Jeff Johnston: Hello there and welcome to the All Day Digital podcast where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange group and I am your host Jeff Johnston.
On today’s episode we get to hear Frank Louthan, managing director, equity research at Raymond James, to get his perspective on fixed wireless and LEO satellites as communication network solutions in rural America. In many parts of rural America, building fiber to the home networks is not economically feasible. Instead, lower-cost wireless networks are emerging as a solution to this problem. But not all wireless networks are the same and it’s important to understand the nuances about what makes one a better solution than the other.
Frank has been advising investors in the communications industry for over 20 years and as such has a deep understanding of the technologies and business models needed to make them succeed.
So, without any further ado, pitter patter, let’s hear what Frank has to say…
Jeff: Frank, welcome to the podcast. It's great to have you here today.
Frank Louthan: Hey, great. Thanks Jeff. Really appreciate it, glad to be here.
Jeff: Great. Hey, I understand we got to do some disclosures off the bat, so let's get that out of the way.
Frank: Yes, absolutely. Let's make the lawyers happy here. I do not own any shares of any of the stocks in any of the companies that we will be covering, or we'll be discussing here today. Raymond James may have investment banking or other business relationships with those companies. If you want some additional information on that, it will be available. Will be made available to you. With that, we can jump right into it wherever you want to start.
Jeff: Great, excellent. I'd love to talk about satellite internet off the bat because that's generating a lot of buzz right now. As I understand it, we've got geo satellites, which are satellites that are really, really high above the Earth's surface, and then we've got this new concept of LEO satellites that orbit the earth much closer to its surface. It seems like those are the ones that are generating a lot of buzz in terms of, "Hey, this is going to be a great solution to bridge the digital divide and connect the people who aren't connected and so on and so forth." Just love to get your thoughts high level on anything about that and why you think it's generating such a buzz.
Frank: Yes, exactly. Satellite internet is really interesting because in theory, it should be able to fill in all the spots, especially in rural areas, hard-to-reach areas.
The problem that satellite has-let's start first with what's called the geostationary satellite and then we'll move into the low earth orbit, or LEO satellite. Geo stationary, if you put in a satellite roughly 26,500 miles above the equator give or take a few feet, it stays in orbit in one place.
If you stand on the beach down in Texas, staring straight up there's a whole bunch of satellites and that's where your DirecTV and Dish and XM Satellite and a bunch of others will stay there, because this can just constantly have a broadcast to North and South America from that one place. There's other orbital slots around the globe for similar things, but you get the point. The problem is it's still 26,500 miles there and 26,500 miles back. There is a delay. When you have to send a signal up there and then all the way back, things don't move quite as quickly.
The other issue it's got is there's only so much capacity on those satellites.
They price it. They do the economic model where you price it to, "Hey, how much capacity do we have? We price it to sell all that we have, but there's a limited amount," and then at that price point, of course, there's less demand. It's not like it's $9.99 a month, it's generally $79 or over $100 a month. Again, it's effective for certain applications. If you're running a business, if you're using your card swipers at a convenience store or you're updating data overnight, things like that, it does work, but it's not great.
The LEO satellites are called low earth orbit satellites, and they're much smaller. They cost less. Think of something the size of a washing machine that's spinning around the Earth anywhere they can be lower, but let's call it 300 to 500 miles above the Earth and they create a mesh. They have to be a little bit more technologically sophisticated because you have to- and you have to put a whole bunch of them up. I don't have the exact numbers off top of my head, but in the hundreds to thousands that you would put up so that you constantly, and they're moving very quickly, right? Low earth orbit, they're moving very, very quickly.
One satellite goes by and you have the signal and then it has to be able to make the handoff and jump to the next one, next one, the next one. You constantly get a signal, but you do have to put a whole bunch of satellites up to get there, but you're only going 300 to 500 miles up. Latency is far better, throughput is far better. There's different bands to get the signals. In this case you can definitely do north of 100 megs, a second for broadband in theory, they claim they can get up to a gig, but if 200 or 300 megs a second on this would be far superior to what you'd be getting from one of the geo stationary satellites or from DSL, or if you have nothing else available.
LEO also has another-- There's another advantage. One thing I failed to mention the geo stationary satellites as you get into farther north latitudes, there are places where they can't see the satellite. If you're on the north side of the mountain, and you can't see, literally you don't have a line of sight from your satellite up to the equator, you can't see it. If you've ever been up to Alaska, far north in Canada and so forth, look at the satellite dishes on the houses, and you may not have noticed this, but it'll jump out at you now they're almost vertical instead of staring on at a 45 degree angle looking into the sky, they're almost vertical, because they got to see all the way around the curvature of the earth.
