A deal cut in the early days of February changed perhaps the likely winners and losers in the 6 player shootout for supremacy in the Mobile Satellite Services space in the US, with EchoStar and other investors backing TerreStar, adding cash and donating key L-Band spectrum, to give it an edge over its rivals, Mobile Satellite Ventures (MSV) and ICO Communications.
The financial future of TerreStar and each of the other companies that can offer US satellite services plus an Ancillary Terrestrial Component (ATC), where they use the same spectrum to build out on the ground to achieve in-building penetration, are down to execution in sales, fundraising and the imagination they can bring to create new services.
The deal announced last week, where TerreStar received $300 million of funding from EchoStar, Harbinger and other investors, shows that TerreStar has at least one thing in place, the ability to attract the big dollars that it is sure to need if it is going to stay the course. It will need that much money at least to put its 2009 scheduled super communications satellite into play, and begin to attract customers.
In this market we are talking about six companies really, TerreStar, which has always had S-Band 2 GHz spectrum, and which now, through the EchoStar and Harbinger deals, also has L-Band spectrum; MSV which began life in L-Band and which actually invented the idea of an ATC and also which originally created TerreStar as a 2 GHz alternative to itself; ICO Communications, another 2 GHz campaigner; and three established satellite services companies Inmarsat, Iridium and GlobalStar.
These will each offer satellite services across three frequency bands with different types of satellite. GlobalStar and Iridium have multiple Low Earth Orbit (LEO) satellites, each individually less powerful than any of the new offerings, but collectively a threat. They have more costs, less time to get their payback, but a more established existing business.
The L-band companies, mostly using high L-Band in the 1.5 GHz range include Inmarsat and MSV and now, with this latest deal TerreStar can also offer L-Band.
If you read everything they say about themselves they have the spectrum, most of them have 20 MHz ground to satellite spectrum, which covers the entire US and, in most cases, a Canadian footprint as well.
Some, such as TerreStar and Inmarsat have spectrum overseas, and either plan satellites for that spectrum, have older satellites in place, or have an existing international fleet. Inmarsat, being Europe based has the strongest existing business in Europe.
The FCC arguments about the use of ATC are largely over, with the investment interest in these companies coming from the fact that the FCC has granted the rights for these mobile satellite services to also use the spectrum on the ground, establishing the ATC.
This is fairly simple, but has required a considerable amount of R&D to achieve, much of it carried out by MSV, and these companies such as MSV and TerreStar benefiting from having full rights to all the patents involved.
The key to all of this is to have radio beams that are largely directional. That way those coming from a satellite do not interfere with those coming from the ground, because antennas can be adjusted automatically to amplify either signal. This had to be proved, patented and licensed before this industry could take off and now it is largely ready to do that, with the new intellectual property going into satellite antenna that will be launched this year and next (2009) in satellites that are described as the ‘most powerful ever built,’ meaning that the amount of bandwidth per $ spent on satellite hardware is significantly higher and each have substantial, modern antennas that can change shape to maximize bandwidth payload and which are sensitive enough to ‘hear’ a signal from a handset sized radio, without it having to burn out its battery on amplification efforts.
The ATC or Ancillary Terrestrial Component can be thought of as a separate network almost. It requires transmitters, which in L-band are likely to have a range of around 12 Km if they have high power limits, with additional gap fillers to deliver into urban canyons (between skyscrapers for instance). Another way to build these networks is to use more transmitters with lower power with a reach than can be as low as 3 Km in built up areas.
This network, because it is in the same spectrum, can be picked up by the same device ‘ and such a network will always fall back to the terrestrial network where it is present. This will mean that the radio in the portable device only has to reach a nearby tower, not a remote satellite. This signal will then be treated in a number of different ways, depending upon where it is headed. If it is, say a voice call, intended for a customer of the satellite service who is in range of a terrestrial transmitter, it can be switched across country through the backhaul network of the ATC and into another part of the terrestrial network and delivered. If the recipient is a customer of the satellite network, and is out of range of the terrestrial component, then the signal is routed to the nearest ‘feeder link’ which is a line of site uplink to the satellite, using 12.5 GHz spectrum, the same type of spectrum that is used to deliver satellite DTH services from the EchoStar and DirecTV, and then down from the satellite.
