All,
If you haven't seen this:
Before long, the skies will be clogged with more than a thousand new satellites, some designed to let you use your wireless phone from anywhere on the planet, others to provide superfast Internet access. The first of these new satellite systems, Iridium, is scheduled to start operating in the fall. Others plan to follow shortly thereafter. But don't get too starry-eyed. The risks are immense. Already there have been failed satellites and botched launches. More will follow.
For investors, the most important question is whether enough customers will materialize to keep all these new systems in business. And it is investors, after all, who are being asked to pony up a large part of the estimated $100 billion it will take to turn all these lofty plans into reality.
Lost In Space | How the Satellite Ventures Stack Up
Merrill Lynch, in a highly optimistic report, projects that global demand for phone-calling via satellite will reach $31.6 billion a year by 2007, up from about $1 billion today. By that same year, Merrill figures, the annual revenues for internet access and data transmission conducted via satellite will hit $37.5 billion, compared with maybe $200 million right now. On top of that, Merrill expects the now-tiny practice of taking pictures of the earth via satellite to reach $6.5 billion in revenue by 2007, and radio transmissions via satellite, another nearly nonexistent business, to hit $8.2 billion.
Given such robust growth projections, not to mention the need to raise that $100 billion, you can easily understand why Wall Street's investment bankers are drooling. To date, their best clients have been Iridium and its chief rival, Globalstar. Each has raised $1.4 billion from junk bonds, and each has been wildly successful in the stock market. Since first issuing shares to the public last June, Iridium has seen its shares jump nearly threefold, to a recent 56 3/4. Globalstar's shares, which debuted in February 1995, have skyrocketed from a split-adjusted $5 to more than $60, a gain of better than 1,100%. These ebullient stock prices mean Iridium
is now valued at $8.1 billion and Globalstar is worth $7.5 billion -- and they aren't even operational yet. Eager to get their own piece of this pie in the sky, investment bankers are busy lining up new stock offerings. ICO, a London-based company that is considered the third serious player in the satellite-telephony business, will likely
issue shares to the public as early as this summer. Orbcomm, a venture owned by Orbital Sciences andTeleglobe, recently filed to make an initial offering to raise up to $137 million. Stock offers for Ellipso
and ECCO, both satellite telephony projects, seem likely next year. And a year or two down the road, you'll probably see one for teledesic, a proposed $9 billion satellite system that's meant to deliver lightning-fast Internet access. Teledesic was dreamed up by billionaires Bill Gates and Craig McCaw.
So, should you climb aboard when the next stock offer hits the launch pad? Given the trajectory of Iridium and Globalstar shares, the idea is tempting. But be careful. Over the next few years, as technological, competitive and regulatory obstacles emerge, several of today's promising satellite projects could turn into so much space debris. What could go wrong? You name it. Exploding rockets. Flawed satellites. Uncooperative regulators. Political scandal. Even price competition. Consider, for instance, the sudden demise of Galaxy IV. A communications satellite operated by PanAmSat, Galaxy IV became front-page news when it stopped working and temporarily knocked out most of the country's pagers. While industry executives insist that kind of failure is rare, it demonstrates the
problems caused by misbehaving satellites. You can't just take out a big ladder, send up a guy in overalls and a tool belt and have him fix it. And then there's the China controversy. Republican legislators have raised questions about the relationship between Loral Space & Communications, one of the most active satellite companies, the Democratic Party and the government of China. At issue is whether the Clinton Administration improperly allowed Loral, headed by big-time Democratic contributor Bernard Schwartz, to help the Chinese government figure out why one of their rockets blew up. Loral and other satellite companies use Chinese rockets to launch satellites, but one could use them to launch nastier payloads.
Schwartz says neither he nor Loral did anything wrong, but some Congressmen want to bar the use of China's Long March rockets by U.S. satellite companies.Steven Dorfman, vice chairman of Hughes Electronics, a division of General Motors that has made use of China's Long March rocket, warns that blocking access to the Long March "would have a negative impact on American industry."
Keep in mind that the limited menu of alternatives includes both Russian and Ukrainian rockets. It's not hard to imagine a similar controversy over those. You want more things to worry about? Scan the "risk factors" section of the current prospectus for Orbcomm. Orbcomm is building a network of 36 low-orbit satellites for simple data collection -- mundane tasks like remotely reading electric utility meters, tracking truck fleets and monitoring security
systems. The $332 million network, targeted for completion in late 1999, uses small, cheap, low-earth-orbit satellites. The snags Orbcomm has suffered demonstrate where some of the dangers lie for all of these projects. Among other things, Orbcomm's satellites have had disturbing technical glitches. So far, Orbcomm has 10 in orbit. Of those, according to an SEC filing, eight have "experienced
an anomaly in their solar power system resulting in reduced
power margins." Orbcomm says they still produce enough power to do work -- except that two of the eight also "have experienced an anomaly in their subscriber transmitters," which means they
can't communicate with the ground. Orbcomm is attempting a software fix to work around the "anomaly." Even if the fix is successful, the coverage area for those satellites will be reduced. Orbcomm also notes that its first two satellites, launched in 1995, have suffered electronic outages, and one of them has been out of commission since
mid-February.
