11.17.12

No alphabet soup for you?

Posted in DISH, Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 11:52 am by timfarrar

Over the last 36 hours there has been a constant stream of stories about DISH Network’s negotiations with various players to launch its proposed wireless network, in what appears to be a last ditch attempt to deflect the FCC from its declared intention to impose strict interference conditions on DISH’s spectrum in order to make the H block auctionable.

First we saw reports of DISH’s “exploratory stage” talks with Google, which unsurprisingly led to massive speculation about Google’s desire to get into the wireless business, largely omitting any mention of Google’s previous (financially disastrous) investment in Clearwire, which was motivated solely by a desire to create more competition and cheaper wireless service and had nothing whatsoever to do with enabling Google to become a wireless operator.

Now we’ve seen reports about DISH’s unsuccessful bid over the summer for MetroPCS, as revealed in MetroPCS’s preliminary proxy statement filed last night. We also saw DISH highlighting that 3GPP standardization work has been completed, with the implication that DISH could move forward very quickly if the FCC approved the network without new interference conditions.

However, it seems clear that the FCC is having none of it, with officials briefing that they are close to a decision, which is expected to confirm that the H block will be auctioned for high power use and therefore the lower part of DISH’s uplink band will face significant powwer restrictions. In other words, the FCC is placing a higher priority on ensuring Sprint has sufficient LTE spectrum (i.e. can extend its 5x5MHz G block LTE network to a 10x10MHz network) and moving forward with an auction of the H block to raise $1B+ than they are on trusting DISH to become a new entrant in the wireless market.

In light of the Sprint-Softbank and TMobile-MetroPCS deals, the FCC has achieved its goal of having four viable players in the US wireless market, and so presumably does not see as much need to encourage a new entrant. Indeed I would expect the FCC would be relatively content to see the DISH spectrum go to AT&T, if it could then “encourage” AT&T to sell some of its PCS spectrum to Sprint (along the lines of Verizon’s AWS spectrum deal with TMobile). We might even see a similar “swap” in the PCS band between TMobile and Sprint (with Sprint getting more of the spectrum and paying some cash to TMobile) as an alternative to a potential rival Sprint bid for MetroPCS. After all, TMobile has far more spectrum per subscriber than any of the other three major players (if Clearwire’s holdings are excluded).

Does DISH have many other options left to build out a new network of its own, as opposed to selling the spectrum to AT&T and pursuing a merger with DirecTV? There still appears to be uncertainty about the status of a potential deal with Clearwire, though DISH’s 10-Q confirmed (as I suggested previously) that it has raised its stake in Clearwire’s debt by $400M during the third quarter to a total investment of $745M (note that Clearwire is not named in the 10-Q, but the amount invested is too large for the investment to be in LightSquared, given other declared holdings).

DISH has undoubtedly talked to almost everyone in the wireless industry, but apparently these talks are currently only at the exploratory stage, which is quite surprising given how much time has elapsed. Of course what the MetroPCS proxy statement reveals is that everyone else has been talking as well, and as set out below, the proxy provides some very interesting nuggets about what’s happened over the last 18 months, once you decode the references to Companies A through H.

Company A: DBSD. MetroPCS determined that DBSD’s spectrum was more attractive than TerreStar’s spectrum and MetroPCS made a binding offer for the spectrum in March 2011, but lost out to DISH.

Company B: TerreStar. MetroPCS ultimately decided not to pursue TerreStar, leaving Harbinger out in the cold in June 2011, but then negotiated unsuccessfully with DISH during the summer of 2011 over a potential sale of spectrum, joint venture or contribution of the spectrum in exchange for equity in MetroPCS.

Company C: DISH subsequential expressed interest in buying MetroPCS, starting in March 2012 when it became clear DISH would not receive its hoped-for ATC waiver, and ultimately made a bid of $11 per share in August 2012, which was rejected by MetroPCS because it was less than the value offered by TMobile. DISH then indicated that it was unwilling to pay a higher price.

Company D: Clearwire. MetroPCS offered to buy spectrum from Clearwire in late 2011 (and earlier had even considered buying the whole company), but was unable to agree on terms. These discussions were revived in June 2012 when Clearwire again suggested a sale of spectrum and a “substantial investor” (Sprint or perhaps DISH???) proposed splitting the company between themselves and MetroPCS. Those “occasional” discussions continued up until the TMobile deal was announced.

