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.
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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.
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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.
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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).
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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.
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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.
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07.19.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 3:21 pm by timfarrar
In recent days, CNET has reported that Sprint “will confirm its network-sharing agreement with LightSquared in conjunction with its earnings announcement on July 28″. However, today Sprint has indicated that details of their 4G story will not come until “this fall”. That fits with what I had been told about Sprint’s Network Vision announcement coming after the Q2 results. However, it does leave something of a puzzle as to what might be announced on July 28.
What I’m hearing now is that LightSquared apparently made a fairly substantial advance payment to Sprint (rumored to be $300M) a couple of weeks ago, in order to keep their agreement alive, and that is what will be disclosed on Sprint’s Q2 results call next week. This will give LightSquared more time both to get FCC approval, and presumably to raise the significant additional money needed to pay Sprint to incorporate LightSquared’s spectrum into the Network Vision rollout (which at the moment apparently baselines only an 800 and 1900MHz network).
It will also provide confirmation from Sprint, rather than just leaks from Harbinger, that there actually is an agreement (albeit highly conditional) under which Sprint would host LightSquared’s deployment. In addition, LightSquared will then be able to ramp up the pressure still further on the FCC for a quick, favorable decision (indeed LightSquared’s CEO is already indicating that he “isn’t planning for the possibility that the FCC denies LightSquared the waiver when the decision comes out in September”). Of course, for LightSquared’s first lien debtholders, it represents another $300M that they might struggle to recover in the event of a LightSquared default, and thus ties them even more closely into Harbinger’s plan.
If this rumor is true, then its not all all surprising that Sprint was happy today, because if LightSquared is unable to move forward, Sprint is getting paid $300M to do nothing other than put LightSquared’s name in a press release. However, in these circumstances, it will be very interesting to see whether Sprint answers questions about the terms of the agreement, including what deadline LightSquared will have to meet and what additional security and/or funding LightSquared will need to provide for Sprint to get started.
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07.13.11
Posted in ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 3:49 pm by timfarrar
As LightSquared continues to be engulfed by a tidal wave of criticism from the GPS industry, it now appears that this storm is setting up perfectly for DISH Network to solve the FCC’s problem: how to ensure that a competitive wholesale mobile broadband network can be deployed when it seems nearly impossible for LightSquared to use its L-band spectrum. While some think that DISH could lease its 2GHz spectrum holdings to LightSquared, to me it seems far more likely that DISH has plans for its own national 4G LTE wireless network, in partnership with “somebody who is more of an expert in that business than we are“.
Indeed in the application to transfer DBSD’s spectrum licenses to DISH, filed back in April, the company stated that “we expect the transaction to result in the provision of mobile broadband services” and in particular:
DISH plans to deploy a hybrid satellite/terrestrial system dedicated to the provision of mobile broadband services. If successful, consumers will be able to use their mobile terminals for high-speed Internet access as well as a myriad of Internet Protocol-based, over-the-top applications, including mobile video. DISH expects that the consumer equipment will include broadband-capable tablet computers, among other devices. DISH anticipates offering services both on a stand-alone basis and in a consumer-friendly bundle with its multichannel video services.
If DISH does manage to line up the partners to deploy such a network (potentially including MetroPCS, whose interest in the 2GHz band is well known), then that might well leave LightSquared to sink without a trace, as it would make it much easier for the FCC to defer to demands from the NTIA for six months of additional testing on LightSquared’s new spectrum plan. Of course, a six month delay would put the decision timeframe into the midst of a presidential election year, when it is all but inconceivable that either the White House or Congress would go against the wishes of millions of farmers, engineers, aviators and boaters.
In contrast, an alternative network proposed by DISH would have a ready made support base, not only from those parties demanding increased wireless broadband competition, but also from all those who have demanded that LightSquared’s network be moved outside the L-band. It seems both sides would therefore be eager to support the FCC granting DISH a waiver similar to LightSquared, permitting terrestrial-only devices, if DISH was to commit to aggressive buildout milestones and to providing wholesale access to its network capacity as Harbinger did back in March 2010.
Today there have been renewed rumors that Sprint will announce a deal with LightSquared during its Q2 results call on July 28, although another source has suggested to me that Sprint does not intend to set out its Network Vision plans at that time. Thus I’m left wondering whether this is an attempt to derail DISH’s plans, which certainly seem to be in pretty high gear, judging by the number of visits DISH has made to the FCC in recent weeks to discuss the 2GHz MSS spectrum band.
