thestreet.com. Satellite Firms Buckling Under Weight of Iridium's Woes
By Carole Winkler
Special to TheStreet.com
6/17/99 12:32 PM ET
Iridium's (IRID:Nasdaq) fall to earth is causing shock waves
in the satellite-phone business that the company was
supposed to revolutionize.
Iridium has fallen so far that rivals are trying to put a galaxy
away. Chatter at the fourth annual Space and Satellite
Conference in New York, which ended Wednesday, focused
on how Iridium's failure to generate paying subscribers was
burying the industry's financing prospects.
"Iridium's failure has created turmoil" in the financial markets,
says Sara L. Porter, managing director of Ascent
Communications Advisors, a wireless communications
consulting firm.
"Iridium has left a bad taste in investors' mouths," says John
Bensche, a satellite analyst for Lehman Brothers. "There
won't be any IPOs this year, barring an act of God." Lehman
Brothers hasn't underwritten for Iridium.
Competitors such as Globalstar (GSTRF:Nasdaq) and ICO
Global (ICOGF:Nasdaq) are cringing as investors shy away
from the financing deals the companies need to complete their
networks. Last week, ICO Global was forced to extend a $500
million rights offering because it found itself some $93 million
short of its goal.
During Wednesday's session, Scott Moskowitz, senior
managing director for Bear Stearns, warned satellite
executives that "in the past year, investors have re-evaluated
what needs to happen for these [satellite] companies to
become successful."
"Technology is not as important as business-plan execution,
particularly in acquiring large customer contracts early on,"
Moskowitz explained. In a skittish, skeptical market, investors
want to see "tangible evidence" of sales, he said.
Launched with a good dose of hype in November, the Iridium
service was aimed at the international business traveler. But
from the beginning, Iridium's promise exceeded its reach. The
company planned to launch 77 low-orbit satellites but settled
on 66. The satellite phone system did not work everywhere
and connections cost a whopping $7 a minute. The clunky
phones made by Motorola (MOT:NYSE) cost as much as
$4,000.
Blame it on engineers who set up the company for failing the
marketing test, says Vijay Jayant, a Bear Stearns analyst.
Instead of the hoped-for hundreds of thousand of subscribers,
Iridium had signed up a paltry 10,300 by March 31. With
quarterly revenue of $1.45 million, and over $3 billion in debt,
Iridium has had to seek refinancing to stave off bankruptcy. No
wonder Iridium shares were trading at 7 15/16 Thursday
morning, down from a 52-week high of 61 5/8. Lenders have
given Iridium until June 30 to expand its customer base to
27,000.
The Sky's Falling
Iridium shares keep slipping.
Source: BigCharts
The financial turmoil has taken its toll on management. In
April, CEO Edward Staiano quit, followed by the chief financial
officer and the head marketer a month later. On Tuesday,
Mauro Sentinelli, executive vice president of marketing and
distribution, failed to speak at the conference as planned.
Merrill Lynch analyst Thomas Watts said that Sentinelli's
contract with Iridium ran out and was not renewed at the end
of April. Merrill Lynch served as an underwriter for Iridium.
Calls to Iridium's news hotline were not returned.
Lately, Iridium has attempted to mend its ways. Merrill's
Watts says to expect price reductions this week. Iridium
phones now cost $2,000 to $3,000 and airtime ranges from
$1.89 to $4.25 per minute, according to industry sources. The
company also laid off 15% of its workforce as part of a
cost-cutting plan.
"Iridium has been the Achilles' heel of the satellite industry,"
says Jayant. "Iridium's failure has caused investors to become
extremely skeptical of multibillion, multistage satellite
constellations with no customer contracts in place." Bear
Stearns is an underwriter for competitor Globalstar, which
plans to offer satellite telephony service by the end of the
year.
Wall Street used to invest money when a company launched
its satellite successfully, Jayant says. But "now Wall Street
doesn't pay when a satellite goes up. It kills you if it
explodes," he says.
In the narrowband arena, a technology that allows limited
two-way data communications, satellite communications
providers are also taking pains to explain how different their
businesses are from Iridium's. "Ours is industrial, not
commercial," explains Scott Webster, Chairman and CEO of
Orbcomm Global (a venture founded by Orbital Sciences
(ORB:NYSE), a low-earth-orbit satellite provider of low-cost,
two-way messaging). "Iridium connects to people and we
connect to things. Our business is tracking and monitoring
assets for multinational corporations and governments."
Even Teledesic, the "Internet-in-the-sky" venture backed by
Bill Gates and Motorola, is not immune. Teledesic has raised
$1 billion in capital but may need as much as $15 billion to
launch and operate 288 low-earth-orbit satellites for service
beginning in 2004.
Carole Winkler, a former NASA consultant, is now working as
a technology writer and computer consultant in Boston. She
has no position in any of the companies mentioned in the
story.
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