02.18.10
Posted in Financials, Handheld, Inmarsat, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 8:05 pm by timfarrar
The FT’s Alphaville blog has highlighted various documents filed by SkyTerra with the SEC as part of its going private transaction with Harbinger, and suggested that Harbinger is still focused on the acquisition of Inmarsat that it originally proposed back in July 2008.
However, in our view these documents actually indicate the opposite, that although Harbinger is actively attempting to put together a consortium to fund an ATC network deployment, this is unlikely to include a bid for Inmarsat. The UBS analysis for Harbinger in July 2009, suggests three possible strategic options after the privatization of SkyTerra (Sol), namely:
(a) Acquire Inmarsat (Ignis)
(b) Pursue the Inmarsat (Ignis) Coordination Agreement
(c) Lease TerreStar (Taurus) Spectrum.
Over the last several months, it is clear that Harbinger has in fact pursued options (b) and (c) rather than option (a) (although admittedly it would not be able to launch a bid for Inmarsat prior to the SkyTerra takeover):
- SkyTerra declared the Inmarsat Coordination Agreement effective in December 2009 (prior to the two year deadline for this action); and
- TerreStar announced in January 2010 that it had entered a 90 day exclusive negotiation period to lease its satellite spectrum to Harbinger in exchange for an advance of $30M against its prior terrestrial (1.4GHz) spectrum lease to Harbinger.
While the Inmarsat coordination agreement (including its payment of $250M to Inmarsat to fit filters to existing Inmarsat terminals) is a necessity to make use of SkyTerra’s spectrum in any ATC network, in our view the potential Harbinger-TerreStar satellite spectrum lease is a direct alternative to pursuing a takeover of Inmarsat (albeit one which may not give access to European S-band spectrum, unless TerreStar is successful in its challenge to the European S-band process, or either Inmarsat or Solaris give up their licenses for this spectrum).
Similarly, while we understand that Harbinger is attempting to raise money from a consortium of investors over the next month or two, using this new funding to acquire Inmarsat would mean that it could not be used to fund a near term buildout of an ATC network. In fact, given the rise in Inmarsat’s stock price over the last year, it appears plausible that Harbinger might even decide to sell off some of its Inmarsat shares in order to provide funding for an ATC deployment, especially if Inmarsat decides to go down the route of spending its cashflows on a new I5 constellation with Ka-band capabilities.
There would be two ways in which an ATC network deployment could happen: if the buildout was funded by an existing wireless operator as a way to add capacity to its existing network, or as a (self-funded) standalone 4G new entrant to the US wireless market. We believe that Harbinger is pursuing the second of these alternatives at present, because the (less expensive and risky) first option is simply not open to it for the foreseeable future. As SkyTerra notes in its preliminary proxy statement:
“The Company had been actively pursuing a major strategic partner for a considerable period of time. In addition, during early to mid 2009 the Company had pursued and encouraged such parties to submit indications of interest to make an investment in and/or acquire the Company. No such partnering efforts were successful and no bona fide offers were received. In the judgment of Morgan Stanley, it was unclear that there was a short-or-medium term need for additional spectrum by ATC companies who were potential strategic partners. In addition, potential strategic partners had sources of spectrum other than through a partnership with SkyTerra, including via spectrum auctions by the FCC, and sales from SpectrumCo, Clearwire or from other entities in the satellite sector.”
Thus the pressing question is whether Harbinger will now be able to convince prospective partners/investors that a new entrant wireless business plan (presumably similar to that of Clearwire but based on LTE) would make sense. Though some funding might be available from (for example) an equipment vendor who would like to demonstrate its 4G technology (as has happened with Clearwire), it is less obvious who might be interested in providing distribution. Most importantly, with doubts persisting about whether Clearwire (with significant backing from wireless and cable operators) will be able to develop a sustainable 4G business, Harbinger will need to demonstrate a compelling reason why customers should choose its service over those of more established wireless providers. The only credible differentiator for such a wireless network lies in the satellite roaming capabilities that will be available (and mandated) in an ATC network deployment (and which Mr Falcone suggested to the Wall St Journal back in April 2009 would attract “vast global demand”). Thus potential partners’ attention will need to be focused on the TerreStar Genus phone (which now looks like it will come to market sometime in the second quarter of this year, after the deadline for Harbinger to complete its potential satellite spectrum lease with TerreStar), and whether they believe it can provide a compelling demonstration of competitive differentiation and market demand, based on this satellite roaming capability.
