12.10.12
Posted in Financials, Globalstar, Operators, Regulatory, Spectrum at 2:58 pm by timfarrar
On November 13, Globalstar submitted a Petition for Rulemaking to the FCC seeking permission to use its spectrum for terrestrial services, without any of the restrictions imposed under the current ATC “gating requirements”, and shift its authorization to Part 27, as used for other standard terrestrial mobile services.
The petition envisages two parallel rulemakings, the first to consider designation of Globalstar’s downlink spectrum (Globalstar refers to this as the “upper Big LEO band”) as an AWS-5 band, permitting flexibility for any wireless service to be offered, such as TD-LTE similar to Clearwire’s planned deployment in the adjacent BRS/EBS band. Globalstar also suggested that it be permitted to offer a Terrestrial Low-Power Service (TLPS), which would effectively be a separate channel for licensed WiFi service, using both Globalstar’s upper band spectrum and the adjacent unlicensed spectrum.
This would only be one possible option under an AWS-5 designation, but what is pretty smart about the low power TLPS service (similar to WiFi use, which already overlaps with these BAS channels) is that Globalstar may not have to relocate legacy BAS users who currently operate in the 2450-2500MHz band and could be impacted by a new wide area high power network deployment (as was seen with some of Open Range’s towers, due to lack of coordination on Open Range’s part). However, it is possible that even if the FCC permitted the TLPS service to begin immediately, it might require further actions to be taken (or impose other coordination requirements) before full flexibility was granted in the 2483.5-2495MHz band.
UPDATE (12/11): I’m told that legacy BAS users do experience interference from existing WiFi channels above 2450MHz, but that to date the FCC has not taken action to address concerns about interference from unlicensed spectrum users. Whether this will have implications for quick authorization of TLPS is unclear.
The second rulemaking that Globalstar envisages would then extend the AWS-5 designation to include Globalstar’s uplink spectrum (which it refers to as the “lower Big LEO band”), thereby enabling FD-LTE across the whole of the Big LEO band, which Globalstar considers to be the “highest and best terrestrial use” of this spectrum. The reason for separating the two requests is that the lower band (uplink) spectrum is close to the GPS band, and so the FCC is likely to be cautious about permitting terrestrial services in this band after the LightSquared debacle. As a result any authorization of high power LTE usage in the lower band spectrum (even though it would be for uplink only) would require considerable testing and therefore it would take some time before any approval could be granted.
If granted permission to provide TLPS by the FCC, it appears that Globalstar would look to monetize the TLPS offering (prior to gaining authorization for a standard LTE service) by providing spectrum for a small cell buildout, most likely by a major wireless carrier, but possibly by a tower company or technology player instead. Though such a buildout could be undertaken with existing licensed spectrum (e.g. Clearwire’s 2.5GHz band), or new unlicensed or shared spectrum (such as TV white spaces or the 3550-3650MHz band that the FCC intends to auction for shared usage), Globalstar’s advantage is that WiFi capability is built into the vast majority of smartphones, and Globalstar estimates that its licensed channel would be expected to offer around three times the range and speed of similar access points in the existing uncontrolled WiFi spectrum. However, Globalstar would need to move quickly to take advantage of the installed base of WiFi-capable devices, before capabilities to use longer range unlicensed spectrum (White Spaces) or other licensed small cell bands become widely available in smartphones.
As a result, Globalstar would need both quick action from the FCC and to strike a partnership (or long term spectrum lease) in 2013 or early 2014 enabling rapid deployment of a small cell network. In that regard, the fact that the FCC has acted much more quickly to put Globalstar’s proposal on public notice (2 weeks) than the recent LightSquared petition (which took 6 weeks) suggests that the FCC may well consider Globalstar’s proposal with rather more urgency. This certainly marks a significant turnaround in Globalstar’s relationship with the FCC, which was rather difficult (to say the least) back in September 2010, when the Commission suspended Globalstar’s ATC authority.
Globalstar believes that because of the availability of an existing WiFi device ecosystem, its spectrum should be more highly valued than alternative small cell spectrum, such as that owned by Clearwire. Indeed, Globalstar apparently considers that the future possibility of using LTE within its spectrum band could make this spectrum worth even more than the $0.20 to $0.30 per MHzPOP valuation seen in recent transactions such as NextWave’s WCS spectrum.
However, that is very dependent on a major cellular operator deciding to choose Globalstar as the solution for a small cell rollout (as well as future LTE licensing), and it remains uncertain what will happen to the value of “small cell” spectrum in the next year or two, as more spectrum is brought to market (a rulemaking on the 3550-3650MHz band will be considered at the FCC Open Meeting later this week), especially if data traffic on existing LTE networks grows more slowly than expected. Some think that the value of the 3550-3650MHz band will be very low (perhaps $0.01/MHzPOP or less), as has been seen internationally, which could lead operators to decide that putting a multi-billion dollar valuation on Globalstar’s spectrum for use in a TLPS service would be totally ludicrous.
