04.05.13
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 4:01 pm by timfarrar
That’s an interesting question after the WSJ reported yesterday that Sound Point had now acquired over $600M of LightSquared’s $1.7B LP secured debt. Speculation has been rampant once again that Ergen is behind this move, which involved buying all of Fortress’s $161M of LP secured debt (as the WSJ noted – indeed if Sound Point now owns over $600M of secured debt, then it must have bought around $100M of secured debt elsewhere in recent weeks, as Providence only owned $7.4M of this debt), but I was told also Fortress’s $87M and Providence’s $38M of LP Preferred Units. The secured debt was apparently bought at par, and the preferred units at 95 cents on the dollar, and assuming the Preferred units turn out to be the fulcrum security, this $125M will give the owner over 80% of the $164.6M that is outstanding in the LP Preferred class, and potential control over LightSquared’s bankruptcy reorganization plan.
Most people appear to believe that Ergen is behind Sound Point’s investment, despite the doubts that were expressed by people close to the situation last May. The fact that the deal was apparently struck immediately after the end of Q1 (and therefore any public company, such as DISH, would not have to reveal a substantial stake until the second quarter 10-Q in August) might support that possibility: although DISH could not hold the LightSquared LP debt itself due to limitations in the debt agreements (and therefore Sound Point would be the vehicle for this investment), Ergen might well decide to acquire the preferred stock through DISH, to give him a direct voice in proposing a bankruptcy reorganization plan after July 15.
However, it remains an intriguing question as to whether Carlos Slim has any involvement, given the challenging Mexican coordination issues facing LightSquared, which the company has reluctantly acknowledged by hiring a Mexican law firm this week to “ provide legal services with respect to LightSquared’s activities and/or negotiations in Mexico and with Mexican authorities”. After all, it hardly seems likely that Ergen would want to take on the major challenge of making LightSquared’s spectrum usable, without some sort of arrangement in Mexico, if a large part of the spectrum could soon be lost to the MEXSAT system.
Incidentally, further confirmation of LightSquared’s difficult February 20 meeting with the FCC has also emerged in the $271K invoice and February billing records submitted by Latham & Watkins a couple of weeks ago: there was no preparation for this meeting until the day of the meeting itself (implying that the lawyers were summoned by the FCC, rather than arranging the meeting on their own initiative), and the meeting was billed as related to ATC licensing, not to 1675-80MHz sharing issues (which was how LightSquared’s ex parte filing characterized the discussion). More importantly an associate was then immediately tasked to “research and analyze FCC opinions and orders related to the dismissal and withdrawal of applications at the request of applicants”, implying that LightSquared was so concerned about the possibility of an imminent rejection by the FCC that it contemplated pulling its September 2012 application. The lawyers then switched immediately to focus on “draft[ing] legislation” and “talking points regarding license mod advocacy” for LightSquared’s government relations team to push at “[Capitol] Hill meetings”. They also appeared to drop the analysis they had been working on with an “economist”, in favor of exploring the hiring of a new “consultant”, presumably to reflect their new emphasis on trying to go around the FCC.
Given all these issues, another possibility is that a further investment in LightSquared is a relatively cheap signal to T-Mobile that Ergen still has alternative ways forward to make his spectrum assets more valuable, even if the possibility of a deal with Clearwire seems to be fading. After all, as I wrote a couple of weeks ago, T-Mobile could secure a deal with DISH as a way to make it clear to MetroPCS shareholders that staying independent is not a good alternative to the T-Mobile merger. It certainly seemed that a DISH-TMO deal of some sort could be close at that point, but T-Mobile’s event the following week focused instead on its new no-contract pricing plans and initial LTE network launch.
However, after the recommendations by two proxy advisory firms that MetroPCS shareholders should reject the merger, T-Mobile is now considering whether to change the terms of the deal, and one way to do that might be to bring DISH into the picture. Certainly T-Mobile’s partnership offer to DISH ought now to be more attractive than it was a couple of weeks ago, but if it is still unacceptable to Ergen, I could envisage DISH making a bid for MetroPCS before the April 12 merger vote, using the $2.3B it raised this week. In that context, any takeover of LightSquared certainly ought to be seen as a fallback option for DISH, which need not even be considered until the situation with T-Mobile and MetroPCS has been resolved one way or another.
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03.21.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum at 5:20 pm by timfarrar
For the last week, since DirecTV’s bid for GVT fell through, rumors have been circulating about a potential merger between DirecTV and DISH. However, to me that seems rather implausible in the near term: while a merger might well be feasible from a regulatory perspective, there would almost certainly be months of jockeying for position in Brazil and elsewhere, before it became clear which of the two companies would be in the stronger position to dictate the terms of a merger.
Instead, if DISH isn’t to be left holding its spectrum assets for many years (with no potential buyer on the horizon, after AT&T and Verizon both declared they would not be buying any more spectrum outside of FCC auctions in the next few years), DISH now has to focus on trying to bring its spectrum plans to fruition in the immediate future. This means seeking either to block the Sprint-Clearwire deal (to gain leverage for a network sharing agreement with Sprint) or to do the same in the T-Mobile-MetroPCS deal, which is now set to close in the next few weeks, unless MetroPCS shareholders vote it down.
