09.13.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 4:20 pm by timfarrar
So this afternoon the FCC has joined with the NTIA in mandating further tests for LightSquared. Though the need for further testing was hardly a surprise after yesterday’s NTIA letter, what comes as a huge shock is that the FCC has offered LightSquared absolutely nothing to indicate it is minded to approve LightSquared’s terrestrial operations in the future. In particular, the FCC has not set out any timetable for completion of the additional testing (although it has stated that the “interference concerns” include “certain types of high precision GPS receivers, including devices used in national security and aviation applications”), or even specified what testing is required (and recall that the NTIA basically said for precision devices “come back when you have made a filter and we’ll think about more testing then”).
Although the FCC hinted back in August that it might be preparing to throw LightSquared under the bus, today’s Public Notice clearly indicates that the FCC has lost all patience with LightSquared and no longer believes that it is a viable near term option for creating additional competition in the wireless market. Thus perhaps Mr Falcone’s next call to the FCC Chairman ought to involve a bit of Shakespeare: Et tu, Julius?
After this ruling, the LightSquared rollout must now be regarded as being suspended indefinitely, and its hard to see where the company (and Harbinger) goes next. My best guess is that it will end up like Iridium back in 1999, where after a few months of utter panic in the spring of 1999, there were three distinct stages to the bankruptcy. In the first stage (lasting about six months), the company and its advisers claimed that the assets were still worth billions of dollars and all they needed was a bit more money. In the second stage (lasting most of 2000), they realized that wasn’t true and struggled even to find a bidder who was willing to pay pennies on the dollar (Iridium sold for $25M after investing $5B in its network). In the third stage, the creditors then spent years suing whoever they could (in that case Motorola) to try and recover their losses.
In this case, while it may take a couple more months before we finally see the end game emerge, its hard to see why anyone is going to fund the enormous costs necessary to keep the LightSquared plan on track, including the ongoing payments to Inmarsat (and perhaps to Sprint as well) for very long in the face of a completely undefined timetable for resolution of the outstanding issues. Its equally hard to see who, other than Inmarsat, might buy these assets, and even then the price would likely be only a few hundred million dollars at best (assuming Inmarsat justifies such an acquisition based primarily on a satellite-based business plan). Then, no doubt, there will be litigation against whoever can be blamed (which of course is why the FCC is being so careful to protect itself in the Public Notice).
Permalink
09.12.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 8:37 am by timfarrar
On Friday Sept 9, a letter was sent by the NTIA Administrator Lawrence Strickling to the deputy secretaries at the DoD and DoT, setting out the proposed way forward on LightSquared testing. This letter proposed that a joint testing plan should be developed “as expediously as possible” in order “to validate data on the performance of cellular and personal/general navigation Global Positioning System (GPS) receivers in light of LightSquared’s modified proposal to confine its operations to the lower 10MHz signal (1526-1536MHz)”. The NTIA requests that “the program be designed to allow for completion of testing and analysis by November 30″.
While at first sight this seems positive for LightSquared, as it will allow conclusions to be drawn before the end of the year on whether interference concerns for hundreds of millions of consumer devices have been resolved, the killer blow is in the follow-up paragraphs, which note:
All parties, including LightSquared, have agreed that LightSquared’s operations in the lower 10MHz signal will cause unacceptable interference to the high precision receivers tested by the TWG. Accordingly LightSquared is undertaking to procure the design and manufacture of a filter to mitigate these unacceptable impacts. LightSquared has acknowledged in meetings with NTIA that it will not commence commercial operations unless and until the federal agencies test the filter and conclude it is effective at eliminating unacceptable overload without degrading the performance of the receivers. Given this commitment, we see no reason for any further testing of high-precision receivers until LightSquared presents its filtering solution to the Federal agencies for testing and evaluation.
