06.04.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:49 am by timfarrar
A first, very modest concession has now emerged from the FCC Chairman over the process for authorizing LightSquared’s commercial operations, in a letter dated May 31 to Senator Chuck Grassley. This letter is a response to the demand from Grassley on April 27 for records of communications between and within the FCC related to Harbinger and LightSquared. The May 31 letter completely ignores Grassley’s specific request and also fails to addresses the concerns he expressed about the very short comment period originally set for the November proceeding, which as the CTIA pointed out, was “unlike most satellite modification filings”. Unsurprisingly, Grassley is therefore still upset about the FCC’s “lack of transparency in this case”.
However, the letter does make one modest concession, in that it promises that the Commission “will establish a public comment cycle and give all parties further opportunities to present their views”. This was one commitment that was missing from the January 2011 waiver order, and was of considerable concern to the GPS community, although it does not go as far as the Save Our GPS Coalition requested, which was for a comment period of “at least 45 days” and for “further FCC actions [to] take place with the approval of a majority of the commissioners”.
The FCC Chairman is presumably very cognizant of the language in the House version of the National Defense Authorization Act (NDAA), which would forbid the FCC from authorizing LightSquared’s commercial operations until GPS interference concerns are resolved, and wants to prevent similar language from being included in the final bill. Whether his concession on a public comment period is sufficient to achieve that remains to be seen, especially given his conclusion that “I remain focused on ensuring that the Commission takes full advantage of the incredible economic opportunities that underutilized spectrum presents. This includes the opportunity presented by LightSquared…”
However, even if the FCC is successful in forestalling Congressional intervention, a public comment period (of say 30 days or longer if it includes time for reply comments) will certainly push back the timeline on which a final ruling from the FCC can be expected to at least the end of July, and more likely sometime in August. Unless and until the GPS interference issue is resolved, it hardly seems likely that Sprint will want to finalize a network sharing deal with LightSquared, or that LightSquared will be able to raise the money to pay for that buildout. Thus it appears that a LightSquared IPO in July is certainly off the table, and the supposed network sharing deal with Sprint seems to be no more imminent than it was in mid-March (when supposedly LightSquared was about to announce a deal with Sprint at CTIA) or in mid-April when these reports last emerged.
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05.31.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 11:08 pm by timfarrar
Although Charlie Ergen has his Seinfeld strategy for exploiting DISH’s new assets, including DBSD and Blockbuster, Harbinger’s plans for LightSquared are becoming ever harder to discern, with news today that LightSquared is “considering a deal with AT&T to buy network capacity from the carrier”. Presumably this story comes in response to concerns that LightSquared might be forbidden from operating its L-band terrestrial network indefinitely, if new language in the National Defense Authorization Act passed by the House of Representatives last week is ultimately included in the final bill. At the very least it now appears that the FAA will insist that LightSquared’s operations be confined to only the lower half of its 40MHz of L-band spectrum, while John Deere contends that “permitting LightSquared to operate its network as proposed or any variant of its currently proposed network will create massive interference into Deere’s StarFire system and other similar systems risking serious harm to the U.S. agriculture industry”.
This news marks yet another 180 degree turn in LightSquared’s ever-changing story, which over the last year has shifted from a $7B contract (or rather MoU) with Nokia Siemens Networks (which disintegrated in January) to a joint bid with MetroPCS for DBSD to a network sharing agreement with Sprint (which at one point was supposedly even going to supplant Clearwire) to now an “initiative” with AT&T, along the way apparently including talks with Cablevision, Time Warner Cable and any number of other companies. This extraordinary saga reads like something by Hans Christian Andersen, the only question being whether the final tale will turn out to be “The Ugly Duckling” or “The Emperor’s New Clothes“.
Meanwhile, the FCC appears to be doing its best to make the TerreStar bankruptcy auction even more confusing, releasing a Public Notice on May 20 which “invites technical input on approaches to encourage the growth of terrestrial mobile broadband services in the 2 GHz spectrum range”. Unfortunately for TerreStar, the FCC once again insists that “the public interest” requires that “any grant of terrestrial rights in the 2 GHz band [should] have ‘conditions designed to ensure timely utilization of the spectrum for broadband and appropriate consideration for the step-up in the value of the affected spectrum’” in the form of “Voluntary Incentive Auctions” or “Voluntary Return of MSS Spectrum Rights”, thereby potentially reducing the perceived value of TerreStar’s MSS spectrum in the upcoming auction quite significantly.
