Live via satellite

The mobile satellite services industry was at one time the sweetheart of the financial world. Iridium, the sector's poster child for success, spent $5 billion to create a service allowing customers to use portable phones around the world, and it was the master of marketing, hyping the demand for its wares so much that many investors became rich from the company's stock before it even launched service in 1998. 

Yet it all came crashing down less than a year later. Iridium filed for bankruptcy in the summer of 1999, followed by ICO Communications two weeks later. And now Globalstar Telecommunications, which launched its service in 2000, is on the brink of bankruptcy, with barely enough money to finish out the year and no investors willing to help. 

Now MSS players are attempting to claw their way back into the good graces of the telecom world. Iridium and ICO have emerged from bankruptcy with new owners and revised business plans, while Globalstar is expected to issue a new business plan this fall that it hopes will attract fresh investment to keep the company operating. Yet the entire MSS industry is still dangerously close to permanent collapse. 

All MSS providers have learned one lesson from the string of failures in their industry: Satellite phones are not mass-market products. 

“I personally never understood where the market was for the business executive rafting down the river in Nepal,” says Walt Purnell, president and chief executive officer of Motient, a satellite carrier operating in what is called the L-band that offers two-way messaging service. “If I'm doing that, I don't want to hear from my office.”

MARKET VALUE

Iridium's management says it will survive because it no longer is targeting the global traveler but government and industrial segments with a lower cost structure instead (Figure 1). Time will tell if the now-private company's strategy will work.

Figure 1 HOW IRIDIUM SURVIVES
TODAY'S IRIDIUM	YESTERDAY'S IRIDIUM
Targeted toward government agencies and industrial segments	No specific target market. Tried to appeal to industrial segments and the global traveler
System cost was $25 million, leaving the company debt-free	The system cost about $5 billion, resulting in debilitating debt
Wholesale prices less than $1.	Calling charges were as high as $9 per minute
Monthly operating costs less than $7 million	Monthly operating costs far exceeded $10 million
Primary handset is a second-generation Motorola, which is smaller than the original	Handsets started off as clunky and pricey, costing more than $3000 each
Source: Iridium

The way Globalstar has sold its service must change, too, says Olof Lundberg, the new chairman of the big low-earth-orbit satellite concern. He's confident a business case exists because minutes of use continue to increase among customers despite Globalstar's financial uncertainties (Figure 2).

Figure 2  STRING OF FAILURES IRIDIUM: After spending more than $5 billion on its system, Iridium was able to attract only 55,000 subscribers and the company filed for bankruptcy. A private company has since purchased the assets with plans to scale back the service drastically GLOBALSTAR: Lost $3.8 billion in 2000 and is reviewing various restructuring proposals after defaulting on debt payments. May be headed toward bankruptcy, according to the company's filings with the SEC ICO: ICO filed for voluntary bankruptcy in 1999 and emerged as New ICO in May 2000 with Craig McCaw assuming control. New ICO now says it cannot survive unless the FCC allows it to incorporate an ancillary terrestrial component that will allow it to compete with wireless operators Sources: New ICO's FCC filing, company reports

“This can still be a good business if you get it right,” says Lundberg, who worked with MSS provider Inmarsat for 15 years. “It never will be perceived by the average consumer as a general product. It can do cellular extension, it can do global roaming and traveling, and it can be a specialty product for the maritime, aeronautical and public safety sector. That, in aggregate, makes it an interesting opportunity.”

Globalstar's carrier partners, such as Australia's Telstra, historically have sold the service through their own distribution channels because Globalstar operates on cellular systems when available in addition to satellite systems in remote areas. But that selling strategy will stop: “Customer acquisition and training have not worked, so we must find other ways of doing that,” Lundberg says, declining to comment in detail on the company's strategy and dire financial condition.

In the meantime, Globalstar's founders, Loral Space & Communications and Qualcomm, won't put more money into the company until its restructuring plan is in place. Lundberg hints that the new strategy will require Globalstar to heavily tailor products to different niche market segments; for instance, a handset for the aviation market may look and operate significantly differently from a product targeting the maritime industry.

“The way to look at it is as a core communications engine,” says Lundberg. “You reuse the core technology to change the capabilities for each market. Even the physical packaging will look different.”

EXTRA: TERRESTRIAL

Management at Motient and New ICO, a medium-earth-orbit (MEO) satellite operator, believe revamped business plans aren't enough. Rather than narrowing the prospects for mobile satellite offerings, they are seeking to broaden their potential customer base.

Motient and New ICO have asked the FCC to allow them to incorporate what is called an ancillary terrestrial component (ATC), which allows providers to reuse their frequencies and offer cellular-like terrestrial service (along with mobile satellite service) to underserved rural areas.

In summary, ATCs are typically integrated into MSS networks via a ground-based satellite control facility consisting of interconnected ground stations, which themselves interconnect to public fixed or mobile terrestrial networks. However, in New ICO's case, the ATC would be built upon standard CDMA infrastructure; the integrated network management center would dynamically configure the satellite elements and the ATC cell plan to allow for efficient and coordinated frequency re-use. Subscribers would then choose from a wide range of transceiver options, capable of operating in either ATC or satellite-only mode (depending on coverage), in order to provide a consistent set of services and applications to various communities of users in fixed or mobile environments.

