Here's the article. 9/99 roll-out start in 13 countries (see below)
Maurice, did you write the last sentence? :-) djane
Impact felt as high-flier Iridium falls to Earth
By Theresa Foley
24 May 1999
The Iridium debacle and a string of recent launch vehicle disasters is taking its toll on the
global satellite industry. Bank and public financing for satellites is drying up, at least until
signs appear that the problems have been addressed.
"The commercial bank market has a great deal of reluctance [to put in more money], and the
high-yield market won't tolerate all these problems either. For now, vendor or strategic
capital is it," said a New York-based banker who asked to remain anonymous.
Unfortunately for the satellite companies the troubles have come exactly at a time when they
are looking for new capital: Global mobile telephony operator Globalstar LP, of San Jose,
California, said it needs $600 million to meet increased costs due to its operational start
being delayed by a month to 1 November 1998; ICO Global Communications plc, London,
has a near-term need for $500 million in cash, which it is trying to raise through a rights
offering; and regional geostationary projects Thuraya Satellite Telecommunications Co.,
which will serve the middle East and Africa, and Asia Cellular Satellite (ACeS), a venture
backed by Pasifik Satelit Nusantara of Jakarta and Lockheed Martin Corp., also need more
money to keep their in-development projects going.
But neither Globalstar nor ICO is planning any major change in strategy in response to
Washington DC-based Iridium LLC's woes. "They are sticking to their guns that everything
will work despite Iridium's problems, but I would expect [them to] change directions and
modify their plans as they watch Iridium," said Armand Musey, principal at investment bank
Nationsbanc Montgomery Securities, San Francisco. "It's a free marketing lesson," he
added.
Analysts agree that there is much that could be learned from Iridium's mistakes.
Iridium created a wall between its corporate operating unit and its "gateway operators" -
service providers that sold the service. In April, public stock shareholders were told by
Iridium senior vice president Leo Mondale that the company could not identify its
customers, apparently because the gateway operators would not tell them.
"There apparently was very little communication between the operator and the service
provider," said an investment source. Iridium's backers want to see the company's senior
management "on the front lines," he said, adding: "You can't rely on the service providers"
to do the selling.
Iridium has also been accused of misrepresenting the facts by shareholders, who have filed
about a dozen class action suits in the weeks since low subscriber numbers and technical
difficulties were disclosed. According to a Wall Street source, Iridium has been
"stonewalling on the questions not because of confidentiality, but because they don't have
the answers."
Stephane Chenard, an analyst at Euroconsult SA, Paris, cites the last public speech of
former chief executive Edward Staiano, who resigned suddenly last month. After a 40-minute
delivery to 200 Merrill Lynch investors and analysts at a conference in New York, Staiano
failed to take a single question and instead burned up a good chunk of his presentation time
replaying video from ABC News of Iridium phone usage in Kosovo.
Compounding Iridium's woes, its $180 million international advertising campaign, touting
the troubles of exotic travel, brought in few sales.
And making matters worse, the company decided to keep the campaign going even when it
became apparent nearly a year ago that the service wasn't ready to meet its operational start
date.
"The ads got [customers'] attention [but] the product is [now] at the store ... sitting on the
shelf. It's too expensive and there's all these reports that it's a crummy service," said Roger
Rusch, president of TelAstra Inc., a satellite consulting company in Palos Verdes, California.
In fact, the advertisement campaign rolled on while the satellite system was still getting
software corrections and handsets were still not in the distribution pipeline.
Faced with a market mulling over these problems the respective chief executives of ICO and
Globalstar, Olof Lundberg and Bernard Schwartz, have taken pains to distance themselves
from Iridium when talking to the markets. Iridium's customers are "not a high volume
market," according to Lundberg, who claims ICO's service will be cheaper and much simpler
to adopt.
Meanwhile Globalstar is after "regional users, not VIPs or world travelers," said Schwartz.
Its targets are: cellular customers who want to extend service into uncovered areas;
industrial users in maritime, energy or similar "vertical" markets; fixed services in rural areas;
and finally that self-same unappealing fellow, the international business traveler.
