To all - text of Barrons piece on Globalstar !
NOVEMBER 15, 1999
Not Lost In Space
Globalstar could succeed where rival satellite outfits crashed
By Harlan S. Byrne
Can Globalstar Telecommunications boldly go where no other mobile
satellite-communications venture has successfully gone before? Even after Iridium
and ICO Global have come crashing down into bankruptcy court, Globalstar may
actually succeed in establishing a mobile satellite system that can bounce telephone
calls, messages and data between satellites to and from corners of the earth
lacking land-based networks. While satellite communications generate excitement
among investors and have attracted such deep-pocket backers as Hughes
Electronics, Motorola, Loral Space & Communications (all makers of satellites)
and phone service companies, others (including Barron's) have raised questions
about the likelihood of early payoffs on such risky and costly undertakings.
But Globalstar may have the best chance of pulling that off where others, so far,
have failed. It has a 48-satellite system that is in an introductory stage of service,
with a full-scale launch promised for next year. Out front trumpeting Globalstar's
prospects is Bernard Schwartz, the operation's aggressive 73 year -- old chief
executive and head of its sponsor, Loral, which owns 45% of Globalstar. Service
started last month, just two months after Iridium was forced into bankruptcy.
Another plus for Globalstar is that it has the advantage of having seen Iridium's
manifold blunders. Just a partial list includes a poor marketing effort that targeted
traveling VIPs willing to pay its astronomical prices; technical glitches that
resulted in poor voice quality; and an inadequate supply of phone handsets, which
were so overpriced and clunky that Iridium had to slash their price in half.
None of which is relevant to Globalstar,
which, says Schwartz, has gotten it right
from the beginning. "I can't foresee
anything going wrong," he asserted in an
interview at his New York City
headquarters, notwithstanding the normal
riskiness of a space-based venture.
Schwartz characterizes Globalstar's
inception of service as a validation of a
business and technology strategy put
together over seven years.
Schwartz's confidence is reflected in
heady financial projections: generation of
meaningful revenues by early next year,
break-even on an operating profit basis by
the end of 2000, and positive cash flow
within a couple of years. Globalstar is aiming for three million subscribers within
three years, after which both operating earnings and bottom-line net income are
expected to follow.
But, as with so many high-tech startups, Globalstar has generated only red ink
since it began operations in 1995. According to First Call's consensus of earnings
estimates, the company is expected to lose $1.36 a share this year and $2.78 next
year, versus 67 cents in 1998. But the long-term payoff could be big. Merrill
Lynch, while cognizant of the risks in the business, in September forecast the
potential near $7 a share in earnings by 2005.
Still, Schwartz isn't offering any
guarantees. There's always the possibility
of satellite mishaps, of which Globalstar
has had its share, or that subscriber
growth will fall short of expectations.
Still, Schwartz should get credit so far for
a comparatively smooth start of the
service. Not that everything went without
a hitch. Among them was a
near-disastrous blow-up of 12 satellites
during a launch in September 1998, which
unnerved management and, needless to
say, investors.
Schwartz gets much of the credit as well
for persuading major investors and
lenders to put up the financing for the
cost of development, all of which is in
place, he says. Also in Globalstar's favor is Loral's broad experience
manufacturing satellites and in developing satellite services.
Without a doubt, Schwartz has proved perhaps the best salesman for Globalstar
stock. He's made a lot of money for early investors, including money manager
George Soros, though the stock has gone through a lot of turbulence, which is not
untypical of high-tech stocks. The stock in the past 52 weeks has swung between
33 and 13.
Globalstar's shares rallied last week, climbing as high as 27 through Wednesday,
and then shooting up to 31 Thursday on unusually heavy volume. The surge
seemed tied to a jump in Loral's stock, which soared on rumors -- later denied that
Microsoft would buy a stake in Loral. But after Microsoft later said the only deal it
was announcing was with Tandy, Globalstar and Loral moved back to lower
orbits, with the former trading around 27. While the stock remained shy of the
year's high of 33, bullish analysts have price targets above 40. These analysts, it
should be noted, also were some of the biggest boosters of Iridium stock, which
traded as high as 72 before its collapse starting late last year.
After having seen Iridium and ICO both reach their apogees in terms of share
price, only to come crashing into bankruptcy -- all while still in their development
stages the crucial thing now for Globalstar is to execute its business plan. The
risks are that investors may be put off by operational glitches or below -- plan
growth. But once development and startup costs are out of the way and revenues
start rolling in, the profit potential is sky-high.
After Globalstar stock climbed sharply just prior to launch, some investors turned
cautious. In early October, Salomon Smith Barney, for instance, cut its rating on
the stock to "outperform" from "buy," based on the stock reaching the investment
firm's price target of 28. Analyst John B. Coates thinks it can be difficult for a
satellite operator to sustain investor interest once the excitement of getting a
service launched has diminished.
