On Monday, the Sprint’s board announced that it has formed a special committee of independent directors to “carefully evaluate” Dish’s $25.5 billion offer to buy up the company. But it also wants to keep its original $20.1 billion deal with SoftBank deal on track — despite Dish’s attempts to put it on hold.

On Friday it asked the Federal Communications Commission to keep its official review of Sprint-Softbank going, keeping the deal on target for final approval this year. The FCC is already 140 days into its initial 180-day review, but the U.S. Department of Justice has asked the FCC to delay proceedings while its National Security division looks into foreign ownership issues.

When Dish countered SoftBank’s offer last week it asked for a suspension of the regulatory review, but Sprint said there is no reason to stop clock even as Sprint negotiates with Dish. In fact, in its FCC filing Sprint accused Dish of political maneuvering to muck up the SoftBank deal. From the letter:

“DISH wrongly suggests that it would be prudent for the Commission to derail this review while it waits until an alleged uncertainty – uncertainty that DISH itself is attempting to create by its unsolicited proposal – is resolved. DISH has this exactly backwards. The Commission has been working diligently on the pending applications, which now stand at day 140 of the Commission’s shot clock. The Commission must not be distracted by DISH’s latest maneuverings, just as it was not distracted by DISH’s original request, and, based on long-established precedent, continue the orderly processing of the applications to conclusion.”

Meanwhile, the special five-director committee will weigh whether the Dish’s bid represents, or will likely lead to, a “Superior Offer” to Softbank’s. Dish may be offering more money, but as TMF Associates analyst Tim Farrar points out, Sprint has to look at other factors besides value to determine if a Dish-Sprint tie-up is worth the trouble.

Dish may offer Sprint some strategic advantages — combining both companies’ spectrum with Sprint’s mobile network and Dish’s satellite TV service — but if SoftBank matches Dish’s offer, Sprint may figure it can buy whatever strategic advantages it needs with SoftBank’s cash.

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In a presentation explaining his bold vision for the company, DISH’s CEO Charlie Ergen detailed plans to provide seamless mobile access to subscription TV content (based around DISH’s Sling and Hopper technology), and a plan to offer fixed wireless broadband to the estimated 40 million households that lack access to high bandwidth fiber or cable networks. Crucially, the latter would be accomplished using a combination of Clearwire’s 2.5GHz spectrum as well as satellite broadband.

That’s the theory, but in practice commentators have questioned whether the leverage inherent in DISH’s bid – for what is a considerably larger company – will constrain the ability of a merged Sprint/DISH to invest in the Sprint network and implement these plans. Further, many expect that Masayoshi Son, the CEO of SoftBank, will outbid Ergen – despite his protestations to the contrary.  Ergen’s vision for DISH’s future is bold and exciting, but the question ultimately is whether Sprint is crucial to achieving it, and whether it can even work without Clearwire.

Sprint not a requirement for mobile delivery

With respect to the delivery of seamless mobile video, DISH already has most of the necessary technology available. After all, you can already use Sling on your mobile device today. The only real constraint is that the cost of wireless capacity makes it prohibitively expensive to watch mobile video on a metered 4G data plan. If DISH does indeed acquire Sprint, then it could potentially exempt Sling content from any data caps implemented for Sprint subscribers, thereby making seamless usage more feasible (and an attractive marketing point for potential new subscribers).

Nonetheless, there is nothing unique about Sprint’s network that makes it a necessary component to that strategy: DISH could just as easily shop its AWS-4 spectrum to T-Mobile for instance, which could  deliver a similar offering.

Wireless broadband crucial for success

Unlike DISH’s mobile video plans, which are responding to potential longer-term shifts in video consumption, DISH’s ambitions to deliver fixed broadband to the home appear to be far more critical to the near-term competitive position of its satellite TV business. Importantly, the entire plan appears to be predicated on the use of Clearwire’s spectrum for a national deployment. In particular, DISH is at a substantial disadvantage compared to cable and telco TV solutions, which offer integrated broadband and video-on-demand capabilities.

DISH has been attempting to acquire around 40MHz of spectrum from Clearwire since last summer, and it is hard to see where else it could hope to dig up that much spectrum for a fixed wireless broadband network, at a reasonable price – unless DISH uses its own AWS-4 spectrum. However doing so would limit Ergen’s leverage to strike a deal with a wireless operator. Alternatively, DISH could attempt to repurpose LightSquared’s spectrum, but that would be fraught with difficulties.

The greater flexibility DISH has in realizing its mobile video plans vs its fixed broadband ones suggests it may be far more important for it to acquire some of Clearwire’s spectrum than to buy all of Sprint right now. After all, if Deutsche Telekom is willing to strike a deal with DISH after completing its merger with MetroPCS, then Ergen could deploy the 2.5GHz Clearwire spectrum on T-Mobile’s network.

So the question is, might SoftBank agree to sell part of Clearwire’s spectrum to DISH, in exchange for DISH agreeing to withdraw its bid for Sprint? That would certainly be logical, but with two billionaires’ egos at stake, it’s never a given that the most rational outcome will prevail.