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01.25.10
Posted in Financials, Iridium, Operators, Spectrum, TerreStar at 3:11 pm by timfarrar
Last week I attended the Iridium Partner Conference held in (a rather wet) Phoenix, AZ at the Hyatt Regency Scottsdale. Ironically that was the very same hotel where the first demonstrations of the Iridium phone were made back in May 1998. 2010 is certainly shaping up to be just as significant for the MSS industry as was 1998, with the launch of the new TerreStar Genus phone just a few months away. We will then find out whether the new entrants are going to be able to mount a credible challenge to existing MSS operators, or whether they will experience an underwhelming customer response as Iridium and Globalstar did a decade ago. Our new profile of TerreStar has just been released, and discusses all these issues, including five year subscriber and revenue forecasts, along with an assessment of the value that might be realizable for ATC spectrum in the next few years.
At the conference itself, Iridium clarified that they intend to contract for the new NEXT constellation in mid-2010, and to ensure that they are fully funded at the same time. That would presumably involve a combination of bank loans guaranteed by export credit agencies and additional capital markets funding, totaling something between $1B and $1.2B – we would guess that they might need to raise of order $200M to $300M in high yield debt or convertible bonds in addition to the guaranteed bank loans. Interestingly, Iridium now regards advance funding from hosted payloads as “icing on the cake”, rather than as an essential component of its NEXT funding, allowing it more flexibility to consider projects which would provide an ongoing stream of revenues as opposed to just an upfront data purchase. Clearly the expectation is that by taking a “big bang” approach to its funding, Iridium will not only be able to persuade their distribution partners and customers that they will be around for the foreseeable future, but also that Iridium will close some of the EBITDA multiple discount on which their shares are trading compared to Inmarsat.
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01.05.10
Posted in Financials, Handheld, Operators, Regulatory, Spectrum, TerreStar at 4:39 pm by timfarrar
There’s a lot happening with TerreStar at the moment, as the company tries to complete the exchange offer to extend the maturity of its preferred shares. The deadline has now been pushed back until early February, while in a separate development, Echostar’s representatives have resigned from TerreStar’s board, effective December 31, 2009.
In the meantime, all eyes will be on the FCC, which needs to approve TerreStar’s ATC application (made back in the summer of 2007) before January 20, 2010 to prevent TerreStar defaulting on its loan agreement for the second satellite, which TerreStar’s deputy GC described in an October 2009 submission to the FCC as an event that “would likely be catastrophic to the company”. TerreStar will certainly be hoping that the FCC’s indications that it is taking another look at MSS allocations as one of the options to free up more spectrum for wireless broadband will not cause them to delay approval of TerreStar’s ATC application beyond this deadline.
Jan 13 update: TerreStar has just received its ATC license, and can look forward to launching commercial service in the “first or second quarter” of 2010 (per its recent statement to Satellite News) once the current testing phase is complete and the company has completed its Preferred Stock Exchange Offer and raised additional funding.
We’re planning to publish our new profile of TerreStar later this month, including forecasts of the market opportunity for both MSS and ATC services, and are also looking forward to trying out the TerreStar Genus phone when its demonstrated at the SATELLITE 2010 show in Washington DC in March. Its going to be fascinating to see whether TerreStar can succeed where others have failed in creating mass market demand for two-way MSS.
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12.07.09
Posted in ICO/DBSD, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 10:41 am by timfarrar
On Friday Dec 4 we attended an FCC discussion of the National Broadband Plan here in Menlo Park, at which Carlos Kirjner and Blair Levin presented on various issues being addressed in development of the National Broadband Plan. The most interesting part of the presentation was the assertion that “at least 150MHz” of TV spectrum could be freed up by relocating over the air TV broadcasters to a smaller portion of the UHF band “while keeping all major channels on the air”.
Its been widely discussed how the broadcasters might be incentivized to move, perhaps by offering them a share of the future auction proceeds, so at the end of the presentation I asked if a similar arrangement would be available for other spectrum bands, such as MSS. Blair Levin confirmed that other bands, including MSS-ATC spectrum, were also under review and that historic band allocations may no longer be optimal to meet future wireless spectrum demand. As part of the FCC’s review of Harbinger’s proposed purchase of SkyTerra, the FCC has also asked some very detailed questions about SkyTerra’s progress towards an ATC deal, and the discussions that they have had with different parties.
Will the National Broadband Plan provide an alternative way for MSS operators such as SkyTerra, ICO/DBSD and TerreStar to monetize their spectrum, as it does not look like any of these operators are going to move forward with ATC deployment in the near future? Globalstar’s ATC lease agreement with Open Range is seeing more progress, but is limited to a few million rural consumers (and the Open Range terrestrial rollout is being supported by USDA loan guarantees).