Clearly the potential value of Globalstar’s spectrum is a critical component in securing investors for the new financing that Globalstar is trying to complete in the early part of 2013, because even though duplex revenues are slowly starting to recover, growth in the SPOT business, which has carried the company for the last few years, has recently fallen short of (at least my) expectations. Globalstar needs to raise money to pay for its EUR150M contract with Thales Alenia Space (TAS) to build a further six satellites, plus the launch and insurance for these satellites. At some point Globalstar will presumably need to complete its second generation ground segment upgrade contracts with Hughes and Ericsson, and Globalstar also has to address the April 1, 2013 deadline when $71.8M of Globalstar’s 5.75% convertible notes may be redeemed for cash at the option of the holders (Globalstar stated in its 2011 10-K that it assumed these notes “will be refinanced in 2013 by issuing additional debt”).
Much of the upcoming capex program would presumably be funded by an increase in Globalstar’s COFACE loan facility (which typically would cover 85% of the costs, although it is unclear if this would relate only to work carried out by French companies). It is worth noting that the FCC licenses do not form part of the security package for the COFACE loan, which could make Globalstar’s fundraising easier, if additional funding (from non-COFACE sources) was secured against the FCC license subsidiary. However, if Globalstar does not succeed in raising the required funds, this also poses the question of whether (in the event of a bankruptcy) the existing convertible note holders could sell the spectrum licenses and receive a recovery, even if the COFACE loan is not paid off in full by a sale of the satellite assets. Such a possibility may complicate negotiations over the upcoming refinancing of the 5.75% convertible notes.
More importantly, it will be very important to see whether the FCC follows the DISH model, and simply grants Globalstar a separate terrestrial license (alongside its satellite license) which could be monetized at a later date (regardless of the ultimate fate of Globalstar’s satellite system), or if it follows the LightSquared path, where (because LightSquared is operating under an ATC waiver) the L-band MSS spectrum cannot easily be disentangled from the continued provision of satellite services. After all, past bankruptcies in the MSS sector have shown how hard it is for creditors to achieve a large recovery from billions of dollars invested in MSS satellite hardware, and at least in the case of DBSD and TerreStar (albeit in a situation with no meaningful existing satellite business, unlike Globalstar), the in-orbit satellites were seen as a potential cost associated with obtaining the spectrum licenses, rather than valuable assets in their own right.
Permalink
12.06.12
Posted in DISH, LightSquared, Operators, Regulatory, Spectrum at 12:34 pm by timfarrar
No not his assertions that “I still believe that we had a great, and we still do have a great vision” and that “a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value”, which look like they are moving even further away from being realized as time goes on.
LightSquared’s latest plan is to relinquish terrestrial rights in part of its L-band spectrum in exchange for the right to use additional government spectrum used by NOAA. However, I’m told that although NOAA may be prepared to allow terrestrial use of the 1675-80MHz spectrum band (subject to payment of relocation costs to move their radiosondes to the 401-406MHz band), LightSquared’s plan may now be derailed by the apparent intention of Congress to mandate an auction of “at least 15MHz” of spectrum in the 1675-1710MHz band, thereby requiring LightSquared to buy this additional spectrum at auction rather than being given (what they are portraying as) a “swap”.
After all, most Democrats appear to have concluded that “What happened to LightSquared is disappointing…But unfortunately that ship has sailed”. NOAA would presumably also like to maximize the auction proceeds to fund the relocation of its other systems in the 1695-1710MHz band which will also be auctioned as (lower value) uplink spectrum. As a first step, NOAA’s position may become clearer next week once the initial comments are filed in response to LightSquared’s petitions for rulemaking.
What I’m actually referring to in the title of this post is Phil’s comment on my blog post back in August 2011 that “Everyone knows Ergen is not going to build out a network. No one trusts him, including the FCC. They are not going to put their eggs in that basket because they know he will make them look foolish.”
That does appear to be a pretty good summary of the underlying rationale behind the FCC’s draft AWS-4 Order, circulated just before Thanksgiving, because the Order does not impose any anti-windfall conditions that would stop DISH from selling the spectrum to another operator, but instead attempts to mitigate this windfall (a concern the FCC is acutely sensitive to) by ensuring that the proceeds of an H-block auction can be maximized. If sold to existing operators, then the 50MHz of spectrum in AWS-4 and H-block combined would help to preserve the current four player wireless market in the US and would also mean that (as the FCC Chairman’s former advisor put it this week) “we’re not in the rush we originally thought” to address the purported spectrum crunch.
Despite this encouragement to cash in, DISH objected to the draft order, with Ergen appealing in person to each of the five Commissioners to make changes. However, the FCC fired back at DISH and has now scheduled the order for a public vote at the meeting on December 12, sending a signal of unanimity to DISH, and perhaps also discouraging any Commissioners who might be wavering from taking a position that would increase DISH’s potential windfall at the expense of H-block auction proceeds for the Treasury. Sprint has maintained its opposition to the latest changes proposed by DISH, and appears to have been successful in fending off any modification to the original draft (if Sprint was losing ground then I would have expected to see more vocal objections, as opposed to the current strategy of providing behind the scenes briefings and a rather non-specific ex parte filing).