Tim Farrar is president of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, Calif., which specializes in technical and financial analysis across the satellite and telecom sectors.He blogs on wireless and satellite issues at tmfassociates.com; follow him on Twitter @TMFAssociates.

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However, like every forecast, the VNI has its flaws — namely that it may overestimate the future demand for mobile data on cellular networks, while understating the need for additional unlicensed spectrum allocations.

Earlier predictions didn’t pan out

Last October, I wrote an article for GigaOm pointing out the dramatic slowdown in mobile data traffic seen in the CTIA’s semi-annual wireless industry survey and asking whether the supposed “spectrum crisis” was a myth. Of course, that didn’t go down well with some people, and CTIA executives lined up to proclaim that It is No Trick – There is a Spectrum Crisis, and asserting that “as Cisco’s data shows… there must be more spectrum to meet demands from consumers and businesses across the country.”

However, Cisco has now revealed its latest VNI mobile data forecast that instead of the originally projected 118 percent growth in North American mobile data traffic between December 2011 and December 2012, traffic grew by only 64 percent over that period – which is to say much slower than in 2011 and far below prior expectations.

So is that the end of the spectrum crisis? Not if you take Cisco’s projections of future growth at face value: They expect 10-fold growth in North American mobile data traffic between 2012 and 2017. Indeed, Cisco actually projects that growth in North American mobile data traffic will be even faster in 2013 (70 percent between December 2012 and December 2013) than the 64 percent it estimated for the last 12 months.

Conflicting data sources

There are reasons to be cautious about the weight that should be given to these forecasts. Cisco has retroactively revised its mobile data traffic estimates, reducing the total estimated global traffic in December 2011 by 13 percent (from 597PB/month in last year’s forecast to 520PB/month in the current model). This is largely due to 30 percent and 23 percent reductions in the European and Asia Pacific traffic estimates respectively, partially offset by a 14 percent increase in estimated North American mobile data traffic. The scale of these revisions indicates that there is considerable uncertainty in Cisco’s numbers, and highlights the difficulty of obtaining real traffic data from mobile network operators.

Nevertheless, at least in the U.S. we can attempt to validate Cisco’s numbers, given that CTIA’s mobile data traffic statistics are based on direct reporting by carriers accounting for 97 percent of wireless connections in the U.S.. In its latest forecast, Cisco estimates that mobile data traffic in the U.S. was 128PB/month in December 2011, and increased to 207PB/month by December 2012.

However, CTIA data indicates that 633PB were carried in the first six months of 2012, for an average of 105.5PB each month. Cisco’s estimate for the U.S. is clearly inconsistent with the CTIA statistics: It is hardly likely that monthly traffic declined significantly between December 2011 and June 2012, and equally implausible that total mobile data traffic in the U.S. then doubled in the second half of the year.

Based on the above analysis, it seems advisable to be rather cautious about the use of Cisco’s mobile data traffic statistics to make policy decisions about the U.S. wireless market structure. That has not been the case historically, with the FCC Chairman often citing Cisco’s projections to suggest that the “skeptics” about the so-called “looming spectrum crunch” were simply wrong. We now have a looming battle between advocates of making more unlicensed and shared spectrum available, and those insisting that all available spectrum (such as that freed up in the upcoming broadcast TV incentive auctions) must be auctioned.

But the most critical piece of data that should be used to inform this debate is how much mobile data traffic will be carried on traditional cellular networks, and how much will instead be able to use unlicensed Wi-Fi spectrum in the 2.4GHz, 5GHz and (potentially) the White Space frequency bands.

Offloading a crucial variable

In previous years Cisco’s forecasts substantially understated the impact of Wi-Fi “offloading” on mobile data traffic growth: Just last year, Cisco estimated that the proportion of data offloaded from smartphones and tablets in the U.S. would fall from 49 percent of their data usage in 2011 to 46 percent of their data usage in 2016. Instead, according to Cisco’s latest forecast, offload is already 60 percent of smartphone and tablet traffic.

Cisco remains relatively cautious about future use of Wi-Fi: the proportion of traffic offloaded from smartphones is only expected to grow by 1 percent per year between 2012 and 2017 – despite having expanded from 21 percent at the end of 2010 to 49 percent at the end of 2011 and as much as 59 percent today. If,  instead, as much as 80 percent of traffic were “offloaded” (which is in line with the traffic split for current users of Cisco’s Data Meter application), then the amount of data traffic carried on cellular networks might be nearly halved. That’s a major difference in outlook from what Cisco is predicting.

When policymakers consider an appropriate balance between future allocations for licensed and unlicensed spectrum, let’s hope they take into account the likelihood that Cisco’s estimates of a 10-fold increase in U.S. mobile data traffic over the next five years may not be realized, whether because of an overestimate of recent traffic growth or an underestimate of future Wi-Fi offload. But given the challenges of dispelling the myth of the “spectrum crisis” (and the carrot of those supposed billions of dollars in auction revenues), I’m not holding my breath.

Tim Farrar is president of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, Calif., which specializes in technical and financial analysis across the satellite and telecom sectors. Follow him on Twitter @TMFAssociates.

