09.28.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:05 am by timfarrar
So LightSquared has filed a modification application this morning with the FCC, proposing that it be granted access to the 1675-80MHz spectrum as an additional downlink, in exchange for relinquishing rights to deploy a terrestrial network in the 1545-55MHz band. LightSquared also asks the FCC to open a rulemaking proceeding to develop service rules for terrestrial use of the 1526-36MHz band. During the pendency of this proceeding, LightSquared offers to “voluntarily” not deploy the L-band downlink spectrum on its terrestrial network.
This proposal certainly represents a climbdown from the options that LightSquared presented to the FCC in May, coming close to the (worst case) 5MHz option presented by LightSquared at that point, but falling short of that demand for “quick start” options that would allow LightSquared “to expeditiously recommence deployment” in 5MHz of the spectrum and leaving open the transition plan for eventual use of the lower L-band spectrum. Indeed several critical issues, like how the pairing would work between the L-band uplink and 1670-80MHz downlink, how concerns about handset (uplink) interference would be addressed, and what level of coverage can be achieved while protecting “the integrity of continuing, essential government operations in 1675-1680 MHz and the adjacent spectrum at 1680-1695 MHz” are left undefined.
[UPDATED 9/28 & 10/3] Indeed the use of 1675-80MHz by LightSquared could prevent the FCC from auctioning 15MHz of spectrum in the 1675-1710MHz as mandated by Congress, and will certainly meet with heavy opposition from NOAA. Critically, as identified in the NTIA report on this band back in October 2010, there is no ITU allocation for mobile service in the spectrum above 1675MHz, a matter which is intended to be addressed by WRC-15. A NOAA presentation to the ITU highlights that the decision to free up the 1695-1710MHz band will require weather balloons (radiosondes) to use the 1675-80MHz band and that “Radiosondes and Broadband Mobile cannot share common spectrum in same geographic areas”. Given that weather balloons need to be used across the US and can drift for hundreds of miles during their flights, it is rather surprising that LightSquared’s lawyers suggested in court on Monday (Oct 1) that:
“We’ve made substantial progress on our regulatory issues…Short of a few sections of the country, dead zones we will attempt to resolve through other means, this would give us 4G LTE coverage throughout the country. It’s not the proverbial home run everyone said we’d hold out for, but it is a significant terrestrial network.”
Instead, LightSquared has told the FCC that it “believes that it is necessarily relieved of the obligation to meet the build-out milestones” imposed back in 2010 and gives no indication of any desire to rapidly deploy a network, as opposed to securing access to spectrum that could then be sold to another wireless carrier. While LightSquared discusses the use of the spectrum it would be granted for a “new, competitive broadband network” the commitment to provide “wholesale access” is notably absent from its new submissions.
LightSquared quotes the PCAST report pretty heavily, highlighting that (as I suspected) it is jumping on the PCAST bandwagon to gain FCC and White House support. However, it is ironic that while LightSquared suggests it is looking “to share [the 1675-80MHz band] with certain government users”, in fact it is still asking for a spectrum “swap” to “use the 1675-1680MHz band to provide a commercially-useable, terrestrial wireless broadband service as part of a contiguous 10 MHz downlink channel”.
That is what is needed to sustain Harbinger’s argument that LightSquared is still worth the billions of dollars required to maintain control and after the recent successes with the FCC it looks like the debtholders will now wait a few months to see how this strategy plays out rather than arguing for an immediate termination of exclusivity which would allow them to force Falcone to “put his money where his mouth is” and pay them off at par. However, it seems likely that if this attempt fails, the debtholders will be quick to declare “that’s it for me”.
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09.25.12
Posted in Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 5:25 am by timfarrar
Surprisingly little attention is being given to Charlie Ergen’s upcoming PCIA keynote speech on October 3, where he is set to “discuss DISH’s wireless plans” and will be followed by a Q&A session with FCC Chairman Genachowski. This may be due to the fact that many analysts believe DISH are unlikely to build out a wireless network and will instead seek to sell their spectrum to AT&T. Support for this view comes from the narrowing field of potential partners for DISH, with DirecTV indicating last week that “it’s hard for us to see why we would want to go and compete in [the wireless] space”. DISH have also been pushing back at the FCC on the proposed shift of their uplinks by 5MHz into the 2005-25MHz band, claiming that a 5MHz buffer is needed between their spectrum and BAS operations above 2025MHz, and that a shift would cause serious delays for their network buildout plans. However, our BAS industry contacts indicate that any interference issues would be largely manageable, and so many believe DISH may struggle to win this battle on interference arguments alone.
