*Was the sky THE limit? Iridium?s failure squeezes competitors ? and raises BIG questions for investors
telecominvestormag.com
By Charles Mason
Imagine trying to raise money to enter a new business in which the pioneer
and only current service provider in that business has been a miserable failure.
That?s the mission facing up-and-coming providers of satellite-based
telecommunications services. The new carriers argue vehemently that they are
not just another Iridium. Their systems are technologically superior, they
maintain, and they have learned from the marketing miscues of their
competitor.
Investors have a lot to consider before sinking money into these new satellite
systems. If that statement weren?t as plain as day from Iridium?s problems,
then investors got a true wake-up call on Aug. 27 when ICO Global (Nasdaq:
ICOGF) ? a company that is more than a year away from providing services
? filed for bankruptcy protection. So everyone?s asking: Is this a domino
effect?
What Not to Do
Iridium LLC became the world?s first global satellite phone and paging
company on Nov. 1, 1998. Its network of 66 low earth orbiting (LEO) satellites,
combined with existing terrestrial cellular systems, was designed to enable
customers to communicate around the globe. Iridium World Communications
Ltd. (Nasdaq: IRID) is the public investment vehicle of Iridium LLC.
Motorola-backed (NYSE: MOT) Iridium was announced with lots of fanfare
several years before its launch. The concept, especially for the day, was on a
grand scale. With so many satellites, a business person or field worker would
never be out of touch, regardless of where he or she roamed, its proponents
claimed. The system was designed to work with cellular and public switched
telephone networks, providing seamless services around the globe.
It wasn?t long after the system was launched that Iridium?s business case was
called into serious question. Pricing for the service was considered exorbitant:
$3 per minute. The handsets cost a whopping $3,000 each. The units were
bulky and heavy; just as wireless customers had become accustomed to
subsidized 5 oz. pocket wonders, they were now being asked to buy a heavy,
awkward and super-priced phone.
Globalstar may be the shining star
for worldwide satellite
communications.
The overall system has technical problems. Its radio signals are unable to
penetrate many buildings and surpass mountains and other natural obstacles.
While these technical limitations had been well-known to engineers, Iridium
continued to be marketed as a catch-all solution to people worldwide ?
something that it could not reliably and consistently deliver. Moreover,
capacity on the Iridium system was (and remains) sharply limited, making
mass market inroads impossible.
Bleeding heavily, the company in late June announced a new strategy that
included price reductions of up to 65%, a flat per-minute rate for international
calls and a greater emphasis on creating a value proposition for industrial
customers that have a defined need for satellite communications. In addition,
the company?s two product manufacturers, Motorola and Kyocera (Kyoto,
Japan), announced reductions in the wholesale prices of their satellite phones
and other subscriber equipment.
Iridium executives then began intense negotiations with Motorola and other
strategic investors ? representatives of its high-yield bondholders and its bank
creditors ? to develop a mutually acceptable plan to restructure the
capitalization of the company. Although the negotiations bought the company
about a month, they proved relatively fruitless. As a result, Iridium?s executives
were forced into a comprehensive financial restructuring through a voluntary
Chapter 11 filing in U.S. Bankruptcy Court in Delaware.
The move was "voluntary" in name only. With creditors refusing to back off,
Iridium?s executives had no other choice.
Not surprisingly, the major stakeholders in this restructuring ? banks,
bondholders and Iridium?s strategic partners ? voiced support for this course
of action. Iridium believes they will continue to cooperate during the bankruptcy
process. Motorola continues to express strong public support from a financial
and operational perspective, in spite of the fact that Motorola executives are
known to be fed up with the investment.
Slowly They Turned...
Two major competitors of Iridium are ready to offer service over the next 18
months ? and some are asking whether they will be additional fodder for the
financial mill.
"In the wake of Iridium, the logical question is, Who wants to burn more
money?" quips Larry Swasey, senior wireless analyst with Allied Business
Intelligence Inc. (ABI; Oyster Bay, N.Y.)
Executives at the rival companies insist they are different. One such company
is Globalstar (Nasdaq:GSTRF), which will launch service this fall.
Indeed, despite Iridium?s travails, market studies point to a demand curve for
wireless that clearly predicts the success of satellite-based
telecommunications services, assuming those systems are technically
designed right and their services are marketed intelligently. Credit Suisse/First
Boston (New York) is one of several major firms that have written positive
reports about the industry (although it should be noted that several leading
financial analysts recommended Iridium as a "buy" in 1998).
Forrester Research Inc. (Cambridge, Mass.) warns that Iridium?s descent into
bankruptcy is a wake-up call. In a recent report, Global Satellites: Lost in
Space, Mark Zohar and Erin Roland note that the industry has billions of
dollars at stake and no proven business model. It?s time for satellite providers
to scale down their global ambitions and focus instead on serving regional
users and new vertical markets, the authors maintain.
The Best Bet?
It?s full-speed ahead for Globalstar. The company late this summer launched
an additional four LEO satellites, bringing the total number it has in space to
36.
The Globalstar system, which can initiate service with as few as 32 satellites
in orbit, will complete its planned constellation of 48 satellites and four in-orbit
spares by year end. Three launches, in September, October and November,
will take place on Soyuz launch vehicles. The Soyuz rocket was used earlier
this year for three launches of four satellites each. The final four satellites to be
launched will be aboard a Delta II rocket in December.
