New Launch Attempt for Satellite Phones
Globalstar Seeks to Avoid MisstepsThat Took Rivals Into
Bankruptcy
By Peter S. Goodman
Washington Post Staff Writer
Saturday, January 8, 2000; Page A03
Adaulto Baldo de Oliveira spends weeks at a time exploring remote reaches
of Brazil, overseeing a business that collects old tires and retreads them for
resale. In years past, reaching his office and family in Sao Paulo entailed
lining up for a pay phone in a provincial town, then enduring scratchy,
maddeningly unreliable connections.
Cellular service was no fix. Beyond the major cities, coverage is limited. So
when de Oliveira saw an ad on Brazilian television six weeks ago for a new
Globalstar satellite phone, he did not hesitate to buy one. Not even after he
learned the price--$1,500 for the phone and as much as $3 a minute for the
calls.
But as Globalstar Telecommunications Ltd. presses to make itself a
worldwide satellite phone company--last week, U.S. national security
officials cleared it to sell service in the United States--does the Earth really
hold enough people like de Oliveira for the company to meet its goal? Are
millions willing to pay the freight for satellites floating through space so they
can talk to other people?
Recent history speaks unhopefully. Two other satellite ventures, Iridium
LLC and ICO Global Communications Ltd., both landed in bankruptcy
proceedings last summer, shot down by marketing mishaps, high costs and,
some analysts contend, an odd modern twist: Despite their futuristic sheen,
satellites may be an anachronism in the telephone world.
In the decade since industry brains first dreamed up the notion of a necklace
of satellites bouncing phone connections far beyond the reach of wires, so
much has changed here on earth. Cell towers sometimes seem to outnumber
trees. Cellular phones have gone mainstream, shrinking in size and price.
"What all these satellite companies did not recognize is how far the
terrestrial wireless networks would come," said Jane Zweig, a wireless
analyst at Herschel Shosteck Associates. "It's pretty hard to go somewhere
where you can't make a phone call."
Globalstar chief executive Bernard L. Schwartz scoffs at such talk. "You'd
have to be deaf, dumb and blind over the last few years to not understand
that cellular is increasing," he said. "We factored it into our calculations. . . .
But there are parts of the world where it's just not going to reach."
Globalstar aims to piggy-back the success of cellular phones by offering
satellite service as an add-on. The company has made deals around the
globe with cellular companies that buy Globalstar service wholesale and sell
it at retail. In North America, Globalstar is sold by Vodafone AirTouch PLC.
More than a few analysts are optimistic. They see customers in oil workers
at the extreme reaches of the globe, aid workers, even suburban commuters
who stray beyond the reach of cellular. But Globalstar's prospects may hinge
on its risky bet that the developing world holds millions of people willing to
pay top rates to connect to the global marketplace.
"We're talking about middle-class people who live in villages of 10,000 or
20,000 population and have contacts with the major cities," Schwartz said.
"In India, there are 400 million people who live in villages like this."
But how many people in India, a country where the average annual income
does not reach $2,000, are seriously in the market for a $1,500 phone?
"The pricing is too high," said William L. Schrader, chief executive of
PSINet Inc., a commercial Internet service provider with global aspirations
of its own. "Nobody's going to pay that."
It is a proposition with an outcome that holds more than the future of a single
company. Legions of engineers have thrown billions of dollars and years of
work into space in a bid to transcend the geographic limits of
communications. So far, the extraordinary costs and technical uncertainties
of satellite connections have brought two major ventures plummeting to
earth. Only one company is left standing.
Globalstar says about 40 million people around the world are potential
customers. It foresees at least 500,000 customers and profitability by the end
of this year. But Iridium set similar goals--500,000 customers after a year.
Analysts say it had perhaps 40,000.
Globalstar's backers say those numbers speak to Iridium's own failures and
not demand. Iridium went bust, they assert, because it marketed service
before its phones were commercially available, then failed to procure
sufficient numbers of them. The phones were as big as bricks, required a
mess of cables and didn't work indoors.
