03.04.09
Posted in Globalstar, Handheld, Inmarsat, Iridium, LightSquared, TerreStar at 11:52 am by timfarrar
Its been revealed today that EMS has taken a $3.4M charge to terminate its work on the Inmarsat next generation satellite phone, and that Inmarsat will be assuming “more control over production phases of the product development”. This is the latest in a long line of setbacks for the ISatPhone, with the first generation phone failing to achieve any meaningful traction and repeated delays in completion of the next generation phone since Inmarsat acquired the ACeS customer base two and a half years ago.
In our view, a key reason for the failure of the original phone was its poor performance on the Inmarsat I4 satellite, with users advised to use a hands-free kit and keep the phone antenna pointed at the satellite! It remains unclear if EMS had solved these technical challenges with the new phone (which are caused by the smaller 9m antenna on the I4 satellites, compared to the 12m antennas used by Thuraya and AceS), and therefore it is quite possible that serious constraints may still apply to the usability of Inmarsat’s new handheld, a concept model of which is shown below. Certainly we expect that it will be difficult if not impossible for Inmarsat to ensure satisfactory handheld performance in Alaska and much of Canada.
The launch of the new phone had already been pushed back from early 2009 to the end of the year, with features such as packet data dropped to save time and money. Now it looks like Inmarsat will experience a further delay until well into 2010, and yet another increase in costs, adding to a development program which already totals around $100M. We will be looking with interest at whether Inmarsat maintains its stated intention to sell the phone for around $500 retail, thereby making it even harder to recover its investment in handset development. Notably, this price point has already met with pushback from potential distributors, who would be unable to realize the margins they make today on the sale of other satellite phones.
The clear winner is Iridium, who will have even more time than they had expected to capitalize on the lack of handheld competition from Inmarsat, and who managed to complete the development of their new 9555 phone on time and at a cost of less than $10M. Other current and potential satellite handheld providers, such as Globalstar, Skyterra and TerreStar, who have faced a barrage of criticism from Inmarsat in recent months, will also be rubbing their hands with glee at Inmarsat’s embarrassment.
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02.17.09
Posted in Financials, TerreStar at 9:38 am by timfarrar
So Liberty Media has struck a deal to invest up to $530M in Sirius XM, in the form of secured loans, and will receive preferred stock convertible into a 40% stake in the company in exchange for its investment. The first $280M tranche from Liberty will be used to pay off $171.6M in bonds held by Echostar, which are due for redemption today. Subsequently, and subject to “various closing conditions”, Liberty will loan Sirius XM a further $150M and offer to acquire up to $100M of the company’s outstanding loans.
While this means that Echostar’s attempt to acquire Sirius XM has been defeated for the moment, it may be too early to write Echostar off completely. As we highlighted previously, Sirius XM would offer potential synergies with Echostar’s other investments (particularly in TerreStar), which will not be available to Liberty. Indeed other analysts have commented on how satellite radio holds little interest for DirecTV, and in our view, speculation that Sirius XM is a good route into mobile video is completely misplaced. We highlighted back in September 2006 that even if the mobile video opportunity is large (which is now far from certain), satellite radio is a very poor solution for providing the necessary handheld coverage, without deploying a huge number of repeaters. Unless either the Sirius or XM radio service was closed down, it is also unclear that there would be sufficient capacity for a meaningful video service, since both Sirius and XM each have only about 4-5Mbps of data delivery capability within their current architectures.
Instead, we consider that the potential to add two-way (OnStar-like) capability to the in-car service, using Echostar’s other assets (i.e. TerreStar), offers much more long term promise. Viewed from this perspective, Liberty’s investment should be seen more as an attempt to frustrate Charlie Ergen’s ambitions, and acquire the satellite radio service at a very attractive price, rather than a desire to add new mobile services to DirecTV’s offering. Conversely, we shouldn’t rule out the possibility of Echostar coming back with a better offer (or simply acquiring more debt than Liberty would want to buy back), given the much greater synergies available to it from an acquisition of Sirius XM, and the likelihood that Sirius XM will continue to struggle to generate enough cash to meet its debt repayments over the next year or more, while new car sales remain at a low ebb.
