LONDON — Mobile satellite services operatorsaid rearranging its radio spectrum in North America to accommodate startup broadband wireless operator will have little effect on its North American business.
In a Nov. 8 conference call with investors, Inmarsat officials suggested that the cash payments to be made by LightSquared will be far greater than the costs incurred by Inmarsat in clearing L-band radio spectrum to enable LightSquared to fully realize its business potential.
London-based Inmarsat stands to earn more than $900 million from LightSquared through 2015, assuming that LightSquared exercises the second of two L-band-restructuring options with Inmarsat. The first, calling for payments totaling $337.5 million through early 2012, took effect in August.
The second option, which Reston, Va-based LightSquared has said it may exercise as soon as December, calls for payments of $115 million per year, rising at 3 percent annually, with no end date.
In return for these funds, Inmarsat has agreed to relocate its services in North America to different parts of the L-band spectrum so that LightSquared has sufficient radio frequency to develop its hybrid satellite-terrestrial wireless broadband service. LightSquared’s first satellite, called SkyTerra-1, is scheduled for launch in December.
Inmarsat officials did not disclose their estimates of how much it will cost the company, either in direct expenses or in lost revenue, to make way for LightSquared.
Inmarsat Chief Executive Andrew Sukawaty said that whatever the amount, these costs will be incurred after the LightSquared milestone payments, meaning that Inmarsat’s work will be prefunded. As for lost business as Inmarsat vacates some of its L-band spectrum, this will be a small price to pay, he said.
“We do a relatively low level of [mobile satellite services] traffic from North America, which is already a crowded market by [mobile satellite services] standards,” Sukawaty said. The second, $115 million annual payment “is strongly incremental to us and does not affect revenues we have targeted in the region.”
For the first series of payments, which have already begun, Inmarsat will incur substantial costs as it moves its services onto new L-band spectrum bands, Inmarsat Chief Financial Officer Rick Medlock said during the call. He did not set a precise figure, but suggested that it could be close to $250 million.
“Although we don’t expect our costs to exceed $250 million, the resulting profitability from this part of the [LightSquared] payments will be more modest, and will be spread out over a couple of years at least.”
Inmarsat introduced its first hand-held telephone, called IsatPhone Pro, this past summer. Sukawaty declined to disclose how many phones had been ordered. He said the terminals are retailing for $699 apiece, but that distributors are marking down the price to $500 or $600 when sales of the handsets are bundled with subscriptions.
Inmarsat is offering a deliberately low-cost handset to capture the market now served by global competitorsand , and regional competitor Thuraya.
Medlock said that for the three months ending Sept. 30, Inmarsat booked revenue of $3.7 million from selling telephone handsets to distributors, which then sell the phones to end customers.
At $500 apiece wholesale, that would be 7,400 phones put into the market. Sukawaty declined to quote any figures, saying Inmarsat needs a few more months to get a sense of how the product is doing. “We don’t want people extrapolating off an early-stage number,” Sukawaty said.
Matt Desch, chief executive of McLean, Va.-based Iridium, said Nov. 9 that Iridium has seen no effect on its sales so far from Inmarsat’s entry into the market.
Inmarsat reported that total revenue, including results for the Inmarsat-owned Stratos Global and the Segovia satellite-services business Inmarsat purchased earlier this year, was $308.8 million for the three months ending Sept. 30, up 18.8 percent from a year ago. Leading the way was the aeronautical sector, where revenue was up 38 percent, to $27.2 million.
Inmarsat’s key maritime business reported that voice traffic declined but data traffic increased, leaving a revenue total of $91.6 million, up 2.8 percent from a year ago. Sukawaty said Inmarsat’s new Fleet Broadband maritime service is eating into business formerly captured by lower-speed, higher-cost Inmarsat terminals. It will take some time, he said, before maritime users adapt to the higher-performance service and ramp up their use. But that will happen, he said.
Similarly, he said, maritime users are now likely to use e-mail rather than voice calling, resulting in a drop in maritime voice traffic. It is a trend Inmarsat expects to capitalize on with its next-generation satellites, which will use Ka-band frequencies and will target data users.
Land-mobile revenue, both voice and data, was down a combined 7.2 percent, to $36 million, as use in Afghanistan by allied governments and troops slackened. Sukawaty said it is unclear if this is the start of a long-term decrease or a temporary dip.