Thus I’m left wondering whether DISH will now be persuaded that its best interests lie in selling out (especially given the diminishing number of available partners), or if instead DISH will continue to fight with the FCC (and challenge the legality of the Order as outlined in last week’s ex parte filing), potentially holding up the deployment of both AWS-4 and the H-block?
Could Sprint have designs on the AWS-4 spectrum as well (after all, Ergen is known for fighting vigorously right up to the time he does a deal with an opponent), or will it simply want to take advantage of disposals that AT&T would be forced to make after buying DISH’s spectrum? We should know more about Ergen’s intentions very soon, and Sprint’s proxy filing, now delayed until December 21, should make even more interesting reading than that of MetroPCS, because it will have to reveal if discussions have been going on with DISH behind the scenes over any potential deals.
Permalink
12.03.12
Posted in Aeronautical, Financials, Services at 4:45 pm by timfarrar
The latest Global Eagle investor presentation, which was filed with the SEC on November 27, makes for some pretty entertaining reading, much like the script for one of those Hollywood disaster movies that Row 44′s new owners may be fond of. Of course it requires some pretty convoluted logic to argue that Row 44, which is selling equipment at cost and losing money on every megabyte of data carried across its network, is worth $250M.
That’s especially true when the company fully intends to continue to sell equipment at cost and intends connectivity to be a “lower margin” service. In addition, despite a new contract with Southwest, which is expected to lead to a near 50% increase in connectivity revenue per passenger by 2014, the connectivity service is projected to produce less than $5M of gross margin (not EBITDA) that year. Instead, Row 44 and Global Eagle “believe the next frontier for growth will be providing quality entertainment, vast entertainment, first through the airlines into a projected multi-billion-dollar marketplace in the air” and so are projecting that Row 44 will make $49M of gross margin in 2014 from “TV/IPTV/VOD” and portal services.
What’s wrong with this picture? At its simplest, Row 44 is projecting that the take rate for connectivity on Southwest will grow to 6.5% (not outrageous, but perhaps ambitious given recent trends for Gogo and the predominantly leisure orientation of Southwest’s customer base) and the take rate for the “TV/IPTV/VOD” service will be 5.75% in 2014. Recall that passengers are paying $5 for internet connectivity on Southwest, which is the same as Row44′s assumed $5 per passenger fee for TV/IPTV/VOD. That’s all well and good if this was seatback IFE, available (and very visible) to all passengers with attractive early window content (very few people pay for live TV onboard planes in the US today), but remember that the only way to get access to the “TV/IPTV/VOD” service is through an Internet-enabled portable device.
Why on earth would almost as many passengers decide to pay (the same amount) for access to just the walled garden “TV/IPTV/VOD” service as pay for access to the rest of the Internet (where they might expect to have access to any content they choose – unless Row 44 decides to cripple the Internet service, which of course will lead to its own problems)? Will Row 44 have some incredibly compelling early-window content? Well studio executives apparently “Lol’d” when asked about whether they would allow early window content to be streamed over wireless IFE networks. And remember that while you might happily access email and social media on your iPhone, its far more difficult to watch long form video on a phone for an hour or two, so in reality even less devices may be suitable for watching the content services than for accessing the Internet.
Row 44 also intends to generate $19M ($0.15 per passenger carried) from its portal business by 2014, even though it has “only nominal revenue from the portal business today”. As another point of comparison, Row44 expects to make more than half of its passenger revenue from the video and portal services by 2014, when today Gogo only generates 2% of its Commercial Aviation revenue from “Gogo Vision, Gogo Signature Services and other service revenue” (i.e. video and portal services combined, plus other services such as VOIP for flight crews).
Fundamentally, I simply can’t understand why on earth Global Eagle think that this business is a good investment (though lack of understanding might be one reason). The history of inflight connectivity is littered with failures, and even Gogo, the market leader, is facing challenges in getting a return on its investment, let alone completing a successful IPO. In every respect, Row 44 is a worse business than Gogo: it has substantial ongoing bandwidth costs, far more expensive equipment, and (in Southwest) probably the least attractive airline in the US from the point of view of demand (few business travelers, short flights and no power outlets). I can only conclude that, as in the picture above, Global Eagle is suffering from the Icarus Syndrome, and flying too close to the sun for its own good.
Permalink
Posted in Globalstar, Handheld, Inmarsat, Iridium, LDR, Operators, Services at 3:26 pm by timfarrar
Apologies for the lack of posts over the last couple of weeks – I’ve been buried in writing my latest MSS industry report, which is bigger and better than ever, and includes not only all the latest MSS industry developments such as an analysis of Inmarsat’s investor day, but 30 pages on everything you want to know about the current spectrum issues involving DISH, LightSquared, etc. I’ll be writing blog posts about that plus some of the latest inflight connectivity developments over the next few days, but I’ll start with a little noticed fact that emerged while I was analyzing MSS subscriber growth: surprisingly enough, the various MSS operators use very different definitions for what they count as a subscriber.
