Warning: Long Post, to summarize what Globalstar is and issues facing it.
Jeff, With the recent arrival of the "shorts", en masse, on this thread, your question is timely. To summarize where we are:
There were three companies that had announced plans to launch a constellation of low-earth-orbit (LEO) satellites for voice service available "anywhere". The first one into service was Iridium. Unfortunately, Iridium had a bunch of problems, most of which were self-inflicted: Call quality was lousy. Dropped calls were frequent. They would have to reach 50% of their total capacity to break even. The total cost of their system was high. They had to charge too much for their calls. They failed to deal successfully with the political issues necessary to get their system approved in many international locations. They geared their product to the wrong market.
LEO communication service is desireable because the satellites revolve around the earth at a low enough height that there is no perceptible voice delay when talking on the phone. This contrasts with Geo-stationary satellites, which are many times higher, and for which telephone calls become odd, because of the delay caused by the distance,
Following the collapse of IRID, a second competitor has bit the dust. ICO has been unable to raise the necessary funding to get a constellation of satellites up. No satellites means no service, and they have apparently given up.
Globalstar is the "last man standing". While they are a satellite telephone company similar to Iridium, there are lots of dissimilarities:
1. The system works. Calls are clear. The success rate of being able to initially connect is excellent. There is a quite low rate of dropped calls. Much of the technical success can be attributed to the design of the system, by Qualcomm. The system uses CDMA and the "soft-handoff" algorithms that are a large part of what makes CDMA cellular superior to TDMA. A second factor, also part of the Qualcomm design is "path diversity". During a call, the telephone handset continues to seek additional satellites, and to communicate through whichever one provides the best signal. Generally, there are three satellites available to the phone. Sometimes four and occasionally only two.
2. Globalstar is being marketed differently from Iridium. It has always been envisioned as a "cellular extension" service, offering wireless service where there is no cellular buildout. Contrary to assertions here lately, there are lots of areas around the world where there simply is no cellular service. And there is a good deal of economic activity (existing and potential) in the areas underserved by both cellular and landlines. Globalstar has focused on those economic activities, for instance the "vertical markets" such as logging, mining, oil-drilling and fishing, as one area that will be well served by their phones.
3. Globalstar is working through local service providers, making them allies rather than competitors. A major problem that Iridium had was that the local telephone companies in countries around the world viewed them as competitors. Globalstar has enlisted these same companies to act as their regional distributors.
4. Globalstar has a clear upgrade path ahead of it. Where Iridium housed a large part of their software in their satellites, Globalstar's satellites are "bent pipes". They simply receive information from the ground and transmit that same information back to the ground, where it is carried to its destination via the global telephone infrastructure. The ground stations, or Gateways as Globalstar terms them, are being established in strategic locations around the globe. Each Gateway can service a circle of about 1,500 miles radius--assuming the call is permitted by the respective political bodies. (For instance, no service is expected to be allowed from Libya.) The Gateways, working with the satellites, can tell where calls are originating from. Global Positioning is built into the system. Globalstar has apparently established a policy that calls will only be completed when they originate from areas where they or a service provider is appropriately licensed. This hurts service capabilities initially, but should pay off with better international relations later.
5. Calls are cheaper on Globalstar than they were on Iridium, and there is substantial room in the Globalstar plan for rates to be lowered--a lot!--while still allowing Globalstar to make a nice profit. It appears that Globalstar management has established their prices at a level they believe will be attractive to sufficient numbers that they will eventually will fill most of their available capacity. If they can do that, they will make lots of money on the current generation of satellites.
6. The present system, supporting voice telephony using 9,600 bps throughput, is only the beginning. Because of the bent-pipe design, users later this year will be able to access the internet and email from their Globalstar phones. That is a software issue that can be installed in the local gateways. (9.6 kbps is not fast by today's standards, but it is sufficient for messaging, and eventually for WAP-type access such as is now available to users of cellphones who are accessing the internet.
7. Fixed phone installations are expected by many to be the larger contributor to total minutes. (Iridium apparently made no provision for this at all). Fixed phones are being made available for installation on boats and ships, in offices and as stand-alone kiosks powered by solar panels sitting on top of the kiosk. Suddenly, a village with no electrical or phone service will have access to global telephony. It will provide a huge leap in infrastructure development. It has been reported Mexico plans to purchase a number of these fixed phones for installation in villages without telephone service.
Are there issues? Is Globalstar a slam-dunk? Of course there are issues. That is why the stock has sunk to its present levels. (If everything was going as originally envisioned by management, the stock price would likely be twenty times its present level). Issues are substantially different from Iridium's. Some of the issues are:
1. There was a delay in initiating service. Some of the delay was caused early on, when a Zenit rocket carrying 8 satellites blew up on launch. That pushed the whole schedule back. There have also been delays in getting Gateways built and in service. Some of these delays have been internal--as software glitches were found and had to be fixed. Others external--The China Gatway is apparently ready to go, but (apparently) awaits political developments in the country. The technical issues have essentially moved the growth curve "to the right" on the timeline.