I suggested last month that if Clearwire drew down the funding line from Sprint at the end of February, then DISH might “potentially move on MetroPCS immediately thereafter”. While no public offer has emerged, in recent days DISH has sounded noticeably less enthusiastic about its prospects of blocking the Sprint-Clearwire merger (and note that DISH is likely to make a $250M-$300M profit on its investment in Clearwire simply by allowing Sprint’s deal to go through). It therefore seems to me that if DISH does emerge with a deal in the near future (which perhaps might have prompted the 5% rise in DISH’s stock price on Wednesday), then the only plausible possibility is that T-Mobile got worried that its MetroPCS merger would be voted down, and negotiated a network sharing deal behind the scenes with Charlie Ergen.
That would be a great move for T-Mobile, at one stroke removing both potential alternative merger partners for MetroPCS (by taking DISH off the table and ensuring that Sprint is tied up with its Clearwire merger) and also cementing its position as the wireless operator best able to offer large, low cost data packages for the foreseeable future. Of course it would also be disastrous for those hedge funds betting that they can force T-Mobile and Sprint to increase the financial consideration being offered for MetroPCS and Clearwire respectively.
What would such a deal look like? I would guess very much like DISH’s desired deal with Sprint, namely that T-Mobile hosts the DISH spectrum on its LTE network, while taking most if not all of the financial consideration in the form of capacity, providing DISH with a roaming deal plus up to half of the AWS-4 capacity to launch its own wireless services. A deal like that, with no spectrum actually changing hands, would provide no basis for further FCC review of the T-Mobile/MetroPCS transaction, so the perfect time to announce it would be in the next couple of days (now all approvals have been received), giving MetroPCS investors time to contemplate their fate ahead of the April 12 vote.
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Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 4:12 pm by timfarrar
According to Wikipedia, “In financial circles, the Mexican standoff is typically used to connote a situation where one side wants something, a concession of some sort, and is offering nothing of value”. That’s presumably how the FCC feels about LightSquared’s request for a so-called spectrum “swap”, as I noted last month when the FCC’s General Counsel summoned LightSquared’s lawyers to tell them that there was no way LightSquared would get access to the 1675-80MHz band for free. LightSquared’s lawyers were forced to promise that the company would at least pay for relocation of NOAA’s radiosondes “consistent with the Commission’s emerging technology” doctrine.
The FCC must therefore have been even more annoyed when LightSquared followed up this meeting with a request for an STA to conduct four months of tests to examine radiosonde relocation, and essentially stated that NOAA should pay for the relocation itself. In particular LightSquared asserted that “continued use of this [1675-80MHz] band by radiosondes may not be compatible with the expected operation of the new GOES-R satellite system that is expected to be deployed in the next few years” and so “the modification of current radiosonde operations in and around the 1675-1680 MHz band…is required by the “downshift” of a portion of the GOES-R satellite downlink channels”. Given that NOAA has spent five years studying this “downshift” to free up the 1695-1710MHz band for auction (in that case to raise money for the government) and has never indicated that relocation of radiosondes out of the 1675-80MHz band is required by this downshift, that is quite a remarkable assertion for LightSquared to make, and is all but guaranteed to alienate NOAA as well.
As a result, a cynic might conclude that LightSquared’s attempt to obtain a four month testing window is intended to delay any negative ruling from the FCC until after LightSquared tries to convince the bankruptcy court that they are well positioned to secure the spectrum they need, and persuade the judge to allow them to cram down the LightSquared LP debtholders, on the grounds that Harbinger’s equity is supposedly still “in the money”. Indeed, the FCC may well be tempted to consent to LightSquared’s request, in order to push out any litigation beyond the end of Chairman Genachowski’s term in office.
However, there is yet another, potentially even more serious, Mexican issue looming on the horizon (which will quite possibly emerge before mid July), namely the MEXSAT-1 satellite that Boeing is constructing, which is scheduled for launch at the end of 2013 or early in 2014. As I noted in December 2010, when the MEXSAT order was placed, after the MEXSAT launch, LightSquared will no longer have “any authority to share spectrum with [Mexico's planned next generation] system in the absence of coordination”.
I’m informed that as part of this new coordination agreement, the Mexican government will now demand the right to use one third of all L-band spectrum in North America for the MEXSAT-1 and 2 satellites, based on Mexico’s huge $1B investment in this system. This amount (~22MHz in total) is of course far more than Mexico’s current allocation for its older satellites. However, LightSquared’s Cooperation Agreement with Inmarsat guarantees that Inmarsat will be held harmless from any future reallocation of spectrum to Mexico, and thus all of the additional spectrum demanded by the Mexicans would have to come out of LightSquared’s allocation. That quite possibly explains why Inmarsat wanted to keep the Cooperation Agreement in place last April, while suspending further payments by LightSquared for two years, because now Inmarsat won’t have to give up any spectrum at all to Mexico. It might also indicate why Carlos Slim was rumored to be interested in LightSquared, although given recent developments, Slim might now have bigger issues to worry about in Mexico.
UPDATE (3/21): Here is a description of the MEXSAT system, confirming that it will need at least 15.4MHz of L-band spectrum (2.2MHz per beam, 7 color re-use) to operate as designed.
LightSquared could potentially reject the Mexican request, which would result in a return to the status quo under the original Mexico City L-band coordination agreement from the late 1990s. However, then the L-band would be broken up into small chunks, with the Mexican spectrum (which is largely in the lower L-band where LightSquared wants to operate terrestrially) preventing LightSquared from gaining any contiguous 5MHz blocks of spectrum that could be used for an LTE network deployment. In adddition, LightSquared would have no right to generate any interference whatsoever into the Mexican system from its terrestrial operations.
