02.11.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 1:57 pm by timfarrar
“Waiting for a train to go or a bus to come,
Or a plane to go or the mail to come,
Or the rain to go or the phone to ring,
Or the snow to snow
Or waiting around for a Yes or No
Or waiting for their hair to grow.
Everyone is just waiting.”
(Dr Seuss, Oh! The Places You’ll Go)
This week we’ve seen news that Clearwire is apparently abandoning its retail strategy, “opening the door for additional investment in the struggling company by Sprint Nextel Corp.” Clearwire is also now suggesting that it “has enough funds to continue operating through the end of the year”, reducing the drumbeat of articles that have recently suggested a deal with T-Mobile would come before the end of the first quarter.
We’ve also seen Harbinger selling its remaining 14% stake in Inmarsat, which also suggests that no partner announcement is imminent from LightSquared, otherwise the sale would presumably have been delayed until after that announcement. This is because Inmarsat’s share price would have been boosted by the confidence in LightSquared’s future that such an announcement would create, and so Harbinger could then have got a better price for its shares. (By way of comparison, LightSquared announced additional funding immediately before selling the first half of its Inmarsat shareholding back in October).
All this points to T-Mobile maintaining the stance, set out in its investor day presentation last month, that it does not have a pressing need to acquire more spectrum, and by implication can wait until later this year before making a decision. In that context, Clearwire and Harbinger’s actions could be interpreted as seeking to demonstrate that they will have sufficient funding to wait for T-Mobile’s decision.
Yesterday the President also indicated that he will press for more spectrum to be auctioned, which may well include the release of the 1755-1780MHz government spectrum that could be paired with the AWS-3 block, and would likely be one favored option for T-Mobile. By waiting until later this year, T-Mobile could also see if there is an opportunity to make use of the 2GHz MSS spectrum, and with the cable companies apparently not seeing much success from their wireless offerings, SpectrumCo might also be more open to a sale of its 20MHz of AWS-1 spectrum.
In the meantime, we’re seeing more attempts to discredit LightSquared, apparently designed to prompt further enquiries by Republicans in Congress. This is likely to turn more attention towards the interference issues created by the LightSquared network, and though Inmarsat has maintained that it “is confident that the effects on [Inmarsat] customers will be minimal”, I understand that view is not shared universally within the MSS community or apparently within the Department of Defense.
I wonder how the FCC feels at this point in time, as it waits for LightSquared to announce how it plans to move forward, assuming that (like me and the “two industry officials” cited in a February 7 Space News article) it expected the announcement of partners to come almost immediately after the waiver was granted. The FCC’s language already appears to have shifted slightly, from stating that “LightSquared would be a new competitor and entrant into mobile broadband with new sources of capital…” when it granted the waiver in late January, to indicating this week that LightSquared “deserves every opportunity to succeed”. Let’s hope for the FCC’s sake that it does, and soon, before there is any problem meeting the “Unique Terrestrial Buildout Obligations” cited by the FCC to justify grant of LightSquared’s waiver.
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02.05.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:19 am by timfarrar
Sometimes when trying to understand Harbinger’s actions, I feel like I don’t just live in another city, but I’m from another planet altogether. That’s certainly the case with the latest revelation, that LightSquared “may bid” for TerreStar and DBSD. Just a few months ago, Harbinger was suggesting that “TerreStar is no longer critical to Falcone’s master plan”, so what has changed now?
Presumably Harbinger would say that TerreStar’s “spectrum holdings would help LightSquared handle wireless traffic” because there is so much demand for capacity on LightSquared’s network. Yet LightSquared is still to announce its wholesale partners, and 40MHz of spectrum seems to be enough for Verizon and AT&T to build out their own LTE networks (in the 700MHz and AWS-1 spectrum). Especially with this development coming immediately after the concerns about GPS interference, it is inevitably going to raise questions about whether LightSquared might be unable to use all of its L-band spectrum, even if, when all is said and done, the interference issues are not a major problem. (However, it is certainly the case that LightSquared is not expected to have access to its full 40MHz of L-band MSS-ATC spectrum until the end of July 2013, 30 months after it gave the Phase 2 notice to Inmarsat).
Harbinger’s move also raises the profile of the 2GHz spectrum band as an alternative source of spectrum for potential partners like T-Mobile and highlights that this spectrum is much less expensive than the cost basis of LightSquared’s L-band holdings.
