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5/01/99 - Lost in Space -- Satellite Providers Battle Mishaps, Dated
Plans And Bad Karma
Apr. 30, 1999 (LTH - CMP via COMTEX) -- High-flying Internet stocks seemingly defy the laws of economic gravity. After all, these prices spring from providers with few assets and little if any revenues to report. They"re effectively propelled by promise rather than performance. This recipe doesn"t work for every provider, though. Consider satellite companies. They"ve got billions of dollars in equipment already in place and plenty of available network capacity to offer subscribers. They"ve also got some pretty big problems that have helped turn them into the ugly stepsister of Internet stocks. Deservedly or not, the market hasn"t been kind to satellite shares. For much of this year, they have underperformed the Standard and Poor"s index, at times actually declining in value. In February alone, share prices for satellite services fell about 15 percent while underperforming the S&P 500 by 12 percent, reports Salomon Smith Barney
Holdings Inc. (New York).
The poster child of the satellite industry"s plight is undoubtedly
Iridium LLC (Washington, D.C.). It isn"t the only publicly traded satellite venture specializing in voice and low-speed data services, but it is the first to market and the most highly publicized. It has also been plagued with delayed satellite launches, handset production problems and a subpar subscriber take rate. All this has taken an enormous toll on Iridium and cast a pall on the industry as a whole. At press time, the company was trading at about $16 a share, down 75 percent from its all-time high of $71 recorded last May. The price looks especially weak given Iridium"s head start, huge infrastructure investments and support from a reported $140 million advertising campaign.
Iridium"s business model undoubtedly seemed well conceived when it was developed more than 20 years ago. With the backing of Motorola Inc., Iridium was designed to offer global communications services, primarily voice, from anywhere not covered by cellular infrastructure.
However, competitive services have emerged or grown since then,
shrinking Iridium"s potential subscriber pool. Twenty years-and $5 billion-ago it was hard to conceive of nearly 70 million reported wireless subscribers in the United States alone, and the impact of the Internet"s e-mail capabilities was almost impossible to predict. Yet both services ate into Iridium"s market before the business was even launched. The coming of third-generation wireless technologies, or 3G, brings new dangers for Iridium and satellite services in general. 3G"s promise of high-speed bandwidth for data applications undermines the value of Iridium"s voice service, with its limited data transmissions for paging and other low-speed data applications.
Recent developments have further hurt Iridium"s profile. In March, chief
financial officer Roy Grant announced his resignation while renegotiating for a loan extension with increasingly nervous lenders. The company got a 60-day reprieve on the condition that Iridium hit new subscription targets. One month later, chief executive Edward Staiano deflated expectations by warning that Iridium wasn"t likely to break even with cash flow before 2000. Before the month was out, so was Staiano, having resigned over philosophical differences with the board just days before the company announced extremely weak first-quarter results showing a $505,000 net loss on sales of just $1.4 million.
Lagging service subscriptions is one major stumbling block. Iridium reports it needs between 500,000 to 600,000 subscribers to reach the black. As of Jan. 1, it had only 3,000 subscribers and as of March 31 its customer base had risen to just over 10,000, well off its first-quarter target of 27,000 customers. With this history, hitting 52, 000 subscribers by the end of May, as required by the loan extension, will be especially difficult.
"Iridium missed the market," says Bruce Egan, a special consultant and affiliated research fellow with the Columbia Institute for Tele-Information at Columbia University (New York). "Staying in touch doesn"t mean voice. It means Internet. All their lunch will be eaten by the next generation of mobile carriers."
Satellite service providers may devour themselves first. A raft of new satellite services concentrating on voice offerings are expected in the near future; these upstarts pose as much of a threat to Iridium as they do to one another. Globalstar L.P. (San Jose, Calif.), ICO Global Communications Ltd. (London) and other Iridium competitors are focusing on the mobile market. ICO will attack by offering relatively cheap services, with phones and per-minute fees less than one third the price of Iridium"s $3,000 handset and calling charges of $1 to $8 per minute.
Satellite providers may not be entirely lost in space. Salomon Smith Barney analyst John Coates, for one, remains bullish on the industry"s long-term fundamentals. "We view the sector"s recent price weakness as a compelling buying opportunity," Coates says. ICO"s lowest-cost system architecture and solid investor backing earned it a favorable stock rating from Smith Barney, he says.
The market still hasn"t bought those arguments for any particular
provider. Globalstar is building a 52-satellite, $3.3 billion system through the wallet of Loral Space & Communications Ltd. (New York). Yet even before it launches services, its share price at press time had dropped to about $14 a share, well off its 52-week high of $36. PanAmSat Corp. (Greenwich, Conn.), which does direct-to-home broadcast, telephony and some Internet services, has also felt the heat; its share price had fallen at press time to $31, less than half its $66 high.
For all its problems, some analysts have faith that Iridium can correct its downward spiral. Its recent $219 million contract with the Defense Information Systems Agency to supply air time may portend a rosier future. "We see preliminary signs that demand is beginning to shape up, including recent contract agreements with the U.S. government and the Australian government," says Coates.
That"s good news, especially if these expectations aren"t based on wishing on a star.
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By: Meg McGinity
Copyright 1999 CMP Media Inc.
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