By Charlie Reed (creed@atlantic-acm.com)

Background:

In March 2010, Harbinger Capital Partners, headed by Philip Falcone, revealed plans to use spectrum owned by SkyTerra and repurpose it into a 4G national wireless network based on LTE.  On July 19th, the Wall Street Journal reported the company is seeking $400 Million in debt to keep the project moving forward.  On July 20th, Harginger-SkyTerra inked a $7 billion, eight-year agreement with Nokia-Siemens to build and operate the broadband network under the name "LightSquared."

Analysis:

The History:

In 2003, in order to create more competition and create alternative providers, the Federal Communications Commission (FCC) agreed to allow satellite companies holding spectrum in the L and S bands to use that spectrum to build terrestrial networks (traditional wireless tower-to-mobile-device), as long as they included a satellite component. Satellite companies raised billions of dollars in investment but have not yet been successful in terrestrial network deployment.

In March 2010 the FCC approved Harbinger Capital Partners' takeover of SkyTerra and its plans to build a 4G network that takes advantage of both terrestrial and satellite connections.  One of the stipulations of the acquisition was providing coverage to at least 100 million people in the U.S. by the end of 2012, 145 million people by the end of 2013, and 260 million people by year-end 2015.

On July 20th Nokia-Siemens announced that it will build and operate the network for the LightSquared venture, which will be run by Sanjiv Ahuja, the former CEO of Orange.

The Business Model:

LightSquared plans to take advantage of demand for mobile data to build another LTE 4G network consisting of 59Mhz of nationwide spectrum, 40,000 base stations and two satellites, to compete with AT&T, Verizon and Clearwire/Sprint 4G networks.  Its plan is similar to Clearwire's in that it will offer only data services.  Services will be offered on a wholesale basis only to retail distribution customers, including PC manufacturers, national retailers, service providers without wireless capacity, consumer electronics manufactures, web players and mobile providers. Offerings will include terrestrial-only, satellite-only and satellite-terrestrial combined services. Its business plan calls for the venture to have 40 million connected terrestrial consumer devices by 2015.

The Market:

The current wireless reseller market, which is the revenue that wireless network providers receive by selling access to their networks primarily to mobile virtual network operators (MVNOs), was $1.5B in 2009 and is expected to achieve growth at nearly 10-percent, per year through 2015, according to the forthcoming edition of ATLANTIC-ACM's annual sizing and share report.

• MVNOs: Wireless customer relationships are sticky and come with high acquisition costs.  For this reason, many MVNOs, such as Virgin Mobile, have expressed difficulties.  It would be difficult, but not impossible, for a new MVNO to emerge using LightSquared's new network and take subscribers from AT&T, Verizon and others, when the trend in the industry is for AT&T and Verizon to expand their dominance.
  
• Other Wireless Providers: T-Mobile has not laid out its 4G plans yet and it is speculated that it could be a partner in the LightSquared network.  This would make sense and would be helpful in getting LightSquared near its goal of 40 million connected devices by 2015, considering it has 33.7 million total customers.  Sprint already has its own wireless plans with Clearwire and is the furthest along in offering 4G services. LightSquared needs additional approval from the FCC to sell services to AT&T or Verizon, making those carriers unlikely buyers.  Leap, US Cellular, and other Tier II wireless providers are all logical buyers of 4G network services.
  
• M2M:  The machine-to-machine market, which is where device providers pay network operators for intermittent connectivity, (e.g., the Amazon Kindle), is small but expected to see high growth.  Mobile operators have begun reporting connected device subscribers, with Sprint holding 1.8 million as of January of this year and Verizon and AT&T respectively having 7.3 million and 5.8 million as of April.  The monthly revenue gleaned from connected devices is very low relative to mobile phone subscribers, but support costs are nominal. There are high expectations about the future of this market but it will not be easy to gain share from established players. 
  
• Others: Cable companies, rural ILECs, Qwest/CenturyLink, and CLECs are potential buyers considering the rollout of wireless operations.  Retailers, with close customer connections and wide distributions, such as Wal-Mart and Best Buy, have the potential to offer mobile services via this network model.

Market Impact:

Assuming that LightSquared gets off of the ground, there will be two major market effects for telecom services:

• More Wireless Competition:  As pricing for wireless voice and data plans remains high there will be incentives for new players to enter the market.  An inexpensive wholesale option would make it easier for an MVNO or other provider without a network to be successful.  Added competition should lower prices, accelerate innovation and improve service quality for consumers.  At the same time this competition could cut into the share of established players.   
  
• Backhaul: Supporting an additional terrestrial 4G network will generate billions in backhaul costs.  ILECs, cable companies and CLECs will see additional gains in wholesale transport revenues.

Obtaining Funds:

This entire proposition is about realizing the value of wireless spectrum. In order to accomplish this objective, LightSquared must build a wireless network, which requires the firm to raise between $1 billion and $2 billion, according to the Wall Street Journal.  Because of disagreement over the value of the LTE venture, some troubles arose with raising money via equity investment, and now Harbinger is using a different method by offering debt.  Because Harbinger is offering a $1.4billion share of SkyTerra and $1.2 billion in other assets as collateral, the company likely will be able to sell the debt.  The agreement with Nokia and the debt offering show that Harbinger is persistent in its efforts to move forward.  Its ability to raise more funds will depend on investors' confidence that Harbinger will successfully see the proposition through to fruition.

The Bottom Line:

With high investment and market-entry costs, this venture is undeniably risky.  Much of the model's potential will depend the amount of flexibility the FCC gives Harbinger to ignore its satellite requirements and lease the network to competitors. The venture has the support of the FCC, as was evinced by Julius Genachowski's comment on July 20th, "[the announcement of LightSquared] shows that the FCC policies are helping grow the US economy by catalyzing investment and job creation," which will help its prospects.

Look for Harbinger to continue to push the venture forward quickly and rapidly secure partners and lease pieces as soon as is practical.  With so much unknown about the future of wireless services, this model will make for a fascinating business story, regardless of the outcome.