Thus LightSquared has been forced to abandon its recent assertions that it can go ahead with its planned rollout, because only 500K-750K high precision receivers are likely to be affected and it can coordinate its rollout so that the impacts are minimal. Indeed LightSquared now has to actually manufacture a filter before testing can even begin. That certainly pushes a decision point until the summer or fall of 2012 at the very earliest, and more likely than not until after the 2012 presidential election and beyond the end of Chairman Genachowski’s term at the FCC. As I pointed out last week, LightSquared’s proposed filter characteristics also represent a complete abandonment of any prospects of ever using the upper 10MHz band.
Remember also that the timeline for a decision to be reached does not include the years that will be needed to actually implement any filter across the installed base of precision GPS equipment. At last week’s House Committee hearing, one of the witnesses stated that “Even if some new, as yet unforeseen, [filter] technology did appear, the industrial, commercial and public sector users of GPS equipment routinely take up to 15 years to complete a normal replacement cycle”. The FCC can impose a shorter timeframe for the transition, but this would impose a significant burden on precision GPS users unless LightSquared was required to pay for the necessary equipment and installation.
Thus, LightSquared is now faced with a major funding crisis, because it seems there is no way it can survive with its current resources until it receives final approval to move forward (assuming that even happens). It is also very hard to see why anyone would want to invest in the company at this stage, given that Sprint has a second lien on LightSquared’s spectrum assets and therefore (even if the spectrum is worth more than the first lien debt, which I doubt because LightSquared now has at most only 2x10MHz of potentially usable L-band spectrum) there are no hard assets to pledge for further fundraising and apparently no meaningful take-or-pay contracts from LightSquared’s growing list of partners either.
UPDATE: In what feels like something out of Alice in Wonderland (“Why, sometimes I’ve believed as many as six impossible things before breakfast”), LightSquared’s CEO is claiming that the letter from the NTIA is just what LightSquared needed at this point in time because it “will finally allow LightSquared to put concerns about the impact of its network on GPS to rest”, while another LightSquared executive says “there will be a resolution to the company’s GPS interference issues within a month”. In the meantime (as I noted back in May), LightSquared has admitted that it has abandoned its plans for initial network deployment in Denver and Phoenix, along with its commitment to the FCC to cover 100M people by the end of 2012.
Permalink
09.08.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 1:58 pm by timfarrar
There wasn’t much consensus in today’s hearing of the House Committee on Space, Science and Technology about how to solve the LightSquared-GPS interference problem, or even whether this is feasible. However, several Democrat and Republican committee members did seem to agree on one thing, that the government was “somewhat complicit” in this problem, or in other words that the FCC was largely to blame, for not considering the possibility of overload interference when it originally granted LightSquared (then MSV) its ATC license.
Government witnesses presented a united front recommending further testing, with Scott Pace of GWU (as the only non-government employee and therefore not subject to the “mandate from the White House to seek a win-win solution” as Mr Russo put it) going further and suggesting that LightSquared should be banned from operating. Indeed Dr Pace’s testimony, as someone aware of the 2002 discussions between MSV and the GPS Industry Council, was quite definitive in stating that the agreement over out-of-band interference rested on the assurance from the FCC that the L-band would be maintained as a (quiet) satellite band without terrestrial-only use. In that context, one might very well tend to blame Inmarsat for agreeing in the December 2007 Cooperation Agreement with MSV (in exchange for its multi-billion dollar spectrum lease contract) that land-based satellite services would no longer be protected from MSV’s terrestrial operations, thereby facilitating potential deployment of a terrestrial network which would (by design) overload MSS terminals (and as we now know GPS receivers) in the L-band. Of course the FCC was also perfectly willing to go along with this in the March 2010 ruling which approved the changes embodied in the Cooperation Agreement, over the objections of two MSS service providers. However, the GPS Industry Council apparently did not comprehend the implications of this agreement (perhaps because many of the technical and operating provisions were confidential?), although it seems the DoD had at least some understanding of the potential for interference.
During the Q&A for the hearing, LightSquared highlighted on several occasions that the $4B it had (supposedly) already spent on the project was based on the “settled expectations” created by the FCC’s 2003 and 2005 rulings, presumably setting the bar for litigating a compensation claim if its terrestrial buildout does not go forward.
