The Coming Wireless Wholesale Wave
Executives at TerreStar spent their long Thanksgiving weekend sizing up more than just second helpings of turkey. The tiny mobile network operator is considering a run for assets that would help it blaze a cellular communications trail.
TerreStar may participate in a government auction for wireless airwaves scheduled for January. But unlike other potential buyers, such as Verizon Wireless, that would use the spoils to bolster their own cellular services, TerreStar (TSTR) would use acquired spectrum to do something unheard of in telecom: become a wholesale provider of wireless network capacity. Companies such as Level 3 Communications (LVLT) and Global Crossing (GLBC) carry out a comparable function in the area of fiber-optic networks, but they're peerless when it comes to wireless.
Not if TerreStar and a handful of other would-be bidders can help it. Regulatory filings show that representatives of TerreStar, Frontline, and Mobile Satellite Ventures have all met with Federal Communications Commission officials in recent weeks with an eye to either participating in the auction or joining forces with a winner. Any one could become a wireless wholesaler that leases its network to mobile-phone service providers, technology companies, government agencies, or other entities that want access to cross-country wireless networks.
Chums with Cash
The potential creation of this new breed of wireless player is the latest indication of how Auction 73 could crack open an industry that has historically been tightly controlled by incumbents such as AT&T (T), Sprint Nextel (S), and Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone (VOD). The government has already rewritten the rules to require the winner of some of the airwaves to open its networks to cell phones and features sold by competitors.
Whichever companies bid will need plenty of cash not only to win an auction, which could fetch $15 billion or more, but also to build a network. Mobile Satellite Ventures already owns a substantial chunk of wireless spectrum and hopes to pair with a winner, rather than vie by itself. The company would combine its communications satellites with the wireless network jointly developed with a partner to launch a mixed terrestrial-satellite wireless wholesale network. "We have a number of strategic discussions going on," says John Mattingly, MSV's president of satellite services.
TerreStar, which already owns some spectrum, hopes to participate in the auction if it secures a financial backer, according to an industry source. The company has developed a phone, no bigger than the Motorola (MOT) Q smartphone, and has contracted with companies such as Accenture (ACN), Nokia-Siemens, IBM (IBM), and Cisco Systems (CSCO) for network services, phones, and infrastructure. It also has raised $900 million in equity and debt and aims to launch trials of its wholesale network in select areas, including Washington-Baltimore in mid-2008, the source says.
Turf Tussle Likely
Frontline could get to market soonest. The startup is run by former FCC Chairman Mark Fowler and former Netscape CEO James Barksdale, who as the head of McCaw Cellular oversaw the development of the first nationwide wireless network. Frontline also recently launched a software development effort to create applications for a new, open network. The effort appears similar to the Android software initiative (BusinessWeek.com, 11/6/07) recently begun by Google and 33 other companies.
To succeed, Frontline and its peers will need takers for their network capacity. Currently, wireless service providers rely on their own networks and in some cases set up so-called roaming agreements that enable subscribers to place calls when they're in a competing carrier's territory. Some carriers, including Sprint, lease capacity to wireless service resellers such as Virgin Mobile, but they often impose high fees.
A wholesale wireless service provider would potentially lease its network to virtually anyone, exercise little control over content, and charge much lower fees. That could be attractive to carriers and resellers alike. It could also come in handy for public safety officials in need of spare capacity, and even hardware makers that would like to sell devices directly to consumers, with little to no contact with a service provider. Amazon.com (AMZN) has struck a comparable arrangement for its new e-book reader, Kindle (BusinessWeek.com, 11/19/07), which lets users access Sprint's network to download new books and log onto Web sites like wikipedia.org.
A "Daunting" Challenge
A nationwide wireless wholesaler could provide relief to dozens of small, regional wireless telcos currently forced to sign roaming agreements with national carriers like AT&T and Verizon Wireless. "We'd probably strengthen their hand in negotiations with these two," says Frontline Chairman Janice Obuchowski. "In some areas, we'd enhance [these carriers'] willingness to be more flexible."
Incumbents may not like the idea of a wholesale provider elbowing in on their turf and would probably use their financial might not only to bid high for airwaves but also undercut on roaming fees, analysts say. "It's going to be tough," says Rebecca Arbogast, an analyst with Stifel Nicolaus. "It's hard for anybody to start from scratch."
Obuchowski says she's ready for the challenge: "It's always daunting to start something this ambitious, but we think this is the right time for a national wholesale network."