Photo courtesy of Alex Garaev/Shutterstock.com

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Sprint didn’t reveal their identities, naming the companies W, X, Y and Z, but Company W is most certainly MetroPCS, a carrier Sprint has been dancing around for more than a year. The proxy statement – which Sprint submitted ahead of a shareholder vote on the Softbank deal – said Sprint was in negotiations with Company W between December 2011 and February 2012 over a possible merger, but the talks fizzled out.

That fits in with reports back in February a year ago that Sprint and Metro were on the verge of closing an $8 billion deal, only to have it quashed by the Sprint board. What’s more, Company W frequently pops up throughout the filing as a Sprint acquisition target throughout the rest of 2012, the last reference to a possible deal being in late September. A few days later, T-Mobile and MetroPCS announced their own blockbuster merger plans. Sprint reportedly weighed countering T-Mobile’s bid, but decided against it.

Surmising the identities of the other three companies is a bit more difficult, though a good guess is that Company Z is Dish Network. Between May and September, Sprint was negotiating a potential spectrum partnership with Z, but nothing came of it because Z’s CEO was “focusing on certain regulatory issues.”

At the time, Dish and Sprint had long been rumored to be working out a network share, in which Sprint would host Dish’s new LTE network on its towers. Dish, however, didn’t get approval from the FCC to use its satellite airwaves for 4G until December. By that time Sprint’s relationship with Dish became hostile. Sprint forced Dish to make concessions on how it could use its spectrum, and Dish has been trying to block Sprint’s acquisition of Clearwire.

Companies X and Y remain bigger mysteries. According to the filing, in 2011 Sprint entertained a spectrum-for-equity deal with Company X, while between May and September of 2012, Sprint and Softbank were extensive discussions with company Y over a possible three-way tie-up.

Spectrum policy analyst Tim Farrar speculates that Company Y is T-Mobile USA. If that’s true, Softbank must have been considering quite the blockbuster deal, combining the third-and fourth-largest carriers in the U.S. T-Mobile and Sprint have been the subject of merger rumors in the past, but such a deal would be loaded with complications. Not only would it be a tough sell to the regulators after AT&T-Mo, but the two companies use different 2G and 3G technologies, which would make integrating their operations a nightmare (Sprint is still learning its lessons from Nextel). Farrar said that Softbank probably soon realized that a T-Mobile-Sprint merger was infeasible, which is why it authorized Sprint to pursue Clearwire in December.

As for Company X, Farrar thinks it’s SpectrumCo, the cable-operator venture that sold its airwaves to Verizon last year. The timing makes sense. A few after Company X’s negotiations with Sprint ceased in 2011, the cable operators announced their blockbuster deal with Verizon.

Feature photo courtesy of Shutterstock user Paul Fleet; Sprint photo courtesy of Shutterstock user Susan Law Cain

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It appears that Dish wants in on any possible deal and might even be angling to purchase the WiMAX operator completely. On Tuesday, Clearwire announced that Dish made an unsolicited offer of $3.30 a share to buy part or all of the company as well purchase a quarter of Clearwire’s spectrum and enter into a network sharing agreement.

On the low end Dish would accept a 25 percent share as long as its interests were protected on the board, but according to the proposal it would be willing to acquire all of the company’s shares, paying a price roughly 11 percent greater than Sprint’s $2.97-per-share offer.

What does all this mean? If you ask spectrum policy analyst Tim Farrar, he’d say this is posturing in a high stakes game of chicken played out by some of the biggest companies in the telecom industry. He pretty much called this scenario last month, when Sprint first made overtures to Clearwire.

According to Farrar, Sprint wasn’t really interested in acquiring Clearwire; Sprint didn’t want anyone else to buy Clearwire, in particular Dish. By submitting a low-ball offer Sprint would either get Clearwire on the cheap or at least tie up the company for months as shareholders debated the offer, which would have the same effect as blocking any Clearwire-Dish deal.

So is Dish now calling Sprint’s bluff? That could be the case, but when I reached out to Farrar he said Dish has little chance on the success. Dish may be offering a higher price, but it doesn’t necessarily mean it’s offering a better overall deal, he said. What this will do is give Clearwire’s shareholder’s motive to challenge the Sprint deal. To put it another way, Dish chairman Charlie Ergen may just be out for a little payback. According to Farrar:

“… it’s hardly surprising that Charlie Ergen is seeking revenge by intervening in Sprint’s proposed Clearwire takeover. It’s hard to see how DISH could win, when Sprint already controls a majority of Clearwire’s equity, but Ergen has given Clearwire’s minority shareholders a lot more ammunition for their fight against the Sprint offer. The court battle by the minority shareholders could take months to resolve, and it seems that Sprint is determined to fight, because there is little chance that offering a few cents more per share would placate the shareholders.”

What happens next? Who knows. I’ll be the first to admit I have no idea what these companies are angling at, and I would be highly skeptical of anyone who says otherwise, unless they happened to be in the Sprint, Dish, Clearwire or Softbank inner circles.

It will be an interesting (and very confusing) next few months.

Dish photo courtesy of (CC BY 2.0) Flickr user Dave Lindblom.

