So it seems like everyone has finally woken up to Amazon’s tests of Globalstar’s TLPS service that I wrote about in early July. Presumably “people with knowledge of the matter” are talking to the press now because Globalstar is trying to get an NPRM issued by interim FCC Chairman Clyburn, before she steps down in favor of Tom Wheeler, who may be more likely to opt for lengthier approval process (as I noted last month, he appears to favor using TLPS as the test case for a negotiated “harm claim threshold” approach).
Of course the longer that approvals take, the more chance that one or more ecosystems for alternative bands will emerge, and undermine the value of TLPS, so its hardly surprising that Amazon rivals such as Microsoft expressed their “concerns about interference to unlicensed uses in the 2.4GHz band” after Globalstar’s experimental license application gave details of the test locations, and the Bluetooth Special Interest Group has been pushing to delay any NPRM “until a full technical analysis of the impacts has been completed and the impact on the existing users of the ISM spectrum is understood”.
Some questions also remain about the compatibility of TLPS with services other than Bluetooth, particularly legacy BAS license holders, which caused the FCC to limit TLPS testing in Silicon Valley to lower power levels and indoor locations only (and has prompted Globalstar to conduct the latest round of testing in New Orleans where there is no legacy BAS usage, although there are some nearby Part 90 public safety users).
TV White Space spectrum is one possibility as a substitute for TLPS, but a more direct alternative appears to be the 3550-3650MHz spectrum, especially if the FCC follows the licensing approach proposed by AT&T and Google in a joint letter to the FCC on August 6, urging the Commission to move forward with allocation of the 3550-3650MHz for small cell deployments via a streamlined (i.e. low cost) auction, with any applicant allowed access to a secondary exclusive tier of spectrum if they commit to a “substantial service requirement???. So it is obviously extremely important, if Globalstar is to have any chance of realizing the $3B it has maintained that its spectrum is worth, that approvals are received quickly.
However, what Bloomberg’s article didn’t appear to have any clue about, is how Amazon might actually use the spectrum and generate enough value to justify paying Globalstar billions of dollars. In my view, the only realistic plan (as GigaOm notes) is a dedicated WiFi deployment, allowing its own devices (such as Kindles) to use a very extensive small cell network instead of relying on cellular networks for data delivery.
To do that Amazon has to get a device into a huge number of homes, and hope that the higher power and longer range of TLPS (compared to unlicensed WiFi) provides widespread coverage in urban areas. The ubiquitous availability of WiFi access points is the theory behind FON, and its notable that in the UK, BT (which has provided FON service through all of its in-home DSL routers for several years) is now switching to licensed 2.5GHz spectrum that it bought in the 4G spectrum auctions earlier this year, in order to provide coverage over a greater distance.
So really the most interesting question here is how Amazon intends to get a TLPS access point into millions of homes. It seems highly likely that Amazon is developing a product much like an Xbox, which can serve as a “hub” for gaming and for delivery of its streaming video services (which perhaps explains Microsoft’s concerns about TLPS), connected to existing in-home broadband connections. Remember that Amazon has not been as successful as Netflix in ensuring that access to its streaming video service is widely available on consumer electronics devices like DVD players (probably because it is less willing to pay incentives for acquisition of streaming video subscribers), suggesting that Amazon may well want to push its own device instead. Its important to realize this is not about Amazon providing a rival broadband access service, like DISH’s wants to do with its former satellite spectrum in the AWS-4 band, but instead would compete with Microsoft’s Xbox and the home media hubs planned by Intel, Google and Apple, amongst others.
I’d speculate that Amazon will want to provide its “hub” to Prime users pretty cheaply, perhaps even for free, and its notable that Amazon has also been working on remote video processing capabilities using its cloud servers, potentially enabling it to simplify (and reduce the cost of) a gaming device. I’d also guess that Amazon wouldn’t want the launch of this device to be constrained by the timeline of TLPS approvals, not least because the FON-like service is only one part of the entire offering. Indeed its previously been rumored that Amazon is planning to launch a set-top box for video streaming as soon as this fall.
However, if TLPS looks likely to gain FCC approval (with the FCC establishing a way forward in the near future), an initial device launch could take place using standard WiFi (and perhaps other solutions like White Space spectrum), with the embedded capability to upgrade to TLPS, once approval comes through. That could mean an upfront option payment for Globalstar (perhaps some tens of millions of dollars?), if Amazon wants to embed the TLPS capability in its devices, but it may take a while longer before Globalstar finds out if it is going to achieve much more significant returns from its spectrum assets.
Back on May 31, LightSquared asserted in its motion to retain Jefferies as placement agent for its exit financing that “both LightSquared and Jefferies are highly confident [that the retention] will lead to fully committed financing in an amount likely in excess of the face amount of the Prepetition LP Obligations, the Prepetition Inc. Obligations, and the DIP Obligations at relatively low costs to the LightSquared estates”. Two weeks ago, I noted that LightSquared had been forced to scale down its planned $3B debt raise to $2B, and would seek to force Ergen/Sound Point to accept PIK second lien debt instead of being repaid from the exit facility.
