GlobalStar Update>
9/12/99 - San Jose, Calif.-Based Telecommunications Firm Takes Phones into Space
Sep. 12 (San Jose Mercury News/KRTBN)--Its $3.3 billion satellite-phone network nearly complete, Globalstar Telecommunications of
San Jose is about to test whether there is a market for a pocket-size phone that can stretch the boundaries of telephone service.
Its pioneering predecessor, Iridium, is in bankruptcy. So is a second planned network, ICO Global Communications Ltd., which ran out
of money before it could complete its satellite constellation.
Nevertheless, Globalstar chief Bernard L. Schwartz, who also runs Globalstar"s New York-based founding partner, Loral Space &
Communications, argues forcefully that there is a huge, untapped need for a satellite-phone service. Iridium was not a true test of the
market, Schwartz says, in part because its prices were sky-high.
Globalstar"s fate is critical to the 290 workers in the San Jose area who run the company"s satellite-control center and do engineering,
administrative and marketing work for the project. In addition, its primary U.S. partner, Vodafone AirTouch Satellite Services, has close
to 100 employees at its headquarters in Walnut Creek.
Unlike Iridium, Globalstar is integrating its service closely with AirTouch and other land-based cellular networks, allowing users to avoid
the more costly satellite charges when they"re in cities. It"s also expecting to charge $1.50 to $2 per minute for satellite calls,
compared to Iridium"s initial prices of $2 to $8 per minute.
More important is the difference in its target market. Iridium initially aimed for globe-trotting executives, but Schwartz sees much more
fertile ground among workers in underdeveloped and undeveloped areas -- for example, a Brazilian businessman with clients on the
outskirts of Sao Paolo, or a rancher whose range extends far beyond the reach of cellular networks. That"s where most of Globalstar"s
customers will be, Schwartz said.
Some of that business will be in satellite phone booths and desk phones, not just the portable handsets that cost upward of $1,000.
For the estimated 50 percent of the world without phone service, adding Globalstar would be an easier way to connect to the global
economy than building a land-based phone network, company officials claim.
Still, the company cannot escape the fact that, like Iridium and ICO, its satellites and ground stations cost billions of dollars to build
and operate. With land-based wireless networks spreading, dropping in price and developing common standards, some analysts argue
that any satellite-based service is a very tough sell.
"The biggest problem," A. Michael Noll, a communications professor at the University of Southern California, wrote in Tele.com
magazine, "is that the metropolitan areas of the Earth are already well served by terrestrial-based wireless cellular systems. There
simply is no market for a high-cost extraterrestrial wireless system."
Schwartz answers such critics by asking how much it might be worth to business people outside those metropolitan areas to be able
to make calls wherever they go on their sales or delivery routes.
"Telephones at any price will be used," he argued. "There"s never been a time ... since Alexander Graham Bell when telephone
demand hasn"t been greater than supply. It"s one of the basic rules, like sex or food."
Schwartz will start testing that assumption soon. The last 12 of Globalstar"s 48 initial satellites, along with four spares, are scheduled
to be launched by the end of the year. The system, which can handle up to 7.5 million customers, will begin operating commercially
this fall.
Coverage will be phased in over the coming year as Globalstar"s operating partners -- major telephone companies like Vodafone
AirTouch and France Telecom -- complete work on the ground stations needed to connect the satellites to phone networks on earth.
Nine of the planned ground stations are done and 20 more are under construction, with close to 60 needed for full global coverage, the
company says.
The partners will buy service from Globalstar at 35 to 65 cents per minute, officials say. A markup of $1 or more per minute is expected
to cover the cost of the ground stations, marketing, sales and support.
In the United States and Canada, AirTouch has two ground stations built and is finishing a third. It expects to begin tests later this
year, said marketing director Andy Radlow, but it won"t sell the service to the public until next year.
Two decades in development, Globalstar"s system works much like a land-based wireless network. The phones -- a 13-ounce model
from Qualcomm for the U.S. market, a slightly lighter one from Ericsson for the rest of the world -- transmit signals electronically to the
nearest receiver, which relays them to the nearest regional switching point. From there the calls travel over the global public phone
network to their destination, whether it"s 20 miles down the road or halfway around the world.
The difference is that the receivers are on one or more satellites 900 miles overhead, not on a pole a few thousand feet away. And the
satellites are moving at 18,000 mph. But users won"t notice those things, Globalstar says, because the satellite is close enough to the
ground to avoid any audible delay.
Users will notice that the satellite phones don"t work inside buildings or under a heavy canopy of trees. Their high-frequency
transmissions require a clear line of sight to the satellites overhead.
To address the in-building problem -- and save users a significant amount of money when they"re in areas with cellular coverage -- the
Globalstar phones are built to work on both the satellite network and land-based wireless networks. The Qualcomm model is
compatible with all U.S. analog and selected digital networks, and the Ericsson model works on the most common form of wireless
network overseas.
