12.06.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:02 pm by timfarrar
LightSquared has received significant backing from the highest levels of FCC as the company moves forward with deployment of its 4G LTE network, including several statements by FCC Chairman Genachowski in support of LightSquared’s public unveiling in July and its plans to donate 2000 handsets to the Indian Health Service, announced in September. Now we will have to wait and see whether the FCC will act to approve LightSquared’s recently updated ATC business plan, which met with significant opposition from cellular interests last week. These comments requested that this “novel re-interpretation of the Commission’s integrated service requirement” be deferred for consideration as part of the currently pending MSS rulemaking proceeding, which would likely delay any resolution of the request by many months.
Unfortunately it seems that LightSquared doesn’t have the friend in high places that really matters, as an act of God appears to have left the SkyTerra-1 satellite (which was launched on November 14, carrying “with it, the ambitions of one of the world’s richest hedge fund managers, Philip A. Falcone“) experiencing problems in deploying its 22m L-band antenna. While we probably won’t know until the end of this month whether or not the problem can be solved, if it can’t, then the satellite would very likely be unable to communicate with LightSquared’s handsets, and the company would be forced to launch the SkyTerra-2 satellite (which may or may not have been intended to remain a ground spare). Space News estimated last week that this could probably be done “within a year”, but that was before Sunday’s Proton rocket failure, which fell into the Pacific Ocean along with its cargo of 3 Glonass satellites. Although SkyTerra-2 currently is listed as having a March 15, 2011 launch date, it seems hard to imagine that it would be possible to go ahead with the launch at that point in time, unless the antenna was uninsured (as happened with TerreStar-1 in the wake of the Solaris problems last year).
In the meantime, it will be interesting to see whether and how LightSquared moves forward with the buildout of its terrestrial LTE network, which it is required to construct “without regard to satellite service” under the second of the conditions agreed with the FCC in March this year. Given the apparent potential for conflict between this condition and the original ATC gating criteria (which require satellite service to be commercially available before the ATC network is launched), it will be particularly fascinating to see what the FCC does next.
Permalink
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.
Permalink
11.29.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 3:57 pm by timfarrar
Last Friday the FCC extended the deadline for comments on the LightSquared’s updated ATC plans to December 2, with reply comments due by December 9, after a request from the CTIA. As I noted last week, it will be interesting to see the response from different cellular industry players, to what the CTIA characterizes as a “new precedent with significant legal, regulatory, and policy effects”.
If the FCC does agree to LightSquared’s request that it should be permitted to offer integrated service just to its wholesale customers, with no obligations upon those customers to offer only integrated service packages, this would mean that end users would then be able to purchase terrestrial-only terminals and service plans. In such circumstances, it is hard to see what would be gained by the 2GHz MSS players agreeing to relinquish their spectrum for an incentive auction, and to share the proceeds of that auction with the government. As a result, the FCC could end up torpedoing the intentions of its own NPRM/NOI, particularly the objective of gaining “appropriate compensation for the step up in value” of the 2GHz spectrum, because, as the FCC admits, it cannot force DBSD and TerreStar to give up their satellite spectrum, while these companies have operational satellites in orbit. Both companies would therefore presumably be well within their rights to hold out for a similar wholesale ATC-based arrangement to that planned by Harbinger and LightSquared, under which they could keep all of the proceeds from (for example) a leasing arrangement with a major cellular operator.
The FCC might still have some leverage, as it would be able to impose buildout conditions on any proposed ATC license modifications (or on a future merger of DBSD and TerreStar). However, any deal could also be delayed considerably by the additional uncertainty that would be introduced over the value of the 2GHz MSS spectrum in the current bankruptcy proceedings. This is likely to be particularly problematic in the case of TerreStar, where it already appears that there will be substantial disagreements between the parties concerned, due to the numerous classes of creditors, including both secured and unsecured debt holders at TerreStar Networks, plus preferred and common stock holders at TerreStar Corporation.
Such an outcome would clearly help Harbinger, as it looks to attract investors and partners for LightSquared, because the 2GHz spectrum would then provide a less clear-cut alternative for cellular operators such as T-Mobile. In that context it was particularly interesting to see a research note issued last week by New Street Research in London, which rated a “deal with Echostar (as likely owner of TerreStar and DBSD spectrum)” as the most probable of five alternative spectrum sources for T-Mobile USA, while suggesting that “a deal with LightSquared (or its successor)” was the least likely option for T-Mobile.