However, I think that in fact the chances of any spectrum sale to AT&T in the near future are rather low, unless DISH can put forward a wireless business plan that scares AT&T into making a knockout bid for the company. Indeed it is in AT&T’s interests to sit on the sidelines if they expect DISH to struggle with network buildout and customer acquisition, because then the potential price for taking the assets off DISH’s hands would most likely go down, and AT&T does not need (and could not use) the 2GHz spectrum band for several years.
As a result, whether or not a deal with AT&T remains a possibility, DISH now need to come up with a concrete plan for their network buildout as well as partnerships that AT&T would consider a real threat. Some of these pieces now appear to be coming together, and the first details may even emerge as soon as next week’s speech. With regard to a network buildout plan, it is interesting to note that DISH have apparently been building a significant stake in Clearwire’s first lien debt, which totaled almost $400M at the end of June and may now be considerably higher. Clearwire have also been highlighting the potential for “asset sales” to raise the money required to complete their planned LTE buildout.
A deal which could meet the needs of both DISH and Clearwire would be for Clearwire to sell its existing WiMAX network and retail customer base to DISH for something like $1B to $2B in cash (and Clearwire debt?) and then enter into a network sharing agreement for Clearwire and DISH’s separate LTE buildouts. This would allow DISH to acquire a network covering 130M+ people (and perhaps more when moved to the 2GHz band) at a very substantial discount to the $4B that Clearwire have invested in their network to date, and enable DISH to offer fixed wireless broadband to their existing satellite TV subscriber base. Indeed, by adding an outdoor 2.5GHz terminal alongside their satellite TV antennas, DISH could extend the range of the 2.5GHz WiMAX network to cover considerably more people compared to existing indoor modems. DISH would also presumably develop a dual mode 2.5GHz WiMAX/2GHz LTE (and perhaps 2.5GHz LTE) handset to provide an evolution path for Clearwire’s handheld customer base. Meanwhile, Clearwire could substantially reduce their network costs and gain additional income from leasing 2.5GHz spectrum to DISH for the next several years.
The second part of the puzzle is who DISH’s partner(s) for their wireless operation might be. Obviously AT&T and Verizon could not be partners, and after their AWS spectrum deal with Verizon, T-Mobile are almost certainly out of contention. Sprint have been looking for a hosting customer similar to LightSquared to help defray the cost of Network Vision, but if DISH enter into a network deal with Clearwire then that would likely rule out a partnership with Sprint (though Sprint’s wholesale WiMAX customers would continue using the Clearwire/DISH network for the time being). With DirecTV also now on the sidelines, it looks like DISH’s partner would have to come out of left field, and the only obvious option there would be Carlos Slim (and presumably America Movil). Its worth noting that Slim already appears to be interested in MSS spectrum, given he is probably the only remaining credible possibility for the mystery LightSquared investor that many thought was Ergen earlier this year, and he has an existing relationship with Ergen in Mexico, so a deal here would not be that much of a surprise.
The biggest unknown is how much of this unfolding story will emerge next week at PCIA. With the FCC not expected to approve DISH’s request for terrestrial use of the AWS-4 spectrum until later in October, it may be risky to reveal too much right now. If an announcement does come next week, then it will also come as a major shock to most wireless industry observers, because almost no attention is being given to the possibility of a tie-up between DISH and Clearwire. However, this may be the last chance for DISH to pressure the FCC not to shift their uplink spectrum, and a major announcement of network plans could tip the scales in their favor. As a result, I suspect that Ergen’s speech could well contain an announcement of a network deal, a partnership or perhaps even both.
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09.24.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:05 am by timfarrar
The FCC witnesses’ testimony at the House Energy & Commerce subcommittee hearing last Friday certainly came as a surprise to many observers, including myself, with their emphasis on blaming the GPS industry for not raising concerns at an earlier date. Predictably, that position defanged much of the criticism from Republican lawmakers, who have switched seamlessly from describing LightSquared as a product of government-backed crony capitalism to a shining example of private enterprise ruined by government regulation. However, it was of course anathema to the GPS Coalition, whose Jim Kirkland described the FCC testimony as “deeply misguided and wrong“.