UPDATE: Judging by darkblue‘s comments on the Washington Post write-up, perhaps a “nice fat lawsuit against those attempting to interfere” is exactly what Harbinger now has in mind?
However, not only the government witnesses, but apparently even the committee members themselves, agreed on the need for more testing. A particularly revealing comment came from Mr Russo, Director of the PNT National Coordination Office (and therefore the point person on defining this testing), when he said that the additional testing couldn’t be defined without clarity from the FCC on what the “end state of operations” will be, in other words whether LightSquared’s proposed “standstill” on upper band operation will be made into a permanent ban by the FCC or will be left open.
LightSquared highlighted that it had made a new proposal to the FCC yesterday, which (even though the main focus is on further limiting LightSquared’s power on the ground) seems to embody a number of subtle concessions, notably that it is basically accepting the GPS industry’s 1dB C/No criteria for assessing degradation rather than the relaxed 6dB degradation criteria it had proposed back in June, and that it is proposing the use of a filter to protect GPS devices which will eliminate any possibility of operating in the upper 10MHz L-band frequencies in the future. Thus it seems that the FCC might now end up ruling that the upper 10MHz block can’t be used for terrestrial operations (at least not without a future application showing what would be an impossible proof of non-interference). As I’ve noted before, that might conceivably put LightSquared into default on some of its debt agreements, though of course, if LightSquared is unable to raise further funding in the near future, it might very well be a moot point.
Permalink
09.07.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 8:20 pm by timfarrar
Back in July, LightSquared’s CEO claimed that he was “so confident…that he isn’t planning for the possibility that the FCC denies LightSquared the waiver when the decision comes out in September”. Unfortunately, after today’s news that government witnesses will tell tomorrow’s hearing of the House Committee on Space, Science and Technology that LightSquared “should face more testing for interference with the global-positioning system before it’s cleared to operate,” it appears LightSquared had better start that planning pretty soon.
In addition to the Bloomberg report, Communications Daily has a full copy of the testimony and is reporting that even Democrats on the House Committee are giving less than fulsome support to LightSquared by admitting that the hearing will not settle the conflict over “whether we are looking at an engineering challenge (building better filters, shaping cell tower antennas) or an insoluble physics problem (whether the sheer power of terrestrial cell signals inevitably overwhelms GPS devices),??? and concluding that “Until there are clearer answers to whether the LightSquared versus GPS conflict is about engineering or physics, we cannot know whether we can have both thriving GPS services and more broadband to spur innovation and employment”.
Thus, as I suggested a few weeks ago, it definitely appears that LightSquared will be consigned to a period of additional testing for now and any approval to move forward will be deferred for at least several months. The problem this presents is that by my calculations, LightSquared is likely to exhaust its current funding by about the end of the year, even if it does not pay Sprint to move forward with a full network deployment. My guess is that LightSquared’s payments to Sprint under the hosting agreement announced at the end of July include a regular quarterly payment plus a lump sum payable before Sprint begins the actual deployment. Plausibly, given the payment of $200M at the beginning of July, and the $9B total cash payment over 9 years, the regular payment could well be $200M at the beginning of each quarter, with the balance of $1.8B due (probably in several stages) over two or three years, as the network is deployed. Under the assumption that LightSquared continues to pay Sprint a regular quarterly payment but does not make any incremental payment to commence deployment, my estimate of LightSquared’s approximate quarterly cashflows is given in the table below.
UPDATE: An alternative payment schedule, under which the next payment to Sprint is not due until early 2012 would show LightSquared running out of cash in Q1 of 2012 and needing to raise about another $1B next year.
As noted by Sprint’s CFO in July, “during this period of time that [LightSquared] are trying to achieve clearance, they’re going to be out in the marketplace going to raise money” because Sprint “will be getting pre-funding of any work that we would be doing for LightSquared”. It appears LightSquared has been going about this task with considerable urgency, but given the delays for further testing, and the lack of certainty about the ultimate outcome, it is harder than ever to imagine where the money is going to come from.
