*WorldlyInvestor. The Right Call on Iridium [I* speaks back]
April 23, 1999 5:14 PM EDT
worldlyinvestor.com
By Jeremy Pink
Editor-in-Chief
Earlier this week, our controversial analyst
David H.M. Baker wrote a column that praised
Globalstar Telecommunications (quote, chart,
profile) and at the same time told investors to
sell their holdings in Iridium.
Baker proved prophetic as Iridium's (quote,
chart, profile) CEO resigned, analysts
downgraded the stock and firm's stock price
plunged.
Not everyone agreed with Baker's assertions,
however, especially not the folks at Iridium.
Soon after we published Baker's column, we
received an e-mail from Marijke Jurgens,
Iridium's Director of Investor Relations, who felt
that Baker's comparison between Globalstar
and Iridium was unfair.
Who do you think is right? Baker or Iridium?
Click here to read Baker's story and you can
read Jurgens's e-mail below.
E-mail me with your thoughts at
jpink@worldlyinvestor.com and I'll post a story
with your comments next week.
Here is an edited version of Jurgens's e-mail:
Dear Mr. Baker,
Having read your recent article
regarding Globalstar and Iridium I must
set the record straight. We are very
accessible and would love to have the
opportunity to respond to your
assertions, which in our view were
written in a very biased manner.
Globalstar and Iridium systems were
designed very differently, which has led
to some confusion regarding costs and
capabilities.
Iridium is designed with inter satellite
links so a call can be made anywhere
on the planet and carried over the
satellite network until it reaches the
closest (or cheapest) gateway to its
final destination.
Globalstar is a bent pipe network,
which means that the satellite must
"see" a gateway (ground station) in
order to complete a call. Globalstar
needs to install 38-60 terrestrial
gateways to cover the world's land
masses (they currently have five built).
These gateways cost $20-$40 million
each and have not been factored into
the cost of the Globalstar network or
retail rates to end users.
As a result of our inter-satellite links,
Iridium becomes its own long distance
carrier capturing the largest revenue
portion of every call.
Iridium is able to net considerably more
from each revenue minute generated
over its system than Globalstar, with no
difference in retail rates to the ultimate
user.
You are misleading your readers when
you compare Globalstar's $0.45-$0.55
per minute wholesale rate (bent pipe
satellite piece only) to an international
retail rate of Iridium's ($3 to $7), and
this only becomes more confusing
when the international long distance
charges gets factored into the equation.
Iridium's domestic retail rates vary from
$1.79 per minute (all included) in the
USA to $1.30 retail domestic rate in
China. The variation depends on the
local carrier's charges.
These rates are very similar to those
recently quoted by France Telecom as
retail Globalstar rates ($1.75 + local
charges).
As for international rates, Iridium rates
vary according to location. A call from
Mongolia to the USA is likely to be
priced in the $7 per minute range, but
the local fees are likely to be close to
$6 per minute.
In this example a Globalstar call would
be $1.75 + $6. In our analysis, the
retail rates of the two companies are
likely to be very similar, with
exceptions varying from region to
region.
I am assuming that your estimate of
Globalstar's $0.14 cost per minute is
based upon their 7-10 billion minutes
per year calculation. Please note that
Iridium's 1.5 billion minutes per year is
based upon a traffic model that
assumes that most traffic is generated
just outside city centers, outside the
cellular network range (within 200
miles) and come within specific hours.
We have not counted capacity in
deserts or other remote regions.
Iridium has seven to ten billion minutes
of system capacity, however unless we
can persuade users to spread
themselves evenly over the globe and
use the system equally over a 24 hour
basis one cannot reach those numbers.
As a result we have come up with what
we feel is a conservative estimate of
system usage. This number will
increase or decrease based upon what
the actual traffic looks like.
Of course this is a moot point for
Globalstar because it will never reach
any of these numbers until it gets its
gateway ground infrastructure rolled out
globally.
I do not believe that this is a win/lose
business, both companies are likely to
become profitable and provide a good
return on investment for their
shareholders.
Sincerely,
Marijke Jurgens
Director Investor Relations
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