There's huge swaths of Alaska, in Hawaii in places that never could get Dish or DirecTV or other satellite. LEO satellite solved that problem too, because you put a mesh network up and it's not just from the equator, it's more geographically centered around the areas that you're trying to cover.
Jeff: That's awesome overview. Very helpful. With that, so I guess the focus we're going to be talking about here are LEO satellites and I guess I'd love Frank to get your thoughts on just how viable are these LEO satellite constellations, Starlink, and maybe Project Kuiper down the road from Amazon. How viable do you think those are as a sustainable internet service provider?
Frank: Yes. From a technological standpoint, absolutely viable, this will work, this gets a great solution. It solves a lot of these problems. It works in a lot of these places. From a technological standpoint, I have no problem with that.
Starlink, I won't put anything past Elon Musk being able to succeed with something. It absolutely can succeed, the problem that it's got is there's other barriers beside if you've solved the technological barrier and you got the capital put up and I'll come back to the government subs, the RDOF funding and so forth. The biggest problem they've got is what I used usually call it the $300 problem when you talk about broadband in rural and lower-income areas, but in this case, it's a $590 problem, which is the upfront what's called customer premise equipment or CPE.
You have to spend $500 just to get a fairly sophisticated device to receive the signal for Starlink. Actually, I signed up to be a tester to get it when it's available in my latitude. I've already gotten the email saying that my $500 is going to be now $590 because of inflation and supply chain stuff and so forth. You're talking about someone in a remote area they're probably lower income or on a fixed income and they got to come up with $590. Now that's down from $2500, 3 years ago, and maybe it can come down more and maybe they could subsidize, or they could finance it, but then the cost of the service is $79 or $89 a month.I'm not sure if that's exact quote, but the point is it's a lot more expensive than DSL or any cable or fiber or anything else like that.
I think that the problem that you've got with these LEO satellites is that you definitely have to have a sophisticated piece of equipment at the customer site. It may or may not be that simple to set up. This is something that has to have a moving part that is tracking the set, these other satellites that's got to be put in the right place and so forth. Got to make sure that gets set up, that could be a challenge, but assuming you get around that, it's a very costly upfront, and then costly monthly service. If you're running a business, it's probably no big deal, but for the average consumer, I think it's really tough.
Now, one of the things been talked about is some wholesale communications because the latency between the satellites is almost nothing. There's some idea that you could get high frequency trading or other folks where latency is very, very valuable to them and they could use the jumps between the satellites and would pay a lot of money for that, that could help maybe subsidize it, maybe get the cost down in the future. Then we'll see.
Then Project Kuiper, again, another source of revenue. Hey, what if they were to expand their Prime business, a whole other group of customers that don't have internet, and so they can't get on Amazon Prime. What does boosting your Prime subscribership by X percent get you to be able to subsidize those costs? What does it help them on their communication cost overall that they could use that they could suddenly put on their own network? The only question I have, and I'll go on record saying, I think Amazon will pull this, even though they don't seem to care what things cost. They've never really successfully run networks. Google, similarly, they all think that network operators are these dumb pipes and that they can do this until they actually try.
It's really difficult as a lot of folks listening to this that are operators understand. I think it's a great solution for that last 5%, it's a solution for a certain percentage of folks in these more remote areas, or if you just maybe want a choice, but I think ultimately it's cost prohibitive for a significant percentage of the target audience, and that's just going to make it really challenging.
Jeff: Then I guess the question becomes with that small market, is this a sustainable business model for Starlink to be able to continually run this network and provide this services. I guess that remains a question too.
Frank: That's tough for me to say, again, there's wholesale opportunities, there's other things they could do.
Jeff: Hey, let's move on to fixed wireless because that's getting a lot of attention, I think lately, specifically as it relates to Verizon and T-Mobile. They seem to be doing quite well executing on that plan. I guess I'd like to just focus more on fixed wireless from a rural perspective and get your thoughts on the viability of unlicensed spectrum, whether it be CBRS or the six gigahertz channel. What are your thoughts on that being a solution to bridging the divide?
Frank: That's a great question. Let's talk about that a little bit. On the unlicensed side, generally, if you wonder, hey, could something happen if it's never happened before, I tend to think there's probably a reason for that. If you look back in history, there's not been any examples of successful viable operators that made their business on unlicensed spectrum. I think that that works in fits and starts, it might work if some ranchers in the county decide to put something together or a small community, but to be a broad based business on unlicensed spectrum, I think that's really, really difficult because it's just hard to borrow, get funding and capital to deploy on something that you don't own the license for, that someone else can come and squat on it and take it from you, or they could change the rules.Not that the government would ever do that, but they could change the rules on it and suddenly decide they want to auction it off.
