Don’t play poker with Charlie Ergen…

Posted in Echostar, Financials, Globalstar, Handheld, Operators, Services, SpaceX, Spectrum at 8:35 pm by timfarrar

Yesterday, Globalstar filed an 8-K noting that on January 31 it had entered into a forbearance agreement with MDA and Rocket Lab, the contractors building 17 new satellites, under which additional payments beyond an initial $20M will be delayed until March 15. In addition, Globalstar noted that:

“The Company is currently exploring financing options for satisfying its remaining payment obligations under the Contractor Agreements, as well as its obligation to refinance its 2019 Facility Agreement. It cannot currently predict whether, and on what terms, any such financing will be available but maximizing shareholder value is the driving consideration.”

The reason for these financing challenges is that Globalstar is unable to close on the new first lien debt agreement to fund the satellites (that was expected to be backed by Apple to the tune of $450M) unless and until it has refinanced the $150M currently owed to Echostar under the 2019 Facility Agreement. Under the September 2022 Partnership Agreements between Apple and Globalstar, Globalstar is required:

“(i) upon commencement of the Services, to convert all loans outstanding under the 2019 Facility Agreement that are held by affiliates of the Thermo Companies (collectively, “Thermo”) into non-convertible perpetual preferred stock with a cash pay interest rate of 7% per annum or lower, convertible preferred stock with cash pay interest rate of 4% per annum or lower, common stock, or another security acceptable to Partner (the “Thermo Debt Conversion”) and (ii) within 90 days of the commencement of the Services, to refinance or convert all loans outstanding under the 2019 Facility Agreement that are held by persons other than Thermo on terms that are no less favorable to the Company than the Thermo Debt Conversion.”

Of course there was no chance whatsoever that Charlie Ergen would agree to exchange first lien debt with a PIK interest rate of 13.5% for preferred stock that would be subordinate to ~$500M of new first lien debt with an interest rate of 4%-7%, so the only plausible reason for Jay Monroe to agree to these terms was a Hail Mary bet that he could find a buyer for Globalstar before the deadline occurred for Echostar’s debt conversion.

That deadline is coming due on Monday February 13, 90 days after Apple began offering services on November 15, 2022 and no buyer has appeared for Globalstar. The Key Terms Agreement has specific provisions dealing with an offer for the company:

(i) Sale Notice. If a third party submits a non-frivolous proposal to acquire any material Required Resource or the Spectrum Subsidiary or for a Change of Control transaction involving Globalstar or Globalstar’s board of directors (or any committee thereof, including the Strategic Review Committee) approves a process with respect to the potential sale of any material Required Resource or the Spectrum Subsidiary or a Change of Control transaction (each, a “Sale Transaction”), Globalstar shall provide written notice of the Sale Transaction, with the material terms and related process of such transaction, including (A) at a minimum the structure of, and the assets proposed to be sold in the Sale Transaction and any relevant timelines or deadlines relating to the Sale Transaction, and (B) other material terms and related process to the extent permitted by Globalstar’s confidentiality obligations (a “Sale Notice”), to Partner within one day following Globalstar’s receipt of such proposal or such determination by Globalstar’s board of directors (or any committee thereof, including the Strategic Review Committee), which Sale Notice shall be considered Globalstar Confidential Information. If Globalstar enters into any confidentiality agreement relating to a potential Sale Transaction after the Effective Date, such agreement shall not restrict Globalstar from providing to Partner any of the information set forth in Section 10.2(e)(i)(A) that is required to be included in the Sale Notice.

(ii) Discussions. Following the delivery of the Sale Notice to Partner, Globalstar’s board of directors (or any committee thereof, including the Strategic Review Committee) shall, and shall cause the management, employees and other representatives of Globalstar to conduct discussions with Partner in good faith and on a non-exclusive basis and provide Partner with all information made available or provided to any potential third party acquiror, to enable Partner to make a proposal to Globalstar for a Sale Transaction, during the ten business day period following the date of the Sale Notice. Globalstar hereby agrees that it shall not, and shall cause its Related Entities, management, employees and other representatives not to, enter into a term sheet or letter of intent or other binding agreement or obligation with any other third party with respect to a Sale Transaction during the ten business day period commencing on the date of the Sale Notice.

(iii) Proposals. If Partner makes a proposal for a Sale Transaction prior to the expiration of the ten business day period, then Globalstar’s board of directors (or any committee thereof, including the Strategic Review Committee) will exercise its fiduciary duties to evaluate Partner’s proposal along with any other proposals for a Sale Transaction. In the event Globalstar’s board of directors (or any committee thereof, including the Strategic Review Committee) determines the proposal from Partner is in the best interests of Globalstar and its stockholders, then Globalstar will enter into a binding agreement to negotiate in good faith with Partner on an exclusive basis for a period of not less than 20 business days.

(iv) Consummation. If Partner declines to make, or Globalstar (after having considered such offer or proposal in good faith) declines to accept or pursue, a proposal for a Sale Transaction from Partner, then Globalstar shall be permitted to consummate a Sale Transaction with a third party, provided that Globalstar shall have first obtained and delivered to Partner a written agreement from the acquiror in the form included as Attachment 7.

So what happens next? The statement in the 8-K that “maximizing shareholder value is the driving consideration” suggests that Ergen will soon (or perhaps already has) submitted a “non-frivolous proposal” to acquire Globalstar, presumably at a very low price, given that Globalstar will soon be in breach of its obligations to Apple. This will trigger the 30 (business) day period for Globalstar to advise Apple of a sale transaction and then negotiate on an exclusive basis, which would also run through the mid March satellite payment deferral period (assuming Ergen has now made an offer for the company).

However, given the cards that Ergen and Apple hold in respect of a potential forced default on the Apple agreement, and that neither appears to have much interest (or belief that there is meaningful value) in Band 53, it is hard to see how their offers would meaningfully exceed the value generated by Globalstar’s satellite services, including the value of Apple’s messaging contract. I estimate that in those circumstances the best Globalstar might obtain would be roughly $1B-$1.5B in cash plus an agreement to assume the costs of the construction contract. That would be a pretty disastrous outcome for Jay Monroe after he’s invested over $800M and 20 years of his life in trying (against overwhelming odds) to make something of Globalstar, and Globalstar shareholders would also be hugely disappointed.

