An interesting debate has ensued about whether the cost of inflight connectivity services will increase if airlines can provide service from gate to gate rather than being restricted to operating above 10,000ft. Obviously on a short flight the extra time might be quite substantial as a proportion of the total flight length, although even if the increased availability is as much as 30%-75% more time (which I think is a little on the high side), the increase in data consumption per user will be far lower, because:
a) longer flights see much greater usage (especially when its paid-for) – the figure quoted by Delta was that take rates for Gogo service were 4 times higher on flights of more than 1500 miles, and
b) laptops consume a lot more data than tablets and phones, and laptops will not be able to be used during take off and landing (because they are too heavy to be safe in the event of an incident).
As a ballpark number, I’d suggest the actual increase in bandwidth consumption per paying passenger might be at most 10%-15% for Row44, given its exposure to Southwest, and much less for Panasonic and Gogo’s Ku-band service, given their different mix of customers. Note that total bandwidth consumption might increase more, because increased availability will stimulate higher take-up, but that’s a good problem to have, because more customers means more revenues as well.
I was quoted in the article offering a cost estimate of “10-20 cents per Mbyte” for traditional Ku-band services (while LiveTV’s Ka-band service will be “single digit cents” – that statement was not referring to GX). I’ve received considerable pushback from one Ku provider that my cost estimate for Ku is far too high and that the number for LiveTV/ViaSat’s Ka-band service is far too low.
I’d note that the retail rate for ViaSat’s consumer broadband service is $5-$7 per Gbyte (i.e. 0.5 to 0.7 cents per Mbyte), so it hardly seems implausible that the number for mobility services (which have a less efficient antenna and bandwidth utilization) would be a few cents. Last time I saw it, LiveTV’s customer pitch said 3 cents.
In terms of Ku-band, I derived my estimate from the cost of Ku-band transponders and the average likely utilization. Row44′s average cost of buying capacity from Hughes is about $2M p.a. for a 36MHz transponder, although that figure might be a bit lower for Panasonic and Gogo when they buy direct from a satellite operator (though there are teleport and backhaul costs to add onto raw transponder lease costs). Then you need to consider the number of bits you get from each Hz of satellite capacity. I assumed around 0.75 bits/Hz for a relatively small aero antenna, though that could go up if you have a very asymmetric usage profile (the aero antenna is far less efficient on the uplink than the downlink) and will certainly improve for High Throughput Satellites which offer a more powerful signal in their small spot beams. Then you look at the peak to average ratio – i.e. how much capacity you need for peak traffic. I assumed usage for around 10 hours per day and 5 days a week, due to the concentration of flights at peak times, the focus on business travelers and the lack of usage on overnight flights, giving a peak to average ratio of 3.36:1 (24/10*7/5). Providers might squash that peak a bit, but only at the cost of increased customer dissatisfaction when their service slows to a crawl (not an infrequent occurrence, implying providers probably do that at the moment).
That means that the underlying cost of capacity, if you had perfectly efficient capacity purchases, is around 6.3 cents. However, to provide global coverage, you need to lease a lot of transponders you don’t use very efficiently, especially at the moment when there are only a few aircraft flying on numerous different long haul routes. At best the efficiency (i.e. usage of purchased capacity) is likely to be no more than 50% today, though perhaps that will get a bit better in the future. So if you’re a provider, you could offer a reasonable service at cost to an airline at around 12.6 cents a Mbyte. And if you actually want to make a profit, then you ought to charge something closer to 20 cents per Mbyte.
Of course that’s not what providers do charge right now: Row44′s service revenues are only about half what it pays for capacity, and I doubt Panasonic’s revenue to capacity cost ratio is much better. So put another way, Row44 is probably getting paid about half of its per Mbyte cost (estimated as 12.6 cents per Mbyte above) or 6 cents per Mbyte, rather than the 20 cents it needs to have a decent business. Does that mean my 10-20 cent estimate is wrong? I think it really means that the current business plan is unsustainable.
In my view the announcement of a partnership between Orbcomm and Inmarsat on Monday evening may represent a sea change for the MSS industry, as Orbcomm showed how its planned “multi-network operator strategy” could eventually lead to it getting out of the business of operating its own satellite fleet, allowing Orbcomm to be what it wants to be: a solutions provider rather than a satellite operator.
In the short term the deal means that Orbcomm will invest in developing a new low cost Inmarsat ISatDataPro (IDP) module, costing around $100 (i.e. aiming to be less expensive than Iridium’s SBD module) which OEMs and VARs can choose to drop into their terminals as a direct alternative to Orbcomm’s own OG2 module, using a common management interface provisioned by Orbcomm.
The choice of module will be up to the OEM, and will depend on their data needs (IDP has higher capacity and less latency, because there will sometimes be several minute gaps in coverage between the 17 OG2 satellites), the geographies they will serve (Inmarsat will provide access to Russia and China) and the price they are willing to pay (IDP service will be more expensive than the current Orbcomm $5-$6 OEM ARPUs). Note that this is somewhat different than Orbcomm’s arrangement with Globalstar, under which Orbcomm’s Solutions business offers a Globalstar tag to retail customers (and existing Comtech VARs), but Globalstar will not be a direct alternative for Orbcomm’s OEM customers (who buy from Orbcomm’s Devices and Products business).