However, on Friday night LightSquared acknowledged that exclusivity had been lost and that competing plans for reorganization would be filed, followed by an auction of the company. Moreover, I’m told that today LightSquared and Jefferies dropped the planned exit financing facility completely (not just putting it “on hold” as was reported last week).
Falcone apparently told potential investors that he was unwilling to go forward because the facility was “too expensive” (with warrants for 15% of LightSquared’s equity being granted upfront to potential lenders). However, I understand that the change of direction appears to have resulted from LightSquared being hauled over the coals by the bankruptcy court last week for ignoring Ergen’s $2B cash offer, and the judge was unwilling to accept LightSquared’s contingent reorganization plan, which would have only been funded after FCC approval was received. As the Secured Lenders noted in their submission on July 9:
“Since these Chapter 11 Cases were filed over a year ago, the Debtors have told the Court repeatedly that the only way to realize value is to pursue a resolution of their regulatory problems with the Federal Communications Commission (“FCC”), and that all they needed was sufficient “runway” to achieve their objective. When the Cases were filed in May 2012, the Debtors believed they needed about six months to get there. In January 2013, during the exclusivity hearing, the Debtors’ management testified that they still needed about six months to clear the regulatory hurdles to value maximization. Today, they claim that their elusive objective remains six months or more away…In reality, the Debtors have no idea whether or when they will ever get regulatory approval.”
Now LightSquared has set out a lengthy timetable for an auction in December 2013 (which is already subject to an objection from the Secured Lenders), because (in fantasyland) Harbinger is apparently highly confident that the FCC will approve LightSquared’s request in November, enabling them to raise money for a counterbid on the back of that approval, before the auction actually takes place. However, even if LightSquared’s proposed timetable is approved (and it appears that the judge is actually losing patience with the company’s repeated delays), it seems rather more likely that Falcone is instead going to be 0 for 3 in his battles with Ergen (with LightSquared following the path trodden by DBSD and TerreStar).
I suppose at least for the time being, Phil can still tell everyone he’s “highly confident” that he will ultimately win his battle with the SEC, but again perhaps he now shouldn’t be as highly confident as in May when he “blindsided SEC officials” by publicly declaring that he’d escaped with a “slap on one wrist“.
Last week, John Dooley of Jarvinian, who have been conducting tests of Globalstar’s proposed TLPS service (which is intended to provide a dedicated, managed WiFi channel) made a filing with the FCC in which he stated that the recent TLPS testing in the Bay Area was undertaken “to help a major technology company assess the significant performance benefits of TLPS for a transformative consumer broadband application”. His filing did not state the name of this company, but the testing under Globalstar’s experimental license (issued by the FCC on April 1) was undertaken at 3 locations in Cupertino and Sunnyvale.
Of course, Amazon’s potential interest in Globalstar’s spectrum appears to be a key reason why Thermo agreed to invest another $85M into Globalstar in May, in order to complete the 5.75% notes exchange and restructure Globalstar’s $586M loan guaranteed by COFACE. Many investors are now also eagerly expecting the FCC to issue an NPRM setting out proposed rules for TLPS, although it is somewhat unclear whether Chairman Clyburn will act on her own, or if any decision will have to wait for incoming Chairman Wheeler (who has worked extensively on interference issues as chairman of the FCC’s TAC, which issued a report in February suggesting TLPS would be a good candidate for the FCC’s new approach to adjacent band interference).
The fact that the Globalstar experimental license will last for two years suggests that it may take some time for all interference issues to be resolved (including the dispute with BAS interests which is becoming increasinglyheated) and/or for Amazon to make a final decision on whether to use TLPS or other spectrum for its planned new application. If Amazon does choose Globalstar then this could lead to a substantial windfall: Globalstar has asserted that its spectrum is even more valuable than that of Clearwire, because of the unique compatibility of TLPS with existing WiFi equipment, implying that it puts a value of at least $2B on the 22MHz of TLPS spectrum.
With the FCC’s intention to license additional spectrum for unlicensed or shared use in the 3600MHz and 5GHz bands, along with promotion of white space access technology, Amazon may have a choice of other cheaper spectrum (albeit without the same ecosystem) in the near future or even using capacity on an existing wireless network. However, until we find out more about the nature of Amazon’s plans it will be hard to know which spectrum is most suitable, and how much Amazon would want to pay to gain access to it.
Today Charlie Ergen’s next battle has officially begun, with the filing of LightSquared’s motion to extend exclusivity and potentially reject Ergen’s purchases (through Sound Point Special Opportunities Fund or SPSO) of LightSquared’s debt. Its important to note that Ergen personally (not DISH) owns SPSO, and Ergen (through an entity named L-Band Acquisition Corp or LBAC) made the $2B offer to acquire LightSquared back in May.
LightSquared wants to extend exclusivity to give it more time to secure approvals from the FCC, because Jefferies is currently trying to get commitments for a $3B exit financing loan (which should be confirmed one way or the other this week). That loan, which carries an 8% interest rate plus substantial warrants for LightSquared equity, would pay off all of LightSquared debts and give Harbinger another year or more to find a buyer for LightSquared’s spectrum, while allowing the company to meet all of its obligations (including a resumption of lease payments to Inmarsat in April 2014).
