02.16.16
Posted in Aeronautical, Financials, Services at 12:18 pm by timfarrar
As I predicted back in January, American Airlines has now selected ViaSat over Gogo to equip its next batch of 200 new 737 aircraft. However, Gogo rejected American’s notification that “ViaSat offers an in-flight connectivity system that materially improves on Gogo’s air-to-ground system” which led American to file a petition for declaratory judgment to enforce its rights under the contract with Gogo.
The clause in dispute is 13.5.2 which reads as follows (with certain confidential information redacted):
With respect to each of the Fleet Types, if at any time after the [***] of the Trigger Date for such Fleet Type (A) an in-flight connectivity services provider other than Aircell offers a connectivity service (B) that provides a material improvement in connectivity functionality [***] (C) such that American reasonably believes that failing to offer such service to passengers on such Fleet Type would likely cause competitive harm to American by [***], (D) such competitive system is installed and in commercial operation on [***], and (E) American has completed sourcing processes with respect to the competitive offering sufficiently rigorous such that American can validate the technology, functionality and feasibility of the competitive offering and provide objective system performance and functionality criteria to Aircell for its use in determining whether it wishes to submit a proposal as contemplated below, then American may provide written notice thereof (including such criteria) to Aircell. In such event, Aircell will have the opportunity to submit a proposal to provide such service to American, which proposal will include, without limitation, proposed terms regarding pricing, system functionality and implementation dates, within [***] after receipt of such notice, and if Aircell timely submits such proposal then American will in good faith consider such proposal. If American reasonably determines that Aircell’s proposal is at least as favorable as the competitor’s offering, this Agreement will be amended to incorporate such additional or replacement offering or functionality and the agreed upon terms. If Aircell declines or fails to submit a proposal to American within such [***], or if American reasonably determines that Aircell’s proposal is not as favorable as the competitor’s offering, then American may elect to termination this Agreement with respect to such Fleet Type. Such election must be made by providing at least [***] advance notice thereof to Gogo, and in such event this Agreement will terminate as and to the extent and otherwise in accordance with American’s termination notice. Notwithstanding anything to the contrary contained herein, American shall not be required to provide to Aircell any information that American may not disclose pursuant to confidentiality obligations to any third party.
It seems that Gogo could only have based its rejection of American’s notice on an assertion that either ViaSat’s service is not a “material improvement” (over basic ATG!) or that it is not in “commercial operation” but neither rationale appears likely to hold up in court. Moreover, the competition to equip American’s next gen 737 fleet has been going on for the last six months or more and Gogo has already offered 2Ku to American in this competition. In fact, according to Runway Girl Network, American told Gogo some time ago to stop working on the STCs needed to install 2Ku on American’s new planes.
UPDATE (2/18): According to Runway Girl Network (although not specified in Gogo’s public filings), the suit “covers approximately 200 of the carrier’s 737 aircraft known as the ‘pre-Apollo’ fleet”, which are older aircraft (delivered before 2009) “flying with ATG today and no in-seat IFE screens.” A key difference between these older aircraft and American’s decision to desire to use ViaSat on future deliveries, is that Clause 13.5.2 references a different “Trigger Date” for each “Fleet Type” and so it seems likely that the time period, after which a termination notice can be issued for the new aircraft deliveries, has not yet expired, and American may therefore not have the right to terminate the Agreement in respect of its new aircraft fleet at this point in time. Conversely, American certainly has the right to terminate the older aircraft even though for some of them, with limited remaining lifespan, it may not be economic to retrofit with satellite communications.
So I’m forced to conclude that in reality, Gogo is simply trying to delay American’s decision to select ViaSat for future aircraft, probably threatening litigation as it initiated (and lost) against Southwest when it purchased AirTran and switched that fleet of Gogo-equipped aircraft to Global Eagle (Delta ultimately purchased 88 of the 128 aircraft which remained on Gogo). And in response, American seems to have decided that it would go nuclear by issuing a termination notice on older aircraft, and a public lawsuit, in order to force Gogo’s hand. However, Gogo made a further filing on Tuesday Feb 17, stating that it had rescinded its prior letter which had questioned American’s termination notice (on the grounds of “system performance and functionality of the competitive technology”), and claimed that as a result American’s suit was now “moot,” presumably in an effort to limit the public airing of the two companies’ disagreements.
After all, if American did not exercise its rights under Clause 13.5.2 of the agreement, it appears that it would have to use Clause 13.5.1, which contemplates a payment to Gogo apparently equal to at least a year’s revenue per plane:
American will have the right to terminate this Agreement at any time on or after the [***] of the Trigger Date for the last retrofitted Fleet Type, by giving [***] written notice and paying Aircell an amount equal to the amount obtained by multiplying (A) [***] by (B) Aircell’s [***] from Connectivity Revenues earned by Aircell in the year ending on the applicable anniversary of the Trigger Date.