Certainly in the 2GHz band (unlike the L-band) there are no existing satellite services which would prevent operators returning their spectrum to the FCC for re-auction. The National Broadband Plan is due to be published in February 2010, so we will soon see whether the FCC is going to come up with a plan to make sure that MSS spectrum is put to use in terrestrial networks in a more timely manner.
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09.30.09
Posted in Financials, Handheld, Operators, Spectrum, TerreStar at 4:38 pm by timfarrar
TerreStar and AT&T have now announced that AT&T will distribute TerreStar’s Genus (Elektrobit) phone to “government, first responders, public safety, energy, utility, transportation and maritime users” and given additional details of the expected pricing for this satellite-cellular roaming service. The phone will cost $800 to $900 (subsidies were not mentioned, which is perhaps not too surprising given that the service is not being targeted at consumers initially), and then in addition to a standard voice plan, subscribers will need to pay $24.99/month for satellite access and an additional usage fee for satellite roaming (in the United States) of $0.65/minute for voice and $5/Mbyte for data.
TerreStar and AT&T are basically targeting the existing handheld MSS market, but expect that the phone will be deployed more widely, because it will become an “everyday” phone for end users, rather than being a shared phone which is kept in a cupboard for emergencies. In our view, the size of the potential addressable market is probably not too far off that for Land Mobile Radio, where we estimate there are around 2.5M to 3M handsets in use in the US today, with about half in public safety and the rest in other government and private sector market segments (parks, utilities, railroads, energy, etc.). Of course only a fraction of those users also carry a employer-provided cellphone, and at this point in time, TerreStar’s solution is more likely to be a replacement for that device rather than for an LMR radio itself. So let’s assume AT&T and TerreStar are targeting a potential market of say 1M people. For comparison, today there are about 170K MSS phones in use in the US and Canada (including many Globalstar phones with limited two-way service at present), of which probably just under 100K are in the lower 48 states (and remember that the TerreStar phone is unlikely to work as reliably as Iridium or Globalstar in Alaska or Northern Canada).
In that context, TerreStar would be doing amazingly well if it could gain 50K subscribers by the end of 2010 and 100K-150K subscribers by the end of 2011 (when SkyTerra also expects to be offering next generation services, and Globalstar will be back in full two-way service). Remember also that in 1999-2000, despite massive advertising (at least in Iridium’s case), Iridium and Globalstar only managed to gain a few tens of thousands of users on a global basis in their first year of commercial service. TerreStar will probably share the end user revenue about 50/50 with AT&T (Iridium and Inmarsat expect to get about 70% of retail revenue but AT&T would likely want a bigger incentive to promote the service) and monthly retail ARPUs (including the satellite access fee but excluding any terrestrial voice plan) might be expected to be between $40 and $50. So let’s assume TerreStar receives $25 per user per month. If there are (in the most optimistic scenario) an average of 20K subs in 2010 (assuming deployment ramps up towards the end of the year) and 100K subs in 2011, then that would generate service revenues for TerreStar of $6M in 2010 and $30M in 2011. There would presumably be additional equipment revenues (although we doubt TerreStar is looking to make a profit on equipment sales) and perhaps revenue from some other services like M2M data (once chipsets are available, which means only a limited amount of revenue could be produced even in 2011).
However, its pretty clear that TerreStar is going to need to raise additional funds to cover its operating costs in the near future, since its cash burn rate even before going into full commercial service is about $25M per quarter, and excluding the money purchase agreement for the second satellite (not part of this $25M cash burn), TerreStar had $110M of cash at the end of June 2009. Thus regardless of what happens to the $430M of preferred shares (which must be redeemed or converted next April), TerreStar will need to raise more money by mid 2010. From mid 2011, TerreStar will also need to begin paying cash interest on its debt, at an annual rate of more than $150M per year in 2012.
Given the relatively limited opportunity in professional markets (at best a few hundred thousand subscribers for TerreStar, once the overall market is shared with SkyTerra and other MSS operators), TerreStar will eventually need to either achieve considerable success in consumer markets (requiring a dramatically different price point for both equipment and airtime) or find a strategic partner interested in buying or leasing the company’s 20MHz of spectrum for a terrestrial ATC deployment (which doesn’t look likely in the near term, not least because TerreStar doesn’t even have an ATC license as yet). In this context, its probably most appropriate to look at TerreStar’s initial service offering as a proof-of-concept (and a means to justify further funding) for one of these two longer term possibilities, rather than as the means to generate an immediate financial return on its own. We’ll see over the next 12 months whether TerreStar is able to provide the proof that both the financial markets and potential strategic partners will be looking for.
