LightSquared: The answer to U.S. wireless competition?

LightSquared, a company that most cell phone subscribers have never heard of, is building a nationwide wireless broadband network that it hopes will rival the nation's largest providers AT&T and Verizon Wireless.

The company has gotten a lot of buzz lately as the Federal Communications Commission and others see it as the answer for more competition in the wireless market. AT&T's announcement last month that it will acquire T-Mobile USA for $39 billion has raised eyebrows among regulators and consumer advocates concerned about too much consolidation in the wireless market.

LightSquared, which plans to sell its service wholesale instead of directly to consumers, has already signed up Leap Wireless and Cellular South as customers. Retail chain Best Buy has also committed to testing the service, and rumors are floating around that the company may be signing a deal with Sprint Nextel to share network resources.

And even though the network won't be up and running until early next year, there's already talk that the company may go public this summer.

But what is LightSquared exactly? And what are its chances of success? And finally, what does the potential success of this company mean for the average consumer?

A brief history
LightSquared was formed in July 2010 to build a new nationwide wireless broadband network using the "4G" wireless technology called LTE. Its primary investor, billionaire hedge fund investor Philip Falcone's Harbinger Capital Partners, saw big potential in building a new nationwide 4G wireless network as demand for wireless data services explodes. But instead of simply creating another wireless carrier to compete directly against AT&T and Verizon Wireless, the company decided to sell its service on a wholesale basis only. This new network would be an alternative to AT&T and Verizon, but it would not be a direct competitor.

Using spectrum acquired from the satellite provider SkyTerra, LightSquared now has a nationwide license for about 59MHz of spectrum mostly in the 1.6GHz band. In January, the company received a waiver from the Federal Communications Commission that will allow the spectrum, which had been limited for use for devices that offer both satellite- and land-based communication, to be used for land-based-only LTE communication. This was a key win for the company, since it will offer LightSquared's wholesale customers the option of offering an LTE-only service. While some clients may want to offer satellite communications as part of their consumer service, LTE-only devices are more affordable.

There is no doubt that LightSquared's ambitions are bold. Building a nationwide network is fraught with challenges. Just ask Clearwire, a company that joined forces with Sprint Nextel, Comcast, Time Warner Cable, Google, and Intel in 2008 to build a nationwide wireless broadband network using a competing "4G" technology called WiMax. Clearwire has already spent more than $6 billion in developing 71 markets. And today the company is struggling to come up with more cash to fund the rest of its network plan.

LightSquared executives say the combination of its business model and the spectrum it has accumulated puts the company on firmer ground than Clearwire. The FCC also sees LightSquared as a vehicle for helping the agency promote its National Broadband Plan, the goal of which is to get broadband service to every American in the next decade. As part of its waiver, the FCC is requiring the company to meet certain milestones over the next several years. LightSquared is expected to cover roughly 92 percent of the U.S. population with its service by 2015. And by the end of 2012, it is expected to serve about 100 million potential customers. The company is already testing its service in Baltimore, Denver, Las Vegas, and Phoenix, and it expects its first customers to launch service early next year.

But LightSquared faces some tough obstacles. In addition to indirect competition from AT&T and Verizon Wireless and potential funding issues, it's also facing potential regulatory challenges. Some of the spectrum that LightSquared is using to build its network sits right next to spectrum used by GPS providers and public safety agencies. And some representatives from these industries say LightSquared's service could cause interference to their services.

If LightSquared does succeed in its ambitious plans, the upside for consumers could be huge. As the wireless industry consolidates with big players gobbling up smaller providers, such as with AT&T's purchase of T-Mobile, LightSquared offers smaller wireless operators a chance to compete. It also provides new entrants in the wireless market a chance to come up with new business models that could change how consumers access wireless broadband services.

"The LightSquared network has the potential to be a real game changer," said Roger Entner, principal analyst at Recon. "It not only could help smaller carriers, but also can be an enabler for connected devices."

It's all about the business model
One of the biggest issues that could derail LightSquared is the enormous amount of money that's needed to build its network. Last week, Reuters reported that industry analysts estimate that LightSquared, which took out more than $1 billion in loans, still needs to raise at least an additional $6 billion to build out its network. The news agency reported that unnamed sources said the company could raise the cash this summer in an initial public offering.