Gogo has declared that it now plans “to submit a competing proposal to install our latest satellite technology – 2Ku – on this fleet”. However, given that American has already considered 2Ku with regard to “system functionality and implementation dates” for its newer aircraft, Gogo’s only option to improve its offer would be to reduce the pricing significantly. As I’ve noted in conference presentations, ViaSat is providing significantly better service, to 4-5 times more passengers, with a revenue per boarded passenger of around $0.50, compared to the $0.80 that Gogo currently generates from its ATG network. In other words, ViaSat’s revenue per Mbyte is something like a factor of 10 lower than Gogo generates at present (and remember Gogo has told investors that the cost of capacity for 2Ku is similar to ATG-4, albeit with future reductions expected as Ku HTS satellite capacity becomes cheaper).
It therefore seems that Gogo will lose either way: it either loses American’s old and/or new aircraft, setting the scene for a complete termination of the existing contract if ViaSat proves to offer a significantly superior service, or it wins the deal by offering dramatically lower pricing, which will reduce its revenue per boarded passenger and increase its capacity costs on these new aircraft, and would presumably provide a benchmark for a renegotiation of the deal covering the rest of the American fleet. That would be a far different trajectory from the increases to as much as $4-$5 per boarded passenger that Gogo set out as its long term objective in previous analyst days.
However, it remains to be seen how and whether American will ultimately be able to proceed with its original plan to install ViaSat on new aircraft deliveries, or whether we are set for a long and ugly stalemate between American and Gogo over how these aircraft will be equipped.
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01.08.16
Posted in Aeronautical, Financials, Inmarsat, Operators, Services at 2:27 pm by timfarrar
Its been interesting to see Inmarsat’s stock price rising recently based on excitement about the prospects for its inflight connectivity business, as well as the fourth GX satellite (which Inmarsat hopes to lease to the Chinese government as the Financial Times also reported in October).
We published our new Inmarsat profile in December which highlights the company’s prospects for strong revenue growth from GX over the next few years, although since then Inmarsat has faced a few setbacks, with the Intelsat appeal of Inmarsat’s US Navy contract win being sustained and Apax finally emerging as the purchaser of Airbus’s Vizada division, despite Inmarsat telling people before Christmas it expected to buy this business in early 2016.
However, there is the potential for an even more worrying development in the near future, with ViaSat expected to give more details of its ViaSat-3 project in early February. This seems to represent something of an acceleration in ViaSat’s plans since last November, and it now looks possible that this announcement could include deals with some large new airline customers to provide advanced passenger connectivity services.
If it can be realized, ViaSat’s proposed 1Tbps capacity for ViaSat-3 would have a dramatic impact on bandwidth expectations and more importantly the low cost of capacity would make it feasible to offer low cost or free Internet connectivity, including streaming video, to airline passengers, even as data consumption continues to grow rapidly in the future. ViaSat could potentially do deals with Southwest and/or American, the first of these sounding the long awaited death knell for GEE/Row44′s connectivity business and the second proving disastrous for Gogo, which currently gets about 40% of its passenger connectivity revenues from American Airlines (though any fleetwide migration to ViaSat wouldn’t happen until after the current 10 year contract expires in 2018, just as seems likely for Virgin America).
That really would represent an explosion in the inflight connectivity market, though not one which would be welcomed by other satellite operators and service providers, many of whom have a difficult relationship with ViaSat. Indeed its notable how ViaSat is now also throwing its one-time partner Thales LiveTV under the bus, claiming that they mounted “a campaign of whispers…alleging that Exede did not meet its advertised performance.”
The implications of deals that could ultimately bring ViaSat’s number of served aircraft in North America up to as many as 2000 planes (i.e. half the equipped fleet) would be wide ranging, not least for inflight connectivity service providers, who’ve become used to seeing Gogo and Panasonic as the market leaders, and passengers, who’ve become accustomed to a market where “Inflight Wi-Fi Is Expensive, and No One Uses It.”
Even amongst satellite operators there could be some upheaval, with Inmarsat having just ordered $600M of I6 satellites (actually $900M+ including launch, insurance and ground segment costs) carrying what looks, in comparison, like a puny ~30Gbps per satellite, SES having signed a ten year $290M bandwidth contract with GEE in November 2014, and Intelsat potentially set to lose some of its claimed “73% share of today’s aeronautical satellite communications market.” Most importantly, if passenger expectations of free or low cost inflight WiFi start to spread beyond North America, then Inmarsat’s estimate that its European Air-To-Ground network will generate $300K per plane per year (more than double Gogo’s current run rate) would look even more questionable.
Widespread angst about the effects of new HTS satellites and slowing revenue growth is already weighing on the outlook for the satellite industry, but if ViaSat really does have one or more big deals to announce next month, then it would take concerns over future capacity and pricing trends to a whole new level. In that case we’d better all buckle in and get prepared for a very bumpy ride.