In the longer term it seems to me that (although this is not part of the current agreement with Inmarsat) Orbcomm will very likely not build a third generation of LEO VHF satellites, as the nature of their network (where the LEO satellites search actively for channels that are free of interference as they orbit the Earth) would be very difficult to consolidate onto an Inmarsat GEO platform. Because Orbcomm will have access to Inmarsat capacity on an I6 constellation which will last into the 2030s, eventually (in a decade or more) Orbcomm could instead migrate its customer base onto Inmarsat’s L-band services, so that it will not have to spend hundreds of millions of dollars on another round of fleet replenishment. In fact, if Orbcomm has any substantial launch problems with OG2 (remember that the satellites from its last two launches have been lost) it might not even make sense to reinvest the insurance proceeds in replacement satellites and conceivably such a migration could take place more quickly.
The significance of this announcement is that it appears to represent the first step towards a reduction in the amount of capex being invested in the rather slow growing MSS market. The next question will be whether, when Inmarsat orders its I6 L-band satellites (likely in late 2014 or early 2015), it opts for a copy (or even a simpler version) of the I4 constellation, and thus whether, as I suggested last year, we really have now reached the “end of history” in the MSS L-band industry. After all, with the sale of the Stratos energy business to RigNet (and a likely disposal of Segovia), Inmarsat is now backing away from its strategy of going direct, and is continuing to focus on maritime price rises to boost revenues, in accordance with the other part of my “end of history” thesis.
So, as many expected, Globalstar’s NPRM finally emerged from the FCC tonight, before the new Chairman, Tom Wheeler, is sworn in on Monday. It appears that Wheeler has had a strong influence on the rather subdued language in this NPRM, which takes a much more equivocal stance than similar NPRMs (and has even been toned down compared to previous drafts, or so I’m led to believe).
As the language perhaps reflects Wheeler’s more cautious stance compared to former Chairman Genachowski’s “full speed ahead” approach, it is hard to predict what this will mean for Globalstar’s potential approval process. However, it is clear that it will take some time, because the FCC is seeking detailed technical studies from commenting parties, and has set a relatively long comment deadline of 75 days after publication in the Federal Register (i.e. January or February 2014).
Nevertheless, it is instructive to compare the language to DISH’s AWS-4 NPRM in March 2012, especially as that is the model that Globalstar sought in its petition, which stated that “the Commission’s rulemaking proposal on terrestrial use of Big LEO spectrum should incorporate a number of the basic reforms proposed by the Commission in the 2 GHz NPRM”. As a starting point, the DISH NPRM set a comment period of 30 days after publication, but more notable is how definitive the DISH NPRM was about its intentions:
DISH: “In this Notice of Proposed Rulemaking, we propose to increase the Nation’s supply of spectrum for mobile broadband by removing unnecessary barriers to flexible use of spectrum currently assigned to the Mobile Satellite Service (MSS) in the 2 GHz band”
Globalstar: “By this Notice of Proposed Rulemaking (Notice), the Commission proposes modified rules for the operation of the Ancillary Terrestrial Component (ATC) of the single Mobile-Satellite Service (MSS) system operating in the Big LEO S band”
DISH: “With this proceeding we intend to fulfill the Commission’s previously stated plan to create a solid and lasting foundation for the provision of terrestrial services in 40 megahertz of spectrum in the 2 GHz band”
Globalstar: “For all the reasons stated herein, we believe that Globalstar’s proposal to deploy broadband access equipment should be further examined and a record developed to determine whether this proposal has the potential to enable more efficient use of Globalstar’s S-band spectrum and spectrum in the adjacent band. This action could potentially increase the amount of spectrum available for broadband access in the United States”
DISH: “According to Cisco Systems, North American mobile Internet traffic more than doubled in 2011 and is expected to grow over 15-fold in the next five years. This explosive growth is creating an urgent need for more network capacity and, in turn, for suitable spectrum”
Globalstar: “The rapid adoption of smartphones and tablet computers, combined with deployment of high-speed 3G and 4G technologies, is driving more intensive use of mobile networks. According to Cisco Systems, global mobile Internet traffic is expected to grow over 13-fold from 2012 to 2017″
DISH: “In this Notice of Proposed Rulemaking (AWS-4 Notice), we build on the Commission’s recent actions to enable the provision of terrestrial mobile broadband service in up to 40 megahertz of spectrum in the 2000-2020 MHz and 2180-2200 MHz spectrum bands. We propose terrestrial service rules for these spectrum bands that would generally follow the Commission’s Part 27 rules, modified as necessary to account for issues unique to the 2000-2020 MHz and 2180-2200 MHz spectrum bands. Given the proximity of these spectrum bands to spectrum bands previously identified as AWS, in our proposal we refer to these spectrum bands as “AWS-4″ or “AWS-4 spectrum”