Permalink
11.22.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:49 am by timfarrar
On November 18, LightSquared filed an updated showing with the FCC of its plans for compliance with the ATC gating criteria. LightSquared states that it will ensure that its wholesale offering includes 500 kbytes of satellite capacity for every 1 Gbyte of terrestrial capacity it provides to a partner, and that dual mode chipsets are available through its $50M development agreement with Qualcomm. However, LightSquared also admits that its “retailer customers will have the ability to offer terrestrial-only plans to their own end users” and that it intends to “file reports with the Commission every six months providing the number of terminals in service falling into each of three categories: MSS only, dual-mode MSS/ATC, and terrestrial-only” (implying that terrestrial-only chipsets and/or devices will also be developed).
In view of the poor reception that the TerreStar Genus phone has received, both in the MSS community and amongst terrestrial-oriented reviewers, it is hardly surprising that potential LightSquared partners are unlikely to be enthused about attempting to sell a dual mode satellite-terrestrial service to a mass market, and would much prefer the opportunity to offer terrestrial-only service. Indeed, as I noted previously, the responses from Leap Wireless and T-Mobile in the FCC’s current MSS NPRM/NOI proceeding, were supportive of interpreting the ATC gating requirements in a manner which would allow for terrestrial-only devices.
While LightSquared states that its “revised business plan satisfies the Commission’s integrated service requirements for L-band MSS systems” the original ATC rules did not consider the business plan that LightSquared now envisages, that of a wholesale provider whose customers are retailers (or other operators) who repackage and sell on the service. For example, the FCC’s February 2005 ATC report and order states:
The purpose of ATC is to enhance MSS coverage, enabling MSS operators to extend service into areas that they were previously unable to serve, such as the interiors of buildings and high-traffic density urban areas. We will not permit MSS/ATC operators to offer ATC-only subscriptions, because ATC systems would then be terrestrial mobile systems separate from their MSS systems. We therefore clarify that “integrated service??? as used in this proceeding and required by 47 C.F.R. § 25.147(b)(4) forbids MSS/ATC operators from offering ATC-only subscriptions.
LightSquared appears to be arguing that because it is offering integrated service to its customers, it is irrelevant whether or not those customers offer ATC-only subscriptions to their end users. Likewise, instead of seeking the safe harbor that all devices will be dual mode, LightSquared apparently intends this narrative (as required by the February 2003 ATC Order) to provide “for Commission review evidence demonstrating that the service they propose to offer will be integrated. This can be accomplished through technical, economic or any other substantive showing that the primary purpose of the MSS licensee’s system remains the provision of MSS.”
It will therefore be interesting to see the responses to this application (although as noted below the short timeframe may limit the number of comments) and the degree of support that LightSquared receives from the FCC. It seems all but certain that AT&T and Verizon will continue their hostility to LightSquared, while assuming Sprint remains committed to Clearwire, it would also likely be counted on to oppose the application. On the other hand, I would expect most of the smaller cellular operators including T-Mobile, Leap and US Cellular to be supportive, as they look to ensure that more spectrum options are available when they eventually decide how to move to 4G.
One additional (and more speculative) conclusion that could also be drawn from this submission is that LightSquared may now push off the announcement of any major partnerships (for example with one or more cellular operators) until more clarity is available on the FCC’s attitude to both this application and the MSS NPRM/NOI (where LightSquared has requested that the FCC reconsider the requirement for a ground spare satellite). This is because it would seem surprising for LightSquared to introduce additional regulatory uncertainty over its business plan if the company was in a position to announce a series of partnerships in the near term (which until recently I had expected might come shortly after the launch of SkyTerra-1). Nevertheless, LightSquared has announced previously that it intends to exercise its Phase 2 option with Inmarsat before the end of the year (which will involve substantial additional payments), and Harbinger appears to be under considerable pressure from its investors to demonstrate the progress it is making, so there will undoubtedly be more developments in this story soon.
UPDATE: Given that the FCC has placed this submission on an extremely accelerated timescale, with comments due by November 29 (immediately after the Thanksgiving holiday) and reply comments due by December 6, it seems plausible that LightSquared might well be expecting to receive a decision on this application very soon. Assuming this ruling was favorable, LightSquared might therefore still be able to announce its planned partnerships and exercise the Phase 2 spectrum option with Inmarsat before the end of the year.
