**DJ. After Iridium Debacle, Sat-Phone Firms Face Big Risks
August 12, 1999
Dow Jones Newswires
By SCOTT EDEN
NEW YORK -- Even with Iridium World Communications LLC (IRID)
on the brink of bankruptcy and its $5 billion satellite system in danger of
becoming an orbiting junk yard, three other go-anywhere phone
companies remain committed to probing the same frontier.
Do they stand a chance?
After all, a well-financed company with state-of-the-art technology failed
to convince enough customers they need satellite-piped communications
from the world's most remote regions, like Mount Everest or the Sahara
Desert. That company, Iridium, defaulted on $1.75 billion in loans
Wednesday and attracted only 10,300 subscribers as of March out of the
52,000 called for by its loan covenants.
Among Iridium's future competitors, Globalstar Telecommunications Ltd.
(GSTRF), ICO Global Communications Holdings Ltd. (ICOGF) and
Ellipso, a project controlled by closely held Mobile Communications
Holdings Inc., all have multibillion-dollar satellite networks in various stages
of development.
They all face questions raised by Iridium's problems about the basic
demand for satellite-telephone services, even though many concede a
series of glitches by Iridium itself contributed to its dearth of customers.
For instance, none of the phones built by the three companies will work
indoors, a source of many complaints and an unwelcome discovery made
by CNN war correspondents in Kosovo - which added to the bad
publicity.
In fact, there doesn't appear to be much qualitative difference between the
companies' end-user services, although they all rely on differing
technological backbones.
"It's a battle of experts," said Armand Musey, analyst with Banc of
America Securities LLC. According to some early rumors, however,
Globalstar's sound quality and signal strength might prove better than
Iridium's. A weak beam irritated Iridium users because it forced them to
find the most direct line of signal-travel between phone and satellite.
The problem doesn't appear to be the potential size of the satellite-phone
market, either; most people believe it's large enough to support four
players. According to Musey, the market could reach $17 billion by 2005.
Projections from the companies themselves put subscription totals for the
industry at 30 million to 40 million people by 2005, Musey said.
The first to go online in the wake of Iridium's near collapse will be
Globalstar, a $3.5 billion 52-satellite system backed by Loral Space &
Communications Ltd. (LOR). It's set to flip the switch on most of its
satellites late next month or in early October, with the entire network
beaming voices by the end of 1999.
There's a lot riding on that product launch. Analysts and investors are
hanging their hopes for the industry on the success, or lack thereof, of
Globalstar's product roll out. If a sustainable market truly exists,
Globalstar will have to prove it, these industry watchers believe. As one
analyst said, "If Globalstar doesn't go, no one will."
Globalstar Financing Is In Place
Working in its favor, Globalstar, unlike its peers, seems to have a
majority of its financing in place, Musey said. His firm's parent company,
Bank of America Corp. (BAC), along with several other banks recently
lent a significant chunk of money Globalstar with collateral put up by the
deep-pocketed Loral.
In addition, some think Globalstar has a better-defined target audience
than did Iridium. Instead of selling services to international business
travelers, Globalstar will focus on regional users, people in developing
countries or remote parts of the U.S. where elaborate land-line or
cellular-phone networks don't exist. Some of Globalstar's initial areas will
be Argentina and South Africa.
Iridium's biggest problems, however, were with distribution: It didn't have
enough handsets to meet even its slower-than-expected customer demand,
and some of its service providers didn't push the product with as much
gusto as possible because they were also selling cell-phone service in the
same regions.
Although analysts believe Globalstar has plenty of handset supply and
better relationships with its marketers, which include Vodafone Airtouch
PLC (VOD), France Telecom (FTE) and China Telecom, it still faces the
possibility of some lax salesmanship.
"They've got a lot of things to worry about," Musey said of Globalstar's
developing-nation service providers, struggling to unload their
cellular-phone services to customers. "Is selling Globalstar going to be on
the top of their list?"
Behind Globalstar by about a year in terms of a market launch, IOC
Global could find itself in as precarious a cash-squeeze as the Iridium. "If
their (financing) doesn't come through, they're really in bad shape," Musey
said.
IOC has said it needs to raise $600 million after a disappointing recent
public offering of shares. Investors stayed away from the deal following
Iridium's financial unraveling, which also undermined the fund-raising efforts
of Ellipso after aerospace giant Boeing Co. (BA) yanked its financing.
Although word came Thursday that one of IOC's minority investors,
Hughes Electronics Corp. (GMH), might inject $600 million into the
struggling company, IOC would still need another $1 billion to stay afloat,
analysts said.
But in a research note, analyst William Kidd of C.E. Unterberg Towbin
Co. outlined the risks financial backers like Hughes and Motorola Inc.
(MOT), an Iridium stakeholder, face when taking stakes in unproven
satellite-phone companies. Including its investment and its contract to build
IOC's satellites, Hughes has some $500 million to $575 million in exposure
to IOC, Kidd said.
-Scott Eden; 201-938-5173 |
