T he world’s five mobile satellite services (MSS) companies are seeking to use a U.S. regulatory quirk to leverage their modest ventures into multibillion-dollar businesses by adding a nationwide network of ground stations that would permit their satellite systems to reach practically the entire country. But they have at best 12-18 months to secure big-spending partners to help them pay for those ground networks, according to industry officials.
Beyond that point, either competitive market forces, U.S. regulatory deadlines or both will likely consign anyone without a partner to the role of also-ran in the development of future wireless networks using spectrum in the United States that had been initially set aside for mobile satellite services.
While waiting for the winners to emerge, the U.S. satellite telecommunications industry is being treated to a highly speculative game of musical chairs in which the five companies race to become one of the two or three operators able to afford to stay in the game.
None of the five companies — Globalstar, ICO North America, Inmarsat, Mobile Satellite Ventures (MSV) and TerreS tar Networks — has the wherewithal to go it alone. The cost of rolling out a nationwide network of ground stations in the United States has been variously estimated at between $3 billion to $8 billion.
Of the five contestants, two — TerreS tar and ICO — currently generate virtually no revenue . The richest of the five, Inmarsat of London, posts sales of just $500 million a year.
But the modesty of their current enterprises and the huge capital expense that will be required have not deterred the companies from pursuing the addition of these ground systems known as auxiliary terrestrial components (ATCs).
The U.S. Federal Communications Commission (FCC) decision to permit MSS companies to use their allocated radio spectrum for an ATC-based communications network without paying for it in auctions — as wireless companies were required to do — has opened investors’ pocketbooks.
ICO North America in May 2005 raised $650 million and told investors its ATC rights could be valued at between $3.9 billion and $9.8 billion. ICO has signed a contract with Space Systems/Loral for a single satellite that must be in orbit in 2007.
Globalstar, which operates a low-orbiting constellation of voice and low-speed data satellites and is weighing a major shift to a single geostationary satellite system, is planning a stock-market offering that industry officials speculate could value the company at nearly $3 billion — 70 percent of that the value of the ATC option. Globalstar is bound by an agreement with its creditors to conduct its initial stock offering by October.
MSV is optimistic it can raise the cash needed to finance a satellite contract with Boeing — valued at more than $500 million just for the two North American spacecraft.
TerreS tar, which raised $200 million in a private placement in mid-2005, has a large satellite under construction at Space Systems/Loral and must deploy it by 2008.
Andy Sukawaty, chief executive of Inmarsat of London, said the speculative buzz around the MSS operators has echoes of the late 1990s, when some of these same companies lost $12 billion to $15 billion following bankruptcies.
“I hope we are not heading in that same direction a second time around,” Sukawaty said.
In a private-client report issued in late January, Telecom, Media and Finance (TMF) Associates of Menlo Park Calif., issued an independent study of whether ATC is a credible value multiplier for MSS companies.
The 135-page report, “ATC: The Future of Mobile Satellite Services?,” is a sobering read for MSS investors. Author Tim Farrar concludes that three MSS operators could build out ATC-based terrestrial networks given the U.S. government’s post-Katrina interest in having a nationwide voice and data network available in emergencies.
The FCC’s argument since 2003 has been that without ATC spectrum authorizations, no hand-held MSS system could survive financially.
“The ATC play is real, but only if they can find the right partner,” Farrar said in an interview. “But the window of opportunity is closing, and no way is there going to be room for five separate networks.”
The report reviews possible partnerships between MSS players and direct-broadcast satellite-television companies, satellite-radio operators, cellular network operators and Internet service providers.
Farrar said there are advantages to all of these, especially if U.S. regulators are going to encourage the formation of an MSS-ATC system.
From a revenue potential, Farrar’s report concludes that a partnership between an MSS operator and either or both of the dominant U.S. satellite-television companies may offer the greatest potential — $4.8 billion in annual revenues from 13.5 million ATC-equipped handheld terminals by 2015.
How much of these revenues would accrue to the MSS operator is an open question. Farrar said it could be no more than 6-12 percent of subscriber revenue unless the MSS operator helps fund the ATC deployment.
Farrar also dismisses the high-end valuations being given some MSS operators, saying they take figures used for past sales of cellular spectrum and assume the same for ATC, which could be more of a data-oriented network.
“Spectrum for data-oriented WiMAX networks has historically been valued at several orders of magnitude less than cellular spectrum,” the report says.
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