GLOBALSTAR Post-Bankruptcy Operating Focus
A Proposal Presented March 3, 2002
Now that bankruptcy has commenced we must determine how to run the business while the process is underway. We have only a limited amount of money and we have a “burn rate” that is constantly reducing that amount. When that money reaches zero the business will truly implode and cease to exist. The carcass of the company at that point will not be worth much to its creditors at all. I believe everyone believes that new money must be attracted to ultimately take the business forward. The primary question, therefore, is how much ownership will creditors be left with when the new money is raised? I would contend that the closer the company is to the ultimate implosion the less the value ascribed to the creditors. Thus, STARTING IMMEDIATELY EVERYTHING POSSIBLE MUST BE DONE TO EXTEND THE TIME OF ULTIMATE IMPLOSION.
This may seem like an obvious conclusion, and I believe it is. If we truly believe it, however, certain actions must be undertaken and I will try to set forth what I believe these are. Please keep in mind that these are not simply “reasonable” actions: they are REQUIRED in an effort to create maximum value going forward. Moreover, time is critical and so these things must be done as quickly as possible. In other words, things must happen in a way they did not happen over the last six months! Reduce costs and/or increase revenues.
Moreover, we have an unusual case here since there is a value that many perceive which may become real simply by the stroke of a pen and unrelated to the exact current cash flow position. I am talking about the ATC possibility and FCC action. In this case, it would be terrible to lose control of the enterprise just before the FCC acted. Of course, there is no guarantee of what the FCC action will be or how this will affect the value of Globalstar. It is reasonably possible, however, that the action could be favorable and the value would be enhanced. This may open up a completely different valuation based on a new business model. The creditors must do everything possible to retain this option or get paid for it. Fortunately, to the extent that the burn rate is reduced we also enhance the time the creditors have to control the company while awaiting the FCC action.
FOCUSING ON THE MISSION
Every action we take now during bankruptcy must support the Mission of the business. What should be the Mission? Given that cash is so constrained, it seems clear to me that the Mission must be constrained to those things that can be done with the least additional investment. Thus, grand plans about possible future services CANNOT be supported at this time. We must use the assets we currently have. If we can attract new money reasonably perhaps we can support new initiatives, but not now.
Here are our primary assets as I see them:
1. A core of employees who know Globalstar;
2. Hundreds of millions of Minutes Of Use available at zero incremental cost;
3. Handsets and Fixed Units already produced.
Each of these assets is essential to providing a service during bankruptcy that can help us reduce the burn rate. Thus, the Mission:
Minimize the Net Burn Rate by Using the Existing Assets.
I will first address increasing revenue.
TELEPHONY
Given that our primary assets mostly revolve around telephony I see no alternative to the REQUIREMENT that actions to increase revenue will revolve around providing telephony service at this time. There is another incontrovertible truth: only a finite number of units are in existence and it is too expensive at this time to create more. Thus, every unit is potentially scarce and must be viewed as such.
On the other hand, we have hundreds of millions of MOU that are available and if not sold today will never be able to be sold at all. This is far different from the “terminal paradigm” since the terminals can be sold tomorrow if not today. The MOU are fleeting and as time goes forward they inexorably are reduced in number. This is like airplane seat miles, billable hours or extrusion press time.
As a simple matter of economics, then, we see the implications for our business model during bankruptcy:
1. Terminals are relatively scarce and must be priced accordingly; and
2. MOU are relatively abundant and must be priced accordingly.
Remember, if we attempt to ignore the basic laws of supply and demand economics as we move forward at this time we will surely fail.
ACTIONS GOING FORWARD
As part of announcing the Bankruptcy filing Globalstar issued a press release which outlined its intentions going forward. The first one dealt with “aggressively priced” telephone service. It is has now been more than two weeks since the filing. This means another $3 Million has been spent. In my opinion the two months of free service fees shown on the GUSA site is NOT aggressive. The cost of a Minute of Use must be SLASHED. We have billions piled up in warehouses around the world and they are rotting on the shelves. What should we charge pursuant to our Mission?