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11.10.15
Posted in Financials, Inmarsat, Operators, Services, VSAT at 9:40 am by timfarrar
Inmarsat has certainly had a great deal of success in the last two months, winning key contracts with the US Navy, Lufthansa and most recently Singapore Airlines, as well as a strategic partnership with Deutsche Telekom to built out its S-band European Aviation Network. While some of these wins may be a direct result of what Inmarsat refers to as “success-based capex” (otherwise known as giving away free terminals), these deals certainly have the potential to provide a significant boost to the company’s revenue growth outlook.
Moreover, it seems that the biggest deal is yet to come, as Inmarsat hinted on its results call last week that “customers in different regions [are] vying to have the [fourth GX] satellite placed over their areas of interest” and the plan for this satellite is expected to be finalized before Inmarsat announces its Q4 results in early 2016. However, in practice there is one deal which is far and away the most likely outcome, and it appears these statements are simply a matter of Inmarsat trying to make sure that it still has some negotiating leverage.
That deal was clearly apparent during last month’s State Visit to the UK by Chinese President Xi Jinping, when the only British company he visited was Inmarsat. Inmarsat highlighted that one purpose was “to understand how Inmarsat is able to uniquely contribute to President Xi’s One Belt One Road (‘OBOR’) strategic vision through the provision of critical global mobile broadband connectivity services, including Inmarsat’s revolutionary new service, Global Xpress” and noted that “Inmarsat has already signed a Memorandum of Understanding (MOU) with China Transport Telecommunication & Information Centre (CTTIC) to establish a strategic partnership to deliver Inmarsat’s revolutionary Inmarsat-5 Global Xpress mobile satellite broadband communications connectivity throughout China and OBOR.”
I’m told that the original intention of President Xi’s visit, accompanied by HRH The Duke of York and the UK Chief Secretary to the Treasury, was to have a signing ceremony for the agreement to formalize this “strategic partnership” and that would involve a full lease of the fourth GX satellite to China. Unfortunately the final agreement required certain changes and therefore could not be completed in time.
However, assuming this deal can be completed, Inmarsat is likely to receive a further significant boost to its revenues. Given Chinese expectations are typically that they will receive lower prices than other countries, I’d expect the payments to Inmarsat for capacity could potentially be on the order of $100M p.a. (assuming the agreement is for 10+ years), depending on who covers the capex and opex costs for the new GX gateways in China. And China could then be in a position to provide free or subsidized satellite broadband capacity to adjacent countries in support of its geopolitical OBOR ambitions, just as Google and Facebook have been working to bring Internet access to developing countries.
Once this deal is done, Inmarsat can move onto ordering I6 satellites with both L-band and Ka-band capacity, in order to supplement the (somewhat limited) capacity of the initial GX constellation. But with Eutelsat apparently looking for French government backing to buy a 3-4 satellite Ka-band system, and ViaSat (not coincidentally) announcing the intention to build its own even bigger 1Tbps satellites, the race to add lower cost Ka-band capacity is far from over. More importantly, despite all the attention given to Ku-band HTS in the last year or two, its hard to agree with the statement Gogo made on its Q3 results call (after its GX distribution deal with Inmarsat was terminated) that “there are simply not enough Ka satellites now or for the foreseeable future to meet the needs of global aviation”.
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09.14.15
Posted in Broadband, Financials, Globalstar, Inmarsat, LightSquared, Operators, Regulatory, Services, Spectrum, VSAT at 9:20 pm by timfarrar
Paris is the place to be in September for satellite industry gossip (though not the weather), and this year is no different. There’s been plenty of chatter already about the MSS sector, as people look forward to Inmarsat’s upcoming investor day on October 8. The company has seen some good news recently, displacing Intelsat General to win a large US Navy contract last week. However, Inmarsat’s aggressiveness on price is highlighted by the reduction in the total ceiling price from $543M last time around to only $450M over 5 years (which is in turn perhaps double the US Navy’s most likely spending profile). Though this contract should help Inmarsat show top line revenue growth in 2016 and beyond, a significant proportion of the capacity (in C, Ku and X-band) will have to be bought in from other players, limiting Inmarsat’s ability to make a profit.
However, the other main news about Inmarsat is that the company is expected to order its first I6 L-band satellite before the end of 2015, and it will include substantial additional Ka-band capacity to supplement the rather limited amount of capacity available on GX, even after the fourth GX satellite is launched in 2016 or 2017. That will likely mean a total capital expenditure of $450M-$500M, plausibly repeated once or twice more in the next few years, just to keep Inmarsat in the bandwidth race.
There’s also been some chatter about the FCC regulatory situation as it affects Globalstar, where a source confirms that my suppositions in June about the purpose of Globalstar’s change in tone to the FCC were correct and that a deal was on the table to approve terrestrial use just for Globalstar’s own MSS spectrum and not the wider 22MHz TLPS channel. However, this approval was only going to be for low power use, and would therefore not be of much import, except as a demonstration of regulatory progress.
