Trouble in getting off the ground. A satellite-services firm declares bankruptcy, even as a "revolution" is predicted in the industry.
September 28, 1999
By Bob Fernandez
INQUIRER STAFF WRITER
Iridium World Communication's crash landing into Bankruptcy Court last month cast a shadow over
one of the nation's most promising high-tech industries - satellite services.
This decade, dozens of low- and high-orbit satellites, costing billions of dollars, have been blasted
into space as the U.S. satellite industry has shifted its attention from military to consumer and
business services.
Companies such as Globalstar Telecommunication, Echostar Communcation, Orbital Sciences
Corp., CD Radio Inc., and American Mobile Satellite Corp.have raised large sums of money in both
bonds and stock offerings to put in place satellite constellations.
When orbiting, these satellites will beam back to Earth voice, text, video and data to users on the
road or in their homes.
With the Iridium disaster, is the boom over? Satellite experts say no.
"We're into a whole new area in that, instead of linking corporations and phone companies, we are
going directly to consumers," Clay Mowry, executive director for the Satellite Industry Association,
said. "It really is a revolution in satellite services."
But there are bumps - bumps that investors should be careful to avoid - along the road to revolution.
Iridium, a mobile satellite phone provider in Washington, was the most ambitious and public of these
ventures, and its failure is costing shareholders and other lenders hundreds of millions of dollars in a
restructuring.
Its bankruptcy filing also took another satellite phone provider, ICO Global Communications, with it.
ICO's plans to raise money for its own constellation of satellites were doomed after the Iridium
debacle.
Trading in public stock of both ICO and Iridium has been suspended.
Next month, Globalstar, another space-age telephone system, will give a "soft launch" of its service.
There will be a full roll-out later this year.
Analysts give the company some hope of surviving, saying its phones are cheaper than Iridium's (they
will cost $1,500, compared with $3,000), and its service will cost $1.50 to $3 a minute. Heavy
discounting by Globalstar is expected to lure users to its service.
These mobile satellite providers were designed to sell service to business travelers overseas, hikers
in rugged terrain, ships on the sea, phone users in developing countries and research scientists in the
field. They are people who are not served with cheaper, more reliable cellular service.
Iridium "needed a home run in top-line revenue growth but they did not even have time to swing the
bat," Vijay Jayant, managing director and satellite analyst with Bear Stearns, said. In other words,
the company's cost structure was too high to offer competitive prices and its marketing never clicked
with buyers.
On the other hand, "Globalstar has the ingredients to be a viable service provider," he said. "Only
time will tell."
But Jayant and other satellite experts said it's wrong to paint the whole satellite industry as struggling
because of the disaster in telephone services.
They say satellite services generated $26 billion in revenue last year and a company is only as good
as the business plan it has in place and the service it provides. "It's not fair to be generic about
satellite companies," Jayant said. In fact, some satellite companies are profitable, while some in
development phase are promising.
Fixed high-orbit satellites, such as those owned by Panamsat, Loral and Comsat, provide video for
television networks and high-volume international Internet, phone, fax and data transmission. They
are the granddaddies of satellite service and they are growing slowly.
Newer companies on the block are direct-broadcast providers - which beam hundreds of channels
of cable programming to about 13 million households. They are about five years old and growing
rapidly.
Two dominant companies are Echostar Communications and DirecTV, a unit of Hughes Electronics.
Since March, the share price in Echostar, a pure play in direct broadcast, has risen from about $25 a
share to $90 a share, closing at $90.19 yesterday .
The reasons are simple. "A lot of people are walking away from cable," Robert Mercer, spokesman
for DirecTV, said. "This business has reached a critical mass, and when that happens,
word-of-mouth takes over."
DirecTV signed up nearly 150,000 new subscribers in August, bringing its total paid subscriber base
to 7.5 million.
For the eight months ended in August, the company had signed up 932,000 new customers. That
was an increase in new customers of 47 percent from the previous year's first eight months, Mercer
said.
DirecTV's subscription fees range from $20 to $80 a month; a new subscriber also has to buy an
18-inch satellite dish, a set-top box and a remote control. This gear now costs about $100 - down
dramatically from the mid-1990s, when the equipment cost $700 or more.
Another emerging satellite service - scheduled to be launched in the next year - is digital audio radio
service, or DARs.
Companies in this market will beam via satellite about 100 stations of commercial-free radio
programming throughout the United States.
Why? They believe Americans are sick of the traditional radio fare - such as pop-music stations and
Rush Limbaugh talk shows - and the onslaught of commercials during the evening and morning
commute.
Two companies, CD Radio and XM Satellite Radio, are racing to provide the service. CD Radio, in
New York, went public in late 1997 at about $5 a share. It's now trading in the high $20s. The
stock has been volatile.
In its financial documents, CD Radio says it will transmit the radio programming - 50 music stations,
covering all categories; and 50 news and talk stations - via three orbiting satellites. The radio service
should be available in December 2000.
Subscriptions to CD Radio will cost $9.95 a month. Electronics manufacturers have agreed to
produce the necessary radios and Ford has agreed to install them, by request, in new cars. Ford and
CD Radio will share in the revenue from the radio service.
XM Satellite Radio, which is based in Washington, is preparing to go public. The company expects
to launch its service in the first half of 2001 and has signed up General Motors to offer its radio
service in its new vehicles.
Orbcomm, which is owned by the publicly traded Orbital Sciences Corp., is another satellite system,
though geared solely toward business. It is a "narrowband system" that will stream data between two
points, using the satellites.
For instance, Orbcomm gadgets can be used to read utility meters, measure oil flowing through a
distant pipeline or track a truck trailer as it travels back and forth across the country.
The company has sold about 100,000 of its tracking units, with about 10,000 now producing
revenue. Analyst Jayant said it has been hard to persuade companies to put the money into such an
extensive monitoring system. Orbcom has "developed slower than we expected," Jayant said.
¸1999 Philadelphia Newspapers Inc.
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