New World Operator

It’s not every day that you come across a new carrier staffed by senior executives who are promising to “reset the industry”. But this is the bold claim made for US newcomer Lightsquared by the firm’s executive vice president of ecosystem development and satellite systems, Martin Harriman. Lightsquared aims to redefine the operator business model altogether, as Harriman will be explaining during his presentation at this year’s LTE World Summit in May.

A veteran of BT, Marconi and Ericsson—and more recently emerging markets WiMAX startup Augere—Martin Harriman has now joined ex-Orange CEO Sanjiv Ahuja (Augere’s founder) at the new US carrier. Lightsquared is backed by Philip Falcone’s hedge fund Harbinger Investments, and plans to use a combination of satellite and LTE technology to deliver wholesale broadband wireless services. It has signed a deal with Nokia Siemens Networks worth £7bn that will see the vendor deploy and operate the network on the new operator’s behalf.

Harriman’s executive title might be a bit on the hazy side, but there’s no lack of clarity in his assertion that traditional carriers do not excel at anything that they do—a state of affairs that he ascribes to the breadth of their operations. There is not another industry in the world, he says, that has such a rigid, vertical structure.

“The operators mine the iron ore, they smelt it, they make it into products and then they advertise and sell those products,” he says. “I think telcos are quite good at all of it, but they’re not very good at any of it. There’s a great opportunity for us to reset the industry, and we’re doing it in the biggest market in the world.”

Greenfield carriers are increasingly rare these days—especially in markets like the US—and it is imperative that they differentiate themselves from the incumbents. For Lightsquared the differentiation is born of financial necessity; the firm can’t afford to deploy, own and operate a nationwide network.

“I look with sheer envy at the infrastructure that Verizon and AT&T have,” Harriman says. “I’m not necessarily sure they’re using it in the best way that they could from a competitive sense, but I do envy it. I just can’t afford to build that.”

Nor, he continues, would it be desirable to do so at this stage in the evolution of the US cellular market. “If you asked people what they would build today if they wanted to deliver broadband wireless services to consumers and businesses,” he says, “I don’t think that anyone, with their hand on their heart, would think about building AT&T.”

Harriman’s take on the incumbent US carriers is necessarily complicated. On the one hand, he clearly doesn’t think they’re going about their business in the most effective way—and plans to exploit that from a competitive standpoint. On the other, the Lightsquared game plan calls for at least some of those incumbents to become customers, so he can’t dismiss them completely.

AT&T and Verizon, Harriman says, are “two colossal companies that effectively control the market”. And he explains that, while Lightsquared will be looking to win their custom in one way or another, there are restrictions on any relationships they might seek to build. US regulator the FCC imposed on Lightsquared a condition that the firm would not sell more than 25 per cent of its capacity to either or both of the top two players in the US market, he says.

Harriman concedes that the Lightsquared team is “not entirely sure yet” where all of its revenues are going to come from. But he says that he expects the firm to obtain a large percentage of its revenues from non-traditional carriers looking to add a wireless broadband element to their offering. Behind AT&T and Verizon, he says, all US carriers are straining to keep pace; a market view on which the Lightsquared model depends. He singles out WiMAX player Clearwire, which itself has a business model partly built on wholesale revenues, as a company that’s “really struggling”.

As a new type of player in the US market, Lightsquared needs to define itself in a way that more traditional operators do not. It won’t own the network and it won’t market itself to end users. So what kind of company is it?

“At the heart of this organisation is a telecoms company,” says Harriman. “It’s a very small one compared to what you see in the market today. But within it, at an executive level, you see people with the kind of experience and competence that could see them at that level in any national operation in the US, or any other country in the world. At the next layer down, the same is true,” he says.

It is below this level that the reduced size enabled by the firm’s outsourcing strategy becomes apparent, he says. At this layer in the corporate structure of a traditional telco the staff numbers are vast. But at Lightsquared, while the layers exist, they are very much smaller. “We’ve outsourced our hands, but we’ve not outsourced our brains,” he says. “While NSN takes care of everything, they do it under our direction.”

