On a clear night last November, on the desert steppes of Kazakhstan, a private rocket lifted off from Baikonur Cosmodrome. One of the world’s largest commercial satellites was on board, fitted with a seven-story-tall antenna that could blanket the entire United States with wireless broadband service. The rocket took off smoothly and executed a roll maneuver before shrinking to a point of light in the sky and then vanishing into the darkness.
For LightSquared, the corporation that launched it, even the sky was no longer the limit. The telecommunications company, based in Reston, Va., has vowed to revolutionize the wireless market with a new sort of business model, offering the use of a broadband network at wholesale prices to any company willing to pay for it. Using its satellite, LightSquared hopes to provide broadband service anywhere in the United States, thus becoming the first start-up to break into the national wireless market currently dominated by four well-established major carriers: Verizon, AT&T, Sprint, and T-Mobile.
Pulling together the necessary elements—the radio spectrum, the infrastructure, and the customer base—to break into the wireless business is notoriously difficult. Still, LightSquared had already scaled some daunting barriers that had defeated other entrepreneurs. In 2010, a teensy satellite-communications firm called SkyTerra reinvented itself as LightSquared. The company secured almost $3 billion in capital from billionaire Philip Falcone, who is known for taking gutsy investment risks. It obtained federal licenses to utilize a sufficient chunk of radio spectrum for its network. And its broadband-for-all message matched the goals of President Obama and Julius Genachowski, the Federal Communications Commission chairman; Genachowski often cited the company’s plans for the slice of spectrum next to the one that Global Positioning System transmissions use. Armed with conditional approval from the FCC, LightSquared was poised to launch its network as soon as 2012, taking on the big boys in a way no small fry ever had before.
But less than a year after sending its satellite into orbit, LightSquared itself may be about to crash and burn.
The company’s first crisis was technological. Only after starting to build its $14 billion, latest-generation wireless network did it become clear that its signals interfere with GPS-enabled devices. This set off a barrage of lobbying in Washington aimed at stymieing the company’s plans. A coalition of opponents in the GPS industry, joined by government agencies—including the Federal Aviation Administration and the military—argued that LightSquared’s network would damage industries that depend on GPS and undermine national security. Pretty soon, company officials were traveling regularly to Capitol Hill to be grilled at hearings.
As congressional Republicans flayed the Obama administration for favoring a company to which the president (who once owned stock in LightSquared’s corporate predecessor) and others had ties, FCC backing began to unravel. “Clearly, in his support for LightSquared, the president has put political posturing over national security,” GOP presidential candidate Michele Bachmann, R-Minn., wrote in an open letter posted on her website last month, dubbing the situation “crony capitalism at its worst.” Lawmakers are comparing the company to Solyndra, the federally subsidized solar-panel manufacturer that just went under. Officially, the FCC’s approval process is still going ahead, but the agency’s public enthusiasm seems to have waned. It hasn’t set a specific time frame for acting on LightSquared’s application, considered a danger sign.
Even Falcone, the patron of the company’s revolutionary broadband network, has been reduced to defending the project against charges that it threatens national security and has benefited from political largesse. “It shouldn’t be a political issue,” he told Fox News anchor Megyn Kelly in an interview last month. “This is a business issue.”
Not anymore. LightSquared’s descent from golden child to punching bag shows how, at least in some sectors of the U.S. economy, just building a better mousetrap isn’t enough. Companies with smart ideas and shrewd investors can’t gain entry into the marketplace—much less master it—if they fail to surmount all the political and regulatory hurdles. Even if LightSquared can fix its technological problem, the company with a once-promising future faces a hard road back to any semblance of success. Washington, desperate to make wireless telecommunications more competitive, has instead furnished an object lesson in the technical, regulatory, and political challenges that new telecom companies are forced to navigate. Procedures that are designed for the public’s protection have created regulatory and political hurdles that most start-ups never need to face.
SHAKING THINGS UP
It’s easy to forget that LightSquared’s venture seemed poised for success just a few months ago. Harbinger Capital Partners, a New York-based hedge fund, formed LightSquared in July 2010 out of the remains of a company that began in 1988 as American Mobile Satellite and later did business as Mobile Satellite Ventures and SkyTerra. Falcone, who cofounded Harbinger in 2001, was a fixture on the financial pages because of his $2.2 billion fortune—ranking him No. 540 on the Forbes list of world billionaires—and his eccentricities. According to Forbes, Falcone’s pet potbellied pig has its own room in his Manhattan town house.
LightSquared found a CEO in Sanjiv Ahuja, who spent 15 years at IBM and ran several foreign telecommunications firms. Gray at the temples and wearing an executive’s power suit, Ahuja, 55, doesn’t look like a revolutionary. “Doing a nationwide network from nothing—it is very rare in the United States,” he told National Journal in an interview.
