with Frank Boulben, CMO of LightSquared
Sprint Nextel (NYSE:S) confirmed that it is entering into a 15-year network hosting deal with wholesale LTE provider LightSquared valued at $9 billion. However, the agreement doesn't resolve the continued uncertainty surrounding LightSquared's L-Band spectrum and its possible interference with GPS receivers. During an 11-year period, LightSquared will pay Sprint around $9 billion in cash for spectrum hosting and network services as well as LTE and satellite purchase credits, which are currently estimated to be valued at around $4.5 billion.
FierceWireless Editor Phil Goldstein spoke Thursday with LightSquared CMO Frank Boulben about the deal, LightSquared's relationship with vendor partner Nokia Siemens Networks, the company's deployment plans and the FCC's review of GPS interference concerns posed by LightSquared's network.
FierceWireless: Did LightSquared need this agreement with Sprint to be viable as a company?
Boulben: The answer is no, but this agreement improves our position considerably. It was not vital, but it's a really positive development for two reasons. The first one is we will be saving $13 billion vs. a scenario in which we would have built the network from scratch. And the second is, because Sprint is modernizing its network at the same time, our interests are aligned to get the network deployed as quickly as possible. And we expect the network to be deployed more than one year ahead of the FCC milestone for 2015 [which is 260 million POPs covered]. These two are very big advantages, and there is a third one, which is the 3G roaming agreement. While the network is built, we will be offering 3G roaming to our customers like Best Buy, meaning our customers will be able to offer nationwide service from day one, offering 4G where 4G has been deployed and 3G elsewhere.
FierceWireless: And that's for all of the customers LightSquared has announced so far?
Boulben: No, that's only for non-wireless customers obviously, because wireless have already got roaming arrangements. So that's for customers like Best Buy or netTalk.
FierceWireless: Did seeing Clearwire (NASDAQ:CLWR) trying to build a greenfield network motivate LightSquared to strike this deal with Sprint?
Boulben: No, we didn't need that. It's simply common sense. In most countries in the world, carriers are negotiating such arrangements to reduce their capex and opex. It's commonplace in Europe. It's commonplace in India. For historical reasons, the U.S. is the only country where such agreements are not prevalent. But for us, it's natural to try and decrease as much as we can the cost of deploying and operating the network. So we've been trying to get into similar arrangements with several carriers in the last year.
FierceWireless: Sprint mentioned on its earnings call that there are some provisions of the agreement that would allow it to terminate the deal if certain conditions aren't met by the end of 2011. Can you describe what would cause Sprint to terminate the deal?
Boulben: Obviously, the deal is based on the premise that we will get FCC clearance with the respect to the deployment of our spectrum. That's basically what that provision is about.
FierceWireless: Are there any other provisions that would allow Sprint to terminate the deal?
FierceWireless: It doesn't have anything to do with LightSquared's financing or anything of that nature?
Boulben: No, there are no conditions of that kind.
FierceWireless: Are there any conditions that allow LightSquared to exit the deal if it decides to do so?
Boulben: Obviously, this is similar to an outsourcing deal. So we've got the usual contractual provisions in an agreement where we've got a third party delivering services to us. I won't disclose any details, but you can expect the agreement to be similar to any major outsourcing agreement.
FierceWireless: Is LightSquared still working with Nokia Siemens Networks?
Boulben: Yes. So, if you look at our network, you have three parts of our network. You've got the satellite, which we have launched and have fully operational. You've got the core network where you've got the gateways, the routers, etc. You've got the radio part where you've got the towers and the base stations. In our initial agreement with Nokia Siemens we were outsourcing to them the deployment and the operation of both the core network and the radio of the network. As a result of the agreement with Sprint, we are outsourcing the radio network to Sprint. So that is not any more part of our agreement with NSN. But we are still working with NSN on the core network.
FierceWireless: So does that change the value of the deal you announced with NSN [$7 billion]?
Boulben: Yes, it impacts it, but we have not communicated on the numbers relating to the new agreement.
FierceWireless: So LightSquared is going to be using the vendors that Sprint is using for its Network Vision project [Alcatel-Lucent (NASDAQ:ALU), Ericsson (NASDAQ:ERIC) and Samsung]?
FierceWireless: Does LightSquared plan to file for an initial public offering? And, if you can't get into that, how does LightSquared plan to get more funding, because the company has committed to paying Sprint a substantial amount of money over the next several years?
