Satellite Communications Enters New Era

As the long-suffering Iridium venture enters its final chapter, attention now shifts to Globalstar Telecommunications Ltd. (San Jose, CA), to demonstrate that satellite-based mobile phone service has a viable chance in the marketplace. Globalstar's determined march into an area where Iridium failed spectacularly should answer two nagging questions: Was Iridium doomed from the start with a flawed business plan that overestimated demand for a service so costly to provide? Or did Iridium simply execute badly, overpricing handsets and airtime, rolling out the service before quality was assured, and targeting too narrow a customer base?

"We're the company that's going to validate the market," said Reid Stephenson, a vice-president of marketing at Globalstar. Company executives, particularly hard-charging CEO Bernard Schwartz, are taking a steady and methodical approach to launching the service. Last month, the company's final launch completed a constellation of 48 satellites. Service is now available in 27 countries, including those in North America, and that number is expected to reach to more than 80 by mid-year.

Cautious Approach
To avoid service glitches that plagued Iridium, Globalstar said it has conducted more than 1 million test calls and won't roll out service to certain regions unless customer care and billing systems are in place.

"Globalstar is approaching the market with some understanding of what befell Iridum in terms of segments that they were targeting and also just how prepared the company is in terms of launching the service," said Crispin Vicars, an analyst with The Yankee Group (Boston, MA).

The decision this month by wireless pioneer Craig McCaw to pass on a rescue of Iridium suggests that Iridium had too many inherent problems to fix. Instead, McCaw's Eagle River Investments will focus on data-centric companies such as McCaw's own Teledesic and ICO Global Communications. McCaw wants to buy the assets of London-based ICO, which is trying to emerge from bankruptcy.

Enough Demand?
Although Globalstar vows to sidestep many of Iridium's mistakes, skeptics abound.

"I think the Iridium experience shows there isn't much demand for a global, cellular voice service," said Ira Brodsky, president of Datacomm Research (Chesterfield, MO). "But I don't think Iridium's failure will discourage users or Globalstar's major investors; although, it's likely to keep Globalstar's stock price depressed." Iridium's bankruptcy and the recent decision to finally pull the plug have cast a dark cloud over Globalstar. After hitting a 52-week high in January, Globalstar's stock has been in a steady decline. This month, two Wall Street firms downgraded their investment ratings, expressing concern that operating projections were likely to fall short this year.

Jeffrey Wlodarczak, an analyst with Toronto-based CIBC World Markets Corp., said the downgrade is based on concerns about slower sign-up rates for Globalstar's service than expected, handset availability, and lower phone usage than anticipated. He sliced the stock's 12-month target price from $32 to $15.

Parts of the Whole
Globalstar is an international consortium of telecommunications companies headed by Loral Space & Communications, which owns 45%. About 33% of Globalstar's shares are publicly owned, with much smaller ownership scattered among companies such as Vodafone AirTouch, China Telecom, Dacom, Qualcomm, and Finmeccanica/Alenia in Italy.

Globalstar plans to sell its service to regional phone companies at wholesale rates ranging from about 37¢ to 65¢ a minute. Those companies are expected to retail the service at $1 to $2 a minute. Globalstar subscribers would use a $1,500 tri-mode phone that can also access wireless digital and analog networks. Although those prices may seem high, they are substantially lower than Iridium's, whose handsets cost as much as $3,500.

Likely Targets
Aside from the globetrotting executives that Iridium targeted, Globalstar will also seek subscribers in such industries as maritime, oil, gas, mining, construction, transportation, utilities, travel, and leisure. The company also envisions a type of fixed public phone service in countries that are under-served or have no wireline or wireless coverage. The company's partners are building ground-based gateways that will connect satellites to terrestrial networks. So, far, Globalstar has only about 13 operational gateways, which Brodsky believes could hamper growth.

"This limits Globalstar's service footprint, so Globalstar may not yet be a viable alternative to Iridium subscribers looking for a replacement service," Brodsky said. He also believes Globalstar must focus on data applications, develop more affordable handsets, and modify its service as the market evolves.

Iridium's 50,000 customers showed that there is demand for satellite-based phone service. But the tougher question remains whether there is enough demand at Globalstar's prices to cover costs and allow the company and its partners to turn a profit.

About the Author
Ed Lopez is a freelance writer based in Highlands Ranch, CO.