01.13.12
Posted in Financials, Inmarsat, Maritime, Operators, Services, VSAT at 9:26 am by timfarrar
Back in 2008, the decision of Maersk to choose Inmarsat’s FleetBroadband service for 150 (later increased to 370) vessels was described by Inmarsat as “a ground-breaking deal” which represented “the strongest possible endorsement of our revolutionary FleetBroadband service”. As a result, this week’s revelation that Maersk is now going to shift 400 vessels to VSAT must be a correspondingly earth-shattering blow to Inmarsat, because not only has Maersk decided to move away from FleetBB, but it has opted for a Ku-band solution from Ericsson and Thrane & Thrane (with a 7 year service agreement), rather than the XpressLink service from Inmarsat which would provide an upgrade path to the Ka-band Global Xpress service.
Maersk’s average spend for the 370 ships using the FleetBB service was about $2600 per ship per month retail, implying that wholesale revenues to Inmarsat in 2011 were between $8M and $9M (and making them Inmarsat’s biggest single maritime customer for L-band service). While Maersk will presumably keep Inmarsat as a backup, its safe to say that the vast majority of this revenue will likely be lost once the transition is completed. The decision to make this change comes after Inmarsat’s move to impose usage caps on maritime vessels in October 2011 (with the data rate limited to 20kbps once the cap is reached), because Maersk had apparently been generating as much as 25% of all I4 (BGAN+FBB+SBB) traffic under its former unconstrained deal, and Inmarsat was worried about the saturation of its I4 network in regions such as the Middle East, which could impact higher value traffic from defense and media users.
This news also comes in the wake of Inmarsat’s major reorganization, which was revealed in early January, and has led to the exits of a number of senior managers in the government and maritime business. Despite Inmarsat’s claims that it “does not intend to change its policy of distributing its services primarily through independent channel partners”, the new management structure will have both direct and indirect sales reporting to the same people, which has been very poorly received by Inmarsat’s distributors, who clearly expect Inmarsat to cut them out of the business in the future, as Inmarsat emphasizes its own direct sales channels and gets “closer to our partners and customers” as the new CEO describes it.
I’m told another part of the reorganization is that Inmarsat’s financial reporting will be realigned from Q1 2012 so that the four new business sectors (Inmarsat Maritime, Inmarsat Government US, Inmarsat Government Global and Inmarsat Enterprise) will report their own results on a total (retail) basis, rather than breaking out wholesale L-band revenues in land, maritime and aeronautical sectors separately. This will mean that a maritime customer transitioning from a FleetBB L-band service to a resold Ku-band service such as XpressLink will bring in the same (or more) retail revenue (albeit with a much lower gross margin), whereas previously Inmarsat would have had to take a hit to its wholesale L-band revenues to facilitate this transition.
However, this is going to make financial analysts even more confused about the prospects for the company than they already are. Most analysts have maintained a very positive view of the company, and apparently the consensus view is that Inmarsat should continue to derive value from its North American spectrum assets, whether or not LightSquared files for bankruptcy. With the triple threats of continuing bad news in the maritime sector (where there is a pretty bleak outlook for shipping companies), reductions in defense spending (including the pullout from Afghanistan) and that Inmarsat might ultimately end up paying money to LightSquared’s creditors rather than receiving future lease payments, Inmarsat’s next results call is definitely going to be worth listening to.
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01.11.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:05 pm by timfarrar
Yesterday, LightSquared held an investor call to provide an update on regulatory progress, including Mr. Falcone’s meeting last week at the FCC (which failed to gain the attention of the FCC Chairman, unlike Mr. Ergen’s visit to the FCC the same day). LightSquared’s investors clearly want to know whether there is any prospect of approval being granted, and a Debtwire story on Jan 3 reported that some of the previous investors have lost confidence in a successful resolution of the issue:
Farallon Capital Management dumped its stake in LightSquared’s USD 1.6bn first lien loan last month as the telecom company and sponsor Harbinger Capital battle regulatory controversies, according to two buyside sources and a source familiar with the matter. Displaying a greater taste for potential distress, Icahn Enterprises has emerged as a recent buyer of LightSquared’s bank debt in the low 40s, the two buyside sources said.
