Anpanman - Strategic Implications of the S-Band Spectrum Priority Rights

[00:00:00] Speaker A: Thanks for joining this. I did a space at 10:00 AM and unfortunately did not put it on record. So that was a live space and there was no playback. So I figured for everyone's benefit, I would just do this again, which shows you how much I care about this talk and the community. So anyway, yeah, I wanted to just, I guess after Kind of digging a little deeper in terms of research overnight and thinking a bit more. Just wanted to provide some thoughts around the spectrum rights transaction that was announced yesterday. And today we saw some additional details around the deal, which— Only have 0.2% now. Which, let's see, was released in an 8-K. I'll just go through the economic terms really quick, which Our fellow account, uh, ASTS Investors, um, summarized very nicely. But yeah, so the company acquired this entity called ElioSat, uh, which holds certain S-band ITU priority rights to MSS, which is mobile satellite services spectrum in the range of 1980 to 2010 for uplink and then 2170 to 2200, uh, for downlink. And the payments associated with the deal are $26 million at closing, $10 million on the second anniversary of closing, and then $10 million on the third anniversary. There's also some success-based payments, approximately $16.6 million tied to successful launch and effective service of the company's first L/S-band satellite, which is what we know or what we call Mid-band satellites, which are probably going to be labeled Block 3, and then another $1.85 million payment for continuous operation of that satellite for at least 90 days. And so the company will have as its option to make this payment either in cash or in shares. And yeah, so that's the basic outline of the economics of the deal. So why is this deal important and what is the company trying to accomplish? And does the market actually understand what this is? I think yesterday there was quite a bit of confusion, understandably so, just given how these regulatory, you know, the regulatory process is somewhat esoteric in nature and people without a background in it, which includes myself, it takes quite a bit to fully, you know, understand what exactly the company's doing here and then what it actually means. Sorry, I'm just taking a sip of coffee here. But here are some initial thoughts and, you know, I don't, I'm not going to purport to be an expert here. And I think importantly, the company's going to probably review some of this on Monday as they explain this transaction a bit further. But here are some initial implications of what this means and why the company did it and how it positions them for the future, which I think is pretty significant strategically. So I think you've seen the company at the beginning when they went public, there was a key focus on using cellular spectrum for their services, the broadband services in partnership with MNOs. However, as part of that strategy, which they didn't initially articulate, but it's always been there, they're now making the moves to enhance that coverage and capacity with MSS spectrum. And so the company now is quite, you know, as we're on the cusp of launching satellites for service, I think now the company is building on strategic elements to enhance that initial terrestrial cellular-based service with MSS spectrum and a related, you know, constellation to deploy that spectrum. Legato was the first step of this process where the company was able to secure the rights for Legato for 80 years. This is the biggest piece of unutilized L-band spectrum that covers the most profitable market in the world, which is the United States and also Canada. And so this transaction yesterday was an important piece in executing on the strategy of basically consolidating L-band and S-band spectrum globally. The reason why this is important is that the company was able to buy this entity that has priority spectrum rights. It's not, it doesn't come with any associated spectrum. So to the extent people think like, you know, they bought spectrum, that's not what this is. They actually, it gives them priority. And so it allows them to then go around the world's regulators and go procure spectrum. And so what I mean by that is imagine If your line in priority was, you know, if you were a new startup company and you wanted to try to procure some S-band spectrum, you might make a filing with the ITU. Then you find out you're like 25th in line. What this does is basically moves the company up to 3rd in line globally. And so what that means is, I've seen some speculation out there. I believe EchoStar is number 1 in priority, and then you've got OmniSpace, which is number 2, and then this puts the company at number 3. 3 in terms of priority with regulators around the world. That being said, like if you have priority with ITU, it doesn't mean necessarily that you're going to get, you know, spectrum, a spectrum license from any given country, but it's an important piece of the puzzle because you need to have ITU priority and harmonization, right? So if you're in that order of priority, then you're able to go around to countries around the world and say, hey, I'm, I want to procure a license. And by the way, I'm going to be operating in this spectrum band in other countries as well. Because obviously you don't want, you know, one, one company to, to have just a license in a given country and then they don't, they don't have license in another. And, and I'll talk a bit more about what the financial impact is and, and, you know, the impact of the ability to deliver service. But what this does is that, you know, today the US and Europe have already allocated their S-band spectrum, although importantly, Europe is going to go through a process where they are going to renew licenses in 2027. But what this does is it basically positions the company with regulators to go procure spectrum globally. And that's for a majority of the world. And so right now, MSS spectrum overall is pretty much a backwater. It's not really used. And as I've discussed in previous, you know, calls, spectrum does have value if you're, if you actually are able to obtain the rights and you own the rights to the