Failure, Squared

LightSquared, Inc. filed for bankruptcy this afternoon after its plan to deliver high-speed wireless broadband nationwide was blocked by federal regulators over interference issues.

LightSquared was a pet project of billionaire hedge fund manager Phil Falcone, who earned his money pitching George Foreman grills and betting against sub-prime mortgages. Falcone invested billions in the satellite Internet venture, despite knowing the wireless technology had run into controversy with nearby satellite spectrum users who claimed it interfered with GPS reception.

Starting in 2010, Falcone convinced the FCC to approve his purchase of SkyTerra Communications, on the condition he construct a nationwide wireless broadband platform that could serve up to 260 million Americans. His hedge fund, Harbinger Capital Partners, spent $3 billion to gain control of 74 percent of the fledgling LightSquared project, despite Falcone’s knowledge the technology would potentially interfere with adjacent spectrum users. But Falcone dismissed those concerns, believing the interference problem was actually the fault of GPS technology that encroached on his spectrum or receivers that were not properly constructed to reject adjacent channel interference.

Falcone

Falcone’s steadfast belief in LightSquared, and the enormous financial backing he gave it, flew in the face of network engineers who reviewed the technology startup.

DirecTV was one company interested in the potential of LightSquared’s wireless satellite broadband back in 2004, but quickly backed away when even tentative tests flashed red lights of caution for DirecTV executives.

“A young engineer we had went and tested it and said, ‘It conflicts with GPS, it will never work.’ So we backed away immediately,” CEO Michael White told Business Week.

Falcone assumed any problems could be smoothed over with the federal government, White added.

With sufficient lobbying money and inside D.C. influence, he might have even overcome the alliance of GPS users that formed to fight the venture.  But in the public debate that followed, the GPS community eventually proved their case and the FCC put the project’s approval on hold. Now some parties involved in the LightSquared debacle are wondering if things might have gone better had the company been more sensitive to those GPS users and had found a way to overcome the interference problems.

Ultimately, the FCC delivered the death blow issuing an eventual revocation of the company’s license to operate its broadband system as presently designed.

Most of the group’s working partners have fled the LightSquared project, Harbinger has seen the biggest drop in assets in industry history — losing $23 billion from direct losses and client withdrawals, and billionaire Falcone is even accused of allegedly stiffing the contractor working on his Long Island home at least $1.2 million, according to a lien filed in Suffolk County.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg The Fall of Phil Falcone 4-16-12.flv[/flv]

Fabio Savoldelli, a finance professor at Columbia University, talks about Harbinger Capital Partners’ Phil Falcone and his investment in wireless broadband startup LightSquared Inc. It has been rough sailing for Falcone ever since he turned the project into a major priority for himself and his investors. Savoldelli shares how it all went wrong with Bloomberg News.  (8 minutes)

At a time when cable operators are more reluctant than ever to overbuild into another operator’s territory, something very strange is going on in central North Carolina.

Time Warner Cable is moving into the neighborhood — one already receiving service from a community-owned cable operator.  That would be like Time Warner moving into one of Comcast’s service areas.  For some reason, those large cable companies completely avoid competing head-to-head, but where community-owned provider MI-Connection has managed to sign up around 15,000 customers for service, Time Warner Cable has also arrived.

As a result, customers north of Charlotte, in communities around Davidson and Mooresville, are getting some amazing prices for cable television, phone, and broadband.  Time Warner will even deliver an offer right to your front door.

Susan Wagner in Mooresville got her deal when she threatened to cancel Time Warner Cable and return to MI-Connection.

“(Time Warner) gave everyone a really good offer when they first came in and then drove up the price after a while,” Wagner told the Charlotte Observer.

When Wagner called to cancel, Time Warner sent an employee to her door offering to slash her cable bill by $50 a month, enough to keep her business.

Other residents in nearby Cornelius are also getting prices substantially lower than residents in cities like Charlotte, where many residents have one choice for cable: Time Warner.  Sam, a Stop the Cap! reader in the Morrison Plantation neighborhood, noted they skipped the last few rate increases from the cable company.