Maybe we are therefore moving towards the last few minutes of this Seinfeld episode. However, as Charlie Ergen knows only too well, in Seinfeld there are very few happy endings, except when they come at someone else’s expense.
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07.05.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:07 pm by timfarrar
I noted 10 days ago that one possible outcome for LightSquared would be for the company to sue the US government and/or FCC if it was unable to move forward because of the GPS interference issues. Last week’s Technical Working Group report submission was accompanied by a very strongly worded set of recommendations by LightSquared blaming the GPS industry as “it is inescapable that their disregard for the Commission’s policies regarding the immunity of receivers to transmissions in nearby frequency bands that is the source of the technical problem”.
This set of recommendations served to deflect from the results of the TWG itself, which highlighted widespread interference and the difficulties in mitigating this even under LightSquared’s revised plan. However, it also may act as something of a red rag to a bull, in terms of Congress’s reaction if the FCC does allow LightSquared to move forward. Of course, if Congress did act to ban LightSquared from operating, then that would provide a much more definitive trigger for any legal action by LightSquared (compared to a move by the FCC to delay any decision or postpone authorizing LightSquared’s operations until more testing is carried out).
On the other hand, while the FCC is still considering whether to give LightSquared the go ahead, it seems unlikely that we will see more overt legal threats. Indeed, the FCC’s deliberations about how to treat LightSquared are especially sensitive because it seems that some blame for the interference problems could very well attach to the FCC, given its apparent failure to live up to the commitments made in the 2005 ATC Order:
While we agree with the GPS Industry Council, NTIA, and other government agencies that it is essential to ensure that GPS does not suffer harmful interference, it is also important to ensure that new technologies are not unnecessarily constrained. In this regard, we recognize that the President’s new national policy for space-based positioning, navigation, and timing (PNT) directs the Secretary of Commerce to protect the radio frequency spectrum used by GPS and its augmentations through appropriate domestic and international spectrum management regulatory practices . . . . Furthermore, the President’s PNT policy calls for the establishment of an inter-agency Executive Committee, on which the Chairman of the FCC will be invited to participate as a liaison, and a National Space-Based PNT Coordination Office. It is our intention to establish discussions with other agencies, through the PNT Executive Committee and Coordination Office as appropriate, to better understand what protection levels for GPS are warranted. The results of those discussions may lead to future rulemaking proposals in order to ensure that all FCC services provide adequate protection to GPS, and produce a more complete record upon which to establish final GPS protection limits for MSS ATC
licensees
Since the release of the TWG report, LightSquared has been attempting to highlight other signs of progress, including raising $265M of additional funding today. However, it seems that the vast majority of this new funding is likely to have been in the form of Harbinger having to stump up its previously unfunded $250M commitment to LightSquared. Harbinger also seems to be experiencing some internal turmoil, and it will be very interesting to see what has happened at the end of the second quarter in terms of redemptions. Most problematically, with the FCC comment and reply period on the TWG report now extending until August 15, and indications that the FCC will not rush to judgment after that, it appears more likely that Sprint will announce details of its Network Vision plan before it has been determined whether LightSquared is able to move forward or not.
In parallel with this activity, it seems we may know more about DISH’s plans for DBSD and TerreStar relatively soon, as comments are due on Friday in the 2GHz spectrum consultation. After Charlie Ergen met with the FCC Chairman on June 22 to discuss matters including DISH’s recent 2GHz MSS spectrum acquisitions, it now seems ever more likely that DISH could provide a readily available alternative source of spectrum for prospective LightSquared partners.
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06.27.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 11:00 am by timfarrar
Last week’s Brattle Group report for LightSquared, not only highlights the regulatory “gift” from the FCC involved in their January 2011 waiver, but also contains an estimated value of $12B for LightSquared’s L-band spectrum. This valuation is derived by assuming that LightSquared’s terrestrial-only waiver means its spectrum should have an equivalent value to “unencumbered AWS wireless broadband spectrum”, which Brattle believes to be worth approximately $1.00 per MHzPOP.
Unfortunately, this valuation, which is derived from an April 2011 Brattle Group analysis, is also deeply flawed. As an aside, it is almost identical to the valuation put on LightSquared (then MSV) by Brattle back in October 2005, when they estimated that 30MHz of MSS-ATC spectrum had a “potential” value of $0.99 per MHzPOP (although ironically, at that point it was asserted that “there are questions regarding interference and other technical issues that potentially make L-band use for ATC problematic, which would require L-band spectrum to be priced at a discount to S-band spectrum”).
