By Scott Woolley
January 11, 2011

Could the beleaguered financier’s wireless company, LightSquared, be a 21st-century Nextel?

It has been a tough couple of months for billionaire Phil Falcone. His Harbinger Capital hedge funds have withered to $9 billion from $26 billion three years ago, drained by bets on bum stocks and the departure of fed-up investors. In early November the Securities and Exchange Commission began looking into improper favors Harbinger may have given some investors, as well as a $113 million personal loan issued to Falcone. Then came the kicker: The latest Harbinger-backed venture, a wireless broadband company called LightSquared, ran into a potentially fatal technical glitch.

LightSquared, based in Reston, Va., wants to use two satellites that serve as cellphone towers in space to deliver superfast Internet connections and phone service. In mid-November the company launched its first satellite — only to have the antenna fail to unfurl, rendering the satellite useless. The antenna eventually opened, but not before giving Harbinger’s remaining investors (and Falcone detractors) reason to question LightSquared’s viability.

In fact, the delicate satellites are just a small part of Falcone’s wireless strategy. Even as LightSquared has been touting the wonders of connecting cellphones to satellites, it has quietly been designing a traditional cellular network on the ground. The company says the 4G network will cover 92% of the U.S. population by 2015.

In a key move, Falcone convinced the Federal Communications Commission that as long as he was offering satellite connectivity, it might as well let him use the same spectrum as part of a ground-based network. Spectrum is the most expensive piece of a modern cellular network, and Falcone’s gambit gave him the chance to build a grid at a huge cost advantage over his larger rivals. (Falcone and LightSquared executives declined to be interviewed, but the company’s plans can be found in federal filings.)

So while LightSquared and regulators talk of the traditional cellular network as merely an “ancillary” part of the satellite system, in reality the reverse is true. “LightSquared is really a terrestrial broadband play,” observes Mark Dankberg, chief executive of satellite maker Viasat (VSAT).

The plan is reminiscent of a tactic employed more than two decades ago by the company that eventually became Nextel. It bought cheap spectrum from taxicab dispatchers and used it for something far more valuable — carrying cellphone calls. (Nextel is now part of Sprint (S).)

If he can get his network built, Falcone will have something companies desperately need as wireless devices proliferate: more capacity. LightSquared has said it would offer cheaper ways to send data to an e-reader or smart electric meter or cellphone. And perhaps regulators will someday let a capacity-constrained wireless carrier buy LightSquared. Before any of that happens, of course, LightSquared needs to complete its system — to date only the one satellite is deployed, and the company has raised just $2 billion of the $8 billion it will need. Given Falcone’s money woes, it isn’t clear if he’ll be the one coughing up the rest of the cash.

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