It is therefore somewhat ironic that “President Obama apparently sees LightSquared’s plan as a centerpiece of a wireless broadband initiative that he hopes to make part of his re-election campaign“. However, the President certainly seems to have a track record of selecting companies that go bankrupt as the “true engine of economic growth”.
Permalink
09.02.11
Posted in Financials, Handheld, Iridium, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 9:20 am by timfarrar
Next week on September 7, Iridium is announcing “a new force in personal communications that aims to address the growing expectation of connectivity everywhere, all the time” which is “more than the launch of a single product”. There have been a couple of rumors about what this might be, firstly a commercial version of the Netted Iridium PTT service that has been such a success with the DoD, in conjunction with the new 9575 phone (which has a convenience key that could support such functionality) or secondly a Bluetooth-enabled device (similar to inReach or SPOT Connect) that is voice and data capable and can connect to standard cellular phones (a concept that has been put forward on multiple occasions by various MSS operators, including ICO Global back in 2001 and is already possible on Inmarsat BGAN terminals). Of course there may be some third unknown possibility, but of these two options it appears that the first is a more differentiated concept and may be nearer to realization at this point in time.
This week Inside GNSS reported some interesting insights into the LightSquared/ GPS interference debate, including a meeting in Washington DC last Friday August 26, “brokered by NTIA” which “suggested that a new test period — of 90 days or more may be needed”. The article also mentioned “Guidance from the White House” which mandates that officials “cannot attack LightSquared” because “President Obama apparently sees LightSquared’s plan as a centerpiece of a wireless broadband initiative that he hopes to make part of his re-election campaign”. More information may emerge at the rescheduled September 8 hearing of the House Committee on Science, Space, and Technology, which could be especially controversial as “NTIA reportedly is refusing to release information about the effect of GPS denial of service submitted by federal agencies” (similar to the devastating FAA assessment) to the Committee chairman.
Finally, a little more clarity emerged on how the claims of TerreStar’s various creditors will be treated, after the bankruptcy judge ruled on August 19 that the first lien debtholders have a valid lien on the proceeds of TerreStar Networks’s spectrum licenses. As a result, it now appears that in the TSN bankruptcy, there may be as little as $30M-$40M of cash left for the unsecured creditors ($1111M left of distributable value after paying the DIP and PMCA loans vs secured claims of $1077M as of August 31), who have total claims of $460M (including $179M for the 6.5% Exchangeable Notes and $104M for Sprint), although of course some of these claims (including an intercompany loan of $57M from TerreStar Corporation) are being challenged and TSN has asserted quite sizeable claims in the TSC bankruptcy (which could increase the total recovery, albeit in New TSC Notes, by tens of millions of dollars). However, this certainly means that Harbinger is taking yet another hit on its TSN investments, when it was buying Exchangeable Notes at as much as 82 cents on the dollar last November and the return to unsecured creditors is estimated to be only 10 to 15 cents on the dollar.
In the TSC bankruptcy, the Plan of Reorganization that has been filed contemplates that unsecured creditors (including potentially Elektrobit and TSN) with total claims estimated at $136M will receive “New TSC Notes” with “face amount equivalent to estimated Allowed Claims” secured by the estimated $177M value of the 1.4GHz spectrum. The Preferred Stock holders ($90M of Series A held by Highland and $318.5M of Series B, the majority of which is held by Soros and Harbinger) will fund an exit facility of $6.5M and receive all of the new equity in TSC, while the 1.4GHz spectrum lease (with Harbinger/ LightSquared) will remain in place providing $2M per month of revenue for TSC and more than covering the estimated $12M annual interest expense on the New TSC Notes.
Permalink
08.31.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 11:26 am by timfarrar
It seems that Sprint is not having much luck with timing when it comes to the announcement of its 4G strategy. Back in March it was apparently poised to announce a deal with LightSquared at CTIA, which was derailed by the AT&T/T-Mobile merger announcement. Now Sprint has just sent out invitations to its October 7 strategy update, only for the DoJ to announce it is filing suit to block the merger.
