01.21.11
Posted in Financials, Handheld, Operators, Spectrum, TerreStar at 11:09 am by timfarrar
TerreStar Networks has now filed its Monthly Operating Report for December, which gives details of its revenues and cost of goods sold (COGS). In December 2010, TerreStar reported total revenues of $113,479 against a total COGS of $615,155, which compares to revenues of $91,626 and COGS of $125,189 in November 2010. However, TerreStar has not stated whether it is in compliance with the terms of the DIP Agreement, which requires both the “Roam-in Revenue??? and the “number of subscribers” to be no less than “85% of the amount set forth in…the Agreed Budget and accompanying projections” as of December 31, 2010. The target number of subscribers is not disclosed in the DIP Agreement, but the Agreed Budget details the Roam-in Revenue (i.e. excluding handset sales) as $89,000 for December 2010. Under the DIP Agreement, this information should have been made available to the “Administrative Agent and the Lenders” (although not necessarily disclosed publicly) within 3 business days after the end of each fiscal month.
Due to the lack of any breakdown for the December revenues in the Monthly Operating Report (and the completely inaccurate supporting comment that “Our revenue currently is derived primarily from a spectrum-leasing agreement”, when in fact it is TerreStar Corporation that has a spectrum leasing agreement with Harbinger), it is quite hard to determine whether TerreStar is meeting the covenants in the DIP Agreement. At an ARPU of $50 per month for the Genus phone as envisaged in the Blackstone business plan, then there would need to have been an average of 1780 Genus subscribers during the month to produce $89K of service revenues in December. However, my assumption is that the real ARPU for TerreStar (once AT&T’s share of the revenues is subtracted) is significantly lower than this figure, implying that potentially in excess of 5000 phones would need to have been activated by the end of December (to produce a month average subscriber base generating sufficient revenue) to meet this target.
It is hard to tell how many phones were shipped to distributors prior to November, as TerreStar has not filed a 10-Q for the third quarter of 2010 or a monthly operating report for October 2010. It is possible that no new phones and accessories have been sold to distributors, and the vast majority of reported revenues in December were “Roam-in” service revenues from AT&T. However, TerreStar reported COGS of over $615K in the month, and it would be somewhat surprising if this was all free equipment for demos, replacements, etc. (especially as we understand TerreStar did not originally intend to supply free demo phones to distributors). Notably, the Agreed Budget envisaged $321K of equipment sales during December, which far exceeds the total revenues actually generated during the month. Given the rapid expansion in “Roam-in” revenue in what was disclosed of the Agreed Budget ($10K in October, $40K in November, $89K in December) it also seems likely that the January 2011 budget target would require further substantial growth in sales, and therefore would be even more challenging to meet.
UPDATE: I’m told that no more than a few hundred Genus phones have been sold to end users (and many of these are likely to have been purchased just for an initial test of the service), so it is inconceivable that the DIP covenants related to “Roam-In” revenues and subscribers could have been met at the end of December.
FURTHER UPDATE (2/11): On February 3, TerreStar filed the third and fourth DIP amendments, confirming that the the covenants related to Roam-In Revenues (Section 6.11) and Minimum Subscribers (Section 6.12) had not been met at the end of December 2010 or January 2011.
The next question is where TerreStar goes from here with the Genus phone. Will it be able to reach agreement with suppliers such as Elektrobit to keep supporting the phone (especially when Elektrobit is owed a substantial sum of money by TerreStar)? Would any breach of the DIP conditions simply be waived, and decisions on the future of the Genus phone postponed until after the company emerges from bankruptcy? With all the uncertainty about what will happen on MSS-ATC spectrum, that would seem to be logical. However, the apparent lack of appeal for this supposedly game-changing phone also highlights why LightSquared is so keen to be granted permission for its partners to offer terrestrial-only services, and I would ultimately expect TerreStar to follow the same path.
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11.30.10
Posted in Financials, Handheld, Inmarsat, Operators, Spectrum, TerreStar at 5:51 pm by timfarrar
TerreStar has finally filed the exhibits to its Disclosure Statement which set out more details about its Genus business plan and the valuation of its spectrum, and though I don’t think Blackstone are paying tribute to Leslie Nielsen when they respond “I am serious” (and don’t call me Shirley), their Genus business plan has caused much mirth in the MSS industry.