Permalink
11.14.10
Posted in Financials, LightSquared, Operators, Spectrum at 5:42 pm by timfarrar
Am I the only person to be somewhat suspicious about the timing of this week’s revelations of withdrawal requests from Harbinger’s funds and investigations by the Securities and Exchange Commission and U.S. Attorney’s office into whether the firm “misled investors” and “improperly allowed some clients to withdraw money following the financial crisis while barring others from doing so”? Though these stories have just emerged, it appears that the withdrawal requests were submitted at the end of September, while the investigations began this summer. As a result, I have to wonder if the timing of these stories was intended to derail the next stage of LightSquared’s plans.
This last week has seen wireless operators such as US Cellular and Leap Wireless state explicitly that they could be open to becoming wholesale customers of LightSquared. T-Mobile also appears to be keeping its options open, given it has not yet struck a deal with Clearwire as was being negotiated back in September, and T-Mobile also indicated potential interest in LightSquared’s capacity this week. Whether or not these operators want to do a deal with LightSquared today, it is certainly in their interests for LightSquared to survive, and to be available as a potential source of capacity when they do reach a decision on 4G. That would, at the very least, help to hold down the price of alternative spectrum (from a source such as Clearwire or a future FCC auction), and their expressions of support come at an important moment for Harbinger.
LightSquared stated over a month ago that it had “already signed wholesale distribution agreements” and was “in advanced negotiations with numerous potential partners”. It also said that the company intended “to accelerate its planned implementation of the Phase 2 agreement, which now will take effect by the end of the year”. With today’s successful launch of the SkyTerra-1 satellite, I had expected to see an announcement of at least some of these partnerships in the very near future, in conjunction with additional equity investments (whether from wholesale partners, or perhaps more likely from other financial investors) to validate the valuation that Harbinger has placed on LightSquared. However, with Harbinger’s clients fuming, we will have to wait and see whether the recent revelations will delay or even derail these plans.
Permalink
11.08.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 4:18 pm by timfarrar
Last Thursday, Clearwire announced that it was laying off 15% of its staff (as I suggested a couple of weeks ago), in an attempt to conserve its cash resources, which are only expected to last “through the middle of 2011″. When news first emerged of the Clearwire spectrum auction back in mid-October, I suggested that it was going badly and appeared to have been leaked by Clearwire itself, and it certainly doesn’t appear that the auction has concluded with a positive outcome (i.e. with T-Mobile agreeing to pay a significant amount for the 40MHz of spectrum that Clearwire was trying to sell).
The question now arises of what this means for LightSquared, which has also been pursuing a deal with T-Mobile as a potential wholesale customer and/or strategic partner for its 4G LTE network. Although T-Mobile appears not to have struck a deal with Clearwire, and thus is at least potentially still a partner for LightSquared, it is far from clear whether this is good news. If T-Mobile’s interest in Clearwire was thwarted because of roadblocks thrown up by Sprint (i.e. Sprint’s unwillingness to share a network with a key competitor), then it is quite possible that a deal with LightSquared could still be on the cards. However, if instead T-Mobile has decided that the price of spectrum is only going to go down over the next 6-12 months (and perhaps even in the medium term), as Clearwire and LightSquared become increasingly desperate for a deal, then that would certainly be bad news. T-Mobile might even be waiting to see if the 2GHz MSS spectrum could present another possible alternative, once the TerreStar and DBSD bankruptcies are resolved, given that this spectrum is closer to its existing PCS and AWS holdings than either the LightSquared L-band spectrum or the Clearwire 2.5GHz spectrum, and could even be available without ATC restrictions (via an incentive auction) in a couple of years’ time.
Whatever the reason, if T-Mobile does delay its decision on 4G spectrum (which might well be suggested by the recent rebranding of its HSPA+ network as 4G), then that would tend to indicate that it is not feeling too much pressure from the supposed “spectrum crunch”. While that may be at least partly because it won’t be offering the iPhone anytime soon, it will be interesting to see whether it also prompts more people to question the received wisdom about future spectrum demand.
Permalink
11.01.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 5:59 pm by timfarrar
Wall Street analysts always seem to have a difficult time understanding the MSS industry. Who can forget the forecasts from the late 1990s that the MSS industry would generate tens of billions of dollars in annual revenues within a few years?
