Re:MSS,when the last mile is a thousand miles from home.....
Here's a pretty good survey article about the current state of the mobile satellite systems industry:
totaltele.com
Communications Week International - CWI Online
Current Issue: 248,17 July 2000
Feature: The only way is up
By Theresa Foley
Mobile satellite systems have been beset by a series of financial and technical
problems, and the business case for such projects is still to be proven. But new
entrants are pushing ahead with their plans, and surely things can't get any
worse, can they?
Spiraling development costs; greatly delayed service launches; high per-minute call
charges; questionable call quality: So far it's been a catalog of well-publicized
disasters for mobile satellite systems companies struggling to market.
So just why are those companies, and some notable backers, pushing ahead with
their MSS plans? Well, for those that can afford them and are willing to put up with
their operational quirks, mobile satellite telephones do work. More than that, a new
generation of geostationary mobiles with smaller handsets and lower prices is about
to arrive that could turn around the dismal picture for MSS.
To many, the question of whether the business of satellite telephony is worth
bothering with is still open to debate. Nevertheless, at least four new contenders -
Globalstar LP, Asian Cellular Satellite System Ltd. (ACeS), Thuraya Satellite
Telecommunications Co. and New ICO Global Communications Ltd. - are lining up
to take their best shot at establishing orbiting systems behind the first in line, Iridium
LLC, Washington DC, which has fallen hard.
Although Iridium has had several reported takeover offers, majority backer Motorola
Inc., Schaumburg, Illinois, is pushing for the satellites to be burned up in orbit. As
CWI went to press, Iridium was stuck in the bankruptcy courts, awaiting a ruling.
"Fifteen billion dollars has been squandered, and future projects in the industry have
been put into question," Roger Rusch, president of TelAstra Inc., Palos Verdes,
California, says of the big LEO (Low Earth Orbit) initiatives, blaming Iridium and
Globalstar for the deferral of other investments in satellite projects. "The fundamental
assumptions were absolute baloney," he says, claiming that people who tried to
"stop the train" by pointing out inadequacies were ridiculed by the project sponsors.
"Perhaps these systems wouldn't have been built if realistic costs and schedules
had been exposed then," he suggests.
Globalstar, of San Jose, California, arrived on the scene in late 1999 and has
stumbled through 2000, but is not yet out of the race. ACeS, Thuraya and ICO aren't
out of the starting gate, but when they are, their backers believe their story will be
entirely different to Iridium's.
Jury still out on market need
In the meantime, the jury remains out on whether the market is big enough for more
than one MSS operator, and the daddy of them all, London-based Inmarsat,
established over two decades ago, could even be well placed to fulfill the role on its
own. Inmarsat plods along with modest subscriber increases each year, a
respectable $400 million in annual revenue, and steadily improved products that
tend to be pricey and bulky, but reliable.
According to a report from Paris-based Euroconsult SA, Satellite Communications &
Broadcasting Markets Survey 2000, published in June, Iridium failed because it
became "confined in a ghetto-like niche market, selling small quantities of highly
specialized products to a few globe-trotters and oil-rig repairmen." Iridium oversold
its product and allowed it to be confused with cellphones, says the consultancy.
Indeed, Euroconsult paints a gloomy picture for MSS systems in general in the
report, pointing out that users are not clamoring for the phones, and that future
demand for them cannot be predicted accurately. Until the MSS business produces a
winner to counter the problems of the last year, the 27 mobile satellite projects
currently in a conceptual stage are likely to remain stalled on the drawing boards, it
says.
The introduction of big LEO mobile satellite constellations in the late 1990s was
supposed to revolutionize the satellite industry, but instead the 62-satellite Iridium
system, with its high costs, was a spectacular failure. Globalstar, although it has a
different technical architecture, appears to have made some of the same mistakes,
and could face difficulties unless a sharp increase in subscriber sign-ups occurs
this summer - in early summer analysts were estimating current subscriber
numbers stood anywhere between 1,500 and 6,500.
Globalstar, whose backers include Loral Space and Communications, Qualcomm
Inc. and Vodafone AirTouch plc, was set to run out of operating cash around late
October. Then earlier this month Loral drew a $250 million bank facility guaranteed
by four of its backers just days before the facility was due to expire. Although the
banks will likely call the loan, in effect it gives Globalstar the resources to operate into
early 2001.