Globalstar: “We believe that Globalstar’s proposal to deploy a low-power terrestrial system in the 2473-2495 MHz band should be examined to determine whether it is possible to increase the use of this spectrum terrestrially in the near term, without causing harmful interference to users of this band and adjacent bands, and without compromising Globalstar’s ability to provide substantial service to the public under its existing MSS authorization. If supported by the record, this action could potentially increase the usefulness for terrestrial mobile broadband purposes of 11.5 megahertz of licensed spectrum. As a result, these changes may induce increased investment and innovation throughout the industry and ultimately improve competition and consumer choice. Therefore, we propose to make the changes to Part 25 of the rules necessary to provide for the operation of low-power ATC in the licensed MSS spectrum in the 2483.5-2495 MHz band”
(note that Globalstar also sought to operate under Part 27, which the Commission rejected, and I’m told that an earlier draft of the NPRM also contained a proposed new name for this band, although not the “AWS-5″ designation that Globalstar had sought)
As far as the specifics of the NPRM proposal goes, it appears that the FCC has gone along with Globalstar’s requested TLPS power and OOBE levels, while highlighting that “significant concerns have been raised about potential detrimental impact on unlicensed devices, such as Bluetooth, that are currently used extensively for various wireless broadband services and applications”. However, there are a number of lurking issues, such as the process to be used for approving any changes to devices to use the new service (which will fall under Part 25 so would normally require a new FCC ID to be granted for an existing Part 15 device operating in the WiFi band).
In addition, proposed use of Part 25 along with a simple modification to the existing ATC rules to require TLPS to be permitted (so long as Globalstar can “demonstrate the commercial availability of MSS, without regard to coverage requirements”), could make it harder to get LTE approval in the future, especially in the L-band, where the FCC warned Globalstar that “Should we find it to be appropriate, the Commission reserves the right to consolidate this proceeding with any proceeding addressing Globalstar’s L-band proposal and Iridium’s petition for rulemaking” (creating a risk that some L-band spectrum could be reallocated to Iridium if Globalstar pushes for LTE authorization: the FCC quietly issued a public notice seeking comment on Iridium’s petition for reallocation of L-band spectrum on Friday as well).
So now the question is whether Wheeler will be prepared to work through these issues, face down the interference concerns and push through a final order approving TLPS, or if he will instead prioritize the 3.5GHz band, where a public notice was also issued today (with a much shorter comment cycle), seeking further comment on how “Priority Access” licenses (which as I’ve remarked before could be somewhat similar to TLPS) might be allocated for exclusive use.
UPDATE (11/3): Globalstar’s press release noted that the release of the NPRM “represents a seminal development and yet another step forward in Globalstar’s renaissance”. However, unlike in September, when the NPRM was circulated, its notable that the company didn’t say that it was “very pleased” with the FCC’s action. Globalstar’s comment that “We look forward to receiving the public’s comments and working towards a final order over the next several months” is also a curious description of a process where reply comments won’t even be received for 3.5 months after publication of the NPRM in the Federal Register.
I won’t belabor the errors of physics in the movie, instead just noting that even though you might think that in space things can keep going in a straight line indefinitely, they are still subject to gravity and you can’t get to a higher orbit without some form of propulsion.
We’ve now seen confirmation from Iridium of what I pointed out last week, that Q3 was very bad for the MSS industry. Iridium missed its expectations for equipment revenues (i.e. handset sales) and subscriber growth (i.e. M2M net adds), although at least the government contract renewal is more favorable than expected – the unlimited nature of the contract removes the incentive for the DoD to scrub its user base to remove unused handsets, which has been a headwind for Iridium in the last couple of years.
Its far from clear that anyone else is doing better: it looks like Iridium’s competitors also saw pretty poor handset sales in Q3 and the SPOT 3 has been very slow to arrive in stores as well. Moreover, the government business is dire – Intelsat’s profit warning (which included its off-net business reselling MSS) is a bad sign for Inmarsat, as are the large scale layoffs in Astrium’s government business last week.
Inmarsat has now followed up its promise not to raise FleetBB prices in 2014 with an enormous 48% rise in maritime E&E prices from January, in an attempt to sustain maritime revenue growth next year. While the stated intention is to persuade the remaining pay as you go customers to move off the E&E network and choose FleetBB instead, the vast majority of higher spending B and Fleet customers have already migrated and many of the remaining users are mini-M voice-only users or really want the PAYG service because they are only occasional users, so FleetBB is not necessarily the ideal option.
Inmarsat is clearly calculating that these customers won’t want to risk moving to Iridium after the OpenPort problems earlier this year and has stepped up its efforts to portray Iridium’s network as “failing”. Despite all this, no-one believes that Inmarsat could possibly achieve its 8%-12% revenue growth target for 2014 and I expect this to be “softened” in the near future as well. Inmarsat is also likely to emphasize its opportunities for internal cost savings next year and move to dispose of some retail business units like Segovia.
