We are short shares of Straight Path Communications Inc. Please click here to read full disclosures.
Sahm Adrangi, Chief Investment Officer, will host a conference call on Friday, October 30, 2015 at 3:00pm EDT to discuss the company’s report.
To participate in the conference call, dial 855-780-5918 and reference the access code 71266689.
A replay of the call will be available following the call at http://kerr.co/strp-oct30.
As we discussed a year ago in our original report on Globalstar, the stock market has a sad history of gullibly buying into grandiose narratives about spectrum value. In Straight Path (NYSE MKT: STRP), the latest and, in some ways, most egregious example of this phenomenon, the market has found an unlikely object for its enthusiasm: a company with only seven employees and $426,000 of annual core revenue headed by a 29-year-old whose previous job was serving as the rabbi of a 50-person synagogue in the Bronx – a far cry from telecom.
Despite these obvious red flags, Straight Path trades at an almost $600 million market cap because investors regard it as a play on “5G,” the nebulous label applied to the next generation of cellular technology after 4G LTE. Though still years away from standardization, let alone commercial release, 5G might include (as just one component) the ability to use extremely high, “millimeter-wave” (mmWave) frequencies that are currently relegated to niche, non-mobile use cases as a result of their very poor propagation. Straight Path holds a large portfolio of spectrum licenses (primarily in the 39GHz band), supposedly making the company an enormous beneficiary of the move toward mmWave technology. In 2015 alone, Straight Path’s stock price has appreciated 151%, with the latest move up triggered by Verizon’s marketing announcement in September that it would launch 5G “field trials” next year.
But mmWave is just one small subset of 5G, and Straight Path’s spectrum is just one minuscule fraction of the gargantuan amount of mmWave bandwidth likely to be available, much of it for free. For example, telecom regulators from the Americas, including the FCC, are already considering rezoning almost 34 gigahertz of mmWave spectrum for mobile use, and that total is likely to grow. Straight Path’s 39GHz portfolio – with less than 0.7 GHz of average bandwidth nationwide – is thus a tiny fraction of the pending supply. Not only is the portfolio nothing special; it also has the distinct disadvantage of being fragmented and non-contiguous. Though one sell-side bull has characterized the future of Straight Path’s spectrum as “[p]erhaps…no different than Manhattan real estate,” a more appropriate analogue would be a few small, scattered plots of undeveloped land in the middle of the world’s largest desert.
Moreover, though even widespread deployment of mmWave frequencies would still fail to generate real value for Straight Path, such deployment is unlikely to ever take place. While complex multi-antenna arrays may help to overcome weak propagation in a cost-effective way – itself an open question – mmWave transmissions still won’t be able to go through walls or over hills, severely limiting their usefulness, and will require extremely dense and thus very expensive networks. There is no straight path here – just a winding, dusty road to failure.
I. Investment Highlights
5G ≠ mmWave. Straight Path enthusiasts tend to mix up distinct concepts, speaking as if every new announcement about “5G” – like Verizon’s – necessarily involves mmWave. But many key aspects of the nascent 5G vision have nothing to do with high-frequency spectrum at all. New air interfaces and massive MIMO, for instance, are technologies that can greatly enhance throughput in the bands already used for 3G and 4G, as well as low-frequency bands to be rolled out in the future, like the 600MHz band, which FCC Chairman Tom Wheeler described in August as “a prime candidate for deployment of a wide-area 5G coverage layer.” In early October, the Chinese equipment vendor Huawei and the Japanese carrier NTT DOCOMO “announced…the world’s first successful large-scale field trial of 5G new radio access technologies,” including Sparse Code Multiple Access and Filtered OFDM, achieving peak downlink throughput of 3.6 gigabits per second (Gbps). But this trial didn’t use mmWave: the press release clearly states that it used “the sub-6GHz frequency band.” Indeed, the first commercial deployments of 5G – whenever they occur – are widely expected to use conventional bands, not mmWave.
5G is also about far more than just higher throughput for smartphones. Key players see it primarily as a platform for communicating with large numbers of distributed sensors (the “Internet of Things”) and other machines, like driverless cars, that may require extremely low latencies and high reliability but not necessarily large quantities of data. (Driverless cars, for instance, are not going to be watching lots of ultra-high-resolution video.) For these crucial and novel use cases at the heart of 5G planning, mmWave is irrelevant. Indeed, Verizon’s own promotional video about its 5G efforts emphasizes the Internet of Things and features the company’s vice president of network planning stating (at 0:54) that “people have enough throughput for the kinds of services they’re performing today on the mobile network” – hardly an indication that enormous amounts of mmWave bandwidth will come in handy any time soon.
Straight Path’s spectrum is just one tiny drop in the mmWave bucket. Straight Path likes to point out (see slide 6) that it holds “96% of active 39GHz FCC licenses”; credulous listeners interpret this as a monopoly on “5G spectrum.” Yet the company’s 828 39GHz licenses comprise just 34% of the total 2,450 licenses that were up for bid at the FCC’s 2000 auction. The explanation is that so many of the companies that attempted to use the 39GHz band gave up, went out of business entirely, or ran into trouble with the FCC that large numbers of licenses across the country were voluntarily canceled or forcibly terminated. (Indeed, Straight Path itself, in its previous identity as IDT Spectrum, canceled 298 of its 39GHz licenses in 2010 – almost a third of the portfolio it had acquired out of the Winstar bankruptcy.) Based on the FCC’s recently released Notice of Proposed Rulemaking (NPRM), these unused licensed will ultimately be re-auctioned to the public, thereby completely circumventing Straight Path.