Company E: Leap. Leap offered to sell “excess” spectrum to MetroPCS in the first half of 2011, but as early as June 2011 had decided to sell the spectrum to another wireless company (Verizon). This implies both that Verizon sat on the Leap deal until it had completed its negotiations with SpectrumCo in December 2011, and that the transfer of the Chicago 700MHz A block spectrum to Leap was presumably only included so the deal could be portrayed to the FCC as a “swap”. (Of course Leap’s presumed follow-up deal of a sale to US Cellular has now been derailed by US Cellular’s exit from the Chicago market and sale of its spectrum to Sprint). In May 2012, Leap asked MetroPCS to consider a combination of the two companies, but MetroPCS decided such discussions would not be productive. Then in July 2012, Deutsche Telekom also raised the prospect of combining Leap with TMobile and MetroPCS, as part of a single transaction, but MetroPCS declined, presumably because of the added complications it would entail.

Company F: AT&T. As was widely reported at the time, MetroPCS was in discusssions with AT&T in 2011 about potential asset sales as a condition of the TMobile acquisition. However, this did not come to fruition because the acquisition was blocked by the DoJ and FCC. Later, in August 2012, MetroPCS discussed approaching AT&T, but the consensus opinion was that AT&T would not be interested in buying MetroPCS.

Company G: Sprint approached MetroPCS about a potential acquisition in September 2011, and this led to the abortive bid in February 2012, which was vetoed by the Sprint board. Even after this time discussions continued with Sprint, and Sprint indicated in August and September 2012 that it was still interested in an acquisition of MetroPCS.

Company H: Verizon. MetroPCS held discussions with Verizon in the spring of 2012 about potentially buying some of the AWS and 700MHz spectrum that Verizon would need to divest to get approval of the SpectrumCo transaction. However, Verizon was not particularly interested in selling the AWS spectrum to MetroPCS (and entered into a deal with TMobile instead).

What all this appears to show is that DISH has looked at a number of transactions which involve further investment in the sector, but the main reason these have not come to fruition is that DISH is trying to pay as little as possible for any acquired assets. Alternatively, if DISH was to be a seller, then it was looking for too rich a price (at least for MetroPCS). In this context, it is likely that only Clearwire would be prepared to do a deal to sell assets to DISH on such terms, as I’ve speculated previously. It also seems pretty clear that the potential network sharing deal mentioned in the WSJ article about the discussions with Google would most likely be with Clearwire rather than Sprint, because the benchmark terms set by Sprint’s deal with LightSquared would be unattractive to DISH. As a result, it seems we are back to where we started – could DISH still pull off a deal with Clearwire (and does it want to in the current circumstances?), or will DISH end up selling its spectrum to AT&T and pursuing a merger with DirecTV instead?

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10.24.12

Things to do in Denver when your deal’s dead…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 11:41 am by timfarrar

Is Charlie Ergen giving up on his wireless plans? An interview with Bloomberg published this morning seemed to signal a change of stance, particularly the explicit suggestion that Ergen would be open to simply selling his spectrum to AT&T, when his (coded) message for the last year has been that AT&T would need to buy the whole of DISH (at a huge premium).

Not only has the Softbank deal enabled Sprint to escape from the box DISH had been trying to put it in, but by buying McCaw’s stake in Clearwire, and indicating to other strategic investors on the board that further equity purchases are up for negotiation, Sprint looks to have headed off Ergen’s planned deal to purchase assets from Clearwire.

Despite this, perhaps Ergen could still do a deal with other partners like Carlos Slim or DirecTV, but it is harder to see the rationale for investing in building a fifth competitive operator than it was a month ago, when Sprint (and perhaps even T-Mobile) were perceived to be in a much weaker competitive (and financial) position. In addition, we may be seeing AT&T attempt to warn off Carlos Slim from a deal with Ergen, in the form of mutterings about foreign ownership of other wireless operators.

So it looks like Ergen may now turn his attention towards a potential merger deal with DirecTV. In the short term that means putting pressure on DirecTV to come to the table, most obviously by competing with them in Brazil. Indeed, Echostar told the FCC at the end of September that it planned to move the Quetzsat satellite to the 61.5W slot, freeing up AMC-15 to be relocated to 45W in order to provide service into Brazil “as soon as January 2013“.

