To all:
Perspective.
We assiduously avoided investing in Globalstar on a pre-commercial basis. Given the project’s international scope and complexity, we wanted to see management pull together all of the technological and regulatory pieces together first.
I find the analytical handwringing over, and micro-analysis of, the last six months subscriber data to be inane in the extreme. Iridium's failure, occurring near contemporaneously with GSTR's launch, has engendered such deep-seated self loathing among IRID’s former sell-side sponsors that they feel compelled to relentlessly vent their frustrations at Globalstar. Determined never to make the same mistake again, these witless scribes seem adamant about finding another way to cost investors money. My personal favorite, silly-analyst quote, came from an insightful chap who opined "Globalstar is just like Iridium, only worse." Oh well.
Iridium and Globalstar were both designed to sell satellite-supported telecommunications services. That's basically where the similarities end. Globalstar's architectural design is dramatically better. It's direct cost per minute to deliver service is a fraction of Iridium's. Of parallel importance, it's service component, marketing strategy and target customer are completely different. Viewed unemotionally, Iridium’s failure was a significant positive for Globalstar since it eliminated a competitor (and a competing marketing message). On the downside, IRID’s bankruptcy cast such a pall over the satellite telephony space that I suspect some customers, at least in North America, have been pushed to the sidelines by the fear of purchasing another orphan phone. That being said, this issue will fade with time.
To start with the obvious, Globalstar L.P. (which we have invested in through its publicly-traded managing partner, Globalstar Telecommunications Limited), wholesales minutes-of-use to marketing partners; little companies like Airtouch, France Telecom, China Telecom and GlobalTel. The marketing partners own the terrestrial gateways, and are principally responsible for marketing the service. STOP. Let me repeat that. The marketing partners own the terrestrial infrastructure and are principally responsible for selling the service to customers. This is a key point because it speaks directly to GSTR’s ability, or should I say near-term inability, to directly influence the sales effort. This process is most akin to herding elephants...big, sleepy,bureaucratic, but also powerful and rich...elephants. To stay within my metaphor, such elephants tend to show a profound respect for Newtonian laws. When at rest, they tend to stay at rest; BUT, once prodded into motion, the resultant mass creates a lot of momentum.
Within this context, Globalstar’s launch seems to directly parallel Airtouch’s launch of CDMA in Los Angeles back in 1996. I remember vividly the horrified pontification that accompanied the tepid subscriber numbers reported during the fall of that year. Pundits assured us that CDMA was a fraud destined to bring plague and pestilence to all its adherents. Airtouch management simply shrugged and noted that it would ramp the marketing effort when the time was right.
Similar apocalyptic nonsense has been offered up for Globalstar a mere six months post commencement of actual commercial operation. While mine is certainly a minority opinion, I think 13,000 subscribers by the end of June was pretty damn reasonable. So let’s establish my frame of reference. There are three relevent investment questions: (1) does the system work, (2) will the company run out of money prior to implementation of the marketing plan and (3) what is the true demand equation.
On the first point, even the bears seem to acknowledge that the network is performing extremely well. This is in stark contrast to the Iridium service, the voice quality of which rivaled smoke-signals on a windy day.
The financing question obviously interrelates with the demand picture as the liquidity questions will evaporate as the subscriber count turns asymptotic. Here is where contact with Globalstar’s carrier partners is most valuable. Simply put, I have spoken with the senior management at a number of Globalstar’s most significant partners and to a man (and woman) they have indicated support, enthusiasm and confidence in the project. While some of the positive tone could be ascribed to bravado, the commentary has overall has been quite balanced. For example, it has been acknowledged that the marketing plan for the United States was somewhat ill-conceived and has been benefited from less than stellar execution. On the hand, Australia and Canada are ramping very nicely. Welcome to the real world of a business start-up! Plans get conceived, some work well and can be executed as contemplated, others work less well, and get reconstituted. It should be obvious that the deterministic time periods involved are substantially longer than six months.