I think unlicensed spectrum is a rifle shot solution in some small parts, but it's not going to be anything broad base. Six gigahertz certainly has some promise, but the propagation characteristics are not as good for that mid band as some of the other things. When you look at fixed wireless, let's talk about it. There's two different ways to think about it. Let's look at the T-Mobile and what they're doing, and let's talk about what Verizon's doing.
T-Mobile is solving for a different problem. I think T-Mobile is currently and will be a good solution for a lot of more cost-conscious folks in rural areas, because what they're effectively doing is building out network where they never had it before. Now, their marketing is they've got the biggest 5G network. Okay. That may be true. The technical truth of that is, they're rolling out 5G on lower band spectrum. 5G on lower band spectrum is better than 4G on lower band spectrum, but it's not like 5G on the millimeter wave that can do multiple gigabits and so forth that Verizon's doing in inner cities.
They are rolling it out. Look it's, again, like I said before, 40, 50 megs on LTE, that's going to beat the pants off of a 6 meg DSL connection or where you have no connection. T-Mobile, and to a lesser extent AT&T, are pushing this out. They're going to take share in the mobile market where there's never really been competition. In our estimation, there's about 30% of the U.S. geography, maybe it's 20% of the population, that's 60% to 80% dominated by Verizon for mobile handsets. That's just because AT&T and T-Mobile don't work there, they've never had network there.
Then to roll this back together, what's making all of this work is on the 5G side, for the first time in wireless technology, you can spend a dollar of capital and get multiple revenue streams off of it. That same antenna set that you put up with 5G, you have the ability to beam from it to a specific location and run fixed wireless on the same infrastructure that you're building out for mobile.
As T-Mobile's building out their 5G network, they're being very smart about it. They're adding these capabilities, they're selling the fixed wireless. I've talked to many people that have used it. It works just fine. One guy I know switched every device in his house over to it. Didn't tell the family and nobody complained. I guess that's the test, when the kids don't complain that Fortnite's not working or whatever.
Jeff: Yes, absolutely.
Frank: On the rural side, I think that can absolutely be a viable option. Longer term, though, my view on fixed wireless is that it is going to be largely an enterprise product, and then what I've called backup broadband. The whole time I've covered the sector, it's always been fascinating to me that the American consumer buys the fastest marketed speed. I can talk on blue in the face about how a 20 meg or 50 meg DSL connection will do everything you want to do, but it doesn't matter.
Fixed wireless, even though, yes, it can do-- Can you do 200, 300 megs? If you're in an urban area and you're 50 yards away from a small cell, can you get a gigabit or more on your wireless? Sure. Ultimately, the terrestrial networks will always have a faster speed. Ultimately, what fixed wireless will be is it will be, again, what I've dubbed back up broadband.
When you're working from home, and let's say you're sitting down to do this podcast, Jeff, and your internet was down, what would you pay to have it turned back up immediately? Probably more than $25. That's what Verizon will sell you at 300 meg fixed wireless access point, and we wouldn't know the difference. Maybe you're using one right now. We wouldn't know the difference. I think a lot of people see it as, "Hey, this is an insurance policy. I can take it with me when I go on a vacation. We go over the relatives’ house and their internet's terrible, so we can bring it with us there." A lot of options.
Then the other one where this will have a lot of success is on the corporate side. For folks in the corporate part of the business, talk to your IT managers, what was their biggest headache when everybody was working remotely during the pandemic? Troubleshooting the customers’ in home cable modem. Your IT department is troubleshooting these things and it's not their job.
What Verizon or AT&T or T-Mobile would do is say, "Hey, buy this device $35 a month, and tell your employees to plug into this and they are directly on a secured, encrypted Verizon network." Done. Your IT manager's going to hear security and encryption and no more. Now we know it's directly on the network, it's over. They'll sell to that.
I think that's where it ultimately shakes out. For now, Verizon's having some success in urban areas where they're target marketing and they're picking off the customers that really are mad at their local cable or phone company. I think that runs its course. Then fixed wireless is going to be a niche product in some rural areas. Then it's going to be a separate category going forward, and we'll hear less and less about it. The last piece will be what AT&T's going to do with it. They would very much like to use fixed wireless to retire a lot of their copper network for voice and then provide some lower speed broadband like T-Mobile's doing in the areas where they are the incumbent ILEC in rural markets and so forth. They would like to use it for that.
I think you'll see them use their fixed wireless technology in that fashion.
