LightSquared's Upstart Network Takes Form, But Faces Hurdles

By Roger Cheng Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Hedge fund manager Philip Falcone's ambition to create an upstart high-speed wireless network is slowly taking form. The newly formed venture--backed by Harbinger Capital Partners--has a name in LightSquared, a veteran management team, additional financing and a vendor in Nokia Siemens Network. It plans to sell wireless service on a wholesale basis to retailers, cable companies and other telecom providers. By creating an alternative network to the established players, it could potentially shake up the market. But the significant technical, financial, regulatory and competitive hurdles could threaten to overwhelm the company before it gets off the ground. "In a market that we believe is overly competitive already, putting billions of capital into building another wireless network seems like a mistake," said Macquarie Securities analyst Philip Cusick. LightSquared, however, believes its pure wholesale business model and the growing need for data services will allow it to grow in spite of the competition. "The data demand will exceed the supply by a massive margin," Chief Executive Sanjiv Ahuja told Dow Jones Newswires. "It's the absolute opportune time for it." The company said Tuesday it awarded a $7 billion, eight-year contract to Nokia Siemens to help deploy its network, which is unique--as well as risky and expensive--because it will marry an army of 40,000 ground radios with two satellites to create a nationwide network, which runs on a fourth-generation technology called Long-Term Evolution. The company plans to cover 92% of the U.S. population with its LTE network by 2015, and plans to begin commercial service by mid-2011. LightSquared also said it had secured $1.75 billion in additional financing, but will need further funds to complete its buildout. "We believe that, if successful, this is only the first of many financings the company will need," Cusick said. Ahuja declined to disclose the investors. Some suspect Nokia Siemens may have provided vendor financing, but Susan Spradley, head of Nokia Siemens's North American operations, declined to comment on the specifics of the deal. Spradley, however, expressed confidence in LightSquared's leadership team. "They know what they need to do to raise the financing," she told Dow Jones Newswires. "We will help them anyway we can to make sure the networks get built." The deal is subject to final approval by the boards of Nokia Siemens and LightSquared. Pressure is mounting on Harbinger to show more progress with its spectrum assets. The four-year-old plan is underpinned by Harbinger's controlling stake in satellite-telecom company SkyTerra Communications Inc., which estimated in a recent earnings presentation that it would need to come up with about $211 million for the third quarter to cover costs related to the development of the network. Expenses include insurance for a satellite launch and development of wireless base stations. In addition, the Federal Communications Commission set benchmark requirements for access to wireless spectrum when it approved Harbinger's acquisition of SkyTerra and its licenses in March. According to one condition, Harbinger must build out its network to provide coverage to at least 100 million people in the U.S. by the end of 2012, 145 million people by the end of 2013, and 260 million people by the end of 2015. Frank Boulben, chief marketing officer of LightSquared, told Dow Jones Newswires he believes the company will move faster than the government-set benchmark. LightSquared still has a long way to go before it becomes a credible threat to the established carriers, analysts say. Verizon Wireless, which is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD), plans to launch its own LTE network later this year. AT&T Inc. (T) is expected to follow. Clearwire Corp. (CLWR), which is majority owned by Sprint Nextel Corp. (S), is in the middle of rolling out its own 4G network, which runs on a rival standard called WiMax. The company is already employing the wholesale model to the cable companies, as well as with retailers such as Best Buy Co. (BBY). Boulben said the company has an advantage over Clearwire because it doesn't have a retail arm, so there isn't any indirect competition. "There's no conflict of interest," he said. "We're only successful if our customers are successful." LightSquared is talking to more than 30 potential customers, including cellular and wireline operators, cable companies and retailers, Boulben said. The lack of any customers may be a concern for investors looking to provide additional financing to the business, according to Credit Suisse analyst Jonathan Chaplin. -By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com (END) Dow Jones Newswires July 20, 2010 13:30 ET (17:30 GMT)