The exit of Farallon signals the loss of one of LightSquared’s former anchor investors. The California hedge fund was one of the biggest par holders in LightSquared’s capital structure, owning more than USD 150m of the Libor+ 1,200 bps term loans the company raised to finance the build out of the its 4G long term evolution (LTE) network, the sources said.
The loans were recently quoted at 43-45 from 90-92 at the beginning of August, according to Markit.
However, I understand that the new investors, including Icahn, haven’t stopped believing that they will be able to overcome the opposition of the GPS community, and ultimately gain approval on the back of (what was described to me as) their greater “sophistication” and financial resources compared to Harbinger. Indeed, part of Mr. Falcone’s objective in his FCC meeting may have been to suggest that the FCC would have to deal with less cooperative owners of the assets in the future, if they delay approval and allow LightSquared to fall into bankruptcy.
Its suprising that anyone could believe that they will succeed where Harbinger has failed, especially as the NTIA now appears determined to spin out the testing process for as long as possible (and almost certainly to beyond the November 2012 election). In addition, it would be easy for the FCC to initiate a (multi-year) rulemaking proceeding on receiver standards for GPS receivers, if they want to kick this issue even further into the long grass. Nevertheless, the implications are that LightSquared’s debt investors are likely to allow the company to keep pushing for approval, rather than trying to force it into bankruptcy more quickly in order to liquidate the assets before all the cash is gone. That would suggest a bankruptcy filing later in the second quarter rather than in the next couple of months.
Ultimately, I think this will look a lot like the Iridium bankruptcy in 1999, where investors thought there was something worth billions of dollars that could be rescued with a bit more money and better execution, and spent nine fruitless months before they finally conceded that $5B of investment needed to be completely written off. The fundamental reason why I think their efforts will fail is that the continuing lease payments to Inmarsat ($115M per year) very likely outweigh the value of 20MHz of L-band spectrum, which at best might be usable terrestrially in 5-10 years time (if approval was even granted).
At this point there is no way that Inmarsat is going to compromise on these lease payments, because the whole LightSquared affair (which Inmarsat enabled through the 2007 Cooperation Agreement) has deeply upset the DoD, which accounts for ~20% of Inmarsat’s total revenues (and probably an even higher proportion of the Global Xpress business plan). Indeed, some within Inmarsat might feel they would give back the money paid to date, if only the whole LightSquared mess could be made to go away. Inmarsat already appears to be telling the DoD that it was not their fault, because they were ordered by the FCC (under a Republican administration) to enter into the Cooperation Agreement, against their better judgment. In that context, Inmarsat’s protests in January 2005 that approval of the ATC plans proposed by LightSquared (then MSV) would lead to substantial degradation of MSS services due to overload interference, now appear very prophetic.
As a result, I expect the end game (which is now unlikely to be reached before 2013) to involve a combination of trying to recover the money paid to Sprint and not spent on deployment, selling the ground spare to Boeing, and agreeing to sell Inmarsat the in-orbit satellite and spectrum assets in exchange for a return of a sizeable proportion of the ~$500M paid to date. Whether that will be sufficient to provide downside protection to buyers of LightSquared’s first lien debt (totalling ~$1.6B) “in the low 40s” remains to be seen.
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11.29.11
Posted in Aeronautical, Broadband, Globalstar, Handheld, Inmarsat, Iridium, LDR, Maritime, Operators, Orbcomm, Services, TerreStar, VSAT at 12:20 pm by timfarrar
As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.
This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.
Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.
If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.