If the call is intended for someone off network the satellite services send it to the large US RBOC which they have connections with, and share the total call cost between them.
If the originator of the message or service is out of range of the ATC, then the message is sent straight to the satellite, and delivered on a downlink direct to the recipient.
The big issue we see in the set up are two things. One is that the battery life, which has a knock on effect on the size of devices, where they have the power to speak directly to the satellite; the other is the amount of money that is required to build out an ATC and supply devices for it. If you want to build a national network with 1.5 GHz, it is just like building out a 3 G network, or other wireless network such as the 2.5 GHz Sprint network. The spectrum propagation characteristics dictate how close towers have to be, in other words maximum cell sizes, but each satellite network only has to reach in-building where a satellite signal will not reach, so large urban and metropolitan areas.
This type of network has the power to compete with cellular operators, but it has a network cost that is similar to cellular for a national footprint, or perhaps it’s a little lighter if you say that only major conurbations need an ATC and everything else can be dealt with by the satellite. But we must not get carried away here. The cost of building such a network is likely to be measured in the low $ billions, while the satellite side is measured in the low $100s of millions, and in some cases lower.
Why can’t the satellite MSS operators only use an ATC? The FCC virtually gave the spectrum way to each of these operators and in many cases raised it from 8 MHz to 20MHz (to re-distribute spectrum where the owners had defaulted on build out promises) because there are obligations placed on the spectrum.
Those obligations come out of the understanding of how much better satellite-based communications would be in the face of terrorist and natural disasters, such as Hurricane Katrina. Each of the designs, and particularly the intellectual property that MSV has brought to bear, are so that multiple emergency services can continue to operate using a variety of communication protocols, but have their conversations connected to one another through the satellite. The local police and security agencies, aid agencies, local government and emergency response will not only be able to talk freely between their own units, but also communication between these services will be able to be set up rapidly by the satellite operator, and be can be given priority automatically.
Of course it is instrumental to services offered over these networks that emergency workers get priority when landlines and cellular operators are blocked or go down, but it is only during the utmost emergencies that this would affect public services.
In a way this guarantees some business success to any satellite that can sign up enough of these emergency services, given that each of these agencies around the US currently has a commitment, often a constitutional commitment, to contract for such services, and they fully understand that they are expensive so have decent budgets set aside.
In the past, satellite services have been extremely ad-hoc, and have required complex set ups, and specialist equipment. But these new MSS services are all about standards. For the most part they expect streams to be made up of IP packets and this means they are like an Internet Service Provider in the sky. But also the communications protocols supported can include WiMAX, GSM, W-CDMA, CDMA, Flash OFDM as the effective air interface. While that assumes that devices which support these protocols have enough power and radio range to reach the satellite, without killing their battery, it is WiMAX and other OFDM based networks that do the best job for carrying IP ‘ because the technology was designed for packet switching.
The satellite version of GSM is called GMR, a version created by Hughes to speak directly to satellites and ICO for instance supports this and OFDM for its DVB-SH mobile TV service (so a combination of GSM and OFDM) whereas TerreStar and MSV expect to be able to support all of those protocols.
The potential for the most efficient use being in a WiMAX network has led to much speculation that these satellites can implement their ATC and their satellite links in WiMAX, and on the device either use a radio that has the reach to send and receive L-Band/S-Band as well as the frequency that is being used by new WiMAX networks such as Clearwire (2.5GHz). The very fact that Clearwire, and potentially Sprint in a partnership, might be able to source devices that can use the MSS satellite spectrum on the ground and to the satellite, as well as to WiMAX base stations solves lots of issues. It means that the MSS carriers can partner with a company that has a major customer acquisition program, and it means that the ATC spectrum can be slowly harvested (built out), as WiMAX spectrum becomes exhausted, or only in markets where it is absent. Of course the devices will need to be able to work in 2.5GHz as well as either L-Band (1.5 GHz) or 2.2GHz or both, and issue a signal strong enough to be picked up on a satellite antenna. But that should not be beyond the currently design capability of WiMAX CPE designers.