spectrum. But then there's also a very large economic cost associated with deploying the infrastructure, that allows you to then utilize that spectrum. And so, for example, Charlie Ergen found out, I mean, he knew this already, but when he purchased a bunch of spectrum out of bankruptcy from Terastar and DBSD, and then won spectrum auctions, that doing so with and getting approval from the FCC required also that he build out a terrestrial network to utilize that spectrum, either build it by certain milestones or it's going to be taken back, which that's kind of the prospect that he's facing right now. But right now, as it stands globally, S-band spectrum is underutilized. It's, as I mentioned, it's a backwater. And so right now there's a unique opportunity for operators to go and procure that spectrum and having a top you know, position in terms of your priority rights is very important to basically kick off those discussions. And it also shows like your seriousness. So this deal allows them to move up in terms of, move up the line in terms of filing priority. And so if you can imagine what's great about this situation is that as the company goes around the world and procures licenses country by country, you know, they are able to do so with a much more attractive package versus some of these legacy players who candidly have been squatting on the spectrum. So for example, OmniSpace has been, you know, touting a business plan and a paper constellation, but they haven't really done anything about it. They're number 2 in priority. EchoStar has, you know, satellites and some limited service, but Obviously they're under pretty heavy financial duress with their pay TV, their satellite pay TV business and the mobile phone business, basically a melting ice cube and $29.5 billion of debt, some level of free cash outside of, you know, what, $5 billion, which is, you know, some of that's restricted. But, you know, those 2 legacy operators, quite candidly, either from a financial perspective or business model perspective, it's going to be really tough for them to get SPAS and licenses and then actually execute on delivering service to customers. What this priority does for us is that it gets, it makes the discussion easier with regulators. And then what we will bring to bear is the fact that, you know, AST SpaceMobile has the financial wherewithal. It's a, what's now, although I guess today the market's down, so, or the stock's down, so it's, it's not quite $18 billion, but You know, $18 billion market cap, $1.5 billion of cash in the bank. Most importantly, an actual commitment to build a mid-band constellation. And so through the Legato transaction, there will be another shell that's focused on 1.5 gigahertz to 2. Call it, I'm guessing 2.4 at the upper end. Katsi will know better, but real constellation that's going up and then partnerships. And this is really important. the ability to go to local regulators and say, we would like an SBAN license to operate in your country. We're doing that in partnership with an MNO who has preexisting relationships with the regulators. That MNO also has an existing customer base, an existing service, and we're basically going to be utilizing them now to resell this. Not only are we doing supplemental coverage through their terrestrial spectrum, but then we're going to offer additional capacity in this S-band spectrum and this new constellation. And so if you're a regulator, you're going to look at that proposal very favorably because I think that relative to, again, the 2 players ahead of you, OmniSpace, who doesn't really— I think they have 1 or 2 test satellites in space and then there's nothing, you know, there's been fits and starts of what they might actually do. But for all intents and purposes, there's nothing there. And then EchoStar, who, as I mentioned before, is under financial duress. For example, in the US, the FCC has, Chairman Brendan Carr has come down on the company and said, if you guys don't truly deploy and get the service up and running, I'm going to seize your AWS-4 and AWS-3 spectrum, which, you know, as we saw, In response to that, Charlie Ergen announced a deal with MDA Space to put up a direct-to-device constellation using Aurora satellites, which is going to cost something north of $5 billion, which the company doesn't have. I think there's some speculation that maybe a deep-pocketed financial player might help them out in doing so. But as I've discussed before, Ergen's a notoriously difficult character personality to hammer out a deal with. And so I'm not really sure anyone in the industry trusts him for that. But I think for EchoStar, like that deal with NBA Space, with Sir Prejik, it's a gambit to buy more time with the FCC, but also they're going to need something to, you know, something material that they're going to have to put some money into ahead of 2027, which is when the EU decides whether or not to renew their S-band license or to basically give it to somebody else. And I'll talk a little more about that shortly. But yeah, I think for AST SpaceMobile, they're going to be able to go to regulators market by market and provide a really compelling reason in partnership with an MNO why they should get an S-band license. And by doing so, they'll be able to provide broadband service, which is going to end up being a significant public good for citizens of that country. The other thing to keep in mind is that these things aren't fixed. So, you know, it's not that the company said they could get up to 30 by 30 megahertz of capacity. So uplink and downlink. However, a local regulator might decide they might split it up. So it might be, you know, 10 by 10 or 15 by 15 or 5 by 5, and they might give it to a few different players, which Again, it's going to matter like how, what's the quality of the applicant for that S-band spectrum. And so I think that's important to keep in mind. Going back to Europe, I think the joint venture with Vodafone, Satco JV, that was the first initial step, which, and this is kind of the second step. And then third step is going to the regulators and actually getting the licenses, which will be in 2027. I think if you can imagine, EchoStar is going to go to the EU and say, hey, we