Lightsquared - some comments

I usually find Senator Charles Grassley's attempts to provoke spats with big-name hedge fund managers tendentious. But in his spat with Falcone and Harbinger he is right on the money. Lightsquared deserves to fail and Grassley knows it.

If you don't know the background start with Bethany McLean's excellent article on Phil and Lisa Falcone in Vanity Fair. I think McLean tries too hard to be balanced on the key policy issue of spectrum and Lightsquared - but McLean offers a good introduction to the issues. By contrast Grassley is not balanced but he is right. Here is why.

There is an international body that administers a binding international treaty on how spectrum should be allocated. That body is the International Telecommunications Union.

The rules need to be binding because otherwise one country's communications build-out could jam communications from another country. This is particularly important where countries are densely packed (like Europe) but is also important in the Americas especially regarding satellite spectrum. (After all spectrum use by Argentina could interfere with spectrum use by the United States if that spectrum is used by a geostationary satellite.)

The biggest conflict is between satellite spectrum and terrestrial spectrum. Satellites are a long way away (in geosynchronous orbit they are 35,786 kilometres above the equator). Because they are a long way away the signal is not very powerful and you often need a dish to catch enough signal to make it usable. Being a very weak signal you need to ensure that there is no very powerful signal in the same spectral region. A powerful signal will block a weak signal just as surely as a big city radio station can drown out a less powerful regional station a little further up the (frequency) dial.

The ITU's job is to make sure this does not happen. The treaty for instance stops Canadian land-based radio devices jamming distant (and hence much weaker) American satellite devices and vice-versa.

The first thing the ITU does it allocates some spectrum as global spectrum (mostly for satellites but also for communicating with ships at sea and similar) and other spectrum as terrestrial spectrum which member countries can allocate however they want. After all there is little international issue in land-based spectrum because interference is basically local. (A cell phone in New York does not interfere with a cell phone in London or visa-versa – so the allocation of terrestrial spectrum in London can be done independently of the American Government or vice-versa.)

Generally satellite spectrum is given away or sold very cheaply – but it comes with obligations. The main obligation is to build out some (normally global) social network (eg communication to remote areas or ships at sea). Terrestrial spectrum is auctioned by local governments and often carries the right to build a cell phone network. That spectrum is hugely valuable and is auctioned for billions of dollars.

There is an underlying global policy issue here – which is that cell phone use is growing like crazy and the real shortages of spectrum are for cell phones rather than for satellites. The iPhone and other internet devices are the core culprit and the inability of many of my readers to use their iPhone in New York City is testament to that.

In an ideal world some of the spectrum allocated to satellites would – over time – be shifted to domestic use and auctioned by the local authorities. This can't be done fast because businesses have satellites in space at the cost of several billion dollars and you can't just render them useless by drowning their signal with (nearer and hence much stronger) domestic signal.

Enter Phil Faclone and Lightsquared. Lightsquared gets access to some satellite spectrum cheaply and then ploughs headlong into a loophole in spectrum laws. The loophole is this: satellite spectrum licenses allow the construction of ground-based booster stations to retransmit their signal and hence make it more useful. The example envisaged is say a remote town in Alaska needs a 6 foot dish to receive the signal (and hence say get high speed internet). Rather than have everyone in the town install a six foot dish they install a single dish and then retransmit the signal around the town – and that way everyone in the remote area can use the signal cheaply. Seems sensible enough.

But in the eyes of Falcone this gives him the right to use 40 thousand plus booster stations all they way across America so he can retransmit to everyone. Of course these booster stations will also be connected to ground-based fibre networks where appropriate. And so Falcone plans to build another US national cell phone network or at least to sell spectrum to the existing networks.

This is – to put it mildly – audacious. And there is little doubt that American consumers would benefit from more wireless spectrum capacity.

But also to put it mildly it is a massive lean on the American taxpayer. You see if the spectrum had been auctioned like traditional spectrum the taxpayer would have received billions of dollars – dollars that will might now flow to Lightsquared and Falcone. Rarely have I seen taxpayers give away larger gifts to corporates (and that includes the banks) but in this case they are giving the gift to one slightly compromised billionaire and his hedge-fund clients. It is really hard – nay impossible – to see any policy basis for that gift.

But the FCC (the relevant regulator) rolled over and granted Falcone permission. McLean points out the political donations involved (they were large my the standards of most people, but tiny when billions of dollars are on the line). Falcone also hired the husband of a key FCC staffer to be a lobbyist. I shouldn't be surprised – this is they way some billionaires make money in the US. But the regulatory birth of Lightsquared will cast a stain across its future and its financing – a stain that I hope Falcone can't avoid.

The first stain is possible interference between Lightsquared's terrestrial network and GPS. There is not much spectral distance between Lightsquared and much GPS signal – but GPS signal is weak (it comes from satellites) and Lightsquared will be much stronger (it is domestic and it needs to carry lots of information). That means that Lightsquared will potentially interfere with GPS networks. Serious people including the defence department object to Falcone's use of the spectrum. Falcone – quoted in McLean's articles – accuses the critics of making up the GPS objection to protect their privileged domestic spectrum positions. Two responses: those critics include the defence department and clearly Falcone is stretching it there, secondly the other critics paid good money to taxpayers for their privileged spectrum position – Falcone relied on a loophole.]

But the GPS stain is not going away. I don't know whether the spectrum interference is terminal or not – but the loophole-political-donation issue raises makes it more believable. After all this spectrum was not allocated according to standard international practice.

And the stain is going to make it really hard for Falcone to finance the use of this spectrum. After all if the network interferes with GPS that will make it less useful. After some pilot too trained to use his GPS gets his signal jammed and crashes a plane Falcone will find it much harder to maintain his ill-gotten spectrum position. Money lent against Lightsquared might be lost because the underlying spectrum ownership is ephemeral.

Carl Icahn it seems has been buying Lightsquared's debt. That will be a fantastic investment if Lightsquared can get past the stain of its birth. But I doubt it.

Anyway I hope this post contributes to the end-failure of Lightsquared. Dirty or incompetent regulators make bad capitalism. If Falcone had obtained the spectrum the usual way, paying the usual number of billion dollars and dealing with interference issues (like GPS) in an open and transparent manner I would have no problems. As it is Falcone sickens me and Grassley is right on the money.

Dear Mr Falcone....

As a manager of a small hedge-fund to one of the leaders in my industry: I will respect you again when you make your next entirely straight billion dollars.

It is not this one.



John