Rusch says each of the big LEO systems went up by three to five times in cost as
each was being developed. But the upcoming geostationary MSS systems - ACeS
and Thuraya - with just one satellite needed to get into service, costing around $500
million-$600 million, should not face the same spiraling costs.
Where did Iridium go wrong?
Industry experts continue to debate what went wrong with Iridium, the technology or
the business plan. The high cost to develop big LEOs - $4 billion-$5 billion each,
according to Rusch - led to high per-minute charges: around $1.44 for Iridium and 90
cents for Globalstar, just to cover costs, although in some cases per-minute tariffs
were as high as $7-$11 for Iridium service.
"Iridium didn't get to the price points needed," says Hoyt Davidson, managing director
at investment institution Donaldson, Lufkin and Jenrette, in New York. "That's a
technology problem, not a marketing one."
Added to this, Rusch says technical errors in the big LEO systems are still being
revealed. Globalstar, for example, has no central mechanism to determine how
many customers are using its system. What's more, the quality of the LEO systems
is inferior to terrestrial telephony. They suffer from frequent disconnects, signal delay
that affects voice quality, and users of the phones need to be outside, with a clear
view overhead.
And when it comes to the flawed business plans there is little room for excuses. As
Rusch points out, the big LEO satellite managers should have known all about
market elasticity from the cellular phone industry. "It should have been clear that a
[typical] retail price of $3 per minute would not attract many customers" - at most
350,000, he says, rather than the millions projected by each operator.
Part of the problem for both Iridium and Globalstar has been the amount of debt each
project has taken on, and the early schedules for repayment.
"Servicing of debt can be a killer in the early years," says Jerry Waylan, president and
chief executive of Constellation Communications Inc., of Fairfax, Virginia, one of two
U.S. licensees for big LEO MSS systems - the other is Ellipso Inc., of Washington DC
- that has not yet begun to build.
Meanwhile the MSS companies themselves, and their technology partners, remain
upbeat as they push on with their launches. "Sometimes these things take a couple
of tries before people get it right," says Russ Daggatt, acting chief executive of New
ICO and holding company ICO Teledesic Global Ltd.
And Hossein Sharifi, Thuraya program manager for Hughes Space &
Communications, which is building the Thuraya system, says Globalstar and
Iridium's problems "have not shaken my confidence, nor the bank's, nor our
customers'." He predicts the market for the $1.1 billion Thuraya system will be
around 2 million subscribers, while Euroconsult estimates 400,000-460,000
subscribers in the first year of operations.
Thuraya, of Abu Dhabi, plans to launch its first satellite in mid-September.
By mid-June, Hughes had produced 1,000 pre-production handsets, with plans to
produce 235,000 by year end, according to Sharifi. The seven-ounce phones will
incorporate a chip to enable them to work with Global Positioning System satellites
for location services, the only one of the satellite mobile telephone systems to do so.
L.M. Ericsson AB, of Stockholm, is making handsets for Globalstar, and also is
supplying smaller, less expensive satellite phones for ACeS' Asia Cellular Satellite,
which goes into commercial service in September. "There is a future for mobile
satellites, but it may be slightly different from what people expected three or four
years ago," says Daryl Chambers, managing director for satellite terminals at
Ericsson's consumer products division. "That's why Ericsson has made a big
investment, is developing products and staying in the market."
ACeS is owned by PT Pasifik Satelit Nusantara, of Jakarta, Philippine Long Distance
Telephone Co., Jasmine International pcl of Thailand, and Lockheed Martin Global
Telecommunications, of Bethesda, Maryland. Like Thuraya, it will begin service with
only one geostationary satellite, and a business plan based on lower handset and
per-minute charges than the big LEOs - calls are planned to be less than $1 for retail
customers and 35-50 cents for service providers.
ACeS launched its Garuda-1 satellite in February, and spent several months testing
the system, only unveiling its handsets and allowing limited public test calls in June
at the CommunicAsia trade show in Singapore. The handsets weigh about 205
grams, compared with Globalstar's 350-gram phone, and Ericsson's monthly
production rate of 20,000 handsets would give ACeS 20%-30% of the annual market
for mobile satellite telephones, Chambers says.