Its interesting to speculate about implications for the wider satellite industry as well. Last time around (in 1999-2003), problems in the MSS industry were a harbinger of a downturn in the FSS industry a couple of years later. That came in the wake of a peak in satellite orders in the 1999-2001 timeframe and after the launch of these satellites, which resulted in a sharp decline in prices, the FSS industry took a big hit. We’ve seen a similar peak in orders in recent years (2009-10), and while the major operators are much more likely to retain pricing discipline (in a far more consolidated industry than a decade ago), the advent of High Throughput Satellites, especially those owned by smaller players like Avanti (who might become the most desperate for contracts), could pressure prices in certain market segments and geographies.
Just as an example, in recent years, underlying transponder demand has grown at roughly 4% p.a., but revenues have been boosted by around 2% p.a. by price rises. Even if demand growth continues (not a foregone conclusion in some sectors like government where WGS is an alternative), a reversal of the pricing trend would certainly make a big difference to the FSS revenue outlook. As I said at the beginning of this post, gravity clearly exerts a force, even in space.
As others have noted, in order to get a 700MHz interoperability deal, which will largely benefit Verizon and AT&T (as AT&T are now the only plausible national user of the A block spectrum and are likely to acquire both Verizon and Leap’s spectrum holdings in this band), DISH has secured a pretty good deal in Washington from interim FCC Chairman Clyburn: in exchange for DISH agreeing to low power use of the 700MHz E block (and bidding $0.50 per MHzPOP in the H block auction), DISH appears set to obtain an option to reband its AWS-4 uplinks to downlinks and an extension of the AWS-4 buildout milestones.
UPDATE (11/13): T-Mobile is raising $2B for spectrum purchases and is now rumored to be contemplating a bid for Verizon’s 700MHz A block spectrum. This would only give T-Mobile a 5x5MHz LTE network, which would not add much capacity in urban areas, but if T-Mobile is seeking to improve its rural coverage then it would have to buy other A block licenses as well.
This gives DISH a significant advantage both in the upcoming LightSquared bankruptcy auction, where no-one really expects any alternative bidder to emerge for the L-band spectrum, because the FCC has all but guaranteed it will not propose the so-called spectrum “swap” that LightSquared has asked for: it’s understood that Ergen will simply drop the request when he buys LightSquared’s satellite assets, so there is no point in the FCC annoying those in Congress who would want to see the 1675-80MHz spectrum band auctioned instead.
More importantly, if DISH is given an option but not an obligation to reband the AWS-4 uplinks (DISH has asked for 30 months to decide, but I would expect the FCC to only allow 12-18 months at most), then it also has a huge advantage in the H-block auction, because if Sprint were to win the spectrum then DISH could hold up standardization of the band (and delay any ability for Sprint to use the H block to relieve capacity constraints in its PCS G block LTE network). After years of experience in being held hostage by Ergen, its therefore hardly surprising that the smart move for Sprint will be to let DISH have the H block at the reserve price. That will force DISH to drive the standardization efforts, and potentially even allow Sprint to put roadblocks in DISH’s way instead of vice versa.
UPDATE (11/13): Both T-Mobile and Sprint have now ruled out bidding for the H-block spectrum. So it seems that both have made the smart move by leaving Ergen to contemplate what to do with ~80MHz of spectrum and no partners.
Moreover, it will establish a low benchmark price for the rest of DISH’s spectrum holdings, well below the $1.00 per MHzPOP that many analysts have been touting recently, and Ergen will then have doubled his bets on spectrum to roughly $8B, when taking into account both the LightSquared and H-block spectrum, without any clear route to monetization. With AT&T focused on European expansion and Verizon encumbered by the debt from buying out Vodafone’s stake, Sprint could then hope to hold the whiphand in any partnership negotiations with DISH.
Indeed next year’s auctions of 70MHz of additional spectrum (AWS-3, 1695-1710MHz and J block) may further impact perceptions of spectrum value: a $0.50 per MHzPOP valuation will again be ample to cover the costs of clearance plus the $7B needed to fund FirstNet. That is the FCC’s key objective in the upcoming spectrum auctions, so it can limit AT&T and Verizon’s participation in the 2015 broadcast TV incentive auction and ensure that Sprint and T-Mobile gain sufficient low frequency spectrum to preserve a four player market after the next presidential election. Once no net revenues need to be raised from the incentive auction, then it won’t matter if AT&T and Verizon refuse to participate, as that would simply keep the price low for Sprint and T-Mobile (or ensure that not as much broadcast spectrum is cleared).
However, rather than negotiating with Sprint on their terms, I expect that Ergen will instead pursue a merger with DirecTV, as an alternative to any wireless partnership, and I still expect a commitment to build out a fixed wireless broadband network with rural coverage to be key to getting regulatory approval for such a deal. Nevertheless, if DirecTV doesn’t put as much value on DISH’s spectrum holdings as Ergen does, it may be difficult to reach agreement on the respective value of the two companies. As a result, while Ergen builds his tower of spectrum cards ever higher, it will be interesting to see whether investors stay confident that he can ultimately create substantial value from these holdings.