“What they are trying to do is make the system more useful on the ground,” says Greg Caressi, research manager of Frost & Sullivan's telecom services and satellite group. “The problem is you can't penetrate buildings with satellite signals. That's a huge restraint on demand. The MSS industry needs to have a broader appeal and get at people with higher data products.”

“We're pretty excited,” says Motient's Purnell. “Systems like those run by Iridium and Globalstar ran into trouble because of line-of-site limitations. That kept operating costs up and handset costs up. With this combination, we'll be bringing costs down. When those costs come down, we can serve people living in remote areas.”

Motient has fared better than most of its mobile satellite counterparts, primarily because it purchased mobile data operator Ardis in 1998, allowing the company to offer complete U.S. coverage on both terrestrial and satellite networks. Purnell says implementing this ATC capability will ensure the company's success in the next generation.

GROUND BEEF

Wireless industry mogul Craig McCaw, who bailed ICO out of bankruptcy, is drumming up some influential supporters on Capitol Hill who see ATC proposals as a solution to a key public policy issue — bridging the “digital divide” in rural areas.

McCaw has already managed to win over a number of U.S. senators, including Earnest Hollings, D-S.C., and Ted Stevens, R-Alaska, who wrote FCC Chairman Michael Powell in support of the new plan. Even former South African President Nelson Mandela wrote a letter to Secretary of State Colin Powell urging him to support McCaw's efforts. Early last month, the FCC issued a notice of proposed rulemaking on the topic.

“We believe that if satellite providers can offer satellite service complemented in some limited way with terrestrial service, we'll have an economic model that ensures those services are able to be provided in the future,” says Gerry Salemme, New ICO's senior vice president of external affairs (Figure 3).

Figure 3 THE ABCs OF ATCs Why New ICO wants the FCC to allow mobile satellite service licensees to incorporate an ancillary terrestrial component: ATCs will solve the chronic coverage problems that have plagued MSS projects to date, extending MSS service to urban and indoor subscribers ATCs will improve service to rural and underserved areas, for commercial, military and public safety applications, by improving the quality of pricing and service and expanding the satellite capacity available for rural use ATCs will allow 2 GHz MSS operators to use spectrum more intensively by designing integrated MSS networks that reuse spectrum already assigned to them in places where otherwise could not be used by anyone Source: New ICO's filing

 

The wireless industry is fighting the plan. Opponents argue the FCC gave the mobile satellite industry free spectrum because it was going to provide satellite services, not terrestrial services that potentially could compete with the likes of Verizon Wireless, Cingular Wireless and AT&T Wireless.

What's more, the wireless industry is reeling from a recent FCC move to grant eight MSS providers new spectrum in the 2 GHz band rather than diverting the licenses to the wireless industry, which is in dire need of new spectrum for data-intensive third-generation services.

Under today's laws, if spectrum is available for terrestrial use, it must be auctioned, says Brian Fontes, Cingular's vice president of federal relations. He also worries about the ambiguous definition of ATC. “It leaves a lot to the imagination. We're looking at 70 MHz of spectrum in a great location that could be used for 3G, and now the satellite folks want to be able to provide mobile services. They can become a [commercial mobile radio service] provider. They have 70 MHz, when we have 45 MHz. We had to pay for our licenses, but satellite operators don't have to pay.”

Salemme calls the wireless industry's accusations sour grapes. “They tried to take our spectrum away, and after losing that fight they reversed their course and said the problem is ancillary use. We aren't talking about building a sixth or seventh wireless competitor in the industry.”

However, New ICO does want to be able to follow customers as they travel the country. Depending on which gains market dominance, the company will use either 802.11 or Bluetooth technology in its palm-sized repeaters, separating the bulky satellite antenna from the wireless device and enabling customers to use compact mobile phones and personal digital assistants inside and outside buildings as well as in rural and urban areas.

“We've tried to ensure that this is truly a satellite service by requiring satellites to be up and operating before the ancillary service is used,” says Salemme. “And Alaska will have services up before New York. That's why we've garnered the support of the U.S. Senate.”

DUAL IDENTITIES

But this is a path Globalstar's Lundberg has seen before. The provider already has in-building coverage through dual-mode handsets that operate on cellular and satellite networks.

“They have tended to oversell the opportunity — that this is a blessing for mankind that can solve poverty and the digital divide,” says Lundberg. “There is a lot of stuff we can do with MSS, but we will never achieve economies of scale and lower production costs by using cellular in areas where there is fixed fiber. We have to reach other market segments.”

If New ICO receives its approval from the FCC, Salemme says it could begin service as early as 2003. New ICO already has launched one satellite, while 11 more are under construction in a Los Angeles factory.

Motient says it's several years away from offering terrestrial-type services because it has yet to launch any next-generation satellites. In June 2000, the company formed Mobile Satellite Ventures to build a next-generation satellite system in North America.

What if the FCC denies these companies' requests? “Then it makes no sense to try something that we know is a failure,” says Salemme. “We are very concerned about an economic model that doesn't allow us to provide service to customers on an integrated basis in big cities. That has been the chief failure in the past.”