However, LightSquared would not be permitted to draw down the loan unless and until the FCC has granted LightSquared rights to use the 1675-80MHz spectrum band. LightSquared has assured potential investors that it expects approval from the FCC this fall, shortly after Tom Wheeler takes over the chairmanship of the FCC, and that there will be no auction of the 1675-80MHz band (instead LightSquared will pay $80M for weather balloon relocation plus a further $170M “fee” in 2017). LightSquared also believes that it will be free to use its L-band uplinks without any GPS problems, as soon as the ruling is issued, and has told potential investors that the lower L-band downlinks will be available for use in 2015.
That sounds a lot like fantasyland (for example the FCC’s proposed FY2014 budget indicates that the 1675-80MHz spectrum will not be available until 2017 after weather balloons have been relocated), and some investors are apparently considering making a commitment in the expectation that no approvals will be received, because then they will get their commitment fees (in cash), but never have to put their money at risk.
A plausible best case for LightSquared is that the FCC defines a way forward later this year (i.e. more GPS testing and work to define interference standards), but it seems inconceivable that the FCC could simply hand over the 1675-80MHz spectrum band without at the very least defining service rules and an allocation framework through an NPRM and then conducting a 9-12 month comment cycle before any ruling is issued. More likely is that Wheeler has other things on his plate (like the incentive auctions), and a giveaway to LightSquared (along with alienating the DoD through more GPS testing) is not worth the political battle.
LightSquared is suggesting that a $3B loan would be well covered by the spectrum value, because it considers its spectrum to be worth the same as AWS-1 spectrum ($0.69/MHzPOP based on the Verizon-SpectrumCo transaction) and that there will be strong demand for its spectrum from AT&T and Sprint, who LightSquared believes would want to pair L-band uplink spectrum with WCS or BRS/EBS downlink spectrum respectively. While AT&T has the power to create a new ecosystem and has permission from the FCC to use WCS in an all downlink configuration, its hard to see why AT&T wouldn’t instead just buy the 1695-1710MHz uplink band which will be auctioned (very likely as unpaired spectrum) next year, with little competition from other carriers (except possibly DISH).
Sprint on the other hand has certainly learned its lesson from paying Apple $15.5B to ensure its own non-standard LTE spectrum was included in iPhones, and it would be crazy to try and make another unique band pairing when it will be far more straightforward to simply make use of the globally allocated BRS/EBS band in SoftBank’s small cell vision. Remember that Ergen wanted to buy Clearwire spectrum to take advantage of the emerging handset ecosystem in this band (as a mobile small cell play), and was going to use the AWS-4 spectrum for fixed wireless broadband (backhauling the mobile small cell traffic), so it wasn’t necessary to force the creation of a handset ecosystem in AWS-4. There’s no way that LightSquared’s spectrum will get an ecosystem outside North America (because international regulators won’t rush to address GPS issues and the 1670-80MHz band will still be allocated for meteorological systems elsewhere in the world), and without AT&T or Verizon, no-one will create an ecosystem in the US either.
So why is Ergen interested in buying LightSquared? If he’s now stuck without a wireless partner (and I don’t expect him to bid for T-Mobile now he won’t control any Clearwire spectrum), then he won’t be able to sell the AWS-4 spectrum to AT&T or Verizon (the two carriers who can force the creation of a new ecosystem at little cost to themselves) until after the next Presidential election, so it would be possible to take this time to reband AWS-4 spectrum to downlink and use LightSquared as uplink. More importantly, LightSquared’s spectrum is part of Ergen’s leverage in a battle with DirecTV (due to the upcoming Mexican coordination), which in my view is a far more plausible near term merger target for DISH, especially if the promise of a fixed wireless broadband network is sufficient enticement for the FCC to approve a DISH-DirecTV merger.
Of course, prospective lenders to LightSquared are therefore also betting that they will ultimately be backstopped by DISH’s interest in the spectrum band. Indeed some even think that Ergen will be prepared to bid $3B+ for the spectrum (despite the fact that this is far higher than DISH offered for Clearwire’s spectrum). Lenders might instead want to consider that by next year, a DISH-DirecTV merger will either have happened or not, and LightSquared’s spectrum will then offer little in the way of leverage to DISH.
In addition, the forthcoming FCC auctions of 75MHz of spectrum (H block, 1695-1710MHz uplink and AWS-3 likely paired with 1755-80MHz) may reset some expectations with regard to spectrum pricing, especially in unpaired uplink bands. Given that the new $3B loan will all have been spent within 12-18 months of emergence, it therefore seems there would be little reason for anyone interested in this spectrum not to wait until LightSquared once again runs out of money, and the price of the debt falls.
The one piece of good news, for Falcone, if not for the new lenders, is that as part of any exit financing deal, it seems that Harbinger will be released from any liability for misleading investors during the sale of LightSquared debt in 2010 and 2011 (when lenders were assured that GPS interference was no problem). So even if Phil ultimately does lose all of his investment in LightSquared, at least he will then only have to account to Harbinger’s investors and not to LightSquared’s investors as well.
