Understanding the MSV/Terrestar Ownership Dance

The U.S. wireless carriers generated revenues of $174.7 billion in 2005, according to the Telecommunications Industry Association.

With numbers like these, it is no wonder that Mobile Satellite Services (MSS) providers have decided to enter the market by developing hybrid satellite/ancillary terrestrial component (ATC) wireless services. Their goal is to compete with cellular carriers like Sprint and Verizon on price, while offering an extra degree of coverage to subscribers through combined satellite/terrestrial networks. Even if these MSS providers only secure 6 percent of the U.S. wireless market, that’s still $10.5 billion in annual revenues.

At the very least, industry analyst firm Frost & Sullivan expects the ATC market to be worth about $1.2 billion to MSS providers by 2012. In contrast, Frost & Sullivan projects non-ATC MSS revenues to hit $3 billion by the same point in time. What this means is that ATC revenues will add an extra 39 percent to MSS providers’ revenues within six years. For a service that has yet to launch, those are heady numbers.

New Ownership Structure

This brings us to the recent decision by Motient Corp. and Skyterra Communications to sort out the majority ownerships of MSS companies Mobile Satellite Ventures (MSV) and Terrestar Networks.

Currently, Motient owns 43.4 percent of MSV and 54.3 percent of Terrestar. Skyterra – whose parent company Skyterra Communications bought 50 percent of Hughes Network Systems (HNS) in December – owns 80 percent in a subsidiary company which, in turn, owns 16.2 percent of MSV and 13.1 percent of Terrestar.

Confused? So are investors, said a financial analyst who spoke to Satellite News on condition of anonymity. “MSV is licensed for the L-band, while Terrestar is licensed for the S-band,” the analyst said. “Under the current ownership structure, anyone investing in either Motient or Skyterra would end up getting chunks of each. Under the new ownership, investors can decide whether they want to back an L-band or S-band play, and invest accordingly. It’s a cleaner structure, and investors like cleaner structures.”

This explanation agrees with a statement provided by Motient COO Chris Downie in response to a Satellite News request for an interview. “This transaction makes strategic sense,” Downie said. “We have been seeking the most efficient and clearest path to realizing the value inherent in MSV and Terrestar for our shareholders, and this structure accomplishes that goal. Simplifying the ownership structure by creating two separate publicly traded companies will also make it easier for both to pursue partnerships and the deployment of satellite networks.”

Even with this explanation, Frost & Sullivan’s Analyst Max Engel wonders why MSV and Terrestar didn’t choose the simple path, and just merge. “I still don’t have any clue as to why there are two of them,” said Engel. “Certainly it makes sense to clear up the ownership structure between the partners, in order to make the value chain obvious. But why are there two companies pursuing the same business where one would do? Perhaps there are legal reasons related to their licenses that require them to operate separately?”

According to our anonymous analyst, licensing is precisely the reason that MSV and Terrestar cannot just merge. “If they did that, then they would have problem with the regulator,” the analyst said. “The U.S. Federal Communications Commission (FCC) doesn’t want people commingling licenses.” Given this obstacle, clarifying who owns what was the next best option open to Motient and Skyterra; at least when it comes to attracting capital to build their hybrid satellite/ATC networks.

MSS Providers Racing To Launch ATC

To date, MSV is better positioned than Terrestar to launch ATC communications thanks to MSV’s two satellites which already deliver MSS services in L-band. This is why “MSV, even with its current satellites, has the ability to off an ATC service without waiting for any further regulatory pronouncements,” stated a November research report issued by industry analyst firm Jefferies & Co.. “In terms of overall capacity, we would expect MSV’s spectrum to support upwards of 50 million wireless users.”

According to Frost & Sullivan, MSV has signed a deal with Anydata Corp. to develop ATC L-band clamshell camera phones. As well, on Jan. 11, MSV awarded a contract to Boeing Co. for three satellites and related ground systems to support MSV’s ATC service.

As for Terrestar, Space Systems/Loral (SS/L) is building the MSS operator’s first geostationary satellite, dubbed, Terrestar-1. The spacecraft, based on SS/L’s 1300 satellite platform, is scheduled to be delivered in 2007. Likewise, SS/L has an option to build a second satellite, Terrestar-2. Meanwhile, the FCC has granted both Terrestar and ICO North America extra unused spectrum in the 2-gigahertz MSS band, such that they now have 20 MHz each. At press time, SS/L was also building a 1300-platform GEO for ICO, which is scheduled to be launched in May 2007.

Globalstar has secured $400 million in financing to design and deploy its second-generation satellite system. “Globalstar is already capable of offering ATC, which the FCC authorized it to provide in January,” the company said April 26. “The second-generation satellite constellation will fully integrate ATC and ensure the company’s long-term capability to provide ATC and other integrated wireless multimedia satellite solutions.”

Will all this effort be worthwhile? According to Frost & Sullivan Satellite Analyst Tim Street, a successful hybrid satellite/ATC market “is still highly speculative.” Among Street’s reasons: “Cellular providers are a moving target and ATC must match their offering in 2008, not today,” he said in a presentation, “ATC: The Wave of the Future or the Next Great MSS Failure?” “… You [MSS ATC providers] must offer everything cellular providers do as well as satellite backup.”

This said, let’s not forget the $174.7 billion in 2005 U.S. wireless revenues in 2005; a total that’s bound to grow in the years ahead. When there’s money this big at stake, investors are willing to take calculated risks. At least, that’s what Globalstar, ICO, MSV and Terrestar are banking on.

–James Careless