10.13.10
Posted in Financials, LightSquared, Operators, Spectrum at 8:40 pm by timfarrar
So news has finally broken that Clearwire is selling 40MHz of its spectrum, as we surmised back in May. However, the valuation range cited is relatively wide ($2.5B to $5B) representing $0.20 to $0.40 per MHzPOP, and Verizon (which was said to be one “potential buyer” of the spectrum along with AT&T, T-Mobile, Time Warner Cable and Sprint Nextel) has now denied it is bidding. It also hardly seems plausible that AT&T would be bidding for spectrum it was forced by the FCC to relinquish just a few years ago. As a result, the release of this information seems like it could well be an attempt to encourage bidding if the auction is not going too briskly, with “potential buyers” rather than actual bidders being listed to create an appearance of higher demand.
If the end result is towards the lower end of the quoted range, then that would clearly be a negative sign for spectrum valuations – falling far short of the $0.50 per MHzPOP valuation suggested by Clearwire and some analysts back in May and coming close to the $0.17 per MHzPOP paid by Clearwire when it acquired spectrum from AT&T/BellSouth in February 2007. If that’s the case, then it would imply that the value of this spectrum has hardly changed in the last three years, despite the supposed “spectrum crisis” that has been widely discussed.
Of course, the headline price for Clearwire’s spectrum is not the only factor that needs to be taken into account when considering this as a valuation benchmark for other spectrum bands. In particular, around 60% of Clearwire’s spectrum (in the EBS part of the band) was acquired under lease agreements, and though some of these are partly prepaid, others will require substantial future payments (totaling $5B over the next 30 years). Thus if Clearwire sells mostly owned spectrum for close to $0.20 per MHzPOP, then the implied spectrum valuation for other bands would be rather lower than if it sold a mix of leased and owned spectrum.
Nevertheless, a low valuation benchmark might well make fundraising more challenging for ATC spectrum holders. LightSquared noted in its presentation at Satcon today that it acquired its spectrum for the “low cost” of $0.20 per MHzPOP, and while one can argue that the propagation characteristics of LightSquared’s lower frequency L-band spectrum make it more valuable than Clearwire’s 2.5GHz spectrum band, mobile operators who are seeking spectrum simply for fill-in 4G coverage in densely populated markets may not necessarily see it that way. LightSquared also has ATC-specific risks to consider, related to the aggressive buildout commitments it made to the FCC back in March and the need for rebanding in the L-band (with the associated substantial payments to Inmarsat). As a result it remains to be seen whether the investments that Harbinger has made to acquire LightSquared’s spectrum will still be seen as a low cost at the end of the Clearwire auction.
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10.09.10
Posted in Financials, LightSquared, Operators, Regulatory at 12:52 pm by timfarrar
“We see them come.
We see them go.
Some are fast.
And some are slow.
Some are high.
And some are low.
Not one of them is like another.
Don’t ask us why.
Go ask your mother.”
Though Dr Seuss did a pretty good job of summarizing the MSS industry, he may not have had the answer to this puzzle. In an interview this week, one of LightSquared’s senior executives referred repeatedly to the “one satellite” LightSquared intends to launch “in the next couple of months”. This is strange because LightSquared was granted a waiver by the FCC back in 2007, enabling it to use two in-orbit satellites for mutual backup rather than relying on a ground spare satellite as would otherwise be required by the ATC gating criteria. The second satellite was apparently needed to satisfy “United States and Canadian interests in the launch of next-generation L band MSS satellites”, and to provide 3dB of extra link margin by use of diversity.
If LightSquared decides not to launch the second satellite, then it would still meet the ground spare requirement in the ATC gating criteria, while saving tens of millions of dollars in insurance and launch costs. However, if it proves successful in its recent request to the FCC to eliminate the ground spare requirement, then presumably not only would LightSquared save on the cost of launching and insuring the second satellite, but could also raise some additional money if it could find a buyer for that satellite.