Of course, things are not looking that great for the FCC’s other attempts to bring additional spectrum into use for terrestrial mobile broadband (i.e. LightSquared and broadcast TV incentive auctions), so perhaps the buyer of TerreStar’s spectrum will simply tell the FCC to go pound sand, and continue to pursue a (loss making) satellite-based business plan until a better offer is on the table. However, in those circumstances, whoever buys TerreStar would need to have deep pockets, and be happy to wait for several years rather than seeking a quick flip of the spectrum. Given Harbinger’s experience with LightSquared, that might well put off some of the financial players who could otherwise have been interested in TerreStar’s spectrum.
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05.26.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:24 pm by timfarrar
Over the last week, a clearer picture has begun to emerge of LightSquared and the GPS industry’s respective strategies, as interference tests continue in Las Vegas. Some data is now emerging from these tests, with a GPS World webinar this morning citing that in a rural test case (see presentation), high precision receivers were impacted up to 1800m from the base station (although the radius of interference would obviously be less for narrowband GPS receivers and for more urban environments with higher levels of clutter).
Given that the problem is mainly caused by transmissions in the upper channel (Phase 0 spectrum) closest to the GPS frequencies, LightSquared is already indicating that it will offer to operate only below 1545MHz, until the FCC introduces receiver standards and old GPS equipment is phased out (a process that will take many years to complete). As Jeff Carlisle of LightSquared commented in a May 23 Space News article: “If the most efficient and fair solution is not to do a receiver-side solution, we haven’t taken any of the possible transmission solutions off the table. We can look at ways of implementing our service, how we do it, when we do it, using what spectrum”. Indeed LightSquared has just paid Inmarsat another $40M to speed up the availability of the Phase 1A spectrum, and moved back its commercial deployment timeline into the first half of 2012 for precisely this reason.
However, as problems have emerged with the testing in Las Vegas, it appears that the GPS industry will demand that significant additional testing must be carried out, before LightSquared is given permission to launch commercial service even in the lower part of the band. As Alan Cameron of GPS World put it on this morning’s webinar, LightSquared does not have the full software [needed to operate its base stations in the way it plans to do commercially] so the current testing is premature. A letter sent to the FCC last week, signed by 33 senators, even asks the Commission to “rescind LightSquared’s waiver until this demonstration [of non-interference with GPS] is made”. Of course, as everyone should know, a demonstration of total “non-interference” is impossible.
Next week we should expect to see more data on the government’s testing of interference in New Mexico, based on the charter of the National Space-Based PNT Systems Engineering Forum, which was tasked to produce a final report “in a publicly releasable version” by May 31, 2011. Indications to date are that this testing certainly does not demonstrate “non-interference” with GPS (and the report itself will written by proponents of GPS not LightSquared), so this is likely to intensify the political firestorm aimed at LightSquared and the FCC.
UPDATE: The FAA report is also scheduled to be released on June 3 and, according to a report in FlightGlobal, the conclusions also appear to be problematic for LightSquared, notably a statement that “From an aviation perspective, operations at Phase 0, 1 and 2 spectral deployments, the upper channel [frequencies above 1536MHz] should not be permitted”.
FURTHER UPDATE: The FlightGlobal article has now been taken down, but is still available here and a more complete report on the study is available here. Also the House of Representatives has now passed the National Defense Authorization Act (NDAA), with strengthened language apparently requiring that the FCC should not provide “final authorization for LightSquared operations until Defense Department concerns about GPS interference have been resolved”. If that bill passes the Senate and is signed by the President, then it would seem likely to stop any prospect of near term commercial operations by LightSquared.
Of course, a requirement for more testing and a further delay to LightSquared obtaining permission to commence service (at best) or a withdrawal of the waiver (at worst) could very easily derail the LightSquared venture completely. I’m told that LightSquared had been hoping to raise money from private equity sources and then undertake an IPO in July, after signing a provisional network sharing agreement with Sprint. This new funding is a pre-requisite for Sprint to move forward with any buildout under the network sharing agreement, because of the upfront costs that it would incur, and so Sprint needs to be convinced that LightSquared will be able to reimburse these costs, either with cash or spectrum rights.