In other words LightSquared’s L-band MSS spectrum assets now run the risk of either becoming either completely worthless or at the very least being significantly reduced, perhaps to as little as 10-15MHz in total (excluding the spectrum leased from Inmarsat). This of course makes it far less plausible that DISH would be willing to countenance using LightSquared’s spectrum (for uplinks) in conjunction with its own AWS-4 spectrum (for downlinks), as LightSquared’s debtholders hope. After all, harking back to another long ago post of mine, it seems DISH has a pretty good understanding about “which of DBSD/TerreStar, Clearwire and LightSquared” turned out to be “the good, the bad and the ugly”.
ADDENDUM (3/23): Apart from its spectrum, LightSquared’s other assets mainly consist of its two new satellites, SkyTerra-1 (in orbit) and SkyTerra-2 (still on the ground). Many assumed that the SkyTerra-2 could be sold to Boeing, for use in the MEXSAT program (since MEXSAT-1 and 2 are very similar to SkyTerra-1 and 2). However, I’m told that it is now far too late for that, as the MEXSAT-2 build is already well underway, and so it is likely to be even more difficult to raise money from the sale of LightSquared’s satellites.
Another option for LightSquared has always been its supposed litigation claims against the FCC. I understand that LightSquared believes it has some communications in its posession which would make this case a “slam dunk”, and so it expects to succeed in extracting concessions from the FCC, including the purported spectrum “swap”. However, note that the Mexican coordination is formally a government to government agreement (with the FCC at least in theory responsible for negotiating on behalf of LightSquared). Thus, I wonder how much leverage LightSquared currently has with the FCC, when a negative outcome (or simply no progress) from the coordination negotiations would likely ruin LightSquared’s prospects of deploying a terrestrial network in the L-band. In particular, LightSquared’s ATC licenses from the FCC could then potentially become useless, even without further action on the GPS-related issues, based on LightSquared’s acceptance of the FCC’s (separate) March 2010 Mexico re-use approvals. This might even provide a convenient way for the FCC to park the GPS issues, while completely avoiding any liability to LightSquared.
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02.23.13
Posted in Globalstar, LightSquared, Operators, Regulatory, Spectrum at 12:16 pm by timfarrar
Yesterday, two interesting pieces of news emerged relating to LightSquared’s proposal that it should be granted “shared” access to the 1675-80MHz band in exchange for giving up “rights” to operate a terrestrial network in the 1545-55MHz spectrum block, which is closest to GPS and caused the biggest concerns during the 2011 testing.
The first of these was the GAO report on options to improve receiver performance mandated in the JOBS bill last February in response to the LightSquared debacle. Both this report and an associated paper by the FCC’s Technical Advisory Committee (TAC) published earlier this month suggest that the FCC should do more to explore setting “harm claim” thresholds at which receiver manufacturers could assert that a new service was causing interference. Spectrum bands in which these thresholds could be trialled are identified, but unfortunately for LightSquared, no mention is made of the L-band/GPS band boundary (and the rationale given for selecting a trial band appears to suggest that the LightSquareed spectrum would not be a good candidate for initial experimentation).
Instead, one of the leading candidates is Globalstar’s proposed S-band TLPS service, which perhaps explains Globalstar’s confidence that the FCC will soon move forward with an NPRM, despite the opposition Globalstar faced from the WiFi community, Clearwire and others in response to the TLPS proposal. On the other hand, the fact that such a proceeding would be an experiment to try and determine an appropriate interference threshold may well mean it would still be very difficult for Globalstar to undertake any large scale deployment in the near term or receive approval by the end of 2013 as Globalstar hoped.
The second, and more significant, development was an ex parte filing by LightSquared which documented a meeting on Wed Feb 20 between LightSquared’s regulatory lawyers and the FCC’s General Counsel and the Acting Chief of the FCC’s Office of Strategic Planning. Curiously, this meeting didn’t involve any technical personnel, despite the fact that the “much of the discussion” focused on “the proposed shared use of 1675-1680 MHz spectrum”. That seems to imply that the FCC was focused on the political problem associated with any perceived spectrum “giveaway” and appears to be confirmed by LightSquared’s offer that it would undertake “relocation of NOAA’s radiosondes…in a manner consistent with the Commission’s emerging technology and other applicable precedents”. In other words LightSquared offered to pay for this relocation.
Even that may prove insufficient, given that LightSquared’s proposed “sharing” with NOAA (based on exclusion zones around certain satellite receiving stations, after relocation of the radiosondes) actually involves even less sharing than will be needed in the 1695-1710MHz band, which has now been confirmed by NTIA as being suitable for auction. In the 1695-1710MHz band there will be protection zones around 18 satellite downlink sites, significantly more than the four locations (Fairbanks, AK, Wallops Island, VA, Suitland, MD, and Greenbelt, MD) that LightSquared would have to protect in the 1675-80MHz band.
As a result, it seems that the development of rules for interference limits at the L-band/GPS boundary is unlikely to be a high priority in the immediate future, and there are still major roadblocks to any spectrum “swap” involving the 1675-80MHz band. We will apparently soon see how much LightSquared is offering to pay for relocation of NOAA’s radiosondes, but if this spectrum is deemed just as suitable for auction as the 1695-1710MHz band, then that may be far from sufficient.