Globalstar phones, in comparison, cost around $1,200, even at discounted rates,
and call charges are $1.50 a minute and above. Globalstar's advantage is that it
works in both GSM and CDMA coverage areas, but this means two chipsets and air
interfaces are needed, making the phones more complicated to build.
The relationship between Globalstar and Ericsson became strained in early 2000
when Globalstar chairman, Bernard Schwartz, blamed both Ericsson and Qualcomm
Inc., of San Diego, California, for rollout troubles. But by June, with the rift apparently
resolved, Ericsson was preparing to launch an aggressive campaign to sell
Globalstar phones in 25 markets focused on GSM, particularly in Europe, China and
Russia, according to Chambers.
Inmarsat, which plans an initial public offering in January 2001, is the only firmly
established MSS operator. "Inmarsat is very different than the LEO systems in terms
of the business model and heritage," claims Perry Melton, Inmarsat's vice president
for strategic development. "We've been in the business 21 years instead of being a
start-up, and we're focused on enterprise and vertical markets." This compares with
the targeted markets for Iridium and Globalstar of international business travelers,
cellular roamers and fixed rural users.
Since going private in April 1999, Inmarsat has embarked on a strategy to move to
third-generation mobile-like services, and to broaden its services to fixed terminals.
The company has acquired four smaller service companies so far this year and will
set up a business-to-business commerce exchange for the maritime industry that
will use its software and satellite connections.
Handset sales and subscriber numbers are the only real way to judge the success
of the MSS companies, and numbers so far are small.
At the end of last year, after two decades of service, Inmarsat had only 184,000
terminals in circulation, 65,000 of which were the mini-M laptop-sized telephone
version, according to Euroconsult.
To make phone calls over a mini-M costs an average of $2.50 per minute and
$2,000-$3,000 for the terminal. Inmarsat chief executive, Michael Storey, cites
statistics from London-based research company Phillips Tarifica Ltd. that show
international roaming "terrestrial" mobile users, and travelers in hotel rooms, pay
$4-$17 a minute for long distance calls, and says satellite telephony compares "very
favorably" with these figures.
Melton says Inmarsat does not compete with Iridium or Globalstar, because it offers
high bandwidth mobile services - 64 kilobits per second with a laptop-sized terminal
and higher rates with larger terminals - rather than just narrowband voice and lower
data rates.
Inmarsat's newest service is GANS (Global Area Network Services), a 64-Kbps
mobile ISDN offering that costs an average $7.50 a minute, with terminals priced at
$11,000. In late 2000, it will augment the circuit-switched ISDN service with a mobile
packet data service.
Indeed Inmarsat's strategy is to move away from the mobile voice telephony
business and towards data services such as mobile Internet/video. By 2004, its
service will likely more closely resemble that being planned by New ICO,
post-bankruptcy.
To that end, in May Inmarsat awarded a $700-million construction contract to Velizy,
France-based Astrium SAS - previously known as Matra Marconi Space - for a new
$1.4-billion satellite system called Inmarsat 4. The system will serve laptop users
with satellite connection at data rates up to 432 Kbps, starting in 2004.
Inmarsat future
Inmarsat's future business line, called B-GANS (Broadband Global Area Network
Services), will be compatible with terrestrial 3G services, will provide 10 times the
capacity of Inmarsat's current fleet, and will reduce service costs by 75% according to
the company. Melton expects 600,000 new subscribers to sign on over eight to nine
years, which would quadruple the size of Inmarsat's current client base, and he
estimates $10 billion-$12 billion in revenue over the system's lifetime.
Heading directly for the same market is the New ICO. Acting chief executive Daggatt
says he sees a lot of vertical market niches that can be aggregated, and some broad
opportunities for satellite-delivered voice and data. Since billionaire investors Craig
McCaw and Subhash Chandra joined forces to take control of ICO in May, paying
$1.2 billion to drag the company out of bankruptcy, a few planned upgrades to the
system have been disclosed, such as improving the quality of the circuit-switched
voice offering and adding packet data to the system. Beyond that, Daggatt discloses
little about what ICO will offer in the future.
What is clear is that several billion dollars in additional investment are required
before cash flow breakeven for ICO, which plans to start service in 2002.
Like the geostationary MSS operators, Daggatt believes ICO's architecture -
medium-altitude satellites and fewer gateways on the ground - is superior to those of
Iridium and Globalstar. Iridium's inter-satellite links and small spots of ground
coverage made the architecture unworkable, and Globalstar relies heavily on ground
systems, with more than 100 expensive gateways for global coverage, he claims.