Other things can go wrong on the ground, including launch timetables and budgets. In Orbcomm's case, the launch schedule is running nine months behind what they projected in an August 1996 debt offering circular. Over that same
span, the anticipated cost of the Orbcomm system has increased 29%, due to
an increase in the number of satellites, among other things. Cost creep can
affect bigger systems as well. Marco Caceres, senior space analyst at the Teal
Group, in Fairfax, Virginia, notes that the original cost estimate for Iridium was
$1.2 billion. The latest guess: $4.4 billion.
Keep in mind, too, that launching satellites is an inherently risky endeavor.
Globalstar, for instance, plans three launches this year, each carrying 12
satellites, using the Zenit, a Ukrainian rocket. But the Zenit has a nasty habit of
blowing apart -- four of the last 28 Zenit launches have failed -- and the rocket
has never before been used for a commercial launch. Even when launches are
successful, satellites can inexplicably fail -- Iridium's network, now in place and
soon to begin operation, already includes five dead satellites.
But perhaps the biggest danger to the satellite industry involves their business
model. All of the satellite phone companies will be reliant on dozens, even
hundreds, of wired and cellular phone companies to sell their wares, handle
billing and interact with customers. While almost everyone agrees that the
potential market is huge, no one really knows how long it might take for the
services to be adopted, or how well the satellite companies can control their
distribution networks. The optimists expect a success story akin to cellular
service, blowing past even the most wide-eyed projections.
Maybe so. But the danger level is high, and the current investment options for
betting on the service providers -- Iridium and Globalstar -- are anything but
cheap. If you feel the urge to bet on the growth of the satellite industry, the
safer route would be to focus on the diversified satellite companies, in particular
Loral and Hughes. Companies seem sure to keep buying satellites, no matter
who wins the coming shoot-out in space.
While mulling over the risks, take a moment to understand what makes these
new satellite systems different from one another. The most ambitious new
projects rely on satellites that are in low or medium orbits above the Earth.
These are known as LEOS or MEOS. Historically, most satellites have circled
the Earth in geosynchronous orbit, more than 22,000 miles above a fixed spot on
the surface. Those satellites, called GEOS, for their geosynchronous Earth
orbits, can serve huge areas of the globe. But their high orbits -- the Space
Shuttle, by contrast, orbits at 150 miles -- creates an annoying glitch. The time it
takes for a caller's voice to go from the ground to the satellite and back creates
a fraction of a second delay, which makes normal conversation awkward.
Blame those darned laws of physics -- you just can't transmit faster than light
speed. The problem explains why transoceanic calls are carried by undersea
cable, rather than by satellite. Low-orbit satellites, however, avoid the timing
problem.
Having demonstrated an ability to
design a low-orbit system, attract
capital, cut nightmarish red tape, get
satellites built and launch them, Iridium
now faces its toughest test. On
September 23, the company begins
operations, and we all get to find out
who will pay up for its service. Iridium
CEO Edward Staiano has set an
ambitious initial goal: He aims to break
even a year after service starts.
First conceived by Motorola in 1987, Iridium will knit together 66 satellites in the
most technically ambitious of the sky-borne telephone systems. Iridium will use
its satellites to switch calls in space, sending signals from one satellite to another
before being downlinked to the ground station that offers the most economical
route to a call's destination. Other systems use a more traditional "bent-pipe"
design, meaning that calls go up to the satellite, then back down to the nearest
ground station, and from there they join the terrestrial network.
Iridium's elaborate design makes the cost of an Iridium call far higher than the
projected cost for rival services. You can figure $3 a minute for the average
Iridium call, versus less than half that for rivals. For the short stretch in which
Iridium has the market to itself, pricing won't be much of an issue. But as new
competitors get their systems up, Iridium's high prices will be difficult to
maintain. Jerry Waylan, CEO of Constellation Communications, sponsor of the
Iridium rival called ECCO, puts it this way: "Anybody who says anything other
than the following is missing the boat -- pricing will come down."
But not right away. Says Iridium's Staiano, "If you call from an Iridium phone to
a regular phone -- we expect the vast majority of our calls to be made that way
-- it's probably going to cost 30%-35% more than if you were somewhere in the
world calling from a hotel room using USA Direct. You'll pay a premium for the
privilege of making the call without a wired phone or nearby cellular tower."