I’ve previously pointed out the similarities to the launch of Iridium (and ironically Blackstone were also the financial advisers to Motorola in their attempts to restructure Iridium after it filed for bankruptcy in 1999). Just as back then, it seems hard to understand how TerreStar can hope to capture 41K subscribers with an average wholesale ARPU of $50 by the end of 2011, let alone 156K subscribers with an average wholesale ARPU of $42 by the end of 2014 (almost equal to the size of the entire North American handheld MSS market today), given the reception that the Genus phone has received so far in the market, and the recent laughable attempt to sell the phone to consumers.
However, it is interesting that TerreStar has now initiated a formal sale process for its assets in an attempt to gauge their market value. This has also generated some amusing responses, but of more interest is whether this means TerreStar has reached a deal with Harbinger to avoid a fight over the “unsecured creditors’ entitlement to excess value of TerreStar-2 (after repayment of the Purchase Money Credit Agreement)” which is acknowledged in the Liquidation Analysis to be an issue of contention (and is presumable one reason why Harbinger has been buying up TerreStar Networks’ 6.5% Exchangeable Notes). Certainly, this process would be an obvious way to find out whether one or other of the European S-band licensees (Inmarsat and Solaris) really is interested in buying the TerreStar-2 ground spare, in order to meet their license obligations to the European Commission, and to see whether the $200M valuation placed on this satellite by an appraisal back in August can actually be realized in practice.
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11.05.10
Posted in Broadband, Inmarsat, Operators, VSAT at 3:24 pm by timfarrar
On its results call last night, Viasat said that it is soliciting preliminary technical proposals from manufacturers for a ViaSat-2 Ka-band satellite to complement the ViaSat-1 spacecraft set for launch in the first half of 2011. Viasat is also aiming to sell around 10% of its Viasat-1 capacity to government users and another 10% of the capacity for mobile applications. With the possibility that the Viasat-2 satellite could add beams to target areas such as the North Atlantic ocean and/or various oilfields, it now seems plausible that Viasat will seek to challenge Inmarsat’s Global Xpress project directly, in several of its Inmarsat’s planned target markets (government, energy and maritime).
This would not be particularly surprising, because it is our understanding that (despite significant efforts earlier in the year) Viasat is not on the list of bidders for the Global Xpress ground infrastructure contract, which Inmarsat is expected to award early next year (and for which bids were received in mid-October). Inmarsat has a major advantage in that Global Xpress will provide coverage around the world, including hotspots for UAV demand such as Afghanistan. However, Viasat has dramatically more capacity on its satellite and so it could potentially cherry pick some high revenue opportunities in North America and the surrounding areas.
On balance I think Inmarsat is better placed to win this battle, because we have projected for many years that the satellite consumer broadband market would not live up to Viasat’s very high expectations. Indeed I still expect that the most that Viasat and Hughes can hope for in the North American consumer broadband market is 2-3 million customers between them, with growth stalling in 3-4 years time as terrestrial buildout continues. Fundamentally, I have a hard time seeing satellite broadband as anything other than a last resort technology, however much capacity Viasat throws at the customer, because the constraining factor is the need to install a relatively costly terminal, which then requires ARPUs of $50 per month and up, far above expectations for terrestrial alternatives (especially in less wealthy rural areas).
As a result, Viasat could well be left with excess capacity if it does decide to contract for Viasat-2 before Viasat-1 has proved its commercial potential, as was stated on the call. Of course that could lead to some destructive price cutting to capture the limited number of regional customer opportunities, but just as in the MSS market when regional players have made inroads in certain areas, Inmarsat could well emerge relatively unscathed.
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10.03.10
Posted in Handheld, Operators, Services, TerreStar at 7:41 pm by timfarrar
Its been known for at least a year that TerreStar’s Genus phone would need an external antenna to provide good performance in Alaska and most of Canada. TerreStar’s latest coverage map indicates this, and also recommends the use of the external antenna in Hawaii and Puerto Rico/US Virgin Islands as well.