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Investors aren’t very happy with Sprint’s low-ball offer. And now Reuters is reporting that Sprint’s would-be owner Softbank won’t go along with any acquisition that valued Clearwire at more than $2.97 a share, which is just seven cents more than what Sprint has offered. If Reuters’ sources are correct then Softbank doesn’t see the value in Clearwire that everyone else seems to see.

Softbank’s $20.1 billion deal to take control over Sprint is of vastly more importance to Sprint than taking over its non-neglected WiMAX provider. Why start negotiations with Clearwire that would result in a price Softbank is sure to reject?

Spectrum policy analyst Tim Farrar believes Sprint isn’t interested in buying Clearwire – at least not yet. Rather he believes Sprint’s bid is just one maneuver in a very complex chess game that pits carriers against one another over spectrum and in which Softbank, Clearwire, Dish Network and AT&T are all players.

You can read Farrar’s full analysis for yourself on his blog, but what it boils down to is this: Sprint wants to block any deal between Dish and Clearwire to operate a shared network using Dish’s newly minted 4G spectrum. By making an offer that Clearwire’s strategic investors – Intel, Comcast and Bright House – would likely consider, Sprint and Softbank could hold up any Dish-Clearwire pact in the works, at least until Softbank’s acquisition of Sprint closes. From Farrar’s blog:

It’s surely not a coincidence that this offer came on the same day that [Dish Chairman] Charlie Ergen received approval from the FCC for terrestrial use of his AWS-4 spectrum, with Dish Stating that “will consider its strategic options and the optimal approach to put this spectrum to use for the benefit of consumers”. After all DISH appears to have had a potential deal with Clearwire on the table for several months, held up only by delays in the FCC’s approval (which were largely caused by Sprint’s intervention via efforts to gain access to the H-block), and has bought $750M of Clearwire’s debt.

If Sprint successfully blocks a Dish-Clearwire deal, what happens then? Well, after the Softbank deal closes, the new company could decide whether to pursue Clearwire in earnest. But Farrar thinks the most likely outcome is that Dish would be forced into the arms of AT&T, which has been eyeballing the satellite broadcaster’s nationwide LTE band. If AT&T buys Dish’s spectrum, then it would have to divest some of its current licenses, which Sprint could then pick up.

It sounds crazy to me, too, but I’ll bet Farrar is more right in his analysis than wrong. There are so many rumors and so much innuendo circling Sprint, Clearwire and Dish that I can’t tell up from down anymore. It’s obvious that Sprint has some ulterior motive – it didn’t just suddenly fall in love with the idea of controlling Clearwire after four years of letting the WiMAX operator languish. We can’t accept any of these deals at face value.

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However, underlying the statistics are numbers that tell a far different story: in fact, there was a dramaticslowdown in wireless traffic growth during the first half of 2012. Of course, CTIA doesn’t want anyone to realize that, because it is significantly at variance with CTIA’s narrative of an impending “spectrum crunch”into which so much lobbying effort has been invested.

The CTIA press release only quotes total wireless data traffic within the US during the previous 12 months upto June 2012 for a total of 1.16 trillion megabytes, but doesn’t give statistics for data traffic in each individual six-month period. That information, however, can be calculated from previous press releases (whichshow total traffic in the first six months of 2012 was 635 billion MB, compared to 525 billion MB in the final six months of 2011).

Counter to the CTIA’s spin, this represents growth of just 21 percent, a dramatic slowdown from the 54 percent growth in total traffic seen between the first and second half of 2011. Even more remarkably, on a per device basis (based on the CTIA’s total number of smartphones, tablets, laptops and modems, of which 131M were in use at the end of June), the first half of 2012 saw an increase of merely 3 percent in average wireless data traffic per cellphone-network connected device, compared to 29 percent growth between the first and second half of 2011 (and 20-plus percent in prior periods).

Data from Sandvine appears to confirm this slowdown, estimating mean monthly usage per mobile device in North America has fallen by 10 percent since October 2011. To be clear, these figures indicate that device owners have effectively plateaued in their consumption of cell-based data—which seems to fly in the face of conventional wisdom, informed by near constant hype of runaway data consumption by mobile consumers.

What was the cause of this dramatic slowdown in traffic growth? We can’t yet say with complete confidence, but it’s not an extravagant leap of logic to connect it with the widely announced adoption of data caps by the major wireless providers in the spring of 2012. It’s understandable that consumers would become skittish about data consumption and seek out free WiFi alternatives whenever possible. And there’s anecdotal evidence that supports the hypothesis.

For instance, in January the Wall Street Journal first reported on wireless users “shutting off their WiFi option … because constantly searching for a signal can eat up battery life.” But then by March, we were told about new iPad buyers who had started to stream March Madness games in HD only to find out the next day they were “out of gas.” In retrospect both of those stories seem laughable, since offloading traffic to Wi-Fi has become de rigueur for savvy cellular users.

Of course, such changes in behavior may not continue indefinitely, but it seems a fair bet that while caps remain a concern, end users will limit their on-network wireless data usage to a much lower level than is necessary simply to stay within their monthly cap. In addition, as others have noted, the penetration of smartphones is approaching saturation, so we can’t count on growth in the number of devices to pick up the slack.