Then after Jay Monroe met with several FCC Commissioners in late July he withdrew this potential compromise and insisted instead on full TLPS approval, presumably believing that if permission either to use the unlicensed spectrum or high power terrestrial use or the MSS band was treated as a separate, second stage of the process, a conclusion would be delayed for years, making it impossible for Globalstar to deploy or monetize its spectrum anytime soon.
So now it seems we are back to an impasse, and though Globalstar has recently added some additional information into the docket on an experimental deployment in Chicago, this documentation doesn’t provide quantitative information on (for example) the exact rise in bit error rates seen by services like Bluetooth, merely observing that no observable performance impact was noted. As a result, I believe it is unlikely that the FCC will feel able to rule on full TLPS approval anytime soon (i.e. this year).
Ironically, Globalstar’s consultants are also acting for LightSquared, and have proposed a similar program of tests for GPS interference, again based on a “KPI” criteria of observable degradation in performance, rather than actual quantified impact on the signal to noise ratio. Most observers seem to believe that LightSquared is no more likely to gain FCC approval for its plans than before, and that after the recent publication of the DOT test plan for their Adjacent Band Compatibility study, the FCC will wait for those tests to be conducted, which could take a considerable period of time.
Predictably LightSquared is already criticizing the DOT test plan, very likely setting us off on exactly the same well trodden (and ultimately disastrous) path as before. As a result, I’m sure that those hedge funds who committing funding to the bankruptcy plan (especially those in the $3B+ second lien, which sits behind $1.5B of first lien debt) must now be feeling pretty nervous. I wonder if any of them will now be frantically searching to see if they have any way to avoid funding these commitments once the FCC approves the transfer of control?
Finally, in yet more FCC-related news, the consensus here seems to be that the 14GHz ATG proceeding may also fail to reach a conclusion in the near term, as I predicted earlier this month, due to the uncertainty over how to protect NGSO systems. Instead, ViaSat’s Ka-band solution seems to be going from strength to strength, with the hugely positive reactions to the performance on JetBlue contributing to their recent win at Virgin America and to other airlines taking another look at what will be the best future-proof solution. All this makes Gogo’s predictions that its US market share is secure and that its revenue potential is “like a gazillion dollars” seem just as foolish as it sounds.
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09.01.15
Posted in Aeronautical, Inmarsat, Operators, Regulatory, Services, Spectrum at 4:14 pm by timfarrar
Often I wonder whether some companies understand how the FCC works and what they really shouldn’t say in an FCC filing. Gogo has just provided a classic example in its August 26 ex parte filing that tries to counter SpaceX’s recent intervention in the 14GHz ATG proceeding, where Gogo has been trying to get 500MHz of spectrum auctioned for next generation ATG networks.
Unfortunately for Gogo, it has been left as virtually the sole active proponent of this auction, after Qualcomm laid off the team that developed the original proposal and stopped participating in the proceeding. While I’m sure Panasonic and Inmarsat would take part if an auction was held, undoubtedly they are relishing the prospect of Gogo struggling to improve its “infuriatingly expensive, slow internet” service with 2Ku capacity that Gogo itself admits is roughly the same cost per Mbyte as its existing ATG-4 network (at least until it can renegotiate its current bandwidth contracts).
So when Gogo makes submissions that directly contradict those it previously put into the record, it shouldn’t be surprised if the FCC regards these rather skeptically. In particular, in July 2014 Gogo told the FCC that it “supports the proposed §21.1120 requirement that interference from all air-ground mobile broadband aircraft and base stations not exceed a 1% rise over thermal” whereas now “Gogo concurs with Qualcomm in that a 6% RoT has a negligible impact on the cost and performance of an NGSO system while creating an additional and disproportionate level of complexity or loss of performance for the AG system” and “Gogo supports the 6% RoT aggregate interference levels initially proposed by Qualcomm”. So suddenly Gogo thinks that its a perfectly acceptable to have six times more interference than a year ago.
Even more of a hostage to fortune was Gogo’s September 2013 comment about the unacceptable problems that an ATG network (referred to as Air to Ground Mobile Broadband Service or AGMBS) would cause for NGSO systems like that proposed by SpaceX:
“In its initial comments, Gogo expressed its concern that Qualcomm’s assumptions regarding the operating parameters of the hypothetical NGSO satellite systems were not representative of typical or worst case system configurations, and that the interference between a future system and AGMBS systems could be far greater than indicated by Qualcomm’s estimates. Gogo is not alone in this view, as the Satellite Industry Association (“SIA”), ViaSat, EchoStar and Hughes all raised similar concerns in their comments. SIA included an analysis within the Technical Appendix attached to its comments which illustrates the potential for much greater interference than had previously been calculated by Qualcomm. In Gogo’s view, some aspects of the analysis are subject to challenge because it overstates the level of interference that may be expected. Nevertheless, the overall conclusion remains valid – an AGMBS system operating consistent with the proposed rules would cause unacceptable levels of interference to many, if not most, possible future Ku-band NGSO system configurations. The analysis of EchoStar and Hughes, provided in Annex B of their comments, provides additional support for this conclusion. Similarly, ViaSat’s comments indicated that the NGSO analysis presented by Qualcomm is not representative of the range of potential Ku-band NGSO systems which have been previously proposed.”