Now we see equally wild guesses about the TerreStar bankruptcy and what might happen to those assets. Jonathan Chaplin of Credit Suisse suggested that there could be a grand bargain between LightSquared, TerreStar and DBSD to pool their spectrum for wireless broadband. Unfortunately this prospect appears to have been comprehensively shot down by Harbinger’s apparent attempt to disrupt the TerreStar Restructuring Support Agreement by buying TerreStar’s Exchangeable Notes.
Next up was Jason Bazinet from Citigroup, with speculation that Echostar was intending to build a satellite-based mobile video network using TerreStar and/or DBSD’s assets. However, this bizarre analysis completely misunderstands the limitations of satellite services: you can build a satellite-based broadcast network using a limited number of repeaters (just like Sirius XM has done), but then its only useful in cars, not for serving the tablet market that Bazinet assumes would be the target market for the service (unless you like standing around outside in a field to watch the video programming). And of course the in-car market for subscription-based video is a small fraction of the market for satellite radio (while Qualcomm’s MediaFLO business has been little short of a disaster), because solo commuters can’t exactly spend their time watching TV whilst driving down the freeway.
So we’re left with the question – can anyone come up with a better analysis of what’s going to happen to these assets, or will we just have to wait for more to be revealed at the end of this week?
Permalink
10.29.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 1:16 pm by timfarrar
In the UK, November 5th is celebrated as Guy Fawkes night, with bonfires and fireworks to commemorate a foiled attempt to blow up the Houses of Parliament back in 1605: “Remember, remember the fifth of November. Gunpowder, Treason and Plot.” (Yes I know that burning an effigy of someone executed 400 years ago sounds pretty bizarre to Americans)
Now it looks like next Friday could also mark a significant date for the future of the MSS industry, as that is the deadline for TerreStar Networks to submit its Disclosure Statement and Plan of Reorganization for emergence from bankruptcy. That Plan could reveal details of how TerreStar Networks intends to move forward with both its MSS services and attempts to monetize its ATC spectrum. We also may find out more about what is likely to happen with the TerreStar-2 satellite, which could end up being used to support a European S-band project. This comes at a time when we are waiting to see what happens to DBSD, after its attempted emergence from bankruptcy was stayed by the Second Circuit in early October. Even more importantly, there appears to be an ongoing battle between Harbinger/LightSquared and Clearwire to secure a partnership with T-Mobile, as the current Clearwire auction moves towards a conclusion (most likely before Thanksgiving). Securing a partnership with T-Mobile could be a make-or-break situation for Harbinger and LightSquared, as T-Mobile is the only major US wireless carrier still to decide how it will move forward with 4G. There has even been speculation from Credit Suisse about a grand bargain that would bring together all three of these ATC spectrum holders. However, with Harbinger now buying the unsecured Exchangeable Notes at TerreStar Networks at 43.5 cents on the dollar, which were only supposed to receive up to 3% of the restructured equity (i.e. less than 20 cents on the dollar), a challenge to the TerreStar Restructuring Agreement might appear to be a more likely outcome.
As a result, the next week is likely to be filled with plotting, but let’s just hope that by next Friday any gunpowder will be signaling celebration rather than destruction in the MSS industry. Today we’re releasing our new profile of LightSquared, which contains a detailed analysis of their LTE business plan and a discussion of spectrum valuation and regulatory issues, all of which will be very relevant to those seeking to understand the implications of these events. Our MSS operator profiles are sold individually and are priced at $995, including a free one hour discussion of our analysis. On Monday we’ll also be releasing a new report with details of MSS industry developments, including Inmarsat’s Ka-band system, regulatory and financial ATC-related developments and updates on market growth, which is available exclusively to subscribers to our MSS information service. Contact us if you need any more information about our research.
Permalink
10.26.10
Posted in Regulatory, Spectrum at 2:19 pm by timfarrar
We’ve already expressed some skepticism about both the methodology and the underlying growth assumptions used in the FCC’s Mobile Broadband Spectrum Forecast. It also appears that there is a limitation in how upgrade costs are treated in the FCC’s model. Specifically, the FCC model assumes that the “economic value” of additional spectrum is based on avoiding the construction of more cell sites by using additional spectrum at existing cell sites to accommodate the increased traffic load. However, the model ignores the cost of upgrading existing base stations to make use of this additional spectrum.