2. Ramp-up is slower than expected. But, the reasons for this appear to be different from Iridium's as well. Where Iridium essentially went live worldwide simultaneously, Globalstar has done a "slow rollout". Service has been initiated country by country as local gateways have gone live and passed through testing successfully. Many of the areas that are anticipated to be the most important are still not active: Only one-third of Brazil is active. China is not live. India will be delayed for a long time, since the originally-contracted local Service Provider dropped out and lawsuits ensued between the local Indian company and the Korean service provider (Globalstar is not a party in the disagreement, but apparently can't proceed until some of the legal issues have been cleared up).
There are positive implications for this: The low numbers that are apparently being generated are from a subset of the total market. We can going forward see ramp-up in numbers both from increased penetration in existing locations and from new locations coming into the stream.
3. Globalstar marketing has been non-existent or lousy. This has been discussed on this thread. The belief is that Globalstar has essentially taken a hands-off attitude in marketing, relying instead on the respective Service Providers. Several marketing professionals have posted many of the steps Globalstar should be taking in their vertical marketing environment. There have been some indications that Globalstar--and Globalstar USA, which is owned by Vodafone and is the local service provider in the US--have begun to take some of the actions they should be taking.
3a. Related to this, and mostly related to marketing, G* management has come under fair criticism on this thread (and I don't mean by any of our recently arrived "shorts") for not delivering on their promises. They have set timetables that they have not met. They have not established the marketing department they should have from the start. They have made ambiguous stements that have later come to light as truthful only in the most extreme reading of the relevant statements. Many on this thread, and many on Wall Street, no longer trust Mr. Schwartz's statements.
4. There is a liquidity issue. Many of us on this thread are confident that the service will eventually succeed. The question is how expensive will it be to get it to that point? And, how badly diluted will the common shareholders be in the process? Some money will almost certainly be needed, and that will certainly dilute our holdings.
One alternative proposed is that the common shareholders will get wiped out, as a condition precedent to new money. I view that as unlikely, given the large stakes, in the form of equity, held by Loral, Vodafone and Qualcomm. G*'s Bankruptcy for them would be extremely unattractive, particularly if they can be assured that the issue is liquidiity and not insolvency. Vodafone and Qualcomm certainly have the resources to add the needed capital, should they be persuaded on this issue.
(Note: Globalstar also has a last-alternative for revenues, should they need it. Qualcomm's Omnitracs can be serviced by Globalstar, if necessary. Qualcomm would certainly demand a rate much lower than the present 47 cents wholesale rate. But, they do have the ability to generate minutes on the system if they are needed).
5. The pricing is still wrong. As has been extensively discussed on this thread, pricing should be geared to getting as many minutes as possible as fast as possible. It should relate to the ultimate cost of the service. It is a cellular extension, and should relate to prevailing cellular rates. The system can run profitably at one-tenth present rates. Globalstar has got to be more aggressive in its pricing, and in jaw-boing the service providers to follow suit. (This gets back to the weakness in G*'s marketing efforts to date).
6. The service providers' interests, while generally similar to G*'s, are not exactly aligned. The service providers can make money by getting handsets into customers' hands and charging them a monthly fee whether or not minutes are actually used. G* only makes money from Minute of Use.
7. We still do not know how many handsets are being sold, and how many minutes are being generated. This is of course the great uncertainty. Maybe we are all wrong (all of us being the individual shareholders, plus Loral and Qualcomm management, plus the managements of all of the gateway operators, who have invested millions in developing their gateways, as well as all of the local distributors who have signed up to support the service through their sales channels.) Maybe there isn't a market for this service.
Or, maybe none of the parties involved will be able to market it successfully. But, Chris Gent of Vodafone, and Irwin Jacobs of Qualcomm have histories of making the right marketing choices, and succeeding.
There. That's about where we are, I think, on some of the most important issues. My view is:
(1) To expect some substantial dilution to the common shareholders, before the company reaches EBITDA breakeven, but
(2) We won't see a bankruptcy filing because large enough companies with deep enough pockets are already committed on the equity side, and they won't let a viable project collapse for want of liquidity, and
(3) Before any collapse, Qualcomm and/or Vodafone will step in to take over managerial control of the marketing.
Hope this helps put things in perspective. Anyone considering G* will have to do his own due diligence, But, that shouldn't include listening to Anthony@Pacific and his cohorts. He's got a clear agenda to drive down the price of the stock. And, I'd never trust anyone whose main claim to fame is an article in the national press describing sanctions imposed on them by the SEC. But of course, that's just my opinion.
Best,
JS |