LightSquared now has a deadline of May 31 to come up with a plan to emerge from bankruptcy and after July 15 it will lose its exclusivity to propose a plan. However, if the FCC continues along the lines indicated yesterday, the main asset of the estate may end up being its legal claims, whether against Harbinger or the FCC.
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02.22.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 9:51 am by timfarrar
The question on everyone’s mind after DISH’s results call on Wednesday is of course “when will Charlie Ergen find a partner” to fulfill his wireless ambitions. Ergen was pretty clear that if DISH’s offer to buy spectrum from Clearwire succeeds then Sprint would be backed so far into a corner that it would be forced to partner with DISH (on Ergen’s terms). Conversely, if Sprint won its takeover bid for Clearwire then there is no way that DISH would accept Sprint’s terms for a partnership. The difference between DISH and Sprint’s positions appears to be that Sprint wants a LightSquared-like deal: a large cash payment for the network buildout, and Sprint having the option (but not the obligation) to buy capacity, whereas DISH wants Sprint to take its payment for a network sharing agreement solely in capacity, not in cash.
As an aside, its interesting to note that the relationship between Ergen and Hesse is obviously pretty poor: Sprint’s proxy for the Softbank deal notes that it was Keith Cowan who dealt with Ergen (Company Z) last summer, not Hesse. As a result, if Sprint did lose Clearwire’s spectrum to DISH, I wouldn’t be at all suprised to see the blame placed on Hesse, resulting in him leaving Sprint, and Masayoshi Son and Charlie Ergen could then work out a partnership between themselves.
If DISH’s bid for Clearwire fails, then DISH will at least have made an impressive profit on the deal: according to DISH’s 10-K, its holdings of Clearwire debt are now worth $951M, compared to an adjusted cost as of September 2012 of $745M. That is a profit of over $200M excluding the interest payment made in December 2012, which would have been at least another $50M (assuming the June interest payment is already included in the adjusted cost basis).
However, and more importantly, what is Ergen’s backup plan, if he simply takes his profits in Clearwire? If DISH wants to achieve a partnership this year, then the only realistic offer is to mount a counterbid for MetroPCS. Recall that DISH offered $11 per share for MetroPCS last summer (in parallel with DISH’s bid to buy spectrum from Clearwire) which was rejected as undervaluing the company. Given MetroPCS is now trading at only $10 per share, what does DISH have to lose by making a similar offer? At the very least that would force T-Mobile to the bargaining table, and DISH might be persuaded to withdraw its offer if T-Mobile offered an attractive network sharing deal. Indeed, if Clearwire’s special committee makes a decision next week to draw on the Sprint funding, I would expect DISH to potentially move on MetroPCS immediately thereafter.
If DISH doesn’t succeed with that gambit, then the timeline for a deal moves back at least until the end of this year or sometime next. LightSquared’s exclusivity in its bankruptcy case has been extended to July 15, but alternative offers can be made after that time, with a view to a resolution of the case before the end of this year. As I’ve noted before, if DISH takes a slightly longer time horizon, then a bid for LightSquared, and conversion of the 2GHz spectrum to downlink use would be an obvious value-enhancing maneuver. In addition, it would put DISH in a much better position to challenge Sprint in the auction for the H-block spectrum, which Sprint has admitted it needs to buy.
Finally, DISH’s ultimate fallback option may be to try and sell the spectrum to another company. However, AT&T appears well set for the next several years, having apparently decided not to pursue DISH when Ergen’s waiver request was denied by the FCC last spring. Verizon has also ruled itself out as a buyer and T-Mobile will be tied up integrating MetroPCS for some time (and after that acquisition will own more spectrum per subscriber than either AT&T or Verizon).
As a result, the timeline for that sale (at least if Ergen is to get an attractive price) may be pretty long, probably beyond the resolution of the broadcast incentive auction (scheduled for 2014) and perhaps even extending until after the 2016 Presidential election, if AT&T and Verizon are to be regarded as serious bidders, given the desire of the FCC to let Sprint and T-Mobile catch-up with their bigger rivals. That is even more likely to be the case if the recent slowdown in the growth of wireless data traffic prompts a reassessment of operators’ future spectrum needs and finally buries the supposed “spectrum crunch”.
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02.07.13
Posted in Regulatory, Spectrum at 12:50 pm by timfarrar
After discovering the retrospective revisions made to 2011 data traffic in Cisco’s Feb 2013 mobile VNI forecast yesterday, I wondered if this was something new, or if it was simply that no-one had ever noticed this issue before. Because some of the 2012 mobile VNI data is still accessible through the fixed VNI tool, it’s possible to do the same set of calculations for last year’s mobile VNI, and conclude that Cisco did in fact retrospectively change the 2010 data in Feb 2012 (on a global basis making an 8% increase for 2010 compared to the 13% decrease for 2011 seen in this week’s figures), as shown below:
The revisions to 2011 have the effect of enhancing Cisco’s announced data growth number for 2012 (now stated to be 70% on a global basis), because the estimated Dec 2012 traffic is only 48% higher than the 597PB/month for Dec 2011 traffic that Cisco estimated last year, and less than half the expected growth of 110% that Cisco forecast last year for 2012. Of course no-one is stepping up to admit that in fact Cisco’s new figures imply global traffic growth in 2011 was only 103%, rather than the 133% growth that was trumpeted originally as exceeding their own projections (and ironically this year’s press release doesn’t even mention that data growth was 70% in 2012).