With Sprint expected to announce its plans for Network Vision this summer, LightSquared therefore needs to achieve some certainty about its spectrum position very soon, or risk missing that boat. Ominously, at a New America Foundation event in Washington DC two weeks ago featuring LightSquared’s CEO, Sprint noted that it would be able to host other spectrum on its Network Vision platform, including “possibly Clearwire, possibly public safety”, but conspicuously failed to include LightSquared on that list.
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05.18.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 7:10 pm by timfarrar
Today, it was reported that LightSquared has revised its deployment plans, and now expects “field trials in the third and fourth quarter this year in Baltimore, Las Vegas and Phoenix” followed by “a ‘full-blown commercial’ launch…scheduled for early next year” rather than “by the end of this year” as was indicated in April. Even that was slower than in January, when LightSquared suggested that it was “testing LTE in Baltimore, Denver, Las Vegas and Phoenix now” and was “expected to launch up to nine Midwest markets this year”.
Back in January, LightSquared was granted a waiver by the FCC, based on commitments that the company was “confident that this [GPS interference] issue can be resolved without delaying deployment of wireless broadband, generally, or the LightSquared network specifically” and that “LightSquared was cognizant of this issue when we made the buildout commitments that served as the basis for the Commission’s own requirements in its March 2010 Order”. Indeed LightSquared also indicated that it would not “continue to roll out our network and meet the rigorous construction timetable that the Commission has made a condition of our authorization” unless the FCC takes “quick, favorable action” to approve its updated business plan.
However, despite the FCC acceding to LightSquared’s waiver request, based on these assurances, it now seems that LightSquared will delay the rollout of its network and blame the GPS interference issue, saying that “the company is watching the FCC before fully rolling out its ground-based network”. It would be understandable if in these circumstances the FCC was becoming somewhat impatient with LightSquared’s progress, and LightSquared’s CEO has recently been doing the rounds of FCC Commissioners, presumably with a view to shoring up LightSquared’s support at the FCC.
UPDATE: LightSquared has told DSLReports that “they’ve always planned their first commercial launch to be in early 2012″. Of course that’s not what LightSquared told the FCC in March 2010, who quoted as part of their public interest rationale for approving the Harbinger takeover that “Service will begin in two trial markets with a commercial launch commencing before the third quarter of 2011, providing service for up to 9 million POPs”.
Looking at LightSquared’s latest statements in more detail, it also appears that Denver has been dropped from the original deployment plan (indeed back in March 2010 LightSquared told the FCC that “service will begin in two trial markets, Denver and Phoenix, with a commercial launch before the third quarter of 2011 providing service to up to 9 million POPs”). It isn’t terribly surprising that the initial rollout will now take place in Las Vegas, because that is basically the easiest major city in the entire US to cover with a wireless network, due to the lack of foliage and the flat terrain. Indeed, ICO (now DBSD) was able to cover the city very well (albeit without the intention to provide indoor coverage) with only 3 base stations, during trials of its MIM service in 2008, as shown in the diagram below.
In Phoenix, I’m told that LightSquared’s site acqusition partner shut down its operations back in January, and at that point the tower companies were no longer being paid rent for the 20 site leases that had been signed. In Baltimore I understand that only a very limited proof of concept deployment was planned (with a handful of base stations at most), to determine the extent of interference with Inmarsat’s maritime safety services. Given this information, unless something significant has changed in the last few months, it seems that at best only a minimal deployment effort is taking place ahead of the potential network sharing agreement with Sprint, and associated contract with Ericsson, that everyone expects to emerge soon (and which today’s Clearwire agreement with Ericsson presumably provides a template for).