Finally, its not even clear where the money would come from for a purchase of TerreStar and DBSD or whether the FCC would allow it, given the concerns they expressed last March that “Harbinger’s acquisition of SkyTerra does pose some risk of anticompetitive harm for users of MSS in the near future” (due to its existing minority ownership stakes in Inmarsat and TerreStar). Thus, while Harbinger’s intervention might be an attempt to cause more trouble in the DBSD and TerreStar bankruptcies, I wonder if in the end this will do more harm than good to LightSquared’s prospects?
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02.04.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 11:28 am by timfarrar
Speculation is intensifying that a victor will be declared soon in the battle between Clearwire and LightSquared for a deal with T-Mobile, although developments in the 2GHz band remain interesting and could delay this process, as could positive noises about additional paired AWS spectrum (1755-1780MHz) being made available by the DoD.
UPDATE: Bloomberg is reporting that LightSquared “is considering bidding on satellite companies TerreStar Corp. and DBSD North America Inc.” because their “spectrum holdings would help LightSquared handle wireless traffic as it prepares to roll out a nationwide fourth-generation network”. This seems very curious, given that LightSquared will already have access to 40MHz of L-band ATC spectrum through its Phase 2 agreement with Inmarsat. It is also not obvious where the money for such a bid would come from. However, it does highlight the discrepancy in the cost of LightSquared’s spectrum versus DBSD and TerreStar. Of course, if Clearwire is prepared to sell 40MHz of spectrum to T-Mobile for “up to $2B“, it it far from clear that DBSD and TerreStar are worth much more than $1B each. Nevertheless, it appears this battle is a long way from being over, especially as DBSD’s second lien noteholders also appear to have reached an agreement with Sprint and will challenge the DISH bid for DBSD.
As I mentioned last week, it seems unlikely that the FCC would have approved the LightSquared waiver without some reassurance that LightSquared had the partners and funding to move forward, and journalists have apparently heard “rumblings that LightSquared may in fact be the partner of choice” for T-Mobile. On the other hand, other reports are suggesting that T-Mobile “may be close to a deal to buy wireless spectrum from Clearwire” which “could happen by the end of the first quarter”.
Obviously both sides are trying to shape media perceptions of themselves as the likely victor, while painting their opponents as being in dire straits. However, the battle is getting pretty ugly, with a request this week from a conservative watchdog group for a Congressional investigation into the FCC’s waiver grant to LightSquared, which appears suspiciously well timed, just like the news of an SEC investigation into Harbinger back in November. Nevertheless, it seems quite plausible that the request might be taken up by the Republicans, simply because it could provide a mechanism for “fishing expeditions” to question the White House, especially given the intervention of Democratic party officials on LightSquared’s behalf.
At this point, the most interesting question is whether we will now have to wait until the “end of the first quarter” or later to hear more about LightSquared’s plans to move forward, beyond the fact that it has exercised its Phase 2 option with Inmarsat to gain access to more spectrum in 30 months time. Even if the “end of the first quarter” is the timeline on which T-Mobile plans to reach a decision, it is unclear whether LightSquared will wait that long, or if it will instead be able to announce additional partners and investors beforehand, which would help to build confidence in the achievability of its buildout timetable and that it does not expect GPS interference issues to hold up its plans. More importantly, an early announcement would demonstrate some of the alternatives available to LightSquared, in the event that T-Mobile ultimately decides to go elsewhere for its 4G spectrum, and perhaps could even provide some indication as to the potential value of LightSquared’s spectrum assets.
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02.01.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 8:42 am by timfarrar
“I have heard there are troubles of more than one kind.
Some come from ahead and some come from behind.
But I’ve bought a big bat. I’m all ready you see.
Now my troubles are going to have troubles with me!”
(Dr Seuss, I Had Trouble in Getting to Solla Sollew)
I commented last week that the waiver granted to LightSquared risked causing additional trouble in the TerreStar and DBSD bankruptcies, which could potentially be to Harbinger’s advantage, because it could limit the competition that LightSquared will face from the 2GHz MSS spectrum holders in the race to secure key partners like T-Mobile and MetroPCS.
