The purchase of Skyterra, completed this week and taken private by Harbinger Capital Partners, looks to us like a purely financial play. The idea that this organization, as it is, will go on to fund the creation of a major 4G network, appears unlikely. But that’s the plan.
But that doesn’t meant that in the current climate Harbinger can’t start the process off, working as a front for perhaps the US government or military and a handful of US commercial interests, and make money out of recycling the spectrum at a later date once these relationships can be revealed.
The FCC has made a commitment to see MSS spectrum used, and Skyterra is just one of the companies that Harbinger has shares in, and is known through Skyterra to have holdings in Terrestar.
So yes, we can see Harbinger owning this operation for a while, putting a few demo sites in the ground and perhaps building out one or two cities in ATC (Ancillary Terrestrial Component) and selling off some capacity, but to make this a US national 4G network will either take the backing of government, the involvement of a whole passel of private equity firms, or it will need the same kind of trade investors that it took Clearwire 6 years to establish from its first, uncertain announcements as a spectrum acquirer in 2004. Google, Comcast and Intel are NOT the head of that queue, because they are already exposed as much as they need to be with Clearwire. However EchoStar and DirecTV may well by in the running.
That doesn’t mean that Skyterra won’t happen, but we have to remember that there are more corporate corpses in the satellite communications business than there are healthy competitors, and it is likely that Harbinger is a front for more serious interests that have already agreed at least ‘some’ of the required investment. These could be any kind of organizations which have agreed to prop this up, from rural coverage outline deals with Verizon and T-Mobile, right down to individual customer agreements from emergency services.
But how we read this is that Harbinger will own this spectrum and play at building it out and proving the service, but only until it can write enough business to take it public or to sell it on or convince other investors to come onboard. It is likely to take $6 billion to build a full US satellite terrestrial hybrid network, and in our view someone will have to spend at least $2 billion to convince bigger money that the idea is working and can deliver a price competitive service.
What’s happened this week is that a deal cut last year for Skyterra to be acquired by the Harbinger fund has completed and the new owner has come out and said not only that it will build an LTE network across the US, but that it will have it finished and reaching 260 million of the US population by 2015. The deal involved a final payment of $262.5 million in cash on top of monies that Skyterra has already borrowed from Harbinger in the past.
Harbinger has specialized in investing in start up businesses that were stressed and this deal could easily be born out of stress.
However the deal did represent a considerable premium on the company’s public share price and Harbinger says that after taking into account SkyTerra’s outstanding debt and securities, the transaction means that the company is worth $1.849 billion. If it never launches a service it’s not worth a red cent.
A mobile satellite service (MSS) can be built out with two separate types of activity, it can put up a satellite, and for a real MSS this needs to be substantially more powerful that the two existing satellites that Skyterra is using right now. It needs Geostationary orbits, so that means communications distances of 22,000 miles each way, from the earth.
For that to work with cellular type devices this means it will need a large antenna, both to amplify earth bounds signals and to sense the minute radio waves given off by a cellphone at 22,000 miles. Yes it can be done, but there are only one or two satellites in the world that can currently do this, so it’s new ground and it will take a 20 meter or 25 meter unfurl-able antenna. The satellites that Skyterra has right now have a maximum of a 5.7 meter antenna.
The Thuraya satellite, which is the operated in the middle east and which offers full two way MSS services, uses a 12 x 16 meter L-Band antenna, and was built about ten years ago. More advanced equipment is available now.
The Skyterra 1 and 2 replacement satellites will go up in late 2010 and are being built by Boeing and will use a 22-meter L-band reflector for mobile links.
The trouble with this where voice is concerned is that it will produce a propagation delay of a couple of seconds, like old intercontinental telephone links when they went through satellites. So the new owner really sees the satellite links being used primarily for data, and for data read web pages, video and machine to machine data transfers.