The fact that the firm’s funding is also non-traditional for a national telco has attracted suggestions that Harbinger Investments’ head man Philip Falcone, who made his fortune betting against the US sub-prime mortgage market, is simply looking to make a quick return on his investment. Some estimates suggest that as much as 40 per cent of Harbinger’s assets are tied up in Lightsquared.

Harriman dismisses the notion that Lightsquared is a fast-buck play for its financial backer. “A lot of people have said this is just Phil Falcone dressing this thing up, putting a bit of lipstick on it and selling it for twice what he paid for it,” says Harriman. “I hope that people are starting to realise that’s not going to happen. We wouldn’t have raised the debt we raised or signed the deal we signed with NSN if we weren’t going to do this, because that would just be stupid.”

So what about that deal with NSN? Infrastructure contracts worth $7bn are as rare as US Greenfield deployments in today’s market and Harriman says he was spoiled for choice when he did the initial RFP. He considered submissions from five vendors, all of which were capable of meeting Lightsquared’s requirements.

To Harriman, this suggests that the infrastructure market is overcrowded.

“It’s unusual in any industry to have that many capable players,” he says. “My view is that there is more consolidation to come on the infrastructure side. It’s a volume game and, if you look at the competing technologies, typically only one or two companies make money on them. It’s unusual that even the third placed player in terms of market share makes money. As someone who worked for the biggest infrastructure business in the world, I don’t think [that market] is a great place to be right now,” he says.

The structure of the deal with Nokia Siemens is not a straight Capex deal that will see Lightsquared buying a certain volume of base stations—but nor is it a managed capacity deal of the kind that have been employed in India. It is, Harriman says, extremely complex. He doesn’t offer a full explanation of how it works, saying that it is, “made up of Capex and Opex; a managed service deal with turnkey capability. It’s not quite as extreme as the managed capacity model.”

Managed capacity deals are very hard to execute successfully, he says, based on his experience on the supply side. “They haven’t worked very well for any of the operators or the vendors that have gone into them,” he says. “They’re too complex and they’re extremely hard to manage. My experience of being on the infrastructure side is that the whole process is one of constant dispute.”

Lightsquared differs from other US cellular carriers in another fundamental way—it will have a satellite element to its offering. As part of the requirements attached to the spectrum, Lightsquared has to have a satellite in the skies, which the firm launched on November 14^th, 2010. Just how much of an asset this will be remains to be seen, but Harriman says it offers the firm opportunities that competitors will lack.

“We have to have it, whether we like it or not,” he says. “We do like it, though, because it gives us national coverage from day one; and we’re just starting to think with our potential customers about what that means.”

Getting the satellite up is one thing; delivering attractive devices is another. Lightsquared has announced that Nokia will be providing “branded, data-centric devices”, but no more detail has been forthcoming. The vagueness of that statement, Harriman says, simply covers the fact that the two firms are involved in feasibility studies to see what products might be possible. Qualcomm has also signed up to provide chipsets, and Harriman references one other big smartphone brand, saying that discussions about a multimode device with satellite capability are underway.

At a time when mobile operators are feeling threatened in their consumer relationships by handset vendors and over the top service providers, Lightsquared appears to be embracing a model that positions the operator as a pipe. The original discussions that led to the firm’s birth centred purely on the availability of national spectrum but it soon became clear, Harriman says, that wholesale was the way forward.

“Based on a number of factors; the amount of spectrum, the fact that we’re at an inflection point in technology evolution and the fact that this market is imbalanced in terms of competitiveness, we decided this was the right thing to do. And that’s the journey we’ve embarked upon.” It’s a journey that the industry will watch with a great deal of interest.

The seventh annual LTE World Summit takes place in Amsterdam on 17th – 18th May