The most interesting question is what Ergen would seek to gain from Apple, if he was to either enable Apple to buy Globalstar at a low price or buy Globalstar himself (presumably through Echostar) and continue the partnership. One obvious possibility could be to collaborate to include the 2GHz satellite spectrum held by DISH and Echostar into future iPhones for additional NTN capacity. Perhaps not entirely coincidentally, Echostar announced plans to build a 28 satellite LEO IoT network just last week.

I also noted a few days ago that D2D is likely to be the next focus for hype over Starlink’s future prospects (which we can already see in the decision of SpaceX’s Jonathan Hofeller to join the Satellite-Cellular panel at Satellite 2023). And I predicted in my D2D report that SpaceX’s next step might be to acquire more MSS spectrum, most obviously Omnispace, but perhaps even Ligado. So now we could face the real prospect of a fight for this new market opportunity and the associated global satellite spectrum rights between Musk and Ergen, building on prior skirmishes over the 12.2-12.7GHz band. Wouldn’t that be fun!


Direct-to-Device hype is Starlink’s new, new thing…

Posted in Globalstar, Handheld, Iridium, Operators, Regulatory, Services, SpaceX, Spectrum, T-Mobile at 9:42 pm by timfarrar

There’s been plenty of hype about the Direct-to-Device (D2D) market for satellite to smartphone connectivity in the last couple of years, and that has only intensified in the wake of recent announcements about Apple’s partnership with Globalstar and Qualcomm’s partnership with Iridium. Some analysts have even gone so far as to suggest that D2D represents the “largest opportunity in Satcom’s history“.

But the reality is that going beyond basic messaging presents significant technical challenges, and the messaging market will remain modest in size, anchored as it is by the size of Apple’s deal with Globalstar, which costs Apple little more than $100M per year for both global coverage and the ability to support tens of billions of messages per year. Regulatory challenges are still significant, with some regulators going so far as to ban systems that plan to use terrestrial spectrum from operating anywhere near their territory.

Nevertheless, D2D is becoming the next opportunity that SpaceX can hype, beyond its core fixed broadband market, as it looks for additional increases in the company’s valuation so it can keep raising money to keep developing Starship, while putting even more distance between Starlink and broadband competitors like OneWeb and Kuiper. And just as SpaceX has scared away potential investors in nascent LEO broadband systems like Telesat’s Lightspeed, we expect SpaceX to crowd out many of the other players in the D2D market, now that funding for speculative space projects is becoming more scarce.

Unfortunately, the perspectives of some investors and commentators have been skewed by the unrealistic D2D projections that were made during the SPAC boom, and they have failed to look at relevant benchmarks such as current levels of spending on international roaming. Our new 70+ page report on the D2D satellite smartphone communications opportunity, which has just been released, looks in detail at the regulatory constraints and technical limits to system performance, and projects revenue growth in both the messaging segment and in the voice and data segment over the next decade.

Our conclusion is that while D2D messaging is likely to deliver meaningful upside for existing MSS networks like Globalstar and Iridium, it will be much more difficult to gain global consensus on use of terrestrial spectrum. As a result, SpaceX is likely to hedge its bets and pursue a twin-track strategy of seeking access to both terrestrial and satellite spectrum, and potentially follow up its 2021 acquisition of Swarm with further deals to buy satellite operators and their spectrum licenses.

Then, as Starlink moves beyond its initial D2D messaging capabilities later this decade, and perhaps even amplifies the hype still further by suggesting that the next step will be to build a SpaceX smartphone, Starlink is likely to gain a majority share of the D2D market. Even so we project the potential market size to remain far smaller than Starlink’s fixed broadband opportunity and it is not at all clear that it will be possible to make an economic return on these D2D investments.

If you’d like to order a copy of the report then an order form is available here. And you can hear me speak about many of these issues this coming week at the SmallSat Symposium in Mountain View, CA.


Starlink has won the race for LEO broadband – what now?

Posted in Broadband, Financials, Operators, SpaceX, Spectrum at 10:06 am by timfarrar

Up until 2020, I was very skeptical about the LEO broadband opportunity, and whether any of the planned systems would be able to raise enough money and build out a constellation that could deliver a service that is competitive with existing GEO operators. That skepticism seemed entirely justified after the failure of LeoSat in late 2019 and OneWeb’s spiral towards a bankruptcy filing in March 2020. SpaceX had also given wildly over-ambitious forecasts for Starlink’s revenue and timing, with projections for $6B of revenue in 2021, rising to over $30B in 2025.

But over the last two years, Starlink has launched a consumer broadband service that has upended the industry by providing vastly more capacity per subscriber than Viasat and Hughes, with a simple, easy to install terminal, and as of June 2022 already served over 400K users. Successfully developing such a system is an extraordinary technical feat when so many previous broadband constellation plans have failed. And after raising over $6B in the last 2.5 years at ever increasing valuations, SpaceX has been able to launch thousands of Starlink satellites and build scale that competitors will struggle to match.

I didn’t think that SpaceX would pull this off, but they did, and today too many people in the industry, who are rightly skeptical of Elon Musk’s litany of unfulfilled promises, remain far too complacent and are continuing to dismiss Starlink as just a consumer service that won’t threaten other parts of the satellite market, or are even suggesting that the network remains economically unviable and is doomed to failure.

However, the dam is starting to break for acceptance of Starlink amongst professional users, with Royal Caribbean’s recent move to deploy Starlink representing just the start of disruption in traditional satellite verticals. And SpaceX’s latest $2B in equity funding should see the company through to late 2023, by which time I expect Starlink to have captured around 1M users and have reached cash flow breakeven (even accounting for ongoing satellite replenishment costs).

That doesn’t mean Starlink (or SpaceX more broadly) will offer a positive return to those recent investors at the ludicrous valuation of $127B, because satellite will remain a last resort solution compared to terrestrial fiber, cable modem and even 5G fixed wireless options, but it does mean that there’s no reason to suppose that Starlink will cease to be an enormous competitive threat to the satellite industry in the foreseeable future.

One largely unrecognized issue in the LEO market is that there are significant benefits to scale, due to the virtuous circle that comes from adding more satellites to a constellation, as shown in the diagram below.

