SpaceX’s Spectrum Deal, EchoStar’s Exit, and the Future of Satellite Wireless with Tim Farrar

Full Transcript

Don Kellogg 0m10s

Hello, and welcome to the two hundred and sixty first episode of the week with Roger, a conversation between analysts about all things telecom, media, and technology by Recon Analytics. I'm Don Kellogg, and with me as always is Roger Entner. How are doing, Roger?

Roger Entner 0m24s

I'm good. How are you?

Don Kellogg 0m25s

Good. So Roger, this week we're joined by Tim Ferrar. Tim is the president at TMF Associates. Tim, welcome to the podcast.

Guest Speaker 0m33s

Thanks very much for inviting me.

Roger Entner 0m35s

Looks like we can't get enough of satellites, right?

Guest Speaker 0m39s

One more every every day.

Roger Entner 0m41s

Yeah. And Tim is one of the premier satellite analysts on the globe. And so Tim offered and we gladly accepted. Let's talk about satellites, Charlie Ergen, Elon Musk. So what was your reaction to it?

Roger Entner 0m57s

Right? It's like, I gave my reaction and we exchanged notes on Twitter or X, even though Elon shouldn't be surprised I call it the dead name. So he should get over it because he doesn't like that. Anyway, on Twitter you said like, why didn't you write about this, this and that? Why don't you tell us about this, this and that?

Roger Entner 1m16s

What did I miss?

Guest Speaker 1m18s

Well, think that it s inevitable that people who are telecom analysts focus on the consequences for telecom. I think that this is probably going to be a) s very consequential for the satellite business. Obviously Joliet has been around for a very long time. He's even older than we are and now he's getting out of this telecom adventure that he's been doing for twenty years. I think it's a surprising way in which he's getting out of it because I think we thought that he would just be selling off spectrum to Telco.

Guest Speaker 1m51s

So now we've got Starlink here. SpaceX paying up $17,000,000,000 for a bunch of spectrum.

Roger Entner 1m58s

'19

Guest Speaker 2m0s

with 19 the interest. Yeah it's just way beyond what we've ever seen in the satellite world before. It remains to be seen if it's a good investment in terms of its satellite business but it's surprising to see. I was certainly taken aback that they were prepared to pay that much. It's hard to know if this direct to sell business is actually worth investing that amount of money.

Guest Speaker 2m26s

I think people have been perhaps carried away by speculation about how amazing this service is going to be and how it's going to be the fourth competitor in the wireless market instead of Charlie again. That doesn't seem in my mind to sort of correspond to the constraints of physics when you're talking about satellites that are hundreds of miles up in space compared to talking to a tower a couple of miles down.

Roger Entner 2m50s

Yeah. A couple of more deep dives from me. On the pricing, what's really amazing is not that he paid for me 17 or $19,000,000,000, but that 8 and a half billion of dollars came in equity to Starlink or SpaceX. Typically, if somebody boasts, Oh, I'm going to buy AT&T, I would expect them to be able to raise enough cash to pay cash, because SpaceX, buying something in equity is always infinitely more expensive than in cash, because your rate of return on equities is at least 12% on average. Your return on debt, or the interest rate you pay on debt, if you're really, really in a bad position like Charlie has been, you're paying 12%.

Roger Entner 3m40s

And I would expect SpaceX valuation to go up way more than 12%. And on top of it, now he has Charlie Ergen, who is not the most friendly guy in the world to his fellow shareholders, sitting on his table and sniping. I can't wait for them to go at it and how much they hate each other.

Guest Speaker 4m2s

Well, that Erkin's only gonna have 2% of the company, and, you know, that's hardly

Roger Entner 4m7s

Doesn't matter. Minority shareholders are protected in The United States to a very significant degree.

Guest Speaker 4m14s

Maybe some of the minority shareholders in Musk or her ventures like Tesla might argue with that.

Roger Entner 4m20s

Well, they don't have a spine. And if you can say anything about Charlie Ergen, he got a spine of steel.

