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.

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.

[drizzle]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 reauctioned 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:

Straight Path Communications

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

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