If continued, the implications of much slower growth in on-net wireless data traffic will be profound. If traffic per device only grows at around 3 percent in the second half of this year, then overall data traffic on cellular network for all of 2012 will be up only about 60 percent on 2011— or about half the widely quoted growth forecast by Cisco. Further, Cisco justifies that number based on the assumption that the “move to tiered pricing does not appear to have an immediate effect on overall mobile data traffic.”In other words, Cisco is making what is essentially an open loop forecast of demand, unconstrained by what customers will be willing and able to afford in the real world.

Those dubious Cisco data points are widely quoted, and especially so by those trying to scare us into thinking that we face a so-called spectrum crunch—a bandwagon that CTIA has all too happily promoted. Even such luminaries as FCC Chairman Julius Genachowski has stated in recent speeches that we are at a crisis point, claiming “U.S. mobile data traffic grew almost 300 percent last year” —while CTIA says it was less than half that, at 123 percent. “There were many skeptics [back in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”

Perhaps therefore we need to take a step back and think about the motivations of those who are telling us of the need for more licensed spectrum because of a purported looming spectrum crunch. Most obviously, Cisco would certainly like to sell more hardware. Large wireless operators, such as AT&T and Verizon clearly don’t want the FCC to impose caps on their spectrum holdings. Small wireless operators want more spectrum to be made available to lower the cost of network expansion.

Those who have made speculative investments in spectrum want their investors to believe these assets will become more valuable. Even the FCC would like you to believe that their “progress in mobile is driving new waves of job creation and investment.” It seems likely that the emperor really does have no clothes. We’ll have to wait to see whether wireless data traffic in licensed spectrum bands will actually meet or fall short of Cisco’s seemingly over-optimistic projections. And perhaps the leading wireless operators will be forced to soften their data caps by consumer pressure and competition from operators offering unlimited data.

However, given the dominance of Verizon and AT&T, neither seems particularly plausible in the current US wireless market. It seems rather more likely that consumers will adapt to a world of offloading instead, so that wide-area cellular networks will de facto become the backup solution for whenever short range solutions such as Wi-Fi aren’t available.

Even before the recent publicity about data caps, Wi-Fi offload was growing far faster than cellular data traffic, and according to the July 2012 PCAST report, one major carrier now claims to be offloading “more than half of its smartphone traffic onto Wi-Fi.” As the PCAST report also recognizes, low power solutions like Wi-Fi will allow spectrum re-use to increase dramatically, “from 900 to as much as 1.3 million times more than a fixed, large cell-based architecture can provide.”

Then perhaps we will realize, as others have notably pointed out, that “there is no more scarcity of wireless spectrum than there is a shortage of, say, the color purple.”

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, Calif., which specializes in technical and financial analysis across the satellite and telecom sectors. 

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On June 4, 2010, Matt Desch, CEO of satellite communications company Iridium, sat in his McLean, Va., office staring into a computer screen at a live video feed of a 368-ton rocket idling on a launch pad in Cape Canaveral, Fla. The telecom veteran had staked Iridium’s future on a $3 billion plan to bring the company’s aging constellation of satellites into the 21st century. A key part of that plan was getting 72 next-generation satellites into orbit, and it was this rocket, now preparing for its maiden flight, that would eventually carry Iridium’s precious cargo into space.

In selecting a company to launch his satellites, Desch hadn’t opted for a tried-and-true aerospace player like Arianespace or International Launch Services. Instead, he had decided to go with the upstart Space Exploration Technologies, better known as SpaceX. Why? SpaceX had offered to launch the six-dozen satellites for half what the established players were charging, saving Iridium half-a-billion dollars.

Matt Desch

But the decision carried a huge amount of risk. While SpaceX’s entrepreneur-founder Elon Musk was already well known for his ambitious goal of privatizing space travel, his company at the time had had more failures than successes. Its previous-model rocket, the Falcon 1,misfired on each of its first three launches: the first caught fire, the engine on the second died, and on its third launch, the rocket’s two stages collided. Those failures sent the company teetering toward toward death, saved only by the Falcon 1′s fourth, successful, launch.

Now, Desch and Iridium were about to see whether SpaceX’s newest rocket, the Falcon 9, was more reliable than its predecessor — and the months leading up to June 4 hadn’t been very reassuring. The rocket was supposed to have embarked on its first flight in November of the previous year, but that launch had been postponed 10 separate times.

The rocket had finally reached the pad, but as Desch watched from his office, there had already been one false start, the launch aborted due to an errant sensor reading. If SpaceX couldn’t light the fuse by 3 PM, the mission would have to be rescheduled once again.

Another string of failures could endanger Iridium’s exacting launch schedule, or worse, send SpaceX spiraling into bankruptcy and Iridium scrambling to find another launch provider. The biggest concern, though, was the reaction of Iridiums’s bankers. Desch had negotiated a $492 millon contract with SpaceX — the largest commercial launch contract in history – but because of SpaceX’s track record, the consortium of European banks underwriting the whole project wanted to see a successful launch of the Falcon 9 before they put pen to paper.

As Desch put it: “Bankers don’t like to see explosions.”