Certainly, as the first to market, Iridium will attract early adopters, whatever the
price. And Iridium will spend freely in an effort to build a global brand. Staiano
says the company will spend $140 million on advertising, acquiring customer
database information, and developing affinity programs. This despite the fact
that the company won't be providing service directly to consumers. Instead,
Iridium has developed a three-tier business model. It will operate the satellite
network and provide service wholesale to 15 regional gateway operators. (The
Defense Department gets a gateway of its own.) The gateway operators then
re-sell service to local carriers and roaming partners, a group that as of last
week included 209 companies, covering 60% of the world's population.
Iridium will spend most of its resources targeting two groups -- industrial
markets and international travelers. The first segment includes miners, shippers,
drillers and relief agencies -- in short, any institution that sends people to places
without decent phone service. Staiano counts more than four million potential
users in that category, and he figures Iridium can get a quarter of them.
Soundview Financial analyst Tim O'Neil thinks the industrial niche could prove
to be the most lucrative part of Iridium's business. "They should provide faster
adoption, higher usage and more loyal customers," he says.
Staiano counts the international-traveler market at up to 30 million people,
though Iridium will make sense only if you spend time in areas without cellular
service, especially given the coming generation of cell phones, which will allow
you to use your cell phone in pretty much any location that has a cellular
network. In other words, Iridium won't help much for travelers to London,
Tokyo and Paris. And for more than one reason, actually. Satellite antennas
need a clear line-of-sight. That means they're not very effective inside buildings,
or in places with lots of skyscrapers, like lower Manhattan, for example. More
useful for urban travelers will be Iridium's global paging and messaging
services, which cover the entire earth and can penetrate most buildings with a
page or a message.
Iridium's chief rival, Globalstar, continues to lag some months behind. A project
dreamed up by Loral, Globalstar plans to start service in early 1999. Globalstar's
network will have 48 low-orbit satellites; eight have been launched. Assuming
no problems with its three Zenit satellite launches, Globalstar will provide
Iridium with tough competition. For one thing, the system will be a lot less
expensive, $2.7 billion, versus $4.4 billion for Iridium. That will allow Globalstar
to undercut Iridium's pricing -- figure 65 cents to $1 a minute at retail, versus
$3. Globalstar's handsets will be cheaper, too, running $750, rather than $3,000
for Iridium's.
"We've constructed a satellite system that's very simple, with all the complexity
of the processing done on the ground, not in the air," says Bernard Schwartz,
CEO of both Loral and Globalstar. "Iridium does satellite-to-satellite
cross-linking, which is expensive. They would argue they gain some quality, but
I would doubt anybody could discern that." Globalstar will also have far more
capacity. Schwartz says Globalstar can handle seven to 10 million subscribers,
versus five to six million for Iridium and ICO combined.
Globalstar, though, has its own particular risks, not the least of which is their
above-mentioned dependence on the none-too-reliable Zenit rocket. Assuming
the Zenits don't cause a problem, Globalstar will have to establish itself in the
face of a marketing blitz from Iridium. Thomas Watts, an analyst at Merrill
Lynch, pointed out in a recent report that Globalstar will be far more reliant than
Iridium on local partners to market the service. Where Iridium will spend a
fortune to establish a brand, Globalstar has chosen to act as an unbranded
wholesaler.
Schwartz isn't worried. "In 2002, our marketing plan calls for just 80,000
subscribers in India," Schwartz says. "That's not a big hurdle. We expect 20,000
in Greece, 200,000 in Brazil, 200,000 in Russia. Our capacity will be used up by
low-hanging fruit." In all, Globalstar forecasts three million subscribers by 2002,
producing more than $2 billion in annual revenues. For investors, though, that
doesn't leave a lot of room for error, with the stock effectively trading at close
to four times the revenues that are expected four years from now.
Starting in 2000, Iridium and Globalstar will face new competition from
London-based ICO Global Communications, a company originally part of
Inmarsat, the international maritime satellite consortium. Now independent, ICO
faces the obvious quandary of coming to market at least two years behind its
primary rivals. But it should be a formidable adversary, thanks to a list of
investors that includes all of the more than 50 members of Inmarsat, many of
them huge state-owned phone companies.
ICO will use medium-orbit satellites, built and launched under a $2.5 billion
contract with Hughes, which has an equity stake in ICO. While ICO will use a
traditional bent-pipe design, there's a twist. The company has set up its own
fiber-optic network, ICONet, to help keep down the cost of the earth-bound
portion of each call. In a sense, they'll do on the ground what Iridium does in the
air -- carry traffic off the normal public telephone network.
ICO figures its network will be easier to build and maintain. It won't be any
cheaper, though, costing $4.6 billion, on a par with Iridium.
Like Iridium, Globalstar and ICO will target both industrial markets and business
travelers. But Globalstar and ICO also plan to offer basic service to people now
not reached by cellular or land lines, a market Iridium has decided to avoid
because of cost. ICO Executive Vice President Fredrik Verkroost figures there
are three billion people who fall into the underserved category, as many as 100
million of whom would sign up for telephone service if they could get it. One
way to address part of that market will be with a type of remote, solar-powered
phone booth.