Given the rapid pace of developments, it looks like a lot of these issues will be clarified over the next few months, most notably who LightSquared’s partners will be, and it will be interesting to see what Phil Falcone pulls out of his hat next. With apologies to Dr Seuss, let’s hope for his sake its not Voom (especially given that when Cablevision finally gave up on the satellite business, it sold the assets to Echostar).
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10.08.10
Posted in Financials, Globalstar, LightSquared, Operators, Regulatory, Spectrum at 11:30 am by timfarrar
Although we remain intrigued by the timing of yesterday’s announcement of LightSquared’s chipset and device partners, what is now clear is that next year should finally result in the actual commercial deployment of an ATC network, offering both satellite and terrestrial mobile services for the first time. (Although Open Range had deployed a couple of thousand terminals under its agreement with Globalstar prior to the FCC suspending Globalstar’s ATC license, these did not include two-way functionality, and to date no handheld terminals had been produced).
LightSquared now claims to have raised over $2B, which the company expects will see it through to “operational launch and beyond” in the second half of next year. Although it is not clear where the $2B is coming from, and whether (as yet unannounced) vendor financing will form part of that $2B or could be incremental to it, it is certainly the case that with Harbinger apparently injecting funds from a $400M UBS loan in July, converting its reported $430M of debt into equity (as part of this week’s $850M debt refinancing) and presumably investing the proceeds from the sale of half of its Inmarsat stake (for $650M) in LightSquared, the company should have enough money both to pay Inmarsat for the ongoing rebanding of the L-band, and to fund the buildout of its first markets in 2011, an outcome that looked like a distant dream less than a year ago.
Given that there are no significant remaining technical barriers to overcome in deploying their satellite network, and LightSquared has commitments to produce both chipsets and ATC devices from leading manufacturers, it will be interesting to see next year both how the LightSquared network is positioned and what the public reaction is to the service. In particular, will LightSquared’s retail partners attempt to use satellite as a key differentiator, or will they rely just on the LTE offering to compete with Verizon, Clearwire, MetroPCS and others?
In the nearer term, we will also look forward to finding out exactly who these retail partners will be, and whether any of them will make a financial investment in LightSquared itself. In that regard, it appears that T-Mobile is certainly keeping its options open with regard to LightSquared, having filed at the FCC in support of relaxing the ATC gating criteria, which currently require all devices to offer integrated satellite and terrestrial services. Leap Wireless also appears to be looking closely at the ATC opportunity, having initially proposed this relaxation of the gating criteria. Whether T-Mobile’s actions are part of its negotiating strategy with Clearwire, or whether T-Mobile and Leap really are taking a potential investment in LightSquared seriously, remains to be seen.
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10.07.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 9:17 am by timfarrar
Although Harbinger/LightSquared hasn’t yet got a terrestrial network to rival those of other cellular operators, it certainly has proved more than a match for them in its PR department, garnering significant positive coverage in recent months for its buildout plans, fundraising and potential partners, despite the doubts of many commentators.
However, its also the case that LightSquared has deployed its PR efforts very strategically, most notably when it announced the deal with Nokia Siemens Networks in July, straight after a skeptical article appeared in the WSJ. This week we also saw the announcement of further funding for LightSquared immediately preceding the decision to sell half of Harbinger’s stake in Inmarsat.
As a result, we’re left wondering if today’s announcement of a chipset partnership and initial device manufacturers, which also “paints a very positive picture for where LightSquared is going”, signals that there will be some bad news coming out soon. What might that be? Well as we’ve pointed out before, decision day is rapidly approaching for TerreStar, which could well involve a bankruptcy filing or other restructuring, and would certainly be another worrying sign for the MSS-ATC sector.
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10.03.10
Posted in Handheld, Operators, Services, TerreStar at 7:41 pm by timfarrar
Its been known for at least a year that TerreStar’s Genus phone would need an external antenna to provide good performance in Alaska and most of Canada. TerreStar’s latest coverage map indicates this, and also recommends the use of the external antenna in Hawaii and Puerto Rico/US Virgin Islands as well.
