(DJNW) Satellite-Phone Companies Struggle With Demand, Technical Glitches
August 13, 1999
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Satellite-Phone Companies Struggle
With Demand, Technical Glitches
By SCOTT EDEN
Dow Jones Newswires
NEW YORK -- Even with Iridium World Communications LLC on the brink of bankruptcy and its $5 billion satellite system in danger of becoming an orbiting junk yard, three other go-anywhere phone companies remain committed to probing the same frontier.
Do they stand a chance?
After all, a well-financed company with state-of-the-art technology failed to convince enough customers they need satellite-piped communications from the world's most remote regions, like Mount Everest or the Sahara Desert. That company, Iridium, defaulted on $1.75 billion in loans Wednesday and attracted only 10,300 subscribers as of March out of the 52,000 called for by its loan covenants.
Among Iridium's future competitors, Globalstar Telecommunications Ltd., ICO Global Communications Holdings Ltd. and Ellipso, a project controlled by closely held Mobile Communications Holdings Inc., all have multibillion-dollar satellite networks in various stages of development.
They all face questions raised by Iridium's problems about the basic demand for satellite-telephone services, even though many concede a series of glitches by Iridium itself contributed to its dearth of customers.
For instance, none of the phones built by the three companies will work indoors, a source of many complaints and an unwelcome discovery made by CNN war correspondents in Kosovo -- which added to the bad publicity.
In fact, there doesn't appear to be much qualitative difference between the companies' end-user services, although they all rely on differing technological backbones.
"It's a battle of experts," said Armand Musey, analyst with Banc of America Securities LLC. According to some early rumors, however, Globalstar's sound quality and signal strength might prove better than Iridium's. A weak beam irritated Iridium users because it forced them to find the most direct line of signal-travel between phone and satellite.
The problem doesn't appear to be the potential size of the satellite-phone market, either; most people believe it's large enough to support four players. According to Musey, the market could reach $17 billion by 2005. Projections from the companies themselves put subscription totals for the industry at 30 million to 40 million people by 2005, Mr. Musey said.
The first to go online in the wake of Iridium's near collapse will be Globalstar, a $3.5 billion 52-satellite system backed by Loral Space & Communications Ltd. It's set to flip the switch on most of its satellites late next month or in early October, with the entire network beaming voices by the end of 1999.
There's a lot riding on that product launch. Analysts and investors are hanging their hopes for the industry on the success, or lack thereof, of Globalstar's product roll out. If a sustainable market truly exists, Globalstar will have to prove it, these industry watchers believe. As one analyst said, "If Globalstar doesn't go, no one will."
Globalstar Financing in Place
Working in its favor, Globalstar, unlike its peers, seems to have a majority of its financing in place, Mr. Musey said. His firm's parent company, Bank of America Corp., along with several other banks recently lent a significant chunk of money Globalstar with collateral put up by the deep-pocketed Loral.
In addition, some think Globalstar has a better-defined target audience than did Iridium. Instead of selling services to international business travelers, Globalstar will focus on regional users, people in developing countries or remote parts of the U.S. where elaborate land-line or cellular-phone networks don't exist. Some of Globalstar's initial areas will be Argentina and South Africa.
Iridium's biggest problems, however, were with distribution: It didn't have enough handsets to meet even its slower-than-expected customer demand, and some of its service providers didn't push the product with as much gusto as possible because they were also selling cell-phone service in the same regions.
Although analysts believe Globalstar has plenty of handset supply and better relationships with its marketers, which include Vodafone Airtouch PLC, France Telecom and China Telecom, it still faces the possibility of some lax salesmanship.
"They've got a lot of things to worry about," Mr. Musey said of Globalstar's developing-nation service providers, struggling to unload their cellular-phone services to customers. "Is selling Globalstar going to be on the top of their list?"
Behind Globalstar by about a year in terms of a market launch, IOC Global could find itself in as precarious a cash-squeeze as the Iridium. "If their [financing] doesn't come through, they're really in bad shape," Mr. Musey said.
IOC has said it needs to raise $600 million after a disappointing recent public offering of shares. Investors stayed away from the deal following Iridium's financial unraveling, which also undermined the fund-raising efforts of Ellipso after aerospace giant Boeing Co. yanked its financing.
Although word came Thursday that one of IOC's minority investors, Hughes Electronics Corp., might inject $600 million into the struggling company, IOC would still need another $1 billion to stay afloat, analysts said.
But in a research note, analyst William Kidd of C.E. Unterberg Towbin Co. outlined the risks financial backers like Hughes and Motorola Inc., an Iridium stakeholder, face when taking stakes in unproven satellite-phone companies. Including its investment and its contract to build IOC's satellites, Hughes has some $500 million to $575 million in exposure to IOC, Mr. Kidd said.
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