Yet now Gogo, having previously claimed that Qualcomm’s calculations were flawed, suddenly decides that after “incorporating [SpaceX's] stated parameters into the Qualcomm interference calculation methodology” everything is fine and “the resultant RoT from an AG system into the SpaceX NGSO system is far less than [its newly relaxed] 6%” interference criteria.
I can only conclude that Gogo must be truly desperate to get the 14GHz ATG proceeding completed, because it needs the capacity ASAP. However, making contradictory filings is certainly not going to help the company to get a favorable ruling from the FCC anytime soon (especially when politics is lurking in the background, in the form of the Association of Flight Attendants expressing concern about the FCC taking action on this matter).
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08.14.15
Posted in Iridium, LDR, Operators, Services at 1:44 pm by timfarrar
As I pointed out in a tweet a couple of months ago, Iridium’s SBD service is being used for command and control of Google’s Project Loon. So it was interesting to see just how much Google has been spending on Iridium airtime, when Iridium’s CFO mentioned in their July 30 results call that:
“…our network provides the connectivity to remotely command and control the assets of the large and unique project by a major company who doesn’t let us reference their involvement in the program. We saw significant airtime usage in last year’s third quarter during the testing phase for this project. We now understand from our customer that this high level of activity will decline in the second half of 2015 as the service moves into another, more mature development phase, which will culminate in commercialization in 2016. We expect a full-year decline of $500,000 in M2M service revenue from this customer as a result of this evolution, with much of that coming in the third quarter.”
Its been reported that the Loon balloons have flown for “more than three million kilometers” at speeds of up to 300km/hour, though an average speed of say 40-50km/hour seems more plausible (which would mean it takes 50-60 minutes for the 40km diameter coverage area to traverse a given location if directly overhead, or somewhat less if the balloon path is more distant).
So that would suggest Project Loon has achieved something like 60,000-80,000 flight hours in total over the three years of the project, with a significant fraction of that during the 2014 testing phase. Much of the spending on command and control was likely incurred in 2014, because Google reportedly moved to sending new orders to the balloons “as frequently as every 15 minutes” (and presumably receiving data from them even more often).
But if Google spent something over $500K on wholesale Iridium airtime (and even more with retail markups included) in 2014, then that would suggest the cost of airtime command and control is something like $8-$10 per hour (before retail markup). As a benchmark, the spending level of about $140K per month in Q3 of last year suggested by Iridium would then equate to an average of 20-25 balloons operating continuously during the quarter (which is consistent with Google’s suggestion that it would step up to “more than 100″ balloons in the next phase of testing).
Google has indicated that the operating costs of each balloon are “just hundreds of dollars per day” but it is still surprising to consider that the company would be spending $200+ per balloon per day just on satellite connectivity. Moreover, it seems that Google’s “hundred of dollars per day” quoted cost could potentially exclude all the other costs involved in manufacturing and deploying the balloons and backhauling the traffic carried by them. That seems pretty expensive compared to the costs of a new fixed cellsite and highlights the perhaps questionable economics of the Loon architecture.
Now that Google has announced an MOU to potentially bring internet to remote areas of Sri Lanka next year, it is also interesting to contemplate just what that might mean in terms of Iridium airtime if the deal comes to fruition. Google has said it needs “more than 100 Loon balloons circling the globe” just to provide “‘quasi-continuous’ service along a thin ribbon around the Southern Hemisphere”. So it seems implausible to think that all of the rural areas of Sri Lanka would be served with less than say 300 balloons operating continuously. Assuming Google could get a somewhat better deal for high volume usage of say $5 per flight hour (of wholesale revenue to Iridium), then that would equate to annual wholesale airtime revenues of perhaps $13M for Iridium. And revenues could be even higher if more balloons are used to ensure continuous reliable coverage.
Perhaps Google can afford to spend a few tens of millions of dollars a year for a demonstration project in Sri Lanka (although the funding sources for this project remain uncertain). However, the scalability of Loon to a global deployment must be in much greater question. For continuous global coverage there would need to be as many as 100,000+ balloons in operation simultaneously. Even ignoring capital costs, if the operating costs of the network (for all aspects, not just satellite connectivity) are of order $300 per balloon per day, then that would amount to $11B per year in operating costs (for comparison US wireless carriers are projected to spend $56B in opex between them in 2017 to serve well over 300M customers). Its therefore unsurprising that Google intends to rely on wireless operators (and perhaps governments) to support these costs, rather than taking on the burden of commercial deployment itself.