I had heard earlier in September that the FCC was working on an order which apparently confirmed the February ruling, but it seems that within the last couple of weeks, LightSquared’s lobbying has paid off and the FCC intends to delay a decision (potentially until after the November election) in order to explore alternative solutions which would allow LightSquared to move forward without the widely anticipated litigation battle. Indeed the FCC testimony indicated that receiver performance issues, which had largely been sidelined after the March workshop, are now going to be the subject of a report from the FCC’s Technological Advisory Council (TAC) in “the next few weeks”, which would presumably precede the ruling on LightSquared itself.
While at first sight it may seem surprising that the FCC wants to take up the LightSquared issues once again and initiate another fight with powerful government agencies such as the DoD and FAA, what may have tipped the scales is the enthusiasm of the FCC Chairman for implementing the recommendations of the recent PCAST report on the sharing of government-held spectrum with commercial wireless operators. That alone portends a battle over spectrum with the DoD, but with the White House standing alongside the FCC (as it did in the early stages of the LightSquared waiver effort), the FCC presumably feels confident that some progress can be made.
LightSquared spent the spring and early summer casting around for various solutions to its GPS interference issues in the form of a direct “spectrum swap”, but with little success. However, since publication of the PCAST report, LightSquared appears to have reformulated its proposal as a deal under which it would become the “poster child” for sharing government spectrum as recommended by PCAST, in exchange for accelerated action by the FCC to implement receiver standards within the L-band. LightSquared would then build its terrestrial network initially using shared spectrum, and subsequently move into the lower L-band spectrum in a few years time. The practicality of all this is still to be seen, not least in terms of the timeline for any use of the L-band. However, the proposal appears to be attracting serious consideration within the FCC, and the forthcoming TAC report on receiver standards should provide some guidance as to the likely way forward. Thus the scene appears to be set for a resumption of last year’s battle, and those in the GPS industry who thought the LightSquared issue had been resolved, will need to steel themselves for yet another bitter fight.
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09.14.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:06 pm by timfarrar
As I noted last week, it appears that the FCC ruling on LightSquared is expected to be released very soon, and two more developments have now provided support for this assessment. Firstly, today’s bankruptcy court hearing on exclusivity and executive bonuses was postponed until October 1 at the request of LightSquared’s debtholders. It would be logical to conclude that this postponement came because the debtholders expect an FCC ruling to emerge before the end of this month, after which time they will be in a much stronger position to argue that LightSquared’s existing management (and Harbinger) should not retain control of the bankruptcy process.
After an FCC ruling (presuming it is negative), it would be clear that a little progress could be achieved during a 5 month extension of exclusivity as LightSquared requests, because the ruling would trigger litigation which would undoubtedly last for many years. Instead the debtholders want to “force Mr. Falcone to put his money where his mouth is” and either hand over the company to them (via an auction where they could credit bid their holdings), or pay off the debtholders at par in order to retain Harbinger’s ownership of the company.
Secondly, news has emerged today that the House Energy & Commerce committee plans to hold a hearing on LightSquared next Friday, September 21, which can be expected to focus on criticizing the FCC’s role in rushing through the LightSquared waiver. As a result, it seems highly likely that the FCC will now move to release their LightSquared order next Thursday evening in order to deflect this criticism and show that their process “worked”.
Of course, its hard to imagine the FCC order doing anything other than confirming their February proposal to withdraw LightSquared’s waiver and ATC authorization (indeed people like Gen. Shelton are already taking that for granted), but if comments from House Republicans focus on blaming the FCC for LightSquared’s losses, then that could be helpful to LightSquared’s PR campaign for a spectrum swap or other compensation. Nevertheless, if the result of the November Presidential election is an Obama win, then after the political backlash caused by the developments of the last two years, it seems unlikely that any such settlement would be forthcoming. So I guess Mr. Falcone will be voting Republican this time around.