want to renew our licenses. And the EU is going to say, well, I don't really see you guys utilizing the spectrum. Why should I give it, give you a renewal versus— So there's 2, there's kind of 2 competing things that could be coming to market for Europe. One is IRIS, which is the EU is proposing some homegrown solution to put up their own direct-to-device network, which is going to cost north of $10 billion. And I think the market, rightly so, is quite skeptical of how that's possibly going to come to market. And, you know, because it's going to be, you know, operated by bureaucrats, like what are the delays? And obviously space is hard, as we all know, clearly. But it's unclear if Europe being so many generations behind in terms of this technology, you know, how can they catch up? But the other important player is going to be Vodafone in joint venture with AST SpaceMobile. So Satco JV is going to go to the European regulators and say, we want to apply for S-band license. We have priority. And in addition to Vodafone, by that time, I think, as you guys will recall, companies said they've already gotten interest from MNOs. Who cover 22 countries in the European market. So I'm guessing that's Orange and a few other key players in Europe. They're going to be able to go to Europe and say, hey, look, we've got a European majority-owned JV. We want to apply for this license. The reason why it's important is that the service that we're going to do, first of all, the terrestrial service, that's going to be important and it's going to allow us to provide additional coverage and capacity For, and this is the cellular service for dead spots. But then if you give us the S-band license, we're going to add another up to 30 megahertz by 30 megahertz of broadband capacity of coverage everywhere. Right. And so not only just capacity on top of the traditional cellular network, but this thing is going to go across borders. There's not going to be any coordination problems or issues. And then we are going to create the first European version of FirstNet responder, first responder network that's going to be pan-European. And that's huge, right? It's not just about disasters and, you know, a backup to the terrestrial network, but it's also from a military perspective, right? So if you think about how much Europe is looking to spend on defense, In light of what's happening in Ukraine, they need a European solution for a communications network that is resilient. And by the way, like, the solution that AST is bringing to bear is going to be not only a terrestrial cellular solution where you're using the typical cellular frequencies, and that will be one constellation, it will be a second constellation that's going to be focused on mid-band. spectrum, which will include S-band as well. And so the interesting things about Europe is that, and this is, you know, I talked about this in the earlier space, one of the hindrances for Starlink is that they're direct-to-device service. They can't put down fixed cell beams and their beams are always constantly moving. And that's why I think you're seeing some issues around Starlink being able to provide service in Europe. Because if you look at Europe geographically, there are a lot of these small countries that have very close borders. And so you actually need satellites that can beam down very precise fixed cells in order to avoid interference. Because if you can imagine, carriers from different countries have different spectrum and you've got to coordinate all that. And so there's potential, very significant potential for interference issues. However, on the flip side, for AST, on the cellular spectrum side, because of the way that the, the solution is architected, we're able to beam down fixed cells that are very accurate, that don't cross borders and are not prone to interference issues given how accurate the beams are and of course the power levels. And so that's just on the cellular side. And then if you can imagine layering on top of that take of spectrum, you know, up to 60 megahertz of S-band spectrum that actually doesn't have to worry about borders, that is actually just going to blanket all of Europe. That's a true game changer, right? So then for Europe, they're going to be able to have a first-of-that-type-of-solution. Let's say, just thinking back, like in Spain when there were those floods, unfortunately, like a lot of people passed away. I think it was like 2 years ago or a year ago. And and the cellular networks were down and everybody was in the dark, which was a huge national disaster. AST will be able to light up the cellular spectrum and provide service to people. And then on top of that, there, if you, you know, once they get SBAM spectrum there, they'll be able to provide additional connectivity to those victims, but also more importantly, first responders who need that communications channel that's going to be, you know, broadband, where they can take pictures, videos, and they can communicate with victims. And so that's really a game changer. And then again, as I mentioned before, the military side where having contiguous spectrum across all of Europe, I think, is going to be important when you're thinking about defense capabilities, whether, you know, it's drones, keeping track of military assets, directing warfighters, missiles, you know, maybe there'll be a a European version of Golden Dome. Who knows? But that's why S-band is important in Europe. And then on the flip side, like if you look at Japan and you've got Rakuten there, my guess is that this is going to be a first step where, and we've speculated this before, but I think Rakuten will probably form a SATCO joint venture with AST to provide satellite service based off of S-band. spectrum in Japan. They'll go to regulators and the pitch will be, hey, we're going to provide additional broadband services. And by the way, as the 4th largest Japanese carrier, it's going to give us a key competitive advantage and we're going to go, we're going to be able to then compete more effectively because we have more capacity and service will be better. And the market is, as always, is better with 4 competitors than 3. Because like once you start getting to 3, Then, you