And it’s no easy task, especially when your intention is to shake things up. “LightSquared will be a disruptive force in the U.S. wireless landscape by democratizing wireless broadband services,” Ahuja promised last year when the company started up. He inherited an eight-year effort to create the first network combining land-based technology and satellite coverage. LightSquared’s pitch to Washington descision-makers was “broadband for all.”
This fit perfectly with the quest of the FCC’s Genachowski to deliver wireless service to more Americans and to use more of the radio spectrum, which cell phones and other wireless devices use for their transmissions. For LightSquared, the stars seemed to align. Its financial footing was sound—it has already amassed $2.9 billion in assets from its main investor, Falcone’s Harbinger Capital. It had the necessary technology in hand and seemed well on its way to gaining final approval from federal regulators.
Last March, the momentum began to translate into contracts. LightSquared inked its first deal with Leap Wireless, parent of the wireless-service provider Cricket, to lease access to LightSquared’s network. Since then, the company has announced deals with more than a dozen other companies. A major agreement with Sprint in July made LightSquared’s business model look more plausible than ever: Sprint agreed to host parts of LightSquared’s network on its spectrum and system for 15 years in exchange for nearly $14 billion in cash and credits. Sprint also has the option of buying access to as much as 50 percent of LightSquared’s wholesale wireless network.
The deal was “a very positive development for LightSquared,” according to Jamie Townsend, who watches the wireless industry at TownHall Invesment Research in Colorado, and it “substantially increases the probability that the wholesale venture will succeed.”
These partnerships with small carriers meant a lot to regulators in Washington. Establishing a network that other carriers could hire would improve the competitiveness of small regional wireless services, such as Cricket, thereby positioning LightSquared to help out the little guys against the marketplace’s so-called duopolists, AT&T and Verizon. The company offered itself as a remedy to a decade of wireless-carrier consolidation. This message resonated—especially in light of AT&T’s proposed merger with T-Mobile, which could give AT&T and Verizon control of 80 percent of the market.
“When the market is consolidating, you need competitive alternatives,” said Jeff Carlisle, LightSquared’s vice president of public policy and regulatory affairs, who served on Obama’s presidential transition team. The company’s broadband-for-all model, he argued, “will enable dozens of others to lease our capacity, with the potential to turn regional or rural carriers into a national player rather quickly.”
Genachowski, the nation’s top telecom regulator, was enthusiastic. He had reason to be. LightSquared’s business model, after all, seemed crafted in the image of his policy agenda. Two of his—and also the Obama administration’s—top goals in communications are promoting competition among wireless carriers and bringing wireless service to more Americans. Genachowski made it no secret that he saw potential in LightSquared, alluding to the company and its plans in public appearances. The FCC was so gung ho that it required LightSquared’s network to eventually be able to serve 260 million Americans.
More helpfully, the FCC eased the company’s way through the regulatory thicket. In January, the agency gave LightSquared permission to let its customers use only its land-based, tower-to-tower network without having to use devices that also pick up satellite signals. This waiver allowed the company’s wholesale customers to offer their consumers devices that use either its terrestrial network alone or both its satellite and land-based networks. Satellite providers are usually barred from offering devices that work on terrestrial networks alone, an FCC tactic to foster the satellite industry as a path to ubiquitous coverage. Agency officials describe this waiver, which is conditioned on LightSquared’s success in resolving some technical issues, as nothing unusual.
GPS manufacturers, however, contend that the FCC’s action changed the game, allowing LightSquared to operate a new kind of network, thereby increasing the value of the company’s spectrum. Unlike land-only carriers such as Verizon and AT&T, LightSquared could send transmissions between towers by satellite, and this network would be cheaper to use and provide better service than satellite phones. Soon, critics in the GPS industry and on Capitol Hill were accusing the FCC of giving the fledgling company special treatment. Life in Washington for LightSquared was about to get a lot more complicated.
A TECHNOLOGICAL SNAG
The fight centers on the use of the radio spectrum, which the federal government regulates. Considered a national resource, the finite amount of usable spectrum has long been divided and set aside for various purposes, from cell phones to television and radio to GPS. Those uses have been traditionally separated to avoid interference. But as more and more devices come to rely on wireless technology, spectrum users don’t have the luxury of buffer zones and are being forced to squeeze ever closer, prompting government officials to urge companies to make their systems more tolerant of interference.