Today it has been announced that DISH has agreed to acquire DBSD for $1B. In conjunction with TerreStar, which is also valued at roughly $1B in its bankruptcy, this creates the opportunity for potential partners to consider using a rival 40MHz block of 2GHz MSS spectrum instead of investing in LightSquared or Clearwire. The FCC’s LightSquared ruling last week, laid out a roadmap for the 2GHz players to gain the same waiver (i.e. to sell terrestrial-only devices), namely committing to a national terrestrial rollout with strict deadlines, and settling the ongoing dispute with Sprint over clearance costs for the 2GHz band. If both of these conditions were satisfied, it is now hard to see how the FCC could refuse to grant a similar waiver.
I’ve noted before the challenges of achieving a high spectrum valuation in the current situation of oversupply. Now in addition to the Clearwire spectrum, apparently valued at “up to $2B” for 40MHz of spectrum, we may also have an even more direct comparison of 40MHz of MSS-ATC spectrum also valued at around $2B.
This makes the $2.9B that Harbinger has invested to date in LightSquared look quite expensive, especially when considering that LightSquared must pay Inmarsat for its Phase 2 spectrum lease on an ongoing basis (amounting to a future liability of more than $2B). It will therefore be very interesting to see which way T-Mobile and other cellular operators decide to go now and whether this new development pushes back the decision point for any key potential partners.
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01.28.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 5:27 pm by timfarrar
Over the last few days, a new series of filings by the US GPS Industry Council have appeared in the LightSquared ATC waiver docket, making some fairly dramatic statements about the potential for interference from LightSquared’s ATC network. As an aside, it is rather curious that these filings didn’t appear to be available when I was writing about this issue on Monday (Jan 24), despite the fact that some of the submissions were received by the FCC as early as January 19.
The January 20 USGPS Industry Council filing includes an analysis by Garmin International of potential interference scenarios for a “very common” consumer automotive navigation device (the nüvi 265W) and a Generation Aviation GPS receiver (the GNS 430W) based on LightSquared supplied parameters for network operations using a 5MHz LTE downlink channel between 1550MHz and 1555MHz. The conclusion of the analysis is that the LightSquared network “will create a disastrous interference problem for GPS receiver operation to the point where GPS receivers will cease to operate (complete loss of fix) when in the vicinity of these transmitters”. Specifically, the report states that “the nüvi 265W lost a fix at a distance of 0.66 miles (1.1km) from the transmitter”, while the GNS 430W “will be completely jammed by LightSquared transmitters over 5.6 miles (9.0km) away”.
The study that has now been mandated by the FCC’s Order is tasked with “identifying near-term technical and operational measures that can be
implemented to reduce the risk of overload interference to GPS devices, and providing recommendations on steps that can be taken going forward to permit broadband wireless services to be provided in the L Band MSS frequencies and coexist with GPS devices.”
However, these instructions make it clear that the aim of the study is to decide how rather than whether to provide terrestrial broadband wireless in the L Band MSS frequencies, and note that “Because the GPS interference concerns stem from LightSquared’s transmissions in its authorized spectrum rather than transmissions in the GPS band, the Commission expects full participation by the GPS industry in the working group and expects the GPS industry to work expeditiously and in good faith with LightSquared to ameliorate the interference concerns.”
One possibility for “ameliorating the interference concerns” is that LightSquared could be required to use L-band downlink channels which are further away from the GPS band than the originally intended 1550-1555MHz channel. However, LightSquared is intending to use 20MHz of downlink, so it will need to operate up to at least 1550MHz and quite likely somewhat higher if it is to operate four 5MHz LTE channels (because the 1544-45MHz band is reserved for safety services so only 3x5MHz channels could fit into the 1525-1544MHz part of the band, and it is possible there will have to be some guard band between the bottom of LightSquared’s fourth channel and the 1544-45MHz safety services). LightSquared might also have additional limitations placed on its operations in the vicinity of airports (e.g. no use of the fourth channel there), while GPS manufacturers could be required to use improved filters in the future, so that their receivers are better protected. However, it will take many years before the billions of dollars worth of existing GPS devices reach the end of their lifetimes, and LightSquared needs to be providing widespread service under its current rollout mandates by the end of 2012 (albeit not on four channels, because Inmarsat will not make the Phase 2 lease spectrum available until mid 2013).