Guest Speaker 4m27s

Well, I think we can argue about whether SpaceX's current business or future prospects really justifies a $400,000,000,000 valuation. Is it realistic to expect that to keep going up at 12% or more every year for the foreseeable future? I don't know. Mean I'm not seeing a lot in this deal that justifies paying 17 or $19,000,000,000 for the spectrum. I'm not seeing an opportunity here that is measured in the tens of billions of dollars of revenue a year, and paying for this partly in equity is a reflection of the fact that SpaceX reinvests every dollar that it generates in cash from the Starlink business into developing the Starship and building more satellites and doing all this stuff.

Guest Speaker 5m16s

They don't have $17,000,000,000 in cash. I'm not even sure they have the 8,500,000,000 in cash in terms of generation from their business to pay the cash component of this. I suspect they'll have to raise some money to do that.

Roger Entner 5m28s

Yeah, but if you're a rich company that boasts that they could buy, oh, an AT&T, Verizon, T Mobile, or anybody else, you better be able to raise more than $8,500,000,000 in cash, right? That's where the bluster comes in. I agree with you completely that the D2C market is not justifying this, but I think he will use this spectrum to bolster his Starlink business that is aimed at beat money and terrestrial internet capabilities.

Guest Speaker 6m2s

So you really think he's going to go and start building terrestrial towers?

Roger Entner 6m6s

No, but he can use the 50 megahertz from the satellite down, so he just got like 1.5 gigabit more capacity. Here's the thing, if he really would want to build or have a terrestrial network, I think he just met a guy who has one that he would probably part with relatively cheaply, because he has no more use for it.

Guest Speaker 6m27s

But you can't be delivering huge feeds from these satellites direct to a device. Mean the capacity of a current sonic broadband satellite is about 100 gigabits per second. The V3 satellites that are going to be on the Starship are talking about a terabit per second. The current direct to cell satellites are certainly less than one gigabit per second and even if that's going to improve by a factor of 20 we're talking about single digit to low double digit gigabits per second of throughput. So there's no way that makes a material difference when you're going to have terabit class broadband satellites operating in the Ku and Ka band.

Guest Speaker 7m7s

That's what's going to drive the broadband business and this is irrelevant to that.

Roger Entner 7m12s

Yeah. Well, it it also goes then to to devices, and I would say satellite works really well where nobody lives. Right? You will not have a d to c business in Manhattan or in Chicago. It's just not how it works.

Guest Speaker 7m27s

Right, and so there will be spare spectrum after this 50 MHz. I'm not convinced they will actually use all 50 MHz by the way. I think the H block is going to be a buffer between the MSS piece where you've got an uplink 2,000 to 2,020, and then you've got a g block downlink up to nineteen ninety five. So you have to have a buffer between them, and that's what the h block is gonna do.

Roger Entner 7m49s

And you can lease it to T Mobile or whoever else you partners with in this country.

Guest Speaker 7m53s

Right. I do think that part of this, the band 66 part, the top bit of downlink could easily be leased, and presumably whoever is going to buy the AWS three spectrum from EchoStar might well be a candidate for leasing some of this AWS four downlink spectrum in the urban areas. That's one way to get back some of this $19,000,000,000 It's also a way potentially to pull in another partner because it seems logical to me that the most likely AWS lead buyer is probably Verizon. They're probably the least strongly attached to AST compared to AT&T. It seems like an easy job for us to say well you can have some of this spectrum terrestrially in the urban areas if you come and partner with us on sale as well.

Roger Entner 8m42s

Yeah I think that's a very good read. I completely agree with you.

Guest Speaker 8m45s

We've got a situation where we need to get on and resolve AWSD because we've got a re auction coming up at the end of the year. Obviously EchoStar is taking some legal action to try and challenge the FCC on that, but wouldn't everyone's life be a lot simpler if they just stole their AWS D and whoever bought it took over the re auction underwriting? Let's get on and do that in the next couple of months and see if Verizon's interested.

Roger Entner 9m11s

I completely agree with you. If Charlie finds a way of selling the AWS three spectrum that's in dispute to save Verizon, who knows if the FCC will not drop the lawsuit, right? Where there's no plaintiff, there's no suit. It might go away, who knows?

Guest Speaker 9m29s

Right, well of course if you are say Verizon buying Charlie's AWS three, why wouldn't you want to pick up the auction spectrum on top of that? I mean you may as well have as much as possible and you may as well underwrite that auction at the reserve price.

Roger Entner 9m44s

Well the AWS is the hitch block, right?