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Posted in LightSquared, Operators, Regulatory, Spectrum at 9:04 am by timfarrar
As more information starts to emerge from real world testing into whether LightSquared’s terrestrial network will interfere with GPS receivers, the news appears to be fairly bad for LightSquared on both the technical and political fronts. In addition to Qualcomm’s comments last week, suggesting that the filters in their A-GPS chipsets might need to be upgraded, New Mexico state officials have submitted a letter stating that their testing “substantiate[s] concerns that the LightSquared network will cause interference to GPS signals and jeopardize 911 and public safety nationwide”. Meanwhile the FCC has been asked by Sen. Chuck Grassley (R-Iowa) “for more information on its review” of LightSquared’s plans, including “all communications between the FCC and Falcone or any other Harbinger Capital and LightSquared employees [and] all internal FCC communications regarding LightSquared or Harbinger Capital” and language has been included in the National Defense Authorization Act (NDAA) that “requires the U.S. Secretary of Defense to notify Congress if he determines that widespread interference with the military’s use of the GPS is caused by a commercial communications service”.
What I’ve always found intriguing is that this issue apparently came out of nowhere to potentially derail the whole LightSquared buildout plan. LightSquared has highlighted that terrestrial use of the L-band has been anticipated since 2003, and that the GPS Industry Council negotiated several agreements with LightSquared (previously SkyTerra and before that MSV) on out-of-band emissions into the 1559-1610MHz band, starting in 2002 and extending right up until August 2009. Indeed in March 2004, the GPS Industry Council urged “the Commission to grant the above referenced [ATC] applications of Mobile Satellite Ventures Subsidiary LLC (“MSV???), and to do so as soon as possible”, commending MSV “for its proposal to use its spectrum in a responsible manner that ensures the continued utility of GPS receivers operating in the vicinity of MSV ATC stations”.
However, it appears that the GPS Industry Council never recognized the potential for GPS receiver overload from transmissions within LightSquared’s own L-band frequencies. Given their comments above, it seems plausible that they were lulled into a false sense of security by LightSquared’s cooperation over out-of-band interference, including limiting the PSD to -100dBW/MHz or less, a very aggressive commitment, giving a high level of protection to GPS receivers. Of course, LightSquared also benefited from that commitment, because to filter LightSquared’s emissions to this level requires about 3-4MHz of separation between the edge of the GPS band at 1559MHz and LightSquared’s terrestrial transmissions at 1550-1555MHz. When similarly challenging constraints were imposed on Globalstar at 1610MHz, it meant that Globalstar would be less able to operate high power terrestrial transmissions at the bottom edge of its L-band frequencies, restricting Globalstar’s ability to support ATC in its more limited Big LEO L-band allocation (and thereby hampering potential competition to LightSquared).
Given the complexity of these issues and how critical their resolution was in obtaining LightSquared’s ATC license, it is hard to believe that no-one at LightSquared was aware of the possibility of GPS overload interference until it was raised in December 2010. Indeed, in an offhand comment in March 2011, even Mr. Falcone’s wife apparently suggested that “this type of interference has always been a potential issue for GPS”. Nevertheless, it appears that no mention is made of such problems in the risk factors section of SkyTerra’s 10-K filings with the SEC, and the 2009 10-K filing basically states the opposite, noting that “We have also agreed to comply with requirements on our user terminals and base stations that we negotiated with the GPS industry to provide additional protection to GPS receivers, beyond existing mandatory limits. Our compliance with these limits is a condition of our ATC license. All of our broadband wireless system designs take into account these requirements and specifications. We believe that they do not materially limit our network deployment or our ability to achieve our business plan”.
Summing up, it seems that the GPS Industry Council clearly dropped the ball when it came to analyzing the potential impact of LightSquared on GPS receivers. However, they may very well feel that they were the victim of a bait and switch play, thinking that MSV/SkyTerra was being extremely cooperative with its expressed intent to “ensure the continued utility of GPS receivers operating in the vicinity of MSV ATC stations”, when in reality out-of-band interference was not most important issue to consider.
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05.10.11
Posted in Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:04 pm by timfarrar
As testing continues into whether LightSquared will interfere with GPS signals, Qualcomm has filed the results of its own initial cellphone testing with the FCC. Of course, LightSquared is depending on Qualcomm as its principal supplier of chipsets and developer of the GMSA/S-EVDO air interface for its satellite services, so it might have been expected that Qualcomm would confirm the position asserted by LightSquared supporters, that cellphones won’t need to use filters to prevent interference with their A-GPS location chips. However, in fact Qualcomm has come to the initial conclusion that “additional rejection of 30dB may be required” and that the current filters used in its A-GPS chipsets may need to be upgraded, in view of how close the upper part of the LightSquared downlink band (the Phase 0 spectrum at 1550-1555MHz) is to the GPS band. Given that most people agree that the interference problem will likely be much worse for other types of GPS receivers, this is not an encouraging result for LightSquared.