Privately, competitors of Iridium (outside of Globalstar) say that one of
Globalstar?s biggest trump cards is Bernard L. Schwartz, its chairman and
CEO. "When Schwartz speaks, Wall Street listens," confides one industry
executive. "He brings a lot of credibility to those of us trying to convince the
financial community of the long-term viability of this business."
The Globalstar system is designed to provide "affordable" satellite-based
digital voice services to a broad range of subscribers. Users include
international travelers; long-haul commercial vehicle operators traveling
nationally and internationally; and fishing boats, yachts and other small craft.
Explorers, geologists, field scientists, civil engineers and disaster-relief
agencies could make use of Globalstar phones. In addition, the company is
targeting developing nations, where its partners will market fixed-site and
mobile telephones.
Schwartz repeatedly says that Globalstar will meet the needs of cellular users
and global travelers who roam outside of cellular coverage areas, as well as
residents of underserved markets who will use Globalstar?s fixed-site phones
to satisfy their needs for basic telephony. That means affordable rates, he
stresses, countering the complaints leveled at Iridium for high prices. Specific
service rates have not been announced for Globalstar.
Loral Space & Communications
(NYSE: LOR) is the founding partner
of the Globalstar system, which was
developed under the aegis of
Qualcomm Inc. (Nasdaq: QCOMM).
The partnership includes service
providers and equipment
manufacturers.
In June, Globalstar arranged a key
$500 million credit facility to finance
the buildout. The facility will be fully
underwritten by Bank of America
NT&SA (San Francisco). The credit
facility is guaranteed by two
subsidiaries of Loral Space &
Communications, which will pledge
certain assets to support the
transaction. Loral will receive consideration for its support in the form of equity
warrants. Schwartz says that the credit, together with expected vendor
financing, completes the funding requirements for the Globalstar project.
Including this recently acquired credit facility, the company has raised $3.8
billion for the development, construction and deployment of the Globalstar
system and for operating costs, budgeted debt service, system improvements
and the development of new features.
Schwartz insists that "every element of the program is on track." All of the
keys to the launch of commercial service this fall, including handset
production, gateway deployment, system testing and marketing programs, are
in place, he says. "We?ve come a long way in eight years and, along with our
partners, are confident that we?ll meet our business plan milestones," he
notes.
Globalstar at presstime expected to begin a regional rollout of commercial
service in September with 32 satellites and nine gateways providing coverage
during the early subscriber acquisition period. By the end of 1999, 48 satellites
plus four spares are to be on-orbit and approximately 16 gateways in
operation. The 22 remaining gateways are scheduled to come on-stream
throughout the first several months of 2000. Telephones are being
manufactured by Ericsson (Stockholm, Sweden), Qualcomm and Telital
(Trieste, Italy). Handset production will ramp up to 40,000 units per month by
early 2000, according to Globalstar.
The handsets, such as the Ericsson R290 satellite phone designed
specifically to work with Globalstar?s satellite-based digital system, will be a
key component for attracting customers. The Ericsson R290 dual-mode
GSM/satellite unit weighs 11.9 oz. and will allow users to send and receive
voice communications nearly anywhere in the world. Globalstar will use
Ericsson?s existing cellular phone distribution network to make the new
handset available to customers later this year.
Telital also will manufacture dual mode satellite phones for GSM markets, and
Qualcomm is producing a fixed-location telephone for use throughout the
European Union. Qualcomm also is manufacturing tri-mode handsets for the
North and South American markets.
ICO: DOA?
Late next year, ICO Global plans to hit the market with its own version of
satellite-based services. Executives maintain that there is plenty of room.
Yet, more than a year away from offering commercial services, ICO has
stumbled badly. At the end of August, less than three weeks after Iridium?s
court filing, ICO Global filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Delaware.
ICO Global CEO Richard Greco concedes that the company badly needs
additional financing to accomplish its business plan. While a number of
investors have confirmed continuing interest in providing the company with
financial support, the Chapter 11 filing will provide ICO with the extra time
needed to reorganize, recapitalize and complete financing, he says. "We
believe that our actions will be successful and that ICO will emerge as a very
effective competitor in providing global mobile satellite telephone services,"
Greco says.
Meanwhile, ICO Global executives continue pursuing their game plan for the
expected service launch.
"The market demand for mobile satellite services is there, there is no question
about it," asserts Mary Frost, ICO?s vice president and regional general
manager for North America. "But you have to offer the right product, pricing
and distribution methods to succeed."
Frost says that ICO has worked hard to develop relationships with distributors
and become familiar with customers and their needs. The company markets a
terrestrial roaming product, ICO Roam, to develop key customer relationships
in preparation for offering satellite-based services, she notes. "We have gained
invaluable insight and experience that will help us market our satellite services
next year," she maintains.
A key part of ICO?s game plan involves data and vertical markets. It intends to
offer data services to various vertical markets, including transportation. "Mobile
data will become important, and we plan to be part of that," she says.
Still, Frost concedes that Iridium?s problems have hurt the business. "We are
all rooting for Iridium," she says. "While we have learned a lot from [its]
missteps, this industry could use a successful Iridium in the future."
October 1
Table of Contents
Home | What's Inside | Search | Contact Us | Subscribe | About Us
¸Copyright 1999 Advanstar Communications. Please send any technical comments or
questions regarding this website to the Telecom Investor Webmaster. |