Wireless and broadband could also be a key part of this deal, via an alignment of both satellite TV operators with AT&T, similar to the Verizon-cable TV partnership, and that would be cemented by the sale of DISH’s spectrum to AT&T. Nevertheless, I would expect the sale to come ahead of an agreement with DirecTV, simply because being left out of a DISH-AT&T alliance would put even more pressure on DirecTV. As I noted last December, this alignment would cement AT&T and Verizon’s market leadership. However, given that the FCC backed off mandating wholesale access as a condition of approving the Verizon/SpectrumCo deal, the only plausible way to promote competition to these two players may then be to allow Sprint and T-Mobile to merge.

Of course putting a price on DISH’s spectrum is hard, but I suspect that the most appropriate comparison for the AWS-4 spectrum is the WCS band which AT&T purchased recently, because neither band is usable immediately (unlike AWS). AT&T paid NextWave more than expected for WCS, but this was offset by the fact that AT&T already owned a substantial part of the band, for which it had paid very little. I would therefore expect an AWS-4 sale to be at a fairly similar price to that AT&T paid NextWave for the usable parts of the WCS spectrum: somewhere in the range of ~$0.30-$0.40/MHzPOP (depending on how much value is attributed to the C/D blocks and AWS holdings), i.e. of order $3.75B-$5.0B plus perhaps another $1B for DISH’s 700MHz E block spectrum.

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10.16.12

Net neutrality or favoritism?

Posted in LightSquared, Operators, Regulatory, Spectrum at 12:30 pm by timfarrar

Today the House Energy & Commerce Committee has released the documents from last month’s hearing, which makes for some interesting reading.

For one, its intriguing that the FCC Chief Economist (on p33 of the PDF) highlights “just how lucrative ATC service could be”, noting that “an entrepreneur that purchased a mobile satellite property wth 34 MHz of ATC-eligible spectrum and successfully rolled out ATC service in partnership with a CMRS incumbent could obtain a rent of $11 billion, equal to the difference between the value of the spectrum ($12 billion) and the cost of developing the required satellite system ($1 billion).”

That $12B valuation of course is the same as LightSquared’s economic consultants used, back in June 2011, to estimate that the January 2011 waiver was worth $10B to LightSquared. The documents also indicate (p10 of the PDF) that the FCC Chairman was warned in September 2009 about the “equity considerations of providing a ‘windfall’ to companies who did not acquire the licenses at auction” and even at that time “changing the ATC handset requirements” was under discussion.

However, far more interesting are the details of the discussions over the extension to the very short comment period on the waiver request in November 2010 (pp13-15 of the PDF). It is clear that the FCC had essentially already agreed the waiver with LightSquared and had “discussed [the timetable] previously”. The FCC was working to this “tight” timetable (later derailed by NTIA concerns about GPS interference) so that order could be issued on December 20, a date that was described as “critical”.

Of course (although it is not stated in the emails) the reason that this date was so critical was that (as I suspected at the time), the Commission intended to (and did) vote on net neutrality rules at the December 21, 2010 Open Meeting, which excluded wireless networks from net neutrality obligations. As a result, if the FCC had been able to announce the LightSquared waiver at that meeting, it would have been possible to say that at least one major 4G network provider had signed up to net neutrality principles of its own accord, effectively endorsing LightSquared as a competitor to the major cellular operators.

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Out of the box?

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 8:44 am by timfarrar

Despite considerable efforts by Charlie Ergen, it looks like the Softbank deal may now have enabled Sprint to escape from the box of constrained capital, limited spectrum and a second rate network that Sprint could have been confined to, if it had failed to gain access to either usable H block spectrum or Clearwire’s network on economically advantageous terms. Many thought that Sprint would move to purchase Clearwire immediately after the Softbank investment, but today sources are denying that is the intention, stating that Sprint has no intention of taking part in mergers or acquisitions until the Softbank deal is finalized in mid-2013. This timeline also implies that Sprint will not move to disrupt the T-Mobile/MetroPCS merger, which is expected to close in 2013Q2.

