By: Joe Zaller 2018/08/08 7:17:07 pm
On July 12, 2018 the United States Federal Communication Commission (“FCC”) voted unanimously to proceed with a plan to open up a portion of the existing the United States C-band spectrum for use by next-generation 5G wireless networks. Interested parties may read the FCC’s 102-page Notice of Proposed Rulemaking (“NPRM”) to understand the plan in greater detail.
The action was expected. FCC Chairman Ajit Pai expressed his ambitions in a February speech at Mobile World Congress in Barcelona. “I’m pleased to announce today that in the coming months, I intend to propose the next steps needed to make the 3.7 to 4.2 GHz band available for commercial terrestrial use” said Pai.
As pictured above, the “mid-band” spectrum from 3.7 to 4.2 GHz is currently occupied by Fixed Satellite users.
Do not dismiss the importance of this C-band satellite spectrum to the United States media industry. In an FCC Ex-Parte filing in regards to the NPRM, Comcast states 84% of the primary signals for its cable channels are received by way of C-band spectrum. A separate filing with the FCC by CBS, Discovery, Disney, Time Warner, Fox, Univision, and Viacom (titled the “Content Companies”) admonishes “this spectrum forms the backbone of the infrastructure for delivering video content to American consumers.”
The NAB Executive Vice President of Communications Dennis Wharton issued the below comment on the NPRM approval, adding further emphasis to the importance of C-Band to today’s media industry,
“Nearly every American depends on C-band satellite spectrum to receive radio and television programming. The FCC should tread lightly when looking at repurposing even more spectrum for the commercial wireless industry. Slogans and promises are what led the FCC to repurpose spectrum for Dish, and that spectrum still sits fallow. NAB looks forward to working with the Commission to take a close look at widespread existing uses of C-band spectrum, and determining the best path forward.”
The importance of C-band spectrum to the current media sector infrastructure is not matched by the universal euphoria for expanding 5G wireless networks. The excitement is seemingly across all constituencies to the decision – regulators, technology suppliers, media companies, telco operators, satellite service providers.
Here is an excerpt from a Verizon’s comment filing to the FCC NPRM that captures this prevailing sentiment, “The United States can no longer afford the luxury of inefficient licensing of this band in this spectrum-constrained world and in the context of the global race to 5G.”
A consequence of this process (and its excitement) is a greater valuation of the spectrum for its upcoming usage, and by extension an increase in valuation of the current owners of the spectrum. Below is a chart of Intelsat’s stock price from its opening at $2.66 on February 9, 2018 to its close on August 7, 2018 at $24.31. A more than 800% increase in valuation. Over the same time frame SES shares have traded up over 70%.
Source: Yahoo Finance
Several analyst reports have suggested possible ‘windfalls’ varying from amounts of €5 to 10 billion to upwards of €60 billion for satellite operators. SES and Intelsat stand to benefit disproportionally. On Intelsat’s Q4 2017 earnings call, CEO Steven Spengler indicated the two companies represent between 90 and 95 percent of the C-Band operational revenues in the US.
The time period of the above chart begins with a novel (my opinion) proposal by Intelsat and SES published on February 8, 2018. The C-band Joint-Use Proposal (the “Proposal”), which now includes Intel and Eutelsat as well, outlines a framework for the satellite operators to form a consortium to “clear and make quickly available nationwide” around 100 MHz of the C-band spectrum to wireless operators, while maintaining existing services for current clients.
In practice the Proposal, if authorized by the FCC, would allow the satellite operators to pool their interests and act as a sole seller/negotiator of the spectrum to interested buyers, most likely mobile service providers. Some coordination of sellers is needed since, in contrast to the recent broadcast incentive auction, any auction of C-band spectrum requires all licensees in a given geography to relinquish rights given the technical challenges of sharing spectrum across use cases. The Proposal has additional merits, beginning with the time to market. Intelsat and SES believe the spectrum could be cleared within 18 months to 36 months after FCC approval.
The Intelsat and SES consortium is the lead proposal in the FCC NPRM and based on the statements of the commissioners seems to have strong support. The primary quality reiterated by proponents of the Proposal is that the approach is superior to the alternatives methods used by the FCC.