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09.13.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 4:20 pm by timfarrar
So this afternoon the FCC has joined with the NTIA in mandating further tests for LightSquared. Though the need for further testing was hardly a surprise after yesterday’s NTIA letter, what comes as a huge shock is that the FCC has offered LightSquared absolutely nothing to indicate it is minded to approve LightSquared’s terrestrial operations in the future. In particular, the FCC has not set out any timetable for completion of the additional testing (although it has stated that the “interference concerns” include “certain types of high precision GPS receivers, including devices used in national security and aviation applications”), or even specified what testing is required (and recall that the NTIA basically said for precision devices “come back when you have made a filter and we’ll think about more testing then”).
Although the FCC hinted back in August that it might be preparing to throw LightSquared under the bus, today’s Public Notice clearly indicates that the FCC has lost all patience with LightSquared and no longer believes that it is a viable near term option for creating additional competition in the wireless market. Thus perhaps Mr Falcone’s next call to the FCC Chairman ought to involve a bit of Shakespeare: Et tu, Julius?
After this ruling, the LightSquared rollout must now be regarded as being suspended indefinitely, and its hard to see where the company (and Harbinger) goes next. My best guess is that it will end up like Iridium back in 1999, where after a few months of utter panic in the spring of 1999, there were three distinct stages to the bankruptcy. In the first stage (lasting about six months), the company and its advisers claimed that the assets were still worth billions of dollars and all they needed was a bit more money. In the second stage (lasting most of 2000), they realized that wasn’t true and struggled even to find a bidder who was willing to pay pennies on the dollar (Iridium sold for $25M after investing $5B in its network). In the third stage, the creditors then spent years suing whoever they could (in that case Motorola) to try and recover their losses.
In this case, while it may take a couple more months before we finally see the end game emerge, its hard to see why anyone is going to fund the enormous costs necessary to keep the LightSquared plan on track, including the ongoing payments to Inmarsat (and perhaps to Sprint as well) for very long in the face of a completely undefined timetable for resolution of the outstanding issues. Its equally hard to see who, other than Inmarsat, might buy these assets, and even then the price would likely be only a few hundred million dollars at best (assuming Inmarsat justifies such an acquisition based primarily on a satellite-based business plan). Then, no doubt, there will be litigation against whoever can be blamed (which of course is why the FCC is being so careful to protect itself in the Public Notice).
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09.08.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 1:58 pm by timfarrar
There wasn’t much consensus in today’s hearing of the House Committee on Space, Science and Technology about how to solve the LightSquared-GPS interference problem, or even whether this is feasible. However, several Democrat and Republican committee members did seem to agree on one thing, that the government was “somewhat complicit” in this problem, or in other words that the FCC was largely to blame, for not considering the possibility of overload interference when it originally granted LightSquared (then MSV) its ATC license.
Government witnesses presented a united front recommending further testing, with Scott Pace of GWU (as the only non-government employee and therefore not subject to the “mandate from the White House to seek a win-win solution” as Mr Russo put it) going further and suggesting that LightSquared should be banned from operating. Indeed Dr Pace’s testimony, as someone aware of the 2002 discussions between MSV and the GPS Industry Council, was quite definitive in stating that the agreement over out-of-band interference rested on the assurance from the FCC that the L-band would be maintained as a (quiet) satellite band without terrestrial-only use. In that context, one might very well tend to blame Inmarsat for agreeing in the December 2007 Cooperation Agreement with MSV (in exchange for its multi-billion dollar spectrum lease contract) that land-based satellite services would no longer be protected from MSV’s terrestrial operations, thereby facilitating potential deployment of a terrestrial network which would (by design) overload MSS terminals (and as we now know GPS receivers) in the L-band. Of course the FCC was also perfectly willing to go along with this in the March 2010 ruling which approved the changes embodied in the Cooperation Agreement, over the objections of two MSS service providers. However, the GPS Industry Council apparently did not comprehend the implications of this agreement (perhaps because many of the technical and operating provisions were confidential?), although it seems the DoD had at least some understanding of the potential for interference.