MSV plans to use a technology from Nokia Siemens Networks called Internet-HSPA. This was conceived by Nokia pre-NSN, and has become the basis of a standard that aims to provide an all-IP, flat network, giving operators the low cost base and efficiency of the emerging IP technologies like WiMAX, but using existing 3G technologies. It eliminates legacy circuit switching, flattening the network and optimizing it for native IP applications and of course uses the Nokia Flexi base station on the ground, to support both the ATC and the native WiMAX effort.
The idea that a remote geostationary satellites (over 22,000 miles above the earth ‘ see diagram below) can talk to small handsets is a new one and the closest to achieving this is at Thuraya to cover the Middle East and Africa. This was a Boeing satellite launched in 2000 and boasted a handset about twice the cubic volume of a modern mobile phone. It also needed a fairly large quadrifilar helix antenna, around half an inch in diameter, which comes out of the devices about 9 inches and sits above the head of the user.
This was made possible because of the sensitivity an unfurlable 12 meter antenna gave to the satellite, and today antennas can be built to 2.5 times that size, to pick up exceptionally weak handset signals. MSV has also added some technology to remove background noise from the signal. The battery no longer needs to drive a power amplifier, and specialist chips are not quite so necessary.
But even today there is some doubt that enough link margin will exist so that a direct link to the satellite can be made by a handset sized device, especially if there is anything in the way, like a house roof.
The overall effect would be a two spectrum network where the terrestrial portions carried most traffic, but where some special devices could reach the satellite as well as commandeer emergency communication services.
But just as easily these MSS services might deploy other protocols aiming to pick up the 30% or so (estimate) of land area in the US where fixed broadband is currently not being delivered. Currently proprietary satellite operations like ‘Wild Blue’ support expensive low end DSL services for most of the major carriers. AT&T and DirecTV and EchoStar all resell the WildBlue services.
These new satellites might take much of this business. At present expensive $500 plus fixed antennas are needed for such services, whereas using MSS this could become a handheld or laptop experience which is far cheaper.
This means that the major RBOCs can contract with the MSS carriers for rural broadband and even for rural cellular voice, using GSM and CDMA protocols and save themselves ANY rural investment at all, and yet fulfill all FCC obligations in that area. Eventually, once sufficient business was tied up in this way, the three remaining RBOCs ‘ Verizon, AT&T and Qwest could either buy these services out, or continue indefinitely at arms length. Of course this might form the basis of a partnership with a few hundred rural telecom incumbents also.
In the end MSS satellites, along with minimal, or local only build out in ATC, might be used as an ISP with multiple protocols and multiple virtual networks. Firefighters can have their own network, alongside maintenance field workers using push to talk job dispatch (one of the well established MSV applications). The firefighters would go up a priority when there was a need to use satellite services in an emergency, whereas the push to talk job dispatch uses very little bandwidth, and is ideal for a satellite two way intercom protocol.
Of course there are lots of other applications for these satellites, and bulk capacity for use on things like enterprise data or even backhaul services are not impossible (cellular backhaul would be time delayed so we’re not sure that’s possible).
And ICO Communications has an experiment with in-car video services from satellite, using the OFDM based S-Band DVB-SH system from Alcatel-Lucent. This will send a one way broadcast set of TV signals to a number of in-car antenna, and offer back of seat TV. It will be sold in the same way that the satellite radio services have been sold, and competes head on with them, by using it as an incentive to sell new cars and bundling it into the price.
We would expect all of these players to begin to offer something similar to this and additionally, wherever they build out ATC transmitters the same service can be offered in-building to handsets. One idea might be to act as a carrier for Placeshifted video content over the network to wherever a handset or laptop is.
But even if all the MSS do this, the revenue potential is far smaller each time than the communications on an emergency service or on a rural DSL service.