Some observers may be wondering if Charlie Ergen is serious when he suggests using LightSquared spectrum as an alternative to Clearwire, as suggested by today’s news that DISH made a $2B cash bid last week to buy LightSquared (note that the offer is for LightSquared LP not Inc, i.e. ignoring the 1670-75MHz Crown Castle lease). After all, some might think this is yet another in a series of increasingly implausible maneuvers, as DISH tries desperately to find a way to exploit its spectrum assets.
However, its important to note that this story comes immediately before Clearwire shareholders were set to vote on Sprint’s bid for the company. That’s curiously similar to the leak of news that DISH was interested in buying T-Mobile (also to Bloomberg), just a few days before DISH made its bid for Sprint last month, so I wonder what Charlie Ergen has in mind this time around.
In the case of LightSquared, the company still has exclusivity to propose a plan until the end of this month, while DISH has indicated that its offer only remains valid until May 31, so DISH has plenty of outs if it wants. In addition, its hardly likely that Harbinger would accept an offer that would wipe out their equity, even if value is left for preferred holders (where Sound Point owns an 80% stake and would thus control the fulcrum security in any reorganization) after paying off the $1.7B plus interest due on the term loan.
LightSquared’s spectrum is certainly not a near term alternative to Clearwire, given that it will take years for use to be approved, and an L-band ecosystem won’t develop until well after that for DISH’s AWS-4 spectrum. On the other hand, the L-band has near term value to DISH because of the Mexican situation, and could be a long term backup option, if DISH plans to sit on its AWS-4 holdings for the next several years and wants to reband it to downlink spectrum, so its worth forcing Harbinger’s hand and ensuring that LightSquared’s assets are ultimately auctioned off.
However, just as the T-Mobile story was a red herring to distract from DISH’s planned bid for Sprint (even though it remains a possible alternative option for DISH), I wonder if the LightSquared story indicates that DISH has another plan to announce in the next few days. Could it be a deal to buy spectrum from Clearwire, if Sprint’s bid is unsuccessful? Certainly the suggestion that LightSquared is a viable option might help DISH in negotiations with Clearwire over price.
Another possibility is that DISH is trying to persuade Clearwire shareholders to sell out to Sprint for a relatively lower price, on the basis that DISH could then go all out to buy Sprint, without worrying about Crest trying to hold out for more money for Clearwire investors. Finally, and perhaps the biggest stretch: could DISH be poised to reach an understanding with SoftBank that it will gain control of some of Clearwire’s spectrum if SoftBank succeeds in buying Sprint and Clearwire without a significant increase in the current bids?
News tonight that Clearwire may decide to delay the vote on Sprint’s bid certainly suggests that Sprint might now succeed in securing the votes to buy Clearwire with only a modest increase in its bid price (to say $3.30 to $3.50 per share). In that case, DISH would have to either negotiate with or outbid SoftBank if it is to secure access to the Clearwire spectrum it wants, unless DISH succeeds in persuading the FCC that Sprint should be forced to dispose of some of Clearwire’s spectrum as a condition of closing the deal.
At least from SoftBank’s point of view, DISH would certainly be a more palatable purchaser of Clearwire’s spectrum than Verizon. If that presents too much of a problem (from the point of view of Sprint shareholders who would then be unable to realize the benefit of a rival DISH bid), could Sprint sell some 2.5GHz spectrum to T-Mobile instead, presenting DISH with another indirect route to acquire this spectrum?
Many epitaphs are being written today, and perhaps even a few pitches for book deals, bringing back memories of my comments to Bethany McLean for her Vanity Fair article two years ago. However, some apparently think the LightSquared saga has a few more chapters to be written, after Chairman Genachowski’s comments yesterday that “he expects LightSquared Inc. to eventually win approval for using its airwaves”. Since I actually asked him the question that prompted this statement (at the Jefferies conference) about what lessons he took from the LightSquared debacle (a characterization he disputed), I thought it would be useful to set the comment in context.
It was prefaced by the statement that Genachowski believed all satellite and broadcast spectrum was underused and should be reallocated for flexible terrestrial mobile broadband use, to meet the “obvious” spectrum crisis, and because of this “crisis” the L-band spectrum was “too valuable to be left unused”. Of course, he didn’t state any timeframe for action, and acknowledged that it was not possible to use the L-band spectrum without new receiver standards or similar changes to protect GPS (which will take years).
Recent actions, such as tomorrow’s NPRM on Qualcomm’s plan to use Ku-band satellite spectrum for Air-To-Ground communications and the effort to allocate C-band spectrum for small cells certainly bear out Genachowski’s lack of regard for satellite services, and so its not surprising that Globalstar has been urging him in recent days to move forward with an NPRM on its TLPS plan “prior to the Chairman’s expected departure later this month”.
In contrast, observers I’ve spoken with expect his successor, Tom Wheeler, to have a keen appreciation of the challenges associated with reallocation of spectrum, by virtue of his chairmanship of the FCC’s Technological Advisory Committee (whose February 2013 white paper on harm claim thresholds notably didn’t even mention attempting to solve the LightSquared/GPS conflict). I’m also told that given the battle that will take place with the DoD over gaining access to the 1755-80MHz spectrum for an auction next year, it is highly unlikely to be worth extending this fight to cover LightSquared/GPS as well.