The portion of spectrum that LightSquared has was designated for use by satellites, but the company’s plan to use it for a land-based network has brought it into conflict with GPS. LightSquared told regulators that its planned network, consisting of a single satellite and thousands of land-based transmitters, would be perfectly compatible with the GPS satellites and their transmissions. The problem is that, for years, GPS manufacturers have been building devices based on the assumption that nothing would interfere with their signals. GPS-enabled devices, whether a cell phone or an instrument in a million-dollar airplane, “look” into a wide range of spectrum and therefore receive transmissions made on LightSquared’s bandwidth; the devices can’t help but receive the powerful transmissions—even though they don’t cross into GPS’s designated portion of the spectrum.
LightSquared officials promised that before going ahead with their plans, they would wait until all parties concerned—federal agencies, GPS manufacturers, and LightSquared itself—conducted tests to determine whether the company’s network would, in fact, interfere with GPS transmissions.
Competing industries, however, were already pushing back. Last March, an anti-LightSquared lobbying alliance called the Coalition to Save Our GPS sprang up seemingly overnight. GPS manufacturers such as Garmin and TomTom joined with the National Association of Manufacturers and other companies that boast decades of Washington experience—John Deere, for example, which makes tractors that use GPS devices of great precision. The group took its case against LightSquared to Congress and the FCC.
Soon enough, LightSquared’s opponents had a reason to exult. The Radio Technical Commission for Aeronautics, an industry-government group that advises the FAA, reported in June that its tests showed that LightSquared’s transmissions caused a “complete loss of GPS receiver function.” The report’s publicly released summary found the company’s land-based network would be “incompatible with the current aviation use of GPS,” unless technological modifications were made. The transmissions from tower to device are much more powerful than GPS signals and overpower the GPS receivers.
Despite this bad news, analysts say, LightSquared still has regulatory precedent on its side in arguing that the responsibility for fixing this problem belongs to the manufacturers of wireless receivers. Traditionally, companies that make GPS devices, cell phones, tablet computers, and other wireless receivers have been responsible for making sure that their products don’t wander into neighboring spectrums. Precedent may not hold, however, in the face of opposition from GPS manufacturers and the powerful agencies and industries that rely on GPS.
Which side, then, should bear the responsibility for any required modifications? The GPS industry argues that there is no known fix for many types of GPS receivers and that putting wireless-transmission filters on smartphones may not work. Besides, “the commission and LightSquared cannot now rewrite the rules to shift the burden of eliminating interference to GPS providers,” Jim Kirkland, vice president and general counsel for GPS manufacturer Trimble, wrote in a May letter to Rep. Anna Eshoo, D-Calif., who is influential on telecom issues. “That burden remains squarely with LightSquared. If LightSquared cannot demonstrate that it will not cause—or that it alone will ameliorate—harmful interference to GPS operations, it must not be permitted to initiate service.”
THE POLITICAL TRENCHES
Thus, a debate over technology and business has become a political football. It’s hardly unprecedented, of course. Washington has long been known for making life difficult for businesses with waves of regulations and subpoenas. Most high-tech start-ups—Google, for instance—didn’t need regulators’ say-so to begin operations, so they never faced the klieg lights of congressional hearings and federal probes until they were well off the ground.
Telecommunications companies, however, aren’t so lucky. The FCC and other agencies control the public airwaves, meaning that companies hoping to break into the wireless-service market face both regulatory hurdles and political fights right from the start. If LightSquared hadn’t needed a slice of the spectrum, smart ideas and access to capital alone might have sufficed.
But they haven’t. The fracas quickly degenerated into a debate in which each side has accused the other—accurately, no doubt—of trying to use Washington to protect its business interests. LightSquared’s critics say that it manipulated the FCC into fast-tracking the approval process, while the start-up maintains that its woes are the fault of big corporations that can’t stand competition.
“We’re breaking up the business model, which is uncomfortable for the incumbents,” Ahuja told NJ. And in an August interview on CNBC, Falcone charged that AT&T and Verizon conspired with GPS manufacturers to block the new wireless network. “They are doing a lot of things behind the scenes,” he said. “They are trying to stamp out innovation.”
Federal bureaucrats have joined the fray. Pentagon and Transportation Department officials wrote to Genachowski in March rebuking the FCC for easing its procedures and complaining that their agencies “were not sufficiently included” in considering LightSquared’s plans. Lawmakers have also leapt into the mix. “I would suggest that it is LightSquared using a part of the spectrum for inappropriate purposes that has led to this dilemma,” Rep. Tom Petri, R-Wis., chairman of the House Transportation Committee’s Aviation panel, wrote in a letter to the company last month. “Don’t blame GPS.”