As a result, it will be very interesting to see how the two sides of this debate can be reconciled. Conceivably a worst case for LightSquared might be that it would only be able to operate its ATC network below 1544MHz (i.e. with just three paired 2x5MHz terrestrial LTE channels). In that case, it is far from clear whether LightSquared would be able to renegotiate its lease with Inmarsat to give up 10MHz of the roughly 18MHz it is now committed to leasing under Phase 2 of the Cooperation Agreement. If LightSquared continues to pay the full $115M per year to Inmarsat, then any requirement to limit terrestrial operations to only 30MHz of ATC spectrum would have a fairly dramatic impact on the residual value of LightSquared’s own spectrum assets.
Nevertheless, it seems that the FCC is determined to make sure that the L-band MSS spectrum will be used for terrestrial services and appears to have concluded that LightSquared’s plan is the only possibility for that to happen in the foreseeable future. Thus, channeling Dr. Seuss (who I’ve noted before, had many great insights into the MSS industry), the FCC message to LightSquared seems to be:
“And will you succeed?
Yes! You will, indeed!
(98 and ¾ percent guaranteed.)”
Now, let’s just hope that any remaining GPS interference doesn’t end up resulting in a slight variant on Dr Seuss’s original story:
“You can get so confused that you’ll start in to race
Down long wiggled roads at a break-necking pace
And grind on for miles across weirdish wild space,
Headed, I fear, toward a most useless place.
And if you go in, should you turn left or right…
Or right-and-three-quarters? Or, maybe, not quite?
Or go around back and sneak in from behind?
Simple it’s not, I’m afraid you will find,
For a GPS system to make up its mind.”
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01.26.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:51 pm by timfarrar
Today the FCC has released a very carefully worded Order, granting LightSquared and its wholesale partners permission to offer terrestrial-only service to consumers. Despite LightSquared’s original assertion that its plan to provide “integrated service” to wholesale partners (who could resell terrestrial-only services to end users) complied with the ATC rules, the FCC found that LightSquared’s wholesale partners did not have the right to provide terrestrial-only services, unless LightSquared also had these rights. Nevertheless, the FCC decided that LightSquared merited a waiver of the rules, because “this is a promising opportunity to promote mobile broadband” which “increases competition and provides consumers with more choices”.
Importantly, the Order is written specifically to justify only giving LightSquared a waiver, without the FCC being obliged to provide a similar waiver to other MSS competitors. The FCC cites five reasons that the waiver would serve the public interest:
1) Provision of Ubiquitous, Nationwide MSS: the FCC notes “LightSquared’s current service offerings and demonstrated commitment to providing MSS” and that the company “is already a significant and substantial provider of MSS”. DBSD and perhaps even TerreStar might find it hard to provide comparable justification.
2) Rationalization of MSS L-band for Improved MSS and MSS/ATC Use: the FCC notes the large sums being spent by LightSquared “to rationalize narrow, interleaved bands of L-band spectrum”. Other MSS providers obviously do not have the same justification, and by way of contrast DBSD and TerreStar have disputed their band clearing reimbursement obligations to Sprint.
3) Investment in Dual-Mode Service and Device Offerings: the FCC notes LightSquared’s “commitment to developing an integrated MSS/ATC marketplace, including dual-mode devices”. While DBSD and TerreStar were originally parties to the LightSquared agreements with Infineon and/or Qualcomm, they have not continued to fund those development agreements since their bankruptcies. TerreStar has launched the Genus phone, but that device is not ATC-compatible.
4) Unique Terrestrial Buildout Obligations in the MSS L-band: the FCC notes LightSquared’s commitment to “significant terrestrial buildout milestones”. This is probably the most critical of all the elements in the eyes of the FCC, but it would obviously require huge expenditure for any other MSS operator to commit to a similar nationwide terrestrial rollout.
5) LightSquared Commitments: the FCC notes that “LightSquared offers numerous commitments, many of which we impose as waiver conditions, below, to ensure consistency with the purposes of the gating criteria and the integrated service rule.” Similar commitments would presumably be required of any other MSS operator.
One of the main outcomes of this ruling is that the 2GHz spectrum holders could face additional confusion and potential delay in both their bankruptcies and subsequent service deployment. Some creditors may see the FCC waiver for LightSquared as increasing the value of the 2GHz MSS spectrum, if they think DBSD and/or TerreStar will not have to resort to incentive auctions to remove the ATC gating conditions (and share the resulting proceeds with the government). This could mean further arguments in the bankruptcy courts over the appropriate valuation of these assets.