Fifteen minutes before the launch window closed, the Falcon 9′s first-stage engines ignited and the rocket lifted off. Six minutes later it achieved its target altitude and placed a dummy capsule in orbit 155 miles above the Earth. The normally stoic Desch let out a cheer of elation. Outside his office his employees celebrated — high fives all around.

A week later, Desch was in Paris hamming it up with the bankers, and true to their word, the financiers signed off on the contract. When Musk attended Iridium’s investor conference in New Orleans later that year he was treated like a superhero — it was like “having Tony Stark, a real-life Iron Man” in the room, Desch said.

Elon Musk

The following is the never-before-told story of how Iridium placed a huge bet on SpaceX that wound up paying off. In a series of interviews, Desch shared with GigaOM the details about how a satellite communications company struggling with its future found common cause with a scrappy startup that wanted to broaden the frontiers of space exploration.

Iridium didn’t need SpaceX to survive, but by placing its faith its Elon Musk’s company it found a way to overhaul one of the largest satellite constellations in the heavens on a shoestring budget — and trade up its old voice-centric business model for one focused on data. In exchange, SpaceX got the major contract it needed to firmly establish itself as a powerhouse in commercial space flight.

A mobile network hurtling through space at 17,000 mph

Iridium was born out of the satellite communications boom of the late 1990s, riding a wave of speculation that satellite players like itself, Globalstar and Orbcomm could build a truly global mobile network for the monied classes. Backed heavily by Motorola, it activated its constellation in November 1999 and began selling its first bulky satellite phones around the world. Nine months later it filed for bankruptcy,

At that point it was clear that satellite telephony wasn’t going to even compete with cellular, much less replace it. There was a good chance that Iridium’s $5 billion to $6 billion network would have been decommissioned entirely, letting the satellites fall out of orbit and burn up in the Earth’s atmosphere, creating one of the most spectacular pyrotechnics display the world has every seen. But at the last minute, a consortium of investors bought Iridium’s extraterrestrial assets for pennies on the dollar and restarted satellite phone service in 2001 with much more modest ambitions.

Iridium isn’t your typical satellite communications company. It’s not tossing a few satellites into orbit that are hovering at fixed points above specific continents. Instead, it operates a constellation of 66 birds that cover the entirety of the Earth’s surface from pole to pole. Each satellite travels at an orbital velocity of 17,000 mph on dispersed planes that intersect on the Earth’s axis, meaning no matter where you’re standing – or floating — on the surface of the earth, you’re in view of multiple Iridium satellites.

That kind of network may not be useful to your typical consumer or business user, but it’s extremely attractive to a certain set of professionals – military, international contractors, merchant marines, field scientists and surveyors – that travel to the far corners of the globe.

When Desch took over as CEO in 2006, Iridium had cemented a close relationship with the U.S. Department of Defense, and was expanding into the private sector. He took the company public, made it a profitable venture, and expanded the company’s portfolio to include data and machine-to-machine services communications (for companies or organizations that want to keep track of their assets even when they are in the middle of the ocean or in the remotest jungle). Desch has doubled Iridium’s subscribers to 576,000 in six years, according to the company’s last earnings report.

Iridium has some big accounts like FedEx and UPS but many of its customers are smaller outfits. Iridium satellites track dog sleds as they race across Alaska in the Iditarod, and they provide crucial communications for the relief workers of the International Federation of the Red Cross and Red Crescent Societies in war-torn and diaster-stricken regions of the world.

Desch said Iridium no longer has any interest in challenging the mobile carrier powers or moving beyond basic voice and data connectivity. “I hate to use the term dumb pipe,” he said. “It has such negative connotations. But I have no problem with the term because no one can supply the kind of dumb pipe we can.”

A fascination with anything that flies 

Desch started his career at Bell Labs 30 years ago, and since then he’s made the rounds through the telecom industry. He was president of the now defunct Nortel Networks’ wireless division, where he oversaw the construction of some of the  world’s biggest 2G networks. In 2002, he was tapped to become CEO of Telcordia, the former research arm of the regional Bell phone companies. He sits on President Obama’s National Security Telecommunications Advisory Committee and has either chaired or sat on the boards of pretty much every U.S. telecom industry trade and standards organization.

An Iridium Flare over upstate New York

Desch grew up during the Apollo Moon flights, and has always been fascinated by anything that flies. Though he’s never left the troposphere, he pilots his single-engine Cessna T210 several times a month. When discussing Iridium, Desch never fails to mention that the satellite constellation has become an object of obsession among star gazers. All of Iridium’s satellites have flat, door-sized, highly-reflective antennas. When those antennas catch the sun’s rays just right they produce a “flare” 3o times brighter than Venus in the night sky.

When Desch accepted his new role at Iridium, he was almost immediately handed a huge task: to replace Iridium’s aging constellation with a new generations of satellites. It’s current network is already well past its anticipated operational lifespan of seven to 10 years, and several satellites have already malfunctioned or have tumbled back into the atmosphere. Iridium 33 was decommissioned in a more dramatic fashion in 2009 when it collided over Siberia with a defunct Russian communications satellite at 22,000 mph.