Now you might think that a subscriber is simply someone who is paying the operator for service (perhaps indirectly via a distributor) and if the customer is paying for x terminals, then the MSS operator will report that they have x subscribers. That is basically what Iridium do, now that there is a charge each month even for suspended terminals. However, until recently Inmarsat didn’t have a monthly access charge for most terminals, and only got paid for airtime. As a result, Inmarsat has always defined its subscriber count as terminals that have accessed the network in the last 12 months. Now that Inmarsat is charging monthly fees for most services, this leads to anomalies such as in its 2012Q2 results, where Inmarsat noted that:
“At the time of our consolidated financial results for the three months ended 31 March 2012, we announced having reached over 55,000 IsatPhone Pro subscribers. However, in our reported active terminals for land mobile, we included a lower number of approximately 49,800 terminals, the difference being the elimination of subscribers who had not used their IsatPhone Pro terminal in the preceding twelve months…”
Even more significantly the number of Satellite Low Date Rate (M2M) terminals reported by Inmarsat has declined quite noticeably over the last year, but as far as Inmarsat’s distributors like SkyWave are concerned, the number of subscribers is actually going up. However, once you realize that a key application for ISatM2M is stolen vehicle recovery, its pretty obvious that only a small proportion of terminals (i.e. those cars that are actually stolen) will need to access the Inmarsat network each year.
That’s a positive for Inmarsat, because their market share in the SLDR/M2M sector is actually quite a bit higher than many assume. However, Globalstar’s counting methodology goes the other way: SPOT customers are included in the published subscriber count even if their terminal is “suspended” for non-payment, because those terminals still have access to the network and Globalstar is attempting to collect payment for the service (although of course no revenue is actually being recognized for those subscribers unless and until collection occurs). The number of suspended SPOT subscribers has increased consistently since this statistic was first reported in early 2010, and by 2012Q3 amounted to 29% of SPOT subscribers. I’ve generally been pretty optimistic about the long term potential of the personal tracking market, but worringly, in the third quarter of this year the number of paying (i.e. non-suspended) SPOT subscribers actually fell from the previous quarter for the first time ever.
Permalink
11.17.12
Posted in DISH, Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 11:52 am by timfarrar
Over the last 36 hours there has been a constant stream of stories about DISH Network’s negotiations with various players to launch its proposed wireless network, in what appears to be a last ditch attempt to deflect the FCC from its declared intention to impose strict interference conditions on DISH’s spectrum in order to make the H block auctionable.
First we saw reports of DISH’s “exploratory stage” talks with Google, which unsurprisingly led to massive speculation about Google’s desire to get into the wireless business, largely omitting any mention of Google’s previous (financially disastrous) investment in Clearwire, which was motivated solely by a desire to create more competition and cheaper wireless service and had nothing whatsoever to do with enabling Google to become a wireless operator.
Now we’ve seen reports about DISH’s unsuccessful bid over the summer for MetroPCS, as revealed in MetroPCS’s preliminary proxy statement filed last night. We also saw DISH highlighting that 3GPP standardization work has been completed, with the implication that DISH could move forward very quickly if the FCC approved the network without new interference conditions.
However, it seems clear that the FCC is having none of it, with officials briefing that they are close to a decision, which is expected to confirm that the H block will be auctioned for high power use and therefore the lower part of DISH’s uplink band will face significant powwer restrictions. In other words, the FCC is placing a higher priority on ensuring Sprint has sufficient LTE spectrum (i.e. can extend its 5x5MHz G block LTE network to a 10x10MHz network) and moving forward with an auction of the H block to raise $1B+ than they are on trusting DISH to become a new entrant in the wireless market.
In light of the Sprint-Softbank and TMobile-MetroPCS deals, the FCC has achieved its goal of having four viable players in the US wireless market, and so presumably does not see as much need to encourage a new entrant. Indeed I would expect the FCC would be relatively content to see the DISH spectrum go to AT&T, if it could then “encourage” AT&T to sell some of its PCS spectrum to Sprint (along the lines of Verizon’s AWS spectrum deal with TMobile). We might even see a similar “swap” in the PCS band between TMobile and Sprint (with Sprint getting more of the spectrum and paying some cash to TMobile) as an alternative to a potential rival Sprint bid for MetroPCS. After all, TMobile has far more spectrum per subscriber than any of the other three major players (if Clearwire’s holdings are excluded).
Does DISH have many other options left to build out a new network of its own, as opposed to selling the spectrum to AT&T and pursuing a merger with DirecTV? There still appears to be uncertainty about the status of a potential deal with Clearwire, though DISH’s 10-Q confirmed (as I suggested previously) that it has raised its stake in Clearwire’s debt by $400M during the third quarter to a total investment of $745M (note that Clearwire is not named in the 10-Q, but the amount invested is too large for the investment to be in LightSquared, given other declared holdings).