As Sprint attempts to write the “fourth chapter” in its 4G strategy for this October event, it appears the upheaval caused by this unexpected DoJ announcement could very well complicate its plans. It has been reported that Sprint has engaged in discussions with several cable companies, but most coverage had focused on whether this would lead to a takeover bid for Clearwire. However, there isn’t much need for a resolution of the Clearwire situation ahead of October 7 – what Sprint really requires is a solution for its wide area LTE coverage rollout rather than the urban capacity enhancement that Clearwire intends to provide. With little probability that it can use LightSquared’s spectrum in the immediate future, and only a limited quantity of its own PCS spectrum available for LTE, I think its more likely that the next chapter of Sprint’s strategy would have involved the cable operators exchanging their SpectrumCo AWS holdings (a near national 20MHz block acquired for only $0.43/MHzPOP in the 2006 auction) for an equity stake in Sprint itself.
Now the DoJ’s actions this morning have introduced considerable uncertainty about whether this would be the best way forward for Sprint, both because a Sprint/T-Mobile merger could ultimately be back on the table, and because the cable companies could potentially sell their AWS holdings to T-Mobile, which was previously regarded as the obvious purchaser for these assets. Thus I think on balance its now less likely that Sprint will have a major new agreement with the cable companies to announce in October.
There could also be repercussions for DISH’s filing with the FCC for a waiver of the ATC restrictions in the 2GHz band. There are certainly many positives, in that either T-Mobile or AT&T could once more become a viable partner for DISH, but it also seems likely that the FCC may be unwilling to decide how it will handle the DISH application (and more particularly what conditions it will agree to) until the ultimate disposition of the AT&T/T-Mobile merger is decided. That’s because there will be less need to insist on DISH becoming a standalone competitor (and perhaps even to provide wholesale access commitments) if there are still going to be four national wireless operators in the market, though of course the FCC will still want to ensure that DISH does not simply flip the spectrum to one of those “big guys”, as some people apparently think it will do.
Permalink
08.22.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 2:08 pm by timfarrar
Today, DISH has filed its transfer application for TerreStar’s 2GHz spectrum licenses with the FCC, stating that it plans to combine the spectrum with that of DBSD, so that it can use the full 40MHz to launch a “hybrid satellite and terrestrial mobile and fixed broadband network…to provide American consumers with greater choice for mobile broadband services”. DISH plans to deploy its network “based on the LTE Advanced standard” for which “commercial devices are expected to be generally available by 2014″, and seeks permission “to provide dual-mode terminals to customers who want them, and single-mode terrestrial terminals to customers who do not want the satellite function” noting that “relief from the integration requirement is an important component of DISH’s plan”. DISH also seeks a waiver of the ATC gating requirement to acquire a backup satellite.
In exchange, DISH states that it “is prepared to work with the Commission to develop a reasonable, attainable buildout schedule keyed to commercial availability of the LTE Advanced standard” and make “certain substantial terrestrial network deployment commitments intended to increase wireless broadband competition, including in rural areas”. However, though DISH has previously indicated that it will seek partners for its mobile broadband play, it does not commit to make network available on a wholesale basis to third parties.
As I’ve pointed out previously, DISH is now in a perfect position to replace LightSquared as the FCC’s favored option for providing additional wireless competition. Indeed DISH highlights specifically in the TerreStar application that “use of the [2GHz] band also does not give rise to the GPS interference issues that have hampered the use of the L-band” which is one of the factors meaning that the “promise of MSS/ATC has yet to be fully realized”. DISH also notes pointedly that it is “a well-financed, capable, and recognized innovator in communications technology [with] unique experience in developing an innovative and competitive retail operation and growing it from zero to approximately 14 million subscribers”.
Thus this application now sets the scene for a negotiation with the Commission over the terms of the promised buildout, including the specific coverage commitments and perhaps even some later promise (depending on the views of DISH’s key partners) to enter into wholesale deals with smaller players. With the cable companies apparently aligning themselves with Sprint, it looks very much like DISH will now partner with MetroPCS and perhaps even DirecTV and/or Leap as well.