So why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve been refining my view of Ergen’s plan for Sprint, Clearwire, LightSquared etc and will shortly be issuing the next update to last week’s report on DISH’s wireless ambitions. On the LightSquared front, what has emerged is that Sound Point has now acquired the majority of LightSquared’s Term Loan debt, and there appears to be reasonably wide consensus that both Ergen and Carlos Slim are backing Sound Point. I’ve also concluded that the near term focus is likely to be on the leverage that gaining control of LightSquared would give Slim to get a Mexican broadcast license, as part of a settlement with the Mexican government to resolve the dispute over spectrum allocation for MEXSAT. That could provide a windfall for Slim (and DISH Mexico) that is worth far more than the $600M-$700M that Sound Point has paid for what is likely to be a controlling stake in a reorganized LightSquared.
In those circumstances, there would be little point in Sound Point offering to buy out the rest of the term loan holders, and instead a debt for equity conversion of the LP Term Loan seems much more plausible. That would leave the remaining Term Loan holders with illiquid equity in an entity with only a very long term possibility of owning valuable spectrum (assuming that any further payments to Inmarsat can be deferred indefinitely until terrestrial usage rights can be established in the L-band) and perhaps some optionality based on future litigation. That might come as a big shock to those who believe that the only outcome is that the Term Loan will get taken out at par plus accrued interest, because of how important LightSquared’s spectrum assets are to Ergen!
The CTIA released its latest semi-annual survey of the US wireless industry this morning, and for the firsttime in years, the press release did not focus on growth in data traffic. That’s perhaps not surprising, given that traffic growth has now fallen sharply (to only 69% in 2012 over the 2011 total and 59% in 2012H2 compared to 2011H2) and these statistics are hardly supportive of the message that there is an impending spectrum crisis.
Ironically, CTIA instead trumpet how high US wireless capex is compared to the rest of the world and how the number of cell sites is growing rapidly, when previously the message of those (including the FCC Chairman) campaigning for more spectrum was that unless 300MHz of spectrum was made available, operators would be forced to invest far too much in their networks and build an implausibly high number of cellsites. Amusingly enough, the FCC’s erroneous model from October 2010 asserting that this economic cost would be $120B (which the authors took their name off), has just been disinterred, and supposedly updated (with the same errors as the FCC made), by those seeking to ensure that no limits are placed on AT&T and Verizon’s participation in the broadcast incentive auctions.
The lack of discussion of data traffic is a shame, because the CTIA survey actually shows an interesting rebound in the growth of traffic per device in the second half of 2012, with 15% growth compared to only 3% in the first half of 2012, as shown in the chart above. That resulted in 2012 traffic growth coming at almost 70% compared to the 60% growth that would have resulted from a continuation of the trend seen in the first half of the year. The two primary factors causing this rebound are likely to be that:
1) data caps caused a rapid one-off adjustment in offloading to WiFi during the first half of the year (which did not repeat in the second half, even though WiFi usage continued to grow), and
2) take-up of LTE increased significantly in the second half of the year (after the launch of the LTE iPhone), and higher average speeds meant that users of LTE devices consumed more wireless data than on their previous 3G devices.
Interestingly the 69% year on year growth appears broadly consistent with the 62% growth in US wireless data traffic estimated by Cisco between December 2011 and December 2012, although the CTIA survey also indicates that Cisco’s traffic estimates are around 30% higher than the actual amount of wireless data traffic in these months.
Looking forward, the most intriguing question is whether this pickup in traffic growth per device will be sustained into 2013. If it is then we could see year-on-year traffic growth in the US for 2013 come in as high as 70%, but if it doesn’t, then traffic growth will fall to 50-60%. My assessment is that traffic growth per device will be faster than in the first half of 2012, now the adjustment to capped data has taken place. However, once the early adopters have mostly switched to LTE and as customers start to predict and control their data usage, the rate of growth will likely be slower than in the second half of 2012.
So a reasonable estimate for overall US wireless traffic growth in 2013 is around 60%, falling to 50% or less in 2014, as smartphone penetration reaches saturation, assuming that there is no step change in data pricing. That appears unlikely, because AT&T and Verizon’s family data plans limit their room for maneuver: if Verizon or AT&T offered more wireless data for the same amount of money, then many customers would trade down to a less expensive plan.
Its interesting to see that two papers have recently emerged focusing on the loss of LightSquared’s spectrum “rights”. One of these, by Lenard and White of the “Technology Policy Institute” is little more than a puff-piece for LightSquared, apparently paid for by the company (the bills submitted by LightSquared’s lawyers document their meetings with the “economist” writing a paper for them), though the authors never state that this is the case. This report was released on Tuesday (April 30) as LightSquared attempts to ramp-up its PR efforts once again in the wake of the FCC granting LightSquared the Special Temporary Authorization it has been seeking for the last two months to test LTE in the 1675-80MHz band (apparently a farewell gift that Chairman Genachowski decided to leave on his successor’s desk).