Globalstar's equipment, though bigger than a standard cellular phone, is
smaller and less complex than Iridium's. And Globalstar's phone is equipped
to function as both a satellite phone and a regular cellular phone. When the
customer is in cellular range, cell rates apply. Satellite service fills in the
gaps.
Believers have lately grown conspicuous.
Last month wireless pioneer Craig McCaw sunk $744 million into ICO
Global Communications and considered taking a stake in Iridium, lending his
prestige to a beleaguered industry. Globalstar's stock price, which plunged as
Iridium fizzled, has nearly doubled since mid-December. Most analysts
attribute the jump to general investor enthusiasm for CDMA, the type of
technology that runs Globalstar's phones, and the company behind it,
Qualcomm Inc., whose stock price rose 2,600 percent last year.
Schwartz gives investors assurance. Before taking over Globalstar, he ran
Loral Space & Communications Ltd. for more than two decades, handing
shareholders annual returns of 27 percent over his tenure. Loral owns 45
percent of Globalstar. "He comes with a tremendous amount of credibility,"
said Armand Musey, an analyst at Banc of America Securities.
Still, some maintain that Globalstar, however well it executes, is doomed by
the reality that satellites have been eclipsed. In an era of dime-a-minute
cellular calling, its prices are simply in the stratosphere.
Globalstar's proponents say the proper comparison is not between satellite
and cellular, but satellite and no call at all.
"We have stations in remote areas where there is no cellular coverage," said
Anjelo Barreto Aranha, an engineer at Cemig, an electrical company in
Brazil that is leasing 18 Globalstar phones. "It's a useful tool."
And Globalstar says it has been pleasantly surprised by the level of interest
from urban dwellers dissatisfied with cellular coverage. In Mexico,
Globalstar's first customer was a doctor who rarely leaves Mexico City but
needs reliable connections to his office and patients.
"We're perceiving a great deal of demand for our services from urban
areas," said Lauro Gonzalez, chief executive of Globalstar de Mexico,
speaking by Globalstar phone from Mexico City. "Even though there is a lot
of wireless infrastructure, the quality of service is a bit patchy." His voice
rang clear, though it sometimes faded.
From 50 percent to 80 percent of the U.S. landmass lies beyond cellular
reach, according to various estimates. With land-use battles raging over
plans for more cell towers and many companies spending dollars to make
existing coverage more reliable before carving out new terrain, many
analysts assume much of the continent will retain its cellular holes.
"I drive up the Hutchinson River Parkway to Scarsdale and I lose coverage,"
said John Bensche, an analyst at Lehman Brothers Inc., referring to his
home in the New York suburbs. "We need Globalstar in Westchester
County."
Globalstar's proponents take pains to distinguish the company from Iridium.
Iridium runs on "smart" satellites that bounce signals from one to another,
then to the ground, as a means of evading long-distance charges.
Globalstar's satellites can only transmit down to a ground station that
connects to the local phone network. While Iridium's satellites will need to be
replaced after five years, Globalstar's could last a decade or more.
Some analysts say the extra years could give the company time to attract
customers to the system, then drop the price to get more. Improving
technology should cut the size and cost of the phones.
The satellite-to-ground station connection necessitated U.S. national security
clearance. Three ground stations serve North America--one in Texas and
two in Canada. The FBI and other agencies expressed concerns that they
could have difficulty wiretapping Globalstar customers making calls to or
from the United States if they had to go through the Canadian government to
gain access. Thus, authorities blocked permission for Globalstar to launch.
But under the agreement reached last week, Globalstar will, in the event of a
legally authorized wiretap, route calls from its Canadian ground stations to
officials in the United States, removing Canadian authorities from the
equation.
Though the agreement allows Globalstar to sell service in the United States,
it does not silence doubters.
"The track record of the other two hasn't been too great," said Zweig, the
Herschel Shosteck Associates analyst, referring to Iridium and ICO Global.
"This is an industry that's premised on promises and hype."
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