Here's the Business Week columnist's "full story":
Dial Into Globalstar While It's Still in Low Orbit?
Iridium's woes are dragging down the satellite phone system's stock, but chances are much better for its success.
It seemed like such a good idea 15 years ago. Why don't we throw up a slew of satellites that will span the earth and give globetrotting executives phone service wherever they go, several telecommunications visionaries asked. In quick succession, Iridium, Globalstar, and ICO were born.
Fast forward to 2000, and the satellite phone business seems to define the word chaos. Iridium, whose principal backer was Motorola (MOT), seems headed for an untimely death. ICO sought bankruptcy protection before it even started service and now appears to be in the hands of billionaire Craig McCaw, who will combine it with his Teledesic project -- a network of satellites that will provide Internet access.
The third satellite network, Globalstar (GSTRF), launched its service last month and has so far been underwhelmed by orders. That tepid initiation led Merrill Lynch analyst Thomas Watts to downgrade the stock on Mar. 8, leading to a rout in the company's shares. Watts, who couldn't be reached for comment, has said he expects the company will have no more than 200,000 subscribers by yearend and might face liquidity problems. Indeed, Globalstar had hoped to corral 500,000 subscribers by next January. Since Watts's report came out, Globalstar stock has dropped 20.8%, to its close on Mar. 15 at $16.38.
CRITICAL MASS. Forward-looking investors, however, can find plenty of good reasons to view the current decline as a buying opportunity. "There won't be liquidity problems at Globalstar because the company has sufficient lines of credit to continue operations for another two years," says Gregory Spear, editor of online newsletter The Spear Report (www.thespearreport.com). "They don't require a lot of revenue until then. And even if they only get 200,000 subscribers by the end of the year, that's not necessarily the death knell for the company."
Everyone agrees that the key to Globalstar's future health is critical mass. The question is when that might be reached. "Right now, with the rollout of the product, we are facing the riskiest time period for Globalstar's product cycle, so it makes sense that the stock should be going down," says Robert Kaimowitz, who follows Globalstar for CIBC World Market and considers it a long-term buy. "That doesn't mean that in the long run it won't be viable product. There's still a lot of time before that can be determined."
For Globalstar, critical mass probably means more than a million subscribers. With that many users, the company could conceivably charge as little as 20 cents a minute of phone time and still break even, says Kaimowitz. During the initial rollout, the company is charging as much as $1.50 a minute, but that number is expected to fall quickly.
LONG-DISTANCE SIGNAL. Meanwhile, Iridium's constellation of dead birds haunts anyone who thinks Globalstar can eventually make a business out of satellite telephony. Why should Globalstar succeed where Iridium failed? Here are three good reasons: cost, clarity, and distribution.
Iridium needed to charge its millions of expected customers a minimum of $3.00 a minute to break even. Since it never signed up more than a few thousand subscribers, it clearly could never have made a profit. In addition, its bulky handsets looked more like World War II walkie-talkies than today's cell phones -- and cost almost $3,000.
Another problem for Iridium was the clarity of its phones' reception. Because its satellites were high up in geo-synchronous orbit, static and echoes were common on calls, thanks to the huge distance the beam had to travel. Globalstar's birds are in low-earth orbit, so that at any given time, a phone is in constant contact with three satellites, which makes calls almost as clear as a land-line connection. Unlike during Iridium's early days, Globalstar customers have voiced no widespread complaints about sound quality.
Finally, Globalstar doesn't have to worry about building a global distribution system for its new phones. That's because it doesn't directly sell its own phones. Instead, they are sold by its partners, which include just about every big international wireless company. Globalstar's phones use the same CDMA standard that cell phones use. When Globalstar users are in range of a cell tower, their voices will be carried over the cheaper cell network. When users go out cell range, the phone automatically switches to satellite coverage.
DESPERATE NEED. That leads to the main reason for Iridium's failure: Motorola just didn't foresee the massive growth in wireless phones that has occurred over the past few years. Globalstar, on the other hand, read the tea leaves right and designed a phone that would complement today's wireless networks.
Still, even though wireless seems to be every, global travelers have a desperate need for Globalstar's service. "Only 13% of the earth has wireless reception," says William Kidd, who covers satellite telephony for C.E. Unterberg Towbin. Millions of professionals want global coverage, and if the price is right they'll pay for it.
Meanwhile, Globalstar's stock has reached ridiculously cheap levels. If its strategy works, the company could soon be raking in billions of dollars a year in revenue. Then again, there are no guarantees: Most analysts are reluctant to even make revenue estimates at this stage of Globastar's life. In the best of circumstances, the company could turn a profit by 2002, according to management. Newsletter editor Spear thinks the stock, whose total market capitalization is currently $1.5 billion, won't wait for that to happen. "We'll know by the fourth quarter of this year," says Spear. "If subscriber growth takes off then, this stock will be worth a lot more than it's worth today." You don't hear any static in that prediction. |