LightSquared may therefore be unable to use the Phase 0 spectrum unless receiver standards are imposed on GPS receivers, as the FCC suggested in its recent 2GHz ruling, which indicated that “incumbent users…must use receivers that reasonably discriminate against reception of signals outside their allocated spectrum”. However, Inmarsat indicated yesterday that on April 25, it signed an amendment to its Cooperation Agreement with LightSquared, and received an additional payment of $40M to accelerate the clearing of the Phase 1A spectrum (i.e. to free up the additional 2x5MHz block at the bottom of the L-band, which under the original agreement would have been made available sometime between February and November 2012). Thus it appears that even LightSquared may be acknowledging that the top part of its frequency band will be largely unusable for the foreseeable future, unless and until receiver standards are imposed on the GPS community, requiring a multi-year program of equipment upgrades and recertification, with all of the additional costs and delays that would imply.
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04.29.11
Posted in Financials, LightSquared, Operators, Spectrum at 4:35 pm by timfarrar
Intriguingly, yesterday’s Reuters article about Harbinger noted that at the end of 2010 Harbinger only controlled “roughly 80 percent of the wireless telecom company’s shares”. This raises the obvious question of who controls the other 20%?
Clearly, some of these shares might have been offered to LightSquared’s new management team as an incentive, but that can’t account for the difference between the 100% of the equity that Harbinger acquired in March 2010 and the 80% reported as of the end of the year. Did Harbinger manage to offload some of its equity stake in LightSquared last year (as it was reported to be trying to do in July)? Could this account for some of the “$2 billion in equity and debt proceeds and in commitments” that LightSquared highlighted in a press release last October?
Who are the potential candidates? I’ve heard various names, but one possibility might be Soros Fund Management, which, according to a November 2010 Wall Street Journal article, “during the past year became a significant new investor” (whether this was in Harbinger or in LightSquared is not explicitly stated in the article). Of course, there may very well be other investors as well.
Even more importantly, how much did the other investor(s) pay for what is presumably a near 20% stake? It appears that not all of the $2B in commitments that LightSquared cited in October 2010 actually materialized (presumably the difference is Harbinger’s “$250 million unfunded commitment to LightSquared“), but I’ve assumed in the past that it included both the $850M October 2010 first lien debt and the $400M July 2010 UBS loan. However, rather than Harbinger converting its original (majority $430M holding of) LightSquared’s first lien debt into equity as part of the October 2010 refinancing (as it had previously indicated), it seems that Harbinger instead retained an unfunded $250M commitment at that stage, allowing it finally to take a limited amount of money off the table.
As of February 2011, LightSquared indicated that in fact it had actually raised “about $1.75B in debt and equity” (the same figure as given in late September, which refers specifically to $1.75B of debt and equity from “outside investors”), before increasing this to “over $2 billion” when the $586M first lien add-on was completed later that month. That would imply that the new equity investment might have been about $500M for a near 20% stake in LightSquared (i.e. $1.75B minus $850M and $400M) which would certainly fit fairly well with Harbinger’s internal valuation of about $3B for its own 80% LightSquared stake (“about half” of the $6 billion fund’s assets according to Reuters). However, it is slightly puzzling that Harbinger still said only that it had raised “over $2 billion” in February (rather than the $2.3B+ that would have been implied by adding $586M to $1.75B). Was some (half?) of the new outside equity either redeemed or converted to first lien debt in February, or is Harbinger just trying to avoid giving an exact figure for how much it has raised?
Of course, if LightSquared really is serious about pursuing an IPO “as early as this summer”, then all of this detail should become much clearer. However, it appears from Sprint’s results call this week that the Network Vision deployment is being delayed until the fourth quarter. That may imply that decision point on a network sharing agreement with LightSquared will also be delayed, presumably until after the results of the GPS interference testing are known in mid June. If Sprint is concerned about whether LightSquared’s spectrum provides adequate security for LightSquared’s commitments under a network sharing agreement, then that would certainly be logical, especially if Sprint views LightSquared (cynically) as an opportunity to boost its spectrum resources at low cost (after a default), rather than as a viable long term supplier of wholesale capacity. Nevertheless, if the first lien debtholders refuse to allow Sprint to pre-empt their claims, then LightSquared might have to move forward with an early (and substantial) IPO to give Sprint the security of more cash in the bank, but otherwise we might not know much more about LightSquared’s financial position for some time to come.