UPDATE (9/20): The FCC testimony for tomorrow’s hearing appears to place the entire blame for the LightSquared debacle on the GPS industry, creating a whole new range of possibilities for how the hearing might develop. If the Committee joins the FCC in this blame game, then that would increase the likelihood that the FCC might offer LightSquared access to some alternative spectrum for a limited period on favorable terms, while receiver standards efforts move ahead in the L-band. However, that approach would also remove any potential legal liability from the FCC, and it is highly implausible that LightSquared would be able to sue the GPS industry for damages for not raising concerns at an earlier date.
As a result, LightSquared’s fate now seems more likely to become entangled in a political rather than a legal process. The FCC also seems determined to delay any ruling further and if the ruling is delayed until after the November election then that would also open up the possibility of throwing LightSquared a bone while limiting the political fallout. However, it still remains far from clear whether there is any spectrum block available that could offer LightSquared sufficient spectrum to pursue additional fundraising and buildout a network, or even allow LightSquared to sell its assets and repay the $2B+ of outstanding debts.
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09.05.12
Posted in Financials, Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:55 am by timfarrar
It looks like the next month or so may be filled with interesting developments in the US spectrum market. Last week, it was reported that the FCC is preparing to launch of review of its “spectrum screen” at the September Commission meeting. Of course if the FCC suggests a preference for distinguishing between low frequency (sub 1GHz) and higher frequency spectrum, in response to concerns that AT&T and Verizon have been accumulating too much of the most valuable spectrum, then that might not only put a damper on the prospects for broadcast TV incentive auctions (recall that AT&T and Verizon contributed over 85% of the 700MHz auction proceeds back in 2008), but could be taken as a clear signal that the FCC would approve of AT&T buying DISH for its higher frequency spectrum.
In that context, it seems increasingly likely that the release of a LightSquared ruling (almost certainly confirming the FCC’s February proposal to withdraw LightSquared’s ATC license) will also come this month, along with approval of DISH’s terrestrial network in the 2GHz MSS band. This week DISH has been continuing its campaign to avoid its uplink allocation being shifted up by 5MHz to 2005-2025MHz, which is an option being considered very seriously by the Commission, as it would satisfy Sprint’s desire to access the H-block (which Sprint probably considered to be a done deal last November when it settled with DBSD and TerreStar), and mitigate both windfall and timeline concerns. However, it is notable that the Public Interest organizations who have been most vocal in raising the windfall issue actually oppose a relocation of the uplink due to the delay it would could in the standardization process.
Intriguingly, if we do see a ruling (at least partly) in DISH’s favor in the next month or two, it may make it even more difficult for Clearwire to pull off any potential spectrum sale. Then we may be faced with exactly the same situation in December as at the end of last year, namely does Clearwire pay the large interest payment due in December, or use the threat of a bankruptcy filing as leverage to raise more money from Sprint and others to fund it through next year.
LightSquared is also wheeling out the big guns in its lobbying campaign right now, with former FCC Chairman Kevin Martin lobbying the Commission on LightSquared’s behalf last week, and the company is once again ramping up attempts to get its side of the story across. This may raise a few eyebrows, given that Martin was key to approving ATC back in 2005 and then requiring Inmarsat to cooperate with LightSquared via their Dec 2007 agreement. However, it seems unlikely to change many minds at the Commission, especially in advance of the November election. Apparently the best that LightSquared could hope for is for the initial decision to be taken by the full Commission, rather than by the International Bureau on delegated authority, which would give LightSquared an earlier opportunity to challenge the decision in court (because an IB decision must first be appealed to the full Commission before any legal action is initiated).
After LightSquared’s attempts to insert consideration of its own situation into the DISH proceeding, it would seem natural for both rulings to emerge at about the same time. The FCC will also need to indicate in the DISH ruling how it plans to take forward any similar flexibility proceedings in other MSS bands, notably the Big LEO band, where Globalstar has emphasized that “Greater flexibility for mobile broadband in Big LEO spectrum [is] necessary to enhance financial viability of Globalstar and its mission-critical MSS offerings” (emphasis mine). With Globalstar looking to raise substantial financing (perhaps as much as US$250M to $300M if Globalstar aims to fund both the remaining satellites and the ground segment buildout) by the end of the year in order to move forward with the final phase of its second generation constellation buildout, it is plausible to conclude that a positive signal from the FCC in this regard within the next month or two may be a pre-requisite for completion of that financing (which would presumably involve a combination of additional Export Credit Agency funding and further investment from Thermo).