Permalink
08.18.11
Posted in Financials, Globalstar, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 8:49 pm by timfarrar
In my last post I estimated that to in order to relocate and preserve precision GPS service for farmers and surveyors there might need to be a “delay of several years” before LightSquared was able to bring its lower 2x10MHz of spectrum into use in a terrestrial network. Indeed, according to one GPS industry commentator, a transition period of 12 years might be more appropriate to “allow a smooth transition with a manageable financial impact to the high-precision GPS user community.”
However, because of LightSquared’s prior assurances that it wanted to cooperate with the GPS industry to preserve existing services, no-one seems to have noticed that in fact the company does have a potential “nuclear option”, namely that because these services are provided on a commercial basis to Starfire and OmniSTAR, LightSquared and Inmarsat could simply decide to cease supporting these services in accordance with their capacity lease contracts. Given that LightSquared is now blaming the GPS industry for the interference problems and accusing GPS manufacturers of being unwilling to cooperate with its attempts to find a solution, it seems increasingly plausible that LightSquared could now say that it simply can’t continue to support these services unless the FCC mandates a rapid transition of precision GPS users to new equipment equipped with filters.
LightSquared (which provides capacity to OmniSTAR, now owned by Trimble) has previously indicated that it only plans to support its legacy services in “emulation mode” for a limited period of time, and it appears likely that the contract with OmniSTAR could therefore potentially be terminated at relatively short notice. While Inmarsat’s contract with Starfire may not operate under quite such a short time horizons, many of Inmarsat’s leases are renewable on an annual basis and so could possibly be terminated if desired. In reaching such a decision, Inmarsat would have to decide whether it prefers the ~$1M or so it receives each year from Starfire to the $115M it is being paid each year by LightSquared (indeed it is conceivable that this issue may have been addressed in the deal under which Inmarsat was paid an additional $40M by LightSquared earlier this year).
Some might argue that the FCC would surely step in to prevent such damage to precision GPS services. However, in March 2010 when it granted LightSquared the requested modifications to its ATC license, the FCC explicitly stated that it would refrain “from interfering unnecessarily with licensees’ business negotiations” even though “this may present challenges to earth station operators using the satellites involved, and may require modification of operations, deployment of new equipment, or other adjustments” because “it would not serve the public interest for the Commission to assume the role of an arbiter of disputes between a satellite operator and its customers.” Nevertheless, the FCC did leave itself one potential escape route, stating that it would not step into such disputes “in the absence of a prior determination that the satellite operator provides essential service and is unconstrained by actual or potential competition from providers of substitutable services.”
Of course, if the FCC did step in and force LightSquared to continue providing precision GPS services, then that might provide grounds for LightSquared to sue for compensation, especially if that was determined to be the main roadblock to offering commercial service in its lower L-band spectrum. As I’ve noted before, ending up in court certainly seems to be an increasingly plausible outcome to what the Economist describes as this “sorry tale of greed, haste and incompetence.”
As an aside, LightSquared does not seem to be the only MSS operator whose ATC services face interference challenges. A recent comment on one of my older blog posts highlighted that Open Range has been getting into difficulties with its use of Globalstar’s S-band spectrum in Indiana. Additionally, if LightSquared’s use of ATC handsets at 1627-1637MHz is a major concern for GPS users in the 1559-1610MHz band, then one would have to expect even greater concern about any future ATC deployment within Globalstar’s L-band spectrum at 1610-1617.775MHz (note that Open Range only uses Globalstar’s S-band spectrum in a TDD architecture). Similarly, there are now a number of comments in the 2GHz proceeding about the potential interference challenges at the bottom end of the TerreStar uplink spectrum (2000MHz).