The most obvious problem with Brattle’s valuation of LightSquared’s spectrum is that is is just as inappropriate to use AWS spectrum as the sole benchmark for L-band valuation today, as it was to use PCS as the benchmark in October 2005. Today the AWS-1 block has substantial existing infrastructure already deployed (both base stations and handsets) which can readily make use of the spectrum, whereas LightSquared was not even able to provide test handsets or full power base stations for the recent Las Vegas testing.
In addition, there are also more subtle issues which render the AWS value in the April 2011 paper unreliable. Notably, Brattle estimates trends in spectrum pricing by reference to a spectrum price index created and maintained by Spectrum Bridge. Brattle suggests that the index “tracks changes in spectrum value reasonably well” because as one example, “the change in SpecEx Index values closely tracked the change in AWS spectrum value based on NextWave’s AWS spectrum sale to T-Mobile in July 2008. The NextWave sale reflected a 91% increase in AWS spectrum value, whereas, the SpecEx Index in the same period indicated an 86% increase in spectrum value.”
However, the cited transaction reflects the sale of spectrum which by July 2008 could be readily put into use in T-Mobile’s built-out AWS-1 network, compared to spectrum which in summer 2006 had not even been cleared of interference. It is as if I bought some farmland and then a developer put in utilities and roads on the adjacent tract of land. The value of my particular plot might have increased, but that would say nothing about the market price of farmland. In spectrum terms, no-one (including Brattle) would suggest that Aloha’s windfall on sale of its 700MHz spectrum to AT&T was largely due to a general increase in the value of spectrum, as opposed to the DTV transition and the 700MHz auction creating certainty about whether the spectrum could be put to use.
A second factor is that of survivorship bias: in the cited NextWave transaction, NextWave’s AWS holdings were sold because the offered price was acceptable (higher than the original price paid), but NextWave failed to sell its 2.3GHz and 2.5GHz spectrum holdings which were on offer at the same time (because the offers, assuming there were any, were too low). Spectrum Bridge claims that its index takes account not only transaction data but also a “custom weighting of value, spectrum, and macro-economic based factors driven by SBI’s valuation and trading data”. However, this inevitably obscures the methodology and makes it all but impossible to determine whether the index accurately tracks spectrum values.
Returning to my farmland analogy, it would seem that the most important factors in attempting to exclude both “improvement” and “survivorship” bias would be that (for currently unused spectrum) the ecosystem for use of the spectrum should not have changed dramatically in the intervening years, and the timing of the sale should be dictated by external events (e.g. a bankruptcy auction) rather than by whether or not the prior holder can make a profit over what it paid previously. In that context, the recent sale of DBSD and the current auction of TerreStar almost certainly provide a better indicator for trends in the value of LightSquared’s spectrum than the index used by Brattle.
At current levels (of roughly $0.25 per MHzPOP), DBSD and TerreStar’s spectrum has actually gone down in value compared to 2005 and is broadly similar to the trading price (and the Motient/SkyTerra exchange valuation) back in 2006 (before most of their satellite construction expenses were incurred and well before the spectrum could be brought into use). This compares to a SpecEx index which has doubled since mid 2006 and trebled since 2005.
If (perhaps optimistically) we assumed that LightSquared’s spectrum with the terrestrial-only waiver is similar to AWS-1 spectrum when it was auctioned in 2006, then based on the DBSD/TerreStar trend (of minimal change in price since 2006) the AWS-1 auction pricing ($0.54 per MHzPOP) might be an appropriate valuation to use. On the other hand, if DBSD and TerreStar also include in their current valuation some allowance for the possibility that the FCC might also grant them a waiver (so are more directly analogous to LightSquared), then their $0.25 per MHzPOP valuation might be more appropriate.
In order to come up with an actual dollar valuation of LightSquared’s spectrum assets, you then need to take into account the impact of interference (i.e. whether to use 20MHz or 40MHz as the basis of valuation) and the NPV of the Inmarsat payments (where a relatively low (8%?) discount rate would probably be used by any established wireless operator purchasing this spectrum).
At the low end (20MHz @$0.25 per MHzPOP), you come out with a negative valuation after the Inmarsat payments (minimal value for the first lien debtholders), whereas at the high end (40MHz @$0.54 per MHzPOP) you have a valuation of about $4B (before paying off the first lien debt). That’s why I said that “It is very hard to see how you justify an equity value for this business (in line with) what Harbinger has invested, unless it can show it will be able to use all the spectrum it owns”.
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