With more satellites in the sky, the user terminal antennas don’t have to scan as far to find a satellite to connect to, so they can be cheaper, with fewer antenna elements. And the altitude of the constellation can be lower, improving the link margin and capacity, and allowing the user terminal to operate at lower power. Capacity provisioning also becomes more uniform, as traffic loading can be averaged across multiple satellites, improving the quality of service. Starlink has been designed from the ground up to minimize the cost of the terminal, unlike traditional satellite systems (even recent designs like Telesat’s Lightspeed), which optimize the satellite and treat the terminal as an afterthought. Cheaper terminals and more capacity attract more users and generate more revenue, which can be fed back into building yet more satellites, making it ever harder for competitors to catch up.

So now we’re in a position where Starlink has clearly won the race for LEO broadband (at least for the next 4-5 years, since Amazon’s Kuiper won’t be completed before 2026-27), and is likely to become the largest satellite operator by revenue within that timeframe. Our new report on LEO broadband and the future of the satellite industry forecasts what this means for industrywide growth in revenue and traffic, and analyzes how satellite operators, distributors and equipment suppliers are likely to respond to what for many will represent an existential threat. The outcomes will include an acceleration of industry consolidation, decisions to exit, and even bankruptcies. The report also complements our June 2022 Starlink profile, which analyzes Starlink’s technology and forecasts Starlink’s revenue growth by segment. You can order one or both reports using the form here, or contact us to discuss subscription options for all of our industry analysis.


Failing At Analysis

Posted in Aeronautical, AT&T, Operators, Regulatory, Services, Spectrum, Verizon at 10:45 pm by timfarrar

What on earth has gone wrong in the C-band rollout that has led to hundreds if not thousands of planes now being grounded? That’s the question that so far the news reports seem to have failed to get a grip on, given the complex technology and difficulty in interpreting what is going on behind the scenes between the FAA, FCC and wireless companies.

On January 4 a deal was announced between the FAA and the wireless companies to delay the rollout by two weeks in exchange for DoT and FAA agreeing that they “will not seek or demand any further delays of C-Band deployment, in whole or in part”. The FAA also committed that it would “work to issue AMOCs as filed by aviation stakeholders to allow for operation of aircraft to the extent permissible.”

The FAA is issuing two forms of notices to deal with the possibility of interference from 5G. The first of these is the NOTAM (Notice To Air Missions) for a specific airport, which sets out constraints on aircraft operations, such as restrictions on use of particular flight paths during bad weather. The second is the AMOC (Alternative Means Of Compliance) which allows certain altimeters (and therefore the specific aircraft types which carry them) to be exempt from these flight path restrictions if the FAA’s analysis has shown that the altimeter type is “high performing” (i.e. resilient to the possibility of interference).

What appears to have happened in the last two weeks is that the FAA has failed to issue as many AMOCs as had been expected and therefore a very large number of aircraft remain subject to the NOTAM restrictions. As of Tuesday, the FAA had only approved two types of altimeter, which account for “about 45% of the US commercial aircraft fleet” and “include Boeing’s 737, 747, 757, 767, MD-10 and MD-11 and the Airbus A310, A319, A320, A321, A330 and A350.” This leaves more than half of the US fleet subject to restrictions, including most regional and wide body jets, notably Boeing’s 777, 787 and 747 aircraft.

Over the weekend we heard stories, based on FAA briefings, about new constraints on 787 operations because “during the two-week delay in deploying new 5G service, safety experts determined that 5G interference with the aircraft’s radio altimeter could prevent engine and braking systems from transitioning to landing mode, which could prevent an aircraft from stopping on the runway.”

But the FAA appears to have failed to complete its analysis of the 777 and 747 during this period, and in what seems to have been an attempt to force the FAA to address the issue, Boeing released an advisory to airlines on Monday evening covering the 777 and 747-8 which “recommends operators do not operate 777 aircraft on approach and landing to U.S. runways” unless there is an alternative means of compliance. This language presumably means that Boeing believes that these altimeters should be approved through the AMOC process, but the FAA has failed to act. As a result, international airlines are now cancelling flights to the US on Wednesday or rearranging them to use other aircraft including the 787 and A380.

One obvious question (even ignoring the delays in taking action before January 3) is why the FAA has been so slow to make the expected progress over the last two weeks. Is it sheer incompetence? Or did the FAA think it was going to be able to extract a better deal from the wireless carriers, with a new and permanently lower signal level, as some aviation experts think could happen? Certainly the FAA now appears to have abandoned its commitment not to demand “further delays of C-Band deployment” and instead secured an indefinite delay to deployments near additional airports, instead of the maximum of 50 airports agreed to on January 3 (which is essentially a return to the demands from DoT on December 31). And the FAA maintained its hostility to C-Band operations even after signing an agreement not to try and delay them.

No wonder, even FCC Chair Rosenworcel, after keeping quiet during the January 3 negotiations, expressed frustration noting that “the FAA has a process in place to assess altimeter performance in the 5G environment and resolve any remaining concerns. It is essential that the FAA now complete this process with both care and speed.” Conversely, the DoT, who on January 4 celebrated the “the amazing [FAA] team for long hours over the holiday to minimize flight disruptions” are now conspicuously silent about the lack of progress over this most recent holiday weekend, with no commitment from the Secretary of Transportation to move quickly.

So how does this end? Will the FAA issue the AMOC approvals for the 777 and 747-8 on Wednesday before tens of thousands of Americans are stranded overseas, as the airline CEOs predicted on Monday? That seems to be what US airlines are betting on, at least for now. And what about regional jets, which account for most of the remaining aircraft, and whose representatives are complaining they have been left out of the agreement? In that case, disruption may be sporadic, since there is no grounding order and cancellations will be dependent on the weather, so things may not come to a head until the next major winter storm.

None of this looks good for the Administration and it certainly isn’t “great work by all involved” as the White House Chief of Staff suggested. However, it looks like the FAA will have to bear the lion’s share of the blame for what seems highly likely to be substantial disruption in air travel over the next few days and possibly much longer when it comes to regional jets.