Permalink
08.09.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 3:07 pm by timfarrar
It seems from today’s unexpected press conference that the FCC Chairman has finally realized that there is no way to avoid the fact that the GPS interference issues are a showstopper, and he is now preparing the ground to basically throw LightSquared under the bus. In particular the FCC is now characterizing the January waiver as a “stop work” order, stating that there is “no timetable” for the review (despite LightSquared’s recent insistence that it was “confident that the FCC will green-light its plans in mid-September”) and suggesting that there will now be more testing of the lower band plan, while use of the upper band will not be “happening anytime soon.”
Judging from these comments, my best guess is that there will now be six more months of testing on the lower band proposal (lasting into the spring or early summer of 2012, depending on how long it takes to issue the ruling), and a final decision could plausibly be deferred until after next year’s Presidential election (in order to avoid a political battle with the farming lobby). In addition, I suspect that even if LightSquared (assuming it is still around) received approval at that time, there could still be a delay of several years for precision users such as farmers and surveyors to modify their equipment before the lower band was brought into use.
Of course the reason that LightSquared had insisted on a mid-September approval is that it needs to raise additional funding before it can move forward with the Sprint deal, and as noted in Sprint’s 10-Q, there are “contingencies related to possible interference issues” in the network hosting agreement which give Sprint the right “to terminate the arrangement if certain conditions are not met either by September 30, 2011 or December 31, 2011.” However, this would apparently involve giving back LightSquared’s prepayments, so it seems more likely that the agreement would be “terminated for LightSquared’s material breach, non-payment or insolvency” in which case “Sprint maintains a second lien on certain of LightSquared’s spectrum related assets” (though that may be worthless) and presumably can also keep any payments made by LightSquared. Unfortunately, as stated today, although the FCC “would be sensitive to the financial situation of LightSquared’s owner, Harbinger Capital … that would not affect how it came to its decision on how to proceed” and FCC officials “insist they never told LightSquared the review would be completed by [mid-September].”
On the other hand, this morning, DISH stated that it plans “to make a mobile broadband play with its recently acquired S-Band satellite spectrum” and it intends to play a “significant role” in the wireless industry. When asked if DISH would reveal its strategy as soon as the Sprint announcement on October 7, DISH cautioned that they “wouldn’t expect anything in the near term.” Thus it seems that with LightSquared now left hanging, and the stock prices of Sprint, MetroPCS and Leap all suffering badly after their Q2 results, DISH is in an increasingly strong position, and may want to take more time to obtain the best possible terms for the partnerships needed for its wireless strategy. However, if that is the case, it is harder to see what might be a plausible “fourth chapter” for Sprint’s wireless strategy in early October, and it is always possible that DISH’s comment could be intended to put pressure on Sprint to offer them a better deal.
Permalink
07.29.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:47 am by timfarrar
You say you want a revolution
Well you know
we all want to change the world
You tell me that it’s evolution
Well you know
We all want to change the world
But when you talk about destruction
Don’t you know that you can count me out
So now Sprint has confirmed a network sharing deal with LightSquared, under which LightSquared plans to pay Sprint $9B in cash plus $4.5B in service credits to cover spectrum hosting fees for a period of 11 years. Indeed, as I mentioned last week, LightSquared has already paid Sprint a total of $290M in prepayments to secure the deal. However, there are various contingencies which could cause the deal to be terminated if LightSquared does not secure approval from the FCC or is unable to raise the money to pay Sprint to undertake the rollout. Sprint has also not committed at this stage to actually use LightSquared’s capacity, and is deferring until October 7 a more detailed announcement of its 4G strategy, partly to allow the FCC to rule on LightSquared’s plan, but also to see if Sprint can add a “fourth chapter” to its strategy (perhaps providing support to Charlie Ergen’s potential new venture?).
Unfortunately the LightSquared-Sprint deal was pre-empted by the leaking of a new FAA report which estimates that LightSquared’s deployment “would result in an estimated impact to the aviation community of at least $70 billion” and could cause the loss of approximately 800 lives over a 10 year period. More bad news for LightSquared is also expected to emerge in the next few weeks as other federal agencies have been asked to give their own estimates of the cost impact that LightSquared’s plans would have.