Incredible…it’s even worse than I thought
That’s been the reaction to my 57 page Globalstar profile, released on Friday (you can see the contents list here and get an order form here), because of the history of challenges that the MSS industry has faced in the past and more particularly the difficulties that the industry is seeing this year.
After discussions with a number of people in the industry over the last few weeks, it looks like Q3 has been pretty disastrous for MSS sales across the board, with none of the usual surge in demand expected in the summer months, as customers stock up to prepare for outdoor adventures or potential hurricanes. Part of that relates to slow government orders, as a result of the sequester (predating the current shutdown), but commercial demand has also been poor, and that’s much harder to explain.
In the handheld segment, one suggestion is that Hurricane Sandy proved that terrestrial cellphone networks are now considerably more reliable during disasters (and far more data capable than MSS phones), so companies are no longer giving as high a priority to MSS equipment in their disaster planning. In the M2M segment, a fairly convincing explanation is that service providers who formerly specialized in MSS are now focusing more and more on selling cellular-based solutions to customers who find they don’t need MSS as a backup.
As a result, I’m now convinced that subscriber growth (and equipment sales) will fall short of expectations this year, particularly in the handheld and M2M segments, for almost all of the major MSS players, with knock-on effects for subscriber revenues in Q4 and more particularly next year. The defense business also looks poor (as shown by Intelsat’s recent profit warning): the word on the street is that Inmarsat may dispose of its Segovia government FSS business, as revenues in Inmarsat’s US Government business unit fell by 11% year-on-year in the first half of 2013 and appear to have eroded further in recent months, particularly in Segovia’s VSAT business. The sale price would be a fraction of what Inmarsat paid for Segovia, but in exchange Inmarsat would hope to secure a GX airtime contract, similar to its RigNet deal in the energy sector.
In the case of Globalstar, the implications of the MSS downturn are that while Globalstar should be able to meet the new bank case revenue forecasts, it won’t be easy to beat them. However, unlike some other players, Globalstar is fortunate in having the potential upside from monetizing its spectrum, if it can complete a deal with Amazon or another company. The report looks at spectrum valuation for both LTE and TLPS and concludes that there could be substantial value for Globalstar, although realizing this will require both rapid approval from the FCC and for a deal to be struck fairly quickly, before new spectrum bands such as 3550-3650MHz develop an alternative ecosystem at what will likely be much lower prices. If you are interested in getting a copy, please contact me for more details.
Tomorrow’s hearing in the LightSquared bankruptcy case was supposed to be the showdown at which the judge would decide between LightSquared’s own proposed bidding procedures (which attempt to reject Ergen’s $2.2B bid for the company) and the alternative bidding procedures which have now been proposed jointly by the LP and Inc secured creditors (and would accept Ergen’s stalking horse bid). However, LightSquared has appointed an independent committee of its directors (including a new member, Donna Alderman, who fought with DISH over the resolution to the DBSD case) and this committee (whose independence is disputed by the LP creditors) has requested that the hearing be delayed until September 30.
Of course, no-one is taking seriously the alternative plan proposed by Harbinger, which would simply keep the existing debt in place (converting it to PIK interest) and allow Harbinger to stay in charge, but LightSquared’s plan would allow it to deem a non-cash bid, contingent on FCC approval, superior to DISH’s cash bid, which could potentially further delay a resolution of the case. In contrast, under the secured creditors plan, any competing bid must be non-conditional on FCC approval, making it hard to see how any strategic buyer could emerge – although since potential bidders have already had two months to make an offer, and none have done so, it is likely that no-one else other than Ergen is actually interested.
LightSquared spent last week groveling to the FCC, suggesting that “The current stalking horse bid might be the only one submitted, if the FCC does not make its decisions quickly, because the company’s assets cannot be fully valued until the Commission acts on the pending modification applications.” However, the FCC’s recent grand bargain with DISH and AT&T over the 700MHz A and E blocks, AWS-4 downlinks, and the PCS H block auction makes it pretty clear that the FCC would prefer DISH as a buyer of the LightSquared assets, so that just the L-band uplinks would be used, rather than Harbinger getting a spectrum “swap” (which in reality would represent another windfall and lead to more criticism in Congress).
Given Phil’s troubles with the SEC, its hardly surprising that Chairman Mignon Clyburn would now choose DISH over Harbinger. That’s in contrast to my post last year asking if Phil was finally right about something with his comment that “Everyone knows Ergen is not going to build out a network. No one trusts him, including the FCC. They are not going to put their eggs in that basket because they know he will make them look foolish” (which prompted this response).
Harbinger’s attempt last month to sue the GPS industry for $1.9B also appears to have backfired, with LightSquared creditors pointing out that Harbinger was violating the bankruptcy exclusivity order by asserting claims of the estate. Moreover, this action, coming immediately after the FCC put LightSquared’s request for uplink approval on public notice, appeared likely to delay rather than expedite any regulatory approval from the FCC. Not only has Phil therefore caused further angst in the bankruptcy case, but I’m told that he is also struggling to find a credible plaintiffs firm to take the lawsuit forward, while the GPS industry have hired Boies Schiller to fight their side of the case. So perhaps now is the time to ask if Phil can get anything right?