The Lenard and White paper uncritically recites LightSquared talking points, without any understanding of either MSS or GPS services, and simply recommends that the FCC do as LightSquared requests. There is no mention whatsoever of MSS providers such as Inmarsat and Iridium (implying instead that LightSquared and Globalstar are the only licensees of the L-band and Big LEO band spectrum), and bizarrely the paper asserts that for the last 25 years the MSS spectrum “was, for all practical purposes, unused”. Similarly for GPS, the paper simply asserts that the “least cost option” would have been for LightSquared to have been allowed to go ahead, leaving “individual GPS owners” to be “responsible for retrofitting or replacing their GPS devices so that they would work properly”. Of course, no mention is made of the use of GPS in aviation and the timeline and costs involved in changing out safety critical equipment.
A more serious academic paper was issued the previous week by Hazlett and Skorup of George Mason University, which makes some broadly similar points, but comes to a rather more nuanced conclusion. However, this paper also suffers from similar defects, particularly when it dismisses the cost estimates attributed to GPS disruption by asserting that “Simple Coasian analysis establishes this [$10B LightSquared license] valuation as a cap on costs to GPS users” because the “cost of any “harmful effect” is “bounded by the most efficient (least costly) mitigation technology” which would be buying LightSquared’s license. The “cost estimate” of “an astounding $245 billion” (and the similar estimates by the FAA of $60B for aeronautical users) is of course nothing of the sort, it is a loss of social welfare benefits to GPS users if GPS service was rendered unusable. Hazlett and Skorup assert later in the paper that that “easily more than $100 billion in social losses [were caused] by pre-empting the creation of new LTE band” without apparently any thought that their purported $10B cap should obviously bound these losses in exactly the same way (as an aside the $10B number was actually the windfall to LightSquared from the FCC’s waiver, not the value of the licenses themselves). If it does not bound either estimate, then of course Hazlett and Skorup are implying that the social loss of “a new LTE band” is less than the social loss that would be caused by eliminating GPS service (which hardly seems surprising given that there are many other LTE bands available), but the question of what approach minimizes the overall social losses (e.g. requiring many years of transition) is left completely unresolved.
More importantly, Hazlett and Skorup then go on to compare the situation between LightSquared and GPS (which they describe as a “tragedy of the regulatory commons”) with what they suppose was the “successful rationalization of the L-band” achieved between LightSquared and Inmarsat, in the form of the December 2007 Cooperation Agreement, which supposedly resolved the “severe in-band interference problems”. This meant that “the FCC did not test radios, seek more clarity of “harmful interference,” or determine what reliability level Inmarsat’s customers would receive due to potential “harmful interference” from LightSquared’s operations. They trusted the parties to make efficient choices with respect to these concerns.”
Of course, while that interpretation might accord with LightSquared’s portrayal of the Cooperation Agreement, it is far from reality. Up until 2007, independent of the interference disputes, LightSquared’s predecessor (MSV) and Inmarsat had been engaged in a series of disputes over 3MHz of spectrum that MSV had previously loaned to Inmarsat and which Inmarsat was keen to retain for its new I4 MSS services (note that the previous year, when Inmarsat was unable to reclaim spectrum that it had loaned to Thuraya, Inmarsat was forced to suspend certain services in the South Atlantic ocean). By signing the Cooperation Agreement, Inmarsat was granted the right to retain this “disputed” spectrum until MSV raised funding to pay Inmarsat the spectrum lease fees due under the agreement, and if MSV defaulted (which was seen as the most likely option at that time, given the enormous amount that would need to be paid to Inmarsat), Inmarsat would retain the disputed spectrum in perpetuity.
When MSV actually secured substantial further investment from Harbinger, I understand that Inmarsat came to the conclusion after internal testing and analysis, that there was no chance that the deployment of MSV’s network would actually happen, under the parameters agreed in the Cooperation Agreement, because of the interference that would be caused to GPS systems. As a result, Inmarsat decided that even if LightSquared did actually initiate payments under the Cooperation Agreement (Inmarsat was to be paid $250M to cover its costs for fitting filters to its own terminals in addition to other very substantial rebanding and lease payments), there was no point in rushing to develop and fit these filters. Indeed the process required to gain regulatory approval for new aeronautical filters was sufficiently long that approval wouldn’t even be possible until 2013 or beyond. The Cooperation Agreement was cleverly worded: Inmarsat was given absolute discretion to simply replace the affected terminals if LightSquared’s network was ever deployed, and so Inmarsat simply banked LightSquared’s payments, and incurred virtually no costs. Then in April 2012, with the deployment of a new MEXSAT system on the horizon, Inmarsat kept the Cooperation Agreement in place, because of more subtle wording which requires LightSquared to hold Inmarsat harmless from any requirement to give spectrum back to the Mexican government when MEXSAT becomes operational.
All of that hardly seems to be a “successful rationalization of the L-band” as Hazlett and Skorup suggest. It sounds to me more like a sophisticated player (Inmarsat) taking advantage of another operator that is desperate to have some agreement to show to a gullible hedge fund manager, so that he would invest more money to keep them afloat.