know, there tends to be oligopolistic, you know, behaviors. But more importantly, I think the carrot for regulators in Japan will be that Rakuten is going to say to them, hey, if we can get this S-band license for AST SpaceMobile's Block 3 Bluebirds, then what we will do is also create Japan's, you know, an equivalent of FirstNet here. And As we all know, like in Japan, unfortunately, beautiful country, but positioned in such an area where they are exposed to a lot of natural disasters, whether that's earthquakes, tsunamis and the like. And so having an important, having a backup network that is always on is broadband and, you know, can serve first responders, but also victims is going to be highly critical and important. And I think probably for the government of Japan, a first priority, as it should be in any country around the world. And so I think that's going to be part of the pitch. And one of the cool things about AST SpaceMobile is that we already have a partnership and we already work with this entity called FirstNet in the US, which is the first of its kind. And also AT&T, who is the key enabling technology of that. And so as people say, like in the world of wireless telecom and communications, like everybody kind of follows the US's lead. I think AST, by having done all the work with FirstNet around push-to-talk, preemption, all those things like that all becomes a very important information and skillset to then leverage to create similar services in other markets. And by the way, this is not something that like FirstNet, it's like, hey, we've, we're gonna develop this stuff and then we're gonna, it's all proprietary, we're gonna keep it. First responders on the public side, they are more than happy and, and it's part of their MO, right? They're, they're there to share best practices and technology. And so I think, I think having FirstNet in the US is gonna be a key competitive advantage for AST and whatever local MNO partner that they're working with. or joint venture in order to deploy similar types of services in other countries around the world, other regions, you know, however you want to define it. But yeah, I think the other thing that's important is that for fully developed regulatory markets, you know, regulators oftentimes will, you know, make their own decisions after very careful deliberations. But the other thing to keep in mind is that for a lot of these other markets that aren't as developed, they typically do follow ITU rulings and licenses and coordination. And so I think just having the— just having a higher priority is going to be important again for AST to start those discussions in order to procure licenses. And so I think it's important to understand that, taking a step back, that these— and I was, you know, when I was speaking yesterday, I hope people didn't take it the wrong way, but A lot of these licenses have not been granted and there's no economics behind them, meaning the company will go to the regulators, ask for license and show why it deserves a license, and then it will get a license granted. There's not going to be, it's not like terrestrial spectrum where, you know, there's an auction and you have to go buy spectrum. And so where the company could do spectrum type of transactions is if there is a license holder of spectrum that perhaps isn't using it and perhaps, you know, in order to get speed to market, the company might purchase that spectrum. And I'm guessing, you know, maybe in the past there have been some discussions with OmniSpace and EchoStar, but I think with this transaction, I think the company can kind of conveniently go around that and just have conversations with regulators in markets where they want access and they're going to provide a compelling case to get that access. So taking a step back, I think it's important to understand that, you know, the company is now kind of shifting part of its approach and not just only leveraging existing cellular spectrum of carriers, but also providing its own, bringing its own spectrum, which would be MSS spectrum, L-band and S-band, to the table, which then helps enhance the value in terms of the partnership that it brings to MNOs. And also in the regulator's eyes helps put some of this unused spectrum to good use, which as you guys have seen in the US where FCC Chair Carr, Chairman Carr has talked about, you know, unleashing spectrum and innovation and connectivity in the US. That's his MO. And I think that's the MO of regulators worldwide where if you're a company that's been squatting on spectrum and, you know, haven't really used it, I think I'd be scared or concerned as regulators kind of make this shift and you've got this new entrant that has technology that is going to bring that technology to bear to light up spectrum in partnership with MNOs. that's going to benefit the public. So anyway, that's kind of the, you know, my views on strategic implications. I know there's been some people who have asked, you know, why do I think the stock market, the stock price is down? If you look at the space sector overall, yeah, today is a pretty big pullback day. It seems to be risk-off in a number of different sectors, particularly in space. Obviously there's been A few companies that have announced results that have not been stellar. Actually, that's an understatement, have announced pretty bad results. So I think you're just seeing some level of beta in the sector. And I think we'll see this coming Monday an update from the company that's going to be pretty chock-full of strategic updates and obviously an update on production and launch, which I think everybody is keenly waiting for. With your breath here. And I do think, as I mentioned before, I think we might actually see a US-based Cape Canaveral launch much earlier than perhaps Israel. But we'll see. Anyway, I hope that's helpful. I will let this run for a bit, but if folks have any questions, maybe I'll answer any responses. But that's it. So. Thank you. Yeah, we'll catch up again soon. As always, Kook will have a space on Sunday night, and then we've got the quarterly update on Monday after the close, which, which I'm pretty excited about. So anyway, thanks everyone for joining, and we'll talk again later.