Boulben: The first thing is, we have a proven track record in terms of raising funds. In the last year alone, we have raised $2.3 billion. Secondly, with this agreement we considerably reduce the operational risks and the funding needs of the business. So moving forward, it should be even easier to raise funds at a lower cost of capital as a result of the Sprint agreement. And lastly, we have been able to disclose the Sprint agreement for now more than six weeks, and that has resulted in fantastic feedback from potential customers.
We are currently in negotiations with 22 companies for commercial contracts, which means that as we announce those customers the business is further de-risked, and that, again, will help us to raise capital more easily and at a lower cost. So we are confident that in the next two years and a half, in several tranches, we will raise the $3 billion to $3.5 billion we need to get to peak funding that is needed to get to cash flow positive.
FierceWireless: LightSquared now expects to deploy LTE in major U.S. markets in the second half of 2012 and early 2013. Is that correct, and if so, what's the reason for the delay?
Boulben: What we have said is that we expect our customers to launch commercial services in the second half of next year. You are talking about a delay, but fundamentally it's not a delay because as I explained, our network will be deployed more rapidly than in our initial plan.
The network will be fully deployed a year ahead of our initial plan, somewhere in 2014. Overall the plan is an acceleration. However, initially, we need to work with Sprint and their vendors on the specifications for our network and frequency band. And that takes a bit to initiate the system basically. And that's why initially we are losing a bit of time. We need to also work on the device ecosystem to have devices that are compatible with Sprint's 3G network.
FierceWireless: Originally it was supposed to be the first half of next year?
Boulben: Yes, correct.
FierceWireless: Is the Sprint deal going to cause LightSquared to have to change the devices it had been planning for the network, either on the radio side or in any other way?
Boulben: It doesn't change the devices on the LTE side, the L-Band LTE. But those devices will have to be 3G-capable, and Sprint is using CDMA technology. So we will have to work with the device and chipset vendors so that our devices are dual-mode, 4G LTE in the L-Band and 3G EV-DO in Sprint's band.
FierceWireless: What is the status of the FCC's review of the proposal that LightSquared submitted in late June, and when does LightSquared expect a decision?
Boulben: We submitted our final report to the FCC on June 29. The FCC on the very same day issued a public notice for comment. The public notice lasts 30 days, so it will end this weekend. And then we will have two weeks to reply on the comments, so that takes us to mid-August. And after that we expect to issue an order within four or five weeks, and that is by mid-September.
FierceWireless: What happens if the FCC says, "LightSquared, the plan that you submitted is not adequate. You need to come up with something else?"
Boulben: That is not a scenario we contemplate, because we are absolutely convinced that our plan is absolutely adequate.
FierceWireless: A lot of people within the GPS industry and the U.S. federal government have said LightSquared's revised plan raises substantial interference concerns. I think the FAA came out with a report to that effect. That doesn't bother you, that these views might have sway?
Boulben: No. First of all, the FAA as far as we know did not come out with a report. The document was leaked. We don't know the status of that document. But in any case, the document that was leaked discusses a LightSquared plan that is no longer on the table. It does not distinguish between the spectrum that is furthest from GPS and the spectrum that is closest to it. Therefore, it does not reflect our most recent proposal, which is focused on using only the spectrum block that is furthest from GPS. What was said in that report is no longer relevant. We expect to continue and cooperate fruitfully with the FAA in the coming weeks. And you said several people say that. I'm not aware of any official source saying that our plan is inadequate.
FierceWireless: What about the GPS industry's concerns that the revised plan still poses a threat to precision GPS?
Boulben: Precision GPS is a category that is very different from our GPS devices, insofar as those devices have been designed to listen to our band, because the GPS signal of those devices is augmented by an L-Band signal coming from an L-Band satellite. So it's very different from the other devices, which are interfering because they have no filters and wide-open front ends. It's not interference per se, because they have been designed for that. So our position is very simple. We are one of the two suppliers of this L-Band service.
As a matter of fact, we provide that service to Trimble and Inmarsat provides that service to John Deere. So we've offered to those companies to cooperate with them on fixing the issue. So that's how we expect the problem to be resolved, either through commercial cooperation or through an FCC decision, but one way or the other, we expect that problem with precision devices to be resolved.