Finally, and separately, TerreStar Corporation appears to have basically resolved its bankruptcy, and the existing preferred shareholders will convert their holdings to equity and keep control of the company. It is interesting to note that the valuation put on the 8MHz of national 1.4GHz spectrum in the event of a liquidation was only $80M to $100M (or $0.03-$0.04/MHzPOP) for an M2M smart grid type network (which is gratifyingly close to my estimate of $60M to $100M two years ago at the beginning of this process). It is hoped that FCC waivers can be secured, which would make the spectrum more valuable and usable for LTE, but that is a long term process, and there is no guarantee that it will be attractive to manufacturers to include this small, isolated band in future LTE chipsets. As a result, although there is a proforma offer for sale of the spectrum, it is inconceivable that any bid would be higher than the $400M+ that the existing preferred holders could credit bid in any auction. Of course its also another example of how just assuming spectrum is always a valuable asset, without consideration of the limitations applicable to that spectrum, is a quick way to lose a lot of money.
So going back to my title above, the next few months should reveal a lot more about who’s going to show that they’re an “All Star” and who will prove to have “the shape of an L on [their] forehead”. However, one thing seems pretty clear: when the FCC announces its decisions, not everyone is going to be a winner.
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08.29.12
Posted in Aeronautical, Financials at 10:48 am by timfarrar
It seems that most if not all commentators have ignored Gogo’s Aug 14 S-1 amendment containing the company’s results for the first half of 2012, instead picking up on Gogo’s Aug 28 press release that Gogo has been approved to operate in Canada (which in fact according to Gogo’s SEC filing was actually approved back in mid July).
That’s a shame because the six month results are pretty fascinating: they show that in Q2 of 2012 Gogo’s take rate and (more significantly) the average revenue per passenger carried both fell compared to Q1. If the revenue per passenger carried does not grow after the price increases Gogo implemented during the second quarter of 2012, then this raises the question of whether we may already be close to the point at which Gogo’s average revenue per plane cannot be increased much further. In addition, Gogo’s average revenue per session fell from the previous year, despite the price rises. Gogo’s filing attributed the decline in revenue per session to more (lower revenue) sponsored sessions compared to the same period in 2011. However, this simply highlights that a major contributor to Gogo’s (rather modest) increase in take rates over the last year has been the growing use of sponsorships, which are counted as part of the “take rate” even when passengers do not pay anything to use the service.
The chart above shows how Gogo’s take rate has developed by quarter since its launch, and how much it has been driven by promotional activity, with take rates at an all time high during the Google promotion in Q4 2010, and falling quite sharply when there was very little promotional activity in Q2 2011. Q1 2012 saw another boost to take rates, again coinciding with high levels of sponsorship revenues.
Though there is clearly some underlying growth in the take rate, during the remainder of 2012 this is likely to be diluted by the increasing number of Gogo installations on regional jets (where usage is much lower than on longer flights) and the (more marginal?) deterrent effect of recent price increases. As a result, I now expect that barring some large scale sponsorship, Gogo take rates for 2012 as a whole are unlikely to exceed 6%, and if we only count paid usage by passengers, then the true take rate may remain below 5%.
That’s pretty scary given the $1B valuation supposedly being mooted for Gogo’s IPO and the $200M valuation put on Row44 in its recent fundraising transactions. Its also interesting that Gogo’s bankers insisted that their recent $135M loan should be secured against Gogo’s profitable Business Aviation subsidiary, with cashflows from that operation potentially devoted to pre-payments on the loan, so that their loan recovery would not depend solely on the success or otherwise of Gogo’s commercial aviation business.
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07.25.12
Posted in Inmarsat, Maritime, Operators, Services at 10:25 am by timfarrar
Its been a little hard to make sense of some of the data emerging from Inmarsat recently. For example, a recent factsheet from OnAir indicates that the first Global Xpress launch will be in October 2013, followed by subsequent launches in April and November 2014. Perhaps OnAir is confusing the launch date and the availability of the satellite for commercial service, but if these are indeed the launch dates, then they are later than the timeline that Inmarsat’s partners were given back in January this year of a first launch in June 2013 followed by subsequent launches in Q1 and Q3 of 2014 (and they don’t correspond to the “availability” dates given then either), even though Inmarsat stated on the Q1 results call in May that GX was “on schedule and on budget”.