UPDATE (Thu Jan 20): After the debacle on Tuesday, with the cancellation of 777 and 747-8 flights by multiple international airlines, it seems the FAA was embarrassed (or forced) into accelerating the issuance of AMOC approvals for additional altimeters, approving the 777 on Wednesday morning, and the number of altimeters approved and percentage of the US fleet covered has now grown very quickly:
Tuesday Jan 18: 2 altimeters and 45% of the US fleet
Wednesday Jan 19: 5 altimeters and 62% of the US fleet
Thursday Jan 20: 13 altimeters and 78% of the US fleet.

The result has been that most disruption has been avoided, although regional jets remain a concern, with some problems resulting from low visibility. However, the rapid pace of approvals, and the expectation from airlines that there won’t be “any material disruption going forward”, further discredits the FAA’s fearmongering over the weekend, not least because an AMOC has now been issued covering all 787 jets, which were supposedly the cause of greatest alarm. Suggestions that airlines would need to “swap out the altimeters” in a process lasting years and costing billions of dollars, also appear to be well wide of the mark.

At this point the consensus seems to be that this has been a crisis created by the FAA’s foot dragging, and the more AMOC approvals that are issued, the more obvious that becomes. So the biggest remaining question is whether and when the Secretary of Transportation will ask for the resignation of the FAA Administrator, who after all is a holdover from the last administration, and therefore will make a convenient scapegoat for this whole episode? However, it also shouldn’t go unnoticed that the reaction of the President (echoed by members of Congress) was to push “as hard as I can to have the 5G folks hold up” rather than calling out the incompetence and delaying tactics of the FAA.

UPDATE (Fri Jan 21): It seems like I was far too confident last night that the 5G problem is on its way to being solved, despite airline executives declaring that the doomsday scenario is over because “The technical experts that are working on it tell us it’s really not that complicated once they all are able to share information and work on it…So they seem encouraged that we’ll be able to address this in a way that allows for full deployment of 5G, including near airports.”

As described by the Regional Airline Association, the tests are conducted by manufacturers and then those plans are “submitted…to the FAA” who issue the AMOC. The airlines appear confident that those manufacturer tests show there will be no problems even after full deployment of 5G.

But the FAA’s statements appear to confirm that they are only issuing AMOCs approving altimeters to operate while the current 5G deployment restrictions remain in place: “The new safety buffer announced Tuesday around airports in the 5G deployment further expanded the number of airports available to planes with previously cleared altimeters to perform low-visibility landings.”

So it is perhaps no wonder Boeing is refusing to comment because they don’t want to get into a public shouting match with the FAA, despite the behind the scenes confrontation over the 777 at the beginning of this week outlined above. But you can be sure that many aviation interests are demanding that the restrictions continue permanently and the FAA is preparing for another showdown on July 5th, when the current six month period of restrictions is set to expire.


The mystery of SpaceX shares

Posted in Financials, Operators, SpaceX at 4:31 pm by timfarrar

There’s been a lot of breathless commentary over the last year about SpaceX’s ever-increasing valuation, which reportedly nearly tripled between spring 2020 and October 2021, with the share price rising from $220 to $560 and the valuation increasing from $36B to $100B.

However, there is a distinct inconsistency between what SpaceX has been telling the FCC about Elon Musk’s stake in the company and the amount of dilution implied by sales of new shares at these prices. Specifically, SpaceX told the FCC in November 2016 that Musk owned 54% of the company, which declined to 50.5% in November 2018, 47.4% in April 2020 and finally 43.61% in August 2021.

Over this period, SpaceX reported selling a total of $5.31B in equity, based on its Form D submissions to the SEC. Using the public reports on the share price for the transactions through April 2021 (before last week’s equity raise of $345M), I calculate that this represents approximately 22.4M shares, which increased the share count from a little over 154M shares to just under 177M shares.

However, if the valuations and share prices quoted to financial reporters are accurate, Musk’s stated ownership percentage over the same period would have equated to 83.4M shares in November 2016, 80.3M shares in November 2018, 78.9M shares in April 2020 and 77.2M shares in August 2021. Did Musk really dispose of his SpaceX shares on a regular basis over this period? That seems unlikely, especially given that he had minimal taxable income in 2017 and 2018.

Or is SpaceX reporting a fully diluted share count to the FCC, including options or restricted shares granted to employees, but not mentioning those to the financial press and investing public? If Musk didn’t sell any of the 83.4M shares corresponding to his 54% stake in November 2016, then in order to dilute his stake to 43.61% over the following four and a half years, the company would have needed to issue an extra 14M shares, over and above those sold and reported via Form D to the SEC.

If that’s the case, then SpaceX would appear to have granted options worth up to $8B at the current $560 share price to employees (although the exercise price for any options would presumably be somewhere between 20% and 40% of this amount and it is possible some of these shares might have been used to acquire technology or incentivize suppliers). Are SpaceX investors aware that the shares they bought might be diluted by about 7%? Does this mean that senior SpaceX executives are now extremely rich and some are perhaps even paper billionaires? That certainly could help to explain a number of recent retirements.

In addition, the most recent (October 2021) reported valuation of $100.3B at a $560 share price appears to reflect an increase of around 2.1M shares since spring 2021. How much of that amount (worth $1.2B at this valuation) represents the shares used to acquire Swarm in August 2021? Although part of this increase might represent conversion of some of the options noted above (since SpaceX was selling 1.35M existing shares), it seems very plausible that a significant proportion of these shares went to Swarm’s owners, which would represent a very high valuation (many hundreds of millions of dollars) for a company that had barely begun to offer commercial services.


Solving real problems doesn’t mean bailing out fake business plans

Posted in LightSquared, Operators, Regulatory, Services, Spectrum at 1:41 pm by timfarrar

No I’m not talking about SpaceX and the RDOF auction, I’m returning to a topic I haven’t written about for years (but also provided plenty of opportunities for pointing out the idiocy of some billionaires), that of Ligado.

Over the last year there’s been a great deal of dysfunction at the NTIA, leading to the unfortunate loss of David Redl and what Oscar Wilde might have described as the “careless” loss of Diane Rinaldo. These problems were amply summed up in Redl’s speech a few days before he resigned, where he noted that:

“In this era of competition for spectrum resources, it can be easy to think that we’re in a winner-take-all battle, but that mindset asks us to make false choices that will shortchange America. For example, we don’t have to choose between making more spectrum available for the private sector and sustaining our critical government systems. We also don’t have to choose between terrestrial 5G and satellite services.”