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04.11.11
Posted in Financials, LightSquared, Operators, Spectrum at 2:36 pm by timfarrar
Last week, I suggested that LightSquared’s most plausible path to a network sharing deal with Sprint would involve signing a multi-billion dollar take-or-pay capacity contract and using this to raise $1B+ of new equity. It appears that LightSquared is definitely exploring a possible equity raise through an IPO, although that would require it to strike a capacity deal first, and the only obvious large deal at present is via paying part of its obligations to Sprint in kind.
Of course that could leave Sprint in the uncomfortable position of being the only potential financial safety net for both LightSquared and Clearwire, precisely the issue which led me to speculate that Sprint might be better off choosing to partner with only one of the two companies. At this point in time, Sprint only gains an advantage in partnering with both LightSquared and Clearwire if it can either be sure that LightSquared will be solvent for long enough to (more than) offset the costs that Sprint would incur in a network sharing agreement, or if LightSquared can provide other adequate security for these obligations. Given LightSquared’s ongoing payments to Inmarsat, and the costs incurred by Sprint in a network sharing buildout, then (under the “deal” modeled by Credit Suisse) that might require new fundraising or guarantees (in addition to LightSquared’s existing cash) of perhaps $1B or more. If LightSquared could successfully execute an IPO then that would presumably help matters significantly, though it is far from clear whether raising anything close to $1B is feasible at this point.
Otherwise, I assume Sprint would be looking for other LightSquared or Harbinger assets to secure LightSquared’s obligations. I’m told that one possibility that has been floated is for Sprint to take a first lien position in LightSquared’s spectrum assets, and subordinate the existing $1.5B of debt. That prospect would presumably be very unpopular with existing debtholders, who already have to face a $2B+ obligation to Inmarsat, associated with the Cooperation Agreement (without which half of LightSquared’s ATC spectrum would be forfeited). Alternatively, would Harbinger offer some sort of guarantee secured against its other hedge fund assets (like the $400M UBS loan last July) or even a personal guarantee from Mr. Falcone?
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04.07.11
Posted in Financials, LightSquared, Operators, Spectrum at 10:17 am by timfarrar
After a difficult March, when Harbinger failed to buy DBSD in partnership with MetroPCS, and Sprint decided not to make the expected announcement of a network sharing agreement at CTIA, it is now becoming possible to discern how LightSquared might plan to move forward.
As I noted previously, the key challenge for LightSquared at this point in time is to persuade Sprint that it should undertake a network sharing arrangement, rather than Sprint focusing solely on its partnership with Clearwire. This will only happen if LightSquared can convince Sprint of its ability to bring substantial funding to the table, which would reduce the cost of Sprint’s Network Vision buildout, and mitigate the risk of leaving Sprint holding the bag for increased tower lease costs that would result from adding the LightSquared frequencies. However, LightSquared has already raised $1.5B of first lien debt, and so any further fundraising would have to be subordinated to that, and would therefore likely have to rely on a take-or-pay capacity commitment from a partner.
As a result, I think the four steps LightSquared will now need to execute, in order to move forward, are as follows:
1) Strike a multi-billion dollar take-or-pay contract with one or more major “anchor tenant” customers
2) Raise $1B+ of additional external equity investments based on the take-or-pay commitment (perhaps even including an IPO???)
3) Convince Sprint that the network sharing agreement is therefore a better deal than going with Clearwire alone
4) Sign a contract with Ericsson for buildout of the network (replacing NSN).
Of course all of these steps are fraught with risk and need to be executed simultaneously, since they are mutually interdependent. Some of the most obvious risks include:
a) How solid can the take-or-pay contract be when there are still interference risks to be resolved?
b) Does the LightSquared equity have any value, when there is $1.5B of first lien debt plus a $2B+ spectrum lease/rebanding commitment to Inmarsat ahead of the equity?
c) Would it be better for Sprint from a regulatory point of view if (one of) LightSquared or Clearwire folded?
