Is the Sky the Limit for ICO Global Communications?
May 7, 1999 6:41 AM EDT
By Emily Burg
Correspondent
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England's ICO Global Communications
(quote, chart, profile) is a satellite phone
service provider and a cellular phone
service provider.
It competes with the likes of higher profile
companies Iridium (quote, chart, profile)
and Globalstar (quote, chart, profile), but
ICO has a built-in advantage over both -
ICO has an almost guaranteed revenue
stream that should keep it afloat should
the satellite business hit snags.
That makes ICO a less risky play on the
high potential mobile satellite systems
(MSS) sector than either Iridium or
Globalstar.
MSS in Action
MSS is the next wave in the telecom
industry. Over the past year, Iridium and
Globalstar have received investor
attention largely because of their
concepts, and on the hype that MSS will
hit big.
This is because although the concept of
being able to use one phone anywhere in
the world is brilliant, the implementation
of the technology, and the business plan
required to get such an operation off the
ground is very complicated.
But then came Iridium's high-profile
meltdown, during which the stock price
plummeted and the top management left
the company. Investors suddenly realized
that they weren't comfortable keeping
their money in an idea anymore. This has
led to skepticism about the viability of
MSS altogether.
Analysts at Merrill Lynch have picked up
on the trend of investing in the concept
rather than the results as applied to the
MSS, and have commented that a
change is imminent.
"In the past, top performing stocks in the
satellite sector were those of early stage,
pre-revenue companies whose stocks
traded upon technical, financial and
regulatory milestones. In the short term,
we expect investors' attention to shift
away from early stage ventures to
companies with current revenues and
cash flow.
"However, as the first generation of
'public venture capital' issuers such as
Globalstar and Iridium substantiate
investors' expectations, pre-revenue
companies should recover their luster,"
write analysts at Merrill Lynch in a recent
report on the Global Satellite
Marketplace.
That means good news for ICO, which is
scheduled to earn revenue by 2000. And
from an investor's perspective, a rise in
Globalstar's share price, which coincided
with a fall in Iridium's, has also benefited
ICO.
Real Customers
One of the biggest criticisms of
competitor Iridium has been that the
company lacks a strong business plan
and target audience. ICO is more
focused on both fronts. Although the
company has yet to post a profit, ICO's
services cover a wider range than Iridium,
whose mobile satellite services are
aimed solely at top-level executives
whose work takes them to the far-flung,
underwired reaches of the globe.
ICO's first venture into international
wireless communications was the
implementation of its ICOroam system,
launched in October 1998. It enables
European cellular phone subscribers to
use their digital GSM standard phones in
North America, where the standard for
wireless communications is CDMA or
TDMA.
ICO also makes "specialty mobile"
phones, designated for use on small
crafts, ships, aircraft and land vehicles.
All handsets will be dual mode, allowing
customers to choose whether or not they
want to use satellite or terrestrial
systems.
ICO's satellite system is supposed to go
live in mid-2000. A comprehensive
telecom system, the ICO MSS will
provide digital voice, data, fax and
messaging services through a handset
that will be comparable in size and shape
to a regular cellular phone.
NEC (quote, chart, profile) and Mitsubishi
(quote, chart, profile), Samsung (quote,
chart, profile) and Ericsson (quote, chart,
profile) are all competing for contracts to
produce ICO handsets.
ICO routes its calls through its ICONET
network, comprised of 12 satellite
access nodes (SANs). Some of ICO's
partners include Deutsche Telekom
(quote, chart, profile), Hughes Network
Systems (quote, chart, profile) and NEC.
Analysts at Merrill Lynch forecast a
10-year, 42% compounded annualized
growth rate in demand for MSS. The
exorbitant cost of handsets, a big
problem for Iridium, has impeded the
success of MSS, but Merrill predicts that
handset prices will fall considerably. This
will no doubt have an impact on the
predicted 90% margins for MSS.
When it comes to investing in MSS,
maybe it's a case of not letting one bad
apple ruin the whole barrel. Growth
prospects for the MSS sector are huge,
thanks to an expected subscriber base of
40 million.
That means that a company like ICO,
with a first-in advantage as well as a
diversified range of service offerings, can
offer great long term returns for the long
term minded investor.
Analysts at Merrill Lynch recommend
proceeding with caution before investing
in the MSS sector, but advise investors
to keep their eyes peeled for good news
for the sector in the future.
"We believe that start-up challenges for
these companies (MSS companies)
suggest caution in the near term but
advise investors to watch for early signs
of large scale subscriber pick-up," write
Merrill Lynch analysts.
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