Iridium replaced those defunct or lost satellites with in-orbit spares, and Desch said that the company could keep the current fleet going until 2017 when it hopes to complete its replacement. But there is definitely a sense of urgency. Iridium may be able to squeeze some more operational life out of its satellites, but it doesn’t change the fact they’re already obsolete.

In the last 10 years, mobile communications has shifted its focus from voice to mobile broadband. Satellite broadband technology has made huge leaps. ViaSat in October put into orbit a satellite with a total network capacity of 140 Gbps, allowing it to offer speeds up to 12 Mbps to customers on the ground. Iridium’s closest competitor Globalstar, which runs a constellation of 40 satellites, is already one-third of the way through its next-generation satellite deployment. Globalstar’s orbiters only support speeds of 256 kbps, but even those sub-broadband connections put Iridium at a significant disadvantage.

Iridium’s network can only support a 10 kbps earth-to-orbit connection, which is pretty much the speed of a 1990 dial-up modem. That might be fine for downloading email without attachments from an ocean-bound oil tanker or sending out the GPS coordinates of a polar expedition. But in an age of multi-megabit connections to smartphones, those speeds just don’t cut it.

Desch’s big bet

Between 2015 and 2017, Iridium plans to replace every single one of its 66 current satellites with new Thales Alenia-built orbiters, and also throw up six spares. Called Iridium Next, the constellation will boast device connection of speeds of well over 1 Mbps to mobile devices and 8 Mbps to dish antennas, and will significantly boost the capacity of the overall satellite grid. When the constellation is complete, Desch said, Iridium will be the only communications company in the world that can deliver a megabit or more of a bandwidth to any point on the globe.

To get such a huge payload into low-Earth orbit, Desch didn’t just need a launch provider to supply multiple rockets, he needed one that could reliably send those rockets into space every few months starting in 2015. Once Iridium puts its first batch of satellites into orbit, the others need to go up in rapid succession.

Iridium’s satellites aren’t just bouncing signals back down to the Earth’s surface. They’re inter-networked. They’re passing calls among one another in a cosmic game of hot potato until one of those satellites flies over one of four ground stations where it finally connects the call to the terrestrial network.

Having a 1 Mbps connection to a new satellite does little good if the satellite completing the chain can only support dial-up speeds. So Iridium Next won’t be open for business until the full complement of 66 new satellites is in orbit.

Finally, Iridium had to buy those launches on the cheap, according to mobile satellite services analyst Tim Farrar. The original Iridium constellation in 1999 was a multi-billion-dollar debacle. So Iridium is determined to get its next-generation network up on a $3 billion budget, Farrar said.

“Iridium really had to go with SpaceX, because more established players have found their launch services in heavy demand in recent years and so have been raising prices,” Farrar said.

For $492 million, SpaceX would deliver eight launches, while any other rocket supplier would have charged $1 billion for the same services, Desch said. But Iridium also hedged its bets. It contracted with ISC Kosmotras – a launch consortium between Russia, the Ukraine and Kazakhstan — to serve as a second launch provider and as a backup in case SpaceX is delayed.

Still, it wasn’t an easy decision, Desch said. Iridium first started negotiating with SpaceX in 2006, when its rockets started falling out of the sky. It wouldn’t matter how much of a deal SpaceX cut if it couldn’t deliver a reliable launch vehicle or ceased operations.

“Our view was always that SpaceX was going to be successful,” Desch said. “What we weren’t sure about was when they would be successful.” Iridium had some leeway since its first launch wasn’t scheduled until 2015, but it couldn’t push its launch date out much further. At that point Iridium’s old orbiters would be 15 years old, long past their original expiration dates. It needed to get the new birds up but before the old ones start failing en masse.

Iridium is by no means Space X’s most important customer — that would be NASA. Nor is Iridium SpaceX’s first commercial satellite customer. But the size and scope of the Iridium deal were key to establishing the fledgling aerospace company as a heavyweight in the commercial launch industry, said SpaceX President Gwynne Shotwell, who led negotiations with the satellite operator.

Gwynne Shotwell

“We definitely knew the significance of that deal,” Shotwell said. “It was the largest commercial launch contract at the time. No one else has ordered six or seven launches. … It’s helped us out in every deal we’ve gotten since.”

Houston, do we have a problem?

Earlier this month, Iridium revealed in its second-quarter earnings call that it was canceling its first Falcon 9 launch, and had decided to go with backup ICS Kosmotras for its first flight. Desch said there were no problems or delays; rather Iridium was just minimizing costs. By packing 10, rather than nine, satellites onto each SpaceX rocket, Iridium says it can reduce the number of launches from eight to seven, saving an estimated $15 million. But Desch added that Iridium also wanted to buy SpaceX more time.

“It’s a smarter strategy for in-orbit testing and provides us some additional cost savings,” Desch said. “It also gives SpaceX a little more time to get through the two dozen or so launches that are on their manifest before Iridium Next.”

Ironically, the greatest risk to Iridium now isn’t the possibility of SpaceX’s failure, but the possibility that SpaceX becomes too successful, according to satellite communications analyst Farrar.