Although it is not the only area where these problems have been manifested (and the fight over the 24GHz spectrum auction was far more important), Ligado has employed its usual lobbying tactics of attempting to secure high level political backing (just like in 2010-11), apparently getting former acting Chief of Staff Mulvaney to push the FCC into drafting an order to approve Ligado’s application last fall (which is why Defense Secretary Esper’s November 18 letter to Chairman Pai was specifically copied to him) and more recently even persuading Attorney General Barr to make the bizarre proposal that Ligado’s L-band spectrum could be used in conjunction with C-band as part of a plan to counter China, which would involve the “United States aligning itself with Nokia and/or Ericsson through American ownership of a controlling stake” in these companies.

Of course this latest business plan is just as much nonsense as the previous business plans presented by Ligado and its predecessor companies in their attempts to persuade the FCC to grant them a license, because other countries are deploying TDD networks in their C-band spectrum for the entirely logically reason that it maximizes the performance of MIMO, and are never going to approve use of L-band uplinks in satellite spectrum in any case. Why would US telcos decide to do anything other than follow suit?

But Ligado’s management has the singular objective of securing regulatory approval and keeping their jobs, rather than actually developing something that would be economically valuable, just like their prior business plans to provide a dual mode satellite-terrestrial network for utilities (despite seamless roaming from terrestrial to satellite mode being impossible), promise rural LTE service using satellite capacity that cost $10,000 per Gbyte, or meet the supposedly “vast global demand” for dual mode satellite phones that turned out to amount to fewer than 2000 phones when Terrestar tried to sell them.

So let’s take a step back. What is the problem we are trying to solve here? Is this really about whether Ligado gets a worthless approval that does nothing to benefit 5G one way or the other? Or is it really what Commissioner O’Rielly’s letter last week asked the President to do, to make sure that the DoD (and other agencies) do not simply get to veto any reallocation of spectrum within IRAC, and instead the NTIA works to properly balance competing spectrum interests, as Redl said last year?

Ligado’s current proposal, that the FCC simply ignore the NTIA’s public recommendation (which was set out even more forcefully in another letter from Associate Administrator Doug Kinkoph last Friday) and “bring an end to…this proceeding“, would make things worse not better. If the NTIA has stated on the record that “We believe that the Commission cannot reasonably reach such a conclusion [that the harmful interference concerns have been resolved]” then the next step is to set up a process to resolve them, not to simply reject this conclusion. Both sides have behaved badly here, Ligado in claiming that there is no harm whatsoever (when some older high precision devices and perhaps even some DoD systems certainly do need to be replaced) and the DoT in claiming that a 200MHz wide swath of spectrum should remain completely unoccupied in order to protect GPS. The US needs an NTIA that works, not an NTIA that is to simply be ignored.

Moreover the idea that the FCC would rush something like this out on delegated authority (which is basically what was being implied by news reports last Friday that an order could come later that day) would repeat the mistakes of LightSquared’s January 2011 approval, which was also approved by the International Bureau on delegated authority, in a ruling which former (Republican) Commissioner Harold Furchtgott-Roth noted “was an unprecedented and surprising development. That they would make this decision at the bureau level and not at the full commission level is just stunning”.


SpaceX and the FCC’s $16B problem

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX at 11:41 am by timfarrar

Eight and a half years ago, I wrote a blog post that got a lot of attention inside the FCC, comparing LightSquared’s request for a license that would give it a $10B windfall to the relatively small beer of the $535M Solyndra loan scandal. Despite knowing that LightSquared’s promise of an integrated satellite-terrestrial network was nonsense (not least because LightSquared had already told the FCC in November 2010 that the wholesale cost of its satellite data would be $10 per Mbyte), the FCC and White House offered strong backing for LightSquared right up until summer 2011 when political pressures became too great and their support was withdrawn.

Now it appears that the FCC’s LightSquared debacle could be exceeded by an even greater debacle in the satellite sector, because SpaceX is seeking to participate in the upcoming Rural Digital Opportunity Fund auction later this year, which will offer up to $16B of funding over 10 years to service providers that commit to offer voice and broadband services to fixed locations in eligible unserved high-cost census blocks. While the Wall St Journal highlighted competitors’ complaints a few weeks ago, SpaceX has now upped its demands even further, suggesting in a March 27 letter to the FCC that “the laws of physics” dictate that SpaceX should be allowed to bid in the highest performance tiers (which carry the most money per potential customer) because “far from [being] untested or hypothetical, SpaceX has already launched over 360 satellites and demonstrated that its network is capable of offering high-speed, low-latency service”.

That of course is complete nonsense, because the laws of physics aren’t the only factor determining the latency of a LEO constellation, especially one that is (or apparently was in SpaceX’s case) supposed to have onboard processing and crosslinks. For example, Iridium’s latency on voice calls is not actually much better than a GEO satellite network and certainly exceeds “the Commission’s 100-millisecond threshold for low-latency services” (this paper estimated it at “between 270-390 milliseconds”). In fact one should regard claims of extremely low (and improved) latency for Starlink’s current satellites as indicating that in reality some of the most important design features, such as onboard processing, have likely been discarded.

To date SpaceX has certainly not demonstrated anything whatsoever about the performance of its planned commercial voice and broadband services for consumers. Notably SpaceX has still not published details of its terminals (except to advise that the antennas will need mechanical steering, raising the cost significantly), and last year’s testing by the US Air Force onboard a plane did not even use a SpaceX antenna. Moreover, that test did not involve most of the operational elements needed to offer a scalable commercial service, such as provisioning and sharing of capacity between multiple users, because SpaceX simply dedicated an entire satellite to one user terminal.

In particular, SpaceX makes great sounding (but carefully worded) claims in its submission to the FCC that “SpaceX also specifically designed Starlink to provide high-speed broadband service, using advanced phased-array antennas that allow the system to automatically optimize service to certain locations and dynamically adjust its throughput per user” when in fact many features of the supposed “design” have not actually been implemented in practice. While some of those discarded design features, such as crosslinks, are well known, I’m told that to date the satellites also don’t have any ability to dynamically reallocate capacity between beams, because that was apparently “too hard”. Perhaps that’s not surprising, when SpaceX is writing the software itself, rather than looking to companies with actual experience in designing scalable satellite broadband networks, like Hughes and Viasat.