So the obvious question is why did Sprint need to issue a $3B convertible bond to Softbank right now? I think that can only be intended to warn off others from doing a deal with Clearwire in the interim, by offering John Stanton the carrot of improved economics and/or further investment from Sprint. Of course there are not many options for Clearwire to sell spectrum, now that T-Mobile and MetroPCS, the two operators most frequently rumored to have designs on Clearwire’s spectrum, are getting together.

As a result, I think Sprint’s actions appear to confirm that Clearwire was about to pull the trigger on a deal with Ergen, as I suggested last month, involving an asset sale and/or WiMAX customer transfer, in exchange for a combination of cash and debt. Notably, receipts from a sale of network assets (as opposed to a spectrum sale) would not have to be used to repurchase Clearwire’s first lien debt, suggesting that this could be a preferred way for Clearwire to raise funds. In addition, I’m told Ergen now holds in excess of $900M of Clearwire’s debt (not all first lien), and some of that could potentially have been traded for Clearwire spectrum.

Reports on the Sprint/Softbank deal have also suggested that both Carlos Slim and SK Telecom have considered investments in Sprint, and it is worth noting that SK Telecom invested $60M in LightSquared back in 2010, while Slim is rumored to be buying LightSquared debt. In fact I’m told that further significant purchases of LightSquared debt have taken place in recent weeks. If one or both of those two players therefore continue to maintain their interest in US telecom assets (which has obviously included MSS-ATC spectrum similar to that held by DISH), then Ergen may be the last, best potential partner available.

So has Sprint now prevented Ergen from achieving a deal with Clearwire? I’m told that (at least with the current ownership situation) Sprint would have no ability to veto such a transaction, so presumably Stanton will now be trying to extract vastly improved economics from the existing capacity agreement with Sprint in order to forego a DISH deal. What concessions will Sprint be prepared to make, and if it does give ground, where does that leave DISH? After all, it doesn’t seem that AT&T is prepared to pay Ergen’s asking price (perhaps as high as $80-$90 per share?) to purchase the whole of DISH anytime soon. Ergen must certainly be fuming at how FCC delays have prevented him from moving forward, while potential partners seem to be rapidly exiting the dance floor. At least he appears to have made a profit on his investment in Clearwire, but that may be little consolation if it now proves more difficult to find a way to monetize DISH’s other, much larger, spectrum investments.

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10.07.12

MSS: The end of history?

Posted in Financials, Inmarsat, Maritime, Operators, Services at 12:29 pm by timfarrar

The history of the MSS industry, like most other parts of the telecom and technology sectors, has revolved around a theme of “faster, better, cheaper” as technological advances have dramatically improved satellite throughput and enabled significant reductions in the price per minute and per bit of voice and data communications. However, it seems that at least in L-band, we may have reached the limit of economically justifiable technological advances, and the future for the traditional MSS market could now be one of slower development cycles, simpler satellite systems and more expensive services.

Some of those technological dead ends are obvious, like the huge satellite antennas built for LightSquared and TerreStar, which did nothing whatsoever to make their satellite services more viable. However, more importantly, Inmarsat sets the tone for the entire MSS sector and could now make it much clearer that we have reached the end of the historical development pattern for this industry.

We’ve already seen Inmarsat pushing up prices this year, and with its new focus on the Ka-band Global Xpress system, Inmarsat has also indicated that it expects to delay capital expenditures on a next generation L-band (I6) satellite system and that the system itself will be cheaper and simpler than the I4 satellites. After feeling a backlash from distributors and customers, Inmarsat has been at pains to suggest that this year’s price rises represented a one-off adjustment, rather than the start of regular yearly price rises. Nevertheless, Inmarsat has seen little if any impact in terms of maritime customer losses because Inmarsat holds such a dominant position in the market and Inmarsat’s 2012 wholesale revenues are likely to be boosted by at least 2%-3% as a result of the price rises.