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07.20.09
Posted in Financials, ICO/DBSD, Operators, Spectrum, TerreStar at 3:20 pm by timfarrar
On July 9, DISH Network filed a letter in the ICO North America (DBSD) bankruptcy case, indicating that it had purchased all of the $43.7M of first lien secured debt from the pre-petition lenders.
The first lien lenders had been objecting to ICO’s proposed restructuring which their financial advisers (Chanin Capital Partners) characterized as “a ‘plan’ that is doomed to fail, due to lack of financing, overwhelming debt and inability to move the company from the developmental (non-revenue producing) stage into an operating, revenue producing one”, while DISH Network stated in its letter that it “adopts those objections in their entirety and is prepared to prosecute the objections…”
According to Chanin, ICO/DBSD’s plan “seeks to put the Debtors in a holding pattern in the hope that the capital markets will become more accessible in the future. During this time the Debtors have no intention of furthering their business”.
However, with Echostar already holding a significant stake in TerreStar, ICO’s 2GHz rival, which just launched its own satellite earlier this month, could this development provide renewed impetus to the long rumored merger of the two companies and provide an alternative way forward for the development of MSS and ATC services in the 2GHz band?
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07.01.09
Posted in Financials, Globalstar, Handheld, ICO/DBSD, Inmarsat, Iridium, LightSquared, Operators, Services, Spectrum, TerreStar at 10:25 am by timfarrar
With apologies to the Eagles…its a lovely place, for MSS consumers at least. However, for MSS operators it seems to be somewhere you can check out [or go bankrupt] anytime you like, but you can never leave.
Today we’ve seen confirmation that Globalstar is now fully funded to complete the construction and launch of its first 24 second generation satellites by the end of 2010, while TerreStar has launched its new S-band satellite from Kourou, French Guiana and intends to initiate commercial services at the end of this year. Iridium also looks increasingly likely to complete its deal with GHL, since GHL’s shares and warrants are now trading well above the $10 value that would be refunded to investors if they voted down the deal. While there has been much speculation about potential mergers in the last two years, these now look less, rather than more, likely to occur in the near future (with the sole exception of SkyTerra’s Harbinger-backed bid for Inmarsat, which should be decided one way or another later this year).
Thus by early 2011, it looks like we will have at least four and more likely six voice and data MSS systems providing service in North America (Inmarsat, Iridium, Globalstar and TerreStar plus ICO and SkyTerra) and four systems (Inmarsat, Iridium, Globalstar and Thuraya) providing service in most of the rest of the world. With new advanced satellites, consumers will benefit from improved data capabilities and smaller, cheaper handheld satellite phones.
However, the development of at least three new systems (ICO, TerreStar and SkyTerra) and to some extent Globalstar as well (based on financial analysts’ comments at the time of its IPO in November 2006) has been justified largely by the value of MSS spectrum, due to the FCC’s rules enabling deployment of Ancillary Terrestrial Components (ATC), rather than by the intrinsic potential of the market for mobile satellite services itself. Thus, unless and until demand for MSS spectrum and ATC materializes, we run the risk of overcapacity for land-based MSS services, particularly in North America. This will certainly benefit end users, and price reductions (especially in conjunction with cheaper, more attractive terminals) may help to stimulate significant market growth, but it remains to be seen whether this will enable all the MSS operators to deliver a return for their investors or whether we’ll see more of them “checking out” with a bankruptcy filing as ICO North America did in May this year.
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06.29.09
Posted in Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 9:23 am by timfarrar
In a recent Report and Order, released on June 12, 2009, the FCC addressed the issue of when ICO and TerreStar can offer commercial service in North America, which has been delayed by the need to clear their uplink band (2000-2020MHz) of existing Broadcast Auxiliary Service (BAS) users, who are being transitioned to frequencies above 2025MHz. In the Order, the FCC removed the requirement that ICO and TerreStar must wait until all of the top 30 broadcast markets have been transitioned before they can launch service. However, ICO and TerreStar will have to coordinate with BAS users if they are to operate in uncleared markets, and Sprint Nextel now has until February 8, 2010 to complete the transition. As a result, though TerreStar intends to begin offering service in late 2009, it looks likely that national service will not be available until several months later.