It’s even more revealing to compare some of Cisco’s numbers to CTIA’s October 2012 statistics on mobile data traffic in the US. After all, even though CTIA has a blinkered focus on pushing the “spectrum crisis” (seen once again today in an op-ed quoting a statistic invented apparently out of thin air, that “Cisco forecasts mobile data traffic in the United States will be 20 times greater in 2015 than it is today”), at least their statistics are based on direct reporting by carriers accounting for 97% of wireless connections in the US, and so in this realm they ought to be king.
Given that wireless operators have no interest whatsoever in understating their traffic, its hard to see how US mobile data traffic could be higher than the CTIA statistics, yet that is precisely what Cisco’s estimates imply. Indeed Cisco have revised their Dec 2011 traffic estimate for the US upwards, to 127PB/mo, compared to the 108PB/mo estimate given in last year’s VNI forecast. However, CTIA’s statistics indicate that US mobile data traffic in the first 6 months of 2012 was 633PB, or an average of 105.5PB per month, and so if Cisco were accurate, then monthly data traffic would have had to decline between Dec 2011 and Jun 2012. Similarly, if Cisco’s Dec 2012 estimate of 207PB/mo of mobile data traffic in the US was accurate, then monthly traffic would have had to roughly double since Jun 2012, again an inconceivable shift (especially if traffic had supposedly fallen between Dec 2011 and Jun 2012).
Overall, based on CTIA’s statistics, I estimate that US mobile data traffic was roughly 96PB/mo in Dec 2011, and assuming consistent growth in the second half of 2012, the total for Dec 2012 should be around 134PB/mo, which is equal to a 40% traffic growth rate for monthly traffic during 2012. Of course that’s much lower than the 59% growth in total traffic between all of 2011 and all of 2012 that is implied by my extrapolation of the 2012H1 data, because the much smaller amount of traffic in the first half of 2011 pulls down the 2011 total. However, the 40% growth is the relevant figure to be used for comparison with Cisco’s numbers, and would have massive implications for the five year outlook: even a continuation of this 40% growth rate would represent only five-fold growth in monthly US mobile data traffic between Dec 2012 and Dec 2017, not the ten-fold growth that Cisco projects. The absolute gap would be even greater: roughly 720PB/mo in Dec 2017 vs 1963PB/mo forecast by Cisco.
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02.06.13
Posted in Regulatory, Spectrum at 9:53 am by timfarrar
Last year when Cisco released the 2012 mobile VNI forecast, I noted that they had been building castles in the air, and needed to put foundations under them. In particular I was concerned about substantial changes in the assumed share of offloaded traffic, which had changed dramatically between the 2011 and 2012 reports. Specifically, in 2011 Cisco had estimated that in 2010 21% of US smartphone and tablet traffic was offloaded (from mobile-connected devices, i.e. apparently excluding WiFi-only tablets) and that would increase to 30% by 2015. In 2012 they estimated that 49% of this traffic was offloaded in 2011 and that would decrease to 46% in 2016. Now in the latest report (actually in the VNI tool stats, not the report itself), Cisco estimate that:
47% of the United States’s mobile data traffic was offloaded in 2012.
66% of the United States’s mobile data traffic will be offloaded in 2017.
The amount of traffic offloaded from smartphones will be 64% in 2017, compared to 59% at the end of 2012.
The amount of traffic offloaded from tablets will be 78% in 2017, compared to 77% at the end of 2012.
So yet again we’ve had a dramatic change in assumptions about offloading, without much explanation or any retrospective view of whether the prior estimates were remotely accurate. Indeed, if the true amount of offload traffic (from smartphones and tablets combined) has increased from 21% at the end of 2010 to 49% at the end of 2011 to something over 60% at the end of 2012, it is far from clear that the share of offloaded traffic on these devices will hardly grow at all (1% p.a.) in the next five years. (Note that the large projected growth in overall offloaded traffic is an artifact of the change in mix, with total traffic becoming dominated by smartphones and tablets, so laptops play a much less important role).
In reality, users of Cisco’s own Data Meter Application already offload more than 80% of their traffic and may be rather more representative of the longer term smartphone market, at least in North America. One consequence of Cisco’s assumption that offload growth will slow, is that data traffic growth is projected to accelerate once again in 2013 compared to 2012 (e.g. North American traffic growth is projected to be 70% in 2013 compared to 64% estimated in 2012, and on a global basis growth of 78% is projected in 2013 compared to 70% estimated in 2012), which seems rather unlikely.
Even more perplexing are some of the individual changes in estimates between 2011 and 2012, which appear to relate to totally undocumented retrospective revisions to the 2011 data (which can be extracted by use of the VNI tool).
In North America, Cisco estimated last year that traffic would grow from 118,972 TB/mo in Dec 2011 to 259,253 TB/mo in Dec 2012 (a growth rate of 118%). Now Cisco estimates that traffic in North America was only 222,378 TB/mo in Dec 2012, with growth of 64% (per the VNI tool), so in other words, Cisco’s estimated 2011 traffic was ~136,000 TB/mo (14% more than the original estimated).
Incidentally, traffic in the US was estimated to have grown by only 62% (almost exactly as I predicted from the CTIA data last October) to 206,854 TB/mo in Dec 2012. However, in absolute terms Cisco’s number for the US appears far too high: extrapolating CTIA’s 6 month statistics (based on real data from almost all US mobile operators) indicates there should be no more than 150,000 TB/mo of mobile data traffic in the US by Dec 2012.