It has been argued that the make-or-break data point for Globalstar will be if, and/or when, the partners put up more capital. Bernard Schwartz has stated repeatedly that he expects that the partners will provide incremental dollars for Globalstar L.P. when needed. I think, though, that many miss the point that the marketing partners are already pouring incremental funding into Globalstar. Each terrestrial gateway, each new distributor, each new marketing plan with heavily subsidized handset prices, all represent substantial and sustained investment. On a worldwide basis, these expenditures certainly exceed the incremental dollars necessary to support Globalstar L.P. through the end of 2001. It is incomprehensible that the partners would fund the marketing effort only to allow the network provider to expire. Simply put, I believe Globalstar will get the funding that it needs.
But, all of this is moot if nobody needs the service right?! Well, I suspect that the “demand doubters” are largely ensconced in the quiet comfort of their air-conditioned offices in Manhattan. My conversations with service providers confirm that the phones are proving marketable to exactly the customer types anticipated. Far from being discouraged, the marketing partners seem almost universally positive. While there are distribution challenges, i.e. Globalstar customers, at least in the U.S., do not by-and-large wander into a local cellular phone store and buy a phone, these issues are being addressed on a market-by-market basis. This having been said, some vertical markets will adopt the technology more rapidly than others. Still I strongly believe that what has demonstrably proven salable to customers in Australia and Canada will prove to be salable worldwide. It is also somewhat incongruous that Deutsche Telecom is willing to pay $50+ billion for Voicestream (VSTR), and its sliver of the U.S. market, when the interest expense alone on this investment would purchase all of Globalstar and its near worldwide footprint. Analyze D-T's capital adjusted cost-per-minute for VSTR against the market opportunity and you'll get the giggles...
It is reasonable to presume that those living in urban/suburban areas of the industrialized world won’t substitute a satellite phone for their accessible, reliable and smaller cellular phones. So what? That’s not the intended market. Still, I would point out that many people pay a premium to use their cellphone for calls that could just as easily be deferred until within reach of a “free” wireline phone. It would appear that convenience, and the need to communicate, seemingly overwhelm pragmatic economics. Nevertheless, the satellite phone user will primarily be motivated by necessity rather than convenience. Those who have traveled outside the contiguous U.S. should understand that communication infrastructure is lacking, if not nonexistent, through huge tracks of civilized geography. The argument that pervasive cellular deployment has obviated the need for Globalstar's service is, to my eye, perpetuated by the simple-minded.
Microsoft’s Bill Gates once commented that we would know that the Internet had arrived when it became part of our life and became something we felt uncomfortable living without. In this vein, I will interject a personal experience. I am a private pilot and own and fly a single-engine airplane. While exceedingly infrequent, an engine failure is a possibility to be considered by any conscientious pilot. Since certified light aircraft are designed to fly, glide a considerable distance, and land without power, the critical path item is not to land safely, but to land safely in a place where one can be rescued. Within this context, I NEVER fly without my Globalstar phone. With the phone and a handheld GPS, I can provide exact latitude and longitude information were I ever forced to ditch in a Florida swap. No, GSTR shareholders aren’t going to get rich off my twenty-to-thirty minutes per month. On the other hand, I would argue that there are roughly 300,000 private pilots in the U.S. who should consider a satellite phone as mandatory safety equipment. Kind of an interesting ‘little’ vertical market, wouldn’t you say, for an industrialized country with no need for satellite telephony?
Overall, I find it amusing that the acquisition of 13,000 customers in just over four months of true commercial service is somehow deemed a dismal failure. Businesses rarely conform to spreadsheet models and ‘elephants’, i.e. GSTR’s marketing partners, do not tap dance on command. However, Globalstar’s partners are settling into the task of making this business successful. Incremental functionality, in the form of data applications, should become available by year-end and will expand the addressable market. I am additionally comfortable that Globalstar’s partners, i.e. Airtouch et al, will provide whatever supplemental funding is necessary to get the job done. As subscriber counts begin to climb, investor’s will again focus on Globalstar’s enormous operating leverage.
In the nutshell, while Globalstar is hardly risk-free, I believe that the rumors of its imminent demise have been vastly overstated. The Street-side naysayers seem to be engaging in a rather mindless orgy of negativity that seems to contrast mightily with the ongoing investment by Globalstar’s deep-pocketed marketing partners. Time will tell, but our position illustrates our convictions. |