More importantly, as part of the order, the FCC initiated a Further Notice of Proposed Rule Making (FNPRM) related to the sharing of costs for the BAS transition (which Sprint Nextel has paid but is seeking to reclaim from other operators who will use the spectrum). The FCC “tentatively conclude[d] that MSS operators and future AWS licensees will have an obligation to share, on a pro rata basis, in the costs associated with the relocation of BAS incumbents if they “enter the band??? prior to the BAS sunset date of December 9, 2013″ and “tentatively conclude[d] that an MSS operator “enters the band??? and thus incurs an obligation to share in the costs associated with relocation of BAS incumbents when its satellite is found operational under its authorization milestone”. In April 2009, Sprint Nextel estimated these costs at $100M each for ICO and TerreStar. ICO and TerreStar have previously argued that they should not be liable for any of these transition costs, so if confirmed, the FCC’s tentative conclusions would be a significant additional cost for both companies. However, it is uncertain if the recent bankruptcy of ICO North America will affect Sprint Nextel’s claim, including whether the ICO Global parent company (which was not part of the bankruptcy filing) will avoid this liability.
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06.19.09
Posted in Broadband, Government, Inmarsat, Services, Spectrum at 11:27 am by timfarrar
We’re not referring to hybrid satellite-terrestrial (ATC/CGC) networks, but to the details of Inmarsat’s long term satellite development plans for its Inmarsat-5 constellation revealed at today’s investor meeting in London. Though its fifth generation satellites are not due to be launched for nearly ten years, Inmarsat is already actively developing plans for satellites which include both L-band and higher frequencies, not just a “cheap and cheerful” low cost evolution of its current satellites.
Inmarsat doesn’t plan to develop what it characterized as “high risk” L-band satellites with ground-based beamforming (which is being employed by ICO, TerreStar and SkyTerra, with no apparent problems that we can discern), but instead is looking at including other frequency bands in the I5 constellation. In addition to indicating that S-band is not needed for its core business (but would instead be used mainly for terrestrial applications), Inmarsat suggested that standard FSS frequencies (i.e. Ku-band) were not particularly interesting. Thus we conclude Inmarsat may have a preference for including military Ka and/or X-band capacity on the I5 satellites. With the US government deploying its own Wideband Global System (WGS), there will be many thousands of DoD terminals in the field capable of using these frequency bands by the time the I5 constellation is launched.
Potentially the I5 satellites could provide surge capacity for the DoD (and other defense agencies) to supplement the government-owned WGS satellites, and provide incremental revenue opportunities for Inmarsat. Alternatively, Inmarsat could carry a hosted WGS-derived payload, in the same way as Intelsat recently agreed to carry a hosted UHF payload for the Australian Defense Force. According to figures provided at the conference, Inmarsat already receives 37% of its revenues from government services, and either approach would cement or even increase the proportion of revenues from government in the future.
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05.15.09
Posted in Financials, ICO/DBSD, Spectrum at 2:49 pm by timfarrar
Is this deja vu all over again for the MSS industry? ICO North America has filed for bankruptcy, and plans to turn over almost all of its equity to the convertible debt holders who would have been due for repayment of $767.6M in August. ICO North America has an S-band GEO satellite in orbit, which it launched in April 2008, and had planned to develop a mobile video service for cars which it referred to as MIM. However, these plans were put on hold while the company renegotiated its debts.
There is a distinction between ICO North America, now referring to itself as DBSD, and its parent company, ICO Global, which is not filing for bankruptcy. ICO Global is responsible for a MEO satellite system, whose first satellite was launched back in 2001, although the system was never completed. Though ICO maintains it has a legacy claim to spectrum rights in the S-band on a global basis, the European Commission decided yesterday that it would instead award European spectrum licenses to the Inmarsat and Solaris Mobile. ICO Global’s main asset is the judgment of $631M that it was awarded against Boeing in January this year, after a trial in which ICO blamed Boeing for its inability to complete the MEO system. ICO has not yet collected this judgment, which Boeing has appealed, and ICO has estimated it could take two years for the matter to be resolved.
ICO Global was under no obligation to share any of the Boeing judgment with the ICO North America convertible debt holders, but could have presumably cut a different deal if had wanted to keep a bigger share in ICO North America’s assets and give up some of the potential future litigation proceeds. Clearly ICO Global has therefore decided that these potential future litigation proceeds are more valuable than the share of the GEO satellite and spectrum assets that it could have obtained in exchange for them. That may be good news for ICO Global’s shareholders, since there are about 200M shares outstanding, implying the potential future litigation proceeds are equivalent to $3 per share (compared to a current trading price of $0.60) if Boeing’s appeal is unsuccessful. However, it doesn’t help the prospects for ATC if Craig McCaw, one of the savviest spectrum investors around, believes that ICO North America’s satellite and spectrum assets aren’t worth more than the $767M owed to its convertible debt holders. Our view continues to be that the ATC spectrum will eventually be put to use in terrestrial networks, the problem is just that ‘eventually’ might be quite a long time.
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