During the Q&A for the hearing, LightSquared highlighted on several occasions that the $4B it had (supposedly) already spent on the project was based on the “settled expectations” created by the FCC’s 2003 and 2005 rulings, presumably setting the bar for litigating a compensation claim if its terrestrial buildout does not go forward.
UPDATE: Judging by darkblue‘s comments on the Washington Post write-up, perhaps a “nice fat lawsuit against those attempting to interfere” is exactly what Harbinger now has in mind?
However, not only the government witnesses, but apparently even the committee members themselves, agreed on the need for more testing. A particularly revealing comment came from Mr Russo, Director of the PNT National Coordination Office (and therefore the point person on defining this testing), when he said that the additional testing couldn’t be defined without clarity from the FCC on what the “end state of operations” will be, in other words whether LightSquared’s proposed “standstill” on upper band operation will be made into a permanent ban by the FCC or will be left open.
LightSquared highlighted that it had made a new proposal to the FCC yesterday, which (even though the main focus is on further limiting LightSquared’s power on the ground) seems to embody a number of subtle concessions, notably that it is basically accepting the GPS industry’s 1dB C/No criteria for assessing degradation rather than the relaxed 6dB degradation criteria it had proposed back in June, and that it is proposing the use of a filter to protect GPS devices which will eliminate any possibility of operating in the upper 10MHz L-band frequencies in the future. Thus it seems that the FCC might now end up ruling that the upper 10MHz block can’t be used for terrestrial operations (at least not without a future application showing what would be an impossible proof of non-interference). As I’ve noted before, that might conceivably put LightSquared into default on some of its debt agreements, though of course, if LightSquared is unable to raise further funding in the near future, it might very well be a moot point.
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09.07.11
Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services at 8:40 am by timfarrar
So Iridium has announced its “vision for the future of personal mobile satellite communications”, Iridium Force, including a range of new products and services. These new products and services are not exactly what was rumored last week (no commercial Netted Iridium service or standalone Bluetooth device). Instead they include the new Iridium Extreme (9575) phone, which includes integrated tracking capability and an SOS button, a new smaller 9523 voice and data module (which could potentially form the core of a standalone voice-capable device) and the AxcessPoint WiFi hotspot which provides data capability through a 9575/Extreme or 9555 phone.
It seems the aim of the AxcessPoint hotspot will be to increase usage of existing phones, via a low incremental cost (~$200) accessory, which is likely to provide a better financial return for existing service providers than a more disruptive low cost standalone device. Indeed Iridium expects to achieve a premium price for the new Extreme phone and does not see a need to lower the price of the 9555 for now (given its strong sales so far this year despite competition from the ISatPhone Pro).
If the two phones are sold (at retail) for say ~$1200 and ~$1000 then it wouldn’t surprise me if up to 80% of Iridium’s handset sales for the rest of this year are of the new Extreme phone (assuming adequate stocks are available). That would certainly be positive for Iridium’s 2011 equipment revenues, which to date have not declined compared to 2010 as the company originally expected. However, Iridium intends to keep the 9555 in production, providing it with optionality on pricing next year, once Globalstar comes back into the handheld market.
What will be really interesting is how Globalstar pitches itself, given that Inmarsat has not achieved much revenue success with the ISatPhone Pro at the low end of the market. It seems Globalstar will need to challenge Iridium and focus on the medium and high end of the handheld market in order to achieve reasonable ARPU levels. In that case, how important will a low price handset be to Globalstar (given this strategy hasn’t yet enabled the ISatPhone Pro to penetrate the high end of the market)? Will unlimited usage packages be a better strategy to pursue, or will Globalstar’s other attributes (consumer distribution channels, better data speeds, low latency and good voice quality) be sufficient to achieve a different result to Inmarsat? Whatever course Globalstar takes, Iridium’s success in the handheld market over the last 12 months means I’m not convinced that lower handset prices are as important to future revenue growth as some people previously expected.