But what is truly outrageous in SpaceX’s submission is the suggestion that the FCC should now let SpaceX participate in an auction to win $16B of ratepayers’ money without ever providing service to a single consumer, because SpaceX has now pushed back the launch date until after the FCC’s planned October 2020 auction date. The latest letter states simply that (even if you are foolish enough to take Elon Musk’s ever-optimistic timelines at face value) “SpaceX will now begin to offer its Starlink broadband service for consumers—first in the United States and Canada—by the end of 2020″. Of course now that Starlink’s primary competitor, OneWeb, has gone into bankruptcy, the urgency of pushing Starlink forward as quickly as possible has diminished (not to mention SpaceX being short of money itself), and why would SpaceX now want to risk consumers experiencing a service that in the early days may not work very well, if at all, before the FCC auction takes place?

But as I pointed out a couple of weeks ago, bidders are not required to actually provide service to any specific number of customers at all in order to receive the RDOF funding, and instead are simply expected to use the funding to subsidize their buildout and make it available. So SpaceX could then take the FCC’s money, never provide service to a single customer that the money was meant to help, and reallocate its capacity to serve other users like the DoD anywhere within the country or even the rest of the world.

Perhaps the FCC and Congress, like the rest of us, are pre-occupied with the coronavirus, and think this issue should not be at the forefront of our concerns right now. But when Elon Musk has convinced many gullible people that Starlink will “catalyze enormous positive change, bringing, for the first time, billions of humans into our future global cybernetic collective” and so it would be “stupid to put one more federal dime into rural broadband when Starlink could solve the whole problem by later this year” it remains possible that SpaceX will be able to get away with this nonsense and walk away with billions of dollars of funding that were intended to help close the homework gap while we are all distracted.


Why SpaceX desperately needs a government bailout…

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX at 12:36 pm by timfarrar

Over the last couple of months its been interesting to watch the maneuvering by SpaceX as it sought to raise its next funding round, in large part from a range of new investors with little or no knowledge of the satellite sector. My understanding is that the original ambition was to raise well over $1B, to be announced in conjunction with Elon Musk’s appearance at Satellite 2020, and attempt to flatten the competition as OneWeb struggled to complete its own planned $1B round.

SpaceX staffed up in anticipation of this new funding, doubling the staff in Boca Chica in February, which has increased the company’s burn rate even further. According to data disclosed at the time of the November 2018 debt funding round, SpaceX generated $270M of adjusted EBITDA in the 12 months to September 2018, but only by counting hundreds of millions of dollars of customer deposits, such as that paid by Japanese billionaire Yusaku Maezawa for his trip around the moon. As a result it seems clear that SpaceX was otherwise burning cash even in 2018, when its revenues were projected to be $2.5B+. And in 2019, revenues roughly halved as the number of launches fell from 21 to 13 (of which 2 were unpaid Starlink launches). So before the staffing ramp up in early 2020, SpaceX had already been burning over $100M per month in cash, and so far in 2020 four of the six launches have been unpaid Starlink launches, resulting in even less revenue now coming in the door.

In early 2020, a key objective was to raise enough money to last until the end of the year, when SpaceX anticipated that it would receive considerable funding from the DoD (we heard rumors that up to $1B was being sought) and planned to obtain billions more from the FCC’s Rural Digital Opportunity Fund auction (which was expected to start in October and will offer up to $16B of funding over 10 years to service providers that commit to offer voice and broadband services to fixed locations in eligible unserved high-cost census blocks). Importantly, bidders are not required to actually provide service to any specific number of customers at all in order to receive the funding, but instead are expected to use the funding to subsidize their buildout and make it available. While this is a rational approach for a terrestrial network that can only make a return on the investment to the extent that it is then able to win customers within the coverage footprint that has been built out, it makes no sense whatsoever for a satellite system that covers all customers immediately but can then reallocate its capacity anywhere within the country or even the rest of the world.

SpaceX downplayed expectations in February as rumors began to spread about its funding round, telling CNBC on February 21 that it was raising $250M to buy back employees’ shares (an obvious attempt to boost its hiring efforts), while hoping to maintain the element of shock and awe, just as happened in May last year when it launched 60 satellites, a far higher number than anyone had expected. As markets began to teeter, SpaceX had to be content with telling CNBC on March 9 that the company had “authorized” $500M in new shares, but when the Form D was filed on March 13 it became clear that investors had contributed far less than expected, with only $221M contributed to date and the round listed as just $250M. That’s no more than two months of cash burn at SpaceX’s current rate of spend.

Elon Musk’s appearance at Satellite 2020 didn’t go well, and was notable mainly for his comments that “zero LEO constellations haven’t gone bankrupt” and that he “just wanted to be in the not bankrupt category”. His obsession with the problems in closing the SpaceX funding round was also very evident from the fact that he was still tweeting about the market correction when he should have already been on stage.

So it’s hardly surprising that we now see reports that the Commercial Spaceflight Federation is asking for a bailout for SpaceX and other member companies and that Musk has adopted a high risk approach of criticizing the coronavirus as exaggerated and insisting that SpaceX remain open and working at full speed. But what articles suggesting that Tesla has the cash to weather the storm miss is that Musk’s most critical near term cash problem is now at SpaceX not at Tesla.

It’s hard to imagine the company changing course and abandoning either Starship or Starlink, which means the enormous cash burn will continue. However, the recent equity valuation of $36B is now completely untenable (especially if OneWeb collapses, as has been rumored this week), although a several hundred million dollar secured loan might still be a feasible option to tide the company over for several months. Nevertheless, unless Musk is proved right about the coronavirus and the markets improve quickly enough that new funding becomes available to SpaceX relatively soon, or alternatively the US government offers to bail him out (either publicly or with off the books money from the DoD), SpaceX is currently heading on autopilot towards a concrete wall of bankruptcy.


Reality and hype in satellite constellations…

Posted in Broadband, Echostar, SpaceX, Spectrum, ViaSat, VSAT at 4:47 pm by timfarrar

I was surprised to see last month that generally well informed observers like Om Malik were taking seriously (and even describing as “astute”) a blog post by Casey Handmer that suggests Starlink is a “very big deal” that will “catalyze enormous positive change, bringing, for the first time, billions of humans into our future global cybernetic collective.”