However, without a concrete promise to deploy a nationwide broadband network on a strict timetable (and to reimburse Sprint for their band clearing costs), it appears that the FCC is determined to deny DBSD and TerreStar a similar waiver of the ATC rules. Such a refusal might well set the stage for prolonged litigation, and potentially delay further the prospects of bringing the 2GHz spectrum into use.
Of course that would also be to Harbinger’s advantage, because it would limit the competition that LightSquared will face from the 2GHz MSS spectrum holders in the race to secure key partners like T-Mobile and MetroPCS. Nevertheless, it would be ironic if the FCC’s decision that “in the absence of a waiver, the substantial public benefit of rationalizing MSS L-band spectrum might not be realized any time soon” resulted in 40MHz of L-band spectrum being brought into use (despite worries about GPS interference) while leaving the 40MHz of 2GHz MSS spectrum (and perhaps even the adjacent 30MHz of AWS-2 and 3 spectrum, whose allocation was supposed to be coordinated with the 2GHz MSS band) languishing for years to come.
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01.25.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:04 pm by timfarrar
It has now been revealed that the FCC is poised to announce the approval of LightSquared’s waiver application on Wednesday, enabling its wholesale partners to “provide wireless broadband access without also having to sell satellite service”. The FCC is also suggesting that “LightSquared would be a new competitor and entrant into mobile broadband with new sources of capital…”, apparently confirming my supposition yesterday that the FCC would not approve the waiver without some reassurance that LightSquared “does have (or shortly will have) the partners and funding to move forward”. Indeed the Wall St Journal is already speculating that LightSquared will now be able to “lease its airwaves to wireless companies like T-Mobile”.
This announcement certainly may come as a surprise to some observers, but I’ve noted before that LightSquared has friends in high places, and this time the direction appears to have come right from the top, with the President announcing in his State of the Union address this evening “a National Wireless Initiative to provide 98 percent of Americans access to high-speed Internet…nearly doubling the amount of wireless spectrum available for mobile broadband (through incentive auctions and other mechanisms to ensure spectrum is used more efficiently)”. Of course authorizing LightSquared’s waiver is not necessarily compatible with promoting incentive auctions, explaining why the FCC apparently does not plan to propose these for the 2GHz band at this point in time. As a result, I still wonder whether this approval will end up becoming a political football for opponents of the recent FCC net neutrality decision.
The most critical long term issue here is whether LightSquared’s potential interference issues with GPS can be solved. Sources I have spoken to, involved in recent testing, suggest that existing GPS receivers (including those built into almost every new cellphone) may be vulnerable to overload interference within several hundred meters of ATC base stations, with older receivers faring the worst. This is why there might still be a problem even if LightSquared can easily fit filters to its own 4G handsets when these are sold, not to mention the potential cost implications if “more expensive” (and potentially more bulky) filters must be added to hundreds of millions of GPS devices and cellphones sold in North America each year. These issues are presumably what the NTIA was referring to when expressing its concerns about the implications of 40,000 ATC base stations being deployed (although given that the number of base stations has been known since March 2010, it remains a mystery why apparently no-one thought to test for this problem until the last few weeks). Is this a big enough issue for LightSquared to become “the great GPS killer“? Only time will tell on that front, but some news about LightSquared’s “new sources of capital” (note the plural!) should emerge very soon, now that the FCC has decided to support LightSquared’s request.
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01.24.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:27 pm by timfarrar
LightSquared has now confirmed that it will 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, which is described as “an essential building block for our network”.
This answers one of the questions I had last week, when Communications Daily suggested that LightSquared’s request “isn’t expected to be taken up right away”, as it repeats the statement that LightSquared made to the NTIA in its January 6 letter. However, as I noted then, the FCC would presumably need to be convinced that LightSquared is able to raise the funding to move forward before approving the application. Thus it seems there is a binary outcome – either LightSquared does have (or shortly will have) the partners and funding to move forward, in which case the FCC would most likely approve the waiver request quickly, or it does not, in which case the FCC would defer action, making it increasingly harder for LightSquared to attract the partners it needs.