We’ve also seen Inmarsat defending its price rises in a briefing paper to the International Chamber of Shipping by stating that their Standard Plan for FleetBB only costs $130 for the subscription charge, or $13/Mbyte for the bundled data. However, Stratos’s website indicates that the subscription fee for the Standard Plan was increasing to $208 per month from May 1, and Inmarsat has indicated separately that the wholesale price alone was being increased by $3 per day or $90 per month (to what I estimate is something very close to $130). So is Inmarsat assuming that distributors will now sell at zero margin, or is it simply quoting a wholesale price when a retail price would be more relevant?
Hopefully we’ll hear a explanation of these apparent inconsistencies on Inmarsat’s upcoming results call, or at least at Inmarsat’s investor day in October. But (mixing my literary references) as Inmarsat continues to suffer the slings and arrows of outrageous fortune, amid predictions of its imminent “downfall”, it might be worth taking a lesson from William Tell’s son, and standing still!
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07.12.12
Posted in Financials, LightSquared, Operators at 3:33 am by timfarrar
LightSquared’s recent filing of the Employment Contract with Sanjiv Ahuja, its former CEO, makes for interesting reading, especially for those impacted by the LightSquared bankruptcy. According to the terms of the agreement, Mr Ahuja was entitled to a base salary of $2M per year plus a target bonus of 150% of his base salary. In addition he was to receive restricted stock with an initial fair market valuation of $135M. All of his domestic travel was to take place by private jet (which must have been useful because NetJets was paid $227K in the 90 days prior to LightSquared’s bankruptcy filing, and NetJets was billing around $100K per month prior to Mr Ahuja leaving in February 2012), including short haul international travel, and “in his reasonable good faith judgment” Mr Ahuja could also “require the use of private planes for long-haul international travel, as appropriate”. Remarkably, however, Mr Ahuja was only expected to devote 50% of his working time to the company.
Now that a proposed settlement has been reached over termination of his employment, Mr Ahuja will be able to retain the 8.83M shares of stock he would have been granted (apparently he did not take the restricted stock he was entitled to at the time, because of the large tax liability that would have been incurred: perhaps he thought that the price would go down rather than up!). Indeed, though the 8.83M shares apparently had a “fair market valuation” of $135M (presumably reflecting the restrictions applicable to the grant), LightSquared Inc. had sold 3.39M shares of common stock to SK Telecom for $60M, giving an market valuation of $17.71 per share, for a total value at that time of $156.4M. Indeed, if Harbinger’s supposed prior contribution of $2.9B of assets to LightSquared (in exchange for 91.88M shares) had been taken at face value, then Mr Ahuja’s shares could theoretically have been worth as much as $31.50 each, for a total of $278M. And if LightSquared’s spectrum had been worth $12B, after the waiver grant, as LightSquared’s consultant told the FCC, then (after deducting LightSquared’s debt) Mr. Ahuja’s stock would have been worth $90-$100+ per share, or at least $800M!
Of course, one has to wonder what on earth Mr Falcone thought he was buying for this sort of money, because it certainly didn’t seem to be a realistic judgment about LightSquared’s prospects of resolving its GPS issues. However, perhaps what was really important was that LightSquared’s debt investors believed Mr Ahuja’s assurances that there wasn’t any need to worry about GPS, when he was persuading them to invest an additional $586M in the company in February 2011. I’m sure Mr Ahuja therefore appreciates the indemnification he is receiving under the proposed settlement agreement “to the fullest extent permissible under LightSquared’s organizational documents and the Employment Agreement…from and against any and all claims and demands related to actions or omissions of the Executive during the time the Executive was as a director, officer or employee of LightSquared.”
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Posted in Regulatory, Spectrum at 2:09 am by timfarrar
As others have pointed out recently, the supposed spectrum crunch is really more of an infrastructure crunch, because if wireless data traffic is going to grow by 10 or 20 times, how can 20% more spectrum possibly solve that problem?
