BusWeek. A New Satellite System Clambers onto the Launchpad. But can Loral's Globalstar get out of Iridium's shadow?
BUSINESSWEEK ONLINE : SEPTEMBER 6, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY
Since Iridium LLC declared bankruptcy on Aug. 13, Bernard L. Schwartz has
had his ear chewed off by backers. They're worried about Loral Space &
Communications Ltd.'s $3.8 billion satellite venture called Globalstar which, like
Iridium, is aimed at providing wireless phone service anywhere, anytime. 'My
partners have been saying 'You better make the damn thing work,' says the
Loral CEO.
It's not just Loral's investors who are edgy. The financial collapse of Iridium,
which sought bankruptcy protection when it could not make debt payments,
has cast a shadow over the future of the entire satellite industry. Sure, Iridium
had special problems, including technical delays and major marketing gaffes.
But its high-profile belly flop has made investors take another look not only at
Globalstar but also at similar systems designed to deliver a variety of voice and
data services by satellite that have nearly $20 billion riding on them.
'Iridium spawned a large number of other projects based on similar business
models or more speculative ones,' says John E. Pike, director of space policy
at the Federation of American Scientists. 'But now, these other guys are going
to have a real hard time sustaining their financing.'
Globalstar has tried mightily to distance itself from Iridium, which was marketed
for elite 'VIP roamers.' Globalstar is aiming at giving well-heeled executives a
service to cover areas where their cell phones don't work. It is focusing mainly
on providing domestic service in developing countries, not international traffic,
as Iridium had. And its pricing, probably about $1.25 a minute, is one-third of
Iridium's fee. Schwartz says the $3.8 billion system needs only 200,000
subscribers to break even on an operating basis. Analysts see 30 million to 40
million people worldwide who would pay for global satellite phone service.
Globalstar is not the only satellite system tarnished by the Iridium debacle.
London's ICO Global Communications, which plans to use an array of 12
satellites to deliver low-cost telephony around the world, could fall short in its
attempt to raise funds for a service launch in late 2000. In July, shareholders
rebuffed a plan for a $500 rights issue. Shares of ICO, whose partners include
British Telecom, Hughes Electronics, and TRW, have plunged from 16 in
January to less than 5, because of growing doubts about its ability to raise
capital.
It's a different story in the emerging broadband arena--transmitting digital data
and video at high speed. Satellite systems enjoy an edge at reaching remote or
sparsely populated regions and in sending broadband data from one point to
many. These might add up to a big market. By 2003, reckons Pioneer
Consulting in Cambridge, Mass., satellite services will grab about 12% of a
global broadband market worth $26 billion.
'BACKBONES.' Another satellite service that must overcome the Iridium
question is Teledesic, a $10 billion-plus scheme backed by Bill Gates and
cellular pioneer Craig McCaw. Teledesic plans to loft 288 satellites to construct
a web of two-way connections sending data as fast as
64-megabits-per-second. Teledesic says its charges will be comparable to
those of fixed-line services when it begins operations in late 2003 or early
2004. But analysts question whether there is a business in selling broadband
service to the remote areas that cable-TV or phone lines won't reach. 'The
villagers of Somalia do not appear to have the ability, let alone the willingness,
to pay for something like this,' says James E. Freidell, president of Daedalian
Technologies Ltd., a consultancy in Littleton, Colo.
Indeed, in the long run, satellites may serve as 'backbones' for broadband
communications, but are unlikely to play a big role in the largest consumer and
business communications markets where phone and cable-TV networks are
ubiquitous. 'In the cities, fiber's so well established it will be hard for satellites
to compete,' says Christopher Baugh, an analyst at Pioneer Consulting.
For now, the future of the satellite phones may ride on the kickoff of Globalstar.
If its business plan orbits successfully, it will prove that Iridium's failure was a
fluke. If not, Iridium won't be the last satellite venture to crash and burn.
By Steven V. Brull in Los Angeles with Janet Rae-Dupree in San Mateo
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