DISH has undoubtedly talked to almost everyone in the wireless industry, but apparently these talks are currently only at the exploratory stage, which is quite surprising given how much time has elapsed. Of course what the MetroPCS proxy statement reveals is that everyone else has been talking as well, and as set out below, the proxy provides some very interesting nuggets about what’s happened over the last 18 months, once you decode the references to Companies A through H.
Company A: DBSD. MetroPCS determined that DBSD’s spectrum was more attractive than TerreStar’s spectrum and MetroPCS made a binding offer for the spectrum in March 2011, but lost out to DISH.
Company B: TerreStar. MetroPCS ultimately decided not to pursue TerreStar, leaving Harbinger out in the cold in June 2011, but then negotiated unsuccessfully with DISH during the summer of 2011 over a potential sale of spectrum, joint venture or contribution of the spectrum in exchange for equity in MetroPCS.
Company C: DISH subsequential expressed interest in buying MetroPCS, starting in March 2012 when it became clear DISH would not receive its hoped-for ATC waiver, and ultimately made a bid of $11 per share in August 2012, which was rejected by MetroPCS because it was less than the value offered by TMobile. DISH then indicated that it was unwilling to pay a higher price.
Company D: Clearwire. MetroPCS offered to buy spectrum from Clearwire in late 2011 (and earlier had even considered buying the whole company), but was unable to agree on terms. These discussions were revived in June 2012 when Clearwire again suggested a sale of spectrum and a “substantial investor” (Sprint or perhaps DISH???) proposed splitting the company between themselves and MetroPCS. Those “occasional” discussions continued up until the TMobile deal was announced.
Company E: Leap. Leap offered to sell “excess” spectrum to MetroPCS in the first half of 2011, but as early as June 2011 had decided to sell the spectrum to another wireless company (Verizon). This implies both that Verizon sat on the Leap deal until it had completed its negotiations with SpectrumCo in December 2011, and that the transfer of the Chicago 700MHz A block spectrum to Leap was presumably only included so the deal could be portrayed to the FCC as a “swap”. (Of course Leap’s presumed follow-up deal of a sale to US Cellular has now been derailed by US Cellular’s exit from the Chicago market and sale of its spectrum to Sprint). In May 2012, Leap asked MetroPCS to consider a combination of the two companies, but MetroPCS decided such discussions would not be productive. Then in July 2012, Deutsche Telekom also raised the prospect of combining Leap with TMobile and MetroPCS, as part of a single transaction, but MetroPCS declined, presumably because of the added complications it would entail.
Company F: AT&T. As was widely reported at the time, MetroPCS was in discusssions with AT&T in 2011 about potential asset sales as a condition of the TMobile acquisition. However, this did not come to fruition because the acquisition was blocked by the DoJ and FCC. Later, in August 2012, MetroPCS discussed approaching AT&T, but the consensus opinion was that AT&T would not be interested in buying MetroPCS.
Company G: Sprint approached MetroPCS about a potential acquisition in September 2011, and this led to the abortive bid in February 2012, which was vetoed by the Sprint board. Even after this time discussions continued with Sprint, and Sprint indicated in August and September 2012 that it was still interested in an acquisition of MetroPCS.
Company H: Verizon. MetroPCS held discussions with Verizon in the spring of 2012 about potentially buying some of the AWS and 700MHz spectrum that Verizon would need to divest to get approval of the SpectrumCo transaction. However, Verizon was not particularly interested in selling the AWS spectrum to MetroPCS (and entered into a deal with TMobile instead).
What all this appears to show is that DISH has looked at a number of transactions which involve further investment in the sector, but the main reason these have not come to fruition is that DISH is trying to pay as little as possible for any acquired assets. Alternatively, if DISH was to be a seller, then it was looking for too rich a price (at least for MetroPCS). In this context, it is likely that only Clearwire would be prepared to do a deal to sell assets to DISH on such terms, as I’ve speculated previously. It also seems pretty clear that the potential network sharing deal mentioned in the WSJ article about the discussions with Google would most likely be with Clearwire rather than Sprint, because the benchmark terms set by Sprint’s deal with LightSquared would be unattractive to DISH. As a result, it seems we are back to where we started – could DISH still pull off a deal with Clearwire (and does it want to in the current circumstances?), or will DISH end up selling its spectrum to AT&T and pursuing a merger with DirecTV instead?
Permalink
10.24.12
Posted in DISH, Financials, Operators, Regulatory, Spectrum at 11:41 am by timfarrar
Is Charlie Ergen giving up on his wireless plans? An interview with Bloomberg published this morning seemed to signal a change of stance, particularly the explicit suggestion that Ergen would be open to simply selling his spectrum to AT&T, when his (coded) message for the last year has been that AT&T would need to buy the whole of DISH (at a huge premium).
Not only has the Softbank deal enabled Sprint to escape from the box DISH had been trying to put it in, but by buying McCaw’s stake in Clearwire, and indicating to other strategic investors on the board that further equity purchases are up for negotiation, Sprint looks to have headed off Ergen’s planned deal to purchase assets from Clearwire.