You say you got a real solution
Well you know
we’d all love to see the plan
You ask me for a contribution
Well you know
We’re all doing what we can
But when you want money while making our planes run late
All I can tell you is brother you have to wait
LightSquared has reacted to the FAA report by claiming that it “discusses a LightSquared plan that is no longer on the table” but of course LightSquared stated in its June 30 submission that it intends to ultimately use all frequencies the FCC authorized, and indicated at the time that use of only the lower 2x10MHz block would only be adequate for “the next several years“.
Now according to Sprint’s CFO, “during this period of time that [LightSquared] are trying to achieve clearance, they’re going to be out in the marketplace going to raise money” because Sprint “will be getting pre-funding of any work that we would be doing for LightSquared”. Notably, LightSquared is paying its $9B of cash over 9 years, even though it covers an 11 year hosting period, which seems to imply that LightSquared may need to pre-fund up to 2 years of network buildout in advance. Judging by Crown Castle’s expectations that it will receive substantial incremental revenues from Sprint in the second half of 2011 (over and above what it had expected 3 months ago), but the option to add LightSquared has not yet been exercised, Sprint also does not appear to be waiting for LightSquared before it moves ahead with the Network Vision buildout.
It therefore definitely appears that LightSquared will now have to raise at least $1B+ of the $3.5B it claims is its peak funding requirement very soon and more than likely before Sprint announces how it will move forward on October 7. This would fit with LightSquared’s assertion that it expects the FCC “to issue an order within four or five weeks [after the completion of the consultation], and that is by mid-September” and any outcome other than approval to move forward on the basis of the June 30 plan “is not a scenario we contemplate”. Although LightSquared indicated that the only way Sprint can terminate the deal is if it fails to get FCC clearance, that of course omits to mention that if LightSquared is unable to meet its payment obligations then Sprint could declare a default and foreclose on LightSquared’s prepayments and the second lien on its spectrum assets. Potentially this could happen as soon as early October, given the timetable set out by Sprint’s CFO, especially if Sprint is able to come up with the “fourth chapter” to its strategy, which could provide it with a more interesting alternative to LightSquared.
However, with the FAA Administrator stating publicly that “I’m very comfortable in saying that we are going to protect the GPS signal”, it seems “almost inconceivable” as Craig Moffett of Sanford C. Bernstein put it that the FCC would do anything other than ask for a period of further testing and it is therefore hard to imagine how LightSquared could be able to raise a very substantial sum from outside investors by early October.
You say you’ll change the constitution
Well you know
We all want to change your head
You tell me it’s the institution
Well you know
You better free your mind instead
But if you go saying our farms can’t plow
You ain’t going to make it with anyone anyhow
Of course, even if the FCC could be persuaded to give LightSquared approval to operate, then its seems highly likely that Congress would overrule the FCC and forbid LightSquared from commencing service. Indeed if further testing pushes a decision point into next year, then it seems inconceivable that LightSquared would be allowed to operate even in the lower 2x10MHz band given the impact that would have on precision agricultural equipment, and the power of the farming lobby in an election year.
Perhaps that is why LightSquared has now pushed back its date for commencing operations yet again, until the second half of 2012, presumably after the November election. However, it seems clear from the emphasis that LightSquared is placing on its 2015 obligation to cover 260M people that it is now certain to miss the 100M coverage obligation at the end of 2012, which would require further cooperation from the FCC if LightSquared’s authorizations are not to become null and void.
In conclusion it seems that while Sprint benefits from the pre-payments it is receiving from LightSquared, nothing in yesterday’s announcement really solves LightSquared’s key regulatory and financing problems. In fact I think that this announcement makes it less likely that the LightSquared saga will drag on into next year, and instead it could all come to a head by October 7. Perhaps it will therefore soon be time to tell the GPS industry (but not LightSquared’s investors) don’t you know it’s gonna be alright.
POSTSCRIPT: A well-known telecom analyst suggested to me that this would be a more appropriate song.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