There are notable objections. For example, T-Mobile is urging the commission reject any incumbent-driven, market-approach as it would result in a “patchwork quilt of spectrum [that] would draw no meaningful investment in the band for wireless broadband use.”
Returning to the economics, the Proposal states the contemplated sale of spectrum will “compensate C-band FSS operators for their prior investments in building the business and for future foregone business opportunity costs.” Though, the reader should note, while SES and Intelsat cite the need to receive compensation for past costs and incurred costs, I suspect this is not the intended approach to actually value the spectrum in any potential auction. Beyond establishing a clear rationale for compensation, it also is a subtle means of creating a pricing floor to start negotiations (my opinion). In an Ex Parte filing (i.e. a party met with the FCC and had to publish the contents of the discussion), the SES and Intel team noted their combined investment in C-band facilities was approximately $15 billion. In fairness, since in-orbit satellites cannot be modified to operate at different spectrum, any loss of spectrum is forever lost revenue streams to the satellite operators.
The expectation of ‘windfalls’ are then based on straightforward logic: the satellite operators control the current spectrum and the spectrum is needed to expand 5G wireless. Therefore, the satellite operators will receive compensation at prevailing market prices for spectrum. It is the last proposition where the details are yet to be determined. Most notably, the amount of spectrum and the price of the spectrum or the even the mechanism for determining the price.
The 102 page FCC NPRM and 200+ parties commenting are collectively definitive on two points: (1) 5G is exciting and necessary; and (2) this is a very complicated process involving lots and lots of voices.
I concede the inherent logic of the argument to the analyst. However, I am uneasy about the magnitude of the conclusion. Could the control of this 100 MHZ portion of spectrum in a single country really yield a ‘windfall’ representing a substantially portion – or even exceeding the entire portion – of the valuation of the global operations of those same companies? (SES and Intelsat had a combined enterprise value of approximately $28B on January 2, 2018). Maybe the answer is yes. Maybe the potential economic value of 5G wireless services enabled from 20% of the C-Brand spectrum available to 5% of the world’s population does indeed dwarf the value of global satellite services. I leave it to the reader to decide.
For their part, SES and Intelsat on latest earnings calls are issuing much more caution statements; even deflecting the potential monetization of the spectrum.
In response to an analyst question on potential proceeds from a spectrum sale, the CEO of SES Steve Collar said the below during SES’s second quarter 2018 earnings call.
“I continue to be fairly cautious around what the industry likes to describe as monetization and what I like to describe as sort of how do we balance the interest of all of the different elements. Every single discussion up till now has been win/lose. We get something, you lose something. This is the first time where we create an environment where we can invest in our customers, in our video neighborhoods and at the same time free up spectrum. The fact that ours is the leading NPRM, I guess, gives me more confidence and has more confidence that we’re heading in the right direction. But I think in terms of financial implications, yeah, we’re still – I still feel like we’re ways away from that.”
Responding to a similar analyst question on monetization during its second quarter 2018 conference call, Intelsat CFO Jacques Kerrest said the following,
“In terms of how the process proceeds, I think it’s probably too early to speculate exactly how things will transpire. We certainly want to see some clarity from the FCC, and that NPRM is a path to do that to an ultimate order; but I think it’s clear what they are looking for in the NPRM, which is speed, which is protection of the incumbents, which is a process that can be well-executed by the consortium to achieve the national priority of freeing up 5G spectrum.”
In his statement accompanying the proposal, FCC Chairman Pai references the 1975 classic movie, Jaws. Pai cites the famous “You’re going to need a bigger boat” quote by Chief Martin Brody (played by Roy Scheider) to describe the need for more spectrum devoted to 5G wireless. Further, Pai draws an analogy between the FCC’s efforts to use market mechanisms for reallocating C-band spectrum with the $3,000 bounty the mythical town of Amity places on the shark in Jaws.
While no analogy is drawn for the actual auction mechanism – specifically the negotiations between a consortium of satellite operators with the interested wireless operators, let me propose one from the same 1975 classic.
Quint (Robert Shaw) teases Matt Hooper (Richard Dreyfuss) about the function of Mr. Hooper’s shark cage. “Cage goes in the water, you go in the water, sharks in the water, our shark. ”
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