“You just call and tell them the rate is too high and as soon as they find out you have MI-Connection as an alternative, they lower the price,” he said. “My niece in Charlotte can’t get the same deal even when we gave her the details — it’s only good in areas where MI-Connection operates.”

That leaves Charlotte residents paying $35-50 more a month than savvy customers further north can have for the asking.

“It sounds like predatory pricing to me when the company offers a special low price that people like my niece are probably subsidizing on their higher bill,” Sam suspects.

The Observer reports Time Warner is also laying cable in other neighborhoods, such as Heritage Green, where the cable company is soliciting business from MI-Connection subscribers door-to-door.

MI-Connection’s CEO, David Auger, formerly from Time Warner Cable himself, claims he’s unconcerned about Time Warner’s aggressive overbuild of his service area.

But the state’s largest commercial cable company has been signing up some of MI-Connection’s current customer base and successfully holding its existing customers in place with significant discounts on service.  Since last July, MI-Connection signed up 667 new customers, but also lost 577 others, most likely to Time Warner Cable.

MI-Connection was launched from the ashes of a bankrupt Adelphia Cable system acquired by the communities of Mooresville and Davidson.  After investing in a needed system upgrade, the community owned provider relaunched service nearly identical technically to other cable systems.  Unlike Wilson and Salisbury, where new fiber-to-the-home systems were built, MI-Connection offers a more traditional cable package.

That makes competition with Time Warner Cable more difficult, but the community provider is trying.  Time Warner Cable’s regular pricing in the area runs $68.49 a month for 85 basic channels.  MI-Connection sells 86 channels for $61.99.  But when customers call Time Warner to complain about their higher prices, the cable operator dramatically lowers them to keep the customer’s business.

“The regular price only matters until you call and complain about it,” says Sam.

There have been complaints, but many of them are less about the cable bill and more about politics.  MI-Connection has not come cheap either town, which had to cover some of the costs of a needed system upgrade and service installation, estimated to run about $1,000 for every new customer signed.

Last fall, mayoral challenger Vince Winegardner made local government involvement in broadband a political issue, saying the purchase of the cable system was a mistake.  He lost his bid, but the system’s money needs remain a frequent topic of discussion in all of the communities involved in MI-Connection, and earlier this year the company company asked for $1.1 million from Davidson and Mooresville to ride out the rest of the fiscal year.

Time Warner’s recent interest in invading a fellow cable operator’s service area and slashing prices for those customers has raised the question whether their overbuild is about competition or predatory pricing to drive MI-Connection out of business.

Wagner doesn’t seem to mind either way, telling the Observer it is a “win-win” for her, scoring a lower cable bill with Time Warner.

But Sam isn’t so sure the savings will last.

“It seems pretty clear to me that Time Warner isn’t hurrying to compete with Comcast or Charter — just MI-Connection and that makes me suspicious,” Sam says. “After spending all that money to ban community broadband in the state, they now seem to be trying to drive out of business the handful of companies that were exempted.”

“My niece is probably paying for this right now on her cable bill too, and once MI-Connection is out of the way, those prices will shoot right back up,” Sam concludes.

As AT&T joins Verizon selling off its Yellow Pages publishing unit and payphones keep disappearing from street corners, the media is writing the landline obituary once again.

CNN Money asks today whether we’re witnessing the death of the landline.

In as little as 20 years, the concept of a wired phone line may become the novelty a rotary-dial phone represents today.  Yes, traditional phone lines will still be found in businesses and in the homes of those uncomfortable dealing with a mobile phone, but America’s largest phone companies are well aware the traditional telephone line is in decline.

[flv width=”412″ height=”330″]http://www.phillipdampier.com/video/ATT Archives What is the Bell System.flv[/flv]

The Bell System, as it was known until the 1980s, used to comprise AT&T, Bell Labs, Western Electric, Long Lines, and two dozen local “operating companies” like New York Telephone, Mountain Bell, etc.  This AT&T documentary, from 1976, explores how “the phone company” used to function.  New innovations like “lightwave” are showcased, promising to deliver voice phone calls over glass fibers one day.  