If we have roughly one Billion MOU available at “peak time” per year right now and if our “burn rate” is $70 Million per year, then we need 7 cents per minute to cover our costs (unless we can reduce our costs further). This is elementary math. (There is another Billion minutes of off-peak as well.) The market values the enterprise now at roughly $225 Million (the street price of the debt). The equity is vanishing and the face value of the debt is also disappearing. A 13% Return would mean $30 Million per year. Thus, to obtain a return and pay expenses we would need to sell out our peak inventory of MOU for 10 cents each. Off-peak could be considerably less since those minutes are perishing every day as well.
Of course, the market is skeptical of Globalstar. Will it survive? We must provide a powerful reason for people to use the service at this point in order for them to do so. On the other hand, that “powerful reason” must be tied to the results that we seek, which is heavy usage. It is essentially useless if someone rarely uses our precious terminal to make a few minutes worth of calls per month. We only have a relatively few terminals so we need HEAVY USAGE per terminal. Thus, again in keeping with basic economics, we must provide incentives for the behavior we wish to encourage.
LEAP Wireless, a Qualcomm affiliate, has demonstrated that there is demand for over 1,000 MOU per month under certain pricing schemes. People do moderate their behavior pursuant to incentives.
What we absolutely know is that the present model does not work. We must change and change radically if we want to have a chance of surviving with the assets that are available now. Thus, I believe a charge of 10 cents per minute for the Globalstar satellite portion, peak and non-peak, should be immediately implemented. This is easy to convey and easy to understand. We could package free weekend minutes and other fancy things, but perhaps a simple approach would be the best now.
This price, however, would only be available for those using more than 1,000 Minutes per month. In other words, they would be spending at least $100 per month on their Globalstar phone. Given the experience of LEAP, therefore, it seems to me we could perhaps save money (billing costs) by simply offering unlimited calling for $100 per month pre-paid. This would be communicated as a special promotional offer.
The objection I have heard is that once you set a rate you cannot increase that rate. This does not seem to be true in the real world. Gas prices fluctuate. Taxes fluctuate. Aluminum, steel and copper fluctuate. Internet access charges are rising in the domestically. WHEN WE SELL OUT OUR INVENTORY OF MINUTES AND THEY BECOME RELATIVELY SCARCE WE WILL BE ABLE TO INCREASE RATES. This is the essence of the economic law of supply and demand. Probably the people who cling to the idea of not being able to raise prices later are the same ones who have provided the advice that has brought us to bankruptcy!
Of course, this is not the end of the matter because this is only the satellite portion. The price to the customer will be higher. There are termination costs, distributor costs and the costs associated with the Gateways that must also be covered. I believe some of the $70 Million noted earlier actually are for Gateway costs. Thus, I do not pretend to know at this moment what the actual incremental costs are, but I do not think they can be more than double the Globalstar costs in the United States. This would imply the following pricing at the consumer level(no roaming or LD in Canada & USA):
Unlimited Minutes per Month for $200 (or less) per individual.
We must also decide how to price the handset. Since they are scarce we must price them accordingly. Thus, they must be priced above the incremental cost to replace them. Let’s assume new ones can be produced for $500. Since there are understandable concerns about Globalstar’s longevity, I think a compelling package might be to charge $25 per month additional to lease the phone. Thus, a refinement:
A Handset plus Unlimited Minutes of Use for $225 (or less) per month.
Again, to meet customer skepticism I think we could offer this on a month-to-month basis and not require any long-term commitment. In other words, they prepay a month at a time and they can bring the phone back and stop the payments at any time (each month non-refundable). If they don’t bring the phone back they pay $900.
The message we must convey is that we really have no interest in selling our precious phones without some expectation that they will generate a lot more usage than 10 or 20 minutes a month. Thus, as we distribute our phones under the scheme above and deplete our inventory we should implement a “bounty” program to buy back the phones that are not really used.
We could also have lower usage programs, but at higher per minute costs. Maybe 500 minutes for $130 and 300 minutes for $90, as examples. I trust you get the idea even if the ultimate plan were somewhat different. What we really cannot encourage is the “insurance phone” that gets no use and yet depletes our inventory. In areas where Globalstar does not control the Gateways our dramatic satellite prices should only be available in concert with the IGO agreeing to slash their consumer prices.