I guess at least from that point of view it was successful for MSV’s then-management, because Falcone proceeded to commit a further $600M in the following seven months to complete and launch the MSV satellites, presumably taking advice from his due diligence advisers (who I’m told specialized in analyzing “fast food restaurants”). My guess is that by the time the GPS problems became apparent to Harbinger, all their money had been spent, so all that was left was to persuade other hedge funds to put their money in alongside Harbinger’s and try to keep up the pretense that all was well. After all, LightSquared’s CEO repeatedly told investors that GPS was not a problem, so that more money could be raised, when it was clear to me and others that was simply not the case.
The real question is when LightSquared came up with the end game of litigation or a spectrum swap to escape from this self-inflicted debacle. Was Falcone so delusional that he thought it wouldn’t matter if there was interference to the GPS system? Or was he expecting compensation from the government all along, once Harbinger’s money had all been spent in 2009?
The FCC’s proposed FY2014 budget, released on Wednesday, now appears to have sounded the death knell for LightSquared’s September 2012 spectrum swap proposal, that it should be granted access to the 1675-80MHz band, in exchange for giving up “rights” to deploy a terrestrial network in the 1545-55MHz downlink part of the L-band. Instead, the budget proposes that NOAA’s radiosondes should be relocated (presumably to the 400-406MHz band which is also used by weather balloons) and that the 1675-80MHz should then be repurposed using “either auction or fee authority” in 2017 to raise $230M.
This news seems to confirm what happened at the February 20 meeting between the FCC and LightSquared’s lawyers, is that the FCC told Latham & Watkins that they were going to propose reallocation of the 1675-80MHz spectrum for commercial use, but would deny the requested spectrum “swap”, so LightSquared would have to bid in an auction just like anyone else. Although the FCC has not yet issued a ruling (perhaps to avoid tarnishing Chairman Genachowski’s recent speeches about his legacy), release of an order may now be quite close, given the public disclosure of the FCC’s intentions in this week’s budget document.
In a statement to Communications Daily (who first reported this issue), LightSquared continued its usual practice of pretending that all is well, asserting that “What happened today is certainly consistent with our filings” because there would be costs associated with any “sharing agreement”. However, even if LightSquared did pay $230M for the spectrum (and I find it hard to conceive that the FCC would simply award the spectrum to LightSquared if other operators want to bid on it at auction), the 2017 allocation date is obviously far too late for LightSquared to proceed with its fantasy of an LTE network buildout.
UPDATE 3 (4/13): LightSquared’s ex parte for an April 3 meeting with Commissioner Pai indicates a different (and more telling) story, going back to LightSquared’s generic appeals from 12 months ago about the “compelling need to find spectrum-based, technical, legal, or other solutions to the current issues” and abandoning the 1675-80MHz proposed “swap”. Notably, this ex parte was not even filed in IB Docket 12-340, relating to LightSquared’s September 2012 request to modify its ATC Authorization, which would have been required if the 1675-80MHz “swap” was part of this discusssion. Instead LightSquared is now apparently going back to its demand for “regulatory approvals” to move forward with its original L-band plan and threatening legal action if that is not forthcoming.
Given the Mexican coordination issues, the implausibility of LightSquared gaining any more spectrum for free, and the potential costs for continuing LightSquared’s Cooperation Agreement with Inmarsat after March 2014, its fascinating to see how much excitement has built in the distressed debt community in the wake of the WSJ’s report last week that Sound Point had been buying up LightSquared’s debt and preferred stock. That is despite the fact that several large holders in the Ad Hoc Secured Group (not just Fortress) have now exited their positions.
I’m told that a target valuation of 130 cents on the dollar for LightSquared’s LP Term Loan debt is now being floated by some people, based on an assumption that Ergen would convert the secured debt to equity. Even if one believes that Ergen will get involved (as opposed to using LightSquared as a bluff to secure a deal with T-Mobile, MetroPCS, CLWR or Sprint), then that seems excessive, given that buying out the TL debt at par plus accrued interest would only give a valuation of 115 cents on the dollar at present, and any bankruptcy auction will presumably look a lot like TerreStar, where DISH bid just enough to buy out the secured debt (including Echostar’s holdings) at par, just as DISH would presumably buy out Sound Point and other holders for cash at par in a LightSquared auction.
After all, DISH has $10B in cash, and potentially not much to spend it on right now. Any DISH deal with T-Mobile would most likely have come before the recent price adjustment to TMO’s MetroPCS bid (not least because it would have made it more difficult for Paulson and PSAM to hold out for alternative suitors), and a counterbid for MetroPCS is harder now that MetroPCS’s stock price has risen. Similarly, a potential deal with Clearwire seems to be slipping away, as it takes more money from Sprint, despite the efforts of Crest to block Sprint’s bid.
What would be the form of a DISH deal with TMO? The four possibilities are:
a) a joint venture (like Clearwire) which wholesales capacity to DISH, TMO and potentially other players
b) a hosting agreement (like Sprint and LightSquared) with TMO taking payment in the form of capacity
c) an investment by DISH in T-Mobile (like Softbank and Sprint) through the contribution of cash and spectrum in exchange for a majority equity stake
d) a full merger of DISH and T-Mobile.