The system is supposed to talk LTE, but most satellites have the capability to modulate and encapsulate data in a number of ways and in the US this is likely to mean both LTE and CDMA and its successors, and even HSDPA and GSM and WiMAX, depending upon each conversation and what dialect any attached device speaks.
Harbinger has already said that it will build out two cities to demonstrate the ATC power of the system, which simply put means that they will build a cellular network using conventional base stations in the same spectrum that the satellite uses. Terrestrial networks broadcast along the ground and this signal can be ignored by the satellite, meaning that this is a conventional cellular network which is connected to the rest of the Skyterra network via the satellite. The local switch can uplink data to the satellite using either conventional satellite transmission in the 12.5 GHz spectrum, or devices can speak to it directly through any of the cellular interfaces.
In effect Harbinger can say it will build out two cities using just enough base stations to support its existing customer base (18,000 scattered all over the US) who are mostly out of city reach, and add the satellite and it can say ‘I have a US wide network.’
But to work effectively the ATC (terrestrial component) would have to support a significant number of future users, so it would have to be about as dense as Clearwire is with WiMAX or as Verizon is building out in LTE. These networks don’t start out particular dense, but they need a certain amount of density just to begin with, so that phones can roam easily between base stations without calls being dropped. Special devices would have to be commissioned that work with the three L-Band spectrum chunks that Skyterra holds. Calls and data from outside the area could be carried either on a terrestrial backhaul or via the satellite, depending upon how they are connected to their own networks.
Already there are chipsets from Qualcomm and Infineon in the market that will support a phone being a cellphone for most of the time, and a satellite phone for some of the time. And satellite antennas in this frequency can now be internal, just like usual 2 GHz 3G and 4G phone antennas.
And the FCC has allowed a terrestrial component in 2 GHz as well as an L-Band component, and Skyterra has both of these spectrum.
Harbinger plans to offer a white label roaming service, supporting other networks in rural gaps and potentially for excess network capacity. This was not Skyterra’s original plan (previously under the name MSV it petitioned for the FCC to allow ATC and obtained the first license).
Skyterra will now offer its network as a cellular overflow network. It will used in a number of ways, for supporting low data rate machine to machine data, such as telematics readings and devices which self report faults. It will offer delivery of fax data. On top of that Skyterra saw itself offering a broadband data service, again as an overflow from existing cellular networks, but also offering multicasts ‘ one way broadcasts that go to multiple devices at once ‘ such as mobile video or live sports broadcasting.
The company always saw itself offering voice despite the propagation delay, and had developed adaptive bit rates for voice for data challenged environments. It wanted to produce a wireless voice priority service for when networks were down, for use by emergency services, as well as emergency calls (911 in the US).
But if the company does not plan to build its own brand, and will not incur the costs of going directly to customers (it already does, but it doesn’t look like it will do this for all of its new network), then it will always be reliant on other operators to give it scraps from the table.
Last year rival Terrestar cut a deal with AT&T to resell Terrestar satellite services in remote areas and is selling the Genus, a smartphone which uses the MSS network only when cellular coverage is unavailable.
This is pretty much the type of service that Skyterra is referring to, and it looks like it has already lost AT&T as a potential customer. Also its license is constrained as we understand it, so that only 25% of its capacity may be sold to the two leading US cellcos, AT&T and Verizon. For a company not expecting to go to market directly, limiting the two major cellular operators (some 60% of US cellular) to using 25% of its capacity, is something of a limitation. Where are the rest of its customers going to come from?
This is certainly the right time in US history to be investing in broadband, just as the Obama administration wants to invest $billions in broadband development. There will also be some feelgood factor surrounding any business in the same sector, but finding $billions for a major terrestrial build out of this kind, when the customer base will, for the most part not belong to the company, is pie in the sky. What is more likely to happen is that Skyterra will be marketed to major brands similar to the Clearwire investors, in the hope of finding more companies with a vested interest in controlling their own network. Think $100 of millions though, not $billions.