TIME TO FIND OUT IF THERE IS DEMAND ELASTICITY?
The basic notion here is that lower prices will stimulate greater usage than we presently experience. While this is a fundamental part of economics 101, it is not known what the elasticity actually is. In other words, when prices are reduced 10% does that stimulate 10% more demand, or 20%? No one knows for Globalstar telephony service. While there are many things we cannot do during bankruptcy, because of lack of funds, it seems that we should be able to discover the answer to this question over the next few months.
If we discover that there is really no elasticity then we will know that the only realistic payoff may be from ATC or data or aviation security applications. During bankruptcy we cannot control any of these things. We can lobby the FCC, but they will make their decision in the manner they control. We do not have the money to invest to exploit data or aviation security at the moment. Our current assets, however, will let us find out whether satellite telephony really has any future. It is essentially the only thing we can do in the short run to try and improve revenues.
Moreover, and of significance, it will not really cost us much to find out. If we don’t sell the minutes we are not really any worse off than we are now. If we sell the minutes we are better off. It seems pretty simple to me. I know there are many people interested in Globalstar’s health who believe such an experiment is required. Some are shareholders. Some are Noteholders. Some might just be technically interested. Thus, to the extent that this experiment is positive I submit that the Rights Offering might be able to raise enough money to keep us going and we would find that we could “save ourselves” while waiting for the FCC or other potentially interested investors to become reasonable. I believe this is a no-lose situation given our current status.
BUT THIS REQUIRES BOLD, IMMEDIATE ACTION !!
EXPENSE REDUCTION
Now that I have defined the Mission (reduce the burn rate) and our immediate course of action to increase revenues (slash MOU prices, but encourage heavy usage), we can turn to reducing expenses. Every expense should be scrutinized to make sure that it supports the Plan. This is an emergency! The patient is bleeding to death on the operating table. Do we need all of the dedicated data lines from all over the world to every Gateway? For those we need, can we get a better deal? Can we renegotiate the San Jose office rent given how much space we are actually using now? Can we sub-lease? Should we consolidate into Sacramento? Are all of the remaining people with their current salaries crucial at this time? What do we really absolutely need from Qualcomm in the way of support given the hardware we have and the expertise we and others around the world have developed in the last two years?
Perhaps none of us knows all the answers to these questions, but I believe they need to be addressed and I think they should be addressed in such a way that the Noteholders can be a part of the assessment. We must obtain more information more regularly now. What is our current burn rate with a great level of detail? Given that the Noteholders will control the company we need to begin getting regularly the information that is being used to run the company so that we can become more familiar with the situation.
THE TIME TO MOVE IS NOW
While there is a lot going on, the central Mission cannot be lost sight of. We must work in dramatic ways to increase revenue and decrease costs. This must be done even as we continue negotiations about the TESAM situation or any others. It must go on even as the Vodafone USA transaction awaits FCC approval. In fact, we must fight hard to speed up the FCC action on this. How can we do that?
Are we organized appropriately to accomplish our objectives now? Are the burdens shared, or do a few people suffer under disproportionate loads? We cannot afford to be like deer caught in the headlights. We must make progress and we must take radical and bold action.
A NEW VOLUNTEER
Realizing that we only have limited human resources and time, I would volunteer to be responsible for the immediate formulation and implementation of an experiment within the U. S. and Canada to ascertain demand elasticity at minimal net cost to the company. I will work with the current sales and marketing personnel of the company and GUSA, as well as with senior management and other interested parties such as the Service Providers. I will not charge any fee at this time (just out-of-pocket reimbursement) and leave it to the later Board to determine, without any obligation, whether any remuneration is warranted. I expect this would result in being in San Jose at least two days a week initially.
I would welcome any comments or questions, but more than this I want to know whether there is acceptance or rejection of my offer. Time is wasting and so are the Globalstar assets.
KEN PETERSON
Chief Executive Officer
Columbia Ventures Corporation
360-882-1052 |