Of these, I think the first can be ruled out, for the same reasons that Clearwire has had so many problems: TMO would take most of the capacity, so would have too much influence, and it would have an incentive to only use the JV capacity after exhausting its own resources. The second can also potentially be ruled out, simply because the deal would have to be more advantageous to DISH than the LightSquared-Sprint agreement: TMO would cover most of the costs and take payment in capacity, not cash, and then DISH wouldn’t need $10B in cash. The fourth option is probably also less appealing (as DISH has hinted previously), because DT might insist that Ergen gives up the dual class share structure which gives him tight control over DISH, and the synergies between DISH’s satellite TV business and T-Mobile’s wireless business are far less compelling than a merger between DISH and AT&T (with its fixed line and U-verse business) would have been. If DISH stays as a separate company then a merger with DirecTV also remains a possibility, perhaps with DISH’s T-Mobile stake being spun off to Ergen if DirecTV buys out DISH.
So the third option sounds like the most plausible, and the question is whether Ergen can purchase a majority stake in a merged T-Mobile/MetroPCS in exchange for $10B in cash and potentially $8B to $10B in contributed spectrum value. This becomes a harder task after the MetroPCS merger goes through and the merged company has a larger enterprise value (estimated at $28B-$30B by BTIG). However, depending on the remaining debt load after DISH’s investment, it still seems like a reasonable objective. Having a public market valuation for T-Mobile also makes DT’s decision about what share of the company DISH would receive a lot more transparent.
Of course, this new development also makes it rather more reasonable to regard a potential DISH bid for LightSquared as another bluff by Ergen, or at the very least a far less attractive fallback option (and if you think a deal might still be done with LightSquared as well as T-Mobile, note that DT is currently embroiled in its own LightSquared-like ATC scandal in India, with some of the original SkyTerra investors). It also confirms that DISH has moved on from its interest in Clearwire, and will most likely just look to cash in its sizeable profits (of up to $300M) on Clearwire’s debt when the Sprint merger eventually goes through.
UPDATE 2 (4/12): Clearwire has filed a proxy statement this evening, noting that it was approached by Party J, a strategic (i.e. non-financial) buyer, earlier this week with an offer to buy 5B MHzPOPs “in large markets” for $1.0B-$1.5B minus the NPV of the associated lease payments. Given the NPV of Clearwire’s lease payments is $1.8B of which I’d guess at least two-thirds is in large markets, and 5B MHz POPs would be around half of the leased spectrum in these markets (assuming this is the top 100M POPs in the US), that would mean a deduction of $600M or more, leaving a net price of ~$400M-$900M.
Walt Piecyk at BTIG thinks that Party J might be Ergen once again and I tend to agree (perhaps this approach is through Echostar?). It would fit with the move on LightSquared last week as another effort to establish a potential backup to T-Mobile, by persuading Clearwire stakeholders to hold out for more money and reject the Sprint bid. Clearwire seems to be hinting that it will file for bankruptcy on June 1 if the Sprint bid is rejected and that would also provide Ergen with far more options in the event that he can’t pull off a deal with T-Mobile, because of his substantial holdings of Clearwire debt. However, given the difficult relationship between Sprint and DISH and the numerous challenges associated with LightSquared, both look far less attractive options than a deal with DT for DISH to invest in T-Mobile.
For those of you not following my Twitter feed (@TMFAssociates), last week there were a couple of interesting developments related to Globalstar, which is currently negotiating with its noteholders under a forbearance agreement (lasting until April 15), after holders of $70.6M of the 5.75% notes exercised their rights to require repurchase of the notes, and Globalstar did not pay the $2M of interest due on April 1.
Firstly, Globalstar has been granted received approval from the FCC for the experimental authority it was seeking for tests of its proposed S-band TLPS service, on March 25 for testing in Cambridge, MA and on April 1 (no joke) for testing in Cupertino and Sunnyvale, CA. Globalstar has also told the FCC that it intends to submit further experimental applications “in the near future”. However, the authorizations are for testing only and are “subject to prior coordination with the Society of Broadcast Engineers”, because both locations are within BAS Channel A10 pickup areas. This coordination has apparently not yet taken place, and because the BAS community is rumored to be very unhappy with the situation, it could take some time to reach an agreement. The timeline for the FCC to issue an NPRM setting out the proposed rule changes to permit commercial use of TLPS also remains unclear, but it seems to be taking longer than originally hoped.
A second recent development is that last week AT&T notified the (less than 1000) subscribers to the TerreStar Satellite Augmented Mobility (SAM) service, that DISH has decided to shut down the service effective May 1, via the letter below, and has “made an arrangement with Globalstar” to offer a discounted replacement rate plan and Globalstar satellite phone.
Of course, those with long memories will recall that TerreStar Networks filed for bankruptcy in October 2010, less than a month after AT&T started selling the Genus phone. Given Globalstar’s current financial challenges, let’s hope that AT&T’s decision to start selling Globalstar service now is not a bad omen for the company.