Why didn’t Phil think of this first?
With MSS revenues in a bit of a funk this year, its not surprising that MSS operators are pursuing opportunities to attract consumers and expand the voice market outside the traditional verticals. We saw this first of all with Thuraya’s SatSleeve, announced at the Satellite 2013 conference in March. The SatSleeve connects via Bluetooth (and in the latest version WiFi) to an iPhone allowing the customer to use their iPhone contacts and touch screen interface. However, a key limitation is the need for compatibility of the sleeve with a particular phone form factor, and Thuraya has just launched a new version of the SatSleeve compatible with the slightly larger iPhone 5 handset rather than the original iPhone 4.
One way to overcome this handset compatibility issue is to use an external puck-like device, similar to a SPOT Connect or DeLorme inReach product, but offering voice and data capability in addition to simple messaging. This concept has been around for many years, and indeed was part of Craig McCaw’s new business plan when he bought ICO out of bankruptcy back in 2000: ICO told the FCC in its original ATC application in March 2001 that
“The use of already-permitted wireless technology such as Bluetooth or IEEE 802.11 could allow a whole range of consumer devices – standard terrestrial phones, PDAs, or laptop computers – to communicate with a satellite transceiver that houses the antennas, amplifiers, and other electronics unique and specific to the satellite link”.
Subscribers to my MSS research service heard 6 weeks ago about Iridium’s new handheld product, scheduled for launch at the end of the year, which is apparently exactly this puck-like device. It will be positioned to compete at the low end of the handheld market with a broadly comparable price to Thuraya’s SatSleeve (which was originally announced at $499 but is now selling for $599 to $799) and the Inmarsat and Globalstar handheld phones. I’m now told that Inmarsat is working on a similar device for release towards the end of next year, and meanwhile Globalstar has announced that it is “aiming to bring a $100 satellite device to market in 18 months time…to enter into a totally different market”.
I understand that Globalstar’s new device is likely to be the long-awaited two-way SPOT product, and may not be voice-capable like Iridium and Inmarsat’s new devices. It remains unclear whether the form factor will be a smartphone-connected puck (like SPOT Connect) or a standalone device: certainly the standalone device has sold much better for Globalstar to date, but equally well this might make it harder to expand beyond the current market of techie-focused backpackers and outdoorsy people (the vast majority of SPOT users are like me: 40-something relatively high income males with an interest in technology). Given the 18 month timetable stated by Globalstar, its also unclear whether this would be based on the new Hughes chipset or the current SPOT uplink plus a similar downlink channel, as the second generation ground segment upgrades are supposed to take about two more years to complete.
As Globalstar moves to raise its profile with investors, it seems the next stage will be a new round of fundraising (Globalstar noted in its 2013Q2 10-Q that “In June 2013, the Company entered into an agreement with Ericsson which deferred to September 1, 2013 or the close of a financing approximately $2.4 million in milestone payments scheduled under the contract”), presumably helping to reduce some of Thermo’s $85M backstop commitment (of which $40M had been provided by the end of July and $4.4M had been offset by receipts from termination of the 2009 share lending agreement). Indeed, it would be plausible for fundraising to go beyond this ~$35M level given the rise in Globalstar’s share price in the expectation of a positive outcome from the FCC, though it appears unlikely Globalstar will order more satellites anytime soon, given that the legal disputes with Thales are apparently still ongoing (Thales has “alleged that Thermo had failed to pay Thales $12,500,000 by December 31, 2012 as required by the Settlement Agreement“).
It seems Globalstar is highly confident that its NPRM will be issued by the time Chairman Clyburn leaves office, so it would be reasonable to suspect that this new financing is intended to take place in the next month or so, helping to cover payments of $20M+ due to Hughes between August 2013 and January 2014). Last week’s grand bargain over the 700MHz A&E blocks, DISH’s AWS-4 downlink waiver request and the H block auction, certainly indicates that I was too pessimistic in believing that Clyburn didn’t want to address spectrum issues and would leave these for Wheeler, and it would therefore now not be in the least bit surprising to see the Globalstar NPRM released at or around the time of the September FCC Open Meeting (when Clyburn will have what might be the last chance to trumpet her accomplishments as Chairman). Clyburn also appears less likely than Wheeler to pursue the “harm claim threshold” approach favored by the FCC’s TAC, which is good news for Globalstar in terms of how long it would take to issue an FCC order, although given that the FCC highlighted the speed with which it had moved to complete the DISH ruling last December (within 9 months of issuing the NPRM), it is still hard to imagine a final ruling on TLPS before early summer 2014.