Globalstar also is planning a different advertising and marketing strategy to Iridium. "We'll
only promote it where the gateways are operating and where the service providers have
been trained and are ready and willing to sell the service," said Reid Stephenson, vice
president for marketing, Globalstar.
The service will be rolled out slowly, starting in September in 13 countries, if three more
satellite launches scheduled for this summer are successful.
Iridium, because of its on-board intersatellite links, had to have all of its 66-satellite
constellation in space to start service, but Globalstar, which relies more heavily on Earth
station gateways to connect calls to the public switched network, can begin service with
only 32 of its planned 52 satellites launched. The availability of Globalstar will be limited by
the number of functioning gateways, with nine at first and rising to 15 by year end when
services should be available in 61 nations.
And the competitors say their projections of demand remain high, no matter how poorly the
Iridium numbers are looking. Lundberg said ICO still believes that by 2007, 2%-3% of the
projected 1 billion terrestrial cellular customers - some 24 million users worldwide - will be
mobile satellite service subscribers.
Schwartz points to the fact that 3.5 billion people are without telephones, while Globalstar
has capacity for 7.5 million users and 10 billion-12 billion calling minutes per year. He claims
Globalstar will have 3 million subscribers by 2002. Globalstar needs to sell 4% of its
capacity, or have about 220,000 customers to cover operating costs, he said, while 1 million
customers are required to cover all costs.
But some analysts still expect these second and third entrants to run into trouble as they
move out of development and into service.
"People who get their hopes up for Globalstar are going to be disappointed," said
TelAstra's Rusch. It will be only a little better, while it needs to be a lot better."
Meanwhile Iridium was heading for bankruptcy last week, according to Vijay Jayant,
managing director of satellite equity research at investment bank Bear Stearns & Co., of
New York. The pricing, limited capacity and service distribution model for Iridium is flawed,
he said. To recoup the $5 billion invested to date, Iridium would have to restructure, write
off some costs and adopt other cost-cutting measures like renegotiating a $2.8 billion
contract with 20% owner Motorola Inc. for operations and maintenance.
"We do not expect Motorola to abandon the project, as it is the prime contractor on the
more ambitious Teledesic project, and pulling the plug on Iridium would not bode well with
potential investors. In our mind, current equity investors in Iridium are likely to receive
modest, if any, equity value," Jayant said.
Iridium's pricing strategy may be the first thing to go. Its system costs more and lasts fewer
years than its competitors' - roughly five years compared with 7 to 12 years - forcing it to
charge more per minute for the service. Rusch believes this means Iridium needs to charge
$1.44 per minute, versus 90 cents for Globalstar and 29 cents for ICO. The geostationary
regional ventures, such as ACeS and Thuraya, which cost the least to deploy, can charge
roughly 20 cents per minute.
ICO's Lundberg cites call prices in the 50 cents to $3 per minute range, and telephones
priced at $700 initially and then dropping. "We want to fill these satellites like airline seats.
Every empty minute is a lost opportunity," he said.
An Iridium spokeswoman said company executives are spending their time working with
bankers to find a way to service the debt. And several sources said they expect the U.S.
government to bail out Iridium via an already awarded $200-million contract under which a
private gateway in Hawaii will be run by Motorola for the U.S. government. Mototola's
intermediate role will allow U.S. government operatives to have control over sensitive or
secret use of the service.
Another big change is certain to be in Iridium's marketing plan, as yet a series of hollow
statements from the company's leadership. During a recent telephone conference call, senior
vice president Leo Mondale would disclose only: "We are still confident that there is lots of
demand for satellite mobile communication. The answer is that we're going to look at
packaging to better fit the demand that is there, to cultivate and develop the channels that
can reach that demand and then to adjust our pricing and our service offering as
necessary."
A year from now, said Euroconsult's Chenard, things will be different: "The golden period of
selling incompletely debugged phones to early adopters who don't care about the price ...
will have ended, and the tough period of wrestling in the mud with competitors for every
last penny-pinching traveling salesman or truck driver will have begun."
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© EMAP Media 1999
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