It is interesting to note one subtle difference between the two letters that LightSquared sent to the NTIA and FCC, which perhaps reflects the different audience, but could also indicate that LightSquared is unsure whether the NTIA will ever be convinced to approve its network. The January 6 letter to the NTIA promises that the “final report [on interference issues] will be submitted to the FCC and NTIA so that those agencies may assess progress. If no progress, or insufficient progress, has been made, the FCC and NTIA would review the open issues and require resolution, giving due consideration to the public interest benefits of operation of the LightSquared network and the nationwide GPS system”. However, the January 21 letter to the FCC proposes simply that “we are willing to accept as a condition on a grant of our request the creation of a process to address interference concerns regarding GPS and, further, that this process must be completed to the FCC’s satisfaction before LightSquared commences offering commercial service”. In other words, the NTIA would no longer have control over the process of evaluating the interference concerns, and would therefore presumably be unable to veto the LightSquared network on interference grounds, if the FCC was determined to allow its operation.
One consultant suggests that it is the fault of the GPS community that receivers were not deployed with “proper” filters, which would have been “more expensive”. However, the US GPS Industry Council’s filing on January 7 highlights that GPS receivers may need relatively high sensitivity in the L-band satellite downlink (1525-1559MHz) because this band is also used for Differential GPS satellite broadcasts. As a result, it is hardly surprising that there could be the potential for problems (although the specific outcome will depend on whether GPS receivers actually become overloaded by any excess noise).
In this regard, another filing was made on Friday by Qualcomm, which indicated that they had examined some of the interference issues and determined that a phone using Qualcomm’s AGPS could “avoid self interference to the GPS receiver operating in the GPS L1 band when simultaneously transmitting data via terrestrial LTE on the L Band” by using a currently available filter. However, Qualcomm “has not determined whether this filter provides sufficient protection to avoid interference to the GPS receiver from LTE base stations operating on the L band”. The letter also notes that “Qualcomm is now in the process of evaluating the extent of interference from LightSquared L Band LTE base stations (i.e., downlink) into the GPS receivers of cell phones using Qualcomm’s AGPS solution, particularly legacy phones already in the market today, given the close proximity of the L and GPS L1 bands”.
Given LightSquared’s “record of concern and cooperation” and its “demonstrated…ability…to resolve potential interference issues” with GPS it is somewhat surprising that the potential for interference from LightSquared L Band LTE base stations into GPS receivers has apparently not previously been evaluated. It is also surprising that to date there has been no comment in the record from Nokia Siemens Networks, which is responsible for building and deploying the base stations for LightSquared and might therefore be expected to have a significant interest in resolving the issue (not least to protect its $7B contract).
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01.21.11
Posted in Financials, Handheld, Operators, Spectrum, TerreStar at 11:09 am by timfarrar
TerreStar Networks has now filed its Monthly Operating Report for December, which gives details of its revenues and cost of goods sold (COGS). In December 2010, TerreStar reported total revenues of $113,479 against a total COGS of $615,155, which compares to revenues of $91,626 and COGS of $125,189 in November 2010. However, TerreStar has not stated whether it is in compliance with the terms of the DIP Agreement, which requires both the “Roam-in Revenue??? and the “number of subscribers” to be no less than “85% of the amount set forth in…the Agreed Budget and accompanying projections” as of December 31, 2010. The target number of subscribers is not disclosed in the DIP Agreement, but the Agreed Budget details the Roam-in Revenue (i.e. excluding handset sales) as $89,000 for December 2010. Under the DIP Agreement, this information should have been made available to the “Administrative Agent and the Lenders” (although not necessarily disclosed publicly) within 3 business days after the end of each fiscal month.
Due to the lack of any breakdown for the December revenues in the Monthly Operating Report (and the completely inaccurate supporting comment that “Our revenue currently is derived primarily from a spectrum-leasing agreement”, when in fact it is TerreStar Corporation that has a spectrum leasing agreement with Harbinger), it is quite hard to determine whether TerreStar is meeting the covenants in the DIP Agreement. At an ARPU of $50 per month for the Genus phone as envisaged in the Blackstone business plan, then there would need to have been an average of 1780 Genus subscribers during the month to produce $89K of service revenues in December. However, my assumption is that the real ARPU for TerreStar (once AT&T’s share of the revenues is subtracted) is significantly lower than this figure, implying that potentially in excess of 5000 phones would need to have been activated by the end of December (to produce a month average subscriber base generating sufficient revenue) to meet this target.