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08.23.11
Posted in Handheld, Inmarsat, Iridium, Operators, Services at 8:41 am by timfarrar
One of the most puzzling aspects of Inmarsat’s Q2 results was the revelation that while it has now activated over 30K ISatPhone Pro handsets (as of early August), and sold at least 15K handsets to distributors during the second quarter, land voice revenue in the quarter was only $3.3M, down 17.5% on the corresponding period in 2010. While the decline in overall revenue appears to be largely due to reduced BGAN voice usage in Afghanistan, service revenues from the ISatPhone Pro still appear to be pretty minimal, presumably less than $1M in the quarter, and Inmarsat admitted that the revenue “is still lagging where we would like it to be”.
I’m told that the reason for this discrepancy is that Inmarsat has sold nearly 10,000 phones in China over the last year, which come pre-activated with a 10 minute prepaid card, valid for 2 years. That explains why Inmarsat is now claiming to have achieved a one third share of new activations, although it still appears to be trailing Iridium in overall handset sales (Iridium added 17K net new commercial voice subscribers in the second quarter).
Of course, the booked service revenue from these ISatPhone Pro sales in China is well under $1 per month, which clearly has a dramatic impact on Inmarsat’s overall handheld ARPU. As a result, if the Chinese market continues to be a major driver of sales for the ISatPhone Pro, it will make it even harder for Inmarsat to come close to gaining 10% of the handheld market in revenue terms by the end of 2012. Indeed the challenge that Inmarsat faces in “break[ing] into the heavy-spending larger customers where there is a long-established provider in place” is amply demonstrated by the fact that apparently journalists don’t even know what an ISatPhone Pro handset looks like.
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08.18.11
Posted in Financials, Globalstar, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 8:49 pm by timfarrar
In my last post I estimated that to in order to relocate and preserve precision GPS service for farmers and surveyors there might need to be a “delay of several years” before LightSquared was able to bring its lower 2x10MHz of spectrum into use in a terrestrial network. Indeed, according to one GPS industry commentator, a transition period of 12 years might be more appropriate to “allow a smooth transition with a manageable financial impact to the high-precision GPS user community.”
However, because of LightSquared’s prior assurances that it wanted to cooperate with the GPS industry to preserve existing services, no-one seems to have noticed that in fact the company does have a potential “nuclear option”, namely that because these services are provided on a commercial basis to Starfire and OmniSTAR, LightSquared and Inmarsat could simply decide to cease supporting these services in accordance with their capacity lease contracts. Given that LightSquared is now blaming the GPS industry for the interference problems and accusing GPS manufacturers of being unwilling to cooperate with its attempts to find a solution, it seems increasingly plausible that LightSquared could now say that it simply can’t continue to support these services unless the FCC mandates a rapid transition of precision GPS users to new equipment equipped with filters.
LightSquared (which provides capacity to OmniSTAR, now owned by Trimble) has previously indicated that it only plans to support its legacy services in “emulation mode” for a limited period of time, and it appears likely that the contract with OmniSTAR could therefore potentially be terminated at relatively short notice. While Inmarsat’s contract with Starfire may not operate under quite such a short time horizons, many of Inmarsat’s leases are renewable on an annual basis and so could possibly be terminated if desired. In reaching such a decision, Inmarsat would have to decide whether it prefers the ~$1M or so it receives each year from Starfire to the $115M it is being paid each year by LightSquared (indeed it is conceivable that this issue may have been addressed in the deal under which Inmarsat was paid an additional $40M by LightSquared earlier this year).
Some might argue that the FCC would surely step in to prevent such damage to precision GPS services. However, in March 2010 when it granted LightSquared the requested modifications to its ATC license, the FCC explicitly stated that it would refrain “from interfering unnecessarily with licensees’ business negotiations” even though “this may present challenges to earth station operators using the satellites involved, and may require modification of operations, deployment of new equipment, or other adjustments” because “it would not serve the public interest for the Commission to assume the role of an arbiter of disputes between a satellite operator and its customers.” Nevertheless, the FCC did leave itself one potential escape route, stating that it would not step into such disputes “in the absence of a prior determination that the satellite operator provides essential service and is unconstrained by actual or potential competition from providers of substitutable services.”
