Teledesic rethinks broadband plans
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.
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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