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02.04.09
Posted in Financials, ICO/DBSD, Spectrum, TerreStar at 10:50 pm by timfarrar
Its now been reported that Echostar has acquired a substantial portion of Sirius XM’s maturing debt as part of a possible attempt to take control of the company through a forced bankruptcy filing. This doesn’t come as a great surprise given Echostar’s other investments in satellite-delivered mobile TV (in Korea and China), in 700MHz spectrum that would likely be used for mobile TV in the US, and in TerreStar’s MSS-ATC system (where it has stated an interest in using the satellites for mobile video, most recently at the SATCON conference in New York last October). Indeed, a primary reason for the spin-off of Echostar from DISH was to enable Echostar to exploit new business models in mobile entertainment, while the slow growth DISH business would ultimately be sold to a telco or merged with DirecTV.
In our view, satellite radio has always had a far more viable business model than mobile TV, despite the recent downturn in new car sales making it difficult if not impossible for Sirius XM to achieve subscriber growth this year. We believe that satellite radio will remain an attractive feature for car manufacturers in the medium to long term both because the satellite infrastructure is ideally suited to providing a near ubiquitous car-based service with only a limited number of terrestrial repeaters and because the technology is not going to change dramatically over the next decade, avoiding the risk of existing OEM installations being left with no service (as happened to many OnStar subscribers when analog cellular networks were switched off). Compare this to cellular-based navigation and entertainment systems, where technology is advancing very rapidly and an aftermarket solution (or a flexible OEM solution such as Sync) is the most viable option for car manufacturers and end users alike. However, we also view a bankruptcy filing by Sirius XM as highly likely, because it will enable the company to renegotiate its biggest (controllable) expense – that of content rights. While some providers such as talk radio hosts may feel that there is a better deal on offer from terrestrial free-to-air networks, for most sports programming there is no viable alternative to satellite radio as a distribution mechanism, because no other broadcast (audio) medium can offer sufficient capacity and reach to deliver multiple simultaneous games to a widely distributed national audience. Some may argue that internet streaming is an alternative, but 3G and 4G wireless networks are (and will remain) ill-suited to providing continuous in-car coverage (not to mention the difficulty of extracting any revenue stream for content providers other than advertising from such users).
So if Echostar does now move to take control of Sirius XM, how will this fit with its other investments? Most obviously it seems plausible that TerreStar’s satellites could be used to provide a two-way communications channel for future generations of Sirius XM receivers, while Sirius XM’s repeater network could form part (although not all) of the necessary Ancillary Terrestrial Component (ATC) to ensure signal reception for TerreStar in urban areas. This would enable low cost integration of other services into cars, whether desired by the manufacturer (such as over-the-air fault monitoring) or paid for by the consumer (such as an OnStar alternative). Indeed, with the exception of mobile video (which we do not believe is likely to gain traction in cars, for the simple reason that the vast majority of satellite radio use is by solo commuters, who obviously couldn’t watch a video) this sounds surprisingly similar to ICO’s proposed Mobile Interactive Multimedia (MIM) service, and given Sirius XM’s strong relationships with most of the major auto manufacturers, this prospect could make it even more difficult for ICO to move forward with a commercial launch of MIM. Perhaps it might even provide an incentive for ICO to contemplate merging with TerreStar (as has often been rumored in the past)? Certainly Echostar’s interest in satellite radio is likely to shake up the MSS sector as well.
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01.21.09
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Regulatory, Spectrum, TerreStar at 9:46 am by timfarrar
Last week, the FCC awarded ICO its ATC license, with no requirement to enter into a ground spare contract at this stage. Indeed ICO will only have to demonstrate 30 days before commencing ATC service that “firm arrangements are in place to meet the spare satellite requirement” within 1 year of service initiation. Of course, since a satellite would normally take around 2 years to construct, ICO would have to enter into a ground spare contract well before that 30 day notice period. However, ICO has gained considerably more flexibility to keep its expenditures to a minimum, while pursuing resolution of its litigation with Boeing and waiting for a more favorable economic climate in which to launch commercial service.
With this ruling, along with Globalstar’s ATC license grant last year, the FCC has shown a desire to be flexible in its interpretation of the ATC rules, so as to ensure that ATC deployments do eventually take place. Arguably, this flexibility has advantaged operators such as ICO and Globalstar, over TerreStar and Skyterra (formerly MSV), who have committed to considerably greater capital expenditure, based at least to some degree on a more cautious interpretation of the ATC requirements. Most notably, TerreStar is already well advanced with construction of its ground spare satellite, although we have heard rumors that work may have paused in anticipation of the ICO ruling, and (unless TerreStar gains a European license in the near future and decides to use the satellite there) we expect that construction will soon be formally suspended to save money, on the assumption that this will not impact TerreStar’s pending ATC application.