Jeff: No, that makes sense. Hey, let's talk about fixed wireless in the context of private networks, because as we've been looking at this-- It's still in its infancy, I think at this point, but certainly getting a lot of attention. It feels like a fixed wireless-- We talked about licensed spectrum, but a fixed wireless using unlicensed spectrum on a farm to be able to deploy precision ag applications. It feels like an elegant solution. Some of the estimates I've heard farmers are willing to pay between $10 to $30 per acre to have broadband coverage. If you have an 8,000-acre farm, you're willing to pay $240,000 to have broadband coverage on your farm, you could deploy a fixed wireless network, a private network for that farm much, much cheaper. I'm just curious, what are your thoughts on private networks, fixed wireless, unlicensed spectrum, that whole story there?
Frank: If a farmer's got $250,000, I'd recommend he builds his own cell tower on there and then he can get some revenue from that, and then he could set something else private up. Yes, that's a lot of money. You're absolutely right. Again, another aspect of the enterprise side is on the industrial side, and it could be in farming, it could be in a factory scenario, it could be in a warehouse scenario. The advantages that 5G have over 4G are, really get down to latency and proximity. What does that mean? The reason that applications like Uber and Lyft exist, were because of 4G.
They exist because with LTE technology, it can get your location down to a certain set of square meters. That way the Uber guy knows to pull to your house, not your neighbor's house or two blocks away, and so forth, you couldn't do that, and having the real-time communication back and forth with the driver and so forth. You couldn't do that before LTE. With 5G that gets even smaller. So now the latency is tremendously faster and instead of square meters you can tell pinpoint a location down to square centimeters. The example that I talk about a lot it would be you've got a machine going through a Walmart and it's cleaning the floors at night, it's a robot and it's also got a scanner and it can scan and it can tell we only got 12 things of Colgate toothpaste and we need 20. We're good on packs of diapers and six packs of Coke and we needed these other things, it can get all of that precision.
You can envision the same thing in farming like looking is the tractor in the right line? The other thing because of the latency you can take a lot of cost out, those sensors can be dumb sensors, the cameras that can watch and see a manufacturing line and look for defects. Or can watch in a farming situation and have sensors and see that there's an issue with heat in a barn or wherever it is, all those cameras can be really dumb because they don't have all the electronics can be central in one place back in the building of the farm.
That allows you to put hundreds of cameras or thousands of cameras across all those acres in the farm all throughout the barn instead of ah, we can only afford one or two or this sort of thing.
Jeff: This has been great Frank, we've covered a lot so appreciate that, it's been very informative. Before we wrap it up I just want to make sure we've covered all the salient points from your end so anything else that I didn't ask or we didn't talk about that you think is important to mention?
Frank: No I think we've hit all the topics, again I think this is really exciting, I think we're hitting a point where these broadband networks are being deployed at such a rate and with multiple different price points. We can finally solve a lot of this digital divide. And then I think really greatly improve people's lives, improve the communities, be able to bring commerce back into these other markets and so forth.
I really think as we take all of the fiber that's being deployed, we take all of the government subsidies, fixed wireless, LEO satellite, the whole it all comes down to one thing. You're expanding broadband out to people and to communities that didn't have before and gives them a lot of opportunities, economic opportunities. They don't have to leave home to work in a city, they can see more commerce, you can just improve everybody's lives and I think it's extremely important for rural America.
I'm glad that the government and the industry's behind this and I think it's actually going to happen and we fast forward and have this conversation in five years looking at a dramatically different situation for a lot of these areas economically, socially, et cetera. I think it's a great thing to watch happen in America much as we saw electrification 100 ago. This is finally the piece parts are here to get broadband and all those and all of its benefits to the rest of the country.
Jeff: Great, no, well said great summary. Thank you, Frank, so much for being on the podcast today, we really appreciate it.
Frank: Hey, thanks Jeff I really appreciate you and CoBank and asking me to be on here so I really appreciate it and look forward to speaking with you again soon.
Jeff: A special thanks goes out to Frank for being on the podcast today. I know all this wireless talk can get kind of technical, especially when we start talking about different types of satellite technologies. My biggest takeaway from talking to Frank is that the promise of there being high-speed, reliable, satellite internet anywhere on the planet might be a stretch. While this is technically possible, the business case to operate and service customers on a LEO satellite network seems to be fraught with a good bit of risk and uncertainty. Fixed wireless seems to have promise as a lower cost option to serve the unserved, and it’s my bet this will be the technology of choice for high-cost rural markets.
Hey, thanks for joining us today and watch out for our next episode of the All Day Digital podcast.