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06.11.15
Posted in Broadband, General, Regulatory, Services at 6:00 pm by timfarrar
I’m told that after a fair amount of difficulty and a month or two of delay, Greg Wyler has now successfully secured commitments of about $500M to start building the OneWeb system, and he will announce the contract signing with Airbus at the Paris Air Show next week. The next step will be to seek as much as $1.7B in export credit financing from COFACE to support the project with an objective of closing that deal by the end of 2015.
This comes despite Elon Musk’s best efforts to derail the project, culminating in an FCC filing on May 29. That filing proposes the launch of 2 Ku-band test satellites in late 2016, which would presumably be aimed at ensuring OneWeb is forced to share the spectrum with SpaceX, as I predicted back in March.
Clearly Musk is not happy about the situation, since I’m told he fired Barry Matsumori, SpaceX’s head of sales and business development, a couple of weeks ago, after a disagreement over whether the SpaceX LEO project was attracting a sufficiently high public profile.
Most observers appear to think that Musk’s actions are primarily motivated by animus towards Wyler and question whether SpaceX is truly committed to building a satellite network (which is amplified by the half-baked explanation of the project that Musk gave in his Seattle speech in January, and the fact that I’m told SpaceX’s Seattle office is still little more than a sign in front of an empty building).
Google also demonstrated what appears to be a lack of enthusiasm for satellite, despite having invested $900M in SpaceX earlier this year, when its lawyers at Harris, Wiltshire & Grannis asked the FCC on May 20 to include a proposal for WRC-15 that consideration should be given to sharing all of the spectrum from 6GHz to 30GHz (including the Ku and Ka-bands) with balloons and drones (see pp66-81 of this document). Needless to say, this last minute proposal has met with furious opposition from the satellite industry.
However, one unreported but intriguing aspect of SpaceX’s application is the use of a large (5m) high power S-band antenna operating in the 2180-2200MHz spectrum band for communication with the satellites. Of course that spectrum is controlled by DISH, after its purchase of DBSD and TerreStar, and so its interesting to wonder if SpaceX has sought permission from DISH to use that band, and if so, what interest Charlie Ergen might have in the SpaceX project.
Nevertheless, it looks like Wyler is going to win the initial skirmish, though there are still many rounds to play out in this fight. In particular, if Musk truly believes that the LEO project, and building satellites in general, are really going to be a source of profits to support his visions of traveling to Mars (as described in Ashlee Vance’s fascinating biography, which I highly recommend) then he may well invest considerable resources in pursuing this effort in the future.
If that’s the case, then the first to get satellites into space will have a strong position to argue to the FCC that they should select which part of the Ku-band spectrum they will use, and so Wyler will also have to develop one or more test satellites in the very near future. Fortunately for him, Airbus’s SSTL subsidiary is very well placed to develop such a satellite, and I’d expect a race to deploy in the latter part of 2016, with SpaceX’s main challenge being to get their satellite working, and OneWeb’s challenge being to secure a co-passenger launch slot in a very constrained launch environment.
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06.03.15
Posted in Inmarsat, Iridium, KVH, Maritime, Operators, Services, VSAT at 8:53 am by timfarrar
Despite the delays in the launch of GX, it seems Inmarsat may be looking to stitch up an even larger share of the maritime market in the near term. Rumors are flying that Inmarsat may soon make a formal bid to acquire KVH, the largest maritime VSAT player in terms of vessels (though not in revenues), adding about 3500 more terminals to Inmarsat’s existing 2200 VSAT equipped ships.
KVH generated nearly $80M from its miniVSAT business in 2014 with an average service ARPU of $1500 per month, compared to Inmarsat’s $90M and ARPU of $4000 including equipment leases (this equates to $2500 per month after stripping out hardware, according to Inmarsat’s most recent results call, which is a more appropriate point of comparison with the KVH ARPU).
The difference in ARPUs between Inmarsat’s current VSAT business and KVH is striking, in fact KVH’s smaller V3 terminal (which has about 900 active terminals) is generating around $500 in monthly ARPU, below even Inmarsat’s FleetBB ARPU of $700 (note that the standard FleetBB package sold by KVH now only provides 20 Mbytes per month of data for $749, whereas KVH offers airtime at rates as low as $0.99 per Mbyte).
If Inmarsat does move ahead with a KVH bid, it would likely be seen as a counter to Airbus’s disposal of its Vizada business unit, because Inmarsat would then have by far the largest number of VSAT-equipped ships. Indeed it would not be surprising to see attempts by competitors to block the deal on antitrust grounds, not to mention the concerns that current KVH customers will have about potential future price increases.
However, it would also be something of an acknowledgement that GX is optimally positioned as a lower end off-the-shelf maritime VSAT service (like KVH’s miniVSAT), as a step up from FleetBB, rather than as a high end solution for cruise ships and oil rigs. KVH’s growth has slowed in the last year, with terminal shipments staying at close to 1000 per year in 2012, 2013 and 2014, but net adds and ARPUs declining. Pressure from Inmarsat will only intensify, once the low cost 60cm GX antenna is available with global coverage, so this looks like it would be a good time for KVH to sell out.