Similarly, the Cisco numbers for Western Europe indicate growth of 44% between Dec 2011 and Dec 2012 (to 181,397 TB/mo), compared to an original projection of 103% growth, but the 2011 estimate has been retrospectively revised to about 126,000 TB/mo, or 31% lower than the 180,370 TB/mo originally given in the 2011 report.
In addition, the previous assessment that significant traffic would be generated by “home gateways” has been completely erased and significant changes have been made to all of the regional traffic totals for 2011, as given in the table below.
UPDATE: Apparently a later version of the February 2012 Mobile VNI forecast (not that linked below) corrected a typo in the Middle East & Africa regional total, so that the discrepancy between the sum of the regional traffic and the global total traffic (597,264 TB/mo) was eliminated. The chart above has been updated to incorporate this modification.
Thus, though Cisco tries to direct our attention to future growth potential (not least by deleting access to previous reports – for your benefit, here are copies of the reports published in February 2010, 2011, 2012 and 2013 respectively), I’m hugely concerned about whether the traffic data that is supposed to be covering historic periods is at all reliable, given the enormous scale of unstated retrospective revisions to these numbers, and the lack of correlation with much more detailed studies such as that by CTIA. If the current data isn’t accurate, then its hard to see how much reliance can be placed on Cisco’s forecasts for future periods.
Nevertheless, Cisco appears to have bowed at least partially to reality, acknowledging that 2012 growth was “slower than expected in some regions” and side-stepping its prior claims of a “data deluge“. I wonder if those, including the FCC Chairman, who have made so much fuss about the “spectrum crisis”, and have repeatedly cited Cisco’s over-optimistic projections to justify their argument, will now do likewise. Perhaps they might even give less credence to these numbers, especially given the apparent inaccuracies in Cisco’s estimates.
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02.04.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum at 9:42 am by timfarrar
The proxy statement filed by Clearwire on Friday morning made for interesting reading, not least in guessing the identity of some of the companies that Clearwire has talked to over the last couple of years. Some are obvious (A=T-Mobile, B=AT&T, C=MetroPCS, D=China Mobile, F=LightSquared, H=Verizon) and some are more speculative (E=Google? G=one of the hedge funds invested in Clearwire, I=Samsung or Qualcomm?), but what stands out is the lack of bids for Clearwire’s spectrum at an attractive price.
In particular, Clearwire didn’t find the bid from T-Mobile (in fall 2010) to be “compelling” and was unable to reach agreement with MetroPCS (in fall 2011) on the spectrum to be included in any deal (i.e. owned vs leased) or the price. Clearwire notes that even DISH’s bid at a price of $0.19/MHzPOP “related to the acquisition of higher quality spectrum assets of Clearwire and would leave Clearwire with less valuable spectrum assets”, implying that it is mostly for owned and/or contiguous spectrum (as I suspected), and implying that the price for the spectrum that Clearwire would be left with could be rather lower.
However, the fundamental reason for Clearwire to acquiesce to the Sprint bid appears to be that Clearwire has been unable to find a second wholesale customer for its network. That target customer appears to have been AT&T, given the financials for the MCC (Multi-Customer Case) set out in the proxy, which assumed that the second customer would generate approximately 1.5 times the revenue produced by Sprint, or in other words would have had around 90 million customers who could use the Clearwire network.
AT&T certainly took quite a lot of interest in Clearwire, conducting “extensive due diligence” in fall 2010 (though ultimately declining to submit an offer, presumably opting instead to pursue the T-Mobile merger) and then resuming discussions (at AT&T’s initiative) in February 2012:
In February 2012, Party B approached the Company about restarting discussions about a possible spectrum sale and commercial agreement. The conversations between the parties focused on technical issues and the spectrum that the Company could potentially make available for sale. Party B made it clear during the discussions that a transaction with the Company was one of the several options it was pursuing in order to satisfy its spectrum needs. Party B terminated further discussions with the Company in May 2012 after it had determined to pursue one of the other options to satisfy its spectrum needs.
AT&T’s deep dive into “several options” in the first half of 2012 (after rejection of the T-Mobile bid) appears to have been very extensive, and focused largely on options to meet longer term spectrum needs (3+ years out). Of course we know that AT&T ultimately decided to buy NextWave, after approaching NextWave initially at the beginning of April. However, I’m told that AT&T also approached LightSquared in early 2012 with a view to buying the 1670-75MHz spectrum block (when LightSquared indicated it was considering a sale of these spectrum leases), and its inconceivable that AT&T didn’t also discuss with DISH the possibility of buying the 2GHz MSS spectrum (when it actively tried to interfere in DISH’s FCC proceeding).
Was AT&T scared off by the FCC’s denial of DISH’s ATC waiver request in early March, or simply by Charlie Ergen’s high asking price. More than likely it was the latter, given AT&T’s initial low ball $350M offer for NextWave’s spectrum in April 2012 (after the waiver denial, but presumably when discussions with DISH were still ongoing), followed by a decision to offer rather more in early June, after AT&T had reached a decision on its preferred spectrum option. Around the same time DISH also began exploring options with Clearwire and MetroPCS, leading up to its parallel bids to take over MetroPCS and buy spectrum from Clearwire in August 2012.