The key problem faced by Ellipso and ECCO, the other primary satellite phone
projects, are their late start -- being the fourth or fifth player in the market isn't
ideal. Each has some unique features, though, which could help them survive.
Ellipso, created by privately held Mobile Communications Holdings, plans a
17-satellite system, most operating in an unusual elliptical orbit. Ellipso has
heavyweight partners -- Boeing will be the prime satellite contractor, and
Lockheed Martin will make the ground stations.
Thanks to those elliptical orbits, Ellipso's satellites will spend two-thirds of their
time over the Northern Hemisphere, which Mobile Communications considers
more lucrative than the Southern Hemisphere. Ellipso thinks it can keep costs to
50 cents a minute during peak times and 35 cents off-peak. In fact, Ellipso say
out loud what their rivals won't: that the company intends to bring prices below
those of terrestrial cellular service. Says spokesman Brian Willard, "Our goal is
to bring low-cost telephony to the world." The planned debut of Ellipso's $1.4
billion project is 2001.
That same year should see the rollout of ECCO Equatorial, the first phase of a
project sponsored by privately held Constellation Communications. ECCO
Equatorial will use 11 satellites to provide service to a quarter of the Earth's
population. By the end of 2003, Constellation will unveil ECCO Global, with the
addition of another 35 satellites. Orbital Sciences will build satellites for the first
phase of the project, which is backed by Bell Atlantic and Raytheon, among
others. The smaller first phase of the project should cost less than $1 billion, the
second phase about twice that.
There will be some additional competition from regional projects using one- or
two-satellite high-orbit systems. While suffering the usual geosynchronous
signal latency, those systems will be cheaper to build and operate than the big
low-orbit systems like Iridium and Globalstar. ACeS, a project led by Pasifik
Satelit of Indonesia, Philippine Long Distance Telephone and Jasmine of
Thailand, will target Southeast Asia, India, China and Australia. Etisalat, the
United Arab Emirates phone company, is building Thuraya, a project targeting
the Mideast, Turkey, Iran, India, Central Asia, North Africa and Eastern
Europe.
One thing the satellite phone companies won't do effectively is transmit data --
at a top speed of 2,400 baud, they wouldn't be much good for surfing the Web.
That's where Teledesic and its rivals in broadband satellite service come in.
These companies will provide fat data pipes for Internet access, virtual private
networks, video-conferencing, interactive gaming and myriad other applications.
The market won't lack for competition. The Teal Group's Caceres counts at
least 60 proposed broadband satellite systems, with a combined price tag of
$130 billion.
The most imposing project is Teledesic, which has received funding not only
from Bill Gates and Craig McCaw but also from Boeing and from another
billionaire, the Saudi Arabian investor Prince Alwaleed bin Talal. Teledesic
recently struck a crucial deal with Motorola which instantly eliminated its most
direct competitor. Motorola, which been planning a comparable service called
Celestri, instead agreed to combine forces with Teledesic, providing $1.5 billion
in cash and technology for a 26% stake. This suggests that Motorola executives
think the project is already worth almost $6 billion.
Teledesic, born in 1990, will provide extremely rapid data transmission, 64
megabits per second downstream, to be exact, which is about 2,000 times faster
than a 28.8 modem. The uplink is slower, though at two megabits per second,
it's still faster than the T-1 line you may have in your office.
In short, it's the wireless equivalent of fiber optics. While Teledesic could
theoretically be used for some wireless-phone applications, what the system will
do best is provide broadband data to fixed points, using an antenna the size of a
laptop computer. The first satellite launch is planned for 2001, with full service
available in 2003.
Teledesic has the potential to provide the equivalent of "fiber to the curb,"
delivering nearly limitless data-transmission ability to homes and offices. Few
people have real fiber access today. For the most part, such fiber lines are used
for "trunking networks," capable of aggregating large volumes of traffic. For
individual users, says Teledesic CEO Russell Daggatt, the economics of fiber
don't work. "Even in this country," he says, "we're virtually starting from scratch
when it comes to broadband access."
Though the bulk of Teledesic's business will initially come from corporate
customers, to the average bandwidth-starved technology reporter, Teledesic
sounds like Nirvana. "We'll be able to provide anyone, anywhere, the equivalent
of optic fiber," says Daggatt. "No part of the world will be left without that
capability." While telephone companies are installing fiber at a rapid rate,
Daggatt doubts they'll ever catch up to demand. "The terrestrial infrastructure
will never be anything approaching ubiquitous," he says. "To provide global
connectivity, you have to look to satellites."
Barrons: June 15,1998
Have a great weekend <(*.*)> |