In order to justify that level of hype, Handmer claims that each satellite will cost $100K (which could “fall to $20k by the thousandth unit off the line”) and generate $30M in revenue during its five year lifetime, delivering “the ocean of gold needed to philanthropically build a self-sustaining city on Mars”. The first half of this claim is excessively optimistic unless the capabilities of the satellite are dramatically scaled down, which is already known to be the case.

For example, Starlink has abandoned crosslinks, at least for now, and would require a fundamental change in design and deployment in order to accommodate them: placing fragile movable RF antennas (let alone laser payloads which was the original plan) on the corners of the satellites would mean changing the current stacking and non-propulsive deployment mechanism and potentially implicate other characteristics like the stabilization of the satellite bus, due to the need for extreme pointing accuracy (especially for laser crosslinks). And the cost of a single phased array antenna on the ground can exceed Handmer’s supposed $100K cost for the entire satellite, which may be another explanation for why the current satellites are apparently operating in a fixed beam configuration.

But my primary focus is on the second half of the claim with regard to revenue, which is far easier to validate against terrestrial broadband benchmarks. In order to get to his $30M per satellite figure, Handmer assumes that a satellite will generate 100 beams capable of supporting 100Mbytes per second (800Mbps), i.e. a peak capacity of 80Gbps per second, with a loading factor of 100 seconds per 90 minute orbit (i.e. 1.85%) in order to carry 1000 GBytes of data per orbit. This peak capacity is significantly in excess of the figures in SpaceX’s own November 2016 FCC filing (which states an average aggregate downlink capacity of 20Gbps), and that filing doesn’t account for any reduction in capacity resulting from SpaceX being required to share spectrum with other satellite systems such as OneWeb.

However, Handmer’s assumed loading factor could be slightly on the low side (thought certainly not “ludicrously low” as he alleges), if Starlink was able to provide services all around the world. For example, Iridium’s (never filled) capacity for its first generation of satellites was just under 4% of the nominal peak capacity per satellite (1100 calls per satellite x 66 satellites = 38.2 billion minutes, but the system only had 1.5 billion minutes of saleable capacity per year).

On the other hand, SpaceX is planning to ignore the ITU spectrum priority rules (claiming merely that Starlink needs to initiate rather than complete coordination with other systens), which give OneWeb priority access to the NGSO spectrum and may block Starlink from gaining market access in many countries. And the low altitude of Starlink’s satellites, combined with the lack of crosslinks, means that providing services to ships and planes crossing the oceans and poles is not a feasible objective in the foreseeable future.

Combining these two factors, it appears that Handmer’s 1000Gbytes of saleable capacity per orbit will in reality be more like 250-500Gbytes per orbit (i.e. 2-4 times less), based on a peak capacity of up to 20Gbps (downlink plus uplink) and a loading factor per orbit of 2%-4%.

But the more important assumption is that this capacity will be sold at “a subscriber cost of $1/GB”. That figure is ludicrously overstated compared to the cost of broadband today. For example the average usage of Altice customers was 220Gbytes per month back in Q2 2018, while Charter’s median broadband usage in Q1 2019 was 200Gbytes with cord cutters averaging 400Gbytes per month. If we take a typical retail ARPU of around $60 then the retail price is $0.15-$0.30 per Gbyte and with consumer Internet data usage projected to increase by 160% between 2018 and 2022 (according to Cisco) the retail price of data on existing fixed broadband connections will soon be below $0.10 per Gbyte. So Handmer has overestimated the retail revenue potential per satellite for Starlink by at least 20-40 times.

Another, even more critical consideration is that the underlying cost of data delivery over fixed networks is much, much lower than the retail price. Back in 2016, Dave Burstein noted that it cost ISPs less than 1 cent per Gbyte to deliver internet traffic, and that figure is undoubtedly lower today. That’s the more appropriate basis for comparison with the cost of delivery for Starlink (unlike Handmer’s ridiculous comparison with an obselete 14 year old submarine cable, when most domestic internet traffic doesn’t even need to go outside the US), which (using our 250-500Gbytes per orbit figure above) would have a satellite capex cost alone of 0.7-1.3 cents per Gbyte over 5 years.

Then you need to add the cost of the ground segment and backhaul (certainly at least as high as the satellite capex), and most importantly, the cost of the user equipment, which will be much higher than the (less than $100) cost of a terrestrial cable modem and will far outweigh the cost of the satellites themselves. As CNN notes, “ground equipment may pose one of the biggest obstacles to success” and was probably the main reason why previous efforts like Teledesic folded.

Viasat spends $700 to acquire each satellite broadband customer of which roughly $300 is the end user equipment and installation adds another $150. But those are fixed dishes which do not need to track the satellites as they move across the sky. A Starlink terminal could easily cost $1000 or more, even with various compromises to reduce cost (such as narrowing the scan angle, though that will require a very large number of satellites, potentially several thousand, to be in orbit), before adding the cost of rooftop installation, let alone customer acquisition. And if each customer consumes say 500 Gbytes per month, then that will mean 250-500 terminals will need to be deployed to consume each satellite’s saleable capacity, implying incremental terminal costs of at least $250K-$500K per satellite (at $1000 per terminal).

To sum up, Handmer’s assessment that the satellites will generate revenue equal to 300 times their costs is fatally flawed. Even looking purely at retail revenues, then the revenues will be 20-40 times lower than he estimates, while the total system capex costs will be 4.5 to 7 times higher than he estimates (including ground segment costs of $100K per satellite and terminal costs of $250K-$500K per satellite). In the best case (and with unlimited demand!) that means retail revenues will be just over 3 times the capital costs, while in the worst case the retail revenues will only just cover the capital costs, ignoring ongoing operations, service and support.

When looking at the underlying costs of data delivery, it is also clear that Starlink’s costs will be meaningfully higher than the cost of terrestrial data delivery in areas with access to broadband, giving terrestrial rivals plenty of room to compete to retain their existing customer base (and ensuring that additional cost sensitive markets like cellular backhaul will remain out of reach).

So my conclusion is that while Starlink may be a “big deal” for the satellite industry (and for astronomers), it certainly isn’t a big deal for the terrestrial broadband market. In essence, under any plausible set of cost assumptions, Starlink’s bandwidth will cost more than current terrestrial broadband connections, and Starlink’s ability to disrupt a retail market where existing providers have existing infrastructure with enormous gross margins will be very limited. That’s nothing like Handmer’s nonsensical claims that “further launches will be funded entirely by providing better service to high density cities”.