I’ve often thought that AT&T’s interest in WCS could be independent of a possible purchase of DISH’s spectrum, with WCS providing a “high band” option for dense urban networks (as a direct alternative to Clearwire’s BRS/EBS spectrum), while DISH’s spectrum provides a “mid-band” alternative to PCS or AWS. Indeed, after AT&T gave up a large slice of its AWS spectrum to T-Mobile as part of the break fee, it was plausible to think AT&T would have a potential shortfall in its mid-band spectrum assets, which would make DISH’s spectrum particularly attractive. However, it appears that AT&T may instead have looked at DISH’s spectrum more as “what do we need for 3+ years out”, considering it alongside WCS and BRS/EBS, which would almost certainly lead to a mismatch of valuation expectations with Charlie Ergen.
Instead AT&T now appears to be focused on a combination of its 700MHz LTE network (bulking up with the B block purchase from Verizon) plus smaller amounts of cellular, PCS and AWS spectrum (including the acquisition from ATNI/Alltel and the AWS spectrum included in the NextWave purchase) to meet its near term needs. The 12MHz of Qualcomm 700MHz D/E block spectrum would then be used for supplementary downlink to relatively narrow 5x5MHz cellular, AWS or PCS LTE deployments in urban areas from 2014 (though DISH’s 700MHz E block holdings could spoil any prospects of deployment outside the 5 major metropolitan areas where AT&T owns the entire band). This would explain why AT&T has retained 10MHz of AWS spectrum in Los Angeles, splitting the AWS A block spectrum with Verizon as part of the 700MHz B block deal.
Although its not been widely recognized, AT&T has already started to deploy LTE within its AWS spectrum in a few markets, and is now emphasizing the capacity enhancements available from small cell technology. Indeed, given the backlash against just the two modestly sized spectrum purchases from Verizon and ATNI, its hardly conceivable that AT&T could be planning to buy DISH’s spectrum in the near term as well. However, if AT&T was going to do another spectrum deal in the near term (which may now be unlikely), I’d bet that using Leap or US Cellular’s spectrum (perhaps even selling their customers to Sprint or T-Mobile?) would be more in line with AT&T’s current spectrum strategy than a deal with DISH.
So where does that leave Charlie Ergen? Perhaps he really does need to secure a deal with Clearwire not just to make it impossible for Sprint to get control of Clearwire’s spectrum, but also so DISH has a way forward to a near term deployment? Alternatively, moving towards a deal with LightSquared and a reorganization of the AWS-4 band to create additional downlink spectrum (as I suggested in December) could continue to create problems for Sprint (given its desire to purchase the H block) without committing DISH to a near term buildout. Either way, it seems that in the near term, Ergen might be more likely to be a buyer than a seller of spectrum.
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01.10.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 4:49 pm by timfarrar
In the wake of Dish’s counterbid for Clearwire, most attention has been focused on trying to discern Charlie Ergen’s objective: does he actually want to buy Clearwire or not? Many seem to think his intention is actually to secure a network sharing partnership with Sprint. However, this doesn’t seem very likely, in view of Ergen’s comments last year about how he looks at “business relationships”, and Sprint’s attempts to talk up a deal with Dish (rather than vice versa).
If Dish’s offer is going to prompt a near term deal with someone else, then it still seems the most likely options would be AT&T or DirecTV: the spectrum cap would create more problems for AT&T if Dish owned additional BRS spectrum (and as discussed below, it is likely that much if not all of the spectrum that Dish has offered to buy from Clearwire would be subject to the spectrum cap), while DirecTV probably would find Dish a less attractive merger partner if major wireless buildout commitments were already in place. As a result, I think if Dish appeared to be making progress with a Clearwire deal, then that might prompt AT&T to act more quickly than it would otherwise do. With Ergen reiterating his lack of desire to sell spectrum, it also seems like the message to AT&T is that a knockout bid for the whole of Dish is the only acceptable option.
As I noted on Tuesday, Dish’s potential offer for Clearwire does seem like a good deal for Dish, especially if the bid is mostly or all for owned BRS spectrum. Dish has offered to buy 11.4B MHzPOPs, which equates to about 38-39MHz on a near national basis, with the option to buy or lease another 2MHz from an adjacent channel to bring the total holding up to 40MHz (presumably to support two 20MHz or four 10MHz TDD channels). It seems likely that Dish would want contiguous spectrum for maximum flexibility, and if Dish was able to buy spectrum from “an adjacent channel” then that channel boundary must be in the BRS band. Thus the most plausible channels may be either the 6MHz BRS-2 channel plus the 6 adjacent 5.5MHz E1-E3 and F1-F3 channels (39MHz in aggregate running from 2618MHz to 2647MHz, all of which is in the BRS block and subject to the spectrum screen) or channels F3, H1-H3 and G1-G3 (38.5MHz in aggregate running from 2651.5MHz to 2690MHz, 22MHz of which is in the BRS block and subject to the spectrum screen).
Most observers would consider this part of the BRS spectrum to be the most valuable part of Clearwire’s holdings, and if particularly if the 2618-2647MHz block of spectrum was sold to Dish, then Clearwire’s remaining spectrum holdings could be substantially less useful to Sprint (or anyone else) in the future. Moreover, if Dish could then take posession of the shared network infrastructure in the event of a Clearwire bankruptcy, there might be very few pieces left for Sprint to pick up.