However, the overarching issue is where such a huge take-or-pay contract would come from. Could it one of the “top three global consumer electronics companies” that LightSquared claimed to be in “advanced talks” with (these 3 are Samsung, HP and Sony)? However, “connections for services such as wireless photo uploads and wireless multiplayer gaming” seem unlikely to generate that much money. Similarly the deal that LightSquared “has already signed…with a maker of tablet computers and smartphones that could start using LightSquared’s network as soon as the fourth quarter” would require an enormous commitment to come close to billions of dollars in value, which is hard to envisage while the LightSquared network has limited national coverage. If neither of these is a realistic option for more than a fraction of the capacity contracts that are needed, then that brings us back to wireless operators or new entrants – MetroPCS or Leap? One of the potential partners that has been talked about in the past? Who knows? But with T-Mobile out of the picture, the list of possible anchor tenants is pretty short, and both Sprint and skeptical journalists will need to see some concrete progress on LightSquared’s part fairly soon, amounting to more than just a roaming or sales agreement with no hard volume commitments.
UPDATE: Credit Suisse is now suggesting that LightSquared would pay 50% of its network sharing costs to Sprint in capacity, which clearly represents multiple billions of dollars of capacity over time. However, in order to convince Sprint to move forward, I think LightSquared’s deals would still have to include major capacity commitments from one or more third parties, so that it can raise the money to pay for the hosting agreement with Sprint. If LightSquared paid $500M upfront in cash, plus $1200 per month per base station in cash for 45,000 base stations as Credit Suisse suggests, it would need to pay Sprint about $650M per year in cash for these hosting fees once the network was fully rolled out, and in excess of a billion dollars in cash in total over the next three years before it can generate much revenue. Given that this does not include LightSquared’s other core network development and operating costs (including the ongoing payments to Inmarsat), and as Credit Suisse admits, Sprint would spend an extra $1.2B between LightSquared and Clearwire before it started to make money from the hosting agreement (and is liable for ongoing payments to tower companies of $700 per tower per month), I think Sprint will want to see that LightSquared is able to fund at the very least the next several years of payments before committing to a deal. This clearly puts the onus back on LightSquared to secure substantial additional capacity commitments from companies other than Sprint, and raise significant equity funding ($1B+) in the very near future.
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04.06.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 10:50 am by timfarrar
One of the key issues for LightSquared is that the downlink transmissions from its base stations are expected to interfere with a wide range of GPS devices, which operate in adjacent frequencies. LightSquared will be using part of the L-band downlink frequencies (1525-1559MHz), while GPS (and GLONASS) operate within the 1559-1610MHz band. Though LightSquared’s base stations will be fitted with filters which cut off the signal abruptly at the top of the L-band, so LightSquared’s signals do not leak into the GPS band, the filters on most GPS devices do not have such a strict cutoff at the bottom of the GPS band, and so can be overwhelmed by the very high power LightSquared terrestrial transmissions in the adjacent L-band frequencies. A good illustration of the impact is given in this chart from a Deere & Company submission to the FCC:
As this chart shows, the types of receivers that are most affected are high precision receivers used in applications such as farming and surveying, although lower precision receivers such as those incorporated in automobile navigation and even in cellphones may be impacted closer to the LightSquared base stations. Aeronautical navigation is an area of particular concern, given the safety critical nature of this application. Testing is now ongoing to determine the extent of interference, and early estimates of the impact vary greatly, ranging from a few hundred meters or less up to several miles for low precision receivers, and potentially tens of miles for high precision receivers.
It appears that LightSquared expects that GPS manufacturers should “fix” their devices, in order to mitigate these interference issues, although unsurprisingly this is being resisted strongly by the GPS community, because the costs would be very significant. PRTM estimates that it will only cost 30 cents per device to fit filters to the “40M standalone GPS devices” made worldwide each year for a total of $12M. PRTM also assumes that no additional filters will be needed for the much larger number of GPS-enabled cellphones sold each year, despite Qualcomm telling the FCC in January 2011 that it plans to use a filter to prevent self-interference in L-band enabled cellphones, and had “not determined whether this filter provides sufficient protection to avoid interference to the GPS receiver from LTE base stations operating on the L band.”