So the key issues for Globalstar are likely to be how successfully it can build up its MSS business (note that the revenue projections given for the bank case in the new COFACE agreement generate just enough cash to cover debt, interest and capex payments through 2022 but little else) and more importantly whether Globalstar can find a partner to exploit its spectrum assets. We know about Amazon, but will there be other interest either from the cellular industry or (perhaps more plausibly) from non-traditional players? What are the best comparisons for spectrum valuation for TLPS and/or LTE authorization? I’ll be publishing my updated profile of Globalstar shortly and all of these issues will be discussed along with my revenue projections for the MSS business.
DISH’s submission to the FCC earlier this week, offering concessions on 700MHz E block power limits (thereby securing support from AT&T), and the prospects of a bid of up to $0.50/MHzPOP ($1.5B) for the PCS H block, in exchange for the option to use the 2000-2020MHz AWS-4 uplink band for downlink operation, confirms that DISH’s plan is to use LightSquared’s L-band spectrum for uplink operations. That would presumably be paired with the 2180-2200MHZ AWS-4 downlink, which would give DISH the opportunity to offer the 2000-2020MHz band as supplementary downlink for PCS operators. It also confirms that DISH’s two targets for a potential partnership are now AT&T and Sprint, since they will be the two main LTE operators in the PCS band, and strongly suggests that DISH no longer has any interest in buying T-Mobile (though a deal with DirecTV remains plausible in 2014).
Its important to remember that now it hasn’t got access to the Clearwire spectrum, DISH is essentially offering a partnership under which it would host AT&T or Sprint’s mobile spectrum (most likely in the WCS and BRS/EBS bands respectively) on its planned fixed broadband wireless network (which would use the AWS-4 downlink and L-band uplink for backhaul). In other words, DISH becomes a tower company, offering small cell hosting for as little as $100-$200 per cell per month, because DISH’s wireless broadband subscribers will be providing the site (on their rooftop satellite TV antenna) and the power for free.
If DISH secures auxiliary PCS downlink spectrum then it will also have an even more attractive set of additional spectrum to lease to AT&T or Sprint for their macrocell rollouts. That’s in addition to the 700MHz E block spectrum which AT&T desperately wants (and will feel even more pressure to secure, now it will be able to move forward with the rollout of the Qualcomm D/E block spectrum). Stating that DISH will bid for the H block also puts additional pressure on Sprint to come to a deal, which would substantially reduce the cost of SoftBank’s planned small cell rollout in the 2.5GHz BRS/EBS band in suburban and rural areas.
UPDATE (9/13): With the FCC confirming plans for a Jan 2014 H-block auction this afternoon, with DISH’s proposed reserve price of $0.50/MHzPOP, it seems near certain that DISH’s deal is on a fairly smooth path to being approved by mid December (30 days before the auction starts), so DISH should have clarity in time for the LightSquared auction. It is possible that this could lead to other subordinated debt/preferred holders attempting to push up the price DISH will have to pay, but it is also important to note that DISH will have other potential choices (such as the 1695-1710MHz block) for uplink spectrum and will have the option but not the obligation to switch the AWS-4 uplink band to downlinks. Thus the timetable this time around is likely to be highly favorable for DISH: it will know about the FCC before the LightSquared auction wraps up, which comes before the H block auction, which comes before the 1695-1710MHz auction.
However, one key consideration for DISH is whether it will be forced to pay lease fees to Inmarsat for the LightSquared spectrum, starting next April, which would be around $90M-$100M p.a. if LightSquared’s application for 20MHz of terrestrial uplink authorization is ultimately approved. (Note that DISH is certain to drop LightSquared’s request for a purported “swap” of downlink spectrum in the 1675-80MHz band, as it only wants the L-band uplink in the near term, and this is an obvious concession to offer to the FCC).
I believe that DISH is unwilling to pay Inmarsat anything material in cash while it is waiting for a terrestrial deal, and therefore needs to gain leverage over Inmarsat in the run up to the April 2014 deadline for payments to resume. To do that I understand that EchoStar’s Hughes subsidiary is working on a dual mode L/S-band satellite phone, and Ergen is considering a roaming agreement/partnership with Thuraya, enabling Thuraya to gain access to the North American market via the TerreStar and/or LightSquared satellites. Alternatively, in order to entice Inmarsat into a deal, DISH is prepared to enter into a European S-band joint venture, using the TerreStar-2 satellite to secure Inmarsat’s S-band license (of course if Inmarsat refuses then DISH could instead partner with Solaris Mobile, the Eutelsat/SES joint venture).
So it now looks like we are set for a tense few months of dealmaking in the MSS industry, and investors will have to wait and see whether Inmarsat is prepared to compromise over the LightSquared Cooperation Agreement. Of course, if Inmarsat refuses, and the Cooperation Agreement lapses, then Inmarsat could prevent any terrestrial use of the L-band spectrum by DISH. However, that might not go down too well with the FCC, if it is relying on DISH to bring the additional spectrum into use soon (and provide rural broadband competition to boot), so it is far from clear who has the most leverage here.
In addition, I’m told that Inmarsat signed the contract with Boeing on Tuesday for the fourth GX (backup) satellite, so it now will incur an extra $150M+ of capex in the next few years (assuming that this satellite remains a ground spare, which is not a foregone conclusion in the medium term).