ICO has only 10 satellites, plus two spares, and 12 gateways on the ground.
The Earth stations are connected by dedicated fiber links, and Daggatt claims ICO
can more easily adjust technical aspects of the system by tweaking the ground
equipment.
Meanwhile, the direction Globalstar will take is less certain. Analysts on Wall Street
largely agree that the venture is heading towards bankruptcy.
The company has a cash burn rate of $120 million a quarter, and will have to come
up with some $520 million more for operations in 2001, according to Bill Pitkin, vice
president at Merrill Lynch, of New York. "The banks won't invest [more] even with
collateral," he says.
What's more, the signs are that phones continued to sell slowly in early summer.
O'Gara Satellite Systems, a Globalstar distributor in New York state, sold 10 phones
in one month in late spring, according to sales representative Marty Gillow. But Gillow
says he expects Globalstar to fare better when it offers Internet access. Another
Globalstar dealer, in Aspen, Colorado, said he'd sold only one phone to date and
was taking steps to get out of the business.
These gloomy sales stories are countered by optimistic announcements from
Globalstar, such as a deal struck in June to provide 4,500 Mexican gas stations with
data connections and fixed phone booths to use the MSS system.
Certainly, the last year has taught those who follow the MSS business many lessons.
"The 'you only need a small percentage of a huge market' theory doesn't work," says
Davidson, at Donaldson, Lufkin and Jenrette.
"You must have market know-how from the bottom up, and have a marketing and
distribution plan to attack it."
Financing of MSS projects in the future is far from guaranteed, says Davidson.
"Market and investor sentiment can change violently against a whole sector in a
matter of days," he says.
But there are still signs of hope. Davidson says numerous strategic investors are still
showing interest in the market, and entrepreneurs such as Constellation's Waylan
are not giving up on the MSS market.
If there are any winners, it remains to be seen which strategy will succeed.
Waylan's vision of appealing to underdeveloped markets, for example, differs widely
from the current wisdom.
ICO and Inmarsat are treating the rural and remote markets as niche areas, focusing
on business users and corporate multinationals as their primary targets. In fact,
Daggatt says ICO will not pursue the rural and remote markets so much as "settings
and applications where it has competitive advantage over terrestrial technologies."
And Storey says Inmarsat will treat rural and remote users as part of the mix, but the
real focus will be on multinational corporates.
Waylan has other ideas. He says that if MSS systems are focused on
underdeveloped markets, where population is large but the economy is
undeveloped, users will continue to emerge.
"I believe the market demand is there if properly served," he says optimistically.
Reassessing the future of the MSS market
Market estimates for mobile satellites during the last three or four years pretty much
unanimously agreed that 30 million-40 million subscribers would eventually sign up
for voice telephony services once Iridium and Globalstar got started. But these
figures have so far proven to be a long way off the mark.
The first year, the predictions went, each operator would sign up 500,000 users.
Instead, Iridium signed up only about 40,000 in its first year, and Globalstar is
believed to have in the neighborhood of 6,000 users some six to nine months after
its "soft rollout" of service began. Counting the 20-year-old Inmarsat service, there
are only about 200,000 users of satellite mobile telephony. When mobile satellite
data terminals are added in, the figure triples to 609,000, according to Paris-based
Euroconsult SA. That includes 230,000 terminals for Qualcomm's Omnitracs'
satellite service for narrowband data, which uses standard geostationary satellites
rather than a special MSS system.
So where will the numbers be in a few years? Wall Street analysts say all market
estimates are now suspect, but revised estimates are available.
In its June report, Euroconsult takes a highly conservative position, predicting a
steady upward trend in the number of terminals, which could reach 3.5 million in
2004 and 4.5 million in 2005. Banc of America Securities' projections, issued in
June, cut earlier figures in half, but are still far more optimistic than Euroconsult's.
Instead of 18 million subscribers by 2005, BoA's revision says 10.6 million
subscribers are likely by year end 2005.
BoA has a positive outlook for MSS over the long term due to its estimate that
terrestrial cellular networks still cover less than 10% of the world's surface area. "We
expect regional GEOs to take significant market share in their specific markets
based on local market knowledge, consumer familiarity and low prices," the BoA
report said. |