But the future sale of a large amount of 39GHz spectrum not held by Straight Path is just a small part of a very large problem: the only reason to use mmWave bands at all is because there is so much spectrum available there. Without this vast supply, research into mmWave mobile broadband might be an interesting academic problem but would be an obvious commercial non-starter given all the immense and as yet unsolved technical difficulties. The only practical reason to bother is the prospect of accessing huge blocks of spectrum, which regulators around the world are beginning the process of freeing up. From a technological perspective, there is nothing special about Straight Path’s 39GHz band as opposed to the many other mmWave bands, including several that either are or are likely to become unlicensed and thus free to use.
The chart below illustrates the size (in gigahertz of bandwidth) of the mmWave bands most likely to be repurposed for mobile use in the medium term, putting Straight Path’s holdings in perspective:
CITEL/CEPT/APT/RCC are regional regulatory bodies for the Americas/Europe/Asia/Eurasia, respectively.
Note: “FCC NPRM bands” includes the 60GHz band (57-64 GHz) already available for unlicensed use.
Above, on the left, we show the aggregate amount of high-frequency bandwidth proposed for consideration as future homes for mobile broadband by various regional regulatory bodies, including CITEL, the Inter-American Telecommunication Commission, of which the FCC is a member. These proposals will be further discussed at the upcoming World Radiocommunication Conference (WRC) in November and finalized in 2019. We also show the total size of the bands in the FCC’s recent NPRM, including the existing 60GHz band, already available for unlicensed use, including mobile. But these bands are only the first step – FCC Chairman Tom Wheeler has already publicly pledged to consider others in the near future. With 20 to 30 GHz in sight, Straight Path’s nationwide average of 817 MHz, including 691 MHz in the 39GHz band and 126 MHz in the LMDS band, looks trivially small. (Even that total is overstated since much of the LMDS band is excluded from both the NPRM and the international proposals.) Far from a mmWave monopoly, Straight Path’s holdings amount to a drop in the bucket. Anyone interested in using mmWave spectrum will have an embarrassment of riches.
Moreover, the supply is likely to grow further, from tens to hundreds of gigahertz, a point ably made in 2011 by two of the mmWave researchers then at Samsung, one of whom went on to become Straight Path’s chief technology officer. They argued that there was 252 GHz of readily usable bandwidth between 3 and 300 GHz, and that even if only 40% could be unlocked for mobile networks, it would amount to “more than 200 times the spectrum currently allocated for this purpose below 3GHz.”
Indeed, one of the benefits of mmWave technology that the Samsung mmWave group has often pointed out is that there’s so much spectrum for the taking that even exclusive access will be incredibly cheap – potentially good news for carriers and consumers but not spectrum owners like Straight Path.
In keeping with the absence of any compelling reason to prefer Straight Path’s spectrum to other similar bands, recent 5G demos have focused elsewhere. For example, back in July 2014, Ericsson, in collaboration with NTT DOCOMO and SK Telecom, demonstrated 5Gbps speeds using the 15GHz band. In March, NTT DOCOMO and Nokia achieved a speed of 4.5 Gbps using the 70GHz band. In April, at the Brooklyn 5G Summit, Nokia demonstrated “a 10 Gbps peak rate system over the air at 73 GHz.” Consumer products using the large, unlicensed 60GHz band via the WiGig protocol already exist. In short, mmWave spectrum will be a commodity in vast supply, and Straight Path has nothing special to offer. In fact, because Straight Path’s 39GHz holdings consist of scattered 50MHz units, not the very wide contiguous channels sought after by industry participants, it’s difficult to see how, without significant favors granted by the FCC, it will ever be practical to use its spectrum for 5G.
mmWave spectrum has fundamental limitations that, even if technology improves, will sharply restrict its usefulness. To be sure, major companies have developed prototypes and simulations showing that sophisticated antenna arrays using very wide bandwidths can overcome some of the propagation problems of the mmWave bands. But it’s a long way from large, clunky prototypes to real-world networks and user devices. In particular, even if signals can reliably achieve targeted ranges on the order of hundreds of meters, they will still suffer from enormous losses when going from outside to indoors – orders of magnitude worse than conventional cellular frequencies, many of which already struggle with in-building penetration. Since approximately 80% of cellular usage is indoors (almost always using signals transmitted from outside), the practical applications of mmWave technology will be few and far between. mmWave handsets also face severe challenges since the user’s head and fingers can easily block the narrow beams used by mmWave signals, potentially requiring multiple duplicate antenna arrays on different sides of the handset. High power consumption is also a problem. Perhaps most dauntingly, mmWave networks will require extremely high base-station densities, thousands of times higher than existing networks, implying enormously costly and time-consuming buildouts for no clear economic benefit. It’s no wonder that the CEO of one Hong Kong-based carrier dismissed 5G as the creation of “equipment vendors…asking us to plow more money in there for a purpose that is not yet entirely clear….You don’t need that much bandwidth.”
Valuation precedents and benchmarks imply that Straight Path’s spectrum is worth >90% less than its current market cap. Even if we ignore the shortcomings of Straight Path’s spectrum, the likelihood that mmWave networks will simply never be deployed on a large scale, and the vast supply of highly similar competing spectrum, Straight Path is still worth very little. For example, based on the price at which Level 3, a large, savvy telecom firm, was willing to sell 39GHz and LMDS licenses in 2012 – just $203,000 for more than 46 billion MHz-pops – Straight Path’s entire portfolio is worth just $1 million. Attempting to extrapolate from dollar-per-MHz-pop levels paid for conventional cellular spectrum but adjusting for the vastly higher cost of deploying the extremely dense network that mmWave would require generates an estimated value of approximately $40mm – more than 90% below the current market cap. Simply put, Straight Path is a bubble, driven by hype, misconceptions, and wishful thinking.
Please read our full report for our analysis.