UPDATE (9/13): Inmarsat also told potential customers this week not to expect global GX coverage until Q1 or Q2 of 2015.
That could be an awkward message for Inmarsat’s investors, who have bid up the company’s shares substantially in recent months, if Inmarsat not only has to spend more money on satellites, but is also facing the prospect of no more cash from the L-band spectrum, the possibility of investment to exploit the European S-band license (if it does partner with DISH) and perhaps even additional competition for its core MSS services (if Inmarsat rejects DISH’s offer).
That seems an appropriate title, as I head off to London and Paris this week, to hear MSS and other satellite operators talk about their future opportunities. I found it interesting to note that Euroconsult released their updated MSS market assessment a couple of weeks ago, cutting their projection of future wholesale revenue growth from 7% p.a. (in the previous version of their analysis) to 5% p.a. over the next 10 years, getting back much closer to my forecasts from a couple of years ago.
However, by my estimate, MSS wholesale service revenues only grew at 2% in 2011 and 3% in 2012 (not 5% as Euroconsult estimates, perhaps due to double counting of Orbcomm’s revenue growth from resale of Inmarsat and now Globalstar services) and the majority of this growth in 2012 came from Inmarsat’s price rises. While it originally looked like 2013 was shaping up to see a bit better growth, Iridium has reduced its guidance, Globalstar’s second quarter results were nothing to write home about and Inmarsat is again seeing a significant part of its modest revenue growth being driven by maritime price rises. So its now far from clear that we will get even to Euroconsult’s lowered 5% growth projection in the near term.
While spectrum is a wildcard that could provide incremental revenues for Globalstar (through a potential deal with Amazon) and Inmarsat (through a resumption of lease payments from LightSquared), progress here may not be as fast as expected. Globalstar’s hoped for NPRM is not on the tentative agenda for the FCC’s September Open Meeting, presumably meaning that although the NPRM has now been placed on circulation this issue may be left for incoming Chairman Wheeler to finalize. The recent application by Oceus Networks for an experimental license to test TLPS for DoD users also suggests that a partnership with Amazon is far from set in stone as the way Globalstar will be able to realize value from its spectrum assets.
In contrast, it looks increasingly like DISH will succeed in its bid to buy LightSquared’s satellite assets later this year, and DISH has agreed to assume the Inmarsat Cooperation Agreement as part of its stalking horse bid. But buying LightSquared is a sign that DISH is unlikely to move forward quickly with its entry into the wireless market, because it would take until late 2014 or beyond before the FCC could approve any change to downlink use for the 2000-2020MHz AWS-4 uplink band. At the moment it seems that interim FCC Chairman Clyburn doesn’t want to take a decision even on LightSquared’s uplink band (let alone address the purported “swap” of downlink spectrum, which Ergen doesn’t want or need – leaving MAST Capital Management stuck holding a largely worthless lease of the 1670-75MHz spectrum band), because the FCC will not receive reply comments until September 23 (shortly before Clyburn relinquishes the chairmanship). So even if DISH buys the satellite assets, and drops the request to get hold of the 1675-80MHz band, reaching any resolution of the current regulatory issues in the L-band will undoubtedly be a lengthy process.
Charlie Ergen hinted on DISH’s Q2 call that he doesn’t anticipate simply continuing the Cooperation Agreement in its current form, so it would not be at all surprising to see a fight between DISH and Inmarsat over renegotiation of the Cooperation Agreement in the early part of 2014. One possible compromise could be in the form of a partnership between DISH and Inmarsat to use the TerreStar-2 satellite to preserve Inmarsat’s S-band license in Europe, in exchange for further postponement of any cash payments under the Cooperation Agreement.
Despite (or perhaps because of) the challenges that the MSS market faces, M&A continues apace. Recent agreements include Inmarsat’s sale of its energy sector assets to RigNet and Rockwell Collins’ acquisition of ARINC. I understand a number of additional notable transactions are in the works. Rumors persist that SITA has put OnAir up for sale (only six months after buying Airbus’s stake in the business) and Honeywell appears to be the most likely buyer, while Orbcomm continues its acquisition of satellite M2M service providers and may now be in negotiations to buy Comtech Mobile Datacom.
UPDATE: According to an OnAir spokesperson “SITA has no intention to sell OnAir to Honeywell or to anyone else and remains OnAir’s sole shareholder.”
It will be particularly interesting to see the valuation put on OnAir, given the recent disastrous public offerings of Gogo and Global Eagle/Row44, because if OnAir attracts a much lower valuation than Gogo and Row44 it could be a sign that SITA is pretty pessimistic about the future of the inflight connectivity market. That would be a surprise to many, because after all inflight connectivity is seen as one of the major areas for growth in the MSS market going forward, but at present making an operating profit, let alone a return on investment, is a pretty distant prospect for most if not all of the service providers. So if now is the time for SITA to get out, will this turn out be the age of wisdom for the sellers and the age of foolishness for the buyers, or the reverse?
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