A future question for the FCC with regard to ATC “flexibility” may well relate to what level of satellite performance is needed to justify that an ATC service is truly “ancillary”. TerreStar and Skyterra have built very large and powerful (and expensive) satellites, in order to deliver voice and data connectivity to “standard” mobile devices without external antennas. ICO and Globalstar’s satellites are rather less capable (and cheaper), but if they are not required to deliver fully reliable handheld satellite voice services, then these satellites could also operate with “standard” mobile devices. For example, if the only test required is to complete a call from a handset on a tripod in an open field, with no head blockage or obstruction from trees etc, then a far less expensive satellite is required than if link margin is needed to overcome these obstructions and the call is made or received by a real person walking around with the phone.
Given that many hundreds of millions of dollars of satellite construction costs are at stake, it will be very interesting to see how the FCC ultimately decides this issue and therefore who has made the right call with their satellite design.
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10.09.08
Posted in Financials, ICO/DBSD, Inmarsat, Spectrum, TerreStar at 10:52 pm by timfarrar
We now know that there are at least four applicants for the European 2GHz MSS spectrum licenses, namely Solaris (the SES-Eutelsat joint venture), Inmarsat, ICO and TerreStar. Applications were due by October 7, and the first phase of the selection procedure (identifying which applicants are technically and commercially “qualified”) should be completed in the first half of 2009. There are 2x30MHz of spectrum available, which is sufficient for 2 or at most 3 applicants, so the current list of applicants will certainly have to be cut back during the selection process.
Perhaps the most surprising application is that from TerreStar, given that it has to date failed to raise external funding for TerreStar Global (its European venture) despite attempting to do so over the last year. TerreStar may calculate that it has little to lose, since it has committed several million dollars to EADS for initial preparatory work and it has already signed a launch agreement with Arianespace. From this point of view, its financial commitments to the European project to date are equivalent to those of Inmarsat (which has stated it will only spend “single digits millions of dollars” on “business development activities” prior to securing a license), although of course TerreStar does not currently have sufficient funding available to complete construction and launch of a European satellite, in addition to its two North American satellites (one of which is a ground spare). However, since both Solaris and Inmarsat strongly prefer 2x15MHz over the 2x10MHz which a three way split would imply, we assume that if TerreStar’s application was approved, it might subsequently seek to team up with one of these two competitors, rather than pursuing a standalone project. For example, Solaris has already indicated that it may acquire a follow-on satellite to the Eutelsat W2A to offer wider pan-European coverage.
Its also worth noting that in addition to putting in an application, ICO is separately seeking to challenge the legality of the EU’s licensing process, in an attempt to preserve the spectrum priority rights of its MEO satellite that was launched in 2001. ICO had been hoping to know the outcome of its litigation with Boeing before the European 2GHz applications were due, but to date it appears the jury has not reached a verdict (after three weeks of trying). Clearly, given the amount of money at stake, this litigation will have a significant impact on how ICO decides to move forward from here on.
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09.16.08
Posted in Financials, ICO/DBSD, TerreStar at 9:04 pm by timfarrar
TerreStar announced today that it has sold its remaining stake of 29.9M shares in Skyterra to Harbinger and other investors for a total of $123M. This will meet TerreStar’s capital needs into 2010, well beyond the delayed launch date for TerreStar’s first satellite in 2Q2009.
We find it particularly interesting that this transaction took place in the week in which ICO’s ongoing lawsuit with Boeing has gone to the jury for a decision. There has been speculation in the past that eventually ICO and TerreStar will merge, to secure a much improved spectrum position, and a key challenge in determining the value of ICO’s business has been the uncertainty in respect of the Boeing lawsuit. ICO faces a deadline of August 2009 to refinance over $750M in convertible bonds, so we wonder if the upcoming resolution of this lawsuit might provide a catalyst to restructure and merge with TerreStar. Certainly TerreStar’s actions in obtaining further funding would help to strengthen its position in any such negotiations.
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