We’ve now obtained a picture of the cradle and external antenna, which we understand will be announced soon, presumably once approval is received for this equipment from the FCC.
UPDATE: SatPhoneStore are now selling what is referred to as the Genus External Antenna and Sled for $265. Interestingly, the Genus phone itself is priced at $1150 (down from a “regular price” of $1299), suggesting that the wholesale price of the phone to distributors other than AT&T may be approaching $1000.
It looks like the Genus phone will be a rather harder sell if users need to buy a separate and relatively bulky external antenna to improve performance, so let’s hope that what happens in Alaska stays in Alaska.
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09.29.10
Posted in Financials, Handheld, Iridium, Operators, Services, TerreStar at 10:42 pm by timfarrar
When I read this review of the TerreStar Genus phone, not only did it confirm my own views about the limited prospects for the phone and the wider lack of interest in dual mode satellite phones, but it brought back quite a few memories from the late 1990s.
Most notably, likening a satellite phone to a “brick” is never a good sign (“It’s huge! It will scare people…If we had a campaign that featured our product, we’d lose“).
Also the suggestion that AT&T hasn’t identified the market correctly if it thinks people will use this as their “everyday mobile device”, along with criticism of the “hefty series of price tags” (“What it looks like now is a multibillion-dollar science project. There are fundamental problems: The handset is big, the service is expensive, and the customers haven’t really been identified“)
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09.23.10
Posted in Aeronautical, Inmarsat, Operators at 11:59 am by timfarrar
Its now been announced that JetBlue has signed an MOU with Viasat to install Ka-band connectivity on its fleet, starting in 2012. One of the primary reasons cited by JetBlue was that the satellite capacity was much cheaper than at Ku-band.
We analyzed the cost of providing service for Aircell and Row44 in one of our recent research reports, and concluded that (as JetBlue also asserted), Ku-band satellite capacity can rapidly become the dominant cost driver for aeronautical broadband even at moderate usage levels and take rates. For example, we estimated that at a 25% take-rate, the cost of Ku-band satellite capacity would be between $30K and $80K per plane per year, depending on the amount of bandwidth allocated to each customer. This compares to an amortized satellite equipment cost of perhaps $40K per plane per year. Viasat’s Ka-band satellite could reduce the capacity cost by a factor of up to about 5 times, bringing the cost of capacity down to say $6K to $16K per plane per year.
Thus the strategic question for JetBlue is whether it will use this capacity cost differential to make the service free to end users (or free for most applications other than say streaming video). As noted in past news articles, charging for in-flight broadband has a huge impact on take rates. However, Row 44 (with expensive Ku-band capacity) and Aircell (with a limited amount of terrestrial bandwidth) can’t afford to offer free usage, unless they constrain the service significantly (e.g. no streaming video and limited bandwidth). JetBlue has already offered free (albeit very limited) service on its Beta Blue plane, whereas Southwest (which will set pricing on its Row44-equipped planes) has indicated that it plans to charge for the service.
If JetBlue did offer free service, then this would certainly shake up the in-flight broadband business. Would airlines step-in to pay Aircell directly for their service instead of relying on passenger revenues? Will there be a return of the sponsorship model used on airlines like Virgin America for a period last year? More to the point, will the mere prospect of such disruption cause airlines thinking about installing Ku-band to consider waiting for Inmarsat’s new Ka-band Global Xpress service in 2014?
UPDATE: Now Southwest has agreed to buy AirTran, which already has fleetwide in-flight connectivity through Aircell, will Southwest have yet another reason to reconsider its Ku-band plans with Row44?
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09.20.10
Posted in Services at 9:45 am by timfarrar
Last week it was reported that LightSquared had raised another $750M loan from UBS, to add to the $400M loan it secured from UBS back in July. Today it is also being reported that SK Telecom is considering an investment of up to $100M in LightSquared.