We’ve now obtained a picture of the cradle and external antenna, which we understand will be announced soon, presumably once approval is received for this equipment from the FCC.
UPDATE: SatPhoneStore are now selling what is referred to as the Genus External Antenna and Sled for $265. Interestingly, the Genus phone itself is priced at $1150 (down from a “regular price” of $1299), suggesting that the wholesale price of the phone to distributors other than AT&T may be approaching $1000.
It looks like the Genus phone will be a rather harder sell if users need to buy a separate and relatively bulky external antenna to improve performance, so let’s hope that what happens in Alaska stays in Alaska.
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09.29.10
Posted in Financials, Handheld, Iridium, Operators, Services, TerreStar at 10:42 pm by timfarrar
When I read this review of the TerreStar Genus phone, not only did it confirm my own views about the limited prospects for the phone and the wider lack of interest in dual mode satellite phones, but it brought back quite a few memories from the late 1990s.
Most notably, likening a satellite phone to a “brick” is never a good sign (“It’s huge! It will scare people…If we had a campaign that featured our product, we’d lose“).
Also the suggestion that AT&T hasn’t identified the market correctly if it thinks people will use this as their “everyday mobile device”, along with criticism of the “hefty series of price tags” (“What it looks like now is a multibillion-dollar science project. There are fundamental problems: The handset is big, the service is expensive, and the customers haven’t really been identified“)
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Posted in ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 4:35 pm by timfarrar
The FCC has just released its ruling on cost sharing rules for the 2GHz BAS relocation, which requires that the 2GHz MSS players will have to pay their pro-rata share of the costs incurred by Sprint Nextel in clearing the band. Back in 2009, Sprint Nextel estimated these expenses would be about $100M for each MSS operator.
The FCC ruled that MSS operators would have 30 days to pay these costs after Sprint Nextel presented them with a bill (which could happen very soon after the ruling becomes effective, sometime in November). If the costs were not paid, then the Commission could take enforcement action, although it would not automatically suspend an MSS operator’s license as Sprint requested. In addition, joint and several liability for the costs would continue in the event that a license was transferred to another party (although the Commission did not address how this liability would be impacted by a bankruptcy filing). With respect to ICO Global’s potential joint liability with DBSD for its relocation costs, the Commission outlined certain principles which would apply to this question, but indicated that Sprint Nextel would have to pursue litigation against ICO Global to resolve this claim.
Though this ruling presents certain issues for DBSD, related to its emergence from bankruptcy, it also has a definite impact for TerreStar, as it is now likely that Sprint Nextel will seek to claim $100M+ from TerreStar by the end of the year. Of course, TerreStar Networks might wish to file for bankruptcy to try and avoid this liability just like DBSD (perhaps after the claim is presented rather than before?) and it remains unclear whether TerreStar Corporation would also be subject to joint and several liability. However, if TerreStar is to monetize its 2GHz spectrum in the future (e.g. through an incentive auction) for which it will very likely need the FCC’s cooperation, it seems rather unlikely that the FCC would also allow it to escape this reimbursement obligation, reinforcing that the FCC has numerous levers to ensure that the 2GHz spectrum question is resolved in the way it wants.
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09.28.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:36 am by timfarrar
Back in August, it looked very much like TerreStar was poised to file for bankruptcy, using a large DIP facility of $200M+ to fund the company for the next several years while it attempted to build a satellite roaming business. Harbinger indicated at the time that it believed a bankrupt TerreStar’s spectrum was worth $1.5B to $2B. This suggests that (as we speculated) the plan may well have been to cram-up the ~$1B of first lien debt that is outstanding at TerreStar Networks. However, it appears that Blackstone was unsuccessful in finding takers for that financing, and so the question arises as to what is now their Plan B for TerreStar.