Guest Speaker 9m47s

No, we're talking about the spectrum that Ergon gave up because it's a designated entity.

Roger Entner 9m53s

That's the one in dispute, absolutely.

Guest Speaker 9m55s

That's the one in dispute. That's the stuff that's going be re auctioned at the end of this year or early next. Echasar has challenged the FCC's rulings about the structure of that re auction and the way in which designated entities will be treated in that saying well if they change the rules then you shouldn't hold us to have to underwrite it anymore. We'll see how that goes in court but as I say I think everyone would be a lot happier if that litigation went away, the re auction proceeded, you could fund the rip and replace, all good things and let's get on and have him sell his AWS three along with the obligation to underwrite this re auction and be done with it.

Roger Entner 10m35s

Yeah, I think only Charlie will not challenge this if there is clear and present upside for him. Because if there's one person who enjoys doing another, it's Charlie Ergen.

Guest Speaker 10m47s

Yeah, absolutely. He's been very good at it, both the litigation side and also the distressed investment. I mean, he's made billions of dollars off buying companies or investing in companies that really need his money, and now he's gonna have a lot of it. So watch out, everyone.

Roger Entner 11m4s

Yeah. He laughs all the way to the bank. In a way, it's great financial engineering that he's done. Created a mirage of I build a wireless network, spend a little bit on it, and then pulled a rabbit out of a of a chapeau.

Guest Speaker 11m18s

Well, I think that's probably a bit harsh. I think actually he probably did believe that he was going to try and achieve something when he started off this wireless network. I'd even argue that he he probably believed that direct to device was an interesting opportunity to get into given his history in the satellite industry. Now of course you throw tens of billions of dollars at him and like most people you'd say 'thank you very much, I'll not have to take the risk anymore'. But I think he did believe that he could do something here in wireless.

Guest Speaker 11m51s

I think a lot of things went against him. First of all, Memo came along and said oh gosh we've got vastly more capacity than we ever thought' so his claim that he would own the bottleneck resource of spectrum didn't really pan out. Then we had oh we're going to sell private networks. Well those haven't worked out so well. Oh we're going to have a tech company come in and enter the wireless business.

Guest Speaker 12m13s

Well they haven't showed up either. So he's made lots of assumptions, of it's worked out.

Roger Entner 12m20s

A lot of that stuff from what I can tell was baloney. I didn't believe it. All these rumors of like, oh, Amazon this, and Microsoft that, and mysterious enterprise, I'm sorry, it was just not gonna happen. And the people who believed it, you know, I have a piece of land in Germany I'm willing to sell to you, and I hear it has like billions of dollars of oil in it, you know, just send me an email, I'll sell it to you. So I give it to him, he built a miraculous five g standalone core network.

Roger Entner 12m59s

But he couldn't sell an ice cube to people in the desert. Well, he could sell cheaper satellite service to people who had only one other choice. But other than that, the sales part of Ergen Mobile, because that name changed now so often, why don't we stick with one name, has been an abysmal failure.

Guest Speaker 13m20s

Don't you think it's MeMo has a lot to do with that? I I think ten years ago you might have argued that you come along and say to people, I'll give you twice as much data for your money, and they might be interested. And today I never look at my You field and more than don't need twice as much data because you have as much as you ever need.

Roger Entner 13m40s

Well, he could have done what Mint has done. And Mint has grown from nothing to like three and a half million customers on that promise of fast speed. He didn't do that. Mitch showed him of how to take his assets, or they got them from T Mobile, they had the assets and they ran with it. And meanwhile, he lost 2,000,000 customers while they added three, with exactly basically the value prop.

Guest Speaker 14m8s

Right. Boost was never a good match for an advanced five g network. It was low end cheap customers, high churn, you know, not the people you go and say, here's this wonderful advanced new network.

Roger Entner 14m21s

And so are Mint's customers. Mint's customers don't look that much different to Boost's customers.

Don Kellogg 14m28s

Well, actually, and I'm gonna go with our survey data here, Mint pulls more people from postpaid than they do from prepaid.

Roger Entner 14m34s

Yeah. Absolutely.

Don Kellogg 14m35s

They do tend to be a little more of an upscale target in terms of and then, you know, what Mint has done is as prepaid was shrinking, and it's not shrinking now, but like as

Roger Entner 14m44s

it Prepaid was shrinking, they were has not shrunk.