This is undoubtedly good news for LightSquared, although it appears that the new $750M loan is likely to be a refinancing of SkyTerra’s outstanding $750M in first lien debt, which would otherwise have become cash pay on October 1. Even so, Harbinger held the majority of the original first lien loan, and so if the $750M is all new money from third parties, this would enable Harbinger to inject as much as $400M to $500M of additional funding into the LightSquared venture, simply by rolling over its original first lien holdings into subordinated debt or equity. Given that Harbinger stated back in July that it was raising up to $1.75B, then this would appear to match with that target ($400M July loan + $750M September loan + $400M-$500M of new Harbinger equity + $100M of third party funding), although in reality there would only be $1B of additional funding for the network buildout (plus potential vendor financing from Nokia Siemens Networks, which has not yet been announced).
However, last week also brought more ominous news for Harbinger in the form of the FCC’s denial of Globalstar’s ATC waiver request. As we noted at the time, Harbinger faces aggressive buildout milestones and has a pending request for a waiver of the SkyTerra-1 satellite launch deadline. If the FCC is sending a signal to Harbinger that it will not tolerate missed deadlines due to funding problems, which was the principal rationale for the Globalstar ruling, then investors in LightSquared will have to worry about how valuable the spectrum assets would be if LightSquared failed or otherwise could not meet the FCC’s deadlines. Indeed Harbinger’s own “voluntary commitments” included the condition that the LightSquared “authorizations” (its ATC license and perhaps even its MSS license depending on the interpretation of this phrase) will automatically be “null and void” without any need for further action by the Commission if LightSquared fails to meet the buildout milestones.
In particular, the question arises of whether the FCC would impose costly buildout conditions on a potential purchaser of the spectrum assets, or possibly even veto a purchase by AT&T/Verizon on competition grounds. In our view, the Globalstar ruling introduces rather more uncertainty about whether it will be possible to guarantee active bidding in the event that the LightSquared assets are sold in the future (especially in a bankruptcy auction where approval of the transfer would have to be sought afterwards from the FCC), and thereby makes it harder to put a floor under the value of LightSquared’s spectrum.
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Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services at 8:46 am by timfarrar
One of the most interesting questions about Inmarsat’s new ISatPhone Pro is how well it will work at low elevation angles, including for example whether the phone antenna needs to be pointed towards the satellite. This is going to be particularly relevant in Alaska, much of which lies very close to the nominal edge of coverage, and well outside the 20 degree elevation angle contour (where Inmarsat suggests that “more user cooperation is required”), as shown below.
However, I’ve been told by Inmarsat that the phone is performing better than expected, even at relatively low elevation angles, so it will be interesting to see what this means in practice. Given that the beams used for registering the phone on the Inmarsat satellite are lower power than the beams used for a call, it appears probable that either the phone will register successfully and then calls can be made OK, or the phone won’t register and then no calls can be made at all.
Its surprising that we haven’t yet seen any published real world tests of the Inmarsat phone in comparison to Iridium, similar to the Frost & Sullivan reports which compared Iridium and Globalstar in 2008 and 2002. However, I’m sure similar analyses will be undertaken by both Iridium and Inmarsat at least for their own internal purposes, and possibly even for external publication if they believe the results are favorable. If you’ve tried out the phone in “fringe” coverage areas then feel free to let us know about your experience in the comments section below.
UPDATE: So now Frost & Sullivan has released its comparison of the Iridium and Inmarsat phones, which was commissioned by Iridium. It is notable that in Anchorage, Alaska, Frost & Sullivan “was unable to make or receive a call despite dozens of attempts and was only able to briefly find a satellite”. This points to difficulties with registration, as we suspected. However, Inmarsat sources tell us that it is perfectly possible to register on the satellite in Alaska, and make calls there. We haven’t yet got an independent view, but it would seem likely that the actual answer may lie somewhere between these two opposing views. We would speculate that you will probably have to have a pretty good idea where the Inmarsat satellite is so you can point the phone antenna at it during registration (maybe using a compass would be helpful?).
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09.16.10
Posted in Handheld, Operators, Regulatory, Services, Spectrum, TerreStar at 10:02 am by timfarrar
We’re told that TerreStar is planning to announce (tomorrow?) that the Genus phone will be released by AT&T next week. However, surprisingly enough, AT&T’s filing yesterday in response to the FCC’s NPRM/NOI on MSS spectrum, didn’t mention the Genus phone once. Not only that, but AT&T actually suggested that “rationalizing the MSS bands for terrestrial wireless use is a
good first step to implementing a comprehensive broadband spectrum strategy”, and supported the concept suggested in the NOI, that “there may be opportunities to ‘meet future [MSS] needs with less allocated spectrum in some or all of the bands.’”
