The sudden move this week by AT&T to buy the spectrum that is held by Aloha Partners for what must seem like the motherlode for Aloha, at $2.5 billion, sets a new value on video broadcasting connectivity and sets a precedent for the 2009 US auctions into 700 MHz.
While US analysts began bemoaning that the price was too high, and claimed that this is the end for mobile TV in the US, our instincts at Faultline is that AT&T may well be buying this spectrum as a reward for HiWire’s demonstration that DVB-H really works, rather than sidelining the spectrum for something else. If so AT&T would be best working with a technology that is better aligned with UMTS than tying its cart to the Qualcomm delivered MediaFLO. Also the purchase price reflects not the money that Aloha spent on the spectrum, but the increasing value of 700 MHz spectrum and a two year lead in building out a mobile TV and data delivery network across the US.
When we said to Aloha a few weeks back that they might get an offer from Qualcomm, to add the spectrum to their existing MediaFLO channel, Aloha told us ‘Qualcomm is unlikely to pay us what it is worth,’ a statement now clearly true.
This all assumes that this purchase is all about mobile TV, which we believe it is, and we would expect AT&T to drop its MediaFLO relationship in favor of a network that it builds itself using DVB-H technology. If that IS the case, and there ARE other possible ways this could pan out, then DVB-H has delivered a body blow to MediaFLO, halving its likely uptake, and weakening its grip on both the US and therefore on any other market that might have been convinced it was the up and coming broadcast mobile TV technology. If AT&T doesn’t want to do something with this spectrum now, Aloha would have become more desperate the closer that it got to the 700 MHz US auctions, and the price could have gone down. When we spoke to Aloha it was very bullish about the value of this spectrum.
But we could never see Aloha building out in this spectrum, which would probably have cost somewhere close to $500 million across the US, and always felt that its mobile TV trials in Las Vegas were all about convincing someone that it had the whip hand in terms of spectrum over MediaFLO. Qualcomm acquired a single 6 MHz channel compared to the two that are owned by Aloha, and despite claiming that it can mount mobile TV 20 channels in this spectrum, Aloha’s spectrum was always going to offer something close to double that, depending upon who you believe. Qualcomm insists that its service offers faster channel change, more channels and better in-building penetration, however mobile TV experts that we have spoken to insist that the two standards vying for supremacy in mobile TV are far more similar than different, and only last week chip maker Siano showed a 2 second channel change when working with DVB-H, directly in line with Qualcomm claims.
But we never thought that AT&T would be moved to pay what the spectrum is clearly worth. A previous piece of analysis where we likened MediaFLO in value to the combined satellite radio operations, showed that if MediaFLO could retain exclusive deals with AT&T as well as Verizon for the delivery of a US-wide mobile TV network, then it might come to be worth more than $10 billion. Overnight that potential has at least halved, if not fallen away entirely.
But AT&T is still likely to go ahead and use MediaFLO for a short time at least while its new network is being built out and there is the remote possibility that we are wrong entirely and that AT&T will in actual fact build out its brand new spectrum not with DVB-H, but with another technology. It could use it for mobile TV, but use MediaFLO, and at least one dissenting voice has told us AT&T is just trying to get a head start in LTE, a suggestion we cannot take seriously since it would still need to acquire further spectrum, and without knowing which part of the 700 MHz spectrum that future spectrum is in, how would it plan and begin building a network
Again we are guided here by the likelihood that AT&T would have to pay not only a royalty to Qualcomm for the patents that it believes it holds in MediaFLO (and which Nokia disputes), but also it would have to convince other CDMA licensees that it was worth developing a MediaFLO phone for a UMTS service, just for AT&T. Licensing for AT&T to use MediaFLO would be expensive, since Qualcomm has said openly that it will bundle its license free to existing CDMA customers ‘ a practice which is also under scrutiny in the US, Europe and Korea by anti-trust regulators. Those operators would be pretty upset if Qualcomm cut a sweet deal with AT&T.
700MHz spectrum has great propagation qualities, and will go through walls, forests and over water, so would be fine for use as a two way communications medium, but until LTE standards are complete and a profile for 700 MHz is built for it, it seems likely that AT&T is thinking about one way broadcasting using DVB-H. It could, of course be buying this spectrum early to ensure that it gets a piece of 700 MHz spectrum which is free of FCC conditions about offering open access.
However it is all these reasons which convince us that our first instincts are right, and this spectrum is destined for DVB-H, building on the work that Aloha and its subsidiary HiWire and its partner SES Americom, and its suppliers, have all put into making the LasVegas trial win plaudits. It is surely the success of that trial which has convinced AT&T of the value of the spectrum, so why would it then go away and play with another technology.
However whether AT&T stops developing for MediaFLO instantly or not will depend upon the exact wording in its contract. This announcement, in the long term, puts AT&T directly up against Verizon in the mobile TV stakes, and its 8 Channel Vcast TV is looking pretty anemic compared to what AT&T might build now. Its only chance it to make hay while the network is being built, and grab as much of MediaFLO that it can get from Qualcomm, either all the available channels or buy the entire network outright. As we say, it may not contractually be able to do this, but if AT&T ditches MediaFLO, Verizon would be crazy not to take up the slack and perhaps will make a move to buy out the entire business before this deal completes in the 6 to 9 months it will take.
One thing that may have been influential in the signing of this deal could have been the legal action brought by Nokia against Qualcomm over the MediaFLO standard, claiming that much of the technology was derived from DVB-H. If it has any success in claiming royalties from Qualcomm over this technology then that cost may have been transferred directly to operators and handset builders. We put that thought to Nokia this week, who told us that it had no idea if AT&T was even using the technology for DVB-H, and who suggested the LTE idea.