Long-term, however, Coates still believes Globalstar will succeed. He predicts in
the future there will be pocket-size telephone handsets costing less than $500, or
about one-third as much as the current tab. These phones will provide "complete
global mobility -- and the only way to get complete coverage is with satellites."
Coates praises Schwartz's management but adds that the risk the company faces
is that the proof of success could come a little slower than some investors may be
led to expect during the highly publicized satellite launching stage.
Coates expects Globalstar to be the market leader even if other systems (including
some still on the drawing board) get off the ground. One interesting question is
what will happen to Iridium's 66-satellite system. ICO Global, meanwhile, may
have gotten a temporary lease on life recently when cellular pioneer Craig McCaw
and other investors proposed a $1.2 billion financial package to get ICO back on
track to put a system in operation within a few years. McCaw and other techies,
including Bill Gates, have been talking about a 288-satellite system to handle
high-speed transmission of data; at this point, the plan is still up in the air.
Beyond high-tech appeal, assessing the investment potential of satellite systems
requires some understanding of their scope. In a recent report titled "Everything
You Wanted to Know About Satellites But Were Afraid to Ask," Coates wrote,
"few people realize how pervasive satellites really are in everyday life." Nearly all
television programming in the U.S., for example, is distributed by satellite. Pages
for many publications, such as Barron's and The Wall Street Journal, are
transmitted to printing plants around the country by satellite. Many other
businesses and government agencies employ satellites in such day-to-day chores
as credit-card authorizations and inventory management, and a host of scientific,
transportation and military tasks. He estimates there are more than 5,000 satellites
orbiting the earth, ranging in size from 200 pounds to five tons each. Typically,
each costs several hundred thousand dollars to develop, manufacture and launch.
Satellites can be put in several types of orbit, depending on how far they are
placed above the planet. Globalstar and Iridium satellites are in what's known as
low-earth orbit (LEO), between 200 and 1,000 miles above the planet. They whiz
along at about 17,000 miles an hour to offset the pull of gravity, and circle the
earth in about 90 minutes. The footprint, or coverage area of each satellite, is
comparatively small, about the size of Alaska. That means it takes many LEOs to
cover the globe. ICO planned for a middle earth orbit (MEO) between 1,500 and
15,000 miles, with a larger footprint and thus requiring fewer satellites. Mobile
satellites rely on earth stations spotted around the planet to direct phone calls
anywhere to and from the nearest landbased phone networks.
Much of today's communication is funneled through satellites in geosynchronous
earth orbit (GEO). At exactly 22,300 miles above the equator, such a satellite
remains stationary over a fixed point, covering, say, an entire continent as it
follows the rotation of the earth. That makes a GEO satellite attractive for
broadcasting and other point-to-multipoint applications, such as direct-broadcast
satellite television, Salomon Smith Barney points out. But because these satellites
are so far out in space, they're less attractive for many uses, including voice
transmission by telephone. GEOs are run by a number of companies and
government agencies.
While the concept of mobile satellite systems is fascinating, getting a handle on the
economics at this stage seems a bit elusive. It also depends a lot on who's talking.
For one thing, estimates of potential users range all the way from 30 million to 40
million. That represents the total number of folks lacking direct access to
worldwide phone connections. The nettlesome questions involve how many
people really want (or can afford) what is, at the current state of the art, an
expensive service. Or more to the point, how many subscribers are needed for a
satellite system to pay back the huge initial investment and, thus, make money.
Some experts such as Schwartz think these out-of-the-world 30-40 million
estimates fail to take into account that capacity for anywhere near that number of
potential subscribers probably won't be available any time soon anyway, even if
such demand truly exists. Globalstar reckons several million subscribers actively
using the service would be adequate to make the service economically feasible.
Despite evident optimism on the part of both Schwartz and the market, skeptics
remain. While conceding Globalstar has gotten off to a better start than Iridium,
some consultants and promoters in the satellite field say that the former company
still may have difficulty making an acceptable profit because of high operating and
debt costs and the possibility that demand for the service will fall short of
projections. David Otten, chairman of Celsat American, which has plans for a
proposed satellite system that would cover just North America, goes so far as to
predict the likelihood that Globalstar will follow Iridium into bankruptcy court.
Roger Rusch, a telecommunications specialist, is far less extreme, but
nevertheless is dubious of demand projections for the service, especially at current
high costs for skyphone service.
When Schwartz was going through trying times to get Globalstar up and running,
he heard plenty of such negative talk from many circles, including bankers and
potential partners. So he tends to dismiss discouraging words, while keeping his
fingers crossed during the critical start-up phase. One canny money manager may
have best described Globalstar's investment prospects. If everything goes right,
"Bernie Schwartz will hit a home run," he says. If not, well, that could call for a
different swing at the bat. But unlike his other free-swinging competitors,
Schwartz hasn't struck out and still is very much in the game. Stay tuned.
Copyright ¸ 1999 Dow Jones & Company, Inc. All Rights Reserved. |