Don Kellogg 14m47s

It shrunk the at the expense of lifeline during the pandemic, but they grabbed postpaid people.

Roger Entner 14m51s

Not according to the CTA data. I'm sorry. The new CTA, they come came out, and it's very clearly there. Prepaid never shrunk. For a time it didn't grow.

Don Kellogg 15m1s

Regardless, regardless, Mint pulls more people from postpaid than prepaid.

Roger Entner 15m5s

Point taken. Yeah, and so could have Charlie. They started both with nothing. And Mint had some really genius marketers like Aaron North, and Charlie had a rotating cast of characters. And I don't remember all of their names.

Don Kellogg 15m22s

My thoughts on the whole why was Charlie not able to do this are centered around the idea that, like, he never articulated the consumers why this next generation network, how it would do anything for them. We all know that it's highly technical and it's a modern Marvel. But to the end user it's just another connection and he was never able to articulate that.

Guest Speaker 15m42s

Yeah. So how is Elon Musk going to get into the wireless industry, and what's he going to differentiate based on?

Roger Entner 15m49s

Well, I think he's going to give a lot of the spectrum to T Mobile, or lease it to T Mobile, and he lets them market it. He does the boogeyman thing of like, oh, I could be a provider, which gives him leverage, bargaining power and leverage, but ultimately trying to get into retail wireless market, almost regardless of the country in the world, is a sucker's game.

Guest Speaker 16m15s

Oh, I agree. But why would you limit yourself to one player? What's the advantage of selling through T Mobile alone when you can sell through all the wireless?

Roger Entner 16m26s

Oh, T Mobile is only a one year exclusive.

Guest Speaker 16m28s

Right.

Roger Entner 16m29s

And like globally, he also has typically doesn't have exclusives. Do I think it's a foregone conclusion that AT&T and Verizon are gonna stick it out with AST? No. They have invested in AST because for whatever reason they couldn't get into an agreement with Elon Musk. But if Elon Musk provides a spectacular service at a reasonable price, and AST does not, then there's no reason why they will not chuck AST.

Guest Speaker 17m0s

Right. And we already know it's not exclusive because Boost is gonna have access to

Roger Entner 17m5s

Yeah. No. No. It's it's it was from day one in the press release when they announced it with T Mobile that it's a one year exclusive. We know that on the record.

Guest Speaker 17m14s

Right, so let's see what happens. Mean, Verizon seems only fairly loosely attached to this. They don't have a commercial agreement with AST yet as far as we know, and they've talked about how they want multiple suppliers, they're doing stuff with Skilo.

Roger Entner 17m33s

They are investors in AST, which to me makes only sense if there is a commercial agreement, and Drini Kalapala, SVP of Product from Verizon was here, and memories fade, right? But I thought he was talking about providing service through AST. So contracts can be very easily written and signed.

Guest Speaker 17m59s

Yeah. Think the big question with all these services is how you bill for it and what is the commercial arrangement. I mean, seems that Verizon's deal with Skylar is based on wholesale as far as I can tell. T Mobile's deal with Darlink has been based on wholesale effectively a roaming payment. If T Mobile's getting wholesale then Verizon seems unlikely to want to do a deal based on a revenue share.

Guest Speaker 18m25s

I know AT&T seems to have signed up for that but this seems to be the most critical point in my mind. You want the flexibility on the carrier side to just buy the capacity you're going to use and then decide how you're going to package it and whether you're going to give it a fee for some people or charge for others or charge a day fee or whatever. But why on earth would you give half of that to your partner? That makes no sense at all to me.

Roger Entner 18m52s

I'm with you. All right, great. Thank you Tim for coming. This was awesome.

Guest Speaker 18m58s

Yeah, it was a bit scattered, but it was there's a lot we could do another two hours of this, for sure.

Roger Entner 19m5s

Well, it's an unscripted conversation, right? It's an unscripted conversation, and I think they're the best.

Don Kellogg 19m13s

All right, thanks gentlemen.

Guest Speaker 19m14s

Thank you.

Don Kellogg 19m15s

Roger, we'll talk to you next week.

Roger Entner 19m16s

Talk to you next week.