In TerreStar’s 2010Q2 10-Q, filed in early August, the company stated that “there is substantial doubt that the available cash balance, investments and available borrowing capacity as of June 30, 2010 will be sufficient to satisfy the projected funding needs for third quarter of 2010″ and yet we are now at the end of the third quarter and there has been no bankruptcy filing. AT&T also announced the commercial release of the Genus phone last week. Some have therefore suggested that this means TerreStar is likely to avoid bankruptcy, because AT&T would not have gone to market with the phone immediately prior to a bankruptcy filing.
Of course, if TerreStar had actually secured further investments, these would have to have been disclosed in an 8-K filing, but it is certainly clear the company has managed to make its cash resources last longer than it previously expected. One possibility is that AT&T paid upfront for the Genus phones it is selling, which would have provided some cash for TerreStar without the need for a public filing. It would also explain why AT&T is keen to move ahead with the commercial launch if it now owns several tens of thousands of Genus phones.
UPDATE: According to documents filed in the TerreStar bankruptcy proceeding, Echostar and Harbinger allowed TerreStar to draw a further $10M from the Purchase Money Credit Facility, and agreed to waive any claims of potential default. However, given that the bankruptcy documents show only a few hundred thousand dollars of expected receipts for TerreStar from phone sales by the end of the year, it still appears possible that either AT&T may have paid upfront for the phones it expects to sell, or (perhaps more likely) Elektrobit has been left holding the bag, given the substantial losses it expects to book on its TerreStar receivables.
However, TerreStar obviously also needs to raise further funds to cover its ongoing operating expenses. It has a window of time until August 2011 when no cash interest is due on TerreStar Networks’ first lien debt, and so it appears plausible that raising say $50M+ at TerreStar Corporation (presumably against the security of the 1.4GHz spectrum) would be (barely) sufficient to see the company through to next August, when the outcome of the FCC’s MSS NPRM/NOI should be clearer.
This might well still require a bankruptcy filing by TerreStar Corporation (depending on what happens with the outstanding $408M of Preferred Stock, since the company has certain obligations to redeem the Preferred Stock if it has more than $10M in available funds), but we assume that Blackstone might conceivably look to keep the TerreStar Networks subsidiary out of bankruptcy (assuming this is permitted by the cross-default provisions on the first lien debt) and thereby enable TerreStar Corporation to retain its shareholding in TerreStar Networks.
Then, if it turned out that the FCC’s NPRM allowed the 2GHz satellite spectrum to be monetized for more than the value of the outstanding first lien debt (something we regard as unlikely), the proceeds could potentially flow to the owners of TerreStar Corporation (although it is implausible that an auction could occur by August 2011 so there would certainly still be significant arguments about the value of this spectrum). In addition, this outcome would ensure that TerreStar’s 2GHz spectrum is not on the market as an alternative to LightSquared, while Harbinger seeks to secure partners for its LTE network buildout over the next 9 months.
UPDATE: From the TerreStar bankruptcy filings, it does not appear that the approach we speculated about would have been feasible, presumably at least in part because it was not possible to raise money against the security of the 1.4GHz spectrum, and in the last few weeks the alternative plan to accepting a deal with Echostar was to try and prime the first lien debt which Echostar controlled at TerreStar Networks. However, in the end TerreStar has had to take a $75M DIP from Echostar and agree to the restructuring plan which Echostar proposed.
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09.23.10
Posted in Aeronautical, Inmarsat, Operators at 11:59 am by timfarrar
Its now been announced that JetBlue has signed an MOU with Viasat to install Ka-band connectivity on its fleet, starting in 2012. One of the primary reasons cited by JetBlue was that the satellite capacity was much cheaper than at Ku-band.
