It isn’t at all obvious what the game of the US Dish Network is, with its $1 billion purchase this week of DBSD, an MSS vehicle in the US, currently owned by ICO Global Communications, a business funded by none other than Craig McCaw. The deal will have to wait until a bankruptcy court gives its go ahead, but involves Dish supplying enough cash, around $87.6 million of debtor in possession finance, to keep other creditors at bay. Dish only has around $2.6 billion in cash and marketable securities to call on, so this deal ties up 40% of its cash capability, so it had better be something real.
If you look between the lines you’d be forgiven for seeing Machiavellian moves afoot which reek of opportunistic control of Mobile Satellite Services in the US. The potential plot feels like one of those unlikely Bond movies such as Diamonds are Forever, which also hinged on control of a satellite, albeit to fry humanity, not give it mobile satellite services.
ICO got into trouble shortly after it began operations as far back as 2000, when it became controlled by Eagle River Investments, a Craig McCaw owned investment arm, which put in $577 million to help bring the company out of Chapter XI. McCaw has repeatedly shown that he understands a thing or two about spectrum assets, and despite holding ICO for over ten years, it looks like he is going to get out of it more than he put in, and it may even buy him enough favors to help him become involved in the MSS business. It’s tenuous logic but bear with us.
DBSD North America is the subsidiary of ICO and it has talked about itself becoming a minor shareholder as DBSD restructures. It seems that the 2GHz S-Band MSS spectrum which ICO owned will go with DBSD, and if Dish CEO Charlie Ergen also manages, through his other vehicle EchoStar, to secure control of the spectrum of the bankrupt Terrestar, he would have a neat little bundle of assets to either compete with LightSquared or lay at its door.
We say this because we do not believe that Ergen will active play outside his area of expertise ‘ satellite signaling ‘ and he might gain plum contracts for EchoStar if someone else builds out this MSS spectrum, and you might guess that this is specifically LightSquared and potentially any collection of financial and operator partners. What Ergen might ask in return will not only be satellite work for EchoStar, but additionally it might be the one chance that his beloved Dish Network has of securing a relatively wide return path, using LTE, to get Dish into the triple play market ‘ voice, broadband and video or quad play if that includes portable voice.
US newspapers are saying that Ergen thinks that the spectrum he might inherit from DBSD is worth more like $2 billion to $3 billion and he could just make a quick turn on the deal, and that is feasible. He has owned, part owned or had debt leverage on some MSS spectrum or other, for some years now and obviously sees its worth.
But similarly Craig McCaw would never sell up spectrum for less than its worth, so it’s easy to imagine some deal where he inserts himself into either the LightSquared equation or to an MSS operation which competes with it. His recent departure from the Clearwire board was accompanied by assertions that he would never again get into a business that was so cash intensive, which would seem to rule out any play at LightSquared or a rival. But then again that’s what he would say if he planned to double up his bets at Eagle River Investments in 4G. That company still owns significant chunks of Clearwire stock, it might just as easily emerge somewhere on the sidelines, helping LightSquared or seeding a rival. Perhaps we have too much respect for McCaw’s know-how. Perhaps not.
We have no insider knowledge of any such tie up, but asking McCaw for one of his assets at a knock down price and using a satellite company as a go-between would prepare the ground nicely for his involvement.
Whatever, spectrum values were given a rocket back in early January when Qualcomm made the promise for AT&T to come good on Carrier Aggregation technology, part of the LTE standard, and put it into future chips. We said at the time that this changed the financial equation for all spectrum, and increased its value. The reason that Qualcomm made this promise was so that it could sell its FLO TV spectrum for almost $2 billion, but as we understand it you can aggregate traffic from multiple diverse spectra using this technique, so that you can select a return data delivery path for any internet or video request, offloading it to different spectrum to the main service. Why would that not work in MSS spectrum as much as in UHF which FLO was in?
MSS spectrum itself was given the rights by the FCC some time ago, to be delivered from both a satellite but also from a terrestrial base station, with the latter being called an Ancillary Terrestrial Component. There could easily be made a technical case for broadcast data such as video to be delivered from the satellite and voice and data to be delivered from terrestrial bases stations in LTE. And if you lump all the spectrum together from the two holdings that Ergen may develop access to ‘ DBSD and Terrestar, and add it to the SkyTerra spectrum that LightSquared has access to. At present LightSquared is supposed to have a leasing deal with Terrestar, but the Bankruptcy court has something to say about that, and EchoStar has senior debt in that equation, so its final ownership is still to be decided.
So even if McCaw has no interest in the equation and is really getting out of spectrum holdings, Charlie Ergen is certainly playing a shrewd game, and has upped the ante in control of spectrum that LightSquared would kill for, and his price for that must surely relate to offering video services to LTE devices from satellites, and make him able to offer quad or triple play services from the Dish existing single play TV service offering. Dish has over 14 million captive customers in the US. The $1 billion deal still has to be signed off by the FCC.
Originally the DBSD spectrum was tested with Clearwire spectrum to see if it could deliver a hybrid satellite-terrestrial communications network for mobile content, but its parent’s ownership has been in bankruptcy protection since May 2009. Dish stock has rocketed over 5% in the past few days, and EchoStar has flipped that far in a single trading day, so clearly the market has some sniff that this move is significant, however it plays out.
Earlier this week LightSquared said it was triggering Phase 2 of its Cooperation Agreement with Inmarsat to make more spectrum available to it, saying that it is seeing much better than expected demand for capacity on its 4G-LTE wholesale network. This deal will mean up to 59 MHz spectrum is available to it across the US. We don’t think that there is room for second wholesale in US LTE, so it’s just possible LightSquared is being lined up to take a whole lot more spectrum.