Despite this, perhaps Ergen could still do a deal with other partners like Carlos Slim or DirecTV, but it is harder to see the rationale for investing in building a fifth competitive operator than it was a month ago, when Sprint (and perhaps even T-Mobile) were perceived to be in a much weaker competitive (and financial) position. In addition, we may be seeing AT&T attempt to warn off Carlos Slim from a deal with Ergen, in the form of mutterings about foreign ownership of other wireless operators.
So it looks like Ergen may now turn his attention towards a potential merger deal with DirecTV. In the short term that means putting pressure on DirecTV to come to the table, most obviously by competing with them in Brazil. Indeed, Echostar told the FCC at the end of September that it planned to move the Quetzsat satellite to the 61.5W slot, freeing up AMC-15 to be relocated to 45W in order to provide service into Brazil “as soon as January 2013“.
Wireless and broadband could also be a key part of this deal, via an alignment of both satellite TV operators with AT&T, similar to the Verizon-cable TV partnership, and that would be cemented by the sale of DISH’s spectrum to AT&T. Nevertheless, I would expect the sale to come ahead of an agreement with DirecTV, simply because being left out of a DISH-AT&T alliance would put even more pressure on DirecTV. As I noted last December, this alignment would cement AT&T and Verizon’s market leadership. However, given that the FCC backed off mandating wholesale access as a condition of approving the Verizon/SpectrumCo deal, the only plausible way to promote competition to these two players may then be to allow Sprint and T-Mobile to merge.
Of course putting a price on DISH’s spectrum is hard, but I suspect that the most appropriate comparison for the AWS-4 spectrum is the WCS band which AT&T purchased recently, because neither band is usable immediately (unlike AWS). AT&T paid NextWave more than expected for WCS, but this was offset by the fact that AT&T already owned a substantial part of the band, for which it had paid very little. I would therefore expect an AWS-4 sale to be at a fairly similar price to that AT&T paid NextWave for the usable parts of the WCS spectrum: somewhere in the range of ~$0.30-$0.40/MHzPOP (depending on how much value is attributed to the C/D blocks and AWS holdings), i.e. of order $3.75B-$5.0B plus perhaps another $1B for DISH’s 700MHz E block spectrum.
Permalink
10.16.12
Posted in LightSquared, Operators, Regulatory, Spectrum at 12:30 pm by timfarrar
Today the House Energy & Commerce Committee has released the documents from last month’s hearing, which makes for some interesting reading.
For one, its intriguing that the FCC Chief Economist (on p33 of the PDF) highlights “just how lucrative ATC service could be”, noting that “an entrepreneur that purchased a mobile satellite property wth 34 MHz of ATC-eligible spectrum and successfully rolled out ATC service in partnership with a CMRS incumbent could obtain a rent of $11 billion, equal to the difference between the value of the spectrum ($12 billion) and the cost of developing the required satellite system ($1 billion).”
That $12B valuation of course is the same as LightSquared’s economic consultants used, back in June 2011, to estimate that the January 2011 waiver was worth $10B to LightSquared. The documents also indicate (p10 of the PDF) that the FCC Chairman was warned in September 2009 about the “equity considerations of providing a ‘windfall’ to companies who did not acquire the licenses at auction” and even at that time “changing the ATC handset requirements” was under discussion.
However, far more interesting are the details of the discussions over the extension to the very short comment period on the waiver request in November 2010 (pp13-15 of the PDF). It is clear that the FCC had essentially already agreed the waiver with LightSquared and had “discussed [the timetable] previously”. The FCC was working to this “tight” timetable (later derailed by NTIA concerns about GPS interference) so that order could be issued on December 20, a date that was described as “critical”.
Of course (although it is not stated in the emails) the reason that this date was so critical was that (as I suspected at the time), the Commission intended to (and did) vote on net neutrality rules at the December 21, 2010 Open Meeting, which excluded wireless networks from net neutrality obligations. As a result, if the FCC had been able to announce the LightSquared waiver at that meeting, it would have been possible to say that at least one major 4G network provider had signed up to net neutrality principles of its own accord, effectively endorsing LightSquared as a competitor to the major cellular operators.
Permalink
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 8:44 am by timfarrar
Despite considerable efforts by Charlie Ergen, it looks like the Softbank deal may now have enabled Sprint to escape from the box of constrained capital, limited spectrum and a second rate network that Sprint could have been confined to, if it had failed to gain access to either usable H block spectrum or Clearwire’s network on economically advantageous terms. Many thought that Sprint would move to purchase Clearwire immediately after the Softbank investment, but today sources are denying that is the intention, stating that Sprint has no intention of taking part in mergers or acquisitions until the Softbank deal is finalized in mid-2013. This timeline also implies that Sprint will not move to disrupt the T-Mobile/MetroPCS merger, which is expected to close in 2013Q2.
