*Teledesic rethinks broadband plans
[I repeat my opinion that Gates/McCaw would be better off by buying Loral and G* (and Skybridge, Cyberstar and other stakes) -- not that I would like it to happen right now at the current very depressed LOR and G* stock prices. djane]
By Theresa Foley
25 October 1999
Teledesic LLC is going back to the drawing board in the wake of the floundering of rival
satellite systems Iridium LLC and ICO Global Communications plc.
According to satellite industry officials Teledesic, the low-earth orbit satellite venture
backed by billionaires Bill Gates and Craig McCaw, is keen to "cut a deal" with another
player that can get it into the market sooner than its proposed start date of 2004, and which
could even take it firmly in a new direction.
Satellite industry executives confirm that Bellevue, Washington-based Teledesic has talked
to some half a dozen companies in recent weeks about changing tack to deliver services
other than the original broadband offerings proposed.
But amidst the speculation there is scant concrete detail, including among the company's
senior management, over exactly where the venture is headed.
"Because we're strong with money, partners and commitments, it is a good time to step back
and look at what's going on," said Bill Owens, co-chairman of Teledesic. "Lots of companies
are calling us. We're looking at opportunities in the marketplace to optimize early revenue
and get Teledesic's name identity into the marketplace."
Sources said Craig McCaw, co-founder and co-chairman of Teledesic, has come to the
realization in recent weeks that the ambitious dream of a $10-billion-plus network of LEO
satellites - the so-called "Internet-in-the-sky" - is simply not tenable in today's volatile
financial market.
"It became apparent that Teledesic needed to get in more quickly to the market, and that
constellation-based low earth orbit satellite systems are not the way to do that," said an
industry official speaking on background.
The sources said McCaw personally has approached two of the faltering global mobile
telephone satellite companies, Iridium and ICO, both of which are in the middle of
bankruptcy procedures. But according to an executive at one of the affected companies,
McCaw is holding his cards close to his chest.
Teledesic officials said that McCaw wants to save one of the failing companies to boost
Teledesic's own chances of survival. If Iridium and ICO both fail, the financial community
will be reluctant to give Teledesic funding in the future; to date it has not approached
financial institutions for backing.
Others familiar with Teledesic's planning say McCaw would like to shift away from
broadband services towards services that connect with his cellular empire - which includes
wireless PCS operator Nextel Communications, McLean, Virginia - or with his fixed-network
assets. Acquisition of a global mobile telephone satellite system would enable McCaw to
make a next-generation Nextel for global cellular coverage, the thinking goes. [This is key for G*...]
Another industry official, involved with Teledesic for several years, said McCaw's current
vision goes far beyond the 2002-2003 timeframe aimed at by other satellite broadband
projects. If Teledesic is delayed, it could be remodelled to suit the broadband computer
market when upgraded software and routers move the Internet into its next phase, he said.
But none of this is forthcoming from Owens. Speaking at Telecom '99 in Geneva, he said
Teledesic's long-term vision of a broadband satellite system by 2004 remains. But he
indicated this would not be the only area of business for the company: "There became a
sense of priestliness about it. Now we have gone through a phase of converting that vision
to reality," he said.
Realistic funding
This includes realistic funding of the system. Teledesic has some $1.5 billion in
commitments, including $750 million from its biggest backer Motorola Inc., Schaumburg,
Illinois, and around $100 million from Boeing Co. of Seattle, Washington. The partners have
never disclosed publicly just how much of their investment is cash and how much a trade
for hardware for the project, but if Teledesic heads in a new direction and they do not get
their hardware contracts, it is unlikely that their investment levels will be maintained.
Prince Alwaleed Bin Talal Bin AbdulAziz Alsaud of Saudi Arabia supplied around $200
million of the cash for the project, while McCaw and Gates are believed to have invested
less than $100 million. The other $300 million is recent equity from unnamed investors.
There has been speculation that McCaw would put $300 million into Iridium or buy up the
ICO satellites and remake them into a global mobile data service. Either idea would have
complications.
"Iridium is unsalvagable," said Robert Kaimowitz, managing director, ING Baring Satellite
Research Group. The Iridium satellites have only four more years of a projected five-year life
remaining, and funding would have to be found to implement the company's recently
announced new business plan, and to start building replacement satellites. The ICO plan
makes more sense, he said.
However, Tig Kreckel, chief executive and president of ICO's satellite builder Hughes Space
and Communications, Los Angeles, said that Teledesic's idea of buying the ICO satellites
would be complicated and expensive.
The satellites are in the jurisdiction of a bankruptcy court and cannot simply be resold by
Hughes even if ICO agreed. And it would cost in the neighborhood of $1 billion to modify
them, Krekel said.
And with ICO in the middle of bankruptcy proceedings, he questioned how fast the
satellites could be put into service if such a deal was struck.
However, Krekel confirmed that Hughes has been having talks with Teledesic on a range of
collaborative possibilities.
While Teledesic is playing the field with new suitors, some say its existing partnerships are
faltering. Several sources asserted that the deal between Motorola and Teledesic is "dead."
The Arizona-based Motorola satellite division that built the Iridium fleet and hoped to
integrate the Teledesic satellites, almost certainly will end its relationship with Teledesic. Of
the $750 million commitment, Motorola has paid about $300 million but has received some of
that amount back, said a source close to the project.
In June, Teledesic and Motorola announced they'd reached agreement on their contract and
would disclose details in 90 days. That time has passed, and both companies say the review
is ongoing.
Boeing too is having second thoughts. David Workman, Boeing's space and
communications group director, business development, said: "Teledesic is not going to
dissolve. The question is, what is it going to morph into?"
But he added: "We won't be obligated to continue to invest if we don't want to. We're
waiting for the Teledesic team to make their decision."
Boeing's former large team of Teledesic engineers has shrunk to a few people as the wait
continues.
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