Star Search -- The Bankruptcies Of Rivals Have Garnered Globalstar Greater Valuation-And Greater Scrutiny
October 04, 1999, Issue: 419
Section: Business
Meg McGinity
The late summer brought good and bad news to Globalstar L.P. (San Jose,
Calif.). The good news is that its two competitors in the global, mobile satellite
voice service market, Iridium LLC (Washington, D.C.) and ICO Global
Communications Ltd. (London), filed for bankruptcy. The bad news? Iridium
and ICO filed for bankruptcy. At first glance, Globalstar would seem to be in
pretty good shape. Two of its main competitors are out of the way-or at least
in publicly tough shape-which has to adversely affect their ability to draw
customers and financing. This has left Globalstar glowing in the limelight of
relative stockholder adoration, which has buoyed its share price as investors
retreat from other satellite providers. While under its 52-week high of $33 a
share, reached in July, its current level near $30 is still well up on a year-long
low of about $8, registered in October 1998.
Unfortunately, as Globalstar officials must know, adoration can fade fast in this
market. Analysts and competitors are wondering whether investors-and, more
important, customers-will remain loyal even when and if the going gets tough.
And if Globalstar is abandoned, will this prove once and for all that the market
for satellite services doesn't exist?
The company's service launch is set for this month, and the pressure will be on
to secure both the customers-it has estimated 250,000 users by
mid-2000-and the financing needed to make this a success.
Globalstar has some things going for it, including lots of money. It has received
commitments for about $3.8 billion, more than 80 percent of which will go
toward the price tag of the system. The clear playing field is certainly another
advantage: It gives Globalstar a chance to make a bigger grab for potential
customers who might be interested in global voice and data services.
The only drawback is that, because of the ICO and Iridium bankruptcies, the
financial market has put Globalstar's business plan under the microscope. The
market is undoubtedly wondering why Globalstar's plan will float if two
megaventures like the $5 billion Iridium project and ICO's $4.7 billion
effort-which were backed by industry giants like Motorola Inc. and Inmarsat
(London)/Hughes Network Systems Inc. (Germantown, Md.),
respectively-couldn't make a go of it.
Globalstar, not surprisingly, scoffs at comparisons to the other two providers,
saying its marketing and business plans differ. Yet some analysts aren't so
sure. "I have yet to see a tangible difference between Globalstar, ICO and
Iridium," says Iain Gillott, vice president of worldwide consumer and
small-business telecommunications at International Data Corp. (IDC,
Framingham, Mass.). "I know there are differences in the marketing
approaches, but I have yet to see them executed, and I don't see any tangible
differences to the end-users."
Some other satellite industry leaders say that while the economic problems
that thwarted Iridium and ICO have certainly affected the satellite industry in
the short term, it shouldn't affect the Globalstar system's long-term success.
"The market is quickly recognizing the differences between the business
models of Iridium and Globalstar. While Iridium made many choices that
committed them to a specific type of design very early on in the project,
Globalstar is perceived as more successful, having the right system design and
marketing approach," says Pascale Sourisse, CEO at SkyBridge LP
(Bethesda, Md.), a fixed rather than mobile satellite service provider set to
launch in 2002.
Globalstar officials have emphasized that the difference between their system
and the failed Iridium system is in their constellation and engineering.
Globalstar says its satellite $3.3 billion phone system will link global system for
mobile communication (GSM) in 33 countries and by January will have a
constellation that comprises 48 low-earth-orbit (LEO) satellites, plus four
backups. The satellites' switching capability is terrestrial-keeping the
intelligence of the network on the ground. Sourisse says this distinction has
enabled the company to minimize costs.
Another difference, Globalstar execs say, is cost. Handsets will set the
customer back about $1,000 to $1,500, almost half of Iridium's fare.
Globalstar's international phone calls will cost around $1 to $2 per minute,
depending on the distributing provider's discretion, rather than Iridium's
$2.99-per-minute fee.
Despite these advantages, Globalstar's success is not entirely in its own hands.
Some of the burden of launching the Globalstar service will fall on American
distributor and wireless service provider AirTouch Communications Inc. (San
Francisco). AirTouch Satellite Services is a partner of Globalstar and the
exclusive service provider of Globalstar's satellite services in North America.
AirTouch will have to make sure the handset production and distribution
problems that plagued Iridium-by frustrating interested customers responding
to the expensive and ubiquitous advertising campaign-do not occur. Globalstar
says it has contracted with three different manufacturers, including Qualcomm
Inc. (San Diego), to ensure handset availability. Although Qualcomm recently
put its consumer products division of handsets on the block, it says this won't
have an impact on Globalstar's handsets, which are being manufactured
separately by another company.
For the time being, Globalstar is still investor's honey. As with all satellite
services, though, the main buzz will live or die around the customer. "The main
challenge facing the entire mobile satellite service industry is to prove that
there's a market for satellite phones," says Joe Tedino, North American
director of communications for ICO. That's a challenge that billions of dollars
and years of research have yet to meet.
Copyright © 1999 CMP Media Inc. |
