Globalstar chief confident of success. Schwartz dismisses Iridium parallels, sees big market
Soapbox
By Jeffry Bartash, CBS MarketWatch
Last Update: 5:01 PM ET Sep 13, 1999
Movers & Shakers
WASHINGTON (CBS.MW) -- Bernard Schwartz, the well respected
boss of Globalstar Communications, has established a stellar track record
over 30 years as a chief executive. In 1972, he took over defense
contractor Loral Corp., then with a market capitalization of $7 million,
and turned it into a multibillion company.
Three years ago, Schwartz sold the defense business for $9 billion and
renamed the company Loral Space & Communications. (current market
cap: $4.8 billion). Loral is also the largest owner of Globalstar, with a 45
percent stake.
CBS.MarketWatch.com spoke to the 73-year-old Schwartz about the
trouble at rival Iridium, the future of Globalstar and other matters. See
Telecom Report.
It's turned out that being first to the market in the satellite phone
business has been more of a curse than a blessing. What has Globalstar
learned from Iridium?s mistakes?
Schwartz: Not very much. Except perhaps the overall lesson is that the
course we set for ourselves has been validated by their experience. Our
approach to the marketplace was very different to Iridium. So it?s very
hard to compare Globalstar to Iridium or to expect that Iridium?s
experience is going to have much of a lesson for us going forward.
The market we were pointed at was much difference. Theirs was a VIP,
well-heeled traveler. Ours was a much broader market based on
established communities or regions that don?t have service, but would
require service. Small business people. People who can afford those kind
of services but where there is no service today.
Second, we really see, and saw ourselves, as a
telephone service rather than an equipment
provider. I think Iridium's approach was that of an
equipment provider. It?s an entirely different kind of
customer we?re looking at and it requires an
entirely different kind of support network on the
ground. That?s one of the reasons we choose
telephone companies as our strategic partners.
They, in fact, have the obligation and responsibility
of being the retailer and distributing the telephones
around the world rather than a company like
Globalstar that is ill-equipped to reproduce the
infrastructure that?s already in the ground in 100
countries. The experience of Iridium is one where
the deployment was going to be a very difficult job
to manage, and we have an entirely different
approach to that. They?re not quite comparable.
In recent ad campaign, your company said
it has the right technology and the right marketing.
You?ve already talked about the marketing. Can
you elaborate a bit more on the technology?
Schwartz: The same basic approach to the marketplace dictated different
approaches on the technical side. Iridium has a very complex, very
expensive design to accommodate the VIP roamer who was going to go
around the world and who would perhaps benefit from a very complex
processing system in the sky. We, on the other hand, put our processing
requirements on the ground in gateways, in the hands of our telecom
partners, who could best operate it. Our satellite system is a very simple
bent-pipe system in the air and therefore is much less expensive and much
easier to maintain. Another very important difference is that Globalstar
uses CDMA instead of the then-current -- some years ago -- technology
of TDMA. The difference is more capacity, better performance and it
allows us to reach a much broader market than they (Iridium) can at a
much lower price.
Critics of Globalstar don?t doubt your resolve or approach so
much as they question whether a big enough market exists to support a
large satellite phone carrier. Iridium had lots of studies show a potentially
large market, and so does Globalstar. What makes you so sure such a
large market actually exists?
Schwartz: I don?t pay a lot of attention to market studies. You have to
have them. You have to go through the trouble of showing outside
investors that you are going through the trouble of having those markets
studied. As a businessman, I place my money on a much better
assessment of the marketplace. And that is the provider that?s already
successfully providing a telephone service in all of the areas we are going
to be operating in.
So our partners, the France Telecoms, the AirTouches, the Vodafones,
the Dacoms, etc., it is there assessment that in their market there is
sufficient demand for an extension of their service. They are the ones that
bet on Globalstar and put equity money into Globalstar. They are
continuing to make impressive amounts of investments in gateways and
telephones. I am basing it on some 20 to 30 telephone companies around
the world that know their marketplace, know their customer. They feel
there is real demand here.
Another question among critics is whether you can sell
subscribers on accepting prices for phones and minutes significantly higher
than cellular, an industry that is expanding all the time? How much can you
lower prices if need be, and are you worried that cellular coverage will
eventually extend to cover the markets you target.
Schwartz: The last point first. No, we are not worried about the fact that
cellular is going to expand. We expect that fully. That was part of our
game plan in understanding the market. Fiber will continue as we go
forward into the 21st century, as will other terrestrial services. But there
are areas of the world in which there are 3.5 billion people living that do
not have any service at all. It will take generations and not be very cost
effective to extend fiber and cellular. And cellular has to be contiguous in
order to make it grow. There are not only cost impediments. There are
physical impediments. The easiest way is going to be through satellite.
When you look at it from that standpoint, it?s not going to be a restrained
market, it?s going to be a continuously expanding market.
To answer your first question, there is a lot of resiliency in our cost
structure to allow for flexibility in price. But I don?t think we?re going to
need that at all because in a market where demand is greater than
capacity, I can?t think of any reason to lower prices.
You?re starting coverage in North America, Brazil, Argentina,
France, Italy, China, South Korea and South Africa. Doesn?t that initially
leave out parts of potentially large markets, such as the maritime and
aeronautical industries as well as many developing countries where phone
service is spotty?
Schwartz: All of these markets are available to us. The only reason we
are starting a phased rollout is the availability of the phones from the
manufacturers who signed up for production. They?ve been in production
now for some months. We expect to come up to about 40,000
telephones produced a month. We are negotiating with those
manufacturers to start second production lines so we can get that.
Is there enough room in the broad-based satellite phone market
for more than one main carrier or do you expect to become the only game
in town, so to speak?
Schwartz: No. I think we may be the only game in town for a long time
only because the others who started and had a false start ... for others to
come in, and be four, five, six years in development, is a daunting
challenge. However, if you look at the market, the market can support
and actually demand more than one supplier. We thought it could always
provide a robust business for three or four suppliers. From a market point
of view, I think that?s true today.
The problem with this industry, and also its benefit, is that the service we
are offering is limited by the restraint of radio spectrum available, so our
capacity is always going to be limited. Therefore the demand is going to
exceed the aggregate capacity of three or four suppliers without any
trouble. In the meantime, I must tell you, that we are going to enjoy being
the only one in the game. But I think others will eventually come into the
field and there?s nothing wrong with that. I think the market can easily
support that.
Globalstar doesn't plan to give out quarterly subscriber
numbers, an approach that created an expectations game that helped sink
Iridium. How are investors supposed to gauge whether Globalstar is
succeeding?
Schwartz: We intend to give them all the information they need. All we
are trying to say is the subscriber information, they won?t need it because
they?ll get alternate and better information on a regular basis. The number
of subscribers that Iridium needed to publish, that was their customer list.
They were selling to subscribers.
We are a wholesalers. We are going to be selling the service to telephone
companies around the world. The one significant and accurate gauge of
Globalstar?s performance is how many minutes a month we bill the
retailer. That information we will be giving out to the financial community
on a regular basis.
What are your long-term targets for subscriber growth and
revenue over the next three years?
Schwartz: If you look at subscriber growth, our plan at the end of the first
year, the end of 2000, we expect to have about 1.2 million users. In order
to meet that, we have to increase the production of telephones, but we?ll
be very close to it in any event. By the year 2002, we expect to have a
little over 3 million subscribers worldwide. The revenue will grow in 2000
to a little over $600 million for Globalstar. In the year 2002, it?s $2.8
billion of revenue.
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