The underlying assumption which is used to justify ignoring this upgrade cost is that existing base stations will be upgraded anyway to 3.5G or 4G technologies. However, it is not always the case that these upgrades can accommodate more spectrum at no incremental cost. That might be a reasonable assumption if a PCS base station adds more PCS spectrum. However, if the new spectrum is at a considerably different frequency (e.g. adding 2.5GHz spectrum to a 850/PCS/AWS network), then it may not be possible to re-use a common set of antennas (potentially implying additional tower lease costs) and in some circumstances it may even be necessary to use a completely new cellsite plan, due to the different propagation characteristics (cell radius) of the new spectrum (although this may be mitigated if the spectrum is being used to add capacity in dense urban areas where the cell radius is very small regardless of the frequency). Thus though these incremental upgrade costs might be somewhat limited (perhaps a few billion dollars?) they can’t be completely ignored when operators decide whether to buy more spectrum or add cell sites in their existing spectrum, and they become more significant if usage growth and the need for spectrum are lower than expected.
Permalink
10.25.10
Posted in Regulatory, Spectrum at 4:53 pm by timfarrar
After looking at the consequences of what appears to be a mathematical error in the FCC’s Mobile Broadband Spectrum Forecast last week, I thought it would be useful to look at some of the underlying traffic growth forecasts themselves.
The FCC forecast gives some detailed projections of traffic growth per device and device penetration in 2014 in a couple of its exhibits, based apparently on Cisco data, split between “basic and feature phones”, “mobile broadband handsets” and portable devices (“computing devices (netbooks and notebooks), tablets, handheld gaming consoles, e-readers, digital cameras and camcorders, digital photo frames, and in-car entertainment systems”) either as substitutes or complements to fixed broadband. The forecast assumes rapid growth of take-up and traffic for data intensive devices, but what is remarkable is that more than two-thirds of all the traffic in the Cisco model comes from portable devices. However, under any reasonable assumptions about ARPUs from each type of device (unless you assume “voice will be free” as Cisco used to assert) – say $40 per month for “basic and feature phones”, $69 for mobile broadband, $35 for fixed broadband and $25 for portable devices, then less than 10% of 2014 revenue comes from this 68% of traffic, as shown in the chart below. (Note that these ARPUs were chosen to match with annual revenue growth of 7.5% p.a., which is in line with the growth rate from 2005 to 2010 according to the CTIA).
In this case, the solution to the spectrum “crisis” is pretty clear (especially for AT&T and Verizon) – sell people DSL/FiOS/U-verse/cable broadband with WiFi, and limit their use of complementary portable broadband devices, unless they are either high end (laptop) users, or don’t use much bandwidth (Kindles). In any case, certainly don’t allow them unlimited usage. If you’re a second tier player then you have to decide if you can afford to meet the needs of these portable device customers, or if targeting the other 90% of revenues is enough for now. If you’re a new entrant trying to go after these portable device customers, then you’d better hope your spectrum really is very cheap. Perhaps you can hope that by serving people’s portable devices you can capture all of their mobile spending (i.e. provide them with a phone as well)? Maybe that could be the case some of the time (though somehow I doubt that buying a Kindle or a camera or a photoframe is going to make you switch cellphone provider), but isn’t it just as likely that the big players will offer “family plan” type bundled rates for various other devices and just keep a tight lid on their usage? How much more do you really want to spend each month on all these devices in addition to your current cellphone bill (indeed is $25 per month even remotely achievable as an average ARPU for these sorts of devices)? After all, a lot of people (myself included) have apparently decided not to bother with 3G iPad connectivity at $25 per month.
Perhaps it could be argued that in fact voice (VOIP) might well be free eventually, so operators have to get used to that and go after these portable device customers instead. However, that outcome is even worse for spectrum valuations, because if 70% of current wireless revenues are destined to disappear then investment dollars for 4G buildouts and spectrum will be pretty hard to come by.
UPDATE: We understand that there is an inconsistency in the FCC report between the data for usage growth per device from 2009-13 (from the Cisco 2009 report) and the penetration in 2014 (from the Cisco 2010 report) due to a major change in the definition of “portable complementary” devices. As a result the 2009 Cisco report predicts there will be about 11M portable complementary devices in 2013 but the 2010 report predicts there will be 51.8M of these devices in 2014. Because the underlying data in the Cisco report is not published (and no definitions appear in the paper), it is hard to see whether the 2009-13 data usage numbers are still valid for 2014 or not. However, our estimates are quite close to the total data usage predicted for North America in 2014 and Cisco certainly assumes that the vast majority of data usage in 2014 comes from “portables, netbooks and tablets”.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
