IBD. ICO Reaches For Heights In Battle Of Phone 'Birds'
Date: 2/24/99
Author: Reinhardt Krause
Playing catch-up in a multibillion- dollar race
to offer worldwide wireless phone services
might worry some firms.
But ICO Global Communications Ltd. says
it's in a good spot - even though it trails in a
three-horse race. Why? Because it's the only
one taking the highest-orbit path to
satellite-based phone services. That gives it
some advantages.
London-based ICO's rivals are Iridium
World Communications Ltd. and Globalstar
Telecommunications Ltd. They're all building
satellite systems that let people send or
receive calls and electronic messages from
any point in the world using a new type of
hand-held wireless phone.
Today's cell phone systems can't match that
global coverage. It's uncertain as yet whether
traditional cell carriers will compete or
partner with this new wave of satellite
players.
As for the satellite guys, one key difference
among them is their orbit. This affects how
they send calls through their networks. It
could well affect their prices as well, analysts
say.
ICO, spun out of the maritime satellite
consortium called Inmarsat, says its high-
altitude strategy will pay off. The company
has yet to launch a satellite.
Iridium, backed by Motorola Inc., launched
commercial services late last year. Analysts
expect Iridium to sign up 50,000 subscribers
by the end of March and 600,000 by early
2000. Investors, however, worry that Iridium
might not reach its goals as fast as expected,
and about its heavy debt load. As a result, the
stock has fallen almost 40% since Jan. 11 to
27 3/8.
Backed by Loral Space & Communications
Ltd., Globalstar plans to start commercial
service late this year. It's launched a handful
of birds so far.
ICO hopes to launch its first bird by late June
and start offering services by late 2000.
Some analysts are upbeat about ICO, even
though it's clearly behind Iridium and may lag
Globalstar, too. ICO Chief Executive Olof
Lundberg likes his chances of catching
Iridium.
''Our system is higher up, so we need fewer
satellites (because) they see more coverage
area,'' he said. ''The life span of our satellites
will also be longer.''
Analysts agree with some of his points.
ICO's satellites, called collectively a medium
Earth orbit system, will fly at a much higher
orbit than its two rivals' satellites, which fly at
low Earth orbit. ICO's satellites are bigger
and can carry more fuel.
''One of the main benefits of an MEO orbit is
spreading the system cost over more years
because the satellites last longer,'' said John
Coates, an analyst at Salomon Smith Barney
Inc. in New York.
ICO's satellites are expected to work at least
10 to 12 years before being replaced.
Iridium's and Globalstar's should last about 5
to 7, analysts say.
Both LEO and MEO systems are an
improvement over current satellite phone
technology, which is used mostly by the
military and maritime industries. These
geosynchronous Earth orbit systems are
located about 22,000 miles above Earth.
They require bulky, briefcase-size satellite
phones to make calls.
ICO's design calls for a web of 10 working
satellites and two spares. ICO concedes that
its satellites are bigger, heavier and more
costly to put into orbit than rival gear.
But Lundberg also claims that ICO's design is
less complex. Tim O'Neil, an analyst at
Soundview Technology Group in Stamford,
Conn., agrees.
''ICO's design requires only 10 satellites
compared with Iridium's 66,'' said O'Neil.
''So they don't have to coordinate as many
intersatellite links and hand-offs to switch
calls.''
Still, the height of ICO's satellites may have
drawbacks. It takes longer for radio signals
to bounce around at higher altitudes. So
O'Neil says phone calls may be hampered by
a time delay. Though that delay is measured
in milliseconds, it could make phone calls
seem choppy.
''It's an issue,'' O'Neil said.
ICO says the quality of its calls will match
that of Iridium and Globalstar.
To build its system, ICO has raised more
than $2 billion from 100 investors. They
include British Telecommunications PLC,
Deutsche Telekom AG and General Motors
Corp. subsidiary Hughes Electronics Corp.
Hughes is making ICO's satellites. TRW Inc.
also joined the project last year as an
investor.
In July, ICO raised only about $120 million in
an initial public offering, about four times less
than it had hoped. Company officials attribute
that to poor timing, but ICO's market
capitalization still trails both its rivals by
plenty.
The company also has obtained about $600
million in other financing, including high-yield
debt, or junk bonds.
ICO expects to continue losing money while
it builds its network. Last year, it said it lost
$110 million, or 56 cents a share. As more
satellites are launched, O'Neil estimates that
ICO's loss could swell to $1.29 a share this
year and $4.18 in 2000.
With its head start, Washington, D.C.-based
Iridium could turn a quarterly operating profit
by early 2000, analysts say.
The satellite phone market remains largely
untested. Traditional cellular systems pose a
threat as they expand, analysts say. Analysts
wonder whether there's enough demand to
support Iridium, Globalstar and ICO.
Who wins may depend on which company
has the best distribution partners among
cellular firms and phone companies.
There's much industry speculation over how
aggressive ICO will be in pricing.
First versions of Iridium's phones were priced
at $3,000. It charges about $50 in monthly
access fees and $3 to $4 per minute for
service. That's more than long-distance rates
charged by most traditional cell service
providers.
O'Neil expects ICO phones to retail for less
than $1,000, and its average cost to be
around $2.50 a minute.
(C) Copyright 1999 Investors Business Daily,
Inc.
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