We analyzed the cost of providing service for Aircell and Row44 in one of our recent research reports, and concluded that (as JetBlue also asserted), Ku-band satellite capacity can rapidly become the dominant cost driver for aeronautical broadband even at moderate usage levels and take rates. For example, we estimated that at a 25% take-rate, the cost of Ku-band satellite capacity would be between $30K and $80K per plane per year, depending on the amount of bandwidth allocated to each customer. This compares to an amortized satellite equipment cost of perhaps $40K per plane per year. Viasat’s Ka-band satellite could reduce the capacity cost by a factor of up to about 5 times, bringing the cost of capacity down to say $6K to $16K per plane per year.
Thus the strategic question for JetBlue is whether it will use this capacity cost differential to make the service free to end users (or free for most applications other than say streaming video). As noted in past news articles, charging for in-flight broadband has a huge impact on take rates. However, Row 44 (with expensive Ku-band capacity) and Aircell (with a limited amount of terrestrial bandwidth) can’t afford to offer free usage, unless they constrain the service significantly (e.g. no streaming video and limited bandwidth). JetBlue has already offered free (albeit very limited) service on its Beta Blue plane, whereas Southwest (which will set pricing on its Row44-equipped planes) has indicated that it plans to charge for the service.
If JetBlue did offer free service, then this would certainly shake up the in-flight broadband business. Would airlines step-in to pay Aircell directly for their service instead of relying on passenger revenues? Will there be a return of the sponsorship model used on airlines like Virgin America for a period last year? More to the point, will the mere prospect of such disruption cause airlines thinking about installing Ku-band to consider waiting for Inmarsat’s new Ka-band Global Xpress service in 2014?
UPDATE: Now Southwest has agreed to buy AirTran, which already has fleetwide in-flight connectivity through Aircell, will Southwest have yet another reason to reconsider its Ku-band plans with Row44?
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09.20.10
Posted in Services at 9:45 am by timfarrar
Last week it was reported that LightSquared had raised another $750M loan from UBS, to add to the $400M loan it secured from UBS back in July. Today it is also being reported that SK Telecom is considering an investment of up to $100M in LightSquared.
This is undoubtedly good news for LightSquared, although it appears that the new $750M loan is likely to be a refinancing of SkyTerra’s outstanding $750M in first lien debt, which would otherwise have become cash pay on October 1. Even so, Harbinger held the majority of the original first lien loan, and so if the $750M is all new money from third parties, this would enable Harbinger to inject as much as $400M to $500M of additional funding into the LightSquared venture, simply by rolling over its original first lien holdings into subordinated debt or equity. Given that Harbinger stated back in July that it was raising up to $1.75B, then this would appear to match with that target ($400M July loan + $750M September loan + $400M-$500M of new Harbinger equity + $100M of third party funding), although in reality there would only be $1B of additional funding for the network buildout (plus potential vendor financing from Nokia Siemens Networks, which has not yet been announced).
However, last week also brought more ominous news for Harbinger in the form of the FCC’s denial of Globalstar’s ATC waiver request. As we noted at the time, Harbinger faces aggressive buildout milestones and has a pending request for a waiver of the SkyTerra-1 satellite launch deadline. If the FCC is sending a signal to Harbinger that it will not tolerate missed deadlines due to funding problems, which was the principal rationale for the Globalstar ruling, then investors in LightSquared will have to worry about how valuable the spectrum assets would be if LightSquared failed or otherwise could not meet the FCC’s deadlines. Indeed Harbinger’s own “voluntary commitments” included the condition that the LightSquared “authorizations” (its ATC license and perhaps even its MSS license depending on the interpretation of this phrase) will automatically be “null and void” without any need for further action by the Commission if LightSquared fails to meet the buildout milestones.
In particular, the question arises of whether the FCC would impose costly buildout conditions on a potential purchaser of the spectrum assets, or possibly even veto a purchase by AT&T/Verizon on competition grounds. In our view, the Globalstar ruling introduces rather more uncertainty about whether it will be possible to guarantee active bidding in the event that the LightSquared assets are sold in the future (especially in a bankruptcy auction where approval of the transfer would have to be sought afterwards from the FCC), and thereby makes it harder to put a floor under the value of LightSquared’s spectrum.
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