So the obvious question is why did Sprint need to issue a $3B convertible bond to Softbank right now? I think that can only be intended to warn off others from doing a deal with Clearwire in the interim, by offering John Stanton the carrot of improved economics and/or further investment from Sprint. Of course there are not many options for Clearwire to sell spectrum, now that T-Mobile and MetroPCS, the two operators most frequently rumored to have designs on Clearwire’s spectrum, are getting together.
As a result, I think Sprint’s actions appear to confirm that Clearwire was about to pull the trigger on a deal with Ergen, as I suggested last month, involving an asset sale and/or WiMAX customer transfer, in exchange for a combination of cash and debt. Notably, receipts from a sale of network assets (as opposed to a spectrum sale) would not have to be used to repurchase Clearwire’s first lien debt, suggesting that this could be a preferred way for Clearwire to raise funds. In addition, I’m told Ergen now holds in excess of $900M of Clearwire’s debt (not all first lien), and some of that could potentially have been traded for Clearwire spectrum.
Reports on the Sprint/Softbank deal have also suggested that both Carlos Slim and SK Telecom have considered investments in Sprint, and it is worth noting that SK Telecom invested $60M in LightSquared back in 2010, while Slim is rumored to be buying LightSquared debt. In fact I’m told that further significant purchases of LightSquared debt have taken place in recent weeks. If one or both of those two players therefore continue to maintain their interest in US telecom assets (which has obviously included MSS-ATC spectrum similar to that held by DISH), then Ergen may be the last, best potential partner available.
So has Sprint now prevented Ergen from achieving a deal with Clearwire? I’m told that (at least with the current ownership situation) Sprint would have no ability to veto such a transaction, so presumably Stanton will now be trying to extract vastly improved economics from the existing capacity agreement with Sprint in order to forego a DISH deal. What concessions will Sprint be prepared to make, and if it does give ground, where does that leave DISH? After all, it doesn’t seem that AT&T is prepared to pay Ergen’s asking price (perhaps as high as $80-$90 per share?) to purchase the whole of DISH anytime soon. Ergen must certainly be fuming at how FCC delays have prevented him from moving forward, while potential partners seem to be rapidly exiting the dance floor. At least he appears to have made a profit on his investment in Clearwire, but that may be little consolation if it now proves more difficult to find a way to monetize DISH’s other, much larger, spectrum investments.
Permalink
10.13.12
Posted in Regulatory, Spectrum at 7:11 am by timfarrar
As I pointed out last week, despite growing skepticism over “What happened to the spectrum crunch?“, the FCC Chairman has been busy making speeches about how “U.S. mobile data traffic grew almost 300% last year, and mobile traffic is projected to grow an additional 16-fold by 2016″ and asserting that
“There were many skeptics [in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”
One would assume that the FCC Chairman regards the CTIA as experts, because after all they have been amongst the foremost cheerleaders for the spectrum crunch over the last three years. Indeed, upon releasing their latest wireless industry statistics, CTIA’s press release on Thursday proclaimed that “Wireless Network Data Traffic Increased 111 percent and Highlights Industry Need for More Spectrum”.
However, the press release buried the far more significant message in the CTIA’s actual data (which counts wireless network traffic from 97% of all US wireless subscribers – it is unclear if any WiFi traffic is included, but it appears not), namely that growth in data traffic per device came almost to a full stop in the first half of 2012 (compared to the previous six months), presumably due to a combination of:
1) changes in user behavior (offloading to WiFi),
2) dilution from less active users buying smartphones, and
3) data caps beginning to impact some high end users.
According to the CTIA survey, total wireless data traffic in the US in the first six months of 2012 was 635B Mbytes, up only 21% on the 526B Mbytes recorded in the previous six month period. This compares to the 54% growth seen in wireless data traffic between H1 and H2 of 2011, and the 51% growth in traffic between 2010H2 and 2011H1.
Even more remarkably, with the number of smartphones and wireless connected tablets growing by 16% between 2011H2 and 2012H1, data traffic per device was only up about 3% (based on the average number of devices in each 6 month period), compared to 29% between H1 and H2 of 2011 and 23% between 2010H2 and 2011H1.
As shown in the chart below, if we extrapolate this same growth in traffic per device to the second half of 2012, then total data traffic during the period will be about 750B Mbytes, and total traffic for 2012 will have increased only 60% compared to 2011. That is only half of Cisco’s Feb 2012 estimate of 118% growth in North American mobile data traffic between 2011 and 2012, and would clearly force a complete re-evaluation of future traffic projections. However, just from the data in the first half of 2012, we can already see that traffic growth is clearly not “exponential” and has now passed its peak. More importantly, if growth in traffic per device has been brought under control, then a spectrum crunch is no longer possible in the foreseeable future, because smartphone penetration is already approaching saturation.
As others have pointed out, “there is no more scarcity of wireless spectrum than there is a shortage of, say, the color purple”. Its therefore perhaps ironic to note that back when the last Emperor Julius (Caesar) was in charge, “virtually every expert confirmed” that the color purple was expensive, difficult to find and limited by regulatory fiat to a tiny elite group.