Inmarsat investors will presumably also welcome a deal, with a much clearer path established to a GX maritime business of $200M+ in annual service revenues over the next few years (though its important to note this represents a retail service business, not the wholesale spend on satellite capacity). However, the obvious question that customers will ask is whether low end price packages will still be offered for miniVSAT users, or whether Inmarsat will move them up to much higher price points, as it has done with FleetBB over the last few years.
And what will be the alternative for these users: will it be other VSAT solutions, or will it be the new broadband services (comparable in capability to FleetBB) offered by Iridium’s NEXT constellation? It will take some time for either of these options to emerge, with low cost small Ku-band VSAT antennas needed for the former, and completion of the NEXT constellation needed for the latter. That provides a further motivation for Inmarsat to move sooner rather than later, while its freedom of action in the low end of the maritime market remains relatively unconstrained by competitive alternatives.
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03.26.15
Posted in Broadband, Operators, Regulatory, Services, Spectrum at 1:51 pm by timfarrar
At last week’s Satellite 2015 conference, considerable attention was focused on new LEO constellations, most prominently OneWeb, whose founder Greg Wyler made a keynote speech to introduce the system and a couple of mockup terminals. Although many doubts exist about the feasibility of the OneWeb system (particularly with regard to the very ambitious cost estimates and the plausibility of building a profitable global Internet access business), its clear that OneWeb is moving aggressively to try and secure funding and sign a contract for satellite construction with one of five bidders in the next month.
Much less was said at the conference about SpaceX’s proposed 4000 satellite constellation, which Elon Musk announced in January with a half-baked speech in Seattle, which included many off-the-wall and some completely incorrect statements (such as that Teledesic “were trying to talk to phones”). Back in January, Google’s investment of $900M in SpaceX was seen as initiating a partnership to launch this new satellite system. However, at Satellite 2015, SpaceX made clear that the satellite venture was in the “very early stages” and Google’s investment was “not for the global internet project we’re exploring right now.”
A logical conclusion to draw, given Musk’s usually impeccable technical depth and the later change in description of Google’s investment, is that the announcement of the SpaceX constellation was rushed out in order to overshadow Wyler’s announcement of the much more modest investment he had secured from Qualcomm and Virgin.
However, what SpaceX has already done (on March 2) is make a filing at the FCC, which “support[ed] the extension of proposed changes to the Commission’s ITU coordination procedures to NGSO systems to encourage such filings through the U.S. administration”. SpaceX noted that there were “incentives for foreign administrations to pursue NGSO broadband satellite filing strategies that effectively block access to available spectrum and orbital resources” in contrast to the FCC’s “modified processing round” approach.
SpaceX proposed that licensees also be required to launch and operate a percentage of the authorized number of satellites (such as 5%) within 3.5 years and then 75% of the authorized satellites within 6 years, rather than the current milestones of 1 satellites then the entire constellation. In addition, it was proposed that the initial milestones for contracting for, and beginning construction of, the satellite constellation should each be shortened by 6 months.
All of these proposals are clearly intended to make OneWeb’s life more difficult. However, the more important subtext of SpaceX’s submission is that it would clearly like to be subject to the FCC rules, which mandate a sharing of both Ku-band and Ka-band NGSO spectrum between all entrants, regardless of ITU filing priority, based on avoidance of inline interference events.
Under these rules, the spectrum is split in half when two satellites from different systems are inline with one another and would therefore interfere with terminals at a particular location on the ground, and the first system to launch simply gets to indicate which (fixed) half of the spectrum it will use during these inline events. Given the large number of satellites that SpaceX and OneWeb both propose to launch, this splitting of the spectrum would happen almost all the time, and therefore for all intents and purposes, OneWeb would lose access to half of the Ku-band NGSO spectrum once both systems were operational.
Some have argued that OneWeb could simply rely on its ITU priority and not seek a license from the FCC. However, its hard to imagine that ignoring the US market is practical, given that the vast majority of the world’s satellite broadband subscribers today are in North America, and OneWeb has expressed its ambitions to provide inflight connectivity services, when most equipped aircraft are also based in North America. Moreover, if as many suspect, one of Qualcomm’s reasons for investing in OneWeb is to gain access to spectrum that could eventually be authorized for terrestrial 5G use (just like the ATC applications by LightSquared, Globalstar and others for 4G in the L-band and S-band), it is hard to imagine trying to pursue such an approach through any administration other than the FCC.
While it might be more difficult for the FCC to enforce its mandated allocation on systems licensed through other administrations when they are operating outside the US (notably Globalstar licensed its second generation constellation through France for precisely this reasons, after the FCC reallocated some L-band spectrum to Iridium), mutually assured destruction could potentially result if a US-licensed system decided to transmit in half of the spectrum in accordance with US rules, wherever its satellites were operating around the globe. (Note that, in contrast, Iridium and Globalstar have reportedly not noticed any interference from the two systems operating at relatively low levels of loading in the portion of the L-band spectrum that the two operators share.)