Of course, if the FCC did step in and force LightSquared to continue providing precision GPS services, then that might provide grounds for LightSquared to sue for compensation, especially if that was determined to be the main roadblock to offering commercial service in its lower L-band spectrum. As I’ve noted before, ending up in court certainly seems to be an increasingly plausible outcome to what the Economist describes as this “sorry tale of greed, haste and incompetence.”
As an aside, LightSquared does not seem to be the only MSS operator whose ATC services face interference challenges. A recent comment on one of my older blog posts highlighted that Open Range has been getting into difficulties with its use of Globalstar’s S-band spectrum in Indiana. Additionally, if LightSquared’s use of ATC handsets at 1627-1637MHz is a major concern for GPS users in the 1559-1610MHz band, then one would have to expect even greater concern about any future ATC deployment within Globalstar’s L-band spectrum at 1610-1617.775MHz (note that Open Range only uses Globalstar’s S-band spectrum in a TDD architecture). Similarly, there are now a number of comments in the 2GHz proceeding about the potential interference challenges at the bottom end of the TerreStar uplink spectrum (2000MHz).
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06.21.11
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 9:01 am by timfarrar
Yesterday’s announcement that LightSquared plans to use the lower 2x10MHz block of its L-band spectrum (1526-1536MHz downlink, paired with 1627.5-1637.5MHz uplink) for initial operations, leaves a number of questions unanswered. In particular, the most critical issue is when Inmarsat will make this block of spectrum available. Half of the spectrum (1526-1531MHz downlink) was part of the Phase 1A plan, which was part of the rebanding plan that LightSquared was paying Inmarsat $250M to undertake, and completion was scheduled for February 2012, though Inmarsat also potentially could have extended this date by 9 months in the event of an “excusable delay”. The other half of the block (1531-36MHz downlink) was part of the Phase 2 spectrum leased by Inmarsat to LightSquared for $115M per year, which was scheduled to be available in July 2013.
Inmarsat has indicated that under the amendment to the Cooperation Agreement signed on April 25, for which LightSquared paid an additional $40M, it will work to make this lower block of Phase 2 spectrum available somewhat earlier than July 2013. It is also possible (although unconfirmed) that Inmarsat may reduce the amount of potential excusable delay in making the Phase 1A spectrum available.
LightSquared has indicated that it plans to “be able to test its service in early 2012 and launch commercial services around mid 2012″. This would presumably imply testing in the Phase 1A 2x5MHz block and launching commercial service in the 2x10MHz block, i.e. Inmarsat would have no excusable delay in making the Phase 1A spectrum available and would advance the Phase 2 lower block spectrum availability by roughly one year. However, the lack of clarity around definitive dates tends to suggest that Inmarsat will be making “best efforts” to move up the Phase 2 spectrum availability but has not made any definitive commitment that it will be able to do so.
This would not be surprising, because Inmarsat has to accommodate its maritime and aeronautical customers who rely on its satellite network for distress and safety services (GMDSS) by fitting filters to these devices. I understand that Inmarsat-C GMDSS terminals use a block of spectrum around 1537-38MHz for their safety-critical communications (basically broadcasting distress messages and other alerts from the Inmarsat satellite to ships in the surrounding area), and I was told that some of Inmarsat’s terminals using this spectrum may not be frequency agile. Even if they are (per the comment below), then after the Phase 2 migration Inmarsat will concentrate its satellite operations within the 1536-45MHz range and so the 1531-36MHz downlink block has the highest potential for interference with these safety services.
