Who Needs Radio Frequency?
Satellite TV companies sent shockwaves across the wireless market in mid-August when they abruptly pulled out of a government auction of radio frequencies. On Aug. 16, an entity called Wireless DBS withdrew from the Federal Communications Commission auction, expected to be the most expensive sale ever of the precious airwaves needed for sending wireless calls.
Of the 168 bidders in Auction 66, the backers of Wireless DBS, rival satellite TV operators EchoStar (DISH) and DirecTV (DTV), had paid the highest deposit, nearly $1 billion. Those companies, above others, needed the airwaves to help expand into wireless communications and step up competition with cable companies such as Comcast (CMCSA) and telephone carriers like Verizon (VZ), or so the argument ran. Why, then, did EchoStar and DirecTV, which is 39% owned by News Corp. (NWS), pull out?
THE WiMAX OPTION.
Turns out, they've got a backup plan. The companies may be considering entering the mobile communications market by relying on a different technology, so-called WiMAX, which blankets large areas with high-speed wireless Internet access. Promoted by Intel (INTC), WiMAX can offer download speeds of 1.5 Mb per second. It's also cheap to use, covering entire sections of cities with minimal equipment.
To deploy WiMAX, the companies could join forces with Clearwire, an outfit headed by wireless pioneer Craig McCaw, which offers WiMAX service to some 90,000 subscribers in smaller cities of states including Oregon, California, and Texas. The company recently cancelled an initial share sale and instead has raised $900 million in funding from a group led by Intel (see BusinessWeek.com, 7/6/06, "Intel's $600 Million WiMAX Bet"). Teaming with Clearwire would give the satellite TV players two powerful allies: Intel and McCaw.
Clearwire is contemplating a deal that would help it provide a broader range of wireless services over a larger area—and make it an even more attractive partner, according to an industry insider who asked to remain anonymous. Clearwire would do this through a partnership with what's known as a mobile virtual network operator (MVNO), or a company that uses another company's wireless network to provide its own wireless services, the person says.
An MVNO deal would essentially provide Clearwire with instant nationwide wireless coverage until the company completes its own higher-speed WiMAX infrastructure in the coming years. In turn, striking a deal with Clearwire would give DirecTV and EchoStar access to a state-of-the-art wireless network, letting them quickly start competing with cable companies and telecom providers.
If an arrangement with Clearwire doesn't work out, EchoStar and DirecTV could instead opt for a little-known technology called ancillary terrestrial component (ATC). ATC uses a combination of satellites and terrestrial equipment to provide high-speed wireless data and voice services in urban areas. And like a deal with Clearwire, using ATC would be cheaper than creating a traditional wireless network from scratch.
Here's why: ATC technology and related spectrum require satellite deployment. But since most telcos and cable companies have no experience with satellites, they're unlikely to use it, says Sharon Armbrust, an analyst with JupiterResearch in Germany. That means that DirecTV and EchoStar are unlikely to see many contenders for the ATC-related spectrum currently in the hands of several companies.
SPECTRUM ON SPEC.
Alternatively, DirecTV and EchoStar could end up paying nothing up front, instead sharing revenues with the spectrum owner. The companies could use the spectrum to build their own ATC network. Even that would be cheaper than creating a network with airwaves acquired in Auction 66, says Thomas Watts, an analyst with Cowen & Co. He figures that Wireless DBS would have had to pay $2 billion for the Auction 66 spectrum, plus another $3 billion to build a network covering much of the nation. But an ATC network would only cost $1.5 billion to construct, Watts estimates. And it would cover more of the country.
So, which ATC-related spectrum holders could DirecTV and EchoStar get together with? The list of potential playmates includes Globalstar, expected to go public this year, ICO Global Communications (ICOHA), Motient (MNCP), SkyTerra (SKYT), and Inmarsat (IMASF). All of these companies, or their subsidiaries, are planning to deploy ATC-based networks in the U.S. in 2007. And while they aren't much talked about, several of these outfits have high-powered backers: ICO's chairman is none other than McCaw. Representatives of the companies declined to comment, as did spokespeople for Clearwire and DirecTV. EchoStar didn't return repeated requests for comments.
What is clear is that many ATC spectrum holders are on the lookout for partnerships in one form or another. Globalstar's Form 10, filed with the Securities & Exchange Commission on Aug. 14, goes into minute details of the company's ATC plans and notes, "We are exploring relationships with a range of communications and media companies to enable us to be among the first in our industry to utilize our spectrum and ATC license for wireless voice, data, and video applications."
ICO's Aug. 11 filing with the SEC states, "Our business model includes the ability to offer services to strategic service providers who are able to complement our service offerings…." Andrew Cole, president of consultancy CSMG Adventis, says the satellite TV companies have been talking to a venture called Mobile Satellite Ventures and backed by the likes of SkyTerra and Motient "for months."
What makes ATC technology more attractive than an arrangement with Clearwire? Because satellites are part of the ATC networks, ATC phones will work in the event of a natural disaster like a hurricane. The ATC companies might also be more willing to sell out or strike an exclusive agreement. But ATC has a few drawbacks. For instance, because ATC is expected to be less widespread than current cellular technologies, ATC handsets will likely cost $5 to $20 more than today's cell phones, figures Watts.
Whatever course DirecTV and EchoStar take, their efforts will likely reshape the wireless industry. Their entry would increase the number of competitors in any given market, helping keep pressure on prices. Already, Clearwire offers its wireless service for $30 to $37 a month, plus a $5 monthly modem rental fee. That's comparable to current DSL and cable broadband rates.
It's also possible that EchoStar and DirecTV will merge before long (see BusinessWeek.com, 8/18/06, "Loud-and-Clear Verdict Rattles EchoStar"). Lately, they've had a number of joint efforts in addition to their participation in Auction 66. In June, DirecTV and EchoStar struck a deal to jointly resell satellite broadband service from WildBlue, which currently has more than 85,000 subscribers in rural areas. They will start offering the service early in the fourth quarter, according to Dave Leonard, WildBlue's CEO. The service will cost about the same as WildBlue's current offering of $49.95 to $79.95, he says. WildBlue had not previously commented on timing or price.
The deal with WildBlue is set to last five years. And it's likely to be only the first of some big steps by satellite companies into wireless territory.