” as the new CEO describes it.
I’m told another part of the reorganization is that Inmarsat’s financial reporting will be realigned from Q1 2012 so that the four new business sectors (Inmarsat Maritime, Inmarsat Government US, Inmarsat Government Global and Inmarsat Enterprise) will report their own results on a total (retail) basis, rather than breaking out wholesale L-band revenues in land, maritime and aeronautical sectors separately. This will mean that a maritime customer transitioning from a FleetBB L-band service to a resold Ku-band service such as XpressLink will bring in the same (or more) retail revenue (albeit with a much lower gross margin), whereas previously Inmarsat would have had to take a hit to its wholesale L-band revenues to facilitate this transition.
However, this is going to make financial analysts even more confused about the prospects for the company than they already are. Most analysts have maintained a very positive view of the company, and apparently the consensus view is that Inmarsat should continue to derive value from its North American spectrum assets, whether or not LightSquared files for bankruptcy. With the triple threats of continuing bad news in the maritime sector (where there is a pretty bleak outlook for shipping companies), reductions in defense spending (including the pullout from Afghanistan) and that Inmarsat might ultimately end up paying money to LightSquared’s creditors rather than receiving future lease payments, Inmarsat’s next results call is definitely going to be worth listening to.
Yesterday, LightSquared held an investor call to provide an update on regulatory progress, including Mr. Falcone’s meeting last week at the FCC (which failed to gain the attention of the FCC Chairman, unlike Mr. Ergen’s visit to the FCC the same day). LightSquared’s investors clearly want to know whether there is any prospect of approval being granted, and a Debtwire story on Jan 3 reported that some of the previous investors have lost confidence in a successful resolution of the issue:
Farallon Capital Management dumped its stake in LightSquared’s USD 1.6bn first lien loan last month as the telecom company and sponsor Harbinger Capital battle regulatory controversies, according to two buyside sources and a source familiar with the matter. Displaying a greater taste for potential distress, Icahn Enterprises has emerged as a recent buyer of LightSquared’s bank debt in the low 40s, the two buyside sources said.
The exit of Farallon signals the loss of one of LightSquared’s former anchor investors. The California hedge fund was one of the biggest par holders in LightSquared’s capital structure, owning more than USD 150m of the Libor+ 1,200 bps term loans the company raised to finance the build out of the its 4G long term evolution (LTE) network, the sources said.
The loans were recently quoted at 43-45 from 90-92 at the beginning of August, according to Markit.
However, I understand that the new investors, including Icahn, haven’t stopped believing that they will be able to overcome the opposition of the GPS community, and ultimately gain approval on the back of (what was described to me as) their greater “sophistication” and financial resources compared to Harbinger. Indeed, part of Mr. Falcone’s objective in his FCC meeting may have been to suggest that the FCC would have to deal with less cooperative owners of the assets in the future, if they delay approval and allow LightSquared to fall into bankruptcy.
Its suprising that anyone could believe that they will succeed where Harbinger has failed, especially as the NTIA now appears determined to spin out the testing process for as long as possible (and almost certainly to beyond the November 2012 election). In addition, it would be easy for the FCC to initiate a (multi-year) rulemaking proceeding on receiver standards for GPS receivers, if they want to kick this issue even further into the long grass. Nevertheless, the implications are that LightSquared’s debt investors are likely to allow the company to keep pushing for approval, rather than trying to force it into bankruptcy more quickly in order to liquidate the assets before all the cash is gone. That would suggest a bankruptcy filing later in the second quarter rather than in the next couple of months.
Ultimately, I think this will look a lot like the Iridium bankruptcy in 1999, where investors thought there was something worth billions of dollars that could be rescued with a bit more money and better execution, and spent nine fruitless months before they finally conceded that $5B of investment needed to be completely written off. The fundamental reason why I think their efforts will fail is that the continuing lease payments to Inmarsat ($115M per year) very likely outweigh the value of 20MHz of L-band spectrum, which at best might be usable terrestrially in 5-10 years time (if approval was even granted).
At this point there is no way that Inmarsat is going to compromise on these lease payments, because the whole LightSquared affair (which Inmarsat enabled through the 2007 Cooperation Agreement) has deeply upset the DoD, which accounts for ~20% of Inmarsat’s total revenues (and probably an even higher proportion of the Global Xpress business plan). Indeed, some within Inmarsat might feel they would give back the money paid to date, if only the whole LightSquared mess could be made to go away. Inmarsat already appears to be telling the DoD that it was not their fault, because they were ordered by the FCC (under a Republican administration) to enter into the Cooperation Agreement, against their better judgment. In that context, Inmarsat’s protests in January 2005 that approval of the ATC plans proposed by LightSquared (then MSV) would lead to substantial degradation of MSS services due to overload interference, now appear very prophetic.