“Their risk has always been that SpaceX gets a lot of money from NASA and so will likely put them first,” Farrar said. “That’s also the exciting, novel stuff like manned spaceflight, so people naturally gravitate towards it. Launching commercial satellites is a less exciting business requiring a lot of repetitive, careful engineering.”

Dragon Spacecraft

SpaceX has been on quite the roll lately. It hasn’t suffered a single failure in its three Falcon 9 launches, the last of which delivered the company’s Dragon spacecraft to the International Space Station on a resupply mission. Earlier this month, SpaceX won the ultimate prize: a $440 million contract from NASA to design a manned spacecraft to shuttle its now-grounded astronauts into orbit.

When asked if SpaceX’s recent success jeopardized Iridium’s tight launch schedule, Desch laughed. He admitted that he freaks out a little when Musk goes off on one of his soliloquies about exploring other planets or talks up new rockets like SpaceX’s Falcon Heavy designed to propel astronauts on their extraplanetary adventures. Desch just needs to get to low-Earth orbit, not Mars.

But Desch said Iridium has SpaceX’s full attention. Iridium Next is still SpaceX’s single largest commercial contract — it’s not going to get pushed to the wayside no matter how many sexier missions the company lands. Desch has been working with Musk and Shotwell for nearly six years, sticking with the company through its lowest points. He believes that SpaceX will remember its early friends. As he told analysts at Iridium’s earning call: “We knew them when they weren’t quite as cool.”

Iridium flare photo courtesy of Flickr user Gadget_Guru

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You can see the bankruptcy filing on TMF Associates’ blog (pdf), listing among its numerous creditors Boeing and Alcatel-Lucent, who have LightSquared on the hook for more than $7 million each for satellite and communications gear. The claim amounts from other creditors are much smaller, but there is a long list of them.

Philip Falcone, whose hedge fund Harbinger Capital owns LightSquared, foretold the filing last month when he stated that bankruptcy might be the safest option for the would-be carrier, allowing it to fend off its lenders while it tried to move its nationwide LTE launch forward. In February, the Federal Communications Commission yanked a critical waiver LightSquared needed to use its satellite spectrum for terrestrial 4G when opposition from government agencies and the GPS industry started stacking up. The issue was the potential interference caused by LightSquared’s high-powered network to the country’s global positioning system satellite signals in an adjacent band.

LightSquared has been fighting the decision, demanding that the FCC either green light its network or supply it with replacement airwaves. But given the industry, government and political outcry against the company, neither scenario is likely to happen.

That leaves LightSquared with a bunch of assets to get rid of in bankruptcy, and none of them are worth all that much. It has its satellites, which Boeing might retake possession of, and it has its spectrum, which was supposed to be its most valuable asset. If LightSquared’s gamble had paid off and the L-band repurposed for 4G use, those licenses would have been worth billions, but no mobile operator would buy them now.

There may be one exception. As TMF analyst Tim Farrar postulated in his blog, Dish Network might have a way of cleaning up LightSquared’s spectrum. Dish owns S-band satellite frequencies in a far-off band. If it could combine that spectrum with LightSquared’s L-band frequencies it might be able to pull off not just a workable, but an extremely high-capacity LTE network that would steer clear of the GPS bands entirely.

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From his press release:

“While no decision has yet been made, the rationale behind a voluntary filing would be to give us the necessary time to continue with our vision, build the network and protect the company from creditors who are more interested in a quick flip.”

Let’s think about what LightSquared actually has to offer. Despite signing multiple customers and trumpeting those deals, LightSquared actually doesn’t yet have a network. It’s primary assets appear to be two satellites and some controversial spectrum. Let’s start with the satellites.

One has already launched and is delivering service from space. So far TMF Associates analyst Tim Farrar says that bird provides revenue but not profits, and is an unlikely candidate for a high bid because it’s already in orbit. As an example he points to Irridium’s bankruptcy. The satellite company spent billions on launching a constellation of satellites, only to then fail and sell its birds in orbit for $25 million.

However, LightSquared second orbiter is still on the ground and is much more valuable. It’s worth up to $120 million, Farrar estimates, and he says Boeing is the most likely buyer since the aerospace company can launch it for the Mexican government’s planned satellite network.

And then there’s the spectrum. Falcone’s whole plan was based on a financial play to flip the satellite spectrum that underpinned the eventual LightSquared network. The FCC approvals and waivers helped boost the value of that spectrum, especially as fears of a spectrum shortage gained publicity. But instead of selling LightSquared’s satellite licenses for a quick windfall, Falcone found himself building an actual network. As that network came closer to becoming real, the GPS industry freaked out about the possibility of interference.

That debate led to tests, political wrangling and finally the FCC pulling the waiver that would allow LightSquared to operate a terrestrial network using airwaves designed for satellites. That’s bad news for LightSquared’s business, but it also is bad news for those airwaves. The value of spectrum cleared for terrestrial mobile broadband is high, but now that those L-band airwaves are politically poisonous, it’s doubtful they’re worth much. Falcone claims bankruptcy helps LightSquared avoid a quick flip, but it’s worth wondering exactly what Falcone actually has to flip.

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