Much of the technology seen in the documentary may be unfamiliar if you are under 30 (and check out how customer records were maintained back then), but those who remember renting telephones in garish colors from your local phone company will recognize the phones that occupied space in your home not that long ago.  The only part of the landline network that hasn’t changed much in the last 40 years is the wiring infrastructure itself, which has been allowed to deteriorate as customers continue to depart.

Why was the company so darn big back then?  Because it had to be, the documentary says, to serve a big America.  Hilariously, the company defends its then-status as a “regulated monopoly” telling viewers “[a] regulated monopoly works well in communications because you don’t duplicate facilities and you produce real economies over the long haul.”  (14 minutes)

CNN reports nearly one-third of all American homes no longer have landline service, double the rate from 2008, triple that of 2007.  Verizon is feeling the heat the most, with revenue down 19% over the last five years.  AT&T has seen their revenue drop 16.5% over the same period.

But things are not all bad for phone companies willing to spend money upgrading their networks.  Verizon’s top-rated FiOS fiber to the home service is a compelling competitor to Comcast and Time Warner Cable.  AT&T’s U-verse has gotten a respectable market share larger midwestern cities and draws customers who like its DVR box and the chance to stick it to the local cable company they’ve hated for years.

But where both companies have decided against investing in upgrades — notably in their rural service areas — the traditional phone line is trapped in time.  Only the network it depends on is changing, and not for the better.

[flv]http://www.phillipdampier.com/video/ATT 1993-1994 You Will Ad Campaign Compilation.flv[/flv]

Back in 1993, AT&T produced seven advertisements dubbed the “You Will” series, showcasing future technologies AT&T would “deliver to you.”  Eerily, the vast majority of these predictions came true, but mostly from companies other than AT&T.  While the phone company predicted what would eventually become E-ZPass, Apple’s iPad, Apple’s Siri, the smartphone, Skype, Amazon’s Kindle, the cable industry’s home security apps, video on demand, and GPS navigation, most of those innovations were developed and sold by others.  

AT&T spun away Bell Labs and became preoccupied selling Internet access, cell phones and reassembling itself into its former ‘hugeness’ through mergers and buyouts. With limited investment in innovation, AT&T risks being left as a “dumb pipe” provider, selling the connectivity (among many others) to allow other companies’ devices to communicate. (Alert: Loud Volume at around 2 minutes) (4 minutes)

Verizon decided to ditch its rural service areas to FairPoint Communications in northern New England and Frontier Communications in 14 other states.  The results have not been good for the buyers (and often customers).  FairPoint went bankrupt in 2009, overwhelmed by the debt it incurred buying phone lines in Vermont, New Hampshire, and Maine.  Frontier has watched its sales fall ever since its own landline acquisition, and the company has gotten scores of complaints from ex-Verizon customers about broken promises for improved broadband, billing errors, and poor service.

Analysts predict AT&T will start dumping its rural landline customers in the near future as well, letting the company focus on its U-verse service areas.  But who will buy these cast-offs?  CNN reports nobody knows.  CenturyLink and Windstream, two major independent phone companies, don’t appear to be in the mood to acquire neglected landline facilities they will need to spend millions to repair and upgrade.

One thing is certain — both AT&T and Verizon are tailoring business plans to favor Wall Street approval.  The companies’ decisions to temporarily boost revenue selling pieces of its operations has helped stock prices, but has also made the companies shadows of their former selves.  Nearly 30 years ago, customers still paid the phone company to rent their home telephones, relied extensively on the companies’ lucrative White and Yellow Pages for directory information, and discovered new technology innovations like digital switching thanks to Bell Labs, the research arm of AT&T — today independent and known as Alcatel-Lucent.  Today, people in some cities cannot even find a telephone company-owned payphone.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/WJBK Detroit Quest to Find a Working Pay Phone 4-10-12.mp4[/flv]

WJBK in Detroit this week ventured out across Detroit to see if they could find a pay phone that actually works.  That old phone booth on the corner is long gone, and some admit they haven’t touched a pay phone in 20 years.  (2 minutes)

A Wall Street analyst says Sprint has a 50/50 chance of being forced into bankruptcy, either pulling through a difficult upgrade to LTE 4G and stabilizing its partnership with Clearwire, or sinking under a load of debt incurred by Apple’s iPhone and network upgrade expenses.