As a result, I expect the end game (which is now unlikely to be reached before 2013) to involve a combination of trying to recover the money paid to Sprint and not spent on deployment, selling the ground spare to Boeing, and agreeing to sell Inmarsat the in-orbit satellite and spectrum assets in exchange for a return of a sizeable proportion of the ~$500M paid to date. Whether that will be sufficient to provide downside protection to buyers of LightSquared’s first lien debt (totalling ~$1.6B) “in the low 40s” remains to be seen.
As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.
This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.
Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.
If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.
So this afternoon the FCC has joined with the NTIA in mandating further tests for LightSquared. Though the need for further testing was hardly a surprise after yesterday’s NTIA letter, what comes as a huge shock is that the FCC has offered LightSquared absolutely nothing to indicate it is minded to approve LightSquared’s terrestrial operations in the future. In particular, the FCC has not set out any timetable for completion of the additional testing (although it has stated that the “interference concerns” include “certain types of high precision GPS receivers, including devices used in national security and aviation applications”), or even specified what testing is required (and recall that the NTIA basically said for precision devices “come back when you have made a filter and we’ll think about more testing then”).
Although the FCC hinted back in August that it might be preparing to throw LightSquared under the bus, today’s Public Notice clearly indicates that the FCC has lost all patience with LightSquared and no longer believes that it is a viable near term option for creating additional competition in the wireless market. Thus perhaps Mr Falcone’s next call to the FCC Chairman ought to involve a bit of Shakespeare: Et tu, Julius?
After this ruling, the LightSquared rollout must now be regarded as being suspended indefinitely, and its hard to see where the company (and Harbinger) goes next. My best guess is that it will end up like Iridium back in 1999, where after a few months of utter panic in the spring of 1999, there were three distinct stages to the bankruptcy. In the first stage (lasting about six months), the company and its advisers claimed that the assets were still worth billions of dollars and all they needed was a bit more money. In the second stage (lasting most of 2000), they realized that wasn’t true and struggled even to find a bidder who was willing to pay pennies on the dollar (Iridium sold for $25M after investing $5B in its network). In the third stage, the creditors then spent years suing whoever they could (in that case Motorola) to try and recover their losses.
In this case, while it may take a couple more months before we finally see the end game emerge, its hard to see why anyone is going to fund the enormous costs necessary to keep the LightSquared plan on track, including the ongoing payments to Inmarsat (and perhaps to Sprint as well) for very long in the face of a completely undefined timetable for resolution of the outstanding issues. Its equally hard to see who, other than Inmarsat, might buy these assets, and even then the price would likely be only a few hundred million dollars at best (assuming Inmarsat justifies such an acquisition based primarily on a satellite-based business plan). Then, no doubt, there will be litigation against whoever can be blamed (which of course is why the FCC is being so careful to protect itself in the Public Notice).
There wasn’t much consensus in today’s hearing of the House Committee on Space, Science and Technology about how to solve the LightSquared-GPS interference problem, or even whether this is feasible. However, several Democrat and Republican committee members did seem to agree on one thing, that the government was “somewhat complicit” in this problem, or in other words that the FCC was largely to blame, for not considering the possibility of overload interference when it originally granted LightSquared (then MSV) its ATC license.
Government witnesses presented a united front recommending further testing, with Scott Pace of GWU (as the only non-government employee and therefore not subject to the “mandate from the White House to seek a win-win solution” as Mr Russo put it) going further and suggesting that LightSquared should be banned from operating. Indeed Dr Pace’s testimony, as someone aware of the 2002 discussions between MSV and the GPS Industry Council, was quite definitive in stating that the agreement over out-of-band interference rested on the assurance from the FCC that the L-band would be maintained as a (quiet) satellite band without terrestrial-only use. In that context, one might very well tend to blame Inmarsat for agreeing in the December 2007 Cooperation Agreement with MSV (in exchange for its multi-billion dollar spectrum lease contract) that land-based satellite services would no longer be protected from MSV’s terrestrial operations, thereby facilitating potential deployment of a terrestrial network which would (by design) overload MSS terminals (and as we now know GPS receivers) in the L-band. Of course the FCC was also perfectly willing to go along with this in the March 2010 ruling which approved the changes embodied in the Cooperation Agreement, over the objections of two MSS service providers. However, the GPS Industry Council apparently did not comprehend the implications of this agreement (perhaps because many of the technical and operating provisions were confidential?), although it seems the DoD had at least some understanding of the potential for interference.
During the Q&A for the hearing, LightSquared highlighted on several occasions that the $4B it had (supposedly) already spent on the project was based on the “settled expectations” created by the FCC’s 2003 and 2005 rulings, presumably setting the bar for litigating a compensation claim if its terrestrial buildout does not go forward.
