LightSquared: Can it live up to its wholesale aspirations?

Harbinger's LightSquared promises to build a nationwide LTE network covering 260 million people by year-end 2015. Is this newcomer's business plan a smart strategy or a pipe dream?

Thanks to additional funding and an infrastructure deal, Philip Falcone and his private-equity firm Harbinger Capital Partners may be closer to making their nationwide wholesale LTE network a reality. Nevertheless, the firm's plans are drawing the ire of skeptics who believe it's unlikely the network will ever come to fruition.

Click here to watch LightSquared’s Sanjiv Ahuja introduce the company.Last week LightSquared (which is majority owned by Harbinger) announced it received an additional $1.75 billion in debt and equity financing, inked an eight-year, $7 billion deal with Nokia Siemens Networks to deploy an LTE network, and lined up a management team that includes veterans of Vodafone, Orange, Time Warner and more.

But this innovative startup (which is a Fierce 15 2010 winner) draws comparisons to Nextwave, the ill-fated venture that gained notoriety in 1996 for outbidding other operators in an FCC auction for valuable PCS spectrum. Nextwave went on to file for bankruptcy and then engaged in a high-profile battle with the FCC over its right to keep or sell its PCS licenses despite not having paid for them. "[LightSquared] brings to mind a few business models from the past--Iridium, Metricom and Nextwave--and none of them succeeded," said Mark Lowenstein, managing director of Mobile Ecosystem, an industry research and consulting firm.

Controversy, skepticism surround LightSquared's proposition

Part of the reason for the skepticism may lie in the way LightSquared acquired its spectrum. After receiving a nod from the FCC to merge with mobile satellite firm SkyTerra in March, Harbinger revealed its plans to use a little-known FCC rule that allows mobile satellite spectrum holders to back up their satellite coverage with towers. The result is clearance to build a conventional ground-based terrestrial wireless network in conjunction with a satellite network. Under the current rules, all devices that LightSquared or its wholesale partners use will have to connect to the satellite network, which some believe will drive up the cost of devices and limit the selection.

Nor does LightSquared's plan sit well with AT&T and Verizon Wireless. In approving the merger of SkyTerra and Harbinger, the FCC also approved a provision that Harbinger wanted that requires SkyTerra to ask for approval before leasing capacity on the network to the largest or second-largest wireless provider. And AT&T (NYSE:T) and Verizon (NYSE:VZ) (the second largest and largest wireless carriers, respectively) have been forbidden from holding more than 25 percent of the spectrum. Verizon and AT&T have petitioned the FCC, arguing the LightSquared network provisions are not in line with the open ethos the FCC has trumpeted.

To meet the FCC guidelines, LightSquared must build its network out quickly, and some question its ability to secure enough funding to meet the requirements. The company is planning initial trials in Baltimore, Denver, Las Vegas and Phoenix, with the network set to launch before third quarter of 2011. LightSquared must cover 100 million people by the end of 2012, 145 million people by the end of 2013 and at least 260 million people by the end of 2015 (Harbinger has set these timetables and the FCC has approved them).

Meeting wholesale demands

Regulatory guidelines aside, the rest of LightSquared's proposition is straightforward. Chief Marketing Officer Frank Boulben said demand for mobile data will increase 44 percent in the next few years, and the company plans to cater to that demand though its wholesale partner network. Unlike Clearwire (NASDAQ:CLWR), which also provides wholesale network capacity to investors such as Sprint Nextel (NYSE:S), Comcast and Time Warner, among others, Boulben said LightSquared has no intention of offering its own broadband service. "We won't compete with our wholesale customers, and every dollar we make will go to network quality and coverage," he added.

Boulben said LightSquared has already talked to more than 30 companies that are interested in partnering with the firm. This includes a combination of wireline operators, cable operators, rural carriers, retailers and even device makers. But don't expect these wholesale partners to become strategic investors in the company. Boulben said LightSquared is more interested in finding financial investors, at least initially.  

Clearwire, meanwhile, wouldn't comment on LightSquared other than to say that it welcomes the new entrant. "The mobile broadband market will be large enough to be served by multiple providers. We are confident in our ability to continue to meet this growing demand through our Clear brand and the brands of our wholesale partners," Clearwire said in a statement.

Understanding the network specifics

LightSquared has access to 59 MHz of spectrum at 1.6 GHz and at 1.4 GHz, and plans to deploy LTE with 5 MHz for the downlink and 5 MHz for the uplink. However, only 13 MHz of LightSquared's 59 MHz of spectrum is available for its terrestrial-only services.

LightSquared Chief Marketing Officer Frank Boulben Boulben said the company's spectrum will support superior indoor penetration. "It's just the law of physics," he said. "The quality of our spectrum combined with the specifications from NSN means we can deliver a high quality of service. And QoS is something that is essential in the U.S. market."

To complement the terrestrial LTE network, LightSquared will deploy two geostationary satellites that will provide backup coverage. "On 100 percent of territory of the U.S.--as long as you can see the sky--you will be able to place a phone call, text or email from your device, data card or smartphone," Boulben said.

The company plans to launch one satellite between December and March of next year. Boulben said the geostationary satellite is being made by Boeing and will be launched in Kazakhstan.

Boulben said most LightSquared partners will want to use LightSquared's terrestrial network, but he expects the satellite component to appeal to three segments: public safety, machine-to-machine apps and services in rural areas.

But for some, Boulben's description sounds a bit too good to be true. Peter Jarich, analyst with Current Analysis, said LightSquared's claim of having better indoor penetration may be true, but it still depends on how the network is constructed.

And of bigger concern, at least to Jarich, is not the network, but the devices. Jarich said LightSquared's unique spectrum position and satellite requirements could make it difficult for the company to obtain suitable devices. "Will vendors build devices that are not in the regular band?" Jarich asked, noting AT&T and Verizon both plan to use 700 MHz spectrum for their respective LTE buildouts.

Boulben said LightSquared has contracts for devices and chipsets, but is not ready to publicly talk about those deals. "We will communicate more in the fall about our ecosystem," he said.

Managing the network

Sue Spradley, head of Nokia Siemens Networks' North American Division, Key to LightSquared's deal with Nokia Siemens Networks is that NSN will not only build the network, but will also manage it. Sue Spradley, head of Nokia Siemens Networks' North American Division, said the company is confident about its ability to handle the terrestrial and satellite components to the LTE network because NSN has worked with other satellite firms and understands how to manage roaming between terrestrial and satellite elements.

For NSN, the LightSquared deal is a crucial win. Nokia Siemens, which recently inked a deal to acquire Motorola's networks business for $1.2 billion, has been working hard to increase its North American presence--and the high-profile LightSquared win takes the company to a new level. "Most managed services deals involve a big organization being integrated into NSN, and come with a transition period to get the people costs to the right level. With LightSquared, from day one we are hiring the right head count and talent. I don't bring on individuals that we don't need," Spradley said.

Spradley expressed confidence that the LightSquared team will be able to move from concept to reality. In fact, some NSN employees have worked with members of the LightSquared team in their past positions at other operators. "This isn't your average startup with three guys in a garage," Spradley said. "These guys know what it takes to build a network. They have the operator and vendor experience and the Wall Street experience--and that's a powerful combination."

LightSquared: Can it live up to its wholesale aspirations?