Sanford Bernstein Research analyst Craig Moffett downgraded Sprint this morning from “market perform” to “underperform,” noting Sprint’s complicated five year credit default swap financing deal already prices in a 50/50 chance Sprint will be forced into Chapter 11 bankruptcy reorganization.

Moffett told investors he believes Sprint’s near term future can be described in one of two ways:

“In the first, the company successfully navigates its complicated Network Vision upgrade, stabilizes Clearwire‘s financial position, and delivers a compelling 4G product. In the second, some combination of its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a stupendous debt burden bring the company to its knees.”

Moffett says Sprint’s biggest risk may come from Apple’s forthcoming 4G LTE iPhone, which he does not believe will work well on Sprint’s network.

“The problem is 4G. Sprint doesn’t have enough free-and-clear spectrum on which to launch a competitive LTE network, and it doesn’t have the money to clear spectrum that’s already in use,” Moffett said. “We expect Sprint’s competitiveness to begin to backslide when LTE becomes the nation’s de facto standard.”

Sprint continues to rely primarily on its troubled partner Clearwire for 4G service, which uses the aging WiMAX standard other carriers abroad are decommissioning.

With the iPhone 5 due later this year, should it provide access to 4G LTE service, Sprint could be in real trouble.  By fall, Sprint’s LTE network is expected to only provide limited coverage in a handful of cities, and on PCS spectrum less suitable for penetrating buildings.  Sprint would be forced to compete against Verizon’s nearly-completed LTE network as well as AT&T’s mixture of LTE and HSPA+ 4G services.  Verizon and AT&T will operate their 4G networks on 700MHz spectrum which can deliver robust signals indoors and out.

“Unfortunately, at this point we simply don’t believe there is any analytical framework that provides strong conviction as to whether Sprint can or cannot avoid bankruptcy over the next four years or so,” Moffett says. “Instead, one is left with this; are the perceived risks rising, or are they falling? We conclude … that risks of bankruptcy are rising, and that perceived risks will rise still further with the release of the first 4G iPhone.”

[flv]http://www.phillipdampier.com/video/CNBC Sprint to Go Bankrupt 3-19-12.flv[/flv]

CNBC speaks with Craig Moffett about the challenges afflicting Sprint’s effort to build a 4G LTE network and how a bankruptcy might affect customers.  (4 minutes)

Payday for Rutledge

Cablevision’s former chief operating officer Tom Rutledge has hit executive pay Powerball, scoring a compensation package worth more than $90 million dollars as the incoming CEO of formerly-bankrupt Charter Communications.

Documents filed with the Securities and Exchange Commission reveal why Rutledge abruptly resigned from his position at Cablevision on Dec. 15.  Just four days later, Charter announced Rutledge would become its new CEO this February, replacing Mike Lovett who earlier announced his departure plans.

Rutledge will be extremely well compensated in his new position, scoring $8,000 a week in walk-around money until February when the executive suite opens up.  After that, his base salary will amount to $2 million annually, with yearly increases possible.  But the real money will come from Rutledge’s bonus and incentives package.  In addition to an annual bonus worth up to $3.5 million annually, Rutledge will also get more than one million shares of Charter stock, worth more than $70 million at present.  If Rutledge focuses on boosting that stock price, he could earn considerably more.

That’s a remarkable pay package for a cable company that declared bankruptcy just two years ago.  It’s also a lot more money for Rutledge, who collected just over $28 million at his old job at Cablevision.

In 2010, soon-to-be-former Charter CEO Mike Lovett earned just under $11 million in total compensation.