In reality, whether or not cellphone manufacturers ultimately decide an additional filter is needed to protect their GPS receivers, the overall cost impact would be far, far greater than PRTM indicate. To take a directly analogous situation, LightSquared is paying Inmarsat $250M to fit filters to its L-band satellite terminals on up to 10K aircraft and perhaps 50K ships. If we assume these filters cost $30 rather than 30 cents each, then following PRTM’s calculations the cost of solving the problem would be less than $2M. However, Inmarsat expects to spend the vast majority of the $250M it is receiving on actually fixing the problem, and the filters themselves are less than 1% of the total cost. Instead, the bulk of the expenditure will go on securing approvals (including from safety authorities) for replacement equipment, then going out and fitting this equipment on ships and aircraft.
Across the GPS industry the same considerations would apply – dramatically increased costs for testing, safety approvals, retrofits of existing equipment, etc. not to mention the markups that would apply to the filter component costs as they flow through to an increased total cost of the devices sold. Many of these costs would be concentrated in lower volume and safety critical applications such as the aeronautical market, and if some GPS users experienced a permanent loss of accuracy, then there could be additional indirect costs to consumers (e.g. reduced crop yields leading to higher food costs). Just to give one example, the National Association of Wheat Growers indicated that its members have invested $3B in GPS equipment for precision farming, in order to increase the productivity and efficiency of farm processes.
Thus it is more credible to look at the total cost impact on manufacturers and consumers as being of order $1B+ per year over the next decade, as tens of billions of dollars of equipment needs to be upgraded or replaced. As in the Inmarsat situation, PRTM’s estimate of the filter hardware costs (for what was in any case only a subset of the overall GPS equipment market) likely represents no more than 1% of the total bill. Given that such a large cost impact might well outweigh the value of freeing up additional L-band spectrum, it would be very interesting to see a detailed cost-benefit analysis of these issues, so that economic rationality can play some part in the ultimate decision.
Nevertheless, despite the significant cost impact on the GPS industry and end users, the FCC might still decide to impose “receiver standards” on future GPS devices. However, it would still take considerable time before these standards became effective. For example, the FCC could easily take 12-18 months (or longer) to decide on what receiver standards to mandate, and then it might require that all new GPS receivers manufactured after say the end of 2014 were capable of withstanding potential interference. Then there would need to be several more years for older devices to be replaced or updated, with a sunset date perhaps as late as the end of 2018 or 2019 (or beyond).
Assuming that this is the path the FCC decides to follow, it is still unclear what spectrum LightSquared would then be able to use for its network in the near term. The Phase 0 spectrum which is currently available to LightSquared has its downlink between 1550 and 1555MHz, which is the channel closest to the GPS band, and so its use would likely be heavily restricted or completely prohibited until GPS receiver standards came into force. LightSquared gains access to an additional 2x5MHz channel (the Phase 1A spectrum) sometime between February and November 2012, depending on how quickly this is cleared by Inmarsat. This channel is at the bottom end of the band (1526-1531MHz downlink) and so is the least likely to interfere with GPS. LightSquared then adds 2x10MHz of additional spectrum (Phase 2) with downlinks at 1531-1536MHz and 1545-1550MHz at the end of July 2013. However, it is uncertain whether and under what conditions the use of the 1545-1550MHz band would be permitted before any receiver standards came into force.
This timeline indicates that (if Channel 1 is usable) LightSquared should have access to 2x5MHz of spectrum sometime in 2012 and at least 2x10MHz of spectrum from the end of July 2013. However, it is far from clear (even assuming LightSquared has a network contractor in place) how the company expects to offer service by the end of 2011.
More broadly, the outcome of the GPS interference testing and FCC deliberations also remains in doubt. PRTM characterized this as “a situation where the neighbor [GPS] built the fence too far over the property line and may not have realised it at the time. Now the other neighbor wants to build a pool and there is not enough space. So the question is: who has to pay to move the fence?”. However, I look at the analogy somewhat differently – regardless of where the fence is, if you have protected butterflies [defense and aviation systems] living at the bottom of both gardens, will the government let you build a pool at all?
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