Its therefore pretty instructive to look at the CTIA’s own figures, which curiously enough simply trumpet the cumulative capex invested by US wireless operators since the 1980s. When you think about it, that’s a bizarre statistic, since cumulative capex will always go up each year, however much wireless operators invest in their networks. Of course, if you actually look at the annual capex you see a very different picture, and indeed in absolute terms network investment has fallen quite sharply since 2004, and only rebounded partially in 2010 and 2011, despite much trumpeted LTE rollouts by Verizon, AT&T and others.
As a percentage of revenues, capex has fallen even further, and has roughly halved in the last decade. At this point, if I was using the tortured logic (and ludicrously hyped sound bites) of spectrum crisis adherents, I should probably conclude that on current trends we will run out of capex by the end of the decade, as capex falls to zero percent of revenues. On the other hand, if I was arguing the carriers’ point of view, I could conclude that because the GDP contribution of the wireless industry increased from $92B in 2004 to $146.2B per year by mid 2011, while capex fell from 27% to 15% of revenues, each 1% decline in capex as a percentage of revenues should be expected to increase GDP by $4.3B. As a result, if wireless carriers stopped all capex completely, it would increase GDP by $65B!
More rationally, while reductions in operator capex in recent years may have been good for their investors in the short term (and indeed carriers would perhaps view it as necessary because their revenue growth has slowed), these figures clearly demonstrate that there is considerable scope to address growth in data usage (assuming the traffic is valuable enough that customers will pay more for it) simply by modestly increasing capex to a level that would fall well within historical norms. Indeed, even though annual capex in 2011 only increased (in absolute dollars) by 1.7% over 2010, operators added over 30,000 cell sites, an all time record, which increased the total number of cellsites in the US by 12%. Given that the FCC’s own (discredited) model suggested that the purported spectrum “deficit” would vanish with this rate of cellsite growth, it seems we are already well on the way to mitigating any potential spectrum crisis.
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06.28.12
Posted in Regulatory, Spectrum at 9:32 am by timfarrar
Verizon’s agreement with T-Mobile earlier this week for a swap of AWS holdings to give both sides more contiguous spectrum within the AWS-1 band, raises a host of interesting possibilities for future transactions in the wireless space. UBS is speculating today that AT&T will dispose of its remaining AWS holdings, but it seems more plausible that AT&T could actually swap its remaining AWS spectrum (most of which is in the A-block or C-block and would naturally pair up with Verizon’s holdings in Los Angeles, Chicago, Dallas, Miami, Minneapolis and numerous other markets) for Verizon’s 700MHz B block holdings.
Although AT&T has more AWS spectrum (~1B MHzPOPs) than Verizon has in the 700MHz B block (just under 600M MHzPOPs), as I’ve noted before Verizon overpaid in the 700MHz auction to prevent AT&T from buying all of the B block, and so Verizon spent $2B on its B block spectrum whereas AT&T’s remaining AWS holdings only cost between $500M and $600M (and using the SpectrumCo transaction as a benchmark, would only be valued at around $700M today). By exiting its 700MHz B block holdings via a swap, Verizon would avoid having to take a loss on this expensive spectrum purchase, but it would be interesting to see whether money actually changed hands in such a transaction with AT&T (given that both companies have an incentive to talk up the value of spectrum, not least to make spectrum acquisitions more expensive for their rivals).
Of course, if such a swap proves infeasible (perhaps because of the significant discrepancy in price per MHzPOP) then it still seems unlikely that AT&T would announce a sale of AWS spectrum without some quid pro quo acquisition, either of Verizon’s B block, or more likely in conjunction with the purchase of DISH’s holdings (after terrestrial use of the AWS-4 block is approved by the FCC). In either case, I assume that a deal wouldn’t come until after the November 2012 presidential election.
Looking further afield, it now also seems less certain that the FCC will free up the PCS H block (which would require DISH’s uplinks to move up by 5MHz to 2005-2025MHz) when it gives DISH the go-ahead for terrestrial use of the DBSD/TerreStar AWS-4 spectrum band. As a result, Sprint might also find itself looking at swaps with smaller players such as MetroPCS and Leap to gain wider channels for its PCS G block LTE network (by using existing F block spectrum). In those circumstances, Leap and MetroPCS could potentially be paid money for a spectrum swap without necessarily giving up any capacity, assuming that Sprint gave them alternative PCS holdings in the lower part of the band instead, and this could prove interesting given the financial pressures that smaller carriers are under.
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