Therefore the obvious question is whether AT&T cares about the success of the Genus phone, or instead would actually benefit from it failing, because it believes that the “2 GHz MSS band is a good target for the creation of new terrestrial mobile services”. Of course AT&T is a large company, and what is in the interests of AT&T at a corporate level may differ from the priorities of the staff working on the Genus launch. However, given the challenges that the Genus phone already faces, it is noteworthy that the project does not appear to enjoy much recognition or support when AT&T is setting out its strategic interests in the wireless business.
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08.23.10
Posted in Financials, Handheld, ICO/DBSD, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 12:09 pm by timfarrar
That’s the big question facing TerreStar and its investors, as the company moves towards a bankruptcy filing which we assume will come in the next week or so. TerreStar Networks has a very substantial amount of debt secured against its in-orbit satellite and 2GHz spectrum assets, with $857M of 15% Secured Notes and $109M of 6.5% Exchangeable Notes outstanding at June 30, 2010 according to TerreStar’s latest 10-Q.
TerreStar stated in the 10-Q that it had “commenced restructuring discussions with certain holders of our 15% Secured Notes and 6.5% Exchangeable Notes”. However, if these discussions are not successful, and TerreStar and its advisers want to argue that the satellite spectrum is worth considerably more than the outstanding first lien debt, then it is possible that they could try to keep this debt in place and raise DIP funding based on TerreStar’s other assets, such as its 1.4GHz spectrum and the ground spare satellite (which is encumbered by a separate $73M Purchase Money Credit Facility).
The result would likely be a dispute in bankruptcy court over whether it is better to halt TerreStar’s plans to launch commercial service, and sell off its satellite and spectrum assets in the near future (e.g. if the current FCC proceeding permits incentive auctions for the 2GHz MSS spectrum), or to keep the company afloat and moving forward with the launch of the Genus phone, which was recently postponed until September. Of course the second option would require considerably more funding to be made available, and it is extremely questionable whether a feasible business plan could be developed to justify commercial launch of the Genus phone. In our profile of TerreStar, published back in January 2010, we estimated that the handheld Genus phone could generate perhaps $25M in wholesale service revenues by 2014, but after trying out the phone in March, we scaled back our expectations.
It may also be difficult to argue that TerreStar’s in-orbit satellite and spectrum is worth significantly in excess of the $966M of outstanding Secured and Exchangeable Notes, when a judge found in the DBSD bankruptcy case last fall that DBSD (with a satellite in orbit and having chosen its 20MHz of spectrum ahead of TerreStar) should be valued at $492M to $692M.
It is far from clear that either DBSD or TerreStar are better positioned than they were last year to secure a strategic partner (such as a wireless operator) who is prepared to fund the rollout of a multi-billion dollar terrestrial ATC network. Indeed, given the recent decision of Harbinger to go it alone with a wholesale approach for LightSquared, major wireless operators have to date proved unwilling to invest on the basis of the ATC model and associated satellite spectrum (despite five years of trying on the part of SkyTerra, ICO/DBSD and TerreStar).
The FCC’s recent NPRM could potentially enable the 2GHz MSS operators to monetize their spectrum via an incentive auction or similar mechanism once the proceeding is completed in 2011, which does represent a change from last year, but the FCC has also emphasized that it will need to receive compensation for the step-up in value accruing from removal of the current ATC rules in the 2GHz MSS band. If the proceeds of an incentive auction were shared 50/50 between the current spectrum holders and the government, as appears plausible, then (taking into account the delay before an auction could take place, most likely in 2012, and the need for additional funding in the interim) such an auction would need to raise close to $0.50 per MHzPOP in order to repay the Secured and Exchangeable Notes.
Although such a valuation is similar to those mooted by Clearwire and Credit Suisse in recent months, the FCC’s interests are not necessarily supportive of increasing spectrum valuations, and the balance between potential buyers and sellers of spectrum is significantly different to that back in 2006, when the AWS auction raised an average of $0.54 per MHzPOP.
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