Whether LightSquared can overcome this opposition isn’t clear. But it’s trying. The company has revised its plans to avoid utilizing—at least for a while—the part of its allotted spectrum closest to what GPS devices use. LightSquared has also developed a prototype GPS device designed to be compatible with its network and has promised to kick in $50 million to find ways to overcome interference with government systems. So far, however, these moves haven’t won over many critics.
Republicans have been trashing LightSquared’s efforts to curry favor with the Obama administration. No surprise, given Obama’s past personal interest. He invested $50,000 in LightSquared’s predecessor, SkyTerra, in February 2005—reportedly the decision of a blind-trust broker—using money that the then-senator had earned from his books. Around the same time, a Republican-led FCC gave the company approval for its network. (Obama sold his stock in fall 2005 at a loss.) A recent report by the Center for Public Integrity revealed that Obama’s former White House personnel chief Donald Gips, now the U.S. ambassador to South Africa, had as much as $500,000 invested in LightSquared while the FCC was considering a regulatory waiver.
Such connections have become fodder for congressional Republican attacks. Rep. Mike Turner, R-Ohio, who heads the House Armed Services Strategic Forces Subcommittee, cited the CPI report in publicizing e-mails from LightSquared representatives to White House officials that pressed for meetings and mentioned contributions to Democratic campaigns.
LightSquared officials noted in their defense that the company won conditional approval for its land-based network in 2005, while Republicans controlled the White House and the FCC. And Falcone describes himself as a registered Republican who has never met the president. “Any suggestion that LightSquared has run roughshod over the regulatory process,” Ahuja told NJ, “is contradicted by the reality of eight long years spent gaining approvals.”
Nor did the FCC do anything extraordinary in issuing its regulatory waiver, commission officials assert. The agency tries to be “as responsive as we can in facilitating the introduction of new services,” said Julie Knapp, chief of the FCC’s Office of Engineering and Technology.
HOPES OF SURVIVAL
For the companies involved, billions of dollars are at stake—either LightSquared’s loss of investment or the GPS industry’s bill to fix its devices. But which side will end up the winner may hinge on whether Washington decision-makers choose to favor an innovative entrant into a concentrated market or the entrenched incumbents that have a history of providing vital service and working with government agencies.
Can LightSquared persuade a panoply of lawmakers and regulators to shove GPS aside and let a new guy in? Possibly, but no time soon, judged Paul Glenchur, a senior telecom analyst at Potomac Research Group in Washington. “I think the history of regulatory battles shows that regulators are extremely reluctant to disrupt incumbent users,” he said. “Eventually, it happens. But it never happens quickly.”
The FCC’s initial support may bode well for LightSquared’s success in the review process to come, but other agencies remain wild cards. “There are plenty of people in the right places for this to go forward, but they won’t without resolving the GPS issue,” Glenchur said. “As a practical matter, the FCC has to follow the lead of the other federal agencies.”
Ahuja said he remains optimistic that the FCC, sooner or later, will give LightSquared a thumbs-up. But many hurdles remain. Rethink Research Associates, a Britain-based consultancy that focuses on the wireless market, noted recently that the FCC “seems to be throwing cold water on such optimism.”
Beyond the wariness of federal Defense and Transportation officials, the FCC’s own enthusiasm may be fading. The agency called last month for more testing of LightSquared’s network. Tim Farrar, a telecommunications analyst at TMF Associates, a consulting and research firm in Menlo Park, Calif., has suggested that LightSquared’s plans may be on hold while the FCC makes up its mind. “What comes as a huge shock,” Farrar wrote, “is that the FCC has offered LightSquared absolutely nothing to indicate it is minded to approve LightSquared’s terrestrial operations in the future.”
Still, LightSquared has reason to hope. It has revised its proposal, promising—at least at first—to confine its spectrum use to the part farthest away from what GPS uses. The Coalition to Save Our GPS has become less strident in calling on the FCC to flat-out block LightSquared’s plans. And federal policymakers continue to regard broadband-for-all as a worthy objective. Telecom-industry analysts say that the political will to get LightSquared off the ground remains high.
“In spite of the political uncertainty, we continue to expect the FCC and LightSquared to find some way to allow the company to proceed,” investment analyst Townsend said. “Common sense still dictates to us that FCC cannot promote the longer-term needs for more spectrum and then kill off one of the solutions to that need.”
Yet the future of LightSquared, its broadband network, and the extent of competition in the wireless marketplace has moved beyond the realm of technological fixes and regulatory rulings. This highly technical, arcane face-off, already a target for Fox News and presidential hopeful Bachmann, could well become an issue in the 2012 campaign and in the ideological tug-of-war between the White House and the Republicans in Congress.
“It’s time Washington politicians stop using LightSquared as a piñata,” Ahuja declared.
This article appears in the Oct. 15, 2011, edition of National Journal.