With OneWeb looking to close an investment round of between $300M and $500M in April, and start manufacturing satellites, it would therefore not be in the least surprising if SpaceX decides to ask the FCC to initiate an NGSO processing round in the very near future (perhaps in both the Ku-band and Ka-band) as a way of impairing OneWeb’s ability to move forward, and perhaps even preventing the investment round from closing. Musk certainly seems to have decided that he wants to destroy Wyler’s project (perhaps because he doesn’t like any potential imitator as a publicity-seeking space entrepreneur), and it is notable that the Steam filings, through Norway, which are generally believed to be controlled by SpaceX, were received at the ITU on June 27, 2014, when Wyler and Musk were still in discussions about potential collaboration.
The effects of an FCC processing round would be to delay any regulatory certainty about NGSO spectrum allocations for at least a year and possibly much more, while the FCC decided whether to confirm its existing rules for spectrum sharing, and it became clear whether this approach would be adopted elsewhere. There could also be some notable knock-on effects from any Ka-band processing round on O3b, whose FCC authorization specifically states that O3b’s use of the NGSO Ka-band spectrum is “subject to the sharing method specified in Establishment of Policies and Service Rules for the Non-Geostationary Satellite Orbit, Fixed Satellite Service in the Ka-band, Report and Order, IB Docket 02-19, 18 FCC Rcd 14708 (2003) and 47 C.F.R.§ 25.261.”
Thus the FCC has mandated that O3b must share its existing NGSO Ka-band spectrum with future systems, and the launch of a new large NGSO Ka-band system (which might include SpaceX’s constellation, if it operates in both Ku- and Ka-band) could have a meaningful effect on O3b’s operations in the future, whether O3b complies with the FCC ruling or withdraws from operating in the US in (what might end up being) a futile attempt to evade these constraints.
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11.13.14
Posted in Financials, Globalstar, Handheld, Operators, Regulatory, Services, Spectrum at 10:57 am by timfarrar
I’ve just released my new 69 page Globalstar profile, analyzing both Globalstar’s MSS business and their spectrum valuation and potential partnerships. Over the last month its been interesting to observe the rather hyperbolic comments from both supporters and opponents of the company, and unfortunately those on both sides appear poorly informed about the potential value of the TLPS spectrum and the growth of the MSS opportunity.
In the MSS business, its crystal clear that growth has fallen far short of expectations in the business plan presented to COFACE in summer 2013, and it is expected that Globalstar will need to make equity cures to address an EBITDA shortfall in 2015, and perhaps even at the end of this year. However, those amounts will be modest, nothing like the $200M raised by Iridium earlier this year, and so there is no need for concern that MSS challenges will disrupt Globalstar’s attempts to monetize its spectrum in the next year or two.
Nevertheless, it seems unlikely that the new Hughes-based devices will dramatically change this picture: MSS terminals offering WiFi links to smartphones but no standalone functionality have generally been fairly unsuccessful in comparison to self-contained communications devices (compare SPOT Connect vs SPOT or the original inReach vs inReach SE/Explorer), and low price terminals/consumer distribution channels have not altered the dynamics of the handheld market very much (for example, the SPOT Global Phone has not changed Globalstar’s business prospects materially). Its also little use selling a new device for $100 if the customer still has to choose from the existing handheld airtime plans (which have a four times higher ARPU than SPOT). So overall, we don’t expect Globalstar’s MSS business to generate enough value to match the $1B invested, or even the current COFACE debt.
While the MSS picture may not be encouraging, I’m more positive about Globalstar’s TLPS opportunity. It’s clear that Globalstar’s spectrum does have potential value to partners, since Globalstar came close to a deal with Google in early 2013, and we suspect a deal with a different partner was almost reached earlier this year. I also expect the FCC to approve TLPS without material concerns, although it seems likely to come in Q1 not Q4, and may involve giving up some L-band spectrum to Iridium, as happened in the past when Globalstar was seeking ATC authority.
The key question is therefore whether a partner can now be secured who will pay a substantial sum for access to the spectrum, from a limited universe of possibilities in the service provider category. Equipment and infrastructure providers are more likely to want to make money from selling equipment to Globalstar (and its service provider partner), than to pay Globalstar for access to the spectrum. The second question is then what the appropriate valuation would be if a deal can be struck: based on comparable valuations for high band spectrum and the alternative sources of spectrum out there (including AWS-3) it is hard to believe that anyone could seriously envisage a $6B or $10B valuation for TLPS. However, the debate should be about what Globalstar’s spectrum is worth, not whether it is worthless.
All of these issues are discussed in more detail in the report: we give specific forecasts for the MSS business by product through 2018 and explain what we believe to be the most appropriate valuation benchmarks for TLPS and who is now the most likely partner. Contact us if you’re interested in more information.
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