The anti-Iridium: Globalstar set to fly. Satellite phone service take different tack. Will it work?
By Jeffry Bartash, CBS MarketWatch
Last Update: 5:01 PM ET Sep 13, 1999
WASHINGTON (CBS.MW) -- Amid the wreckage of Iridium and ICO
Global Communications, Wall Street is coalescing around Globalstar
Communications as the best and brightest hope among satellite-phone
carriers.
But is it? Truth is, no one will know for at least six months after the launch
of Globalstar's satellite service, slated for October.
One thing is certain.
Globalstar, the
brainchild of longtime
Loral Corp. chief
Bernard Schwartz, is
better positioned to
succeed, avoiding the
pitfalls that have beset
its rivals, especially the
highly publicized
Iridium.
Still, the question persists: In an age of cheap and ever-expanding cellular
communications, is there room for a premium-priced satellite service that
requires costly and more specialized phones? Or is it a pie-in-the-sky
dream?
The anti-Iridium
By now the downfall of Iridium is well known. Though its $6 billion,
66-satellite system is considered a technical marvel, the company goofed
up on the launch of its network, failing to market the service effectively
and unable to drum up enough phones to meet initial demand.
In addition, potential subscribers were put off by the bulky phones and
their exorbitant price (an initial $3,000-plus), cost of service ( more than
$5 a minute to start) and gaps in the network's coverage (callers would
have trouble in buildings or cars).
Iridium, in a broad, splashy $140 million ad campaign, positioned itself as
an upscale phone service for global businesspeople. In one commercial, it
panned the limitless expanse of a desert (as if a CEO is going to be
sight-seeing in the Sahara while a big merger is going down).
Globalstar's cheaper 48-constellation system
couldn't be more different.
For starters, the service offers smaller, lighter
phones that can easily switch to ordinary cellular
calls when customers are in busy metropolitans with
plenty of traditional wireless coverage. Its rates are
also far cheaper to start (phones are expected to
cost $1,200 or less and per-minute rates around
$1.25). Its less expensive $40 million ad campaign
will also be more narrowly targeted.
More important, the service is targeting a broader
array of markets, including small businesspeople in
developing nations; fixed wireless service in
underserved regions; maritime, aeronautical, mining
and other far-flung industries; and military personnel
and government officials.
Globalstar and its partners say market studies show
a potential 30 million to 40 million customers
worldwide for its service, only 200,000 of whom
are needed for the company to break even on a cash-flow basis.
(Ironically, those are the markets now targeted by Iridium in the hopes
that the carrier emerges intact and functional from bankruptcy hearings.)
Where's the customer?
Critics of the satellite-phone system don't question Globalstar's
management. What they do question is whether the demand actually
exists.
"The issue is still the market," said Jane Zweig, executive vice president of
Herschel Shosteck Associates. "They haven't convinced me that they are
going after a market that isn't served." She also questions whether
potential customers in developing countries will be able to afford the
service.
Zweig's concerns shouldn't be discounted. Her firm predicted in the early
1990s that Iridium was unlikely to succeed and stuck by its guns even as
most Wall Street brokerages, many of whom have made millions off
investment-banking deals involving Iridium or Globalstar, were rushing to
anoint the carriers as the next big thing in communications.
One Wall Street analyst who's soured a bit on the satellite-phone sector,
Tim O'Neil at Soundview Financial Group, also questions whether a
market exists and says satellite carriers will have to be more competitive
with much cheaper cellular providers to succeed.
"To be successful, you need to price competitive with current cellular
offerings," O'Neil said, " or at the very best a slight premium."
The problem is, satellite systems cost so much ($3.8 billion for Globalstar)
that operators need to charge higher rates to pay off their debt and thus
be able to raise more money. Cellular handsets, by contrast, can run as
little as $50 and per-minute rates are as low as 10 cents.
Another problem, O'Neil said, is that Globalstar's initial area of coverage
-- the U.S. Canada, France, Italy, South Korea, China, Brazil, Argentina
and South Africa -- target mostly developed areas where cellular
coverage is already prevalent.
"Given that scenario, I think Globalstar will be extremely challenged in
finding a market," he said.
Driven to succeed
Such criticisms don't rattle the confident CEO of Globalstar, Bernard
Schwartz. Known as great salesman and astute businessman, Schwartz
has done a good job selling Wall Street on Globalstar (GSTRF: news,
msgs) and keeping its stock relatively stable despite the industry hiccups
caused by the bankruptcy filings of ICO and Iridium.
Indeed, it's not unreasonable to suggest that Schwartz's reputation, his
hard sell and, to cynics, his willingness to spread business around to
various investment banks, have been been all that's stood between market
success and failure in light of the Iridium disaster.
Nonetheless, the blunt-talking Schwartz, who says the Iridium failure
holds no lessons for his satellite service, dismisses concerns about a lack
of market and even downplays the company's own studies showing a
potentially large customer base.
"I don?t pay a lot of attention to market studies," he told
CBS.MarketWatch.Com. "I am basing it on some 20 to 30 telephone
companies around the world that know their marketplace, know their
customer. They feel there is real demand here." See full interview.
Indeed, Globalstar has lined up an impressive array of partners, including
Vodafone AirTouch (VOD: news, msgs) and France Telecom, who have
a strong incentive to sign up customers: they'll get a large bite of the
revenue. Globalstar will charge 47 cents per wholesale minute and its
partners will get the rest. Contrast that to Iridium, whose partners had less
incentive to attract customers and thus fell far short of targets.
Also unlike Iridium, Schwartz said his company always expected cellular
coverage to expand quickly. Still, with only 20 percent at most of the
globe covered, Globalstar will complement and extend that coverage,
which is why cellular operators are willing to align themselves with the
satellite carrier, Schwartz said.
"(T)here are areas of the world in which there are 3.5 billion people living
that do not have any service at all. It will take generations and not be very
cost effective to extend fiber and cellular," he said. "The easiest way is
going to be through satellite."
High-flying goals
Convinced that huge demand exists, Schwartz said there are no plans to
reduce prices further "because in a market where demand is greater than
capacity, I can?t think of any reason to lower prices."
Indeed, he believes there is still room for several more satellite services,
saying that technical limitations will constrain his 48-satellite service to 7
million to 8 million customers. He predicts Globalstar will reach 3 million
subscribers by 2002.
Even staunch supporters of Globalstar question that premise, however.
Said Mark Zohar of Forrester Research: "The satellite market is a niche
market. It's not a mass market."
Thus, the question lingers in the mind of investors: Is the market big
enough to support the grand ambitions of Globalstar? The jury is still out.
What most analysts agree, however, is that Schwartz's entry is probably
best suited to find out.
"What is clear that is that Globalstar is externally focused and knows what
it has to do to execute," Zohar said.
For the 73-year-old Schwartz, the success of Globalstar could be the
capstone of a fine 30-year career as a chief executive. If the satellite
systems fails to fly, however, his reputation could crash as well. For that
reason, expect him to do whatever he can to make Globalstar work.
Jeffry Bartash is a reporter for CBS MarketWatch.
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