It is hard to tell how many phones were shipped to distributors prior to November, as TerreStar has not filed a 10-Q for the third quarter of 2010 or a monthly operating report for October 2010. It is possible that no new phones and accessories have been sold to distributors, and the vast majority of reported revenues in December were “Roam-in” service revenues from AT&T. However, TerreStar reported COGS of over $615K in the month, and it would be somewhat surprising if this was all free equipment for demos, replacements, etc. (especially as we understand TerreStar did not originally intend to supply free demo phones to distributors). Notably, the Agreed Budget envisaged $321K of equipment sales during December, which far exceeds the total revenues actually generated during the month. Given the rapid expansion in “Roam-in” revenue in what was disclosed of the Agreed Budget ($10K in October, $40K in November, $89K in December) it also seems likely that the January 2011 budget target would require further substantial growth in sales, and therefore would be even more challenging to meet.
UPDATE: I’m told that no more than a few hundred Genus phones have been sold to end users (and many of these are likely to have been purchased just for an initial test of the service), so it is inconceivable that the DIP covenants related to “Roam-In” revenues and subscribers could have been met at the end of December.
FURTHER UPDATE (2/11): On February 3, TerreStar filed the third and fourth DIP amendments, confirming that the the covenants related to Roam-In Revenues (Section 6.11) and Minimum Subscribers (Section 6.12) had not been met at the end of December 2010 or January 2011.
The next question is where TerreStar goes from here with the Genus phone. Will it be able to reach agreement with suppliers such as Elektrobit to keep supporting the phone (especially when Elektrobit is owed a substantial sum of money by TerreStar)? Would any breach of the DIP conditions simply be waived, and decisions on the future of the Genus phone postponed until after the company emerges from bankruptcy? With all the uncertainty about what will happen on MSS-ATC spectrum, that would seem to be logical. However, the apparent lack of appeal for this supposedly game-changing phone also highlights why LightSquared is so keen to be granted permission for its partners to offer terrestrial-only services, and I would ultimately expect TerreStar to follow the same path.
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01.20.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:38 pm by timfarrar
According to Communications Daily, it appears that LightSquared’s request for the FCC to approve its revised business plan “isn’t expected to be taken up right away”, and the FCC’s forthcoming order related to the July 2010 MSS spectrum NPRM will not propose a Further NPRM to deal with the issues raised in the Notice of Inquiry (i.e. relaxation of the ATC gating criteria) at this point in time.
Today’s T-Mobile USA strategy presentation also poured cold water on expectations that T-Mobile has a pressing need to acquire more spectrum, with the company stating that it would not need additional spectrum until 2014. Interestingly, T-Mobile also stated that it expected demand to grow at a CAGR of 60% p.a., drastically lower than the 93% p.a. growth in the FCC’s October 2010 Mobile Broadband Spectrum Forecast (to put this into perspective it would mean data demand increasing by a factor of 6.5 times between 2010 and 2014, not 14 times as the FCC model assumes, completely eliminating the need for any additional spectrum at all in 2014 under the FCC’s calculations). This lack of urgency will allow T-Mobile to run a pretty effective Dutch auction between Clearwire and LightSquared, to see who is prepared to offer the best deal, as both companies get increasingly desperate to secure a partnership.
It is also quite striking that even though T-Mobile is still a potential buyer of spectrum from Clearwire (and would presumably look to buy 40MHz of national spectrum), the amount that could be raised from Clearwire’s spectrum sale is stated as “up to $2 billion“, implying that T-Mobile would be prepared to pay no more than about $0.17 per MHzPOP for Clearwire’s spectrum. Although, as I’ve pointed out before, there are numerous differences that need to be taken into account in drawing comparisons with LightSquared’s 40MHz of L-band ATC spectrum, anything even remotely close to a $2B valuation for LightSquared would be disastrous for Harbinger, given it has contributed “$2.9 billion of assets” to LightSquared and the $850M secured credit facility that closed in October 2010 would be first in line for proceeds from any asset sale.
This leaves LightSquared hanging on the telephone waiting for positive news from both the FCC and T-Mobile. It wouldn’t be surprising if the two were closely connected, because T-Mobile would presumably want the flexibility to offer terrestrial-only service in order for it to invest, and the FCC wouldn’t want to stick its neck out for LightSquared unless it was sure of the company’s viability. In the interim, it will be interesting to see if LightSquared follows through on its suggestion to the NTIA that it “requires quick favorable action [on its FCC request] so that we may continue to roll out our network” or whether it continues to move forward with network deployment so as to meet its original plan to have “a commercial launch before the third quarter of 2011 providing service to up to 9 million POPs”. However, as the song suggested “If I don’t get your call then everything goes wrong…”
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