If all that sounds like an engineering marvel, consider what the 66-satellite Iridium network does. There, international calls are passed
from satellite to satellite before being relayed to the ground station closest to the party being called. That way, the caller avoids the
fees that the public phone network applies to long-distance and international calls.
Globalstar"s simpler approach means it requires fewer and less costly satellites. It also reflects how different Globalstar"s view of the
market is from Iridium"s: Globalstar saw the need for a regional solution, while Iridium"s plan was to provide a phone for global travelers.
In the late 1980s, when Iridium was on the drawing board, that didn"t seem like such a bad idea. Cellular networks around the world
were spotty and incompatible with one another.
Today, however, there is much more extensive coverage from terrestrial wireless networks, with new digital systems augmenting the
older analog ones. And rather than spending $1,500 or more for an Iridium phone, you can buy a multi-network cellular phone for $300
that will work in almost any city with cellular coverage.
Said analyst Ray Jodoin of Cahner"s In-Stat Group, "In the 10 to 12 years it took the thing to go through the gestation period, a hell of a
lot in the industry has happened, and Iridium never caught up with it."
The same high-cost argument applies to Globalstar"s phones. But Schwartz noted that you don"t have to drive far outside of many
cities today before your mobile phone goes dead.
"Remember that the U.S. is not our (main) market," Schwartz said. "That"s where the facilities for the telephone infrastructure are most
concentrated....Our main customer base is beyond that market."
The customers he envisions include small manufacturers, distributors, retailers, health organizations and security businesses in rural or
underdeveloped areas. "In a town of 20,000 (or) 30,000 that does not have telephone service, you can imagine the requirement for
communications in a modern business environment," he said.
"But it does not preclude the individual who is middle-class or wealthy...in places like India and China, South Africa, Australia. There
are an enormous number of people who fit that category.
"Remember this: Our bogey is 7.5 million customers. That"s what our capacity is worldwide. When you break it down by individual
areas, those are not daunting numbers."
Eddie Hold, a senior analyst at Current Analysis Inc., a research and consulting company, said he thinks Globalstar has a better
chance than Iridium, but he questioned whether either one would be a practical solution in underdeveloped areas.
"That comes down to a pricing issue," Hold said. "Two or three dollars (per minute), you"re not going to be calling on a regular basis."
Schwartz countered: "France Telecom, Vodafone, AirTouch, ChinaSat, China Telecom, Elsacom, DACOM -- they think that this is
priced right, in the service area that they are now selling telecom services to. We did not begin Globalstar in the vacuum of the
marketplace."
Schwartz also faults Iridium for launching a major advertising campaign before the service was available, and for selling a phone that
was difficult to use. Instead of having a built-in ability to work on land-based cellular networks, Iridium requires users to modify their
phones with special cassettes or plug-ins.
"There was absolutely no test of this market by Iridium," Schwartz said. "It was a failed introduction of a product that was not ready to
be there."
In one sense, AirTouch isn"t fully ready with its Globalstar product, either. Radlow said that for the first year or so, AirTouch will have to
assign two separate numbers to the Globalstar phones: one for satellite calls, one for cellular calls. That means two separate voice
mailboxes, too, until the satellite network is fully integrated with the land-based wireless one.
Analysts say it"s critical the satellite phones be able to do what cell phones can do, and Globalstar is lagging a bit on the
data-communications side. The hefty, 7-inch-long Qualcomm phones will initially include voice mail, short text messaging and position
location, to be followed in 2000 by fax and Internet-related capabilities.
Schwartz admitted the expanding capabilities of land-based wireless phones put pressure on his company to keep up. In the works are
upgrades to increase the amount of data that can flow over the satellite network, enabling it to function as a higher-speed Internet link --
not as fast as a wired connection on Earth, but good enough as a secondary channel, Schwartz said.
In the meantime, Globalstar is planning to launch four satellites a month for the rest of the year, completing its constellation three to
four months later than planned. The delay stems from a disastrous launch last year in which 12 Globalstar satellites were lost.
Once it begins service, Globalstar will have to compete with the struggling Iridium, at least one regional satellite project, and efforts by
land-based wireless providers to extend their coverage to underdeveloped areas. That doesn"t bother Schwartz, who sees 30 million
potential customers for his service.
He expects the company, which needs no additional financing to complete its network, to break even by the fourth quarter of next year.
The satellites have a useful life of about seven-and-a-half years, Schwartz said, and replacements will be phased in as the demand for
the service grows.
To analyst Hold, the key for Globalstar will be getting customers to spend more on their Globalstar accounts than the $40 to $50 per
month average for cell-phone subscribers. "I think you"ve got to be looking around $100 as a hopeful average revenue per customer," he
said.
Schwartz, who recently increased his personal stake in Globalstar by $8 million, said it won"t be long before the results are in. "In the
year 2000 I will be reporting income. This is not a long-term play. This is not a pie-in-the-sky proposition."
By Jon Healey
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