LightSquared: A Model for Success?

Hype may impress Wall Street, but it is much more difficult to impress Main Street!

LightSquared is a company with lofty goals and it certainly knows how to get attention. But can it succeed and flourish in today’s wireless environment? In July, LightSquared announced it would build a nationwide LTE network using both terrestrial and satellite communications services.

LightSquared was conceived and founded by Philip Falcone, founder and CEO of Harbinger Capital Partners, and it bought SkyTerra Communications, Inc., which provides satellite GSM service in conjunction with AT&T Wireless. It has kept a constant stream of press releases coming including the latest about a $7 billion deal with Nokia-Siemans to build out the network. The object of LightSquared is to provide a wholesale-only network for use by virtually anyone who wants to resell LTE services.

The network, which will provide satellite only, terrestrial only, or a combination of the two services for resellers will consist of up to 40,000 cell sites plus two satellites and it is being designed to cover 92% of the U.S. population by 2015. The first thing that is evident about this new company is that it is an expert at marketing hype. According to its press releases, this network will be the first LTE wholesale network to be built and will be the “first truly open and net neutral wireless network spurring the development of new wireless devices, applications, and services,” and for the U.S. Government crowd, “LightSquared network build-out is anticipated to generate more than 100,000 direct and indirect private sector jobs within five years.”

After reading the massive number of press releases, and statements from Falcone, we find that LightSquared has partnered with “telecommunications visionary Sanjiv Ahuja, who will lead the LightSquared team as chairman and chief executive officer. Ahuja brings a successful track record to the new company and will lead the development and nationwide rollout of its network. Ahuja was chief executive officer of the global telecom giant Orange Group from 2004 through 2007, during which Orange’s customer base grew from 48 million to more than 100 million subscribers globally.” You might come away thinking that this is the best thing to happen to the U.S. wireless broadband landscape and that it will put pressure on existing network operators while at the same time enabling those not yet in the wireless business to offer their own wireless broadband services by reselling the LightSquared network.

Behind all of the hype, there are some realities I have not yet seen addressed. First, it is not possible to build a nationwide network of 40,000 cell sites, let alone incorporate two satellites, for anywhere near $7 billion dollars. The price tag will more likely be in the $20 to $30 billion range. Next is its spectrum holdings. LightSquared press releases make a big deal about owning 59 MHz of spectrum but don’t mention the fact that only 13 MHz will be available for terrestrial services. The company says it intends to deploy LTE in 5X5 MHz increments, and since it only has 8 MHz of spectrum at 1.4 GHz and 5 MHz at 1.6 GHz, it appears as though its entire terrestrial network will consist of one 5X5 LTE network, hardly enough to support a sufficient number of customers to pay for the investment. This also means its LTE devices will be one-off devices and will probably cost more to build than comparable 700-MHz devices.

The satellite portion of the system is also problematic. Satellite data speeds, even using LTE, will be much slower, network latency will be higher (meaning for example that SSL encryption for banking services may or may not work), and, of course, there will be little if any satellite coverage within major metro areas and certainly none inside buildings. I also question the number of cell sites being planned; 40,000 seems like a convenient number since it puts LightSquared into the ballpark with AT&T and Verizon with their number of sites in operation today, but I wonder how much coverage and capacity the terrestrial part of the network will really have.

When I projected the 10-year price tag for build-out of the MTZ network a few years ago, I came up with a total of more than $40 billion. If this network is built, I believe its true 10-year costs will be equal to or greater than that number. With only 13 MHz of spectrum, which translates to a single 5X5 MHz terrestrial network, LightSquared cannot possibly make a decent return on this investment. In my estimation, the end game here is to create lots of hype and sell the spectrum to someone else who buys into the idea of providing a wholesale network and will pay a premium for the spectrum since it is a finite resource.

In the meantime, I would suggest to Mr. Falcone that he contact Allen Salmasi of NextWave fame and have a chat with him over lunch. It would probably be an enlightening discussion. Or perhaps he should talk to Craig McCaw whose Clearwire is still bleeding money. Both of these men are visionaries when it comes to wireless and in their past lives they were responsible for changing the wireless landscape, but in the past few years it seems their latest companies have not fared as well. It is tough to compete with wire and cable that is already in the ground, cell sites that are already built and operating, and operators that already have millions and millions of customers. It is also difficult to compete with companies that still pay for their basic costs with income from voice services when LTE voice services are still years away from reality.

Hype may impress Wall Street, but it is much more difficult to impress Main Street! My prediction is that the LightSquared network will not see the light of day but that its spectrum assets and other contracts in place will be sold for a decent return on investment and someone else will emerge to start the hype cycle all over again. Meanwhile, the FCC will “find” and auction 300 MHz of additional broadband spectrum within the next 5 years and others will sit down at the auction table with their own visions of dollars dancing in their heads. Instead of opening spreadsheets and working the numbers, they will write checks to the feds for billions of dollars as they chase the wireless rainbow.

Andrew M. Seybold

2 Comments on “LightSquared: A Model for Success?”

  1. Martyn Roetter says:

    Hi Andy, I agree with the identification of the formidable and basic obstacles to the success of LightSquared which you have pointed out. In the realm of speculation I wonder if it will find a partner among existing terrestrial mobile operators for a variety of reasons including (i) access to shared cell sites, towers etc, to reduce its capex to closer to $7 Billion than to $20-30 billion; (ii) access to more terrestrial frequencies; plus (iii) access to other assets including financial and other (e.g. customers) ones. But whether LightSquared has a terrestrial partner or not, its revenue potential would seem to be limited primarily to places where terrestrial networks do not reach (its terrestrial capacity will be insufficient in the areas of highest traffic density, and as you point out satellites will not work in buildings). The challenge for LightSquared as for all satellite-based mobile operators remains the same as that faced by, for example, Iridium (it provides coverage where no one else does but there is hardly anyone there (except for Special Forces, activities associated with the exploration for and extraction of natural resources in remote regions etc.)). Iridium, which depends on an aggregation of customers in many countries, and on maritime and aeronautical as well as land-based usage and applications, could only build a credible business after bankruptcy when the vast majority of its capex had been written off. One wonders how LightSquared will fare and compare relative to Mobile Satellite Services providers such as Inmarsat, Globalstar, Thuraya etc.

  2. Martyn, thanks for the comments and you are dead on, however, so far LightSquared maintains that they will be a wholesale provider, which means that any relationship with existing providers would be to wholesale services only–but you know as well as I do that business models change based on circumstances, NextWave reinvented itself several times overs, in essance, Clearwire did too since they started out in smaller cities and towns where broadband was not already available.
    Time will tell, perhaps T-Mobile would be a good partner if the D block does not go out to auction (and I hope it won’t), they could be a really good partner.

You must be logged in to comment or reply.