Customers few in Globalstar orbit
Burned by other firms' failures, the satellite phone system
struggles to attract users.
By Michael White
By Michael White
SAN JOSE, Calif. - More than 800 miles
above the Earth, 48 Globalstar Inc. satellites
speed silently through space, waiting to beam
telephone calls to and from the world's remote
places.
By all accounts, Globalstar's $4 billion system
works beautifully. Using a Globalstar handset,
a tourist backpacking in the Australian
Outback can call a friend in Milwaukee. A
salesman in Slovenia can dial up the home
office in New York.
The problem is, hardly anyone is calling.
Potential customers have been turned off by the cost of phones and fear that
Globalstar is doomed to follow the downward trajectories of Iridium and ICO
Global Communications, earlier attempts to build satellite-based phone systems
that turned into costly failures.
By its own estimate, Globalstar needs to sign half a million users to break even
on operating costs and twice that many to turn a profit.
But after six months of commercial operation, it has only about 13,000.
Shares have plunged from a high of $53 to below $8. The company lost $417
million in the first half of 2000.
"They've got a rough road to go. I wouldn't write them off, but they've definitely
got to make a stronger move to get phones out there," said Greg Caressi, a
satellite analyst with Frost & Sullivan, a consulting firm in San Jose, Calif.
"The failure of Iridium really poisoned the well for Globalstar. From the outset,
people were saying: 'You guys can't make it,' " he said.
A year ago, Motorola-backed Iridium, with 55,000 customers, went bankrupt, a
victim of weak sales, high operating costs, and technical glitches. Motorola plans
to destroy the satellites by letting them fall into the atmosphere.
ICO ran out of money last year before its first satellites could be launched. It
emerged from bankruptcy in May and merged with Teledesic L.L.C., a planned
satellite-based telephone and Internet service.
Comparisons to Iridium and ICO irk Bernard Schwartz, chairman and chief
executive of Globalstar and its biggest shareholder, Loral Space &
Communications Ltd.
"It helps like a nail in the heart," Schwartz said during a recent, occasionally testy
conference call with analysts.
In an interview, Schwartz acknowledged that Globalstar was off to a slower start
than he expected, but said momentum was building.
"In both the product marketplace and in the financial marketplace, the Iridium
failure had a very strong impact on us. It has slowed us down tremendously," he
said. "Buyers out there who have had a bad experience spending $3,000 on an
Iridium phone have built up a lot of resistance, which we are overcoming."
Globalstar's vendors are increasing their marketing effort with promotions that
have trimmed phone prices from about $1,000 to below $700. Per-minute
charges range from 73 cents to $3, depending on location. In areas where the
Globalstar vendor offers cellular coverage, the phone switches to cell mode and
the customer is billed at regular cellular rates.
Iridium calls ranged from $2 to $4 per minute, although surcharges and taxes
imposed by some countries could push the cost higher.
Even before the promotions were launched, Globalstar's numbers were
improving. Subscribers increased fivefold to 10,000 in the quarter ended June
30; 3,000 were added in July. Billable minutes more than doubled to 1.14 million
in the last quarter.
Globalstar also has signed a deal with In-Flight Network to provide phone and
high-speed Internet service to jet passengers, and is developing other markets
for Internet and data-transmission services.
Perhaps most important, major backers are prepared to invest an additional
$150 million to $200 million, Schwartz said. That, plus $250 million drawn from
a credit line in June, is expected to keep the company going through the end of
2001.
Some analysts worry that that might not be enough. "It gives them more time, but
it doesn't address the real issue: that the phones aren't selling," William Kidd, an
analyst with C.E. Unterberg Towbin, said.
Globalstar was founded in 1991 by Loral, which has 38 percent of the company,
and Qualcomm Inc., a wireless technology developer, which holds a 7 percent
share. Vodafone Group P.L.C. also has a 7 percent stake.
Slow sales haven't given Qualcomm second thoughts. The company will continue
to back Globalstar financially if necessary, Qualcomm's chairman and chief
executive officer, Irwin Jacobs, said.
When it was launched in 1998, Iridium targeted high-level, globe-trotting
executives as its primary customers, but it found the market too small. Too late,
Iridium slashed prices and broadened its marketing to include mining and
shipping companies and government agencies, a Motorola spokesman, Scott
Wyman, said.
Globalstar is courting a much larger pool of mid-level executives, small-business
owners, salespeople and relief organizations that operate in regions that lack
reliable telephone service.
The company also hopes to sell phones to mining companies and adventure
travelers. It is marketing a fixed-location pay phone to local governments in
remote towns in developing countries.
The number of potential customers for satellite phones is estimated to be about
40 million. Globalstar has the capacity to handle 7 million of them, Schwartz said.
Although service is available in more than 30 countries, it is not yet a true global
system. Availability depends on construction of land stations, or "gateways," that
process calls relayed by the satellites.
So far, the system covers North America, Australia, Europe and the North
Atlantic, but only portions of Asia, Africa, the Middle East and South America.
All of South America and wider areas of Asia and Africa will be covered by
year's end. |
