IRIDIUM ALL BUT BURIED.GLOBALSTAR READY TO SHINE.
Wireless Deals Are Bad News for Satellite Players
By Scott Moritz
Staff Reporter
9/27/99 7:00 AM ET
The frenzy of wireless deals means the world's going to be easier to connect but satellite-telephone companies will not see much benefit.
According to news reports, MCI WorldCom (WCOM:Nasdaq) will grab Sprint (FON:NYSE). MCI WorldCom and Sprint had been in informal talks for some time but negotiations intensified as Bell Atlantic (BEL:NYSE) and Vodafone AirTouch (VOD:NYSE) forged their recent wireless telephone joint venture. MCI WorldCom had been seeking a wireless partner for a while and Sprint's Sprint PCS (PCS:NYSE) wireless business makes an attractive addition.
Bell Atlantic and Vodafone AirTouch have signed an agreement worth $70 billion to form the world's largest wireless service with 20 million customers. In addition, AT&T (T:NYSE) and British Telecom (BTY:NYSE ADR) formed Advance, a transatlantic pact to provide customers of the combined companies a "seamless" international service.
All the activity is bad news for satellite phones. Already in Chapter 11, Iridium (IRIQE:Nasdaq) and London-based ICO Global Communications (ICOFQ:Nasdaq ADR) now face tougher competition, especially from transatlantic wireless hookups aimed squarely at the global traveler.
The Vodafone service, for example, would allow a port wine sales executive for the Dow Port house to make calls with a Vodafone AirTouch phone in Lisbon, Paris and London. Then she could fly to her U.S. office in New York, switch to a Bell Atlantic phone, and call in sales orders to Lisbon, and have all the calls billed to the same account.
The no-orbit wireless companies are essentially beating the low-orbit satellite phone companies at their very own game.
Blame large debt, slow sales and high prices. In August, Washington, D.C.-based Iridium declared bankruptcy after only nine months of operation and after spending 12 years and $5 billion to launch 88 low-orbit satellites. Two weeks later, ICO filed for Chapter 11 protection. Now, say analysts, Globalstar (GSTRF:Nasdaq) is perhaps the only satellite-phone company able to carry on the "one world, one phone" business.
But even Globalstar doesn't shine so brightly given the new competition.
"AT&T and BT, for instance, are addressing a better solution for the kind of person who is bouncing around the world," says Charles Drayton, vice president of network marketing and business development for Nortel Networks (NT:NYSE) in Richardson, Texas. "This is a key piece of the market the satellite operators are trying to go after."
Others are more blunt.
Iridium is all but buried, says telecom analyst Gregory Miller with Jefferies & Company, who does not have a rating on satellite-phone companies. Jefferies has done no financing for the satellite businesses.
"These alliances between cell phone companies allow them to do now what Iridium had attempted to do. Now the question is, how many people need phone coverage in the Himalayas?" Miller says.
Satellite-phone companies once boasted of providing "one world, one phone" service but increasingly are being pushed to provide service to the outback.
Satellite companies put on a brave face. "Once we have a smaller and cheaper phone, I think the business travelers will be very keen on getting our service," says Iridium spokeswoman Michelle Lyle.
But as the wireless carriers continue to align their competing technologies, the niche markets will also be a target.
That hasn't stopped Iridium's fans from keeping hope alive. "There is still a market for satellite-phone service. These are markets that are not now served by wireless terrestrial networks and not likely to be served," says ING Barings analyst Steve Solazzo, who no longer follows Iridium.
Solazzo rates Globalstar a buy. ING Barings was an underwriter of Globalstar debt offerings. The eight-year-old, San Jose, Calif.-based company has launched 36 of a planned 52 satellites for its $3.9 billion network and is scheduled to start service by the end of this year.
Globalstar uses a more robust CDMA, or code division multiple access transmission format. As opposed to Iridium and ICO's TDMA, or time division multiple access technology, CDMA is compatible with the largest number of U.S. users.
Also, Globalstar has a formidable list of partners: Loral Space & Communications (LOR:NYSE) owns 45%, wireless chipmaker Qualcomm (QCOM:Nasdaq) has a 6% stake and Vodafone another 7%.
Analysts estimate that Globalstar needs between 200,000 and 500,000 subscribers to reach break-even in cash flow by the end of next year.
A conventional wire service signs up about 200,000 customers each quarter, but satellite-phone companies are looking at an already small pool of far-flung business travelers, offshore oil-rig workers and ship captains. Iridium only managed to sign on an estimated 10,000 subscribers in nine months.
For sure, there remains another major challenge ahead for the satellite companies. The international wireless community is trying to puzzle together a common language or standard called third generation, or 3G, protocol that -- though years away -- intends to do for wireless phones what the Internet did for computers.
"Satellite has such a small market and by the time it becomes a big enough market, we will be at 3G," says Bruce Kasrel, an analyst with Forrester Research, which has done consulting work with numerous wireless and satellite companies.
Looks like all the satellites may be converted into a theme park pretty soon.
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