Permalink
10.07.12
Posted in Financials, Inmarsat, Maritime, Operators, Services at 12:29 pm by timfarrar
The history of the MSS industry, like most other parts of the telecom and technology sectors, has revolved around a theme of “faster, better, cheaper” as technological advances have dramatically improved satellite throughput and enabled significant reductions in the price per minute and per bit of voice and data communications. However, it seems that at least in L-band, we may have reached the limit of economically justifiable technological advances, and the future for the traditional MSS market could now be one of slower development cycles, simpler satellite systems and more expensive services.
Some of those technological dead ends are obvious, like the huge satellite antennas built for LightSquared and TerreStar, which did nothing whatsoever to make their satellite services more viable. However, more importantly, Inmarsat sets the tone for the entire MSS sector and could now make it much clearer that we have reached the end of the historical development pattern for this industry.
We’ve already seen Inmarsat pushing up prices this year, and with its new focus on the Ka-band Global Xpress system, Inmarsat has also indicated that it expects to delay capital expenditures on a next generation L-band (I6) satellite system and that the system itself will be cheaper and simpler than the I4 satellites. After feeling a backlash from distributors and customers, Inmarsat has been at pains to suggest that this year’s price rises represented a one-off adjustment, rather than the start of regular yearly price rises. Nevertheless, Inmarsat has seen little if any impact in terms of maritime customer losses because Inmarsat holds such a dominant position in the market and Inmarsat’s 2012 wholesale revenues are likely to be boosted by at least 2%-3% as a result of the price rises.
Looking forward, the outlook in most parts of the MSS market is fairly depressed, with M2M services providing the main source of growth, and overall wholesale L-band revenues are only likely to grow by perhaps 4% p.a. in the next few years. Although we’ll find our more specifics on Tuesday about Inmarsat’s expectations for Global Xpress, it also remains hard to see how GX will meet the original target of $500M in incremental wholesale revenues within 5 years, suggesting that Inmarsat’s move to Ka-band will not move the needle on overall MSS market growth very far. Reasons for this include the apparent lack of military Ka-band frequencies (which were supposed to be secured by Boeing and would be needed to allow GX to operate as a seamless supplement to WGS), the fact that XpressLink customers are being given the option but not the obligation to upgrade to GX when it is launched and, most importantly, the threat posed by Intelsat’s new Epic satellites, which have secured some key anchor customers (Panasonic, MTN and Harris Caprock) and caused many distributors and end customers to reconsider the “inevitability” of a move to Ka-band.
As a result, it seems there is now a fairly clear case for Inmarsat (as the price leader in the MSS sector) to push through regular annual price rises on the 50% or so of its wholesale L-band revenue base that is least likely to move to alternative solutions and has the lowest price elasticity. This would mean price rises for low and mid range maritime customers plus many land customers, while leaving aeronautical and high end maritime customers (who are more at risk from VSAT competition) largely untouched. Today there is an essentially flat outlook for L-band revenues, as modest growth in M2M and handheld is being offset by the migration of high end maritime and aeronautical customers to XpressLink (and other VSAT solutions), together with reductions in defense spending/event revenues. However, a price rise of 5%-10% p.a. would potentially allow Inmarsat to grow its L-band business at 2%-4% p.a. for the next several years.
Other MSS operators would also benefit through (modest) gains in market share and more pricing freedom, and the overall MSS sector could perhaps then return to something closer to the 7% p.a. revenue growth rate seen before the downturn of the last couple of years. Even distributors, who have seen their margins pressured over the last decade, would appreciate some ability to increase their overall revenues (given that demand elasticity is quite low), if margins can be sustained or even increased.
However, in order to execute such a change in strategy, Inmarsat would also need to repair its relationship with independent distributors, which has taken a significant knock from Inmarsat’s acquisitions of Segovia and Ship Equip and its decision not to pass on some wholesale price increases through its own direct distribution channels. There have also been several instances where Inmarsat has made its own bids for key contracts which massively undercut the bids from the incumbent independent distributors providing the same services. Indeed it often appears that Inmarsat has the explicit intention of driving its leading independent distributor, Vizada (now owned by Astrium Services) into the arms of other satellite operators such as Intelsat and Iridium. It seems to me that only with the cooperation of independent distributors can Inmarsat present a united front to end customers, and explain that price rises are necessary for a healthy market, as opposed to having their assertions undermined not only by (the expected) sniping from competitors, but by distributor dissatisfaction (and potential defections due to increased margin pressures) as well.
Is Inmarsat willing to change this dynamic and restrain its direct distribution arm, or will it resort to a “bunker mentality” and either miss the chance to boost revenues or push further price rises onto its independent distributors, amidst a rising tide of opposition? Time will tell, but its perhaps worth remembering that the full title of the book was “The End of History and the Last Man”, the last man being someone who “is tired of life, takes no risks, and seeks only comfort and security“.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