Starlink may provide service for customers with no access to terrestrial broadband alternatives, but the satellite broadband market has fewer than 2M subscribers in North America and 1M users in the rest of the world combined, which Viasat, Echostar and others have spent the last decade trying to serve (and at least in North America have essentially saturated the market). So it seems unlikely that Starlink will do much better.


Picking up the C-band pieces…

Posted in AT&T, Financials, Intelsat, Operators, Regulatory, SES, Spectrum, Verizon at 2:13 pm by timfarrar

It looks like the CBA’s offer today to make a (not particularly generous) defined contribution to the US Treasury may have come too late to rescue a private auction, with reports that FCC Chairman Pai will shortly lay out a plan for a public auction of the C-band spectrum. That comes after what I’m told was a call to Chairman Pai from President Trump, at the instigation of Sen. Kennedy, who has used increasingly heated rhetoric to demand a public auction in recent weeks.

The irony of that action will not be lost on those who remember Pai’s statement in March 2016 on the prior Commission’s net neutrality decision that “Moving forward, the Commission must recommit itself to being a truly independent agency that makes decisions based on the facts and the law, not on the whims of any White House.”

UPDATE (11/18): Chairman Pai has now announced that the FCC will conduct a public auction before the end of 2020. However, the FCC has also stated that the President “did not express an opinion” in his call to Chairman Pai, and it is “categorically false” that Trump drove the decision on a public auction. A bill to mandate a public auction, with at least 50% of the proceeds going to the Treasury, has also been introduced in the Senate, although it is unclear if it will be taken up expeditiously.

A great backgrounder on the issues involved was laid out by Harold Feld on Wednesday, where he points out that a major issue is that Congressional rules do not permit a “voluntary contribution” to be spent by Congress, unlike the proceeds from an FCC run auction. Moreover, Congress can spend whatever the CBO estimates the proceeds will be, and a ludicrously optimistic $50B-$60B figure is being widely banded about.

As Harold also points out, the FCC does have authority to repurpose the C-band spectrum in the public interest by only paying transition costs to the parties involved. However, he doesn’t note that in recent years Republican policy wonks such as Tom Hazlett have been encouraging private transactions to repurpose spectrum for its “highest and best use”, arguing (correctly) that FCC intervention has often directed spectrum to politically connected players rather than serving the public interest.

What the FCC does not have is authority to share the proceeds of a public auction with the satellite operators, unless it can contort the incentive auction statute (which requires at least two competing bidders) to fit this situation. However, if the FCC cannot share the proceeds with the satellite operators then not only will there be prolonged litigation, but the satellite industry may be plunged into even more of an existential crisis than it already faces from declining revenues and the loss of customers to terrestrial alternatives. Moreover, there will be no incentive for satellite operators to move swiftly to make the spectrum available for terrestrial use within the next three years.

As a result, there is a clear imperative for satellite operators to receive a meaningful proportion of the proceeds, which was recognized by the proposed Matsui bill earlier this summer. That bill would have allowed the satellite operators to keep 75% of the net proceeds if they had cleared 300MHz, as is now on the table (the current CBA offer is less generous to the government, despite specifying a minimum 30% voluntary contribution, because that contribution is “inclusive of all Federal income tax liabilities incurred by the CBA member companies as a direct result of the auction”). However, it is unclear whether any such legislation will be able to pass into law in the current fevered political climate, especially when Sen. Kennedy has railed against giving away “$60 billion that belongs to the people of America to two companies in Luxembourg and one other one in Canada”.

What options does that leave the FCC with? Well the most obvious possibility might be for the FCC to return to the original concept, before the October 2017 offer from Intelsat and Intel, and conduct a public overlay auction for spectrum rights in 300MHz of the C-band before the end of 2020. If the CBA can come up with a agreed, concrete price and timetable for clearing the spectrum for the benefit of the overlay rights holders, set at a level that is acceptable to the cellular operators, then the FCC can claim to have complied with the Congressional (and Presidential) demands to conduct a public auction, without needing new legislation or to work around the language of the incentive auction statute. Of course the public auction would then raise a much more limited amount of money, assuming the CBA is going to receive many billions of dollars for moving out of the spectrum and giving up its rights to this part of the band.

However, it is unclear whether the CBA is capable of agreeing to a specific clearing price in the short time remaining before Chairman Pai has to decide how to move forward. One of the biggest problems in this whole process has been how long it took to come up with a concrete commitment to clear 300MHz and now to publish a specific revenue share for the government. Of course the CBA has been worried that by publishing specific figures it would be bidding against itself. But by allowing the process the drag on for so long, it became possible for Sen. Kennedy and others to consolidate their opposition to a private sale.

Now that Eutelsat is on the sidelines (and has its own interests in worsening Intelsat’s financial position), it may be even more difficult to reach agreement. Investors’ unreasonable expectations about the price that could be realized in an auction, represent another barrier to agreeing a fixed clearing price with AT&T and Verizon. With 280MHz on offer, it is very hard to see how demand could significantly exceed supply, which would be needed for auction prices to rise to $50B or $60B. Verizon and AT&T are unlikely to spend more than $10B each to buy 100MHz per operator, and T-Mobile will not need to participate in a major way if its merger with Sprint goes through. Beyond that there are very few companies who will want to pay billions of dollars for C-band spectrum, because it makes little sense to start in that band as a potential new entrant. So I struggle to see the gross total raised from a C-band spectrum sale getting to more than $30B (~$0.30/MHzPOP).

More importantly, a fixed clearing price certainly could not exceed the amount AT&T and Verizon are collectively prepared to pay for their share of the spectrum (i.e. $20B), since they would be instrumental in negotiating that figure. More likely, AT&T and Verizon would be unwilling to agree to a clearing price above about $15B (if not less), leaving net proceeds after ~$3B of actual costs at roughly $5B each for Intelsat and SES. Compared to where we stood two years ago, when no value was attached to C-band spectrum, that seems like a pretty stunning achievement. But at this point in time, after two years of declines in the core satellite business, it would be unlikely to make Intelsat shareholders happy.

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