Why then would Dish be offering to buy up to 100% of Clearwire’s equity as well? Remember that an offer to buy the equity wasn’t part of Dish’s offer back in November, and now appears to have been included simply to trigger the “fiduciary out” to the “no shop” in the Sprint merger agreement. Ergen wouldn’t expect Sprint to sell its shares to Dish, and many of those equity holders like Crest who are betting that the Clearwire equity ought to be worth $5+ per share might not take a $3.30 offer either. Thus it is far from certain that Dish would in the end purchase a large slice of Clearwire equity whose value might be impaired by the spectrum sale.
What is most intriguing is that Clearwire’s executives (as opposed to the board) are apparently very keen on a Dish deal, describing it as “doable but complicated”. That’s perhaps unsurprising because in many cases their interests are significantly different to those of the Clearwire board (and shareholders): with Ergen they would keep their jobs and be responsible for a new independent LTE network build, whereas under Sprint ownership they would likely all be fired.
I understand that Clearwire executives may have been working on a deal with Dish since last summer (I mentioned it in a blog post in September), and note that MetroPCS’s proxy in November indicated that someone (likely Dish) had suggested splitting Clearwire between themselves and MetroPCS back in June 2012, while Dish started acquiring significant quantities of Clearwire debt in the second quarter of 2012. In addition, I’m told that Clearwire renegotiated a significant quantity of spectrum leases (covering more than 1.4B MHzPOPs) between September and November 2012, suggesting that they were preparing for the disposal of significant amounts of their spectrum, either bringing more leased spectrum into use, or selling those leases to Dish.
Given Sprint’s arguments that Dish’s current proposal will go through because they will vote against it, Clearwire management presumably have been working to structure a transaction that could be undertaken without board or shareholder approval, perhaps in the form of the spectrum sale desired by Dish (which could well fall below the 20% of assets requiring approval) plus either a modest tender offer for some of Clearwire’s shares, without any board representation, or no equity purchase by Dish at all.
This leaves open the possibility that if Clearwire’s minority shareholders reject Sprint’s bid, then a spectrum sale and network sharing agreement with Dish would be the only offer left on the table. Of course, that might also prove to be a pyrrhic victory for Crest, if the end result is a Clearwire with significantly diminished spectrum assets (possibly with little easily saleable spectrum) and a network that Dish could simply take over in the event of a bankruptcy.
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01.08.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 5:11 pm by timfarrar
So DISH has now made a (preliminary) public offer to acquire up to 100% of Clearwire’s shares at a price of $3.30, as part of a complicated transaction to acquire 25% of Clearwire’s spectrum (11.4B MHzPOPs for $2.2B, i.e. $0.20 per MHzPOP) and enter into a network sharing agreement for a buildout of both this 2.5GHz and DISH’s existing AWS-4 spectrum.
As indicated in Clearwire’s press release, last fall, before the Sprint Agreement, DISH had expressed interest in acquiring these spectrum assets and entering into the network sharing agreement, largely confirming my analysis, but with Clearwire responsible for the network buildout, not DISH (though I assume DISH would ensure that the buildout agreement allowed it to take over the network if Clearwire went under). It still seems like a reasonable guess that 2.5GHz could have been used to provide a solution for fixed broadband access, especially given DISH’s recent assertions that “it won’t just be about wireless”.
Its notable that the price offered for this spectrum (which is likely the best slice of Clearwire’s spectrum, presumably almost entirely the owned BRS spectrum, not the leased EBS spectrum) is only $0.20 per MHzPOP, far below the valuation of up to $30B ($0.70/MHzPOP) put on the spectrum by Clearwire’s minority shareholders, and only in line with the book value of around $0.19/MHzPOP used for owned spectrum in Clearwire’s 2011 10-K. Given that the book value for Clearwire’s leased spectrum is less than a third of the level of the owned spectrum (on a per MHzPOP basis), and the NPV of the spectrum lease payments is of order $0.05/MHzPOP, Ergen’s proposed acquisition might leave Clearwire with much diminished value for its remaining spectrum holdings.
Of course much of the money that DISH offers for this spectrum would simply return to DISH via repurchase of Clearwire’s first lien debt (which DISH has spent $750M on acquiring). DISH’s new offer at least provides a potential exit for Clearwire’s shareholders, but that’s a modest incremental cost to get Clearwire’s most valuable spectrum and what is most likely a cheap AWS-4 network buildout.
While Ergen’s offer therefore seems like a deal that would be good for DISH, its hard to see that DISH could realistically expect to succeed, given Sprint’s majority ownership of Clearwire’s equity and expressed intention to block this deal. However, what Ergen will certainly achieve is to give Crest and Mount Kellett far more ammunition in their fight against the Sprint takeover, potentially tying up the proposed Sprint buyout for months. Its hard to tell what the Delaware courts will say, though it seems rather implausible that the FCC would block Sprint’s takeover of Clearwire.
If Clearwire turns down the Sprint bridge funding, but is unable to accept DISH’s offer, then Clearwire’s financial position will grow weaker, increasing Sprint’s leverage as time goes on. I’d therefore expect Sprint to refuse to budge on its offer, in the absence of a reversal in the Delaware courts, and though Softbank might want all this to simply go away, the gap between what the Clearwire minority shareholders are demanding ($5 per share) and what Softbank is prepared to pay might just be too big to paper over.
As a result, it seems this battle will continue to provide entertainment (at least to outside observers) for months to come and show Sprint that if you mess with Ergen (via Sprint’s intervention in the AWS-4 proceeding at the FCC) then you should expect to get a taste of your own medicine.
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