However just because Verizon decides that it needs more mobile TV coverage does not mean that Qualcomm would be happy to sell off the US MediaFLO network. It has trials around the world in places as diverse as the UK, Taiwan, Hong Kong, Japan and Malaysia and wants to convince more of the global heavyweights to at least try out MediaFLO. Most of those trials have stronger local DVB-H or other technology trials that have been in place longer, and there is no certainty that MediaFLO will win any other customers outside of the US.
The fact that so far Verizon has only offered an 8 channel service, despite the fact that Qualcomm insists that MediaFLO can handle 20 channels in a 6 MHz slice of spectrum, allows rivals like T-Mobile, and Sprint, both of which have taken a long hard look at the technology, as well as Alltel, a chance to buy into the existing mobile TV multiplex in the current spectrum. If Verizon takes all the capacity or buys the network outright, those companies can no longer be courted, a fact that will harm Qualcomm’s global efforts.
AT&T could even turn the screw and offer any new DVB-H mobile TV service that it creates, to other UMTS carriers such as T-Mobile, or even to CDMA rivals such as Sprint, but of course that’s very unlikely. As much as AT&T wants to disadvantage Verizon, it does not want to help out another rival. It may deem killing off the Verizon Vcast TV more important than other rivalries, although from its deal with Apple over the iPhone, it is more likely to keep it as an exclusive, building out against the day when Sprint’s network has 4G capability through its WiMAX build out, and threatens to steal customers.
Build out of a DVB-H network, when carried out at breakneck speed, will still take 18 months in the top US markets and although planning can start prior to the deal completing, which would save some time, not so much as a single transmitter can be put in place until AT&T is sure that it is allowed to buy the Aloha spectrum.
The next issue is to ask who will supply the infrastructure equipment, software and devices that will sit on such a network, and the first idea that comes to mind is the iPhone. Apple has shown that strategically, anything that prevents its devices from being solely reliant on iTunes for content is anathema to its senior management. But one of the neat things about the iPhone is the amount of onboard storage that AT&T could easily, at least partially, convert to a digital video recorder for TV. Apple is already tied to an exclusive there, so why wouldn’t it add the $10 bill of materials required to turn the iPhone into a DVB-H receiver.
We can tell you that our spies out in the chip market have not sniffed any Apple interest in DVB-H receiver chips as yet, but then again the network won’t be operational, even partly, for at least a year.
Failing the iPhone, Motorola has DVB-H devices on sale in other parts of the world, while Samsung and LG would readily create a UMTS DVB-H device (though perhaps not so readily one for CDMA). Nokia is the global leader in the devices, but its implementation is understood not to work with the existing multiplex that HiWire has built. But that could soon be changed and lead to a solid opening within AT&T for some of the sexier new Nokia devices such as the N95 and N73.
While US transmitter company Harris, and rival Thomson Grass Valley might be favorites to pick up huge contracts at AT&T, the incumbent at the Las Vegas trial is German transmitter maker Rohde and Schwarz along with DMT, another European transmitter builder. Also suddenly the rest of the mobile TV community, including specialist chip players DiBcom, Siano and local start ups like NewPort Media, along with Texas Instruments, will all have a shot at providing core chips to device makers, with even Qualcomm making a chip that offers both MediaFLO or DVB-H.
Looking back at the Modeo departure from the DVB-H business, when it sold off its 1675 spectrum to two investment companies, it was perhaps also in negotiations with AT&T and felt it was losing the fight to HiWire and Aloha, hence it made the sideways move. It managed to recoup its losses entirely by bowing out in a deal
Modeo sold off its existing efforts to Telcom Ventures and Columbia Capital, tow companies both known to have had interests, in the past, in satellite radio through XM Satellite Radio. Could they help turn the satellite radio players into satellite mobile TV players using this spectrum and present yet another rival? It sounds a long shot, but these companies are known for playing long shots, and the 700 MHz purchase by Aloha must be considered such a long shot, which in this case came off.
If Verizon does find itself without any further suitable spectrum, and tied to a service that can at best offer 20 TV channels, up against an operation that can do twice that, it will be forced to look at other technologies to see what it can do to keep up. Already Alcatel is setting up a satellite DVB-SH broadcast from a satellite owned by ICO Communications, a Craig McCaw owned operation, which we have assumed will align with Clearwire and potentially Sprint. That allegiance makes it highly unlikely that it could also work with Verizon, so we discount that possibility.
Which realistically leaves Verizon having to construct more channels using some form of cellular multicast, devoting a small piece of existing spectrum, temporarily at each base station, upon request.
The protocol which manages this within CDMA networks comes from the 3GPP2 standards body and is called Broadcast Multicast Services and referred to as (BCMCS). This is being used in experiments in Japan by KDDI, but has little following elsewhere. However Qualcomm might be able to harness 10 to 15 mobile TV channels within the chip circuitry designed for EV DO Rev 3, as it has done on its HSDPA chips with the equivalent MBMS protocol for UMTS networks.
AT&T’s announcement said simply that its board of directors has approved a deal to buy the spectrum which covers 196 million US people in 281 markets in 72 of the top 100 markets.
The figure of $20 billion has been suggested as the amount that the FCC might raise in the 2008 auctions for 60 MHz of spectrum in the 700 MHz range, which would make it worth around $2 billion for each 6 MHz slice, which makes the payment that AT&T is prepared to make for the Aloha spectrum a considerable discount to the $4 billion that this spectrum might have fetched in 2008 for use in 2009. But then again the auction may fetch considerably less