Jubak's Journal. Pie in the sky for satellite wireless
moneycentral.msn.com
Posted 2/2/99
Think the technology was tough? Wait until Iridium and
Globalstar try to market their phone service.
By Jim Jubak
Excited by Iridium World Communications, Globalstar
Telecommunications, the still-private Teledesic or any of the
other companies building satellite-based wireless phone
networks?
After all, if Bell Atlantic (BEL) was willing to pay $45 billion
for AirTouch just to build a coast-to-coast network in the
United States, what's the stock of a company that owns a
global wireless network worth?
If you want to play any uptick that these stocks will get when
they get their technology working this year and next, go
ahead. But if you're thinking out longer than six months, I
think you'd be wise to cool your jets. Marketing realities are
likely to bring these technology companies back to earth at
least once this year -- well before any of these stocks start a
sustained upward move.
Marketing, rather than science, is the key to these
technology companies. I certainly don't think that makes
these companies unique. In fact, I think there are lessons
here for any investor who is thinking about backing a stock
that's trading on the promise of future earnings.
It's easy to overlook the mundane facts of marketing when
the technology has been as difficult to execute as it has been
in this industry. The big failures have been spectacular. For
example, when a rocket with 12 satellites on board blows
up, as happened in late 1998 at a Globalstar (GSTRF)
launch, you can be sure everybody notices.
But the nitty-gritty details haven't exactly been a piece of
cake either. Think it's easy to build a small wireless phone
that will talk to a satellite? Iridium (IRIDF) missed its
well-publicized Nov. 1 launch when a series of software
glitches took down the network unexpectedly.
After overcoming problems like these, it only seems fair that
getting the birds into the air and talking to the ground stations
and individual wireless phones should guarantee success.
But it doesn't. The real, tough work of identifying customers
and selling them on the product has really just started.
Iridium's ambitious goals
Iridium is the company closest to launching service and since
it has actually started to sell phones, investors can actually
get a pretty good handle on the company's cost structure
and some of its assumptions. Let's use Iridium as an example
and see how the marketing numbers play out.
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At the end of 1998, Iridium had about 3,000 customers. The
company is counting on finishing 1999 with 500,000 to
600,000 customers. If it can reach that goal, the company
believes it would become profitable in early 2000. How
likely is that and how expensive would it be?
A good place to start to answer those questions is with the
cost of the product. At a time when the price of a minute on
a land-based wireless phone is dropping toward a dime and
companies are selling phones for $50 or even a penny, the
cost of an Iridium phone seems shockingly high. A handset
costs around $2,500 -- before such add-ons as a pager.
The price of airtime varies depending on where the call
begins and ends. In November, charges ranged from $2.50
a minute from a point in Japan to another point in Japan to
$10.20 a minute from Latin America to China.
Those costs are important not because they argue that no
one will use the service -- there's definitely a market for
Iridium -- but because they help determine how
time-consuming and expensive it will be for the company to
find its customers. At $2,500 for a phone and at an average
$5 a minute, Iridium service isn't for everyone. It makes
sense for the oil company executive who travels to
Azerbaijan or for the Hewlett-Packard manager setting up a
plant in Hunan, but it probably doesn't make sense for you
and me.
So how will Iridium market its products? Certainly not by
mailing out millions of CDs to every U.S. home, as America
Online (AOL) does. That works when half of the addresses
in the country house computers and are owned by potential
customers. If Iridium had to rely on mass marketing to find
the customers lurking out there like needles in the haystack,
the company would go broke.
There simply isn't any way to mass-market an expensive
niche product and make a profit. America Online spent $95
million in the most-recent quarter -- an annualized $380
million -- on marketing. That only works for America Online
because, with its mass-market product, it was able to add
1.6 million new customers in the quarter. Cost: About $60
each.
Fortunately, Iridium doesn't have to do this. (But that doesn't
mean that it won't anyway; the company is now running
prime-time television ads.) In its original prospectus, Iridium
claimed that its customers were the 42 million traveling
professionals in the world. Well, that's a neat number if
you're trying to raise money from investors, but all of us who
travel for our jobs know that only a very small percentage of
our peers are really potential Iridium customers. In reality,
almost all of Iridium's potential customers work at the 8,000
companies in the world with more than 1,000 traveling
professionals in their employ. To make its sales, Iridium
needs to get its foot in just a few thousand front doors. The
sales model isn't America Online-style direct marketing or
Coca-Cola (KO)-style mass-media advertising, but the kind
of intense relationship building that drug companies such as
Pfizer (PFE) and Warner-Lambert (WLA) practice.