Looking forward, the outlook in most parts of the MSS market is fairly depressed, with M2M services providing the main source of growth, and overall wholesale L-band revenues are only likely to grow by perhaps 4% p.a. in the next few years. Although we’ll find our more specifics on Tuesday about Inmarsat’s expectations for Global Xpress, it also remains hard to see how GX will meet the original target of $500M in incremental wholesale revenues within 5 years, suggesting that Inmarsat’s move to Ka-band will not move the needle on overall MSS market growth very far. Reasons for this include the apparent lack of military Ka-band frequencies (which were supposed to be secured by Boeing and would be needed to allow GX to operate as a seamless supplement to WGS), the fact that XpressLink customers are being given the option but not the obligation to upgrade to GX when it is launched and, most importantly, the threat posed by Intelsat’s new Epic satellites, which have secured some key anchor customers (Panasonic, MTN and Harris Caprock) and caused many distributors and end customers to reconsider the “inevitability” of a move to Ka-band.

As a result, it seems there is now a fairly clear case for Inmarsat (as the price leader in the MSS sector) to push through regular annual price rises on the 50% or so of its wholesale L-band revenue base that is least likely to move to alternative solutions and has the lowest price elasticity. This would mean price rises for low and mid range maritime customers plus many land customers, while leaving aeronautical and high end maritime customers (who are more at risk from VSAT competition) largely untouched. Today there is an essentially flat outlook for L-band revenues, as modest growth in M2M and handheld is being offset by the migration of high end maritime and aeronautical customers to XpressLink (and other VSAT solutions), together with reductions in defense spending/event revenues. However, a price rise of 5%-10% p.a. would potentially allow Inmarsat to grow its L-band business at 2%-4% p.a. for the next several years.

Other MSS operators would also benefit through (modest) gains in market share and more pricing freedom, and the overall MSS sector could perhaps then return to something closer to the 7% p.a. revenue growth rate seen before the downturn of the last couple of years. Even distributors, who have seen their margins pressured over the last decade, would appreciate some ability to increase their overall revenues (given that demand elasticity is quite low), if margins can be sustained or even increased.

However, in order to execute such a change in strategy, Inmarsat would also need to repair its relationship with independent distributors, which has taken a significant knock from Inmarsat’s acquisitions of Segovia and Ship Equip and its decision not to pass on some wholesale price increases through its own direct distribution channels. There have also been several instances where Inmarsat has made its own bids for key contracts which massively undercut the bids from the incumbent independent distributors providing the same services. Indeed it often appears that Inmarsat has the explicit intention of driving its leading independent distributor, Vizada (now owned by Astrium Services) into the arms of other satellite operators such as Intelsat and Iridium. It seems to me that only with the cooperation of independent distributors can Inmarsat present a united front to end customers, and explain that price rises are necessary for a healthy market, as opposed to having their assertions undermined not only by (the expected) sniping from competitors, but by distributor dissatisfaction (and potential defections due to increased margin pressures) as well.

Is Inmarsat willing to change this dynamic and restrain its direct distribution arm, or will it resort to a “bunker mentality” and either miss the chance to boost revenues or push further price rises onto its independent distributors, amidst a rising tide of opposition? Time will tell, but its perhaps worth remembering that the full title of the book was “The End of History and the Last Man”, the last man being someone who “is tired of life, takes no risks, and seeks only comfort and security“.

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10.06.12

Coordinate that!

Posted in LightSquared, Operators, Regulatory at 2:28 pm by timfarrar

As I noted in an earlier post, it was quite surprising to read LightSquared’s assertions in court last Monday October 1 that:

“We’ve made substantial progress on our regulatory issues…Short of a few sections of the country, dead zones we will attempt to resolve through other means, this would give us 4G LTE coverage throughout the country. It’s not the proverbial home run everyone said we’d hold out for, but it is a significant terrestrial network.”

As far as I know, no-one has pointed out that these “few sections of the country” where LightSquared would have problems using the 1675-80MHz band it has asked to share, actually include 69 fixed radiosonde launch stations in the lower 48 states (plus additional mobile launch sites when severe weather conditions such as hurricanes are anticipated), from which the weather balloons can drift 180 miles or more, depending on which way the wind is blowing. A quick look at a map of these locations shows a near uniform distribution of sites around the country and that a 180 mile exclusion zone around each station would make it impossible to provide service almost everywhere in the US.

Of course in the past LightSquared demonstrated its skill at predicting and even controlling which way the political winds were blowing. So maybe they now intend to see if that capability extends to real life weather as well?

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10.04.12

This speech, like youth, wasted on the young…

Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:23 pm by timfarrar

FCC Chairman Genachowski took a trip to W