Deflated Iridium: Will it soar again? Satellite phone operator meets turbulent start
cbs.marketwatch.com
By Jeffry Bartash, CBS MarketWatch
Last Update: 5:20 PM ET Feb 26, 1999
NewsWatch
WASHINGTON (CBS.MW) -- Global satellite phone operator Iridium isn't
flying so high these days.
The much touted service, backed by Motorola (MOT), Sprint (FON) and
others, has suffered from late delivery of its unique phones to potential
customers, undercutting subscriber growth. Its marketing strategy, which
relies heavily on partners to promote the service, hasn't worked all that
well, either.
As a result, the company has failed to hit initial user and revenue
targets and is in talks with big lenders to renegotiate terms on
more than $800 million in debt, the Financial Times reported
Thursday. Iridium officials could not be reached for comment.
Those woes have brought the satellite-phone carrier's stock back
down to earth, from a high of 72 3/16 nine months ago to the
mid-20s now. On Friday, Iridium (IRIDF) lost 1 1/2 to 25
13/16.
For the most part, analysts on Wall Street remain
undeterred by Iridium's troubles. Many expect the
company to renegotiate its loan accords, and just
two days ago, Iridium announced that one of its
major phone suppliers, Kyocera of Japan, is finally read to ship. (See
press release) Delays at Kyocera are mainly blamed for the lack of
available phones.
"We believe that as the company works out problems with its distribution,
the (subscriber) numbers will accelerate," Goldman Sachs analyst Suzanne
Stein wrote to clients earlier this week.
Concurred Riyad Said of Friedman Billings Ramsey Group: "I don't see
that impacting the long-term viability."
Falling behind
Still, it's hard to imagine Iridium will come anywhere close
to its targets for 1999. At the end of last year, the company
only had 3,000 subscribers and is well behind its goal of
88,000 by the end of the first quarter. It had hoped to reach
more than 500,000 users by year end.
Count Jane Zweig among the skeptics. Zweig, executive
vice president of wireless researcher Herschel Shosteck
Associates, believes Iridium's high-cost service may not garner enough
interest from its initial target, international business travelers, to undergird
the company's growth.
She points out that cellular operators of phones based on the TDMA and
GSM transmission standards recently agreed to ensure that
next-generation phones are compatible, broadening the reach of cellular
services to the farther reaches of the globe. That could lessen the need
among jet-setting executives for the bulky, expensive ($3,000 each)
Iridium phones.
"It's not very good news to any mobile satellite service provider," agreed
Mei Huang, vice president of international wireless at The Strategis
Group, a Washington, DC-based consultancy.
Not too long ago, Zweig's boss, Herschel Shosteck, trekked to the
Negev desert in Israel. What did his camel guide have tucked into his
pocket? A Nokia (NOK.A) cell phone. Most busy international travelers
aren't going to venture to such god-forsaken places, she suggests.
"They're going to be in a five-star hotel using their cell
phones," she said. Incidentally, Iridium phones don't
work in hotels or other buildings.
Allies on earth
Naturally, Iridium doesn't see it that way.
The company's chief executive, Ed
Staiano, told listeners at the GSM World
Congress in Cannes, France on Feb. 23
that he sees Iridium's service as
complement to ground-based cellular
service.
"Together, we can provide worldwide,
ubiquitous coverage under one standard
- the GSM standard - with GSM
technology covering the developed
areas and Iridium satellite service filling
in the gaps," Staiano said.
"What we're talking about here is the making of an ideal
partnership," he said. "The bottom line is that we think the
Iridium service offering is a fabulous tool for terrestrial
wireless operators to retain their high-end, high-usage
customers -- and to expand market share. In return, the GSM
operators provide Iridium customers wireless coverage when
they are in urban areas."
Meanwhile, the company has reorganized its sales force and
altered its marketing strategies to improve outreach to
potential customers and kick-start the momentum the service
gained last fall from a multimillion dollar advertising
campaign.
Not everyone is impressed. "They're really struggling to
define their market," Zweig asserts. "It suggests that there are
real problems."
Sizing up the situation
Nonetheless, analysts universally agree a market exists for
the kind of service Iridium provides. The question is, how
big?
Compounding the problem is the eventual entry of a
handful of other satellite phone operators, including
Globalstar Telecommunications (GSTRF) and ICO Global
Communications (ICOGF), though they are not targeting exactly the same
audience.
Still, Iridium has spent $5 billion to erect the most comprehensive network
-- 66 low-orbit satellites blanketing the globe -- and has a sizable
headstart in offering actual service, which began last November.
And while global cellular service has grown more sophisticated and
comprehensive than Iridium had expected, satellite analyst Sigrid Lo of
Frost & Sullivan says cellular still doesn't have the same reach. Besides,
she said, "Roaming is expensive."
By year end, she predicts Iridium will reach 300,000 subscribers, well
below the company's estimate, but still a strong number in light of its
recent problems.
"This is a key year to gauge what kind of market exists for this company,"
said Huang of the Strategis Group.
For the company's sake it better start achieving those numbers. Within
three years, Iridium likely will have to start sending up new satellites to
replace its current ones, which generally have a life of five to seven years,
analysts say. It also has to iron out difficulties in reaching urban markets
and ratchet down exorbitant per-minute charges -- estimated at an
average of $5 -- to attract more customers and hence more revenue.
"They'll be in trouble without cash flow," Lo summed up.
Jeffry Bartash is an online reporter for CBS MarketWatch.
© 1997-1999 MarketWatch.com, Inc. All rights reserved. Disclaimer.
CBS and the CBS "eye device" are registered trademarks of CBS Inc. |