So it will be another string to the MSS players’ bow but we would not expect it to be the main drive towards profitability.
But if you think of how many field representative types across the US that often stray into areas where only satellite might reach them and the same for emergency workers, then suddenly you have a big, exclusive cluster of constituencies that MSS can chase.
So collectively is all of that enough business to support 6 separate satellite operators in the US?
There really is no average capex cost of a satellite. Some LEOs are way under $100 million and some GEOs significantly over that value. If we take a low figure like $70 million for a single satellite MSS Capex and add the Opex at less than 20% of that amount per annum, there’s still an annual requirement on a ten year life expectancy for each satellite to claw back around $14 million, and at monthly customer rates of $50 or so each month (monthly bills for satellite voice users range from $25 for certain public safety and emergency applications to over $100 for high volume users), and around 50% of this might be spent in customer acquisition or profit shared with partners. In that case a population of at least 50,000 customers would be required to break even. So for 6 satellite companies, you might assume that’s 300,000 customers. If we live with that for a second and it would depend upon circumstances to how this figure might change if there is any element of handset subsidy (if for instance this involved mobile voice in rural non-served areas for AT&T or another RBOC).
Given that Iridium is actually a bankrupt global cluster of 48 satellites bought out of Chapter XI, which anticipates a replacement cost of $2 billion over ten years, this gives an idea of how unappetizing these numbers might be for Iridium. But for MSV, TerreStar putting up two satellites each, and ICO putting up one, in the US alone, that’s far more realistic.
But despite its potential for future costs, Iridium has added to its subscriber base at a double-digit rates over the past 18 months and now has about 212,000 subscribers, including 100,000 using satellite mobile phones and it is profitable due to the lack of costs associated with its satellite fleet.
Even the relative newcomer MSV has 30,000 direct customers and another 170,000 through indirect channels such as Geologic Solutions, Wireless Matrix, Transcore and SkyBitz.
So those economics might work, but that would still condemn these operations to being bit-part emergency plays permanently and the potential cost for a US wide ATC network, additional to the satellites, could be closer to $2 billion to $3 billion in build out alone. That might work if they all share all the ATCs they build out and work together on ground infrastructure.
Valuations for companies like MSV and TerreStar have always been worked out when each slice of capital has injected into them, on a per MHz per pop basis of between $0.18 and $0.25. In other worlds on how much MHz of bandwidth they hold multiplied by the number of people their services might eventually reach multiplied by a discounted per customer net margin. Today, after the EchoStar deal, TerreStar is valued at $490 million (which is pretty low given that it just got $300 million of cash). A per MHz per Pop calculation would come out at 300 million US population times 10 MHz (20 MHz with half each way) times say $0.20, which is roughly where it is today.
The real calculation will need to be much more like total likely customers in the next few years (call it XXX), multiplied by annual revenues (say $600 per customer) less cost of likely capex and opex (including customer acquisition cost) and cost of debt. In order for any of these companies to generate enough business to make that formula positive when it has $3 billion in ATC build out costs, then XXX will need a minimum of 1 million customers and perhaps a whole lot more.
Which leads us to the conclusion that the only way for these businesses to make a real impact in the telecommunications skyline in the US, is for a number of them to merge their efforts, and for this to happen around deals with other major operators, such as Sprint, ClearWire, or even the RBOCS, or possibly all of them.
And now that EchoStar has made a statement of intent by backing TerrStar, and donating its L Band spectrum, it has perhaps elevated it from the company that might have been thought to be least likely to succeed, and which so far has achieved the least, and turned it into one of the two or three potential survivors in a future shake out that cannot support 6 suppliers. The EchoStar involvement may also meant that DirecTV gets involved with one of the other players, perhaps ICO, so that it can also look to a mobile TV addition to its TV services.
Another deal a few weeks back was announced, for MSV to work with Inmarsat and share its network, so that achieves much the same for MSV ‘ it keeps Inmarsat from launching on its own satellite and overspending to support this new business area, and at the same time offers MSV a strong overseas partner, which will help it land contracts that are global rather than US and Canada only.