LightSquared executives declined to comment on the rumors.

At the CTIA tradeshow in Orlando, Fla., last month, LightSquared CEO Sanjiv Ahuja said the company already has secured $14 billion in private funding over the next eight years to build its network. About $7 billion comes from a vendor-financing deal with infrastructure provider Nokia Siemens. So far, LightSquared has not used any of the vendor-financed cash, Frank Boulben, chief marketing officer for the company, said in an interview.

While Boulben agreed that building a network of LightSquared's scope is expensive, he said the company's business model, which focuses exclusively on being a wholesale provider, gives it an edge over competitors trying to do the same thing. He said that by eliminating the cost of marketing and supporting consumers directly, the company can reduce the amount of money it needs to fund its business by about half.

"To break even using this wholesale model, we need only half of what you'd need if you were trying to establish a retail brand," he said. "The funding requirements are greatly reduced because we don't need to pay for marketing and customer care and everything else that goes along with building a retail business."

Instead of going the retail route, it will only sell network capacity and wireless service to customers who will then repackage and resell the service to consumers. LightSquared's potential customers will be other wireless providers, such as Leap Wireless and Cellular South, two smaller regional wireless operators.

Recently, it's been rumored that Sprint Nextel might sign on as a LightSquared partner. The two companies have supposedly been in talks to share towers and other network resources, according to a story in The Wall Street Journal. Neither LightSquared nor Sprint would comment on the speculation.

According to The Wall Street Journal, the deal between Sprint and LightSquared would give LightSquared access to Sprint's 3G infrastructure. Sprint would be paid in a mix of cash and access to LightSquared's spectrum and 4G network, anonymous sources told the paper.

The use of the spectrum in rural areas where Sprint doesn't have a network could help Sprint cut back on roaming deals with competitor Verizon. But it could also provide a path for Sprint to offer LTE service. Today, Sprint offers 4G wireless service via Clearwire, which uses WiMax instead of LTE.

LightSquared also plans to sell its service to retailers (such as Best Buy) and device makers, so that they can bundle the LTE wireless broadband service into products.

"The idea is to have retailers or device makers bundle the service into their products like Amazon has done with the Kindle," Boulben said.

Indeed, AT&T and Verizon Wireless have each said they see big potential in this market. AT&T is already seeing some success with this business model. The company provides the network for the Amazon Kindle e-book reader. The way it works is that the network service is bundled into the cost of the device. AT&T is paid for the service by Amazon every time a Kindle is sold. These connected devices made up a large portion of AT&T's new wireless subscriber additions in the first quarter of 2011.

Verizon Wireless has also been touting the machine-to-machine market. The company is offering wireless service for connected devices, such as home security monitoring devices and smart electrical grid devices and appliances.

But LightSquared's network could offer device makers the option of bypassing the big phone companies altogether. For example, Apple could sell a 4G LTE version of its iPod Touch or iPads without requiring consumers to buy service from AT&T or Verizon. It's unclear how many device makers or retailers will actually find this option appealing, but Boulben said he is hopeful that it could spur new business models for the entire device ecosystem.

Interference issues
Coming up with the cash to build its network is an obvious challenge ahead of LightSquared. But the company also faces potential regulatory roadblocks. Manufacturers of GPS equipment warn that signals from the LightSquared network could drown out signals for existing navigation systems, much the same way radio stations can interfere with each other when one signal is stronger than another.

GPS makers say the issue is that satellite receivers, which are designed to detect weak signals from space, could be overwhelmed by higher-power signals coming from LightSquared's 40,000 cellular base stations that will be transmitting the LTE signals in frequencies that are close to the GPS signals.

These device makers say that the interference could harm navigation devices for aviators as well as emergency responders.

LightSquared and the FCC say that the new network can coexist with GPS systems. And Boulben is undeterred by the potential roadblock.

"Like all spectrum holders we have an obligation to operate properly within our band, and we take that responsibility very seriously," Boulben said. "In preparation of this service, we have been working collaboratively with the FCC, executive branch agencies, and the GPS community since 2003 to ensure that critical broadband services and GPS can coexist. At the request of the FCC, a technical working group has been formed and is submitting monthly reports to the FCC articulating its progress. We will launch commercial operations in our band only when this process is completed to the satisfaction of the government."