However, not only the government witnesses, but apparently even the committee members themselves, agreed on the need for more testing. A particularly revealing comment came from Mr Russo, Director of the PNT National Coordination Office (and therefore the point person on defining this testing), when he said that the additional testing couldn’t be defined without clarity from the FCC on what the “end state of operations” will be, in other words whether LightSquared’s proposed “standstill” on upper band operation will be made into a permanent ban by the FCC or will be left open.
LightSquared highlighted that it had made a new proposal to the FCC yesterday, which (even though the main focus is on further limiting LightSquared’s power on the ground) seems to embody a number of subtle concessions, notably that it is basically accepting the GPS industry’s 1dB C/No criteria for assessing degradation rather than the relaxed 6dB degradation criteria it had proposed back in June, and that it is proposing the use of a filter to protect GPS devices which will eliminate any possibility of operating in the upper 10MHz L-band frequencies in the future. Thus it seems that the FCC might now end up ruling that the upper 10MHz block can’t be used for terrestrial operations (at least not without a future application showing what would be an impossible proof of non-interference). As I’ve noted before, that might conceivably put LightSquared into default on some of its debt agreements, though of course, if LightSquared is unable to raise further funding in the near future, it might very well be a moot point.
So Iridium has announced its “vision for the future of personal mobile satellite communications”, Iridium Force, including a range of new products and services. These new products and services are not exactly what was rumored last week (no commercial Netted Iridium service or standalone Bluetooth device). Instead they include the new Iridium Extreme (9575) phone, which includes integrated tracking capability and an SOS button, a new smaller 9523 voice and data module (which could potentially form the core of a standalone voice-capable device) and the AxcessPoint WiFi hotspot which provides data capability through a 9575/Extreme or 9555 phone.
It seems the aim of the AxcessPoint hotspot will be to increase usage of existing phones, via a low incremental cost (~$200) accessory, which is likely to provide a better financial return for existing service providers than a more disruptive low cost standalone device. Indeed Iridium expects to achieve a premium price for the new Extreme phone and does not see a need to lower the price of the 9555 for now (given its strong sales so far this year despite competition from the ISatPhone Pro).
If the two phones are sold (at retail) for say ~$1200 and ~$1000 then it wouldn’t surprise me if up to 80% of Iridium’s handset sales for the rest of this year are of the new Extreme phone (assuming adequate stocks are available). That would certainly be positive for Iridium’s 2011 equipment revenues, which to date have not declined compared to 2010 as the company originally expected. However, Iridium intends to keep the 9555 in production, providing it with optionality on pricing next year, once Globalstar comes back into the handheld market.
What will be really interesting is how Globalstar pitches itself, given that Inmarsat has not achieved much revenue success with the ISatPhone Pro at the low end of the market. It seems Globalstar will need to challenge Iridium and focus on the medium and high end of the handheld market in order to achieve reasonable ARPU levels. In that case, how important will a low price handset be to Globalstar (given this strategy hasn’t yet enabled the ISatPhone Pro to penetrate the high end of the market)? Will unlimited usage packages be a better strategy to pursue, or will Globalstar’s other attributes (consumer distribution channels, better data speeds, low latency and good voice quality) be sufficient to achieve a different result to Inmarsat? Whatever course Globalstar takes, Iridium’s success in the handheld market over the last 12 months means I’m not convinced that lower handset prices are as important to future revenue growth as some people previously expected.
One of the most puzzling aspects of Inmarsat’s Q2 results was the revelation that while it has now activated over 30K ISatPhone Pro handsets (as of early August), and sold at least 15K handsets to distributors during the second quarter, land voice revenue in the quarter was only $3.3M, down 17.5% on the corresponding period in 2010. While the decline in overall revenue appears to be largely due to reduced BGAN voice usage in Afghanistan, service revenues from the ISatPhone Pro still appear to be pretty minimal, presumably less than $1M in the quarter, and Inmarsat admitted that the revenue “is still lagging where we would like it to be”.
I’m told that the reason for this discrepancy is that Inmarsat has sold nearly 10,000 phones in China over the last year, which come pre-activated with a 10 minute prepaid card, valid for 2 years. That explains why Inmarsat is now claiming to have achieved a one third share of new activations, although it still appears to be trailing Iridium in overall handset sales (Iridium added 17K net new commercial voice subscribers in the second quarter).
Of course, the booked service revenue from these ISatPhone Pro sales in China is well under $1 per month, which clearly has a dramatic impact on Inmarsat’s overall handheld ARPU. As a result, if the Chinese market continues to be a major driver of sales for the ISatPhone Pro, it will make it even harder for Inmarsat to come close to gaining 10% of the handheld market in revenue terms by the end of 2012. Indeed the challenge that Inmarsat faces in “break[ing] into the heavy-spending larger customers where there is a long-established provider in place” is amply demonstrated by the fact that apparently journalists don’t even know what an ISatPhone Pro handset looks like.