Appealing to business travelers
Here's the trade-off, though, and it's an important one. Mass
marketing is expensive, but it isn't time-consuming. A
company using tactics like mass-media advertising or
mass-mailings of promotional samples doesn't have to train a
huge sales force and then put it out on the street. For
example, America Online has 8,500 employees. Pfizer, the
owner of the biggest marketing force in the drug industry,
has 14,500 salespeople. Iridium has around 490 employees.
I don't think that
either a
reorganization in
headquarters or a
deal for mindshare
on airliners is
going to get
Iridium from 3,000
phones now to
500,000 phones by
the end of 1999.
Iridium is so lean because it's a consortium of 18 companies.
Members such as Stet Hellas Telecommunications
(STHLY), the second-largest mobile-phone company in
Greece, and Sprint (FON) are supposed to provide sales
and service for Iridium.
There are signs that this decentralized marketing effort hasn't
worked well so far. Iridium recently has reorganized its
internal Washington D.C.-based sales force in an effort to
pick up the pace. The company recently bought Claircom,
an operator of a digital air-to-ground phone network that
has access to 100,000 phones in airplanes, for $65 million. I
see that deal as a smart marketing play since it will help get
Iridium's product in front of business- and first-class
travelers, the company's prime market.
But I don't think that either a reorganization in headquarters
or a deal for mindshare on airliners is going to get Iridium
from 3,000 phones now to 500,000 phones by the end of
1999. Call this a year for seeding the phones into the biggest
companies in the world.
Nothing wrong with that. And Iridium will get some mileage
out of being the first satellite communications company that
can actually sell service. Globalstar, for example, isn't
expected to start selling service until late in 1999 or early
2000. Iridium will have pretty much a whole year to open
doors without having to fend off competing vendors.
Details
Company Report
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Earnings Estimates
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Research Wizard
Rivals at the flank
What does all this mean for the stocks of Iridium and
Globalstar, the next company likely out of the chute with
service? In the short run, I think the implications are actually
pretty perverse. Iridium's stock should rally when the
company finally rolls out full-scale service. The stock has
been depressed lately on news of various technical problems
that have produced high levels of dropped calls, for
example. Getting issues like that fixed can only help the
stock. But I think Iridium is likely to miss Wall Street
expectations badly for customers and sales this year. If
customer numbers in the first quarter don't look likely to
result in the 500,000 the company has led Wall Street to
expect, look out.
Globalstar, on the other hand, is a year away from launching
service. Technical problems at the network have been so
visible that I don't think anyone on Wall Street is even taking
a second to think about marketing. With recent progress in
circulating enough satellites to begin service, Globalstar has
outperformed Iridium recently. I think that pattern could
continue in 1999 as Globalstar solves its technology
problems and Iridium begins visibly to wrestle with the
marketing problems that its competitor won't face fully until
2000.
In the long run, this one will be won in the marketing
trenches. But we're still a year away from the beginning of
that game.
Frankly, I'd worry less about this if the satellite wireless
companies weren't swimming against some strong trends in
the larger wireless industry. The trends there are for universal
service (right now, that means national rather than global
networks) priced at a level competitive with traditional
long-distance using increasingly standardized hardware
rather than proprietary systems. AT&T (T), the company
that's driving the industry in the U.S., is a good example --
the company's bundled service offers consumers a single
price for wireless and traditional long-distance minutes and
combines those services on one bill with AT&T's Internet
service. We're clearly headed for the time when we'll use
just one phone number for calls, no matter what device
we're using.
I'd rather ride that trend for the next year than bet on the
untried marketing prowess of Iridium and Globalstar. My
picks in wireless right now would be Nextel
Communications (NXTL), one of just three national wireless
service providers in the U.S., and Nokia (NOK.A),
currently the No. 1 maker of wireless phones in the world. I
think either of these stocks is a good long-term holding, and
they also both promise enough of a return within the 12-18
month time horizon of Jubak's Picks for me to add them to
that portfolio.
My 12-month price target on Nextel is $42.50, a potential
31% gain. Nokia has pulled back recently on fears of a
slowdown in the company's global markets. I think that's a
good buying opportunity. My 12-month price target for
Nokia is $178, a potential 27% return. |