Inmarsat also plans to close its Aero H and I services, which are apparently not compatible with LightSquared’s operations, and transition these customers to SwiftBroadband safety services (which will be better protected from interference). However, the SBB safety services are only expected to start flight trials in early 2013, which would then lead to safety certification during 2014. Whether this timetable is compatible with making the Phase 2 spectrum available at an earlier date is also unclear. Notably I understand that there may be as many as 1000 US government aircraft that rely on Aero H in North America, and so there may be considerable pushback if these users are forced to transition without either compensation or an approved alternative aeronautical safety service.
With respect to Inmarsat’s land services, there is no intention to protect these services (which include the John Deere Starfire GPS augmentation broadcasts that use the Inmarsat satellites). In fact I’m told that Inmarsat is specifically prohibited by the terms of its agreement with LightSquared from fitting filters to its land terminals to allow them to operate in the presence of LightSquared interference. The reason for this is that the uplinks from Inmarsat’s relatively high powered satellite terminals (such as BGAN or ISatPhone Pro) could produce significant interference to the sensitive LightSquared receivers on its terrestrial towers if they were to operate within range of a LightSquared base station. However, without an input filter these terminals will be overloaded by the terrestrial LightSquared signal and will shut down, thus preventing them from transmitting and causing interference to LightSquared.
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06.07.11
Posted in Handheld, Inmarsat, Iridium, Operators, Services at 1:50 pm by timfarrar
Last July, I suggested that although the performance of ISatPhone Pro was better than I had expected, the pricing strategy adopted by Inmarsat seemed to be mistaken and their expectations of rapid churn from Iridium were wide of the mark. Some criticized this opinion as biased, suggesting that the ISatPhone Pro would actually be “a huge hit“. Based on conversations with distributors last fall, I encountered a quite diverse set of views, with some expecting the low price of the ISatPhone Pro to open up significant new markets, and others concerned that they would not be able to make up for the lower revenues through increased volumes and (what were supposed to be) better margins.
Now that the first results are in from Q1 of this year, it appears that Inmarsat sold only 6K-7K handsets (total revenues of $3M including accessories), while Iridium sold well over twice that quantity (15K+), with handset unit sales up 39% on the previous year. These results come as quite a shock, because even though I was relatively skeptical about the potential of the ISatPhone Pro to open up new markets, I still found it hard to envisage a scenario where Iridium sold more handsets than Inmarsat this year. However, unless things turn around dramatically in the second quarter of the year (which is the key sales window for handheld MSS phones), that will very likely be the outcome for 2011 as a whole. (Note that Inmarsat did have slightly more net adds than Iridium in the quarter, ~7K as opposed to 4K-5K for Iridium, but that reflects the fact that Iridium has well over 200K commercial handheld subscribers, some of whom will inevitably terminate service each month).
Distributors now seem far more downbeat about the prospects for the ISatPhone Pro than they were even late last year, presumably because so far it doesn’t look like substantial untapped markets have emerged, and customer response to the phone itself (as opposed to the price) has not been that positive. In addition, the ARPUs being generated by those ISatPhone Pros that have been sold appear to be rather low, because Iridium seems to have been quite successful in targeting multi-unit sales and retaining its high value customers, while leaving the low end individual market largely to Inmarsat, by not reducing the headline price of the handset too much.
Will Inmarsat therefore fall short of its target of reaching 10% of the MSS handheld market after 2 years? In terms of active handsets the target remains achievable (if now somewhat more challenging), because Inmarsat needs to gain around 70K-80K handheld subscribers by the end of 2012 (compared to around 15K ISatPhone Pro users at the moment). However, it seems all but impossible for Inmarsat to generate the $30M in annual wholesale service revenues it would need to gain a 10% share of handheld MSS revenues. Indeed, unless Inmarsat does gain much greater traction amongst high end users, it is plausible that its annual wholesale service revenues from the ISatPhone Pro may be as low as $10M (and in any case are unlikely to be more than $15M) in 2012.
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