By Owen D. Kurtin

Last month’s column took a closer look at ancillary terrestrial component (ATC) technology and provides a natural lead-in to discuss the extraordinary spectrum-based valuations reportedly being assigned to some of the Mobile Satellite Service (MSS) operators with ATC business plans, such as Mobile Satellite Ventures and Globalstar. The valuations reported are significantly higher than those to be derived from traditional valuation methods and reflect optimistic ATC market assumptions.

Since the U.S. Federal Communications Commission (FCC) granted ATC authority in February 2005, ATC has been one of the most talked-about pots being stirred in the satellite sector. Critics have asked whether ATC is merely a new iteration of the MSS debacle of the 1990s. ATC proponents argue that smaller handsets and lower charges, combined with partnering arrangements with terrestrial wireless providers, will make MSS telephony a different proposition this decade than in the last one. Not in dispute is that ATC build-out will cost billions of dollars, a pre-revenue capital expenditure that demands great confidence in the ATC market. Are spectrum-based valuations reasonable, or are they a bubble?

One significant issue facing MSS operators is the bruising that the terrestrial wireless industry feels it received in the ATC authority grant. Since ATC operators probably must find terrestrial operator partners, and since that substantially consolidated industry features companies that dwarf the MSS operators in size, it is no help that the Cellular Telecommunications & Internet Association (CTIA), the wireless industry association, fought so hard and bitterly against ATC authority. Specifically, U.S. terrestrial wireless spectrum licenses are awarded by auction pursuant to a law enacted in 1993 to encourage federal government revenue realization from what was increasingly recognized to be a scarce, if non-depletable, resource. The history of those auctions has been a mixed one, but the CTIA argued that the MSS spectrum now designated for ATC would have been auctioned for billions had it been designated for terrestrial use at the time.

The auction process demonstrated potential pitfalls of spectrum-based valuations in the case of Nextwave Personal Communications, a newly formed company that successfully bid $4.74 billion on license blocks in 1996. Nextwave paid an initial installment of $474 million, then had difficulty in obtaining investment to fund the remaining installments and filed for bankruptcy protection in 1998. Nextwave blamed the FCC for the investment climate, taking the position that subsequent auctions had devalued its licensed spectrum, making financing of the remaining installments and build out of its planned network impossible. The FCC then purported to revoke the licenses. While the U.S. Supreme Court later repudiated the FCC’s action on U.S. Bankruptcy Code grounds, the case highlights the issues facing a business using a spectrum-based valuation. Can you build it, and will you be able to find the partners you need? If you build it, will they come? And will the spectrum retain its value by the time of service launch even if the network is built out? Release of additional spectrum, improved streaming and compression technology, and workarounds of patented technology, which might survive an infringement action, are all risks to the spectrum-based valuation model. Patent infringement actions are a nuclear option, since they are expensive to prosecute and many of them actually result in a determination that the patent should not have been granted in the first place. Finally, the FCC authority requires that the terrestrial component remain truly ancillary to the space component and that handsets be dual mode. Despite reportedly impressive technology gains, dual-mode handsets are likely to compare unfavorably on weight, antenna size and power amplification requirements with purely terrestrial handsets, given the need of dual-mode handsets to uplink and downlink with satellites in geostationary orbit. Depending on how the FCC restriction is construed and how much teeth it turns out to have, terrestrial partners — or even acquirers — may be more or less interested.

All that being said, should the ATC players care? For their investors, spectrum-based valuations provide an attractive potential exit, and, even if an early exit is not planned, the valuations provide a basis for the kind of capital raises that will be necessary to build out a network of repeaters to boost signals. The bet may not be a sure thing, but without the spectrum commanding the valuations it now does, the MSS operators might not be able to ante up.

Next: A Closer Look: Smallsats.

Owen D. Kurtin is a partner in the New York office of law firm Brown Raysman Millstein Felder & Steiner LLP and a member of the firm’s Technology, Media & Communications and Corporate Departments. He may be reached at +1.212.895.2000 or by e-mail at [email protected].